<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
Susquehanna Bancshares, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Pennsylvania 6022 23-2201716
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
</TABLE>
26 North Cedar Street
Lititz, Pennsylvania 17543
(717) 626-4721
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------
ROBERT S. BOLINGER
President and Chief Executive Officer
26 North Cedar Street
Lititz, Pennsylvania 17543
(717) 626-4721
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------
Copies to:
<TABLE>
<S> <C> <C>
CHARLES L. O'BRIEN JOHN B. LAMPI NICHOLAS BYBEL, JR.
Morgan, Lewis & Bockius LLP Saul, Ewing, Remick & Saul LLP Shumaker Williams, P.C.
417 Walnut Street 2 North Second Street, 7th Floor 3425 Simpson Ferry Road
Harrisburg, PA 17101 Harrisburg, PA 17101 Camp Hill, PA 17011
(717) 237-4030 (717) 257-7553 (717) 763-1121
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement and after the
effective time of the merger of a wholly-owned subsidiary of the registrant with
and into Cardinal Bancorp, Inc. and the merger of a second wholly-owned
subsidiary of the registrant with and into First Capitol Bank, as described in
the Prospectus/Proxy Statement included herein.
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. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
----------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Each Proposed Maximum Proposed Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Offering Registration
to be Registered Registered Per Share Price Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $2.00
per share........................ 2,081,280 shares (1)(3) N/A $17,391,000 $5,130.35
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $2.00
per share........................ 1,055,357 shares (2)(3) N/A $11,250,000 $3,318.75
- -----------------------------------------------------------------------------------------------------------------------------------
Total............................... 3,136,637 shares $28,641,000 $8,449.10
===================================================================================================================================
</TABLE>
(1) Shares to be issued in the Cardinal Merger (as defined herein) computed
in accordance with Rule 457(f)(2), solely for the purpose of
calculating the registration fee, based upon the book value of Cardinal
Common Stock (as defined herein), at March 31, 1998, the latest
practicable date prior to the date of filing of this Registration
Statement. Includes shares issuable upon the exercise of outstanding
director stock options.
(2) Shares to be issued in the First Capitol Merger (as defined herein)
computed in accordance with Rule 457(f)(2), solely for the purpose of
calculating the registration fee, based upon the book value of First
Capitol Common Stock (as defined herein), at March 31, 1998, the latest
practicable date prior to the date of filing of this Registration
Statement.
(3) The number of shares to be issued gives effect to a three-for-two split
of the Susquehanna Common Stock effected in the form of a 50% stock
dividend paid on July 1, 1998.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
<PAGE>
[LETTERHEAD OF CARDINAL APPEARS HERE]
__________, 1998
Dear Shareholder:
We invite you to attend the Special Meeting ("Cardinal Meeting") of
Shareholders of Cardinal Bancorp, Inc. ("Cardinal"), the holding company of
First American National Bank of Pennsylvania ("FANBP"), to be held at
__________________, ______________, _________, Pennsylvania, on __________,
__________, 1998 at ___:___ __.m. The Cardinal Meeting is being held as a
result of the proposed acquisition of Cardinal and FANBP by Susquehanna
Bancshares, Inc. ("Susquehanna"), a $3.7 billion bank holding company with 121
community banking offices in Pennsylvania, Maryland and New Jersey.
The attached Notice of Special Meeting and Proxy Statement/Prospectus
describe the formal business to be transacted at the Cardinal Meeting. During
the Cardinal Meeting, we will also report on the operations of Cardinal.
Directors and officers of Cardinal will be present to respond to any questions
that our shareholders may have.
The purpose of the Cardinal Meeting is to consider and vote upon the
Agreement and Plan of Affiliation dated as of April 13, 1998, (the "Cardinal
Merger Agreement"), among Cardinal, FANBP, Susquehanna and Susquehanna
Bancshares West, Inc., a corporate subsidiary of Susquehanna, organized to
facilitate the acquisition of Cardinal and FANBP. The Cardinal Merger Agreement
provides for the merger of Susquehanna Bancshares West, Inc., with and into
Cardinal (the "Cardinal Merger") and the conversion of each outstanding share of
common stock of Cardinal into shares of common stock of Susquehanna based on the
exchange ratio, as determined in accordance with the Cardinal Merger Agreement,
all as more fully described in the accompanying Proxy Statement/Prospectus.
Completion of the Cardinal Merger is subject to certain conditions, including
the approval of the Cardinal Merger Agreement by the requisite vote of
shareholders of Cardinal at the Cardinal Meeting and approval by various
regulatory agencies.
Garland McPherson & Associates, Inc., Cardinal's financial advisor, has
advised the Board of Directors that in its opinion the consideration to be
received by Cardinal's shareholders pursuant to the Cardinal Merger is fair,
from a financial point of view, to the shareholders of Cardinal. The Board of
Cardinal has carefully considered the Cardinal Merger Agreement and has
determined that the Cardinal Merger is in the best interests of Cardinal and its
shareholders. Accordingly, the Board of Directors recommends that you vote "FOR"
approval of the Cardinal Merger Agreement.
The attached Proxy Statement/Prospectus contains important information
concerning the Cardinal Merger. We urge you to give it your careful attention.
Your participation in the Cardinal Meeting, in person or by proxy, is
important. The affirmative vote of the holders of 75% of the outstanding shares
of Cardinal Common Stock is required to approve the Cardinal Merger Agreement.
An abstention or failure to vote has the same effect as voting against the
Cardinal Merger Agreement. Therefore, we urge you to complete, sign, date and
return the enclosed proxy card in the enclosed postage-paid envelope as soon as
possible to assure that your shares will be voted at the Cardinal Meeting. On
behalf of the Board of Directors, I thank you for your support and urge you to
vote "FOR" approval of the Cardinal Merger Agreement.
Sincerely,
Clyde R. Morris,
Chairman
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME
<PAGE>
[FIRST CAPITOL BANK LETTERHEAD]
__________, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
First Capitol Bank ("First Capitol") to be held at __________________,
______________, _________, Pennsylvania, on __________, __________, 1998 at
___:___ __.m. The meeting is being held as a result of the proposed acquisition
of First Capitol by Susquehanna Bancshares, Inc. ("Susquehanna"), a $3.7 billion
bank holding company with 121 community banking offices in Pennsylvania,
Maryland and New Jersey.
The attached Notice of Special Meeting and Proxy Statement/Prospectus
describe the formal business to be transacted at the meeting. You are urged to
read the material carefully. Directors and officers of First Capitol will be
present to respond to any questions that you may have concerning the Merger.
Shareholders will be asked to consider and vote upon a proposal to approve
an Agreement and Plan of Affiliation dated as of April 16, 1998 by and among
First Capitol, Susquehanna and Susquehanna Interim Bank, a corporate subsidiary
of Susquehanna organized to facilitate the acquisition of First Capitol.
Pursuant to the Merger Agreement, Susquehanna Interim Bank will merge with and
into First Capitol and First Capitol will become a wholly-owned subsidiary of
Susquehanna. Upon the consummation of the Merger, you will receive in exchange
for each share of First Capitol common stock ("First Capitol Common Stock")
which you own, 2.028 shares of Susquehanna common stock ("Susquehanna Common
Stock") as set forth in the Merger Agreement, so long as the average closing
price per share of Susquehanna Common Stock for a 10-business-day period ending
two days before the closing of the First Capitol Merger is between and including
$21.33 and $28.00, together with a cash payment in lieu of any fractional share
of Susquehanna Common Stock which you would otherwise be entitled to receive.
First Capitol may terminate the Merger Agreement if the average closing price is
greater than $28.00, and Susquehanna may terminate the Merger Agreement if the
average closing price is less than $21.33. However, if the party with the right
does not choose to terminate the Merger Agreement, then the Merger will proceed
and you will receive the number of shares of Susquehanna Common Stock set forth
in Schedule 1.2 of the Merger Agreement. In such situation, for instance, you
will not receive 2.028 shares of Susquehanna Common Stock for each share of
First Capitol Common Stock but, rather, the number of shares determined by
reference to Schedule 1.2. Consummation of the Merger is subject to certain
conditions, including the approval of the Merger Agreement by the affirmative
vote of 80% of the outstanding First Capitol shares and by various regulatory
agencies.
Danielson Associates, Inc., First Capitol's financial advisor, has advised
the Board of Directors that in its opinion the consideration to be received by
First Capitol's shareholders pursuant to the Merger is fair, from a financial
point of view, to the shareholders of First Capitol. The Board of First Capitol
has carefully considered the Merger Agreement and has determined that the Merger
is in the best interests of First Capitol and its shareholders. Accordingly,
the Board of Directors recommends that you vote "FOR" approval of the Merger
Agreement.
Your participation in the meeting, in person or by proxy, is important.
The affirmative vote of the holders of 80% of the outstanding shares of First
Capitol Common Stock is required to approve the Merger Agreement. An abstention
or failure to vote has the same effect as voting against the Merger. Therefore,
we urge you to complete, sign, date and return the enclosed proxy card in the
enclosed postage-paid envelope as soon as possible to assure that your shares
will be voted at the meeting. On behalf of the Board of Directors, I thank you
for your support and urge you to vote "FOR" approval of the agreement.
Sincerely,
Owen O. Freeman, Jr.,
Chairman
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME
<PAGE>
CARDINAL BANCORP, INC.
140 East Main Street
Everett, Pennsylvania 15537
(814) 652-2131
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1998
NOTICE IS HEREBY GIVEN that the Special Meeting (the "Cardinal Meeting") of
Shareholders of Cardinal Bancorp, Inc. ("Cardinal"), the holding company of
First American National Bank of Pennsylvania ("FANBP"), will be held at
__________, _________, _______, Pennsylvania on __________, __________, 1998 at
___:___ __.m. A Proxy Card and a Proxy Statement/Prospectus for the Cardinal
Meeting are enclosed.
The Cardinal Meeting is for the purpose of considering and acting upon the
following matters:
1. Approval of the Agreement and Plan of Affiliation dated as of April 13,
1998 (the "Cardinal Merger Agreement") by and among Susquehanna Bancshares,
Inc. ("Susquehanna"), Susquehanna Bancshares West, Inc. ("SBI Merger
Sub"), Cardinal and FANBP. Pursuant to the Cardinal Merger Agreement, SBI
Merger Sub will merge with and into Cardinal and Cardinal will become a
wholly-owned subsidiary of Susquehanna and FANBP will become a wholly-
owned, second-tier subsidiary of Susquehanna. Upon the consummation of the
Cardinal Merger, each Cardinal shareholder will receive in exchange for
each share of common stock of Cardinal, par value $0.50 per share
("Cardinal Common Stock"), the number of shares of common stock of
Susquehanna, par value $2.00 per share ("Susquehanna Common Stock"),
provided for in the Cardinal Merger Agreement. The Cardinal Board of
Directors, in its sole discretion, has the right to terminate the Cardinal
Merger Agreement if the average closing price per share of Susquehanna
Common Stock for a 10-business-day period ending on the second business day
before the closing of the Cardinal Merger is greater than $26.67 per share.
Conversely, Susquehanna, in its sole discretion, has the right to terminate
the Cardinal Merger Agreement if the average closing price of Susquehanna
Common Stock is less than $22.67 per share. If not exercised by the party
with the right to terminate the Cardinal Merger Agreement and all other
approvals are received, the Cardinal Merger will proceed, and the number of
shares of Susquehanna Common Stock exchanged will be as provided by
Schedule 1.2 of the Cardinal Merger Agreement;
2. Adjournment of the Cardinal Meeting to a later date, if necessary, to
permit further solicitation of proxies in the event there are not
sufficient votes at the time of the Cardinal Meeting to constitute a quorum
or to approve the Cardinal Merger Agreement; and
3. Other matters as may properly come before the Cardinal Meeting or any
adjournment thereof which are incidental to the foregoing.
Any action may be taken on any one of the foregoing proposals at the Cardinal
Meeting on the date specified above, or on any date or dates to which, by
original or later adjournment, the Cardinal Meeting may be adjourned. Pursuant
to the Bylaws of Cardinal, the Board of Directors has fixed the close of
business on __________, 1998, as the record date for determination of the
shareholders entitled to notice of and to vote at the Cardinal Meeting and any
adjournments thereof.
Please sign and date the enclosed Proxy Card, which is solicited by the Board of
Directors, and mail it promptly in the enclosed envelope. The giving of your
proxy does not affect your right to vote in person in the event you attend the
Cardinal Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Everett, Pennsylvania -------------------------------------
, 1998 Merle W. Helsel
- ---------- President and Chief Executive Officer
IMPORTANT: PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY WHETHER OR NOT YOU
PLAN TO ATTEND THE CARDINAL MEETING. THE PROMPT RETURN OF PROXIES WILL SAVE
CARDINAL THE EXPENSE OF FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AND A
FAVORABLE VOTE. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
FIRST CAPITOL BANK
2951 Whiteford Road
York, Pennsylvania 17402
(717) 755-6414
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1998
NOTICE IS HEREBY GIVEN that the Special Meeting (the "First Capitol Meeting") of
Shareholders of First Capitol Bank ("First Capitol") will be held at __________,
_________, ______, Pennsylvania on __________, __________, 1998 at ___:___ __.m.
A Proxy Card and a Proxy Statement/Prospectus for the First Capitol Meeting are
enclosed.
The First Capitol Meeting is for the purpose of considering and acting upon:
1. The approval of the Agreement and Plan of Affiliation dated April 16, 1998
(the "First Capitol Merger Agreement") by and among Susquehanna Bancshares,
Inc. ("Susquehanna"), Susquehanna Interim Bank and First Capitol. Pursuant
to the First Capitol Merger Agreement, Susquehanna Interim Bank will merge
with and into First Capitol and First Capitol will become a wholly-owned
subsidiary of Susquehanna. Upon the consummation of the First Capitol
Merger, each First Capitol shareholder will receive in exchange for each
share of common stock of First Capitol, par value $10.00 per share ("First
Capitol Common Stock"), the number of shares of common stock of
Susquehanna, par value $2.00 per share ("Susquehanna Common Stock"), set
forth in the First Capitol Merger Agreement. The First Capitol Board of
Directors, in its sole discretion, shall have the right to terminate the
First Capitol Merger Agreement if the average closing price per share of
Susquehanna Common Stock for a 10-business-day period ending on the second
business day before the closing of the First Capitol Merger is greater than
$28.00 per share. Conversely, Susquehanna, in its sole discretion, shall
have the right to terminate the First Capitol Merger Agreement if such
average closing price of Susquehanna Common Stock is less than $21.33 per
share. If not exercised by the party with the right to terminate the First
Capitol Merger Agreement, the First Capitol Merger will proceed, and the
number of shares of Susquehanna Common Stock exchanged will be as provided
by Schedule 1.2 of the First Capitol Merger Agreement;
2. The adjournment of the First Capitol Meeting to a later date, if necessary,
to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the First Capitol Meeting to constitute a
quorum or to approve the First Capitol Merger Agreement; and
3. Such other matters as may properly come before the First Capitol Meeting or
any adjournment thereof which are incidental to the foregoing.
Any action may be taken on any one of the foregoing proposals at the First
Capitol Meeting on the date specified above, or on any date or dates to which,
by original or later adjournment, the First Capitol Meeting may be adjourned.
Pursuant to the Bylaws of First Capitol, the Board of Directors has fixed the
close of business on __________, 1998, as the record date for determination of
the shareholders entitled to vote at the First Capitol Meeting and any
adjournments thereof.
You are requested to complete, sign and date the enclosed Proxy Card, which is
solicited by the Board of Directors, and to promptly mail it in the enclosed
envelope. The giving of such proxy does not affect your right to vote in person
in the event you attend the First Capitol Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
York, Pennsylvania -------------------------------------
, 1998 Thomas S. Capello
- --------- President and Chief Executive Officer
IMPORTANT: PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY WHETHER OR NOT YOU
PLAN TO ATTEND THE FIRST CAPITOL MEETING. THE PROMPT RETURN OF PROXIES WILL
SAVE FIRST CAPITOL THE EXPENSE OF FURTHER REQUESTS FOR PROXIES TO ENSURE A
QUORUM AND A FAVORABLE VOTE. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
PROXY STATEMENT/PROSPECTUS
CARDINAL BANCORP, INC.
PROXY STATEMENT FOR
SPECIAL MEETING OF SHAREHOLDERS
_________, 1998
FIRST CAPITOL BANK
PROXY STATEMENT FOR
SPECIAL MEETING OF SHAREHOLDERS
_________, 1998
SUSQUEHANNA BANCSHARES, INC.
PROSPECTUS FOR
3,136,637 SHARES OF COMMON STOCK
PAR VALUE $2.00 PER SHARE
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Cardinal Bancorp, Inc.
("Cardinal"), the holding company of First American National Bank of
Pennsylvania ("FANBP"), to be used at the Special Meeting of Shareholders of
Cardinal (the "Cardinal Meet ing") which will be held at _________, _________,
_________, Pennsylvania on _________, _________, 1998 at ___:___ __.m. The
accompanying Notice of Special Meeting, Proxy Card and this Proxy
Statement/Prospectus are being first mailed to shareholders on or about
_________, 1998.
At the Cardinal Meeting, holders of record of common stock of Cardinal,
par value $.50 per share ("Cardinal Common Stock"), as of __________, 1998 (the
"Cardinal Record Date") will consider and vote upon the approval of the
Agreement and Plan of Affiliation dated April 13, 1998 (the "Cardinal Merger
Agreement") by and among Susquehanna Bancshares, Inc. ("Susquehanna"),
Susquehanna Bancshares West, Inc. ("SBI Merger Sub"), Cardinal and FANBP. A
copy of the Cardinal Merger Agreement is attached hereto as Appendix C. In
addition, shareholders of Cardinal may consider and vote upon the approval of
the adjournment of the Cardinal Meeting in the event there are not sufficient
votes cast in person or by proxy at the Cardinal Meeting to constitute a quorum
or to approve the Cardinal Merger Agreement, and such other matters as may
properly come before the Cardinal Meeting or any adjournments thereof.
Pursuant to the Cardinal Merger Agreement, SBI Merger Sub will merge with
and into Cardinal, and Cardinal will become a wholly-owned subsidiary of
Susquehanna and FANBP will become a wholly-owned, second-tier subsidiary of
Susquehanna (the "Cardinal Merger"). Upon the consummation of the Cardinal
Merger, each Cardinal shareholder will receive for each share of Cardinal Common
Stock, 1.92 shares of common stock of Susquehanna, par value $2.00 per share
("Susquehanna Common Stock"), so long as the average closing price per share of
Susquehanna Common Stock for a 10-business-day period ending on the second
business day before the closing of the Cardinal Merger is between and including
$22.67 and $26.67, together with a cash payment in lieu of any fractional share
of Susquehanna Common Stock which the Cardinal shareholder would otherwise be
entitled to receive. The number of shares to be issued gives effect to a three-
for-two split of the Susquehanna Common Stock effected in the form of a 50%
stock dividend paid on July 1, 1998. If such average closing price is less than
$22.67, Susquehanna has the right to terminate the Cardinal Merger Agreement.
If such average closing price is more than $26.67, Cardinal has the right to
terminate the Cardinal Merger Agreement. However, if the party with the right
does not choose to terminate the Cardinal Merger Agreement, then the Cardinal
Merger will proceed and the Cardinal shareholders will receive the number of
shares of Susquehanna Common Stock set forth in Schedule 1.2 of the Cardinal
Merger Agreement; in such situation, the Cardinal shareholders will not receive
1.92 shares of Susquehanna Common Stock for each share of Cardinal Common Stock
but, rather, a number of shares determined by reference to Schedule 1.2. If the
Cardinal Merger had been closed on the date of this Proxy Statement/Prospectus,
each share of Cardinal Common Stock would have been converted into the right to
receive 1.92 shares of Susquehanna Common Stock. For examples of the
determination of the number of shares to be received if the average closing
price of Susquehanna Common Stock is less than $22.67 or more than $26.67 per
share, see the caption entitled "Terms of the Cardinal Merger-Exchange Ratio."
<PAGE>
Consummation of the Cardinal Merger is conditioned upon, among other things, the
approval of the Cardinal Merger Agreement by the requisite vote of Cardinal's
shareholders and by various regulatory agencies.
The consideration to be received by Cardinal's shareholders pursuant to the
Cardinal Merger Agreement was negotiated by the Board of Directors of Cardinal
("Cardinal Board of Directors" ) in light of various factors, including
Cardinal's and Susquehanna's recent operating results, current financial
condition and perceived future prospects. Garland McPherson & Associates, Inc.
("GMA"), Cardinal's financial advisor, has advised the Cardinal Board of
Directors that in its opinion the consideration to be received by Cardinal's
shareholders pursuant to the Cardinal Merger is fair, from a financial point of
view, to the shareholders of Cardinal. A copy of the GMA opinion dated as of
the date of this Proxy Statement/Prospectus is attached hereto as Appendix E.
THE CARDINAL BOARD OF DIRECTORS BELIEVES THAT THE CARDINAL MERGER IS IN THE BEST
INTERESTS OF CARDINAL'S SHAREHOLDERS AND RECOMMENDS THAT CARDINAL'S SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE CARDINAL MERGER AGREEMENT.
Cardinal Common Stock is not traded in The Nasdaq Stock Market over-the-
counter market or any stock exchange. Susquehanna Common Stock currently is
traded, and the Susquehanna Common Stock to be issued pursuant to the Cardinal
Merger Agreement will be traded, in The Nasdaq Stock Market National Market
System over-the-counter market and will be authorized for quotation on The
Nasdaq Stock Market National Market System. The last known sales price per
share of Cardinal Common Stock was $______ on _____________, 1998. The last
reported sales price per share of Susquehanna Common Stock as reported on The
Nasdaq Stock Market National Market System on __________, 1998 was $_________.
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of First Capitol Bank ("First
Capitol"), to be used at the Special Meeting of Shareholders of First Capitol
(the "First Capitol Meeting") which will be held at _________, _________,
_________, Pennsylvania on _________, _________, 1998 at ___:___ __.m. The
accompanying Notice of Special Meeting and Proxy Card and this Proxy
Statement/Prospectus are first being mailed to shareholders on or about
_________, 1998.
At the First Capitol Meeting, holders of record of common stock of First
Capitol, par value $10.00 per share ("First Capitol Common Stock"), as of
__________, 1998 (the "First Capitol Record Date") will consider and vote upon
the approval of the Agreement and Plan of Affiliation dated April 16, 1998 (the
"First Capitol Merger Agreement") among Susquehanna, Susquehanna Interim Bank
(the "Interim Bank") and First Capitol. A copy of the First Capitol Merger
Agreement is attached hereto as Appendix D. In addition, shareholders of First
Capitol may consider and vote upon the approval of the adjournment of the First
Capitol Meeting, in the event there are not sufficient votes cast in person or
by proxy at the First Capitol Meeting to constitute a quorum or to approve the
First Capitol Merger Agreement, and such other matters as may properly come
before the First Capitol Meeting or any adjournments thereof.
Pursuant to the First Capitol Merger Agreement, Interim Bank will merge
with and into First Capitol, and First Capitol will become a wholly-owned
subsidiary of Susquehanna (the "First Capitol Merger"). Upon the consummation
of the First Capitol Merger, each First Capitol shareholder will receive for
each share of First Capitol Common Stock, 2.028 shares of Susquehanna Common
Stock, so long as the average closing price per share of Susquehanna Common
Stock for a ten-business-day period ending on the second business day before
closing of the First Capitol Merger is between and including $21.33 and $28.00,
together with a cash payment in lieu of any fractional share of Susquehanna
Common Stock which the First Capitol shareholder would otherwise be entitled to
receive. The number of shares to be issued gives effect to a three-for-two
split of the Susquehanna Common Stock effected in the form of a 50% stock
dividend paid on July 1, 1998. If such average closing price of Susquehanna
Common Stock is less than $21.33, Susquehanna has the right to terminate the
First Capitol Merger Agreement. If such average closing price is more than
$28.00, First Capitol has the right to terminate the First Capitol Merger
Agreement. However, if the party with the right does not choose to terminate
the First Capitol Merger Agreement, then the First Capitol Merger will proceed
and the First Capitol shareholders will receive the number of shares of
Susquehanna Common Stock set forth in Schedule 1.2 of the First Capitol Merger
Agreement; in such situation, the First Capitol shareholders will not receive
2.028 shares of Susquehanna Common Stock, but, rather, a number of shares
determined by reference to Schedule 1.2. If the First
-2-
<PAGE>
Capitol Merger had been closed on the date of this Proxy Statement/Prospectus,
each share of First Capitol Common Stock would have been converted into the
right to receive 2.028 shares of Susquehanna Common Stock. For examples of the
determination of the number of shares to be received if the average closing
price of Susquehanna Common Stock is less than $21.33 or more than $28.00 per
share, see the caption entitled "Terms of the First Capitol Merger-Exchange
Ratio." Consummation of the First Capitol Merger is conditioned upon, among
other things, the approval of the First Capitol Merger Agreement by the
requisite vote of First Capitol's shareholders and by various regulatory
agencies.
The consideration to be received by First Capitol's shareholders pursuant
to the First Capitol Merger Agreement was negotiated by the Board of Directors
of First Capitol ("First Capitol Board of Directors") in light of various
factors, including First Capitol's and Susquehanna's recent operating results,
current financial condition and perceived future prospects. Danielson
Associates, Inc. ("Danielson"), First Capitol's financial advisor, has advised
the First Capitol Board of Directors that in its opinion the consideration to be
received by First Capitol's shareholders pursuant to the First Capitol Merger is
fair, from a financial point of view, to the shareholders of First Capitol. A
copy of the Danielson opinion dated as of the date of this Proxy Statement/
Prospectus is attached hereto as Appendix F. THE FIRST CAPITOL BOARD OF
DIRECTORS BELIEVES THAT THE FIRST CAPITOL MERGER IS IN THE BEST INTERESTS OF
FIRST CAPITOL'S SHAREHOLDERS AND RECOMMENDS THAT FIRST CAPITOL'S SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE FIRST CAPITOL MERGER AGREEMENT.
First Capitol Common Stock is not traded in The Nasdaq Stock Market over-
the-counter market or any stock exchange. Susquehanna Common Stock currently is
traded, and the Susquehanna Common Stock to be issued pursuant to the First
Capitol Merger Agreement will be traded, in The Nasdaq Stock Market National
Market System over-the-counter market and authorized for quotation on The Nasdaq
Stock Market National Market System. The last known sales price per share of
First Capitol Common Stock was $_____ on _________. The last reported sales
price per share of Susquehanna Common Stock as reported on The Nasdaq Stock
Market National Market System on __________, 1998 was $_________.
This Proxy Statement/Prospectus constitutes a prospectus of Susquehanna
filed as part of a registration statement filed with the Securities and Exchange
Commission relating to the 3,136,637 shares of Susquehanna Common Stock issuable
pursuant to the Cardinal Merger Agreement and the First Capitol Merger
Agreement. All information contained in this Proxy Statement/Prospectus with
respect to Susquehanna and its subsidiaries has been supplied by Susquehanna,
and all information with respect to Cardinal, First Capitol and their respective
subsidiaries has been supplied by Cardinal and First Capitol, respectively.
This Proxy Statement/Prospectus does not cover any resales of the
Susquehanna Common Stock issuable in the Cardinal Merger and the First Capitol
Merger by any shareholders deemed to be affiliates of Cardinal, First Capitol or
Susquehanna. No person is authorized to make use of this Proxy Statement/
Prospectus in connection with such resales, although such stock may be
traded without use of this Proxy Statement/Prospectus by former shareholders of
Cardinal and First Capitol who are not deemed to be affiliates of Cardinal,
First Capitol or Susquehanna.
THE SHARES OF SUSQUEHANNA COMMON STOCK ISSUABLE IN THE CARDINAL MERGER AND
THE FIRST CAPITOL MERGER 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.
THE SHARES OF SUSQUEHANNA COMMON STOCK ISSUABLE IN THE CARDINAL MERGER AND
THE FIRST CAPITOL MERGER ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS
OF A BANK OR SAVINGS INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
The date of this Proxy Statement/Prospectus is __________, 1998.
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No person is authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus
and, if given or made, such other information or representations must not be
relied upon as having been authorized by Susquehanna, Cardinal or First Capitol.
This Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any security other than the securities covered
by this Proxy Statement/Prospectus, or the solicitation of a proxy to or from
any person in any jurisdiction where it is unlawful to make such offer or
solicitation of an offer or proxy solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities made hereunder
shall, under any circumstances, create any implication that there has been no
change in the information about Susquehanna, Cardinal or First Capitol contained
in this Proxy Statement/Prospectus since the date hereof.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains and incorporates by reference
certain statements that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements include all statements regarding the intent, belief or
current expectations regarding the matters discussed or incorporated by
reference in this Proxy Statement/Prospectus (including statements as to
"beliefs," "expectations," "anticipations," "intentions" or similar words) and
all statements which are not statements of historical fact. Such statements are
subject to risks, uncertainties and assumptions, including, but not limited to,
trends for the continued growth of the business of Susquehanna, Cardinal and
First Capitol, the realization of anticipated revenues, profitability and cost
synergies of the combined companies, and other risks and uncertainties. Should
one or more of these risks or uncertainties materialize or should underlying
assumptions prove incorrect, actual results, performance or achievements in 1999
and beyond could differ materially from those expressed in, or implied by, such
forward-looking statements.
AVAILABLE INFORMATION
Each of Susquehanna and Cardinal is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, accordingly, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed with the Commission are available
for inspection and copying at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and at World Trade Center,
Suite 1300, New York, New York 10048. Copies of such documents may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Each of
Susquehanna and Cardinal are electronic filers with the Commission. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission Web site is:
http://www.sec.gov. First Capitol is not subject to the informational
requirements of the Exchange Act. Susquehanna Common Stock is authorized for
quotation on The Nasdaq Stock Market. Such materials and other information
concerning Susquehanna, therefore, can also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C.
Neither Cardinal Common Stock nor First Capitol Common Stock are authorized
for quotation on The Nasdaq Stock Market or any stock exchange.
Susquehanna has filed with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), a Registration Statement on Form S-4
(including all amendments and exhibits thereto, the "Registration Statement")
with respect to the Susquehanna Common Stock issuable pursuant to each of the
Cardinal Merger Agreement and the First Capitol Merger Agreement. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Registration Statement,
including any amendments and exhibits thereto, is available
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for inspection and copying as set forth above. Statements contained in this
Proxy Statement/Prospectus as to the contents of any contract or other document
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
This Proxy Statement/Prospectus incorporates by reference documents
relating to Susquehanna which are not presented herein or delivered herewith.
These documents (not including exhibits thereto, unless such exhibits are
specifically incorporated by reference herein) are available without charge to
any shareholder of Cardinal or First Capitol, including any beneficial owner to
whom this Proxy Statement/Prospectus is delivered, upon written or oral request
directed to the Secretary, Susquehanna Bancshares, Inc., 26 North Cedar Street,
Lititz, Pennsylvania 17543, telephone number (717) 626-4721. In order to
ensure timely delivery of the documents in advance of the meeting to which this
Proxy Statement/Prospectus relates, any request should be made no later than
___________ ___, 1998.
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INCORPORATION OF DOCUMENTS BY REFERENCE
Certain documents previously filed by Susquehanna with the Commission
pursuant to the Exchange Act or the Securities Act, as the case may be, are
hereby incorporated by reference in this Proxy Statement/Prospectus as follows:
(1) the Definitive Proxy Statement on Schedule 14A for the Annual Meeting
of Shareholders on May 29, 1998;
(2) the Annual Report on Form 10-K for the year ended December 31, 1997;
(3) the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
(4) the Current Report on Form 8-K dated April 28, 1998;
(5) the Current Report on Form 8-K dated August 6, 1997; and
(6) the Current Report on Form 8-K dated March 14, 1997.
All documents filed by Susquehanna pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the consummation of
each of the Cardinal Merger and the First Capitol Merger shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
thereof. Any statement contained in a document incorporated or deemed to be
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 that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus. All information appearing in this Proxy
Statement/Prospectus should be read in conjunction with, and is qualified in its
entirety by, the information and financial statements (including notes thereto)
appearing in the documents incorporated herein by reference, except to the
extent set forth in the immediately preceding statement.
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TABLE OF CONTENTS
<TABLE>
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FORWARD-LOOKING STATEMENTS.................................................................................... -4-
AVAILABLE INFORMATION......................................................................................... -4-
INCORPORATION OF DOCUMENTS BY REFERENCE....................................................................... -6-
SUMMARY....................................................................................................... -10-
SELECTED FINANCIAL DATA....................................................................................... -25-
THE CARDINAL MEETING.......................................................................................... -29-
General.............................................................................................. -29-
Voting, Revocation and Solicitation of Proxies....................................................... -29-
Voting Securities and Security Ownership............................................................. -30-
Other Matters........................................................................................ -32-
Auditors of Cardinal................................................................................. -32-
THE FIRST CAPITOL MEETING..................................................................................... -33-
General.............................................................................................. -33-
Voting, Revocation and Solicitation of Proxies....................................................... -33-
Voting Securities and Security Ownership............................................................. -34-
Other Matters........................................................................................ -36-
APPROVAL OF THE CARDINAL MERGER............................................................................... -37-
Background of the Cardinal Merger.................................................................... -37-
Reasons for the Cardinal Merger and Recommendation of the Cardinal Board of Directors................ -39-
Vote Required........................................................................................ -40-
Opinion of Financial Advisor......................................................................... -40-
Dissenters' Rights................................................................................... -44-
Terms of the Cardinal Merger......................................................................... -46-
Cardinal Stock Option Agreement...................................................................... -54-
Regulatory Approvals of Cardinal..................................................................... -55-
Interests of Certain Persons in the Cardinal Merger.................................................. -55-
Management and Operations Following the Cardinal Merger.............................................. -56-
Accounting Treatment of the Cardinal Merger.......................................................... -57-
Income Tax Consequences of the Cardinal Merger....................................................... -57-
APPROVAL OF THE FIRST CAPITOL MERGER.......................................................................... -59-
Background of the First Capitol Merger............................................................... -59-
Reasons for the First Capitol Merger and Recommendation of the First Capitol Board of Directors...... -60-
Vote Required........................................................................................ -61-
Opinion of Financial Advisor......................................................................... -61-
Dissenters' Rights................................................................................... -63-
Terms of the First Capitol Merger.................................................................... -65-
First Capitol Stock Option Agreement................................................................. -73-
Regulatory Approvals of First Capitol................................................................ -74-
Interests of Certain Persons in the First Capitol Merger............................................. -74-
Management and Operations Following the First Capitol Merger......................................... -77-
Accounting Treatment of the First Capitol Merger..................................................... -77-
Income Tax Consequences of the First Capitol Merger.................................................. -77-
RESALE RESTRICTIONS........................................................................................... -78-
</TABLE>
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DESCRIPTION OF SUSQUEHANNA AND ITS CAPITAL STOCK............................................................. -79-
Information Concerning Susquehanna.................................................................. -79-
General............................................................................................. -80-
Common Stock........................................................................................ -80-
Preferred Stock..................................................................................... -80-
Pennsylvania Anti-Takeover Law Provisions........................................................... -80-
Provisions in Susquehanna's Articles of Incorporation and Bylaws.................................... -81-
COMPARISON OF SHAREHOLDER RIGHTS............................................................................. -83-
Introduction........................................................................................ -83-
Dividends........................................................................................... -83-
Classified Board of Directors....................................................................... -83-
Number of Directors................................................................................. -84-
Nomination of Directors............................................................................. -84-
Cumulative Voting................................................................................... -84-
Removal of Directors................................................................................ -85-
Filling Vacancies on the Board of Directors......................................................... -85-
Call of Special Shareholders' Meeting............................................................... -85-
Notice of Shareholders' Meetings.................................................................... -85-
Quorum Requirements and Adjournment of Meetings..................................................... -86-
Shareholder Proposals; New Business at a Meeting.................................................... -86-
Action Without Meeting.............................................................................. -86-
Dissenters' Rights.................................................................................. -86-
Preemptive Rights................................................................................... -86-
Limitations on Directors' Liability................................................................. -86-
Indemnification..................................................................................... -87-
State Anti-Takeover Law Provisions.................................................................. -87-
Anti-Takeover Provisions in the Susquehanna, Cardinal and First Capitol Articles;
Approval of Certain Transactions........................................................... -88-
Amendment of Articles of Incorporation.............................................................. -90-
Amendment of Bylaws................................................................................. -90-
DIVIDENDS AND MARKET PRICES OF SECURITIES.................................................................... -92-
Susquehanna......................................................................................... -92-
Cardinal............................................................................................ -92-
First Capitol....................................................................................... -92-
REGULATIONS AFFECTING DIVIDENDS.............................................................................. -94-
Susquehanna......................................................................................... -94-
Cardinal............................................................................................ -95-
First Capitol....................................................................................... -95-
BUSINESS OF CARDINAL......................................................................................... -97-
General............................................................................................. -97-
Services............................................................................................ -97-
Regulation.......................................................................................... -98-
Competition......................................................................................... -99-
Employees........................................................................................... -99-
Certain Relationships and Related Party Transactions................................................ -99-
Litigation.......................................................................................... -100-
Properties.......................................................................................... -100-
Impact of the Year 2000 Issue....................................................................... -101-
</TABLE>
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BUSINESS OF FIRST CAPITOL.................................................................................... -102-
General............................................................................................. -102-
Services............................................................................................ -102-
Regulation.......................................................................................... -102-
Competition......................................................................................... -103-
Employees........................................................................................... -103-
Certain Relationships and Related Party Transactions................................................ -104-
Litigation.......................................................................................... -104-
Properties.......................................................................................... -104-
Impact of the Year 2000 Issue....................................................................... -104-
IMPACT OF THE YEAR 2000 ISSUE ON SUSQUEHANNA................................................................. -106-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CARDINAL........................................................................... -108-
Comparison of Results of Operation for the Three Months Ended March 31, 1998 and 1997............... -108-
Comparison of Results of Operations for the Years Ended December 31, 1997, 1996 and 1995............ -113-
Financial Condition................................................................................. -118-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FIRST CAPITOL...................................................................... -139-
Comparison of Results of Operations for the Three Months Ended March 31, 1998 and 1997.............. -139-
Comparison of Results of Operations for the Years Ended December 31, 1997, 1996 and 1995............ -146-
Financial Condition................................................................................. -148-
ADJOURNMENT OF THE CARDINAL MEETING.......................................................................... -162-
ADJOURNMENT OF THE FIRST CAPITOL MEETING..................................................................... -162-
INDEPENDENT ACCOUNTANTS...................................................................................... -162-
EXPERTS...................................................................................................... -162-
Susquehanna......................................................................................... -162-
Cardinal............................................................................................ -163-
First Capitol....................................................................................... -163-
LEGAL OPINIONS............................................................................................... -163-
APPENDIX A CARDINAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS................................... A-1
APPENDIX B FIRST CAPITOL BANK FINANCIAL STATEMENTS.................................................... B-1
APPENDIX C CARDINAL MERGER AGREEMENT.................................................................. C-1
APPENDIX D FIRST CAPITOL MERGER AGREEMENT............................................................. D-1
APPENDIX E OPINION OF GARLAND McPHERSON & ASSOCIATES, INC. ........................................... E-1
APPENDIX F OPINION OF DANIELSON ASSOCIATES, INC. ..................................................... F-1
APPENDIX G DISSENTERS' RIGHTS PROVISIONS.............................................................. G-1
APPENDIX H CARDINAL STOCK OPTION AGREEMENT............................................................ H-1
APPENDIX I FIRST CAPITOL STOCK OPTION AGREEMENT....................................................... I-1
</TABLE>
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SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information appearing elsewhere or incorporated by
reference in this Proxy Statement/Prospectus and the Appendices hereto.
Shareholders are urged to read this entire Proxy Statement/Prospectus, including
the Appendices hereto. Certain terms used in this summary and elsewhere in this
Proxy Statement/Prospectus are used as defined in this summary or elsewhere in
this Proxy Statement/Prospectus.
The Cardinal Meeting
The Cardinal Meeting will be held at _________, _________, ________,
Pennsylvania on _________, _________, 1998 at ___:___ __.m. At the Cardinal
Meeting, holders of record of Cardinal Common Stock as of the Cardinal Record
Date will consider and vote upon the approval of the Cardinal Merger Agreement
by and among Susquehanna, SBI Merger Sub, Cardinal and FANBP. In addition,
shareholders of Cardinal may consider and vote upon the approval of the
adjournment of the Cardinal Meeting, in the event there are not sufficient votes
cast in person or by proxy at the Cardinal Meeting to constitute a quorum or to
approve the Cardinal Merger Agreement, and such other matters as may properly
come before the Cardinal Meeting or any adjournments thereof. The holders of
record of shares of Cardinal Common Stock at the close of business on the
Cardinal Record Date, __________, 1998, will be entitled to one vote for each
such share then so held. The presence, in person or by proxy, of at least a
majority of the total number of shares of Cardinal Common Stock outstanding and
entitled to vote as of the Cardinal Record Date will be required to constitute a
quorum at the Cardinal Meeting. For additional information, see "THE CARDINAL
MEETING."
The First Capitol Meeting
The First Capitol Meeting will be held at _________, _________, ________,
Pennsylvania on _________, _________, 1998 at ___:___ __.m. At the First
Capitol Meeting, holders of record of First Capitol Common Stock as of the close
of business on the First Capitol Record Date will consider and vote upon the
approval of the First Capitol Merger Agreement by and among Susquehanna, Interim
Bank and First Capitol. In addition, shareholders of First Capitol may consider
and vote upon the approval of the adjournment of the First Capitol Meeting, in
the event there are not sufficient votes cast in person or by proxy at the First
Capitol Meeting to constitute a quorum or to approve the First Capitol Merger
Agreement, and such other matters as may properly come before the First Capitol
Meeting or any adjournments thereof. The holders of record of shares of First
Capitol Common Stock at the close of business on the First Capitol Record Date,
__________, 1998, will be entitled to one vote for each such share then so held.
The presence, in person or by proxy, of at least a majority of the total number
of shares of First Capitol Common Stock outstanding as of the First Capitol
Record Date will be required to constitute a quorum at the First Capitol
Meeting. For additional information, see "THE FIRST CAPITOL MEETING."
Cardinal and FANBP
Cardinal is a Pennsylvania business corporation formed in November 1986 and
functions as the bank holding company for FANBP. Cardinal's principal business
has been directing, planning and coordinating the business activities of FANBP.
FANBP is a national banking association headquartered in Everett,
Pennsylvania, which conducts business through five offices, located in Everett
(the main office), Bedford, Breezewood, Duncansville (a suburb of Altoona) and
Woodbury, Pennsylvania.
Cardinal's executive offices are located at 140 East Main Street, Everett,
Pennsylvania 15537, and its telephone number is (814) 652-2131.
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First Capitol
First Capitol is a Pennsylvania state-chartered bank formed in 1988 and
headquartered in York, Pennsylvania, which conducts business through four
offices located in York City and its suburbs in York County, Pennsylvania.
First Capitol's executive offices are located at 2951 Whiteford Road, York,
Pennsylvania 17402, and its telephone number is (717) 755-6414.
Susquehanna
Susquehanna is a bank holding company whose sole activity consists of
owning and supervising its nine depository subsidiaries (eight banks and one
federal savings bank) and two non-depository subsidiaries. Susquehanna's
depository subsidiaries consist of Citizens National Bank of Southern
Pennsylvania, Greencastle, Pennsylvania; Equity National Bank, Marlton, New
Jersey; Farmers & Merchants Bank and Trust, Hagerstown, Maryland; Farmers First
Bank, Lititz, Pennsylvania; Farmers National Bank, Mullica Hill, New Jersey;
First National Trust Bank, Sunbury, Pennsylvania; Founders' Bank, Bryn Mawr,
Pennsylvania; Susquehanna Bank, Baltimore, Maryland; and Williamsport National
Bank, Williamsport, Pennsylvania. These subsidiaries are engaged in providing
banking, bank-related, and saving and loan services in central and southcentral
Pennsylvania, principally in the counties of Columbia, Franklin, Lancaster,
Lycoming, Northumberland, Snyder, Union and York, in southeastern Pennsylvania,
principally in the counties of Chester, Delaware and Montgomery, in
northwestern, southeastern and central Maryland, in the City of Baltimore and in
the counties of Allegany, Anne Arundel, Baltimore, Carroll, Cecil, Harford,
Washington, Wicomico and Worcester, and in southern New Jersey, principally in
Burlington, Camden and Gloucester counties. The day-to-day management of
Susquehanna's subsidiaries is conducted by each subsidiary's officers, subject
to review by its board of directors, thereby permitting each subsidiary to
retain substantial autonomy to better service its market in day-to-day
operations.
Susquehanna was incorporated in Pennsylvania in 1982. Its executive
offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and
its telephone number is (717) 626-4721.
The Cardinal Merger and the First Capitol Merger
Cardinal and FANBP
------------------
In the Cardinal Merger, Cardinal will become a wholly-owned subsidiary of
Susquehanna and FANBP will become a wholly-owned, second-tier subsidiary of
Susquehanna by means of a merger of SBI Merger Sub with and into Cardinal, with
Cardinal as the surviving entity (sometimes referred to as the "Surviving
Corporation"). Upon the consummation of the Cardinal Merger, Cardinal
shareholders will receive in exchange for each share of Cardinal Common Stock,
1.92 shares of Susquehanna Common Stock, so long as the average closing price
per share of Susquehanna Common Stock before the closing of the Cardinal Merger
is between and including $22.67 and $26.67. The number of shares to be issued
gives effect to a three-for-two split of the Susquehanna Common Stock effected
in the form of a 50% stock dividend paid on July 1, 1998. Cardinal may
terminate the Cardinal Merger Agreement if the average closing price is greater
than $26.67, and Susquehanna may terminate the Cardinal Merger Agreement if the
average closing price is less than $22.67. However, if the party with the right
does not choose to terminate the Cardinal Merger Agreement, then the Cardinal
Merger will proceed and the Cardinal shareholders will receive the number of
shares of Susquehanna Common Stock set forth in Schedule 1.2 of the Cardinal
Merger Agreement; in such situation the Cardinal shareholders will not receive
1.92 shares of Susquehanna Common Stock for each share of Cardinal Common Stock
but, rather, the number of shares determined by reference to Schedule 1.2.
Cardinal shareholders will receive a cash payment in lieu of any fractional
share of Susquehanna Common Stock which the Cardinal shareholders would
otherwise be entitled to receive. If the Cardinal Merger had been closed on the
date of this Proxy Statement/Prospectus, each share of Cardinal Common Stock
would have been converted into the right to receive 1.92 shares of Susquehanna
Common Stock. The last reported sale price of Susquehanna Common Stock on The
Nasdaq
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Stock Market National Market System on ______, 1998 was $_____ per share.
Consummation of the Cardinal Merger is conditioned upon, among other things, the
approval of the Cardinal Merger Agreement by the requisite vote of Cardinal's
shareholders and by various regulatory agencies. See "APPROVAL OF THE CARDINAL
MERGER."
General
Pursuant to the Cardinal Merger Agreement, SBI Merger Sub will merge
with and into Cardinal, with Cardinal as the Surviving Corporation, as a result
of which Cardinal will become a direct wholly-owned subsidiary of Susquehanna,
and FANBP will become a second-tier subsidiary of Susquehanna (the "FANBP Bank
Acquisition"). The name of the Surviving Corporation will be "Susquehanna
Bancshares West, Inc."
Exchange Ratio
Pursuant to the Cardinal Merger Agreement, the outstanding shares of
Cardinal Common Stock will be exchanged for shares of Susquehanna Common Stock
in accordance with the exchange ratio ("Cardinal Exchange Ratio") set forth in
the Cardinal Merger Agreement ("Cardinal Merger Consideration"). This number
may be adjusted subject to conditions set forth in the Cardinal Merger
Agreement.
The number of shares of Susquehanna Common Stock to be issued to
holders of Cardinal Common Stock in accordance with the Cardinal Exchange Ratio
will be based upon the average closing price per share of Susquehanna Common
Stock over a 10-day trading period ending two business days prior to the closing
of the Cardinal Merger. The number of shares to be issued gives effect to a
three-for-two split of the Susquehanna Common Stock effected in the form of a
50% stock dividend paid on July 1, 1998. In general, 1,900,800 shares of
Susquehanna Common Stock will be exchanged for Cardinal Common Stock, such that
each of the 990,000 shares of Cardinal Common Stock will be exchanged for 1.92
shares of Susquehanna Common Stock. However, if the average closing price over
such period is less than $22.67, Susquehanna will have the right to terminate
the Cardinal Merger Agreement, but if Susquehanna does not choose to terminate,
then the exchange ratio will be adjusted as provided in Schedule 1.2 of the
Cardinal Merger Agreement with the effect that more than 1.92 shares of
Susquehanna Common Stock will be exchanged for each share of Cardinal Common
Stock. On the other hand, if the average closing price over such period is
greater than $26.67, Cardinal will have the right to terminate the Cardinal
Merger Agreement, but if Cardinal does not choose to terminate, then the
exchange ratio will be adjusted as provided in Schedules 1.2 of the Cardinal
Merger Agreement with the effect that less than 1.92 shares of Susquehanna
Common Stock will be exchanged for each share of the Cardinal Common Stock. For
examples of the determination of the number of shares to be received if the
average closing price of Susquehanna Common Stock is less than $22.67 or more
than $26.67 per share, see the caption entitled "Terms of the Cardinal Merger-
Exchange Ratio." Additionally, both Cardinal and Susquehanna will have the
right to terminate the Cardinal Merger Agreement if the Cardinal Merger is not
consummated by December 31, 1998. Nonetheless, the parties have the right to
extend the time for closing beyond December 31, 1998 by mutually amending the
Cardinal Merger Agreement.
Fractional Shares
No fractional shares of Susquehanna Common Stock will be issued.
Susquehanna will furnish to any holder of Cardinal Common Stock otherwise
entitled to a fractional share a check for an amount of cash equal to the
fraction of a share of Susquehanna Common Stock represented by the certificates
so surrendered multiplied by the average closing price per share as determined
in accordance with the Cardinal Merger Agreement.
Closing; Effective Date
The Cardinal Merger Agreement provides that the Cardinal closing
("Cardinal Closing") will occur at such time and place as shall be agreed upon
by the parties, but no later than the 30th business day after: (i) the last
approval of required governmental authorities is granted and any related waiting
periods expire; (ii) the lifting, discharge or dismissal of any stay of any such
governmental approval or of any injunction against the Cardinal Merger or the
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FANBP Bank Acquisition; and (iii) all shareholder approvals required by the
parties pursuant to the Cardinal Merger Agreement are received. Immediately
following the Cardinal Closing, and provided the Cardinal Merger Agreement has
not been terminated or abandoned in accordance with the terms thereof, Cardinal
and SBI Merger Sub will cause articles of merger to be properly prepared and
completed and filed with the Secretary of State of the Commonwealth of
Pennsylvania (the "Pennsylvania Department of State"). The Cardinal Merger, and
the transactions described in the Cardinal Merger Agreement, will become
effective at 11:59 p.m. on the day on which the articles of merger have been
duly filed with and accepted by the Pennsylvania Department of State (the
"Cardinal Merger Effective Date").
First Capitol
-------------
In the First Capitol Merger, First Capitol will become a wholly-owned
subsidiary of Susquehanna by means of a merger of Interim Bank with and into
First Capitol. Upon the consummation of the First Capitol Merger, each First
Capitol shareholder will receive in exchange for each share of First Capitol
Common Stock, 2.028 shares of Susquehanna Common Stock, so long as the average
closing price per share of Susquehanna Common Stock for a ten-business-day
period ending on the second business day before closing of the First Capitol
Merger is between and including $21.33 and $28.00. The number of shares to be
issued gives effect to a three-for-two split of the Susquehanna Common Stock
effected in the form of a 50% stock dividend paid on July 1, 1998. First
Capitol may terminate the First Capitol Merger Agreement if the average closing
price is greater than $28.00, and Susquehanna may terminate the First Capitol
Merger Agreement if the average closing price is less than $21.33. However, if
the party with the right does not choose to terminate the First Capitol Merger
Agreement, then the First Capitol Merger will proceed and you will receive the
number of shares of Susquehanna Common Stock set forth in Schedule 1.2 of the
First Capitol Merger Agreement; in such situation, the First Capitol
shareholders will not receive 2.028 shares of Susquehanna Common Stock for each
share of First Capitol Common Stock, but, rather, the number of shares
determined by reference to Schedule 1.2. First Capitol shareholders will
receive a cash payment in lieu of any fractional share of Susquehanna Common
Stock which the First Capitol shareholders would otherwise be entitled to
receive. If the First Capitol Merger had been closed on the date of the Proxy
Statement/Prospectus, each share of First Capitol Common Stock would have been
converted into the right to receive 2.028 shares of Susquehanna Common Stock.
The last reported sale price of Susquehanna Common Stock on The Nasdaq Stock
Market National Market System on ______, 1998 was $_____ per share.
Consummation of the First Capitol Merger is conditioned upon, among other
things, the approval of the First Capitol Merger Agreement by the requisite vote
of First Capitol's shareholders and by various regulatory agencies. See
"APPROVAL OF THE FIRST CAPITOL MERGER."
General
Pursuant to the First Capitol Merger Agreement, Interim Bank will
merge with and into First Capitol, with First Capitol as the surviving entity
(sometimes referred to as the "Surviving Bank"), as a result of which First
Capitol will become a direct wholly-owned subsidiary of Susquehanna. The name
of the Surviving Bank will be "First Capitol Bank."
Exchange Ratio
Pursuant to the First Capitol Merger Agreement, the outstanding shares
of First Capitol Common Stock will be exchanged for shares of Susquehanna Common
Stock in accordance with the exchange ratio ("First Capitol Exchange Ratio") set
forth in the First Capitol Merger Agreement ("First Capitol Merger
Consideration"). This number may be adjusted subject to conditions set forth in
the First Capitol Merger Agreement.
The number of shares of Susquehanna Common Stock to be issued to
holders of First Capitol Common Stock in accordance with the First Capitol
Exchange Ratio will be based upon the average closing price per share of
Susquehanna Common Stock over a 10-day trading period ending two business days
prior to the closing of the First Capitol Merger. The number of shares to be
issued gives effect to a three-for-two split of the Susquehanna Common Stock
effected in the form of a 50% stock dividend paid on July 1, 1998. In general,
1,026,032 shares of Susquehanna Common Stock will be exchanged for First Capitol
Common Stock, such that each of the 505,933 shares
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of First Capitol Common Stock will be exchanged for 2.028 shares of Susquehanna
Common Stock. However, if the average closing price over such period is less
than $21.33, Susquehanna will have the right to terminate the First Capitol
Merger Agreement, but if Susquehanna does not choose to terminate, then the
exchange ratio will be adjusted as provided in the First Capitol Merger
Agreement with the effect that more than 2.028 shares of Susquehanna Common
Stock will be exchanged for each share of First Capitol Common Stock. On the
other hand, if the average closing price over such period is greater than
$28.00, First Capitol will have the right to terminate the First Capitol Merger
Agreement, but if First Capitol does not choose to terminate, then the exchange
ratio will be adjusted as provided in the First Capitol Merger Agreement with
the effect that less than 2.028 shares of Susquehanna Common Stock will be
exchanged for each share of First Capitol Common Stock. For examples of the
determination of the number of shares to be received if the average closing
price of Susquehanna Common Stock is less than $21.33 or more than $28.00 per
share, see the caption entitled "Terms of the First Capitol Merger-Exchange
Ratio." Additionally, both First Capitol and Susquehanna will have the right to
terminate the First Capitol Merger Agreement if the First Capitol Merger is not
consummated by March 31, 1999. Nonetheless, the parties have the right to extend
the time for closing beyond March 31, 1999 by mutually amending the First
Capitol Merger Agreement.
Fractional Shares
No fractional shares of Susquehanna Common Stock will be issued.
Susquehanna will furnish to any holder of First Capitol Common Stock otherwise
entitled to a fractional share a check for an amount of cash equal to the
fraction of a share of Susquehanna Common Stock represented by the certificates
so surrendered multiplied by the average price per share as determined in
accordance with the First Capitol Merger Agreement.
Closing; Effective Date
The First Capitol Merger Agreement provides that the First Capitol
closing ("First Capitol Closing") will occur following three business days
notice to First Capitol, as shall be agreed upon by the parties, which date
shall not be later than the 30th business day after: (i) the last approval of
required governmental authorities is granted and any related waiting periods
expire; (ii) the lifting, discharge or dismissal of any stay of any such
governmental approval or of any injunction against the First Capitol Merger; and
(iii) all shareholder approvals required by the parties pursuant to the First
Capitol Merger Agreement are received. Immediately following the First Capitol
Closing, and provided the First Capitol Merger Agreement has not been terminated
or abandoned in accordance with the terms thereof, First Capitol and Interim
Bank will request that the Pennsylvania Department of Banking ("Department of
Banking") cause articles of merger to be delivered and filed with the
Pennsylvania Department of State. The First Capitol Merger, and the
transactions described in the First Capitol Merger Agreement, will become
effective at 12:01 a.m. on the day of the First Capitol Closing ("First Capitol
Merger Effective Date").
Opinions of Financial Advisors
Cardinal
--------
GMA has rendered an opinion to the Cardinal Board of Directors that in its
opinion the Cardinal Merger Consideration is fair, from a financial point of
view, to the shareholders of Cardinal. The opinion, which is attached hereto as
Appendix E, should be read in its entirety with respect to the assumptions made
and other matters considered by GMA in rendering such opinion. See "APPROVAL OF
THE CARDINAL MERGER--Opinion of Financial Advisor."
First Capitol
-------------
Danielson has rendered its opinion to the First Capitol Board of Directors
that in its opinion the First Capitol Merger Consideration is fair, from a
financial point of view, to the shareholders of First Capitol. This opinion,
which is attached hereto as Appendix F, should be read in its entirety with
respect to the assumptions made and other matters
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considered by Danielson in rendering such opinion. See "APPROVAL OF THE FIRST
CAPITOL MERGER-- Opinion of Financial Advisor."
Recommendations of the Boards of Directors
Cardinal
--------
The consideration to be received by Cardinal's shareholders pursuant to the
Cardinal Merger Agreement was negotiated by the Cardinal Board of Directors in
light of various factors, including Cardinal's and Susquehanna's recent
operating results, current financial condition and perceived future prospects.
THE CARDINAL BOARD OF DIRECTORS BELIEVES THAT THE CARDINAL MERGER IS IN THE BEST
INTEREST OF CARDINAL'S SHAREHOLDERS AND RECOMMENDS THAT CARDINAL'S SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE CARDINAL MERGER AGREEMENT.
First Capitol
-------------
The consideration to be received by First Capitol's shareholders pursuant
to the First Capitol Merger Agreement was negotiated by the First Capitol Board
of Directors in light of various factors, including First Capitol's and
Susquehanna's recent operating results, current financial condition and
perceived future prospects. THE FIRST CAPITOL BOARD OF DIRECTORS BELIEVES THAT
THE FIRST CAPITOL MERGER IS IN THE BEST INTEREST OF FIRST CAPITOL'S SHAREHOLDERS
AND RECOMMENDS THAT FIRST CAPITOL'S SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
FIRST CAPITOL MERGER AGREEMENT.
Votes Required
Cardinal
--------
The affirmative vote of the holders of 75% of the outstanding shares of
Cardinal Common Stock is required to approve the Cardinal Merger Agreement.
Directors and executive officers are expected to vote substantially all of the
74,753 shares held by them, representing approximately eight percent of the
Cardinal Common Stock outstanding at the Cardinal Record Date and entitled to
vote at the Cardinal Meeting, "FOR" approval of the Cardinal Merger Agreement.
First Capitol
-------------
The affirmative vote of 80% of the outstanding shares of First Capitol
Common Stock is required to approve the First Capitol Merger Agreement.
Directors and certain executive officers have separately agreed to vote
substantially all of the 124,044 shares held by them, representing approximately
24% of the First Capitol Common Stock outstanding at the First Capitol Record
Date and entitled to vote at the First Capitol Meeting, "FOR" approval of the
First Capitol Merger Agreement. In addition, First Capitol's principal
shareholder, National Penn Investment Company has separately agreed to vote all
of the 112,473 shares held by it, representing approximately 22% of the First
Capitol Common Stock outstanding at the First Capitol Record Date and entitled
to vote at the First Capitol Meeting, "FOR" approval of the First Capitol Merger
Agreement.
Dissenters' Rights
Cardinal
--------
Pursuant to the Pennsylvania Business Corporation Law of 1988, as amended
("BCL"), the holders of Cardinal Common Stock will have the right to dissent
from approval of the Cardinal Merger, and to demand and receive the "fair value"
of their shares of Cardinal Common Stock. In order to assert such dissenters'
rights, a Cardinal shareholder must: (i) file a written notice of intent to
dissent with Cardinal prior to the shareholder vote at the Cardinal Meeting;
(ii)
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refrain from voting in favor of the Cardinal Merger; (iii) file a written
demand for payment and deposit the certificates representing his or her shares
in accordance with the terms of the notice to demand payment that will be sent
by Cardinal; and (iv) comply with certain other statutory procedures set forth
in the BCL. Proxies which are returned but which do not contain voting
instructions will be voted in favor of the Cardinal Merger Agreement, which will
result in the forfeiture of dissenters' rights with respect to the Cardinal
Merger. A copy of the applicable sections of the BCL are attached to this Joint
Proxy Statement/Prospectus as Appendix G. Any deviation from the procedures set
forth in such statutory provisions may result in the forfeiture of dissenters'
rights with respect to the Cardinal Merger. Accordingly, shareholders wishing to
assert dissenters' rights are urged to read carefully "APPROVAL OF THE CARDINAL
MERGER--Dissenters' Rights" and Appendix G to this Joint Proxy
Statement/Prospectus.
First Capitol
-------------
Pursuant to the BCL, the holders of First Capitol Common Stock will have
the right to dissent from approval of the First Capitol Merger, and to demand
and receive the "fair value" of their shares of First Capitol Common Stock. In
order to assert such dissenters' rights, a First Capitol shareholder must: (i)
file a written notice of intent to dissent with First Capitol prior to the
shareholder vote at the First Capitol Meeting; (ii) refrain from voting in favor
of the First Capitol Merger; (iii) file a written demand for payment and deposit
the certificates representing his or her shares in accordance with the terms of
the notice to demand payment that will be sent by First Capitol; and (iv) comply
with certain other statutory procedures set forth in the BCL. Proxies which are
returned but which do not contain voting instructions will be voted in favor of
the First Capitol Merger Agreement, which will result in the forfeiture of
dissenters' rights with respect to the First Capitol Merger. A copy of the
applicable sections of the BCL are attached to this Joint Proxy
Statement/Prospectus as Appendix G. Any deviation from the procedures set forth
in such statutory provisions may result in the forfeiture of dissenters' rights
with respect to the First Capitol Merger. Accordingly, shareholders wishing to
assert dissenters' rights are urged to read carefully "APPROVAL OF THE FIRST
CAPITOL MERGER--Dissenters' Rights" and Appendix G to this Joint Proxy
Statement/Prospectus.
Federal Income Tax Consequences of the Cardinal Merger and the First Capitol
Merger
Cardinal
--------
It is anticipated that the Cardinal Merger will be a tax-free
reorganization for federal income tax purposes and that no gain or loss will be
recognized by shareholders of Cardinal on the exchange of Cardinal Common Stock
for Susquehanna Common Stock (other than with respect to cash received in lieu
of fractional shares and cash received upon exercise of dissenters' rights, if
any). CARDINAL SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISERS
REGARDING THE TAX CONSEQUENCES OF THE CARDINAL MERGER WITH RESPECT TO THEIR OWN
PARTICULAR CIRCUMSTANCES. See "APPROVAL OF THE CARDINAL MERGER--Income Tax
Consequences of the Cardinal Merger."
First Capitol
-------------
It is anticipated that the First Capitol Merger will be a tax-free
reorganization for federal income tax purposes and that no gain or loss will be
recognized by shareholders of First Capitol on the exchange of First Capitol
Common Stock for Susquehanna Common Stock (other than with respect to cash
received in lieu of fractional shares and cash received upon exercise of
dissenters' rights, if any). FIRST CAPITOL SHAREHOLDERS SHOULD CONSULT WITH
THEIR OWN TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF THE FIRST CAPITOL
MERGER WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES. See "APPROVAL OF THE
FIRST CAPITOL MERGER--Income Tax Consequences of the First Capitol Merger."
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<PAGE>
Accounting Treatment
Cardinal
--------
The Cardinal Merger is intended to be accounted for as a pooling of
interests. See "APPROVAL OF THE CARDINAL MERGER--Accounting Treatment of the
Cardinal Merger."
First Capitol
-------------
The First Capitol Merger is intended to be accounted for as a pooling of
interests. See "APPROVAL OF THE FIRST CAPITOL MERGER--Accounting Treatment of
the First Capitol Merger."
Comparison of Shareholder Rights
Cardinal and Susquehanna
------------------------
Upon the consummation of the Cardinal Merger, holders of Cardinal Common
Stock will become shareholders of Susquehanna, a Pennsylvania business
corporation. Cardinal and Susquehanna are each organized as Pennsylvania
business corporations and, accordingly, the rights of former Cardinal
shareholders after the Cardinal Merger will continue to be governed by the BCL
as well as the articles of incorporation and bylaws of Susquehanna. Certain
differences arise from differences between the articles of incorporation and
bylaws of Susquehanna and the articles of incorporation and bylaws of Cardinal.
See "COMPARISON OF SHAREHOLDER RIGHTS."
First Capitol and Susquehanna
------------------------------
Upon the consummation of the First Capitol Merger, holders of First Capitol
Common Stock will become shareholders of Susquehanna, a Pennsylvania business
corporation. First Capitol is organized as a Pennsylvania commercial bank
governed by the Pennsylvania Banking Code of 1965, as amended (the "Banking
Code"). The rights of former First Capitol shareholders after the First Capitol
Merger will be governed by the BCL as well as the articles of incorporation and
bylaws of Susquehanna. Certain differences arise from differences between the
BCL and the Banking Code, as well as differences between the articles of
incorporation and bylaws of Susquehanna and the articles of incorporation and
bylaws of First Capitol. See "COMPARISON OF SHAREHOLDER RIGHTS."
Conditions to the Cardinal Merger and the First Capitol Merger
Cardinal
--------
Consummation of the Cardinal Merger is subject to various conditions,
including approval of the Cardinal Merger by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") and the Department of Banking.
The Cardinal Merger is also subject to satisfaction of various other conditions
specified in the Cardinal Merger Agreement, including the approval of the
Cardinal Merger Agreement by the requisite vote of Cardinal's shareholders and
the satisfaction of the criteria necessary to permit a pooling of interests for
accounting purposes. In the event that more than 10% of the outstanding shares
of Cardinal are covered through the exercise of dissenters' rights, the criteria
for pooling-of-interest treatment will not be satisfied. See "APPROVAL OF THE
CARDINAL MERGER--Terms of the Cardinal Merger--Conditions Precedent" and
"APPROVAL OF THE CARDINAL MERGER--Dissenters' Rights."
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<PAGE>
First Capitol
-------------
Consummation of the First Capitol Merger is subject to various conditions,
including approval of the First Capitol Merger by the Federal Reserve Board and
the Department of Banking. The First Capitol Merger is also subject to
satisfaction of various other conditions specified in the First Capitol Merger
Agreement, including the approval of the First Capitol Merger Agreement by the
requisite vote of First Capitol shareholders and the satisfaction of the
criteria necessary to permit a pooling of interests for accounting purposes. In
the event that more than 10% of the outstanding shares of First Capitol are
covered through the exercise of dissenters' rights, the criteria for pooling-of-
interest treatment will not be satisfied. See "APPROVAL OF THE FIRST CAPITOL
MERGER--Terms of First Capitol Merger--Conditions Precedent" and "APPROVAL OF
THE FIRST CAPITOL MERGER--Dissenters' Rights."
Operations After the Cardinal Merger and the First Capitol Merger
Cardinal and FANBP
------------------
Persons appointed by Susquehanna to the board of directors of SBI Merger
Sub, with such additions or deletions as Susquehanna, in its sole discretion,
may determine, will serve as members of the Cardinal Board of Directors
following the Cardinal Merger. The directors of FANBP on the Cardinal Merger
Effective Date, together with up to two persons recommended by Susquehanna
reasonably acceptable to the FANBP board of directors, will serve as members of
the FANBP board of directors following the Cardinal Merger.
First Capitol
-------------
The officers and directors of First Capitol immediately prior to the First
Capitol Effective Time will be the officers and directors of the Surviving Bank,
with such additions or deletions to which senior management of Susquehanna and
First Capitol shall mutually agree.
Termination of the Cardinal Merger and the First Capitol Merger
Cardinal
--------
The Cardinal Merger Agreement provides that, whether before or after its
approval by the shareholders of Cardinal, it may be terminated and the
transactions described in the Cardinal Merger Agreement abandoned at any time
prior to the Cardinal Merger Effective Date: (i) by the mutual written consent
of Susquehanna and Cardinal, if the board of directors of each so determines by
majority vote of the members of the entire board; (ii) by Cardinal in the event
(a) of a material breach by Susquehanna of any representation, warranty,
covenant or agreement contained in the Cardinal Merger Agreement which is not
cured within 30 days after written notice of such breach is given to Susquehanna
by Cardinal, (b) by written notice to Susquehanna that any condition precedent
to Cardinal's obligations as set forth in Article V of the Cardinal Merger
Agreement has not been met or waived by Cardinal at such time as such condition
can no longer be satisfied, (c) the Cardinal Board of Directors fails to make,
withdraws or modifies or changes its favorable recommendation to the
shareholders, or (d) the Cardinal Board of Directors determines that an
Acquisition Proposal (as defined in the Cardinal Merger Agreement) is likely to
be more favorable to the shareholders of Cardinal than the Cardinal Merger;
(iii) by Susquehanna in the event (a) of a material breach by Cardinal or FANBP
of any representation, warranty, covenant or agreement contained in the Cardinal
Merger Agreement which is not cured within 30 days after written notice of such
breach is given to Cardinal by Susquehanna, or (b) that any condition precedent
to Susquehanna's obligations as set forth in Article V of the Cardinal Merger
Agreement has not been met or waived by Susquehanna at such time as such
condition can no longer be satisfied; (iv) by Cardinal by giving written notice
of such election to Susquehanna within one business day following a
determination that the average closing price per share of Susquehanna Common
Stock before closing is greater than $26.67 per share at the time such
calculation is required to be made pursuant to the Cardinal Merger Agreement;
(v) by Susquehanna if Susquehanna chooses to give written notice of such
election within one business day following a determination that the average
closing price per share of
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Susquehanna Common Stock before closing is less than $22.67 per share at the
time such calculation is required to be made pursuant to the Cardinal Merger
Agreement; or (vi) by Susquehanna or Cardinal if the Cardinal Merger is not
consummated by December 31, 1998, unless the failure to so consummate by such
time is due to the breach of any representation, warranty or covenant contained
in the Cardinal Merger Agreement by the party seeking to terminate; provided,
however, that such date may be extended by the written agreement of the parties.
First Capitol
-------------
The First Capitol Merger Agreement provides that, whether before or after
its approval by the shareholders of First Capitol, it may be terminated and the
transactions contemplated in the First Capitol Merger Agreement abandoned at any
time prior to the First Capitol Merger Effective Date: (i) by the mutual
written consent of Susquehanna and First Capitol, if the board of directors of
each so determines by majority vote of the members of the entire board; (ii) by
First Capitol in the event (a) of a material breach by Susquehanna of any
representation, warranty, covenant or agreement contained in the First Capitol
Merger Agreement which is not cured or not curable within 30 days after written
notice of such breach is given to Susquehanna by First Capitol, (b) by written
notice to Susquehanna that any condition precedent to First Capitol's
obligations as set forth in Article V of the First Capitol Merger Agreement has
not been met or waived by First Capitol at such time as such condition can no
longer be satisfied, or (c) the First Capitol Board of Directors fails to make,
withdraws or modifies or changes its favorable recommendation to the
shareholders, or (d) the First Capitol Board of Directors recommends to the
shareholders of First Capitol that an Acquisition Proposal (as defined in the
First Capitol Merger Agreement) is likely to be more favorable, from a financial
point of view, to the shareholders of First Capitol than the First Capitol
Merger; (iii) by Susquehanna in the event (a) of a material breach by First
Capitol of any representation, warranty, covenant or agreement contained in the
First Capitol Merger Agreement which is not cured or not curable within 30 days
after written notice of such breach is given to First Capitol by Susquehanna, or
(b) that any condition precedent to Susquehanna's obligations as set forth in
Article V of the First Capitol Merger Agreement has not been met or waived by
Susquehanna at such time as such condition can no longer be satisfied; (iv) by
First Capitol, by giving written notice of such election to Susquehanna within
one business day following a determination that the average closing price per
share of the Susquehanna Common Stock before closing is greater than $28.00 per
share at the time such calculation is required to be made pursuant to the First
Capitol Merger Agreement; (v) by Susquehanna if Susquehanna chooses to give
written notice of such election within one business day following a
determination that the average closing price per share of the Susquehanna Common
Stock before closing is less than $21.33 per share at the time such calculation
is required to be made pursuant to the First Capitol Merger Agreement; or (vi)
by Susquehanna or First Capitol if the First Capitol Merger is not consummated
by March 31, 1999, unless the failure to so consummate by such time is due to
the breach of any representation, warranty or covenant contained in the First
Capitol Merger Agreement by the party seeking to terminate; provided, however,
that such date may be extended by the written agreement of the parties.
Expenses
Cardinal
--------
If the Cardinal Merger Agreement is terminated, in accordance with the
terms of the agreement: (i) by the mutual, written consent of Cardinal and
Susquehanna; (ii) by Cardinal or Susquehanna in the event the Cardinal Merger is
not consummated by December 31, 1998; (iii) by Cardinal if the average closing
price per share of Susquehanna Common Stock before closing is greater than
$26.67 per share; or (iv) by Susquehanna if the average closing price per share
of Susquehanna Common Stock before closing is less than $22.67 per share, it
shall be without cost, expense or liability on the part of any party to the
other party and the Cardinal Stock Option Agreement (as defined below) shall be
null and void. If the Cardinal Merger Agreement is terminated by reason of the
Cardinal Board of Directors failing to make, withdrawing, modifying or changing
its favorable recommendation described at Section 4.2 of the Cardinal Merger
Agreement, other than as a result of a Material Adverse Change (as defined in
the Cardinal Merger Agreement) in Susquehanna's financial condition, properties,
assets, liabilities, business or results of operation and other than as a result
of the failure of Cardinal's financial advisor to update its fairness opinion,
Cardinal must pay to Susquehanna, within two business days after the
termination, a fee of one percent of the aggregate consideration that would be
paid
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if the date of termination were the Cardinal Merger Effective Date. In all
other instances, termination of the agreement shall be without cost, liability
or expense on the part of any party to the other parties, unless the breach of a
representation, warranty or covenant is caused by the willful conduct or gross
negligence of the party, in which event such party will be liable to the other
parties for all out-of-pocket costs and expenses.
First Capitol
-------------
If the First Capitol Merger Agreement is terminated, in accordance with the
terms of the agreement: (i) by the mutual, written consent of First Capitol
and Susquehanna; (ii) by First Capitol or Susquehanna in the event the First
Capitol Merger is not consummated by March 31, 1999; (iii) by First Capitol if
the average closing price per share of Susquehanna Common Stock before closing
is greater than $28.00 per share; or (iv) by Susquehanna if the average closing
price per share of Susquehanna Common Stock before closing is less than $21.33
per share, it shall be without cost, expense or liability on the part of any
party to the other party. If the First Capitol Merger Agreement is terminated
by reason of the First Capitol Board of Directors failing to make, withdrawing,
modifying or changing its favorable recommendation described at Section 4.2 of
the First Capitol Merger Agreement as a result of a Material Adverse Change (as
defined in the First Capitol Merger Agreement) in Susquehanna's financial
condition, properties, assets, liabilities, business or results of operation or
the failure of First Capitol's financial advisor to update its fairness opinion,
it shall be without cost, expense or liability on the part of First Capitol to
any other party. If the First Capitol Merger Agreement is terminated by First
Capitol because the First Capitol Board of Directors (a) failed to make,
withdrew, or changed its favorable recommendation to the First Capitol
shareholders to approve the First Capitol Merger Agreement, or (b) recommends to
the First Capitol shareholders that an Acquisition Proposal (as defined in the
First Capitol Merger Agreement) is more favorable, from a financial point of
view, to the Capitol shareholders than the First Capitol Merger, then First
Capitol must pay to Susquehanna, within two business days after the termination,
a fee of $500,000. In all other instances, termination of the agreement shall
be without cost, liability or expense on the part of any party to the other
parties, unless the breach of a representation, warranty or covenant is caused
by the willful conduct or gross negligence of the party, in which event such
party will be liable to the other parties for all out-of-pocket costs and
expenses.
Stock Option Agreements
Cardinal
--------
Concurrently with the execution and delivery of the Cardinal Merger
Agreement, as a condition and an inducement to Susquehanna's willingness to
enter into the agreement, Cardinal, Susquehanna and SBI Merger Sub entered into
a Stock Option Agreement dated April 13, 1998, (the "Cardinal Stock Option
Agreement" which is attached hereto as Appendix H), granting Susquehanna an
irrevocable option (the "Cardinal Option") to purchase from Cardinal up to that
number of shares of Cardinal Common Stock as shall equal 15% of Cardinal's
shares of common stock outstanding immediately prior to the purchase, at a
purchase price that is the average price per share of Cardinal Common Stock
during the five trading days immediately preceding the date of execution of the
Cardinal Merger Agreement. The Cardinal Option may be exercised by Susquehanna,
in whole or in part, at any time or from time to time after the date of the
Cardinal Stock Option Agreement and prior to the earlier to occur of (i) the
Effective Time (as defined in the Cardinal Merger Agreement), or (ii) upon a
Purchase Event (as defined below), the date six months following the event,
provided that if an exercise notice has been given on or before the expiration
of such six month period and the Cardinal Option cannot be exercised on such day
because of an injunction or similar court order, the Cardinal Option shall
expire on the 10th business day after such injunction or order has been
dismissed or withdrawn.
Under the Cardinal Stock Option Agreement, a Purchase Event means any of
the following: (i) any person (other than Susquehanna or a subsidiary of
Susquehanna) shall have commenced a tender offer or an exchange offer to
purchase Cardinal Common Stock such that, upon consummation of such offer, the
person could own or control 10% or more of the outstanding Cardinal Common
Stock; (ii) Cardinal shall have authorized, recommended, proposed or announced
an intention to authorize, recommend or propose, or entered into, an agreement
with any person (other than Susquehanna or a subsidiary of Susquehanna) to (a)
merge or consolidate with Cardinal or enter into a similar
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transaction, (b) sell, lease or otherwise dispose of all or substantially all of
the assets of Cardinal to such person, or (c) sell or otherwise dispose of
securities representing 10% or more of the voting power of Cardinal, and as to
(a), (b) and (c), the same shall have been scheduled by Cardinal to close within
365 calendar days following the date of termination of the Cardinal Merger
Agreement; or (iii) any person (other than Susquehanna or a subsidiary of
Susquehanna) shall have acquired beneficial ownership (as such term is defined
in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial
ownership, or a new group has been formed which beneficially owns, 10% or more
of the outstanding Cardinal Common Stock.
The Cardinal Stock Option Agreement also grants Susquehanna certain option
share appreciation rights upon a Purchase Event, if requested by Susquehanna and
the Cardinal Stock Option Agreement has not expired. Upon such a request,
Cardinal must pay to Susquehanna an amount equal to the product of (i) the
excess, if any of, (a) the greater of (A) the highest price paid or proposed to
be paid in connection with such Purchase Event for any shares of Cardinal Common
Stock and (B) the aggregate consideration paid or proposed to be paid in
connection with such Purchase Event divided by the number of shares of Cardinal
Common Stock then outstanding, over (b) the purchase price, multiplied by (ii)
the total number of Cardinal Option shares as to which the Cardinal Option has
not yet been exercised. If such appreciation rights are paid to Susquehanna,
all other rights of Susquehanna under the Cardinal Stock Option Agreement shall
be extinguished (but the rights of Susquehanna under the Cardinal Merger
Agreement shall not be affected). See "APPROVAL OF THE CARDINAL MERGER--
Cardinal Stock Option Agreement."
First Capitol
-------------
Concurrently with the execution and delivery of the First Capitol Merger
Agreement, as a condition and an inducement to Susquehanna's and Interim Bank's
willingness to enter into the agreement, First Capitol, Susquehanna and Interim
Bank entered into a Stock Option Agreement dated April 16, 1998 (the "First
Capitol Stock Option Agreement" which is attached hereto as Appendix I),
granting Susquehanna an irrevocable option (the "First Capitol Option") to
purchase from First Capitol up to 100,681 shares of First Capitol Common Stock,
at a purchase price per share of 95% of the average price per share of First
Capitol Common Stock during the 30 trading days immediately preceding the day
prior to the announcement of a Purchase Event (as defined below). The First
Capitol Option may be exercised by Susquehanna, in whole or in part, at any time
or from time to time after the date of the First Capitol Stock Option Agreement
and prior to the earlier to occur of (i) the Effective Time (as defined in the
First Capitol Merger Agreement), or (ii) upon a Purchase Event (as defined
below), the date six months following the event, provided that if an exercise
notice has been given on or before the expiration of such six month period and
the First Capitol Option cannot be exercised on such day because of an
injunction or similar court order, the First Capitol Option shall expire on the
10th business day after such injunction or order has been dismissed or
withdrawn.
Under the First Capitol Stock Option Agreement, a Purchase Event means any
of the following: (i) any person (other than Susquehanna or a subsidiary of
Susquehanna) shall have commenced a tender offer or an exchange offer to
purchase First Capitol Common Stock such that, upon consummation of such offer,
the person could own or control 10% or more of the outstanding First Capitol
Common Stock; (ii) First Capitol shall have authorized, recommended, proposed or
announced an intention to authorize, recommend or propose, or entered into, an
agreement with any person (other than Susquehanna or a subsidiary of
Susquehanna) to (a) merge or consolidate with First Capitol or enter into a
similar transaction, (b) sell, lease or otherwise dispose of all or
substantially all of the assets of First Capitol to such person , or (c) sell or
otherwise dispose of securities representing 10% or more of the voting power of
First Capitol, and as to (a), (b) and (c), the same shall have been scheduled by
First Capitol to close within 365 calendar days following the date of
termination of the First Capitol Merger Agreement; (iii) any person (other than
Susquehanna or a subsidiary of Susquehanna) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange Act) or the
right to acquire beneficial ownership, or a new group has been formed which
beneficially owns, 10% or more of the outstanding First Capitol Common Stock; or
(iv) the shareholders of First Capitol shall have disapproved the First Capitol
Merger after any person (other than Susquehanna or a subsidiary of Susquehanna)
shall have publicly announced a proposal to acquire First Capitol by merger,
consolidation, purchase of all or substantially all of its assets or any other
similar transaction, and the same shall have been scheduled by First Capitol to
close within 365 calendar days following the date of termination of the First
Capitol Merger.
-21-
<PAGE>
The First Capitol Stock Option Agreement also grants Susquehanna certain
option share appreciation rights upon a Purchase Event, if requested by
Susquehanna and the First Capitol Stock Option Agreement has not expired. Upon
such a request, First Capitol must pay to Susquehanna an amount equal to the
product of (i) the excess, if any of, (a) the greater of (A) the highest price
paid or proposed to be paid in connection with such Purchase Event for any
shares of First Capitol Common Stock and (B) the aggregate consideration paid or
proposed to be paid in connection with such Purchase Event divided by the number
of shares of First Capitol Common Stock then outstanding, over (b) the purchase
price, multiplied by (ii) the total number of First Capitol Option shares as to
which the First Capitol Option has not yet been exercised. If such appreciation
rights are paid to Susquehanna, all other rights of Susquehanna under the First
Capitol Stock Option Agreement shall be extinguished (but the rights of
Susquehanna under the First Capitol Merger Agreement shall not be affected).
See "APPROVAL OF THE FIRST CAPITOL MERGER--First Capitol Stock Option
Agreement."
Dividends
Cardinal
--------
The Cardinal Merger Agreement provides that Cardinal shall not declare, pay
or set aside any dividend or other distribution in respect of its capital stock
except in conformity with past practice as to the amount and timing of such
dividends, with increases in conformity with past practices.
First Capitol
-------------
The First Capitol Merger Agreement provides that First Capitol shall not
declare, pay or set aside any dividend or other distribution in respect of its
capital stock except that it shall have the right, after January 1, 1999, to
declare and pay a dividend corresponding in amount and timing with past
practice.
Adjournment of the Cardinal Meeting and the First Capitol Meeting
Cardinal
--------
In the event that there is an insufficient number of votes cast in person
or by proxy at the Cardinal Meeting to approve the Cardinal Merger Agreement,
the Cardinal Board of Directors intends to adjourn the Cardinal Meeting to a
later date to permit the further solicitation of sufficient votes to approve the
Cardinal Merger Agreement. The affirmative vote of a majority of the shares
represented and voting at the Cardinal Meeting is required in order to approve
any such adjournment. The Cardinal Board of Directors recommends that
shareholders vote "FOR" the proposal to adjourn the Cardinal Meeting if
necessary to permit further solicitation of proxies to approve the Cardinal
Merger Agreement. See "ADJOURNMENT OF THE CARDINAL MEETING."
First Capitol
-------------
In the event that there is an insufficient number of votes cast in
person or by proxy at the First Capitol Meeting to approve the First Capitol
Merger Agreement, the First Capitol Board of Directors intends to adjourn the
First Capitol Meeting to a later date to permit the further solicitation of
sufficient votes to approve the First Capitol Merger Agreement. The affirmative
vote of a majority of the shares represented and voting at the First Capitol
Meeting is required in order to approve any such adjournment. The First Capitol
Board of Directors recommends that shareholders vote "FOR" the proposal to
adjourn the First Capitol Meeting if necessary to permit further solicitation of
proxies to approve the First Capitol Merger Agreement. See "ADJOURNMENT OF THE
FIRST CAPITOL MEETING."
-22-
<PAGE>
COMPARATIVE PER SHARE DATA
Unaudited
The following table sets forth certain historical per share data of
Susquehanna, Cardinal and First Capitol, and unaudited pro forma combined per
share data of Susquehanna, Cardinal and First Capitol, based on the assumption
that the Cardinal Merger and the First Capitol Merger were effective on January
1, 1995 and were accounted for as a pooling-of-interests. The pro forma data is
not necessarily indicative of results that would have been achieved had such
transactions been consummated on such dates and should not be construed as
representative of future operations. The information presented should be read in
conjunction with the historical consolidated financial statements, and notes
thereto, of Susquehanna, Cardinal and First Capitol incorporated by reference or
appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended ----------------------------------
March 31, 1998 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Susquehanna Historical per share [1]:
Net income - Basic $0.31 $1.21 $0.95 $0.95
Net income - Diluted 0.31 1.20 0.95 0.95
Cash dividends declared 0.14 0.55 0.52 0.49
Book value 10.45 10.25 -- --
Cardinal Historical per share [2]:
Net income - Basic $0.43 $1.88 $1.54 $1.76
Net income - Diluted 0.42 1.85 1.53 1.75
Cash dividends declared 0.16 0.49 0.38 0.30
Book value 17.57 17.35 -- --
First Capitol Historical per share:
Net income - Basic $0.36 $1.54 $1.30 $1.25
Net income - Diluted 0.36 1.48 1.24 1.22
Cash dividends declared 0.20 0.17 0.15 0.10
Book value 22.24 22.43 -- --
Pro Forma per Susquehanna
Common Share:
Net income - Basic $0.31 $1.18 $0.93 $0.94
Net income - Diluted 0.30 1.18 0.93 0.94
Cash dividends declared 0.14 0.55 0.52 0.49
Book value 10.40 10.21 -- --
Pro Forma Equivalent per Cardinal
Common Share [3]:
Net income - Basic $0.60 $2.27 $1.79 $1.80
Net income - Diluted 0.58 2.27 1.79 1.80
Cash dividends declared 0.27 1.06 1.00 0.94
Book value 19.97 19.60 -- --
Pro Forma Equivalent per First Capitol
Common Share [4]:
Net income - Basic $0.63 $2.39 $1.89 $1.91
Net income - Diluted 0.61 2.39 1.89 1.91
Cash dividends declared 0.28 1.12 1.05 0.99
Book value 21.09 20.71 -- --
</TABLE>
[1] Susquehanna historical amounts are adjusted for the three-for-two stock
splits in 1997 and July, 1998.
[2] Cardinal historical amounts are adjusted for the two-for-one stock split in
1996.
[3] Pro Forma amounts per share were calculated by taking the corresponding per
share amounts for Susquehanna, Cardinal, and First Capitol combined and
multiplying that by an exchange ratio which gives effect to the exchange of
1.92 shares of Susquehanna common stock for each outstanding share of
Cardinal at each reporting date.
[4] Pro Forma amounts per share were calculated by taking the corresponding per
share amounts for Susquehanna, Cardinal, and First Capitol combined and
multiplying that by an exchange ratio of 2.028 shares of Susquehanna common
stock for each outstanding share of First Capitol at each reporting date.
-23-
<PAGE>
Market Value of Securities
The table below sets forth the last sale prices on The Nasdaq Stock
Market National Market System for Susquehanna Common Stock for April 10, 1998,
the last trading day before the announcement of the Cardinal Merger, and for
April 15, 1998, the last trading day before the announcement of the First
Capitol Merger, each adjusted to give effect to the three-for-two stock split
payable July 1, 1998 to shareholders of record June 15, 1998.
Susquehanna
Historical
----------
April 10, 1998........ $23.92
April 15, 1998........ $24.67
There is no established public trading market for Cardinal Common
Stock. However, bids for Cardinal Common Stock are quoted on the over-the-
counter Electronic Bulletin Board Interdealer System. Trading in Cardinal
Common Stock is limited and sporadic. The absence of an established market may
affect the prices at which Cardinal's shares are traded. Subject to the
foregoing, the sale price of Cardinal Common Stock on April 8, 1998, the most
recent date before April 13, 1998, on which a sale occurred was $38.00 per
share.
There is no established public trading market for First Capitol Common
Stock. However, bids for First Capitol Common Stock are quoted on the over-the-
counter Electronic Bulletin Board Interdealer System. Trading in First Capitol
Common Stock is limited and sporadic. In addition, First Capitol is not subject
to the requirement of filing periodic reports with the Commission. The absence
of an established market and publicly available information regarding First
Capitol may affect the prices at which First Capitol's shares are traded.
Subject to the foregoing, the sale price of First Capitol Common Stock on March
26, 1998, the most recent date before April 16, 1998 on which a sale occurred
was $38.00 per share.
-24-
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth certain selected consolidated historical
financial information for Susquehanna, Cardinal and First Capitol. This data is
derived from and should be read in conjunction with, and is qualified in its
entirety by, the consolidated financial statements of Susquehanna, Cardinal and
First Capitol, including the notes thereto, incorporated by reference or
appearing elsewhere in this Proxy Statement/Prospectus. Interim unaudited data
for the three month periods ended March 31, 1998 and 1997 reflects, in the
opinion of Susquehanna's, Cardinal's and First Capitol's respective managements,
all adjustments necessary for a fair presentation of such data. Results for the
periods ended March 31, 1998 and 1997 are not necessarily indicative of results
which may be expected for any other periods or for the fiscal years as a whole.
-25-
<PAGE>
Susquehanna Historical
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At or for the Three Months
Ended March 31, At or for the Year Ended December 31,
--------------------------- ----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Data
Net interest income $36,494 $35,319 $145,653 $139,599 $116,706 $102,914 $95,152
Provision for loan and lease losses 1,233 1,206 4,557 4,807 5,164 4,247 5,280
Other income 6,931 5,330 23,754 22,223 17,136 16,127 17,034
Other expense 26,827 25,794 106,028 110,541 88,316 79,480 72,326
Income before taxes, extraordinary
item and cumulative effect of a
change in accounting principle 15,365 13,649 58,822 46,474 40,362 35,314 34,580
Extraordinary item -- -- -- -- -- (732) --
Cumulative effect of a change
in accounting principle -- -- -- -- -- -- 1,123
Net income 10,604 9,456 40,202 31,183 28,252 24,095 25,354
Basic earnings per common share
before extraordinary item and
cumulative effect of a change in
accounting principle $0.31 $0.29 $1.21 $0.95 $0.95 $0.84 $0.84
Dividends declared per common share 0.14 0.13 0.55 0.52 0.49 0.45 0.41
Balance Sheet Data
Assets $3,736,791 $3,308,590 $3,524,887 $3,335,117 $2,828,637 $2,430,392 $2,234,556
Loans and leases, net of unearned
income 2,560,452 2,375,846 2,569,613 2,349,776 1,847,396 1,574,512 1,410,275
Deposits 2,911,521 2,739,815 2,851,217 2,754,118 2,335,577 2,046,264 1,882,630
Shareholders' equity 353,687 316,926 346,738 313,296 293,910 234,765 234,814
Shareholders' equity per share (book
value) $10.45 $9.62 $10.25 $9.51 $9.06 $7.97 $7.97
Selected Ratios
Return on average assets
before extraordinary item and
cumulative effect of a change in
accounting principle 1.18% 1.17% 1.19% 0.96% 1.07% 1.08% 1.13%
Return on average shareholders'
equity before extraordinary item and
cumulative effect of a change in
accounting principle 12.33% 12.17% 12.30% 10.25% 11.34% 10.61% 11.12%
Average shareholders' equity to assets 9.57% 9.61% 9.64% 9.37% 9.41% 10.14% 10.20%
Net interest yield 4.48% 4.80% 4.73% 4.73% 4.89% 4.94% 4.94%
Net charge-offs to average loans and
leases 0.23% 0.24% 0.21% 0.20% 0.26% 0.15% 0.14%
Allowance for loan and lease losses
to period-end loans and leases 1.34% 1.42% 1.34% 1.44% 1.58% 1.61% 1.65%
Nonperforming assets to
period-end loans and leases and
OREO 1.04% 1.42% 1.06% 1.43% 1.82% 2.00% 2.08%
- ---------------
</TABLE>
-26-
<PAGE>
Cardinal Historical
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At or for the Three Months
Ended
March 31, At or for the Year Ended December 31,
--------------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Data
Net interest income $1,471 $1,346 $5,739 $5,434 $5,243 $4,714 $4,368
Provision for loan and lease losses -- -- -- -- -- (300) 125
Other income 209 139 620 533 476 456 529
Other expense 1,069 891 3,804 4,096 3,714 3,487 3,509
Income before taxes, extraordinary
item and cumulative effect of a
change in accounting principle 611 594 2,555 1,871 2,005 1,983 1,263
Extraordinary item -- -- -- -- -- -- --
Cumulative effect of a change in
accounting principle -- -- -- -- -- -- 60
Net income 431 453 1,860 1,524 1,740 1,665 1,050
Basic earnings per common share
before extraordinary item and
cumulative effect of a change in
accounting principle $ 0.43 $ 0.46 $ 1.88 $1.54 $1.76 $1.68 $1.00
Dividends declared per common share 0.16 0.10 0.49 0.38 0.30 0.55 0.23
Balance Sheet Data
Assets $137,085 $129,608 $129,941 $129,557 $124,472 $112,606 $121,222
Loans, net of unearned income 76,925 68,550 73,940 67,173 61,601 60,845 64,871
Deposits 115,451 113,306 109,421 105,755 108,796 99,650 108,590
Shareholders' equity 17,391 15,284 17,180 15,223 14,829 12,123 12,053
Shareholders' equity per share (book
value) $ 17.57 $ 15.44 $ 17.35 $15.38 $14.98 $12.25 $12.18
Selected Ratios
Return on average assets before
extraordinary item and cumulative
effect of a change in accounting
principle 1.27% 1.40% 1.41% 1.20% 1.45% 1.42% 0.88%
Return on average shareholders'
equity before extraordinary
item and cumulative effect of a
change in accounting principle 9.97% 11.45% 11.31% 10.01% 12.61% 13.31% 9.06%
Average shareholders' equity to assets 12.88% 12.27% 12.49% 11.97% 11.48% 10.69% 9.66%
Net interest yield 4.78% 4.78% 4.86% 4.83% 4.81% 4.45% 4.06%
Net charge-offs to average loans and
leases 0.01% -- -- 0.60% 0.26% 0.26% 0.60%
Allowance for loan losses
to period-end loans 1.23% 1.41% 1.30% 1.42% 2.16% 2.46% 3.01%
Nonperforming assets to period-end
loans and OREO 0.97% 1.15% 0.65% 1.21% 3.55% 2.36% 3.41%
</TABLE>
-27-
<PAGE>
First Capitol Historical
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At or for the Three
Months Ended March 31, At or for the Year Ended December 31,
-------------------------- -------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings Data:
Net interest income.................................. $ 971 $ 846 $ 3,767 $ 3,321
Provision for loan losses............................ 36 59 174 182
Other income......................................... 58 155 277 144
Other expense........................................ 756 734 2,931 2,462
Net income........................................... 176 141 672 553
Basic earnings per common share...................... 0.36 0.33 1.54 1.30
Diluted earnings per common share.................... 0.36 0.32 1.48 1.24
Dividends declared per common share.................. 0.20 0.00 0.17 0.15
Balance Sheet Data:
Assets............................................... $109,819 $96,153 $107,793 $93,892
Loans, net of unearned income........................ 71,386 64,553 71,226 66,422
Deposits............................................. 82,259 73,010 80,828 73,428
Shareholders' equity................................. 11,250 8,900 10,400 8,905
Shareholders' equity per share (book value).......... 22.24 21.01 22.43 21.02
Selected Ratios:
Return on average assets............................. 0.68% 0.63% 0.68% 0.63%
Return on average shareholders' equity............... 6.66% 6.33% 7.18% 6.36%
Average shareholders' equity to average assets....... 10.29% 9.86% 9.47% 9.87%
Net interest margin (tax equivalent basis)........... 4.08% 4.02% 4.18% 4.03%
Net charge-offs to average loans..................... 0.00% 0.08% 0.22% 0.30%
Allowance for loan losses to period-end loans........ 1.41% 1.48% 1.37% 1.43%
Nonperforming assets to period-end loans
and OREO........................................ 0.68% 0.55% 0.40% 0.43%
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------
(Dollars in thousands, except per share data) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Earnings Data:
Net interest income.................................. $ 2,963 $ 2,605 $ 2,249
Provision for loan losses............................ 159 110 308
Other income......................................... 162 156 217
Other expense........................................ 2,394 2,223 1,939
Net income........................................... 531 428 219
Basic earnings per common share...................... 1.25 1.01 0.56
Diluted earnings per common share.................... 1.22 1.01 0.56
Dividends declared per common share.................. 0.10 0.00 0.00
Balance Sheet Data:
Assets............................................... $81,225 $73,242 $68,106
Loans, net of unearned income........................ 58,064 56,724 52,825
Deposits............................................. 66,731 63,999 59,120
Shareholders' equity................................. 8,526 7,748 7,524
Shareholders' equity per share (book value).......... 20.13 18.29 17.76
Selected Ratios:
Return on average assets............................. 0.66% 0.60% 0.29%
Return on average shareholders' equity............... 6.48% 5.60% 3.03%
Average shareholders' equity to average assets....... 10.19% 10.94% 11.20%
Net interest margin (tax equivalent basis)........... 3.94% 3.96% 3.89%
Net charge-offs to average loans..................... 0.17% 0.10% 0.06%
Allowance for loan losses to period-end loans........ 1.64% 1.57% 1.59%
Nonperforming assets to period-end loans
and OREO........................................ 1.16% 0.99% 0.09%
</TABLE>
- ---------------
-28-
<PAGE>
THE CARDINAL MEETING
General
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Cardinal Board of Directors to be used at the
Cardinal Meeting which will be held at_________, _________, ______, Pennsylvania
on _________, _________, 1998 at ___:___ __.m.
At the Cardinal Meeting, holders of record of Cardinal Common Stock as of
the Cardinal Record Date will consider and vote upon the approval of the
Cardinal Merger Agreement. In addition, shareholders of Cardinal may consider
and vote upon the approval of the adjournment of the Cardinal Meeting, in the
event there are not sufficient votes cast in person or by proxy at the Cardinal
Meeting to approve the Cardinal Merger Agreement, and such other matters as may
properly come before the Cardinal Meeting or any adjournments thereof.
Pursuant to the Cardinal Merger Agreement, Cardinal will become a wholly-
owned subsidiary of Susquehanna by means of a merger of SBI Merger Sub with and
into Cardinal. Thereupon, FANBP will become a wholly-owned second tier
subsidiary of Susquehanna. Upon the consummation of the Cardinal Merger, each
Cardinal shareholder will receive in exchange for each share of Cardinal Common
Stock, 1.92 shares of Susquehanna Common Stock as set forth in the Cardinal
Merger Agreement, so long as the average closing price per share of Susquehanna
Common Stock for a 10-business-day period ending two days before the closing of
the Cardinal Merger is between and including $22.67 and $26.67, together with a
cash payment in lieu of any fractional share of Susquehanna Common Stock which
the Cardinal shareholder would otherwise be entitled to receive. If the average
price per share of Susquehanna Common Stock before closing is greater than
$26.67, Cardinal has the right to terminate the Cardinal Merger Agreement. If
the average price per share of Susquehanna Common Stock before closing is less
than $22.67, Susquehanna has the right to terminate the Cardinal Merger
Agreement. However, if the party with the right does not choose to terminate
the Cardinal Merger Agreement, then the Cardinal Merger will proceed and each
share of Cardinal Common Stock will be exchanged for the number of shares of
Susquehanna Common Stock as determined by the formula set forth at Schedule 1.2
of the Cardinal Merger Agreement which will be less than 1.92 shares of
Susquehanna Common Stock if the average closing price per share of Susquehanna
Common Stock is greater than $26.67 per share and more than 1.92 shares of
Susquehanna Common Stock if the average closing price per share of Susquehanna
Common Stock is less than $22.67 per share.
The average price per share of Susquehanna Common Stock before closing will
be determined by adding the price at which Susquehanna Common Stock is reported
to have closed by The Nasdaq Stock Market over a period of 10 business days
ending on the second business day preceding the date set for the Cardinal
Closing, and dividing such total by 10. The last reported sale price of
Susquehanna Common Stock on The Nasdaq Stock Market on ________, 1998 was
$______ per share. Consummation of the Cardinal Merger is conditioned upon,
among other things, the approval of the Cardinal Merger Agreement by the
requisite vote of Cardinal's shareholders.
For examples of the determination of the number of shares to be received if
the average closing price of Susquehanna Common Stock is less than $22.67 or
more than $26.67 per share, see the caption entitled "Terms of the Cardinal
Merger-Exchange Ratio."
Voting, Revocation and Solicitation of Proxies
The presence, in person or by proxy, of at least a majority of the total
number of shares of the Cardinal Common Stock outstanding and entitled to vote
on the Cardinal Record Date, __________, 1998, will be required to constitute a
quorum at the Cardinal Meeting. Shareholders who execute proxies retain the
right to revoke them at any time. Unless so revoked, the shares represented by
such proxies will be voted at the Cardinal Meeting and all adjournments thereof.
Proxies may be revoked by written notice to the Secretary of Cardinal, the
filing of a later dated proxy prior to a vote being taken on a particular
proposal at the Cardinal Meeting or by attendance at the Cardinal Meeting and
voting in person; however, attendance alone will not revoke a proxy. A written
notice revoking a
-29-
<PAGE>
previously executed proxy should be sent to Cardinal Bancorp, Inc., 140 East
Main Street, Everett, Pennsylvania 15537, Attention: William B. Zimmerman,
Secretary/Treasurer.
Proxies solicited by the Cardinal Board of Directors will be voted in
accordance with the directions given therein. Where no instructions are
indicated, proxies will be voted in favor of each of the proposals set forth in
this Proxy Statement/Prospectus for consideration at the Cardinal Meeting. The
proxy confers discretionary authority on the persons named therein to vote with
respect to matters incidental to the conduct of the Cardinal Meeting. If any
other business is presented at the Cardinal Meeting, proxies will be voted by
those named therein in their best judgment. Proxies marked as abstentions will
not be counted as votes cast. In addition, shares held in street name which
have been designated by brokers on proxy cards as not voted will not be counted
as votes cast. Proxies marked as abstentions or as broker no-votes, however,
(i) will be treated as shares present for purposes of determining whether a
quorum is present and (ii) will have the same effect as a vote against the
Cardinal Merger proposal.
The cost of soliciting proxies will be borne by Cardinal. Cardinal will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Cardinal Common Stock. In addition to solicitations by
mail, directors, officers and regular employees of Cardinal may solicit proxies
personally or by telegraph or telephone without additional compensation.
Voting Securities and Security Ownership
Holders of record of Cardinal Common Stock as of the close of business on
the Cardinal Record Date are entitled to one vote for each share then held. As
of that date, there were 990,000 shares of Cardinal Common Stock issued and
outstanding, and there were approximately _____ shareholders of record.
The following table sets forth as of the Cardinal Record Date, the amount
and percentage of the Cardinal Common Stock beneficially owned by each executive
officer, each director, and all officers and directors of Cardinal as a group.
The Cardinal Board of Directors does not believe that any person is the
beneficial owner of more than five percent of the Cardinal Common Stock.
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of
or Identity of Group Beneficial Ownership (1) (2) Percent of Class (11) (13)
- -------------------- ---------------------------- --------------------------
<S> <C> <C>
Donald W. DeArment 23,400 (3) 2.16%
Darrell Dodson 13,900 (4) 1.28%
Merle W. Helsel 2,670 (5) --
Ray E. Koontz 14,400 (6) 1.33%
Clyde R. Morris 32,000 (7) 2.95%
Robert E. Ritchey 24,600 (8) 2.27%
James C. Vreeland 13,100 (9) 1.21%
William B. Zimmerman 14,120 (10) 1.30%
All executive officers and 138,753 12.80%
directors as a group
(9 persons) (12)
</TABLE>
-30-
<PAGE>
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Commission and may include securities
owned by or for the individual's spouse and minor children and any other
relative who has the same home, as well as securities to which the
individual has or shares voting or investment power or has the right to
acquire beneficial ownership within 60 days after the Cardinal Record Date.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Information furnished by the directors, officers and Cardinal.
(3) Includes 4,000 shares of Cardinal Common Stock held individually by Mr.
DeArment; 10,400 shares of Cardinal Common Stock held individually by his
spouse; and unexercised stock options for 9,000 shares of Cardinal Common
Stock which are currently exercisable. In calculating the tabulated
percent of class, the additional 9,000 shares were added to the shares of
Cardinal Common Stock currently held by Mr. Dodson.
(4) Includes 4,900 shares of Cardinal Common Stock held individually by Mr.
Dodson; and unexercised stock options for 9,000 shares of Cardinal Common
Stock which are currently exercisable. In calculating the tabulated
percent of class, the additional 9,000 shares were added to the shares of
Cardinal Common Stock currently held by Mr. Dodson.
(5) Includes 1,000 shares of Cardinal Common Stock held jointly by Mr. Helsel
with his spouse; 670 shares (rounded to the nearest share) beneficially
owned individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee
Stock Ownership Plan; and unexercised stock options for 1,000 shares of
Cardinal Common Stock which are currently exercisable. In calculating the
tabulated percent of class, the additional 1,000 shares were added to the
shares of Cardinal Common Stock currently held by Mr. Helsel.
(6) Includes 5,200 shares of Cardinal Common Stock held individually by Mr.
Koontz; 200 shares of Cardinal Common Stock held jointly with his spouse;
and unexercised stock options for 9,000 shares of Cardinal Common Stock
which are currently exercisable. In calculating the tabulated percent of
class, the additional 9,000 shares were added to the shares of Cardinal
Common Stock currently held by Mr. Koontz.
(7) Includes 200 shares of Cardinal Common Stock held individually by Mr.
Morris; 22,800 shares of Cardinal Common Stock held as tenant in common
with his spouse; and unexercised stock options for 9,000 shares of Cardinal
Common Stock which are currently exercisable. In calculating the tabulated
percent of class, the additional 9,000 shares were added to the shares of
Cardinal Common Stock currently held by Mr. Morris.
(8) Includes 1,000 shares of Cardinal Common Stock held individually by Mr.
Ritchey; 14,600 held individually by his spouse; and unexercised stock
options for 9,000 shares of Cardinal Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
9,000 shares were added to the shares of Cardinal Common Stock currently
held by Mr. Ritchey.
(9) Includes 4,000 shares of Cardinal Common Stock held individually by Mr.
Vreeland; 100 shares of Cardinal Common Stock held individually by his
spouse; and unexercised stock options for 9,000 shares of Cardinal Common
Stock which are currently exercisable. In calculating the tabulated
percent of class, the additional 9,000 shares were added to the shares of
Cardinal Common Stock currently held by Mr. Vreeland.
(10) Includes 4,100 shares of Cardinal Common Stock held individually by Mr.
Zimmerman; 320 shares of Cardinal Common Stock held individually by his
spouse; 200 shares of Cardinal Common Stock held by Zimmerman's Hardware &
Supply Company, Inc.; 500 shares of Cardinal Common Stock held by
Zimmerman's American Hardware; and unexercised stock options for 9,000
shares of Cardinal Common Stock which are currently exercisable. In
calculating the tabulated percent of class, the additional 9,000 shares
were added to the shares of Cardinal Common Stock currently held by Mr.
Zimmerman.
(11) Less than one percent unless otherwise indicated.
(12) Ted J. Chwatek is a senior officer of the corporation, but he is not a
member of the Cardinal Board of Directors. Mr. Chwatek beneficially owns
individually 563 shares (rounded to the nearest share) of Cardinal Common
Stock under the Cardinal Bancorp, Inc. Employee Stock Ownership Plan.
(13) The percent of class assumes all outstanding options, issued to directors
and officers have been exercised and, therefore, on a pro forma basis,
1,084,000 shares of Cardinal Common Stock would be outstanding.
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Other Matters
The Cardinal Board of Directors is not aware of any business to come before
the Cardinal Meeting other than those matters described in this Proxy
Statement/Prospectus. However, if any other matters should properly come before
the Cardinal Meeting which is incidental to the matters described in this Proxy
Statement/Prospectus, it is intended that proxies in the accompanying form will
be voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies.
Auditors of Cardinal
The auditors of Cardinal is the firm of S.R. Snodgrass, A.C. ("Snodgrass"),
located at 101 Bradford Road, Wexford, Pennsylvania 15090. Representatives of
Snodgrass are expected to be at the Cardinal Meeting to make a statement and
also to be available to respond to appropriate questions.
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THE FIRST CAPITOL MEETING
General
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the First Capitol Board of Directors to be used at
the First Capitol Meeting which will be held at_________, _________, ______,
Pennsylvania on _________, _________, 1998 at ___:___ __.m.
At the First Capitol Meeting, holders of record of First Capitol Common
Stock as of the First Capitol Record Date will consider and vote upon the
approval of the First Capitol Merger Agreement. In addition, shareholders of
First Capitol may consider and vote upon the approval of the adjournment of the
First Capitol Meeting, in the event there are not sufficient votes cast in
person or by proxy at the First Capitol Meeting to approve the First Capitol
Merger Agreement, and such other matters as may properly come before the First
Capitol Meeting or any adjournments thereof.
Pursuant to the First Capitol Merger Agreement, First Capitol will become a
wholly-owned, first-tier subsidiary of Susquehanna by means of a merger of
First Capitol with Interim Bank. Upon the consummation of the First Capitol
Merger, each First Capitol shareholder will receive in exchange for each share
of First Capitol Common Stock, 2.028 shares of Susquehanna Common Stock as set
forth in the First Capitol Merger Agreement, so long as the average closing
price per share of Susquehanna Common Stock for a 10-business-day period ending
the second business day before the closing of the First Capitol Merger is
between and including $21.33 and $28.00, together with a cash payment in lieu of
any fractional share of Susquehanna Common Stock which the First Capitol
shareholder would otherwise be entitled to receive. If the average price per
share of Susquehanna Common Stock before closing is greater than $28.00, First
Capitol has the right to terminate the First Capitol Merger Agreement. If the
average price per share of Susquehanna Common Stock before closing is less than
$21.33, Susquehanna has the right to terminate the First Capitol Merger
Agreement. However, if the party with the right does not choose to terminate
the First Capitol Merger Agreement, then the First Capitol Merger will proceed
and each share of First Capitol Common Stock will be exchanged for the number of
shares of Susquehanna Common Stock as determined by the formula set forth at
Schedule 1.2 of the First Capitol Merger Agreement which will be less than 2.028
shares of Susquehanna Common Stock if the average closing price per share of
Susquehanna Common Stock is greater than $28.00 per share and more than 2.028
shares of Susquehanna Common Stock if the average closing price per share of
Susquehanna Common Stock is less than $21.33 per share.
The average price per share of Susquehanna Common Stock before closing will
be determined by adding the price at which Susquehanna Common Stock is reported
to have closed by The Nasdaq Stock Market over the period of 10 business days
ending the second business day preceding the date set for the First Capitol
Closing, and dividing such total by 10. The last reported sale price of
Susquehanna Common Stock on The Nasdaq Stock Market National Market System on
________, 1998 was $______ per share. Consummation of the First Capitol Merger
is conditioned upon, among other things, the approval of the First Capitol
Merger Agreement by the requisite vote of First Capitol's shareholders.
For examples of the determination of the number of shares to be received if
the average closing price of Susquehanna Common Stock is less than $21.33 or
more than $28.00 per share, see the caption entitled "Terms of the First Capitol
Merger-Exchange Ratio."
Voting, Revocation and Solicitation of Proxies
The presence, in person or by proxy, of at least a majority of the total
number of shares of the First Capitol Common Stock outstanding and entitled to
vote on the First Capitol Record Date, __________, 1998, will be required to
constitute a quorum at the First Capitol Meeting. Shareholders who execute
proxies retain the right to revoke them at any time. Unless so revoked, the
shares represented by such proxies will be voted at the First Capitol Meeting
and all adjournments thereof. Proxies may be revoked by written notice to the
Secretary of First Capitol, the filing of a later proxy prior to a vote being
taken on a particular proposal at the First Capitol Meeting or by attendance at
the First Capitol Meeting and voting in person; however, attendance alone will
not revoke a proxy. A written notice revoking
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a previously executed proxy should be sent to First Capitol Bank, 2951 Whiteford
Road, York, Pennsylvania 17402, Attention: Secretary.
Proxies solicited by the First Capitol Board of Directors will be voted
in accordance with the directions given therein. Where no instructions are
indicated, proxies will be voted in favor of each of the other proposals set
forth in this Proxy Statement/Prospectus for consideration at the First Capitol
Meeting. The proxy confers discretionary authority on the persons named therein
to vote with respect to matters incident to the conduct of the First Capitol
Meeting. If any other business is presented at the First Capitol Meeting,
proxies will be voted by those named therein in their best judgment. Proxies
marked as abstentions will not be counted as votes cast. In addition, shares
held in street name which have been designated by brokers on proxy cards as not
voted will not be counted as votes cast. Proxies marked as abstentions or as
broker no-votes, however, (i) will be treated as shares present for purposes of
determining whether a quorum is present and (ii) will have the same effect as a
vote against the First Capitol Merger proposal.
The cost of soliciting proxies will be borne by First Capitol. First
Capitol will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of First Capitol Common Stock. In addition to
solicitations by mail, directors, officers and regular employees of First
Capitol may solicit proxies personally or by telegraph or telephone without
additional compensation.
Voting Securities and Security Ownership
Holders of record of First Capitol Common Stock as of the close of
business on the First Capitol Record Date are entitled to one vote for each
share then held. As of that date, there were 505,933 shares of First Capitol
Common Stock issued and outstanding and there were approximately ___
shareholders of record.
The following table sets forth, as of the First Capitol Record Date,
the name and address of each person who owns of record or who is known by the
First Capitol Board of Directors to be the beneficial owner of five percent or
more of First Capitol Common Stock, the number of shares beneficially owned by
such person and the percentage so owned.
<TABLE>
<CAPTION>
Percent of Outstanding Common
Name and Address Shares Beneficially Owned (1) Stock Beneficially Owned (1)
- ---------------- ----------------------------- ----------------------------
<S> <C> <C>
National Penn Investment Company 112,473 22.23%
103 Springer Building, P.O. Box 7048
Wilmington, Delaware 19803
Owen O. Freeman, Jr. 41,536 (2) 8.21%
c/o First Capitol Bank
2951 Whiteford Road
York, Pennsylvania 17402-3780
Thomas L. Bauer, M.D. 34,007 (3) 6.72%
c/o Apple Hill Surgical Associates, LTD
25 Monument Road
York, Pennsylvania 17011
</TABLE>
(1) See Note (1) under the following caption entitled "Beneficial Ownership
by Officers, Directors and Nominees" for a definition of "beneficial
ownership."
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(2) Mr. Freeman beneficially owns 41,536 shares, or eight and twenty-one
hundredths percent of the outstanding shares of First Capitol Common Stock.
2,703 shares of those beneficially owned by Mr. Freeman are held by various
relatives.
(3) 33,957 shares of those beneficially owned by Dr. Bauer are held by Apple
Hill Surgical Retirement Plan directed for the benefit of Dr. Thomas L.
Bauer.
Beneficial Ownership by Directors and Executive Officers
--------------------------------------------------------
The following table sets forth as of the First Capitol Record Date, the
amount and percentage of the First Capitol Common Stock beneficially owned by
each director, and all executive officers, directors and directors emeritus of
First Capitol as a group.
Percent of
Shares of
First Capitol
Number of Shares Common Stock
Name Beneficially Owned (1)(2) Outstanding (3)
- ---- ------------------------- ---------------
Dr. Thomas L. Bauer 34,007 (4) 6.72%
Roger P. Calabretta 3,400 (6) --
H. Douglas Campbell, Jr. 3,600 (5) --
Thomas S. Capello 8,046 1.59%
Chloe R. Eichelberger 14,955 2.94%
Owen O. Freeman, Jr. 41,536 (7) 8.21%
David A. Friedman 13,500 (8) 2.61%
Robert V. Iosue, Ph.D. 2,000 --
Jack R. Kay 1,350 --
Edward L. Motter 1,650 --
Glenn W. Randolph (9) 5,000 --
All executive officers and 129,044 24.95% (10)
directors as a group (10
directors, two of whom are
executive officers, and one
director emeritus, 11 persons
in total)
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Federal Reserve Board and the
Commission and may include securities owned by or for the individual's
spouse and minor children and any other relative who has the same home, as
well as securities to which the individual has or shares voting or
investment power or has the right to acquire beneficial ownership within 60
days after the First Capitol Record Date. Beneficial ownership may be
disclaimed as to certain of the securities.
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<PAGE>
(2) Information furnished by the directors and First Capitol.
(3) Less than one percent unless otherwise indicated.
(4) See Note (3) under the above caption entitled "Principal Owners" as to the
shares of First Capitol Common Stock held beneficially by Dr. Bauer.
(5) 2,350 shares of those beneficially owned by Mr. Campbell are held by
various relatives.
(6) 2,400 shares of those beneficially owned by Mr. Calabretta are in trust for
his children.
(7) See Note (2) under the above caption entitled "Principal Owners" as to the
shares of First Capitol Common Stock held beneficially by Mr. Freeman.
(8) Mr. Friedman does not individually hold shares of First Capitol Common
Stock; however, JES Partners, a partnership of which Mr. Friedman is a five
percent partner, owns 2,250 shares. Mr. Friedman may, at any time,
purchase up to 11,250 shares of First Capitol Common Stock pursuant to
Stock Purchase Warrants that he holds. In calculating the tabulated
percent of class, the 11,250 additional shares were added to the shares of
First Capitol Common Stock held presently by Mr. Friedman and to the total
outstanding shares. For further information on the disposition of these
Stock Purchase Warrants, see the caption entitled "Terms of the First
Capitol Merger-Warrant Substitution Agreement."
(9) Glenn W. Randolph retired from the First Capitol Board of Directors
effective February 1, 1995, as a Class B Director. Mr. Randolph acts in
the capacity of a Director Emeritus of the First Capitol Board of
Directors.
(10) The percent of class assumes all outstanding Stock Purchase Warrants issued
to the directors and officers of First Capitol have been exercised and
therefore, on a pro forma basis, 517,183 shares of First Capitol Common
Stock would be outstanding.
Other Matters
The First Capitol Board of Directors is not aware of any business to come
before the First Capitol Meeting other than those matters described in this
Proxy Statement/Prospectus. However, if any other matters should properly come
before the First Capitol Meeting which is incidental to the matters described in
this Proxy Statement/Prospectus, it is intended that proxies in the accompanying
form will be voted in respect thereof in accordance with the judgment of the
person or persons voting the proxies.
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APPROVAL OF THE CARDINAL MERGER
The following description of the Cardinal Merger is not intended to be a
complete description of all material facts regarding the Cardinal Merger and is
qualified in all respects by reference to the Cardinal Merger Agreement and the
fairness opinion, attached hereto as Appendices C and E, respectively. Cardinal
shareholders are urged to read carefully the Cardinal Merger Agreement and the
fairness opinion. For a summary description of the Cardinal Merger, see
"SUMMARY - The Cardinal Merger."
Background of the Cardinal Merger
The Board of Directors of Cardinal has for several years, as part of its
long-range planning practices, periodically reviewed and evaluated the various
strategic options and alternatives available to Cardinal. In particular, the
Board has considered the relative merits of maintaining the independence of
Cardinal and FANBP and of merging Cardinal and/or FANBP with a larger, super-
community or regional financial institution in light of current economic,
financial and regulatory conditions and their impact on the financial services
industry. The Board has also considered the desirability of increasing the
value and liquidity of the stock held by Cardinal's shareholders by arranging a
merger in which Cardinal's shareholders would receive publicly-traded stock in a
larger supercommunity banking organization. The Board's primary consideration in
taking the actions that led to the execution of the Cardinal Merger Agreement
was to provide a fair financial return to Cardinal's shareholders and increase
the liquidity of their stock, while maintaining, to the extent possible, local
identity and autonomy for FANBP in order to serve Cardinal's other
constituencies, the community, and FANBP's customers and employees. The Board
concluded that in a rapidly changing, increasingly competitive market for
financial services, Cardinal can compete more effectively as a part of a larger
banking organization with more resources and a wider range of products and
services than those that Cardinal currently offers.
Through the Cardinal Merger, Cardinal believes that it can expand its
resources and its range of products and services on an accelerated timetable as
compared to reliance on internal growth. In general Cardinal is entering into
the Cardinal Merger because it believes it can better maximize its shareholders'
long-term return through an affiliation with a larger, more diversified
supercommunity financial institution. Cardinal's Board of Directors believes
that Susquehanna's greater resources will enable FANBP to offer expanded
services to its customers and the communities it serves.
In addition, the Cardinal Merger with Susquehanna will increase the
liquidity of the stock held by Cardinal's shareholders by exchanging it for
stock in a larger banking organization that is quoted on the NASDAQ Stock Market
National Market System.
In considering the Cardinal Merger, Cardinal's Board of Directors
considered, among other things discussed herein, the financial terms of the
Cardinal Merger, the structure of the transaction, the historic and current
financial performance of Susquehanna, the commitment of Susquehanna to the
community its subsidiary serves, the operating culture of Susquehanna, and the
opinion of its financial advisors as to the fairness of the transaction, from a
financial point of view, to Cardinal shareholders. See, "APPROVAL OF THE
CARDINAL MERGER-Reasons for the Cardinal Merger and Recommendations of the Board
of Directors of Cardinal" and "APPROVAL OF THE CARDINAL MERGER-Opinion of
Financial Advisor."
In December of 1997, the Board received an unsolicited proposal from a
community bank holding company to arrange an exchange of the outstanding shares
of Cardinal for shares of the proposing bank holding company (the "Original
Proposal"). The terms of the Original Proposal provided that FANBP would be
merged into a subsidiary of the bank holding company and employees of FANBP
would be retained to the extent possible.
On January 26, 1998, the Board of Directors of Cardinal met to discuss
their strategic options to enhance the profitability and shareholder value of
Cardinal. The directors discussed their fiduciary duties, in general, to the
several constituencies of Cardinal and FANBP and their fiduciary duties in the
context of a merger or acquisition scenario. In conjunction with its assessment
of Cardinal's strategic options, the Board previously had retained Garland
McPherson
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and Associates, Inc. ("GM&A"). The Board received a detailed presentation from
GM&A on the current merger and acquisition environment and an assessment of
Cardinal's strategic options. A review was conducted of the Original Proposal.
The Board reviewed other potential strategic combinations and alternatives,
including remaining an independent banking organization.
The Board of Directors of Cardinal then discussed the strategic objectives
of Cardinal: enhancing shareholder value through stock price and future
earnings; increasing liquidity of shareholder investment; maintaining local
autonomy and identity of FANBP; retaining current employees and the "corporate
culture" of FANBP; and service to the community and customers. These strategic
objectives were then discussed in conjunction with evaluation of the Original
Proposal and other potential strategic combinations and alternatives. The Board
determined that, while it favored further exploration of the Original Proposal,
the Board believed that the value of Cardinal and FANBP exceeded the purchase
price proposed and that the Original Proposal did not adequately address the
non-financial objectives of Cardinal and FANBP. After careful consideration of
the GM&A presentation and exhaustive discussion, the Board concluded that
Cardinal should invite merger proposals from selected larger financial
institutions, located in western and central Pennsylvania and Maryland that
might have an interest in acquiring Cardinal. The invitations, on a
confidential basis, for proposals asked each party to outline the terms of their
proposal, if any, in detail. Four institutions responded with nonbinding
proposals, subject to negotiation and certain other conditions. All proposals
were received on a confidential basis, were non-binding and were never made
public by Cardinal or the companies making the proposals.
On February 9, 1998, the Cardinal Board of Directors met for the purpose of
reviewing and evaluating the four confidential responses to the invitation,
including a revised version of the Original Proposal and a proposal received
from Susquehanna (the "Susquehanna Proposal"), for the acquisition of Cardinal
and FANBP. The responses each contained conditions subject to negotiation and
were reviewed in detail from a financial perspective and a non-financial
perspective. In addition, the objectives and strategies of the Board were
reviewed in relation to the fiduciary duties of the Board under Pennsylvania
law. The Board reached a consensus with regard to the objectives of Cardinal,
and the goals of increasing shareholder value and liquidity, maintaining the
local identity and autonomy of FANBP to serve its customers and communities, and
broadening the range of products and services offered to FANBP's customers and
communities. In addition, the Board discussed the operating cultures of the
various entities, the management depth of the various companies and the
geographic areas served by each company. GM&A attended the meeting and
presented its analysis of the proposals. See, "APPROVAL OF THE CARDINAL
MERGER-Opinion of Financial Advisor."
Following the February 9, 1998 meeting, members of the Board were in
communication with representatives of each of the companies who responded to
Cardinal's invitation for proposals, and the bank holding company that submitted
the Original Proposal. Based upon February 6, 1998, closing prices that were
reviewed and evaluated at the Board's meeting on February 9, 1998, Susquehanna's
per share offering price was $3.12 per share, or 6.48%, less than another
proposal, and was the second highest per share price among the four proposals
received by the Board. However, the Board considered that the company with the
higher price was substantially smaller than Susquehanna (with assets
approximately one-half those of Susquehanna) and its shares were far less liquid
than the Susquehanna Common Stock would be in the hands of Cardinal's
shareholders. Specifically, the Board considered that the average daily
transaction volume for the six month period ending February 4, 1998, of
Susquehanna's Common Stock was 33,982 shares compared with 4,388 shares for the
common stock of the smaller company. The Board calculated that this additional
daily transaction volume of the shares of Susquehanna Common Stock was eight
times the average daily transaction volume of the shares of the smaller company
and, in the Board's opinion, would be of significant advantage of the Cardinal
shareholders. The Board also notes that, in its opinion, Susquehanna had an
extensive history of successful acquisitions, an operating culture similar to
Cardinal's, superior management depth and an institutional geographic coverage
area of high potential growth. All of these attributes, the Board believed,
were absent from, or much superior to, the smaller company. The Board discussed
various issues regarding the Susquehanna Proposal, including the exchange ratio,
continued local identity and autonomy of FANBP, continued employment for
employees of FANBP and representation on Susquehanna's board of directors. On
February 11, 1998, Robert Bolinger, Drew Hostetter and Edward Balderston met
with the Cardinal Board. They made a presentation describing Susquehanna's
strategic plans, subsidiary structure and operations. In addition, they
discussed, in detail, Susquehanna's corporate culture and the
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attributes of Susquehanna's common stock, including long-term price appreciation
and liquidity. Among the matters discussed were subsidiary Board responsibility,
employee retention, employee benefits, computer systems conversion, and
operations. The discussions resulted in several revisions to the Susquehanna
Proposal, including an increase in the exchange ratio, to address financial and
non-financial issues of importance to Cardinal, which were consolidated into a
revised proposal (the "Revised Susquehanna Proposal").
Two of the proposals received by Cardinal expired during these
negotiations. One expired by its terms on February 10, 1998; the proposal from
the smaller company, described above, expired on February 27, 1998. On February
27, 1998, the smaller company's proposal represented a $3.73 per share premium
(or 7.98%) over the Revised Susquehanna Proposal. The Cardinal Board did not
attempt to contact the smaller company to encourage the submission of a higher
proposal because the Board believed that an affiliation with the smaller company
would not be in the best interests, taken as a whole, of the Cardinal
constituencies for the reasons delineated above. Had such an attempt been made,
the smaller company may have responded with a revised proposal with a higher per
share price. Cardinal continued extensive negotiations with Susquehanna.
On April 10, 1998, the Cardinal Board met to consider the results of its
discussions with Susquehanna. GM&A presented its oral and written opinion as to
the fairness of the consideration, from a financial point of view, as determined
by negotiation of the parties, provided to Cardinal shareholders in connection
with the Revised Susquehanna Proposal. Legal counsel also conducted a detailed
review of the Revised Susquehanna Proposal. The Directors concluded that the
Susquehanna proposal was in the best interest of the Cardinal constituencies.
Among other advantages, discussed herein, the Susquehanna offer provided
significant liquidity for Cardinal shareholders and the size and strength of
Susquehanna as a banking institution made the Susquehanna proposal attractive.
After consideration, the Board of Directors of Cardinal accepted the Revised
Susquehanna Proposal and approved the Cardinal Merger Agreement as being in the
best interests of Cardinal, its shareholders, FANBP, and Cardinal's other
constituencies, including the community at large, customers and employees of
FANBP, and, consequently, recommended that the shareholders vote for the
approval of the Cardinal Merger.
The Cardinal Merger Agreement was executed by the parties on April 13,
1998, and press releases announcing the transaction were issued by Cardinal and
Susquehanna early on April 14, 1998.
Reasons for the Cardinal Merger and Recommendation of the Cardinal Board of
Directors
In evaluating the Cardinal Merger Agreement, the Cardinal Board of
Directors considered a variety of financial factors, including: (i) the
consideration being offered to Cardinal's shareholders in relation to the market
value, book value, earnings per share and projected earnings per share of
Cardinal; (ii) the quality of a financial investment in and the liquidity of
Susquehanna common stock; (iii) the historical results of operations, current
financial condition and future prospects of Susquehanna and Cardinal; (iv) the
presentations by GM&A, Cardinal's financial advisors, as to the fairness of the
Cardinal Merger Consideration, from a financial point of view, to Cardinal's
shareholders; and non-financial factors, including: (a) the prospects for
continued local identity and autonomy for FANBP; (b) continued employment for
current employees of FANBP and continued service for current directors of FANBP;
(c) a structure that should provide advantageous service to the community and
customers of FANBP; and (d) the quality of Susquehanna and its operating
history, including its products and services, for example, trust services.
Susquehanna also has an extensive history of successful acquisitions, an
operating culture that is similar to Cardinal's and the Susquehanna
institutional geographic coverage is in an area of greater potential growth.
In this regard, the Cardinal Board of Directors received a written opinion from
GM&A dated April 10, 1998, and updated as of the date of the Proxy
Statement/Prospectus that, as of such dates, the Cardinal Merger Consideration
is fair to Cardinal's shareholders from a financial point of view. (The updated
opinion is attached as Appendix E hereto; for a summary of the presentations of
GM&A, see "Opinion of Financial Advisors" below.) Other financial and non-
financial factors considered by the Cardinal Board of Directors included: (A)
one of the proposals included an operating culture that called for, among other
things, the consolidation of branch offices, which might lead to the closing of
certain Cardinal or FANBP branch bank locations, as well as the elimination of
numerous employees' jobs due to the branch consolidation and administrative job
redundancies; (B) the resources that Susquehanna would bring to face the
competitive environment for financial
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institutions generally; (C) the compatibility of the respective business
management philosophies of Cardinal and Susquehanna; (D) the ability of
Susquehanna to provide comprehensive financial services to the markets currently
served by FANBP; (E) the projected social and economic effects of the Cardinal
Merger upon Cardinal, its shareholders and other corporate constituencies,
including employees, suppliers and customers in the communities in which it does
business; (F) the financial terms of other recent business combinations in the
local financial services industry; (G) the fact that the consideration to be
received in the Cardinal Merger by Cardinal's shareholders reflects a premium
over the values at which Cardinal Common Stock has traded in the market; and (H)
the fact that Susquehanna, as a larger financial institution company, has the
financial resources to serve the lending and deposit needs of the local
communities served by Cardinal. The primary negative factor considered by the
Cardinal Board of Directors was that the per share value of another company's
proposal, though expired, was arguably higher. All other material negative
factors discussed by the Board are described in "OPINION OF FINANCIAL ADVISOR",
below. The difference was greatly outweighed, in the opinion of the Board, by
Susquehanna's substantially increased liquidity and the benefits to the various
Cardinal constituencies discussed herein and in "APPROVAL OF THE CARDINAL
MERGER-Background of the Cardinal Merger." The Cardinal Board of Directors
determined, in light of the material factors discussed above, that the terms of
the Cardinal Merger are fair to, and in the best interests of, Cardinal and its
shareholders. The factors discussed above and herein are believed to be all of
the material factors considered by the Cardinal Board of Directors in evaluating
the Cardinal Merger. In view of the wide variety of material factors considered
in connection with its evaluation of the Cardinal Merger, the Cardinal Board did
not find it practicable to, and did not, quantify or otherwise attempt to assign
any relative weight to the various factors considered, except, however, that
liquidity and the size and attributes of the acquiror were determined by the
Board to be significant factors. In addition, individual directors may have
given differing weights to different factors. There can be no assurance that any
of the potential opportunities considered by the Cardinal Board will be achieved
through consummation of the Cardinal Merger.
THE CARDINAL BOARD OF DIRECTORS BELIEVES THAT THE CARDINAL MERGER IS IN THE
BEST INTERESTS OF CARDINAL'S SHAREHOLDERS AND RECOMMENDS THAT CARDINAL'S
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE CARDINAL MERGER AGREEMENT.
Vote Required
The affirmative vote of holders of 75% of the outstanding shares of
Cardinal Common Stock is required to approve the Cardinal Merger Agreement.
Cardinal's directors and executive officers are expected to vote substantially
all of the 74,753 shares held by them, representing approximately eight percent
of the Cardinal Common Stock outstanding at the Cardinal Record Date and
entitled to vote at the Cardinal Meeting, "FOR" approval of the Cardinal Merger
Agreement.
Opinion of Financial Advisor
General
Pursuant to engagement letters dated January 8, 1998, and January 30, 1998,
(collectively, the "Garland McPherson & Associates, Inc. engagement letter") the
Cardinal Board retained Garland McPherson & Associates, Inc. ("GM&A") to render
financial advisory and investment banking services to Cardinal in connection
with the possible sale of Cardinal (the "Transaction").
GM&A, as part of its investment banking and bank consulting business, is
engaged in the valuation of financial institution securities for a variety of
purposes, including mergers and acquisitions, and the determination of adequate
consideration in merger and acquisition transactions. The Cardinal Board
selected GM&A on the basis of its experience in and knowledge of the banking
industry and its ability to evaluate the fairness of the Transaction from a
financial point of view. GM&A acted exclusively for the Cardinal Board in
rendering its fairness opinion and has received fees from Cardinal in rendering
its fairness opinion and has received fees from Cardinal in rendering its
services. There are no other material relationships between GM&A, its
affiliates and representatives and Cardinal or its affiliates.
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In addition to prior written and oral presentations made on January 26,
1998, and February 9, 1998, GM&A has rendered a written opinion to the Cardinal
Board, dated April 13, 1998, regarding the fairness of the Susquehanna offer,
which opinion is updated as of the date of this Proxy Statement/Prospectus (the
"GM&A Opinion"), and states that, as of the date hereof, the per share merger
consideration is fair, from a financial point of view, to the holders of the
Cardinal Common Stock. The GM&A Opinion was based solely on the information
available to it and the economic, market and other circumstances as they existed
as of the date hereof; events occurring after the date hereof could materially
affect the assumptions used in preparing the GM&A Opinion. GM&A has not
undertaken to reaffirm and revise its Opinion or otherwise, on any events
occurring after the date hereof. THE FULL TEXT OF THE GM&A OPINION IS ATTACHED
AS APPENDIX E TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. CARDINAL SHAREHOLDERS ARE URGED TO READ THE GM&A OPINION IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS
CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY GM&A
IN CONNECTION THEREWITH. THE FOLLOWING SUMMARY OF THE GM&A OPINION IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF THE GM&A OPINION. THE PER SHARE MERGER
CONSIDERATION WAS DETERMINED BY NEGOTIATION BETWEEN CARDINAL AND SUSQUEHANNA AND
WAS NOT DETERMINED BY GM&A. See "APPROVAL OF THE CARDINAL MERGER - Background
of the Cardinal Merger."
In rendering the GM&A Opinion, GM&A: (i) reviewed the historical financial
performances, current financial positions and general prospects of Cardinal and
Susquehanna; (ii) reviewed the Cardinal Merger Agreement; (iii) reviewed the
Proxy Statement/Prospectus; (iv) reviewed and analyzed the stock market
performance of Cardinal and Susquehanna; (v) studied and analyzed the
operations, historical financial statements and future prospects of Cardinal;
(vi) considered the terms and conditions of the proposed Transaction as compared
with the terms and conditions of comparable bank mergers and acquisitions; (vii)
met to discuss with various senior officers of Cardinal and Susquehanna the
foregoing as well as other matters it believed relevant to its opinion; and
(viii) conducted such other analyses, studies and investigations as were deemed
appropriate.
GM&A relied without independent verification upon the accuracy and
completeness of all the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to the Cardinal
financial forecasts reviewed by GM&A in rendering its opinion, GM&A assumed that
such financial forecasts were reasonably prepared on the basis reflecting the
best currently available estimates and judgments of the management of Cardinal
as to the future financial performance of Cardinal. GM&A did not make an
independent evaluation or appraisal of the assets (including loans) or
liabilities of Cardinal or Susquehanna nor was it furnished with any such
appraisal. GM&A also did not independently verify, and has relied on and
assumed, that all allowances for loan losses set forth in the balance sheets of
Cardinal and Susquehanna were adequate and complied fully with all applicable
law, regulatory policy and sound banking practice as of the date of such
financial statements.
In connection with rendering the GM&A Opinion, GM&A performed a variety of
financial analyses. Although the evaluation of the fairness, from a financial
point of view of the Transaction and of the consideration to be paid in the
Transaction was to some extent a subjective one based on the experience and
judgment of GM&A and not merely the result of mathematical analysis of financial
data, GM&A principally relied on the financial evaluation methodology summarized
below in its determinations. GM&A believes its analyses must be considered as a
whole and that selecting portions of such analyses and factors considered by
GM&A without considering all such analyses and factors could create an
incomplete view of the process underlying GM&A's Opinion. In its analysis GM&A
made numerous assumptions with respect to business, market, monetary and
economic conditions, industry performance and other matters, many of which are
beyond Cardinal's and Susquehanna's control. Any estimates contained in GM&A's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates.
The following is a summary of selective analyses prepared by GM&A and
analyzed by GM&A in connection with the GM&A Opinion.
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Comparable Company Analysis
GM&A compared selected financial and operating data for Cardinal with those
of a peer group of rural banking organizations with assets between $100 and $300
million. This data included, but was not limited to: return on average assets,
return on average equity, certain capital adequacy ratios and certain asset
quality ratios. GM&A excluded securities gains and other items of a non-
recurring nature in computing profitability ratios. The analysis showed that
Cardinal's return on average assets was 1.4% compared to the peer group median
of 1.3%; its return on equity was 11.4% compared to the peer group median of
13.9%; its leverage ratio was 12.8% compared to the peer group median of 9.2%;
its non-performing loans measured 0.4% of total loans compared to the peer group
median of 0.7%; and its loan loss reserve as a percentage of nonaccrual loans
was 333% compared to the peer group median of 412%.
GM&A compared selected financial and operating data for Susquehanna with a
peer group of Pennsylvania banking organizations that consisted of BT Financial
Corporation, First Commonwealth Financial Corporation, First Western Bancorp,
Inc., Fulton Financial Corporation, Keystone Financial, Inc., Omega Financial
Corporation, S&T Bancorp, Inc., and USBANCORP, Inc. This data included, but was
not limited to: return on average assets, return on average equity, certain
capital adequacy ratios and certain asset quality ratios. GM&A excluded
securities gains and other items of a non-recurring nature in computing
profitability ratios. The analysis showed that Susquehanna's return on average
assets was 1.1% compared to the peer group median of 1.2%; its return on equity
was 11.6% compared to the peer group median of 12.5%; its ratio of equity to
assets was 9.8% compared to the peer group median of 9.8%; its non-performing
loans measured 1.3% of total loans compared to the peer group median of 0.8%;
and its loan loss reserve as a percentage of nonaccrual loans was 139% compared
to the peer group median of 258%.
GM&A also compared stock market data for Susquehanna with an expanded peer
group consisting of seventeen Middle Atlantic banking organizations. The
analysis showed that the average ratio of trading price to book value per share
for the expanded peer group was 257.6% as compared to 245.0% for Susquehanna.
In addition, the peer groups average stock price to earnings per share before
non-recurring items was 20.7 compared to 21.8 for Susquehanna.
Analysis of Selected Merger and Acquisition Transactions
GM&A compared the multiples of book value and latest twelve months'
earnings of the Transaction with the multiples associated with bank mergers in
Pennsylvania and surrounding states that were announced since July 1, 1997. GM&A
also compared the multiples of book value and latest twelve months' earnings of
the Transaction with the multiples associated with selected recently announced
acquisitions of banking institutions with equity to assets between 10% and 15%
and return on assets between 1.2% and 1.7%. However, no company or transaction
used in any of these analyses is identical to Cardinal or Susquehanna.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgements concerning the
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 analysis, GM&A estimated the present value of the
future dividend streams that Cardinal could produce over a five-year period
under various earnings growth assumptions. GM&A also estimated the terminal
value for Cardinal by applying an earnings multiple of twenty. The dividend
streams and terminal value were discounted to determine the present value using
discount rates ranging from 10% to 12%.
GM&A also used discounted dividend analysis to estimate the present value
of the future dividend streams that Susquehanna could produce over a five-year
period under various earnings growth assumptions. GM&A also estimated the
terminal value for Susquehanna Common Stock by applying an earnings multiple of
twenty. The dividend streams and terminal value were discounted to determine
the present value using discount rates ranging from 10% to 12%.
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GM&A derived the discount rates used in the discounted dividend analysis
using the Capital Asset Pricing Model (CAPM), a well recognized theoretical
model for estimating the risks and expected returns of equity investments. The
CAPM is mathematically expressed by the following formula:
K\\e\\ = R\\f\\ + B(R\\m\\ - R\\f\\)
where: K\\e\\ = Required return on an equity investment
R\\f\\ = Risk-free rate of return
B = Beta, an indication of the relative risk of a security.
More specifically, Beta is a measure of the volatility
of the returns from a particular security relative to
the overall stock market.
R\\m\\ = The expected return of the overall stock market. Hence,
R\\m\\ - R\\f\\ is the market risk premium or the
excess of the expected return of the overall stock
market over the risk-free rate.
GM&A used the twenty-year treasury rate at the time of the analysis of 5.7%
for the risk-free rate of return. Beta was determined by taking the average of
the available Beta for the Middle Atlantic peer group of bank stocks. The
average Beta for this group of stocks was 0.51. The market risk premium, R\\m\\
- - R\\f\\, was derived from empirical studies that indicate that the historical
market risk premium is 7.5%.
A shortcoming of the CAPM is that it fails to capture the risks associated
with small capitalization stocks such as Susquehanna. Stocks of smaller
companies present additional risks to investors relative to their larger
counterparts. Small companies have less diversified markets and products, have
less access to capital, and are more susceptible to competition due to smaller
economies of scale. In addition, small companies typically provide less
information to shareholders and have thinner lines of management succession.
Investors require a greater return to offset these increased risks.
Based upon these considerations, GM&A applied a small capitalization
premium of 1.0% to the discount rate derived by the CAPM thereby yielding an
adjusted discount rate of approximately 11%. GM&A therefore used discount rates
ranging from 10% to 12% as an appropriate range of rates of return for a company
with Susquehanna's risk characteristics.
Pro Forma Merger Analysis
GM&A analyzed, using projections, and discussions with managements of
Cardinal and Susquehanna, certain pro forma effects resulting from the
Transaction based on the proposed consideration. The analysis examined the
projected impact (including management's estimates of transaction related
savings) on earnings per share and book value per share of Susquehanna.
In reaching its opinion as to fairness, none of the analyses performed by
GM&A was assigned a greater significance by GM&A than any other. As a result of
its consideration of the aggregate of all factors present and analyses
performed, GM&A reached the conclusion, and opines, that the consideration, as
set forth in the Cardinal Merger Agreement, is fair, from a financial point of
view, to holders of Cardinal's securities.
In connection with delivering the GM&A Opinion, GM&A updated certain of its
analyses and reviewed the assumptions on which such analyses were based and the
factors considered therewith.
GM&A, as part of its investment banking business, is regularly engaged in
the valuation of assets, securities and companies in connection with various
types of asset and securities transactions, including mergers, acquisitions,
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private placements, and valuation for various other purposes and in the
determination of adequate consideration in such transactions.
In delivering its opinion, GM&A assumed that in the course of obtaining the
necessary regulatory and governmental approvals for the Transaction, no
restrictions will be imposed on Cardinal or Susquehanna that would have a
material adverse affect on the contemplated benefits of the Transaction. GM&A
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 Susquehanna after the Cardinal Effective Date. Pursuant to the
terms of the engagement letters dated January 8, 1998, and January 30, 1998,
Cardinal has paid GM&A $40,000 and has agreed to reimburse GM&A for its
reasonable out-of-pocket expenses. Whether or not the Cardinal Merger is
consummated, Cardinal has agreed to indemnify GM&A and certain related persons
against certain liabilities relating to or arising out of its engagement.
The full text of the Opinion of GM&A, as of the date of this Proxy
Statement/Prospectus, which sets forth assumptions made and matters considered,
is attached hereto as Appendix E to this Proxy Statement/Prospectus. Cardinal's
shareholders are urged to read the Opinion in its entirety. GM&A's Opinion is
directed only to the consideration to be received by Cardinal shareholders in
the Transaction and does not constitute a recommendation to any holder of
Cardinal's securities as to how a security holder should vote at the Cardinal
Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE FAIRNESS OPINION OF GMA AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH
IS SET FORTH AS APPENDIX E TO THIS PROXY STATEMENT/PROSPECTUS.
Dissenters' Rights
General
Pursuant to the BCL, any holder of Cardinal Common Stock has the right to
dissent from the Cardinal Merger and to obtain payment of the "fair value" of
such holder's Cardinal Common Stock, in the event that the Cardinal Merger is
consummated.
Any shareholder of Cardinal who contemplates exercising a holder's right to
dissent is urged to read carefully the provisions of Subchapter D of Chapter 15
of the BCL attached to this Joint Proxy Statement/Prospectus as Appendix G. The
following is a summary of the steps to be taken if the right to dissent is to be
exercised, and should be read in connection with the full text Subchapter D of
Chapter 15 of the BCL. Each step must be taken in the indicated order and in
strict compliance with the applicable provisions of the statute in order to
perfect dissenters' rights. The failure of any holder of Cardinal Common Stock
to comply with the aforesaid steps will result in the holder receiving the
consideration contemplated by the Cardinal Merger Agreement in the event that
the Cardinal Merger is consummated. See "APPROVAL OF THE CARDINAL MERGER--Terms
of the Cardinal Merger--Exchange Ratio."
Any written notice or demand which is required in connection with the
exercise of dissenters' rights, whether before or after the Cardinal Merger
Effective Date, must be sent to Cardinal Bancorp., Inc. at 140 East Main Street,
Everett, Pennsylvania 15537, Attention: William B. Zimmerman,
Secretary/Treasurer.
Fair Value
The term "fair value" means the value of a share of Cardinal Common Stock
immediately before consummation of the Cardinal Merger taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the Cardinal Merger.
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Notice of Intention to Dissent
A Cardinal shareholder who wishes to dissent must file with Cardinal,
prior to the vote of shareholders on the Cardinal Merger at the Cardinal
Meeting, a written notice of intention to demand payment of the fair value of
such holder's share of Cardinal Common Stock if the Cardinal Merger is effected,
must effect no change in the beneficial ownership of his or her Cardinal Common
Stock from the date of such notice through the Cardinal Effective Time, and must
refrain from voting his or her Cardinal Common Stock for approval of the
Cardinal Merger Agreement. Neither a proxy nor a vote against approval of the
Cardinal Merger will constitute the necessary written notice of intention to
dissent.
Notice to Demand Payment
If the Cardinal Merger Agreement is approved by the required vote of
holders of Cardinal Common Stock, Cardinal will mail a notice to all dissenters
who gave due notice of intention to demand payment and who refrained from voting
for approval of the Cardinal Merger Agreement. The notice will state where and
when a written demand for payment must be sent and certificates for Cardinal
Common Stock must be deposited in order to obtain payment, and will include a
form for demanding payment and a copy of Subchapter D of Chapter 15 of the BCL.
The time set for receipt of the demand for payment and deposit of stock
certificates will be not less than 30 days from the date of mailing of the
notice.
Failure to Comply with Notice to Demand Payment, etc.
A holder of Cardinal Common Stock who fails to timely demand payment or
fails to timely deposit his or her Cardinal share certificates, as required by
Cardinal's notice, will forfeit his or her dissenters' rights and such holder
will receive shares of Susquehanna Common Stock determined in conformity with
the Cardinal Exchange Ratio.
Payment of Fair Value of Shares
Promptly after the Cardinal Effective Time, or upon timely receipt of
demand for payment if the Cardinal Merger already has been consummated, Cardinal
will either remit to dissenters who have made demand and have deposited their
stock certificates the amount that Cardinal estimates to be the fair value of
the Cardinal Common Stock or give written notice that no such remittance is
being made. The remittance or notice will be accompanied by: (i) a closing
balance sheet and statement of income of Cardinal for a fiscal year ending not
more than 16 months before the date of remittance or notice together with the
latest available interim financial statements; (ii) a statement of Cardinal's
estimate of the fair value of the Cardinal Common Stock; and (iii) a notice of
the right of the dissenter to demand supplemental payment under the BCL
accompanied by a copy of Subchapter D of Chapter 15 of the BCL.
Estimate by Dissenter of Fair Value of Shares
If a dissenter believes that the amount stated or remitted by Cardinal is
less than the fair value of the Cardinal Common Stock, a dissenter may send to
Cardinal his or her own estimate of the fair value of the Cardinal Common Stock,
which shall be deemed to be a demand for payment of the amount of the
deficiency. If Cardinal remits payment of its estimated value of a dissenter's
Cardinal Common Stock and the dissenter does not file his or her own estimate
within 30 days after the mailing by Cardinal of its remittance, the dissenter
will be entitled to no more than the amount remitted to him or her by Cardinal.
Valuation Proceedings
If any demands for payment remain unsettled within 60 days after the latest
to occur of: (i) the Cardinal Merger Effective Date; (ii) timely receipt by
Cardinal of any demands for payment; or (iii) timely receipt by Cardinal of any
estimates by dissenters of the fair value, Cardinal may file in the Court of
Common Pleas of Bedford County (the "Bedford County Court") an application
requesting that the fair value of the Cardinal Common Stock be determined
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by the Bedford County Court. In such case, all dissenters, wherever residing,
whose demands have not been settled, shall be made parties to the proceeding as
in an action against their shares, and a copy of the application shall be served
on each such dissenter.
If Cardinal were to fail to file such an application, then any dissenter,
on behalf of all dissenters who have made a demand and who have not settled
their claim against Cardinal, may file an application in the name of Cardinal at
any time within the 30-day period after the expiration of the 60-day period and
request that the fair value be determined by the Bedford County Court. The fair
value determined by the Bedford County Court may, but need not, equal the
dissenters' estimates of fair value. If no dissenter files such an application,
then each dissenter entitled to do so shall be paid Cardinal's estimates of the
fair value of the Cardinal Common Stock and no more, and may bring an action to
recover any amount not previously remitted, plus interest at a rate the Bedford
County Court finds fair and equitable.
Cardinal intends to negotiate in good faith with any dissenting
shareholders. If after negotiation a claim cannot be settled, then Cardinal
intends to file an application requesting that the fair value of the Cardinal
Common Stock be determined by the Bedford County Court.
Costs and Expenses
The costs and expenses of any valuation proceedings in the Bedford County
Court, including the reasonable compensation and expenses of any appraiser
appointed by the Bedford County Court to recommend a decision on the issue of
fair value, will be determined by the Bedford County Court and assessed against
Cardinal except that any part of the costs and expenses may be apportioned and
assessed by the Bedford County Court against all or any of the dissenters who
are parties and whose action in demanding supplemental payment the Bedford
County Court finds to be dilatory, obdurate, arbitrary, vexatious or in bad
faith.
Terms of the Cardinal Merger
The description of the Cardinal Merger Agreement set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Cardinal Merger Agreement, a copy of which is attached as Appendix C to this
Proxy Statement/Prospectus and incorporated by reference herein. Shareholders
are urged to read carefully the Cardinal Merger Agreement.
Effect of the Cardinal Merger
Pursuant to the Cardinal Merger Agreement, SBI Merger Sub will merge with
and into Cardinal, with Cardinal as the surviving entity (sometimes referred to
as the "Surviving Corporation"), as a result of which Cardinal will become a
direct, wholly-owned subsidiary of Susquehanna, and FANBP, a national bank, will
become a second-tier subsidiary of Susquehanna. The name of the Surviving
Corporation will be "Susquehanna Bancshares West, Inc."
Exchange Ratio
Pursuant to the Cardinal Merger Agreement, the outstanding shares of
Cardinal Common Stock will be exchanged for shares of Susquehanna Common Stock
according to the Cardinal Exchange Ratio set forth in the Cardinal Merger
Agreement. This number may be adjusted subject to conditions set forth in the
Cardinal Merger Agreement. The number of shares to be issued gives effect to a
three-for-two split of the Susquehanna Common Stock effected in the form of a
50% stock dividend paid on July 1, 1998.
At the Effective Time (as defined in the Cardinal Merger Agreement, the
"Cardinal Effective Time"), each share of Cardinal Common Stock issued and
outstanding (other than shares the holders of which are exercising appraisal
rights pursuant to the BCL and shares held by Susquehanna other than shares held
in a fiduciary capacity or in satisfaction of a debt previously contracted)
shall become and be converted into the right to receive shares of Susquehanna
Common Stock determined in conformity with the Cardinal Exchange Ratio, as set
forth below:
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(i) So long as the average price per share of Susquehanna Common Stock
before the closing is between and including $22.67 and $26.67, then 1.92
shares of Susquehanna Common Stock shall be exchanged for each of the
outstanding shares of Cardinal Common Stock and the Cardinal Exchange Ratio
shall be 1.92. The average price per share of Susquehanna Common Stock
before the closing will be determined by adding the price at which
Susquehanna Common Stock is reported to have closed by The Nasdaq Stock
Market National Market System (or if Susquehanna Common Stock is not quoted
on The Nasdaq Stock Market National Market System then as reported by a
recognized source as to the principal trading market on which such shares
are traded) over the period of 10 business days ending on the second
business day preceding the date set for the Cardinal Closing, and dividing
such total by 10.
(ii) If the average closing price is greater than $26.67, then $50,688,000
divided by the average closing price shall be the total number of shares of
Susquehanna Common Stock to be exchanged for all of the outstanding
Cardinal Common Stock, and the Cardinal Exchange Ratio shall be the total
number of shares of Susquehanna Common Stock to be exchanged for all of the
outstanding Cardinal Common Stock divided by the total number of shares of
Cardinal Common Stock outstanding on the Cardinal Merger Effective Date.
For example: if the average closing price of Susquehanna Common Stock is
$32.00 per share, then the Cardinal Exchange Ratio shall be 1.6
($50,688,000 / $32 = 1,584,000, then 1,584,000 / 990,000 = 1.6).
Notwithstanding the foregoing, Cardinal may terminate the Cardinal Merger
Agreement upon written notice within one business day of such determination
if the average closing price is greater than $26.67.
(iii) If the average closing price is less than $22.67, then $43,085,000
divided by the average closing price shall equal the total number of shares
of Susquehanna Common Stock to be exchanged for all of the outstanding
Cardinal Common Stock, and the Cardinal Exchange Ratio shall be the total
number of shares of Susquehanna Common Stock to be exchanged for all of the
outstanding Cardinal Common Stock divided by the total number of shares of
Cardinal Common Stock outstanding on the Cardinal Merger Effective Date.
For example: if the average closing price of Susquehanna Common Stock is
$18.00 per share, then the Cardinal Exchange Ratio shall be 2.418
($43,085,000 / $18.00 = 2,393,611, then 2,393,611 / 990,000 = 2.418).
Notwithstanding the foregoing, Susquehanna may terminate the Cardinal
Merger Agreement upon written notice within one business day of such
determination if the average closing price is less than $22.67.
As of the Cardinal Effective Time, each share of Cardinal Common Stock held
by Susquehanna, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted, will be canceled, and no exchange
or payment will be made with respect thereto.
The shares of common stock of SBI Merger Sub and FANBP issued and
outstanding immediately prior to the Cardinal Effective Time shall remain
outstanding and unchanged after the Cardinal Merger, and shall thereafter
constitute all of the issued and outstanding shares of the capital stock of the
Surviving Corporation and FANBP, respectively. At such time, all of the capital
stock of FANBP will be owned by the Surviving Corporation and all of the shares
of the Surviving Corporation will be owned by Susquehanna.
If prior to the Cardinal Merger Effective Date, the outstanding shares of
Susquehanna Common Stock are increased or decreased through a reclassification,
stock dividend, stock split or reverse stock split, or other similar change,
appropriate adjustment will be made to the Cardinal Exchange Ratio.
Fractional Shares
No fractional shares of Susquehanna Common Stock will be issued.
Susquehanna will furnish to any holder of Cardinal Common Stock otherwise
entitled to a fractional share a check for an amount of cash equal to such
fraction of a share of Susquehanna Common Stock represented by the certificates
so surrendered in accordance with the Cardinal Exchange Ratio.
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Representations and Warranties
The representations and warranties of Susquehanna, SBI Merger Sub, Cardinal
and FANBP are set forth in Article III of the Cardinal Merger Agreement. The
representations and warranties relate, among other things, to representations as
to corporate existence and authority and the ability of each party to carry out
the transactions as contemplated by the Cardinal Merger Agreement;
capitalization; subsidiaries; no violations of law; regulatory reports and
financial statements; the absence of certain changes or events; the absence of
material litigation not otherwise disclosed; the absence of regulatory actions;
labor and employee benefits matters; environmental matters; board action; fees;
compliance with laws; taxes, material contracts and agreements; regulatory and
capital compliance; fully paid assessments; Year 2000 compliance except as
otherwise disclosed; and information to be provided in the Proxy
Statement/Prospectus. Cardinal and FANBP have made additional representations
as to the status of title to assets, the adequacy of allowances for losses on
loans; the inapplicability of certain anti-takeover provisions, the material
interests of certain persons; insurance; dividends; books and records; labor
matters; fairness opinions; fidelity bonds; the condition of tangible assets;
and loans by FANBP. On the Cardinal Merger Effective Date, Susquehanna,
Cardinal and FANBP must each present to the other certificates evidencing the
continued accuracy of their representations and warranties.
Covenants
The Cardinal Merger Agreement also contains certain affirmative and
negative covenants of all of the parties. Cardinal has agreed that: (i) it
shall direct and use its best efforts to cause its officers, directors,
employees, agents and representatives not to initiate, solicit or encourage
inquiries regarding the making of any merger proposal or any proposal to
purchase any significant portion of the assets or equity securities of Cardinal
or FANBP and, subject to the fiduciary obligations of its directors as
determined upon consultation with counsel, it will not engage in any
negotiations or discussions or provide any confidential information in
connection with any such proposal; (ii) it will cooperate with Susquehanna in
the preparation of this Proxy Statement/Prospectus and the filing thereof as
part of Susquehanna's Registration Statement on Form S-4 (the "Susquehanna
Registration Statement"); (iii) it will take all required action to call the
Cardinal Meeting; (iv) subject to the fiduciary duties of the Cardinal Board of
Directors and the receipt of an updated fairness opinion as of the date of this
Proxy Statement/Prospectus, it will use its best efforts to obtain approval of
the Cardinal Merger Agreement; and (v) it will furnish to Susquehanna a list of
all persons known to be affiliates of Cardinal within the meaning of Rule 145
under the Securities Act and will use its best efforts to cause any such person
to deliver a written agreement providing that such person will not sell, pledge,
transfer or otherwise dispose of the shares of Susquehanna Common Stock received
pursuant to the Cardinal Merger except in compliance with the Securities Act and
the rules and regulations thereunder and after such time as financial results
covering at least 30 days of post-merger combined operations have been
published.
During the period prior to the effectiveness of the Cardinal Merger,
Cardinal and FANBP are required to provide Susquehanna and its representatives
with reasonable access to their respective books, records, employees, properties
and such other information as Susquehanna may reasonably request and to provide
Susquehanna with copies of their respective financial statements periodically.
Susquehanna is required to provide Cardinal and FANBP with copies of all of
its filings with the Commission pursuant to the Exchange Act, together with
applications filed with regulatory authorities and certain other information.
Conduct of Business Pending the Cardinal Merger
Cardinal, FANBP, Susquehanna and SBI Merger Sub have all agreed to
cooperate with each other in completing the transactions described in the
Cardinal Merger Agreement and to refrain from taking or making any commitment to
take any actions that would cause any of the representations or warranties of
each party as set forth in the Cardinal Merger Agreement not to be true or
correct in all material respects.
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Pursuant to the Cardinal Merger Agreement, Cardinal and FANBP have each
agreed to carry on their business in the usual, regular and ordinary course of
business, consistent with past practices and to maintain and preserve intact
their respective business organizations, assets, leases, properties,
advantageous business relationships and other items, to use their reasonable
efforts to retain the services of their officers and key employees, to refrain
from taking any action which, to their knowledge, could materially delay or
adversely affect Cardinal or FANBP in general or their ability to obtain any
approvals, consents or waivers of any governmental authorities necessary for the
consummation of the Cardinal Merger, and to not knowingly take any action that
is reasonably likely to have a Material Adverse Effect (as defined in the
Cardinal Merger Agreement) on Cardinal.
In addition, during the period pending the Cardinal Merger, Cardinal and
FANBP have each agreed to refrain from doing any of the following, other than in
the ordinary course of business or with the prior written consent of
Susquehanna: (i) making any loan or advance or incurring or guaranteeing any
indebtedness; (ii) adjusting, splitting, combining or reclassifying any capital
stock; (iii) making any distribution or dividend (other than as permitted under
the Cardinal Merger Agreement); (iv) redeeming, purchasing or otherwise
acquiring any shares of its capital stock or any securities convertible into
shares of its capital stock or granting any stock appreciation rights; (v)
selling or issuing any shares of its capital stock or any right to acquire any
shares of its capital stock; (vi) other than in the ordinary course of business
consistent with past practice and pursuant to policies, if any, currently in
effect, selling, transferring, mortgaging, encumbering or otherwise disposing of
any of its properties, leasehold interests or assets or canceling, releasing or
assigning any indebtedness, contracts or agreements in force as of the date of
the Cardinal Merger Agreement; (vii) increasing in any manner the compensation
or fringe benefits of any of its employees, other than payment of bonuses in the
ordinary course of business and general increases in compensation, provided that
such increase made after the date of the Cardinal Merger Agreement, when
combined with such general increases made prior to the date thereof but after
September 30, 1997, does not exceed three percent of the individual's September
30, 1997 compensation; (viii) paying any pension or retirement allowance not
required by law or an existing plan or agreement or becoming party to, amending
or committing itself to any pension, retirement, profit-sharing or welfare
benefit plan or agreement or employment agreement with or for the benefit of any
employee or director; (ix) voluntarily accelerating the vesting of any stock
options or other benefit (other than as allowed under the Cardinal Merger
Agreement); (x) amending its articles of incorporation, charter or bylaws,
except as expressly contemplated by the Cardinal Merger Agreement or as required
by law and, in each case, as concurred in by its counsel; (xi) changing its
method of accounting from that in effect as of December 31, 1997, except as
required by changes in generally accepted accounting principals or required by
law; or (xii) permitting or allowing its direct or indirect ownership of the
capital stock of any subsidiary existing as of the date of the Cardinal Merger
Agreement to be less than 100% of its total capital stock.
Susquehanna has also agreed that it will not knowingly take any action or
knowingly cause its material subsidiaries to take any action which would
materially adversely affect or delay its ability to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
transactions described in the Cardinal Merger Agreement or that is reasonably
likely to have a material adverse effect on Susquehanna, on a consolidated
basis.
Cardinal Options
Options to purchase 94,000 shares of Cardinal Common Stock were outstanding
to current and past directors of Cardinal on the date of the execution of the
Cardinal Merger Agreement at exercise prices ranging from $13.185 to $21.00 per
share. At the Cardinal Effective Time, all options outstanding and disclosed to
Susquehanna in accordance with the terms of the Cardinal Merger Agreement
(individually a "Cardinal Option" and collectively, the "Cardinal Options")
shall remain outstanding following the Cardinal Effective Time for the remainder
of their terms and in accordance with the terms of the respective Cardinal
Options. At the Cardinal Effective Time, the Cardinal Options shall by virtue
of the Cardinal Merger and without any action on the part of Cardinal or the
holder of any of the Cardinal Options, whether the same shall be vested or
exercisable, be assumed by Susquehanna and constitute an option to acquire, on
the same terms and conditions as were applicable under such assumed Cardinal
Options, a number of shares of Susquehanna Common Stock equal to the product of
the Cardinal Exchange Ratio and the number of shares of Cardinal Common Stock
subject to such Cardinal Options. The option exercise price per share of
Susquehanna Common Stock shall be equal to the option exercise price per share
of Cardinal Common Stock divided by the Cardinal
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Exchange Ratio (the option price per share, as so determined, being rounded
upward to the nearest full cent). From and after the date of the Cardinal Merger
Agreement, no additional options of any kind shall be granted by Cardinal, or
any or its respective subsidiaries, under any plan, arrangement, agreement or
program whatsoever.
Dividends
The Cardinal Merger Agreement provides that Cardinal shall not declare,
pay or set aside any dividend or other distribution in respect of its capital
stock except in conformity with past practice as to the amount and timing of
such dividends, with increases in conformity with past practices, it being
understood on the basis of Cardinal's representations of past practice that a
dividend of $0.16 per share for the first quarter of 1998, $0.18 per share for
the second quarter of 1998, $0.20 per share for the third quarter of 1998, and
$0.22 per share for the fourth quarter of 1998, is consistent with the past
practice of Cardinal as to amount and timing of dividends.
Conditions Precedent
In addition to the approval by the Cardinal shareholders, the Cardinal
Merger is contingent upon the satisfaction of a number of conditions, including,
among others, (i) all required approvals, consents, or waivers, including
without limitation, approval by the Federal Reserve Board and the Department of
Banking, and all applicable statutory waiting periods shall have expired except
those approvals for which failure to obtain would not, individually or in the
aggregate, have a Materially Adverse Effect (as defined in the Cardinal Merger
Agreement) on Susquehanna, SBI Merger Sub, Cardinal or FANBP; (ii) all other
requirements prescribed by law which are necessary to the consummation of the
transactions contemplated by the Cardinal Merger Agreement shall have been
satisfied; (iii) the absence of any order, decree or injunction of a court or
agency of competent jurisdiction which would enjoin or prohibit the consummation
of the Cardinal Merger, or any litigation or proceeding pending against
Susquehanna or Cardinal or their subsidiaries by any governmental agency seeking
to prevent consummation of the transactions described in the Cardinal Merger
Agreement; (iv) the absence of any statute, rule, regulation, order, injunction
or decree enacted, entered, promulgated or enforced by any governmental
authority which would prohibit, restrict or make illegal consummation of the
Cardinal Merger; (v) the Cardinal Merger shall meet the requirements for
pooling-of-interests accounting treatment under generally accepted accounting
principles and under the accounting rules of the Commission, (vi) the
Susquehanna Registration Statement shall have been filed by Susquehanna with the
Commission under the Securities Act and shall have been declared effective prior
to the time this Proxy Statement/Prospectus is first mailed to the shareholders
of Cardinal, and no stop order with respect to the effectiveness of the
Susquehanna Registration Statement shall have been issued, and the Susquehanna
Common Stock to be issued pursuant to the Cardinal Merger Agreement shall have
been registered or qualified under the securities or "blue sky" laws in all
states in which such action is required; (vii) a ruling from the Internal
Revenue Service, or an opinion of counsel, regarding the tax consequences of the
Cardinal Merger, shall have been delivered in accordance with the terms of the
Cardinal Merger Agreement; and (viii) the existing employment contract between
Cardinal and FANBP, on the one side, and Merle W. Helsel, on the other side,
shall have been canceled and Mr. Helsel shall have entered into an agreement
with Susquehanna in accordance with the terms of the Cardinal Merger Agreement.
Additionally, the obligations of Susquehanna and SBI Merger Sub to effect
the Cardinal Merger are subject to satisfaction of the following conditions
prior to the Cardinal Effective Time: (i) each of the representations and
warranties of Cardinal and FANBP contained in the Cardinal Merger Agreement
shall be true and correct in all material respects as of the Cardinal Closing,
each of Cardinal and FANBP shall have performed each of the covenants and
agreements material to its operations and prospects contained in the Cardinal
Merger Agreement, and certificates to such effect shall have been delivered to
Susquehanna and SBI Merger Sub; (ii) Susquehanna shall have been furnished an
"agreed upon procedures" letter dated the Cardinal Merger Effective Date, in
form and substance satisfactory to Susquehanna to the effect that, based upon
procedures performed with respect to the financial condition of Cardinal, FANBP
and affiliates, for a period from December 31, 1997 to a specified date not more
than five days prior to such letter, nothing has come to their attention that
would indicate that there has been a change in the capitalization of Cardinal or
FANBP on a consolidated basis, or any material adjustments would be required to
the audited financial statements for the period ended December 31, 1997 in order
for them to be in conformity with generally accepted
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accounting principles applied on a consistent basis with that of prior periods;
(iii) an opinion of counsel shall have been delivered to Susquehanna; (iv) there
shall not have occurred any change in the financial condition, properties,
assets, business or results of operation of Cardinal or FANBP which,
individually or in the aggregate, has had or might reasonably be expected to
result in a Material Adverse Effect on Cardinal or FANBP other than changes
resulting from changes in banking laws or regulations or changes in generally
accepted accounting principles, or interpretations thereof, that affect the
banking or thrift industries; (v) Susquehanna shall have received from each
person identified by Cardinal to be an affiliate of Cardinal an executed
counterpart of an affiliates agreement in the form contemplated by the Cardinal
Merger Agreement; and (vi) except as otherwise provided in the Cardinal Merger
Agreement, all issued and outstanding options, warrants or rights to acquire
Cardinal Common Stock or any capital stock of FANBP shall have been canceled.
The obligations of Cardinal and FANBP to effect the Cardinal Merger are
subject to satisfaction of the following conditions prior to the Cardinal
Effective Time: (i) each of the representations and warranties of Susquehanna
and SBI Merger Sub contained in the Cardinal Merger Agreement shall be true and
correct in all material respects as of the Cardinal Closing, each of Susquehanna
and SBI Merger Sub shall have performed each of the covenants and agreements
material to its operations and prospects contained in the Cardinal Merger
Agreement, and certificates to such effect shall have been delivered to
Cardinal; (ii) an opinion of counsel shall have been delivered to Cardinal;
(iii) there shall not have occurred any change in the financial condition,
properties, assets, business or results of operation of Susquehanna or SBI
Merger Sub, which individually or in the aggregate, had or might reasonably be
expected to result in a Material Adverse Effect on Susquehanna or the
Susquehanna Subsidiaries (as defined in the Cardinal Merger Agreement) taken as
a whole; (iv) Cardinal shall have received an updated opinion from GMA, dated as
of a date no later than the date this Proxy Statement/Prospectus is mailed to
the Cardinal shareholders in connection with the Cardinal Merger and not
subsequently withdrawn, to the effect that the Cardinal Merger Consideration is
fair to Cardinal's shareholders from a financial point of view; (v) the shares
of Susquehanna Common Stock to be issued in the Cardinal Merger shall have been
authorized to be listed for quotation on The Nasdaq Stock Market National Market
System; (vi) a certificate for the required number of whole shares of the
Susquehanna Common Stock, as determined in accordance with Section 1.2 and
Schedule 1.2 of the Cardinal Merger Agreement, and cash payable for the
fractional shares interests, shall have irrevocably been delivered to Farmers
First Bank, as Exchange Agent; (vii) no transaction or event involving
Susquehanna shall have occurred that would result in (A) a material change to
the nature of the securities described in Susquehanna's articles of
incorporation as amended at Susquehanna's 1998 annual meeting of shareholders,
(B) a change in the identity of the legal entity of the issuer of the securities
to be issued in the Cardinal Merger to holders of Cardinal Common Stock, or (C)
Susquehanna's ceasing to own a Material Subsidiary (as defined in the Cardinal
Merger Agreement) accounting for 10% or more of Susquehanna's total assets,
provided Susquehanna shall be permitted to reorganize or merge its Material
Subsidiaries in any manner whatsoever within its bank holding company system;
and (viii) the side letter (the "Side Letter") required by the Cardinal Merger
Agreement shall have been executed. The Side Letter generally provides that (a)
the current employees of FANBP will be retained after the Cardinal Merger in
substantially the same positions and at current salary levels, subject to the
ongoing needs of FANBP, or any successor, and changes in the future as may be
appropriate, as determined by its governing body, and (b) Susquehanna shall
continue the separate corporate existence of FANBP as an operating subsidiary of
Susquehanna or a subsidiary of Susquehanna until at least December 31, 2000,
unless a majority of the continuing FANBP directors agree otherwise or an
applicable regulatory agency recommends otherwise.
Waiver; Amendment
Prior to the Cardinal Effective Time, any provision of the Cardinal Merger
Agreement may be (i) waived by the party benefitted by the provision, or (ii)
amended or modified at any time (including the structure of the transaction) by
an agreement in writing between the parties approved by their respective boards
of directors, except that no amendment or waiver may be made that would change
the form or the amount of the Cardinal Merger Consideration or otherwise have
the effect of prejudicing the Cardinal shareholders' interest in the Cardinal
Merger Consideration following the Cardinal Meeting.
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Closing; Effective Date; Termination
The Cardinal Merger Agreement provides that the Cardinal Closing will occur
at such time and place as shall be agreed upon by the parties, but no later than
the 30th business day after (i) the last approval of required governmental
authorities is granted and any related waiting periods expire, (ii) the lifting,
discharge or dismissal of any stay of any such governmental approval or of any
injunction against the Cardinal Merger, and (iii) all shareholder approvals
required by the parties pursuant to the Cardinal Merger Agreement are received.
The Cardinal Merger, and the transactions described by the Cardinal Merger
Agreement, will become effective at 11:59 p.m. on the day the articles of merger
are filed with the Pennsylvania Department of State. The presentation of the
articles of merger for acceptance and filing is subject to the rights of the
boards of directors of Susquehanna and Cardinal to terminate the Cardinal Merger
Agreement under certain circumstances.
The Cardinal Merger Agreement provides that, whether before or after its
approval by the shareholders of Cardinal, it may be terminated and the
transactions contemplated in the Cardinal Merger Agreement abandoned at any time
prior to the Cardinal Merger Effective Date (i) by the mutual, written consent
of Susquehanna and Cardinal, if the board of directors of each so determines by
majority vote of the members of the entire board; (ii) by Cardinal if (a) there
has been a material breach by Susquehanna of any representation, warranty,
covenant or agreement contained in the Cardinal Merger Agreement which is not
cured within 30 days after written notice of such breach is given to Susquehanna
by Cardinal, (b) any condition precedent to Cardinal's obligations as set forth
in Article V of the Cardinal Merger Agreement has not been met or waived by
Cardinal at such time as such condition can no longer be satisfied, (c) the
Cardinal Board of Directors fails to make, withdraws or modifies or changes the
favorable recommendation described at Section 4.2 of the Cardinal Merger
Agreement, or (d) the Cardinal Board of Directors receives an Acquisition
Proposal (as defined in the Cardinal Merger Agreement) which it determines is
likely to be more favorable to the shareholders of Cardinal than the Cardinal
Merger; (iii) by Susquehanna in the event (a) of a material breach by Cardinal
or FANBP of any representation, warranty, covenant or agreement contained in the
Cardinal Merger Agreement which is not cured within 30 days after written notice
of such breach is given to Cardinal by Susquehanna or (b) any condition
precedent to Susquehanna's obligations as set forth in Article V of the Cardinal
Merger Agreement has not been met or waived by Susquehanna at such time as such
condition can no longer be satisfied; (iv) by Cardinal, by giving written notice
of such election to Susquehanna within one business day following a
determination that the average closing price per share of Susquehanna Common
Stock before closing is greater than $26.67 per share at the time such
calculation is required to be made pursuant to the Cardinal Merger Agreement;
(v) by Susquehanna, by giving written notice of such election to Cardinal within
one business day following a determination that the average closing price per
share of Susquehanna Common Stock before closing is less than $22.67 per share
at the time such calculation is required to be made pursuant to the Cardinal
Merger Agreement; or (vi) by Susquehanna or Cardinal if the Cardinal Merger and
the transactions described in the Cardinal Merger Agreement are not consummated
by December 31, 1998, unless the parties agree to extend the time by which such
closing must occur.
Expenses
If the Cardinal Merger Agreement is terminated, in accordance with the
terms of the Cardinal Merger Agreement: (i) by the mutual, written consent of
Cardinal and Susquehanna; (ii) by Cardinal or Susquehanna in the event the
Cardinal Merger is not consummated by December 31, 1998; (iii) by Cardinal if
the average closing price per share of Susquehanna Common Stock before closing
is greater than $26.67 per share; or (iv) by Susquehanna if the average closing
price per share of Susquehanna Common Stock before closing is less than $22.67
per share, termination shall be without cost, expense or liability on the part
of any party to the other party and the Cardinal Stock Option Agreement shall be
null and void. So long as Susquehanna shall not have breached it obligations
under the Cardinal Merger Agreement, if the Cardinal Merger Agreement is
terminated because the Cardinal Board of Directors fails to make, withdraws,
modifies or changes its favorable recommendation described at Section 4.2 of the
Cardinal Merger Agreement, other than as a result of a Material Adverse Change
in Susquehanna's financial condition, properties, assets, liabilities, business
or results of operation and other than as a result of the failure of Cardinal's
financial advisor to update its fairness opinion, Cardinal must pay to
Susquehanna, within two business days after the termination, a fee of one
percent of the aggregate consideration that would be paid if the date of such
termination were the Cardinal Merger
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Effective Date. In all other instances, termination of the Cardinal Merger
Agreement shall be without cost, liability or expense on the part of any party
to the other parties, unless the breach of a representation, warranty or
covenant is caused by the willful conduct or gross negligence of the party, in
which event such party will be liable to the other parties for all out-of-pocket
costs and expenses.
Exchange of Stock Certificates
At the Cardinal Merger Effective Date, without any further action on the
part of holders of shares of Cardinal Common Stock, each share of Cardinal
Common Stock that is issued and outstanding as of the Cardinal Merger Effective
Date (other than (i) shares the holders of which (each a "Dissenting
Shareholder") are exercising appraisal rights pursuant to the BCL (the
"Dissenters' Shares"), if any, and (ii) shares held directly or indirectly by
Susquehanna, except for shares held in a fiduciary capacity or in satisfaction
of a debt previously contracted) shall automatically become and be converted
into the right to receive shares of Susquehanna Common Stock determined in
conformity with the Cardinal Exchange Ratio. As of the Cardinal Merger
Effective Date, any shares held directly or indirectly by Susquehanna except in
a fiduciary capacity or in satisfaction of a debt previously contracted shall be
canceled and retired and cease to exist and no exchange or payment shall be made
with respect thereto.
Within five business days after the Cardinal Merger Effective Date,
Susquehanna shall cause to be sent to each person holding shares of Cardinal
Common Stock transmittal materials and instructions for surrendering their
certificates for Cardinal Common Stock in exchange for a certificate for the
number of whole shares of Susquehanna Common Stock to which such person is
entitled along with a cash payment equal to the value of any fractional share of
Susquehanna Common Stock to which the shareholder is entitled. If the record
date of any dividend on Susquehanna Common Stock occurs after the Cardinal
Merger Effective Time, the declaration shall include dividends on all whole
shares of Susquehanna Common Stock into which shares of Cardinal Common Stock
have been converted under the Cardinal Merger Agreement, but no former holder of
Cardinal Common Stock shall be entitled to receive payment of any such dividend
until surrender of the shareholder's Old Certificates (as defined in the
Cardinal Merger Agreement) shall have been effected in accordance with the
instructions furnished by Susquehanna. Upon surrender for exchange of a
shareholder's Old Certificates, such shareholder shall be entitled to receive
from Susquehanna an amount equal to all such dividends, without interest thereon
and less the amount of taxes, if any, which may have been imposed or paid
thereon, declared, and for which the payment date has occurred, on the whole
shares of Susquehanna Common Stock into which the shares represented by such Old
Certificates have been converted.
After the Cardinal Merger Effective Date, there shall not be any more
transfers on the stock transfer books of Cardinal, the Surviving Corporation or
Susquehanna of shares of Cardinal Common Stock. To the extent permitted by law,
in the event that any certificates representing shares of Cardinal Common Stock
have not been surrendered for exchange in accordance with the Cardinal Merger
Agreement on or before the second anniversary of the Cardinal Effective Time,
Susquehanna may at any time thereafter, with or without notice to the holders of
record of such shares, sell for the accounts of any or all of such holders any
or all of the shares of Susquehanna Common Stock which such holders are entitled
to receive. Any such sale may be made by public or private sale or sale at any
broker's board or on any securities exchange in such manner and at such times as
Susquehanna shall determine. The net proceeds of any such sale shall be held
for holders of the unsurrendered certificates, to be paid to them upon surrender
of such certificates for exchange. If outstanding certificates for shares of
Cardinal Common Stock are not surrendered prior to the date on which such
certificates would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and any other applicable law, become the property of
Susquehanna (and to the extent not in its possession shall be paid over to it),
free and clear of all claims or interest of any person previously entitled to
such claims.
In the event any outstanding certificates for shares of Cardinal Common
Stock shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such certificates to be lost, stolen or
destroyed and the posting by such person of a bond in such amount as Susquehanna
may direct as indemnity against any claim that may be made against it with
respect to such certificates, Susquehanna will issue in exchange for such lost,
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stolen or destroyed certificates, the shares of Susquehanna Common Stock into
which such certificates have been converted pursuant to the Cardinal Exchange
Ratio.
Cardinal Stock Option Agreement
Susquehanna expects an entity it is acquiring to enter into a stock option
agreement. Susquehanna takes the position that such an agreement is necessary
to discourage competing offers from other bank holding companies or financial
institutions inclined to make competing offers and to compensate Susquehanna for
the loss of business opportunities in the event a potential acquiree terminates
an affiliation agreement under such circumstances. Accordingly, concurrent with
the execution and delivery of the Cardinal Merger Agreement, as a condition and
an inducement to Susquehanna's willingness to enter into the Cardinal Merger
Agreement, Cardinal, Susquehanna and SBI Merger Sub entered into the Cardinal
Stock Option Agreement, which is set forth as Appendix H to this Proxy
Statement/Prospectus, granting Susquehanna an irrevocable option (the "Cardinal
Option") to purchase from Cardinal up to that number of shares of Cardinal
Common Stock as shall equal 15% of Cardinal's shares of common stock outstanding
immediately prior to the purchase, at a purchase price that is the average price
per share of Cardinal Common Stock during the five trading days immediately
preceding the date of execution of the Cardinal Merger Agreement (April 6, 1998
to April 10, 1998; during that period the average bid/asked in the local over-
the-counter market on each of April 6 - April 10, 1998 was $36.69 per share).
The effect of the Cardinal Stock Option Agreement is to discourage other
competing offers, with the effect that even if such a competing offer were
accepted and the Cardinal Merger Agreement terminated, such termination will be
at a cost, and a subsequent purchaser will be burdened with Susquehanna's rights
under the Cardinal Stock Option Agreement.
The Cardinal Option may be exercised by Susquehanna, in whole or in part,
at any time or from time to time after the date of the Cardinal Stock Option
Agreement and prior to the earlier to occur of (i) the Cardinal Effective Time,
or (ii) upon a Purchase Event (as defined below), the date six months following
the event, provided that if an exercise notice has been given on or before the
expiration of such six month period and the Cardinal Option cannot be exercised
on such day because of an injunction or similar court order, the Cardinal Option
shall expire on the 10th business day after such injunction or order has been
dismissed or withdrawn.
Under the Cardinal Stock Option Agreement, a Purchase Event means any of
the following: (i) any person (other than Susquehanna or a subsidiary of
Susquehanna) shall have commenced a tender offer or an exchange offer to
purchase Cardinal Common Stock such that, upon consummation of such offer, the
person could own or control 10% or more of the outstanding Cardinal Common
Stock; (ii) Cardinal shall have authorized, recommended, proposed or announced
an intention to authorize, recommend or propose, or entered into, an agreement
with any person (other than Susquehanna or a subsidiary of Susquehanna) to (a)
merge or consolidate with Cardinal or enter into a similar transaction, (b)
sell, lease or otherwise dispose of all or substantially all of the assets of
Cardinal to such person or (c) sell or otherwise dispose of securities
representing 10% or more of the voting power of Cardinal, and as to (a), (b) and
(c), the same shall have been scheduled by Cardinal to close within 365 calendar
days following the date of termination of the Cardinal Merger Agreement; or
(iii) any person (other than Susquehanna or a subsidiary of Susquehanna) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act) or the right to acquire beneficial ownership, or a new group
has been formed which beneficially owns, ten percent or more of the outstanding
Cardinal Common Stock.
The Cardinal Stock Option Agreement also grants Susquehanna certain option
share appreciation rights upon a Purchase Event, if requested by Susquehanna and
the Cardinal Stock Option Agreement has not expired. Upon such a request,
Cardinal must pay to Susquehanna an amount equal to the product of (i) the
excess, if any, of (a) the greater of (A) the highest price paid or proposed to
be paid in connection with such Purchase Event for any shares of Cardinal
Common Stock and (B) the aggregate consideration paid or proposed to be paid in
connection with such Purchase Event divided by the number of shares of Cardinal
Common Stock then outstanding, over (b) the purchase price, multiplied by (ii)
the total number of Cardinal Option shares as to which the Cardinal Option has
not yet been exercised. If such appreciation rights are paid to Susquehanna,
all other rights of Susquehanna under the Cardinal Stock Option Agreement shall
be extinguished (but the rights of Susquehanna under the Cardinal Merger
Agreement shall not be affected).
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Regulatory Approvals of Cardinal
Because the Cardinal Merger involves the acquisition of a bank holding
company registered under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"), it is subject to the approval of the Federal Reserve
Board under the Holding Company Act. An application for approval of the
acquisition of Cardinal was submitted by Susquehanna to the Federal Reserve Bank
of Philadelphia on _________________1998. In reviewing the application, the
Federal Reserve Board considers the financial and managerial resources of
Susquehanna and Cardinal, the effect of the transaction on competition in the
markets served by Susquehanna and Cardinal, the convenience and needs of the
public and, among other things, Susquehanna's and Cardinal's record of
performance in helping to meet local credit needs.
In addition to the foregoing, Federal Reserve Board approval is contingent
upon its assessment of the impact of the Year 2000 Issue on the parties to the
proposed merger. See, "BUSINESS OF CARDINAL--Impact of the Year 2000 Issue";
"IMPACT OF THE YEAR 2000 ISSUE ON SUSQUEHANNA"; and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CARDINAL--Impact of
the Year 2000 Issue."
The approval of the Department of Banking under the Banking Code must also
be obtained before the Cardinal Merger may be consummated. The Department of
Banking will consider factors similar to those examined by the Federal Reserve
Board. An application was submitted to the Department of Banking on
________________ 1998.
The Cardinal Merger cannot proceed in the absence of the requisite
regulatory approvals. To date, however, none of the required approvals have
been obtained in respect of the Cardinal Merger, and there can be no assurance
that all such regulatory approvals will be obtained, and, if the Cardinal Merger
is approved, there can be no assurance as to the date of any such approval.
There can also be no assurance that any such approvals will not contain a
condition or requirement which causes such approvals to fail to satisfy the
conditions set forth in the Cardinal Merger Agreement. There can likewise be no
assurance that the U.S. Department of Justice or a state Attorney General will
not challenge the Cardinal Merger or, if such challenge is made, as to the
result thereof.
Interests of Certain Persons in the Cardinal Merger
Certain members of Cardinal's management and the Cardinal Board may be
deemed to have interests in the Cardinal Merger in addition to their interests
as shareholders of Cardinal generally. These include, among other things,
provisions in the Cardinal Merger Agreement relating to indemnification and
employment and the conversion of certain stock options. Directors and executive
officers of Cardinal and FANBP are the holders of stock options to acquire
Cardinal Common Stock which will be assumed by Susquehanna and converted into
options to acquire Susquehanna Common Stock on the Effective Date.
As of the Record Date, the directors and executive officers of Cardinal
beneficially own approximately 138,753 shares of Cardinal Common Stock,
including exercisable options to purchase 64,000 shares of Cardinal Common
Stock. On the Effective Date, each outstanding option to acquire Cardinal Common
Stock (the "Cardinal Options"), whether or not such Cardinal Option is
exercisable on the Effective Date, shall cease to be outstanding and shall be
converted on the Effective Date into and become an option to acquire that number
of shares of Susquehanna Common Stock equal to the number of shares of Cardinal
Common Stock covered by the Cardinal Option multiplied by the Exchange Ratio, at
an exercise price equal to the present stated exercise price of the option
divided by the Exchange Ratio.
Pursuant to the Cardinal Merger Agreement, Susquehanna has agreed to
indemnify the present and former officers, directors, employees and agents of
Cardinal and FANBP against certain liabilities arising prior to the effective
time of the Merger to the full extent then permitted under Pennsylvania law and
by the Articles of Incorporation and Bylaws of Cardinal, the charter of FANBP
and the bylaws of each, as in effect on the date of the Cardinal Merger
Agreement.
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Under the terms of the Cardinal Merger Agreement, Susquehanna and its
affiliates have the right, but not the obligation, to employ the employees of
Cardinal and FANBP. Pursuant to correspondence from Susquehanna, Susquehanna is
to employ the employees of Cardinal and of FANBP. Cardinal and FANBP employees
who remain employees of the surviving corporation or FANBP after the Effective
Date, will be entitled to credit for past service with Cardinal or FANBP for
purposes of eligibility, vesting and accrual and to participate in employee
health, welfare, pension and fringe benefit plans, or whatever stock option,
bonus or incentive plans or other fringe benefit programs may be in effect for
employees of Susquehanna and its subsidiaries. Susquehanna has also stated, in
correspondence, that upon the expected termination of the defined benefit plan
sponsored by FANBP, Susquehanna has agreed to increase the accrued benefit of
each participant to 105% as permitted by Internal Revenue Service rules and
regulations. In addition, under the terms of the Cardinal Merger Agreement, the
employment agreement between Merle W. Helsel, President and Chief Executive
Officer of Cardinal will be canceled and Mr. Helsel will enter into an agreement
with Susquehanna, pursuant to which Susquehanna shall pay, or shall cause FANBP
to pay the aggregate amount of Two Hundred and Fifty Thousand Dollars
($250,000.00), payable in five annual installments of Fifty Thousand Dollars
($50,000.00) each, to be paid over a five year period, beginning at the
Effective Date and ending on the anniversary date of the closing of Cardinal
Merger, in the year 2003. These payments shall be paid in consideration of full
satisfaction of the existing obligation under Mr. Helsel's prior Employment
Agreement between Mr. Helsel, Cardinal and FANBP. FANBP shall be responsible for
all applicable withholdings. The agreement also includes a non-competition and
non-solicitation clause.
Also pursuant to the agreement with Susquehanna, after the Effective Date,
Mr. Helsel will receive a salary of Ninety-One Thousand Dollars ($91,000.00),
per year for the term of the agreement, payable in intervals consistent with
FANBP's payroll policies. Mr. Helsel also shall receive vacation and benefits
consistent with FANBP's standard policies and procedures. If Mr. Helsel's
employment is terminated for any reason prior to the fifth anniversary date of
the closing of the Cardinal Merger, Mr. Helsel will make himself reasonably
available to provide insight and understanding of the FANBP's business and
operations.
The Cardinal Merger Agreement provides that the directors of FANBP
immediately prior to the Effective Date will constitute the directors of FANBP
immediately following the Cardinal Merger and for a period of at least three
years from the Effective Date. Each director will receive compensation of
$7,980 per year for each year in which the director attends at least 10 meetings
of the FANBP Board of Directors. A director who fails to attend at least 10
meetings a year will receive only $665 per meeting actually attended. The
Cardinal Merger Agreement also provides that Susquehanna will appoint one person
who is a director of Cardinal to the Board of Directors of Susquehanna, as of
the Effective Date.
Pursuant to the terms of the Cardinal Merger Agreement, the existing
Directors' Deferred Income Agreements, including all Addenda, with Messrs.
Koontz, DeArment, Dodson and Morris will be amended to provide that the
compensation, as defined in the agreements and provided thereunder, will be in
certain equal amounts and that from the Effective Date FANBP directors will
participate, if at all, only in Susquehanna deferred director fee plans, if any,
for which the directors of FANBP are eligible for participation.
See "APPROVAL OF THE CARDINAL MERGER -- Management and Operations Following
the Cardinal Merger," and "-- Interests of Certain Persons in the Cardinal
Merger."
Management and Operations Following the Cardinal Merger
At the Cardinal Effective Time, (i) the articles of incorporation and
bylaws of SBI Merger Sub in effect immediately prior to the Cardinal Effective
Time will be the articles of incorporation and bylaws of the Surviving
Corporation, and (ii) the directors and officers of SBI Merger Sub immediately
prior to the Cardinal Effective Time will be the directors and officers of the
Surviving Corporation. At and immediately following the Cardinal Effective
Time, the directors of FANBP shall consist of (a) the persons who were the
directors of FANBP (the "FANBP Board of Directors") immediately prior to the
Cardinal Effective Time, and (b) up to two other persons elected to the FANBP
Board of Directors who shall be recommended for appointment by Susquehanna and
who shall be reasonably acceptable
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to the FANBP Board of Directors, effective at the Cardinal Closing, to hold
office until the next annual meeting of FANBP. Additionally, the Susquehanna
Board of Directors, shall elect one person, nominated by the Cardinal Board of
Directors and acceptable to the Susquehanna Board of Directors, in its
reasonable discretion, to become a member of the Susquehanna Board of Directors
on the Cardinal Merger Effective Date. The Cardinal Merger Agreement further
provides that the President and Chief Executive Officer of Susquehanna propose
to the Susquehanna Board of Directors that the Susquehanna board adopt
resolutions providing that upon expiration of the initial term of the person
from the Cardinal board elected to the Susquehanna Board of Directors, the
Susquehanna Board of Directors shall nominate and recommend to the shareholders
of Susquehanna, at the subsequent Susquehanna annual meeting of shareholders,
the election to the Susquehanna Board of Directors a member of the FANBP Board
of Directors who meets the eligibility requirements for directors of
Susquehanna, such person to be proposed by the FANBP Board of Directors and
agreed to by Susquehanna, which agreement shall not be unreasonably withheld.
Such a resolution was proposed and adopted by the Susquehanna Board of Directors
on April 15, 1998.
Accounting Treatment of the Cardinal Merger
The Cardinal Merger is intended to be treated as a pooling of interests for
accounting purposes in accordance with generally accepted accounting principles
and under the accounting rules of the Commission. As a condition to the
consummation of the Cardinal Merger, Susquehanna is to receive a letter from its
independent accountants, Coopers & Lybrand L.L.P., that the Cardinal Merger will
be treated as a pooling of interests. In order to preserve the intended
accounting treatment of the Cardinal Merger as a pooling of interests, the
Cardinal Merger Agreement also requires as a condition to the obligations of
Susquehanna and SBI Merger Sub under the Cardinal Merger Agreement that each
person deemed to be an "affiliate" of Cardinal enter into an agreement not to
sell shares of Susquehanna Common Stock acquired in the Cardinal Merger until
financial results covering at least 30 days of post-Cardinal Merger combined
operations have been published.
Income Tax Consequences of the Cardinal Merger
The following is a general discussion of the anticipated federal income tax
consequences of the Cardinal Merger. Susquehanna and Cardinal believe that for
federal income tax purposes: (i) the Cardinal Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and Cardinal and Susquehanna will each be a
"party to a reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Cardinal or Susquehanna by reason of
the Cardinal Merger; (iii) except for cash received in lieu of fractional
shares, no income, gain or loss generally will be recognized by Cardinal
shareholders on the exchange of their shares of Cardinal Common Stock for shares
of Susquehanna Common Stock; (iv) the basis of the Susquehanna Common Stock to
be received by the Cardinal shareholders generally will be, in each instance,
the same as the basis of the Cardinal Common Stock surrendered in exchange
therefor; (v) the holding period of the Susquehanna Common Stock to be received
by the shareholders of Cardinal generally will include the period during which
the Cardinal Common Stock surrendered in exchange therefor has been held,
provided that the Cardinal Common Stock surrendered is held as a capital asset
on the date of the exchange pursuant to the Cardinal Merger; and (vi) the
payment of cash to the Cardinal shareholders in lieu of their fractional share
interests of Susquehanna Common Stock generally will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of Susquehanna Common Stock which such shareholders would otherwise be
entitled to receive and will qualify as capital gain or loss.
The obligations of the parties to consummate the Cardinal Merger are
conditioned upon receipt of a ruling from the Internal Revenue Service (the
"IRS") or an opinion of counsel substantially to the effect that the federal
income tax consequences of the Cardinal Merger are as summarized above. Unlike
a ruling from the IRS, an opinion of counsel would have no binding effect on the
IRS. Such ruling or opinion would not deal with all of the tax considerations
that may be relevant to particular Cardinal shareholders, such as shareholders
who are dealers in securities, foreign persons, tax-exempt entities or the
impact of the alternative minimum tax. Such ruling or opinion would not address
any state, local or foreign tax considerations, any federal estate, gift,
employment, excise or other non-income tax considerations.
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THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF THE CARDINAL MERGER, WITHOUT CONSIDERATION OF THE PARTICULAR
FACTS AND CIRCUMSTANCES OF EACH CARDINAL SHAREHOLDER'S SITUATION. EACH CARDINAL
SHAREHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX ADVISORS AS TO
PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE TO SUCH SHAREHOLDER AND
NOT COMMON TO SHAREHOLDERS AS A WHOLE AND ALSO AS TO ANY ESTATE, GIFT, STATE,
LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE CARDINAL MERGER AND/OR ANY
SALE OF SUSQUEHANNA COMMON STOCK RECEIVED IN THE CARDINAL MERGER.
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APPROVAL OF THE FIRST CAPITOL MERGER
The following description of the First Capitol Merger is not intended to be
a complete description of all material facts regarding the First Capitol Merger
and is qualified in all respects by reference to the First Capitol Merger
Agreement and the fairness opinion attached hereto as Appendices D and F,
respectively. First Capitol shareholders are urged to read carefully the First
Capitol Merger Agreement and the fairness opinion. For a summary description of
the First Capitol Merger, see "SUMMARY -- The First Capitol Merger."
Background of the First Capitol Merger
In August, 1996, the Board of Directors of First Capitol considered First
Capitol's position as an independent banking company serving the York County
market area with respect to the changing and increasingly competitive financial
services industry and to its strategic alternatives -- continued independence;
internal growth by opening new branch offices; growth through the acquisition of
branch offices from other financial institutions; or present or future sale of
the First Capitol franchise. First Capitol's competition included credit
unions, commercial banks, thrift institutions, securities brokerage and
investment companies. Many of these competitors provided a greater array of
products and services to customers and offered their employees more
opportunities to advance their careers. The Board of Directors determined that
an affiliation with a larger institution would be in the best interests of its
shareholders, customers, employees, vendors and the York County communities in
which it conducts business, if the shareholders would be financially rewarded
for their investment and the following conditions to such an affiliation could
be met: (1) retention of as many employees as possible following an affiliation;
(2) continued existence in York County as a local banking alternative to the
national banking chain companies that were emerging; and (3) potential to expand
First Capitol's market share in York County through the increase in financial
resources that such an affiliation would provide (the "Non-Financial
Conditions").
Management of First Capitol kept the Board of Directors informed of the
continuing changes in the banking industry and in other segments of the
financial services industry during the period from August 1996 to October 1997.
During this time period, management had informal discussions with several
financial institutions about possible affiliations. At a meeting held in
October 1997, the Board of Directors determined again that the best course to
follow was an affiliation with a larger institution so long as the financial
consideration to the shareholders would be fair and the Non-Financial Conditions
could be met.
After the October 1997 meeting of the Board of Directors, First Capitol
retained Danielson Associates, Inc. ("Danielson") as its financial advisor.
With Danielson assistance, First Capitol management identified those financial
institutions which it believed would likely be most interested in acquiring
First Capitol and which it believed would present the best opportunity for the
shareholders of First Capitol to realize short-term and long-term value in an
acquisition. The principal criteria used to identify these financial
institutions centered upon the liquidity of their common stock, geographical
proximity to the York County market and their perceived ability to meet the Non-
Financial Conditions based upon the terms of past acquisitions in which they
took part. After obtaining a confidentiality agreement from all institutions
that expressed an interest in the acquisition of First Capitol, Danielson then
provided them with an Information Memorandum which described in detail, among
other things, the financial condition, results of operations, business,
operations, management and markets of First Capitol. Each potential acquiror
was solicited to submit its best offer for the acquisition of First Capitol to
Danielson in late January 1998. No potential acquiror with the ability to put
forth a bonafide and competitive offer was excluded. Of the four parties asked
to submit an offer and to which was delivered an Information Memorandum, two
chose to submit offers for First Capitol. The other two expressed an interest,
but felt they would not be financially competitive. In addition, management
advised the Board of Directors that it had received an indication of interest,
through a third-party, from an institution that was not solicited by Danielson,
although such institution was known to Danielson. However, Danielson indicated
that such institution would not meet the financial terms of the Susquehanna
offer.
At a meeting of the Board of Directors on February 18, 1998, the two offers
were reviewed with the assistance of Danielson and special counsel. The
Susquehanna offer was far superior to the other offer with respect to its
financial
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terms for the shareholders and to the Non-Financial Conditions discussed above.
The Board of Directors authorized Owen O. Freeman, Jr., the Chairman, to
negotiate terms of a definitive merger or affiliation agreement with
Susquehanna.
Subsequent to the February 1998 Board of Directors meeting, Mr. Freeman had
discussions with Susquehanna management on the specific terms and conditions of
a possible affiliation.
At the Board of Directors meeting on April 15, 1998, the Agreement and Plan
of Affiliation was presented to the directors for their consideration. At this
meeting, First Capitol's management and legal counsel described the negotiations
which had taken place and the due diligence activities conducted by First
Capitol. Included in these due diligence activities was an inquiry into
Susquehanna's preparations concerning the Year 2000 with respect to
Susquehanna's computer systems and programs; other date-sensitive equipment;
and vendors' and customers' Year 2000 level of preparedness. If Susquehanna
would not be in satisfactory compliance with the Year 2000 conversion process at
the time of closing on this merger, then there would be the potential risk that
the federal bank supervisory agencies would not approve Susquehanna's
application to acquire First Capitol. The Board of Directors approved
unanimously the Agreement and Plan of Affiliation with Susquehanna. This
agreement was executed by Mr. Freeman on April 15, 1998.
Reasons for the First Capitol Merger and Recommendation of the First Capitol
Board of Directors
The Board of Directors of First Capitol believes that the terms of the
Susquehanna affiliation are fair and in the best interests of First Capitol and
its shareholders and recommends that the shareholders of First Capitol vote for
approval of the affiliation.
In considering the transactions contemplated by the Susquehanna
affiliation, the Board of Directors was assisted and advised by Danielson. At
the April 1998 meeting of the Board of Directors, Danielson presented valuation
analyses and discussed its views with respect to the Exchange Ratio. Danielson
then delivered its opinion to the Board of Directors that the price was fair,
from a financial point of view, to the holders of First Capitol Common Shares.
The terms of the First Capitol Merger, the First Capitol Merger Agreement,
the Stock Option Agreement and related agreements resulted from arm's length
negotiations between First Capitol and Susquehanna and their respective
representatives. In the course of reaching its decision to approve the First
Capitol Merger, the First Capitol Merger Agreement, the Stock Option Agreement
and related agreements, the Board of Directors consulted with First Capitol's
financial and legal advisors as well as First Capitol's management, and
considered a number of factors in addition to those discussed above, including
the following:
i. a review of the business, results of operation and financial condition
of First Capitol;
ii. economic conditions and prospects for First Capitol in the market in
which it operates in light of intensifying competitive pressures in
the financial services industry;
iii. the opinion rendered by Danielson to the effect that the price was
fair, from a financial point of view, to the holders of First Capitol
Common Stock, and the presentations made by Danielson including
presentations as to selected financial and stock market data
concerning Susquehanna and First Capitol, both on a historical and on
a prospective basis, and information reflecting the two companies on a
combined basis;
iv. comparisons to certain financial multiples (premium to market price,
book value and earnings per share) obtained by sellers in other recent
acquisitions of financial institutions;
v. the fact that the merger would allow holders of First Capitol Common
Stock to participate on a tax-free basis in the opportunities for
growth in the combined company after the merger;
vi. the belief that a business combination with Susquehanna will offer
long-term value to First Capitol shareholders;
vii. the historical business, results of operations and financial condition
of Susquehanna and Susquehanna's prospects for growth after the
merger;
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viii. the overall effect of the merger on First Capitol's customers,
employees, and the communities in which it does business (which
includes the Non-Financial Conditions);
ix. the terms of the Agreement and Plan of Affiliation and the Stock
Option Agreement as presented to the Board of Directors of First
Capitol; and
x. a review of regulatory and legal implications of the proposed merger.
None of the above considerations was given preference over the others.
However, each consideration was part of the entire basis on which the Board of
Directors reached its decision.
THE FIRST CAPITOL BOARD OF DIRECTORS BELIEVES THAT THE FIRST CAPITOL MERGER
IS IN THE BEST INTERESTS OF FIRST CAPITOL'S SHAREHOLDERS AND RECOMMENDS THAT
FIRST CAPITOL'S SHAREHOLDERS VOTE "FOR" APPROVAL OF THE FIRST CAPITOL MERGER
AGREEMENT.
Vote Required
The affirmative vote of holders of 80% of the outstanding shares of First
Capitol Common Stock is required to approve the First Capitol Merger Agreement.
First Capitol's directors and executive officers have separately agreed and are
expected to vote all of the 124,044 shares held by them, representing
approximately 24% of the First Capitol Common Stock outstanding at the First
Capitol Record Date and entitled to vote at the First Capitol Meeting, "FOR"
approval of the First Capitol Merger Agreement. In addition, First Capitol's
principal shareholder, National Penn Investment Company, has separately agreed
and is expected to vote all of the 112,473 shares held by it, representing
approximately 22% of the First Capitol Common Stock outstanding at the First
Capitol Record Date and entitled to vote at the First Capitol Meeting, "FOR"
approval of the First Capitol Merger Agreement.
Opinion of Financial Advisor
First Capitol retained Danielson to advise the First Capitol Board of
Directors as to its "fair" sale value and the fairness to its shareholders of
the financial terms of the offer to acquire First Capitol. Danielson is
regularly engaged in the valuation of banks, bank holding companies, and thrifts
in connection with mergers, acquisitions, and other securities transactions and
has knowledge of, and experience with, Pennsylvania banking markets and banking
organizations operating in those markets.
Danielson was selected by First Capitol because of its long-standing
relationship with First Capitol and Owen O. Freeman, Jr., the Chairman. Arnold
Danielson, the principal of Danielson, has worked with Mr. Freeman for over 22
years on various consulting and financial advisory projects involving the
banking industry. Danielson was engaged in 1988 to prepare the feasibility
study for First Capitol's charter application to the Pennsylvania Department of
Banking and the membership application to The Federal Reserve Bank of
Philadelphia, and, recently, First Capitol engaged Danielson to prepare the
feasibility study for First Capitol's newest branch office. Mr. Freeman first
engaged Mr. Danielson in 1976 to assist in the preparation of a five year
strategic plan for the banking company at which Mr. Freeman was employed. In
1985, Danielson also prepared the feasibility study for a de novo commercial
bank that Mr. Freeman was organizing in Newtown, Bucks County, Pennsylvania. In
1997, Mr. Freeman engaged Danielson to be the financial advisor for that bank in
connection with its recent acquisition by a Philadelphia regional thrift holding
company.
In such capacity, Danielson reviewed the Merger Agreement with respect to
the pricing and other terms and conditions of the Merger, but the decision as to
accepting the offer was ultimately made by the First Capitol Board of Directors.
Danielson rendered its oral opinion to the First Capitol Board of Directors,
which it subsequently confirmed in writing, that as of the date of such opinion,
the financial terms of the Susquehanna offer were "fair" to First Capitol and
its shareholders. No limitations were imposed by the First Capitol Board of
Directors upon Danielson with respect to the investigation made or procedures
followed by it in arriving at its opinion.
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In arriving at its opinion, Danielson (a) reviewed certain business and
financial information relating to First Capitol and Susquehanna, including
annual reports for the fiscal year ended December 31, 1997 and call report data
from 1989 to 1997 including quarterly reports for 1997; (b) discussed the past
and current operations, financial condition and prospects of First Capitol with
its senior executives; (c) analyzed the pro forma impact of the merger on
Susquehanna's earnings per share, capitalization, and financial ratios; (d)
reviewed the reported prices and trading activity for the Susquehanna Common
Stock and compared them to similar bank holding companies; (e) reviewed and
compared the financial terms, to the extent publicly available, with comparable
transactions; (f) reviewed the First Capitol Merger Agreement and certain
related documents; and (g) considered such other factors as were deemed
appropriate.
Danielson did not obtain any independent appraisal of assets or liabilities
of First Capitol or Susquehanna or their respective subsidiaries. Further,
Danielson did not independently verify the information provided by First Capitol
or Susquehanna and assumed the accuracy and completeness of all such
information.
In arriving at its opinion, Danielson performed a variety of financial
analyses. Danielson believes that its analyses must be considered as a whole
and that consideration of portions of such analyses and the factors considered
therein, without considering all the factors and analyses, could create an
incomplete view of the analyses and the process underlying Danielson's opinion.
The preparation of a fairness opinion is a complex process involving subjective
judgements and is not necessarily susceptible to partial analysis and summary
description.
In the analyses, Danielson made certain assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which were beyond First Capitol's or Susquehanna's control. Any estimates
contained in Danielson's analyses are not necessarily indicative of future
results of value, which may be significantly more or less favorable than such
estimates. Estimates of the value of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or their securities may
actually be sold.
The following is a summary of selected analyses considered by Danielson in
connection with its opinion letter.
Pro Forma Merger Analyses
Danielson analyzed the changes in the amount of earnings and book value
represented by the receipt of about $25.2 million for all of the outstanding
shares of First Capitol Common Stock, which will be paid in Susquehanna Common
Stock. The analysis evaluated, among other things, possible dilution in
earnings and capital per share for Susquehanna Common Stock.
Comparable Companies
Danielson also compared Susquehanna's (a) stock price as of April 13, 1998
equal to 20.3 times earnings and 237% of book, (b) dividend yield based on
trailing four quarters as of December 31, 1997 and stock price as of April 13,
1998 of 2.30%, (c) tangible capital as of December 31, 1997 of 8.76% of assets,
(d) nonperforming assets as of December 31, 1997 equal to .97% of total assets,
(e) return on average assets during the trailing four quarters ended December
31, 1997 of 1.19% and (f) return on average equity during the same period of
12.30%, with the medians for selected banks and bank holding companies that
Danielson deemed to be comparable to Susquehanna. The selected institutions
included BT Financial Corporation, F.N.B. Corporation, First Commonwealth
Financial Corporation, First Western Bancorp, Inc., Fulton Financial, Inc.,
Harleysville National Corporation, JeffBanks, Inc., National Penn Bancshares,
Inc., Omega Financial Corporation, S&T Bancorp, Inc. and USBANCORP, Inc. The
comparable medians were (a) stock price equal to 20.4 times earnings and 257% of
book, (b) dividend yield of 2.09%, (c) tangible capital of 8.70% of assets, (d)
.69% of assets nonperforming, (e) return on average assets of 1.19% and (f)
return on average equity of 13.71%. Danielson also compared other income,
expense, and balance sheet information of such companies with similar
information about Susquehanna.
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Comparable Transaction Analysis
Danielson compared the consideration to be paid in the merger to the latest
twelve months earnings and equity capital of First Capitol with earnings and
capital multiples paid in acquisitions of Pennsylvania banks in 1997 and 1998
through the opinion date. Of these, the most applicable recent transactions
included Fulton's purchase of Ambassador Bank of the Commonwealth, Community
Banks' acquisition of Peoples State Bank of East Berlin and Juniata Valley
Financial's buying Lewistown Trust Company. At the time Danielson made its
analysis, the consideration to be paid in the merger was 242% of First Capitol's
December 31, 1997 book value and 37.5 times First Capitol's earnings in 1997.
This compares to the median multiples of 289% of book value and 23.4 times
earnings for the most applicable comparable acquisitions and 20.1 times earnings
and 239% of book for all Northeast bank acquisitions in 1997.
Other Analysis
In addition to performing the analyses summarized above, Danielson also
considered the general market for bank and thrift mergers, the historical
financial performance of First Capitol and Susquehanna, the deposit market
shares of both banks, and the general economic conditions and prospects of those
banks.
No company or transaction used in the analysis is identical to First
Capitol or Susquehanna. Accordingly, an analyses of the results of the
foregoing is not mathematical; rather it involves complex consideration and
judgements concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the company or companies to which they are being compared.
The summary set forth above does not purport to be a complete description
of the analyses and procedures performed by Danielson in the course of arriving
at its opinions. In payment for its services as the financial advisor to First
Capitol, Danielson is to be paid an estimated fee of about $126,000.
The full text of the opinion of Danielson dated as of April 15, 1998, which
sets forth assumptions made and matters considered, is attached hereto as
Appendix F of this Proxy Statement/Prospectus. First Capitol shareholders are
urged to read this opinion in its entirety. Danielson's opinion is directed
only to the consideration to be received by First Capitol shareholders in the
First Capitol Merger and does not constitute a recommendation to any First
Capitol shareholder as to how such shareholder should vote at the First Capitol
Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE FAIRNESS OPINION OF DANIELSON
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION,
WHICH IS SET FORTH AS APPENDIX F TO THIS PROXY STATEMENT/PROSPECTUS.
Dissenters' Rights
General
Pursuant to the BCL (which is applicable pursuant to Sections 1607 and 1222
of the Banking Code), any holder of First Capitol Common Stock has the right to
dissent from the First Capitol Merger and to obtain payment of the "fair value"
of such holder's First Capitol Common Stock, in the event that the First Capitol
Merger is consummated.
Any shareholder of First Capitol who contemplates exercising a holder's
right to dissent is urged to read carefully the provisions of Subchapter D of
Chapter 15 of the BCL attached to this Joint Proxy Statement/Prospectus as
Appendix G. The following is a summary of the steps to be taken if the right to
dissent is to be exercised, and should be read in connection with the full text
Subchapter D of Chapter 15 of the BCL. Each step must be taken in the indicated
order and in strict compliance with the applicable provisions of the statute in
order to perfect dissenters' rights. The failure of any holder of First Capitol
Common Stock to comply with the aforesaid steps will result in the holder
receiving the consideration contemplated by the First Capitol Merger Agreement
in the event that the First Capitol
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Merger is consummated. See "APPROVAL OF THE FIRST CAPITOL MERGER--Terms of the
Merger--Exchange Ratio."
Any written notice or demand which is required in connection with the
exercise of dissenters' rights, whether before or after the First Capitol Merger
Effective Date, must be sent to First Capitol Bank, 2951 Whiteford Road, York,
Pennsylvania 17402, Attention: Secretary.
Fair Value
The term "fair value" means the value of a share of First Capitol Stock
immediately before consummation of the First Capitol Merger taking into account
all relevant factors, but excluding any appreciation or depreciation in
anticipation of the First Capitol Merger.
Notice of Intention to Dissent
A First Capitol shareholder who wishes to dissent must file with First
Capitol, prior to the vote of shareholders on the First Capitol Merger at the
First Capitol Meeting, a written notice of intention to demand payment of the
fair value of such holder's share of First Capitol Common Stock if the First
Capitol Merger is effected, must effect no change in the beneficial ownership of
his or her First Capitol Common Stock from the date of such notice through the
First Capitol Effective Time, and must refrain from voting his or her First
Capitol Common Stock for approval of the First Capitol Merger Agreement.
Neither a proxy nor a vote against approval of the First Capitol Merger will
constitute the necessary written notice of intention to dissent.
Notice to Demand Payment
If the First Capitol Merger Agreement is approved by the required vote of
holders of First Capitol Common Stock, First Capitol will mail a notice to all
dissenters who gave due notice of intention to demand payment and who refrained
from voting for approval of the First Capitol Merger Agreement. The notice will
state where and when a written demand for payment must be sent and certificates
for First Capitol Common Stock must be deposited in order to obtain payment, and
will include a form for demanding payment and a copy of Subchapter D of Chapter
15 of the BCL. The time set for receipt of the demand for payment and deposit
of stock certificates will be not less than 30 days from the date of mailing of
the notice.
Failure to Comply with Notice to Demand Payment, etc.
A holder of First Capitol Common Stock who fails to timely demand payment
or fails to timely deposit his or her First Capitol share certificates, as
required by First Capitol's notice, will forfeit his or her dissenters' rights
and such holder will receive shares of Susquehanna Common Stock determined in
conformity with the First Capitol Exchange Ratio.
Payment of Fair Value of Shares
Promptly after the First Capitol Effective Time, or upon timely receipt of
demand for payment if the First Capitol Merger already has been consummated,
First Capitol will either remit to dissenters who have made demand and have
deposited their stock certificates the amount that First Capitol estimates to be
the fair value of the First Capitol Common Stock or give written notice that no
such remittance is being made. The remittance or notice will be accompanied by:
(i) a closing balance sheet and statement of income of First Capitol for a
fiscal year ending not more than 16 months before the date of remittance or
notice together with the latest available interim financial statements; (ii) a
statement of First Capitol's estimate of the fair value of the First Capitol
Common Stock; and (iii) a notice of the right of the dissenter to demand
supplemental payment under the BCL accompanied by a copy of Subchapter D of
Chapter 15 of the BCL.
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Estimate by Dissenter of Fair Value of Shares
If a dissenter believes that the amount stated or remitted by First Capitol
is less than the fair value of the First Capitol Common Stock, a dissenter may
send to First Capitol his or her own estimate of the fair value of the First
Capitol Common Stock, which shall be deemed to be a demand for payment of the
amount of the deficiency. If First Capitol remits payment of its estimated
value of a dissenter's First Capitol Common Stock and the dissenter does not
file his or her own estimate within 30 days after the mailing by First Capitol
of its remittance, the dissenter will be entitled to no more than the amount
remitted to him or her by First Capitol.
Valuation Proceedings
If any demands for payment remain unsettled within 60 days after the latest
to occur of: (i) the First Capitol Merger Effective Date; (ii) timely receipt
by First Capitol of any demands for payment; or (iii) timely receipt by First
Capitol of any estimates by dissenters of the fair value, First Capitol may file
in the Court of Common Pleas of York County, Pennsylvania (the "York County
Court") an application requesting that the fair value of the First Capitol
Common Stock be determined by the York County Court. In such case, all
dissenters, wherever residing, whose demands have not been settled, shall be
made parties to the proceeding as in an action against their shares, and a copy
of the application shall be served on each such dissenter.
If First Capitol were to fail to file such an application, then any
dissenter, on behalf of all dissenters who have made a demand and who have not
settled their claim against First Capitol, may file an application in the name
of First Capitol at any time within the 30-day period after the expiration of
the 60-day period and request that the fair value be determined by the York
County Court. The fair value determined by the York County Court may, but need
not, equal the dissenters' estimate of fair value. If no dissenter files such
an application, then each dissenter entitled to do so shall be paid First
Capitol's estimate of the fair value of the First Capitol Common Stock and no
more, and may bring an action to recover any amount not previously remitted,
plus interest at a rate the York County Court finds fair and equitable.
First Capitol intends to negotiate in good faith with any dissenting
shareholders. If after negotiation a claim cannot be settled, then First
Capitol intends to file an application requesting that the fair value of the
First Capitol Common Stock be determined by the York County Court.
Costs and Expenses
The costs and expenses of any valuation proceedings in the York County
Court, including the reasonable compensation and expenses of any appraiser
appointed by the York County Court to recommend a decision on the issue of fair
value, will be determined by the York County Court and assessed against First
Capitol except that any part of the costs and expenses may be apportioned and
assessed by the York County Court against all or any of the dissenters who are
parties and whose action in demanding supplemental payment the York County Court
finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith.
Terms of the First Capitol Merger
The description of the First Capitol Merger Agreement set forth below does
not purport to be complete and is qualified in its entirety by reference to the
First Capitol Merger Agreement, a copy of which is attached as Appendix D to
this Proxy Statement/Prospectus and incorporated by reference herein.
Shareholders are urged to read carefully the First Capitol Merger Agreement.
Effect of the First Capitol Merger
Pursuant to the First Capitol Merger Agreement, Interim Bank will merge
with and into First Capitol, with First Capitol as the surviving entity
(sometimes referred to as the "Surviving Bank"), as a result of which First
Capitol will
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become a direct wholly-owned subsidiary of Susquehanna. The name of the
Surviving Bank will be "First Capitol Bank."
Exchange Ratio
Pursuant to the First Capitol Merger Agreement, the outstanding shares of
First Capitol Common Stock will be exchanged for shares of Susquehanna Common
Stock according to the First Capitol Exchange Ratio set forth in the First
Capitol Merger Agreement. This number may be adjusted subject to conditions set
forth in the First Capitol Merger Agreement. The number of shares to be issued
gives effect to a three-for-two split of the Susquehanna Common Stock effected
in the form of a 50% stock dividend paid on July 1, 1998.
At the Effective Time (as defined in the First Capitol Merger Agreement,
the "First Capitol Effective Time"), each share of First Capitol Common Stock
issued and outstanding (other than shares the holders of which are exercising
appraisal rights pursuant to the BCL and shares held by Susquehanna other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) shall become and be converted into the right to receive shares of
Susquehanna Common Stock determined in conformity with the First Capitol
Exchange Ratio, as set forth below:
(i) So long as the average price per share of Susquehanna Common Stock
before the closing is between and including $21.33 and $28.00, then 2.028
shares of Susquehanna Common Stock shall be exchanged for each of the
outstanding shares of First Capitol Common Stock and the First Capitol
Exchange Ratio shall be 2.028. The average price per share of Susquehanna
Common Stock before the closing will be determined by adding the price at
which Susquehanna Common Stock is reported to have closed by The Nasdaq
Stock Market National Market System (or if Susquehanna Common Stock is not
quoted on The Nasdaq Stock Market National Market System then as reported
by a recognized source as to the principal trading market on which such
shares are traded) over the period of 10 business days ending on the second
business day preceding the date set for the First Capitol Closing, and
dividing such total by 10.
(ii) If the average closing price per share of Susquehanna Common Stock
before closing is greater than $28.00, then $28,729,000 divided by the
average closing price shall be the total number of shares of Susquehanna
Common Stock to be exchanged for all of the outstanding First Capitol
Common Stock, and the First Capitol Exchange Ratio shall be the total
number of shares of Susquehanna Common Stock to be exchanged for all of the
outstanding First Capitol Common Stock divided by the total number of
shares of First Capitol Common Stock outstanding on the First Capitol
Merger Effective Date. For example: if the average closing price of
Susquehanna Common Stock is $32.00 per share, then the First Capitol
Exchange Ratio shall be 1.775 ($28,729,000 / $32.00 = 897,781.25, then
897,781.25 / 505,933 = 1.775). Notwithstanding the foregoing, First Capitol
may terminate the First Capitol Merger Agreement upon written notice within
one business day of such determination if the average closing price is
greater than $28.00.
(iii) If the average closing price per share of Susquehanna Common Stock
before closing is less than $21.33, then $21,889,000 divided by the average
closing price shall equal the total number of shares of Susquehanna Common
Stock to be exchanged for all of the outstanding First Capitol Common
Stock, and the First Capitol Exchange Ratio shall be the total number of
shares of Susquehanna Common Stock to be exchanged for all of the
outstanding First Capitol Common Stock divided by the total number of
shares of First Capitol Common Stock outstanding on the First Capitol
Merger Effective Date. For example: if the average closing price of
Susquehanna Common Stock is $18.00 per share, then the First Capitol
Exchange Ratio shall be 2.404 ($21,889,000 / $18.00 = 1,216,055.5, then
1,216,055.5 / 505,933 = 2.404). Notwithstanding the foregoing, Susquehanna
may terminate the First Capitol Merger Agreement upon written notice within
one business day of such determination if the average closing price is less
than $21.33.
As of the First Capitol Effective Time, each share of First Capitol Common
Stock held by Susquehanna, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted, will be canceled, and no exchange
or payment will be made with respect thereto.
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The shares of common stock of Interim Bank issued and outstanding
immediately prior to the First Capitol Effective Time shall remain outstanding
and unchanged after the First Capitol Merger, and shall thereafter constitute
all of the issued and outstanding shares of the capital stock of the Surviving
Bank.
If prior to the First Capitol Effective Time, the outstanding shares of
Susquehanna Common Stock are increased or decreased through a reclassification,
stock dividend, stock split or reverse stock split, or other similar change,
appropriate adjustment will be made to the First Capitol Exchange Ratio.
Fractional Shares
No fractional shares of Susquehanna Common Stock will be issued.
Susquehanna will furnish to any holder of First Capitol Common Stock otherwise
entitled to a fractional share a check for an amount of cash equal to such
fraction of a share of Susquehanna Common Stock represented by the certificates
so surrendered in accordance with the First Capitol Exchange Ratio.
Representations and Warranties
The representations and warranties of Susquehanna, Interim Bank and First
Capitol are set forth in Article III of the First Capitol Merger Agreement. The
representations and warranties relate, among other things, to representations as
to corporate existence and authority and the ability of each party to carry out
the transactions as contemplated by the First Capitol Merger Agreement;
capitalization; subsidiaries; no violations of law; regulatory reports and
financial statements; the absence of certain changes or events; the absence of
material litigation not otherwise disclosed; the absence of regulatory actions;
employee benefits matters; environmental matters; board action; fees; compliance
with laws; taxes; material contracts and agreements; regulatory and capital
compliance; fully paid assessments; Year 2000 compliance except as otherwise
disclosed; and information to be provided in the Proxy Statement/Prospectus.
First Capitol has made additional representations as to the status of title to
assets; the adequacy of allowances for losses on loans; the inapplicability of
certain anti-takeover provisions; the material interests of certain persons;
insurance; dividends; books and records; labor matters; fairness opinions;
fidelity bonds; the condition of tangible assets; and loans by First Capitol.
On the First Capitol Merger Effective Date, Susquehanna, Interim Bank and First
Capitol must each present to the other certificates evidencing the continued
accuracy of the representations and warranties.
Covenants
The First Capitol Merger Agreement also contains certain affirmative and
negative covenants of all of the parties. First Capitol has agreed that: (i)
it shall direct and use its best efforts to cause its officers, directors,
employees, agents and representatives not to initiate, solicit or encourage
inquiries regarding the making of any merger proposal or any proposal to
purchase any significant portion of the assets or equity securities of First
Capitol and, subject to the fiduciary obligations of its directors as determined
upon consultation with counsel, it will not engage in any negotiations or
discussions or provide any confidential information in connection with any such
proposal; (ii) it will cooperate with Susquehanna in the preparation of this
Proxy Statement/Prospectus and the filing thereof as part of the Susquehanna
Registration Statement; (iii) it will take all required action to call the First
Capitol Meeting; (iv) subject to the fiduciary duties of the First Capitol Board
of Directors and the receipt of an updated fairness opinion as of the date of
this Proxy Statement/Prospectus, it will use its best efforts to obtain approval
of the First Capitol Merger Agreement; and (v) it will furnish to Susquehanna a
list of all persons known to be affiliates of First Capitol within the meaning
of Rule 145 under the Securities Act and will use its best efforts to cause any
such person to deliver a written agreement providing that such person will not
sell, pledge, transfer or otherwise dispose of the shares of Susquehanna Common
Stock received pursuant to the First Capitol Merger except in compliance with
the Securities Act and the rules and regulations thereunder and after such time
as financial results covering at least 30 days of post-merger combined
operations have been published.
During the period prior to the effectiveness of the First Capitol Merger,
First Capitol is required to provide Susquehanna and its representatives with
reasonable access to its books, records, employees, properties and such other
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information as Susquehanna may reasonably request and to provide Susquehanna
with copies of its financial statements periodically.
Susquehanna is required to provide First Capitol with copies of all of its
filings with the Commission pursuant to the Exchange Act, together with
applications filed with regulatory authorities and certain other information.
Conduct of Business Pending the First Capitol Merger
First Capitol and Susquehanna have agreed to cooperate with each other in
completing the transactions described in the First Capitol Merger Agreement and
to refrain from taking or making any commitment to take any actions that would
cause any of the representations or warranties of each party as set forth in the
First Capitol Merger Agreement not to be true or correct in all material
respects.
Pursuant to the First Capitol Merger Agreement, First Capitol has agreed to
carry on its business in the usual, regular and ordinary course of business,
consistent with past practices and to maintain and preserve intact its business
organization, assets, leases, properties, advantageous business relationships
and other items, to use its reasonable efforts to retain the services of its
officers and key employees, to refrain from taking any action which, to its
knowledge, could materially delay or adversely affect First Capitol in general
or its ability to obtain any approvals, consents or waivers of any governmental
authorities necessary for the consummation of the First Capitol Merger, and to
not knowingly take any action that is reasonably likely to have a Material
Adverse Effect (as defined in the First Capitol Merger Agreement) on First
Capitol.
In addition, during the period pending the First Capitol Merger, First
Capitol has agreed to refrain from doing any of the following, other than in the
ordinary course of business or with the prior written consent of Susquehanna:
(i) making any loan or advance or incurring or guaranteeing any indebtedness;
(ii) adjusting, splitting, combining or reclassifying any capital stock; (iii)
making any distribution or dividend (other than as permitted under the First
Capitol Merger Agreement); (iv) redeeming, purchasing or otherwise acquiring any
shares of its capital stock or any securities convertible into shares of its
capital stock or granting any stock appreciation rights; (v) selling or issuing
any shares of its capital stock or any right to acquire any shares of its
capital stock; (vi) other than in the ordinary course of business consistent
with past practice and pursuant to policies, if any, currently in effect,
selling, transferring, mortgaging, encumbering or otherwise disposing of any of
its properties, leasehold interests or assets or canceling, releasing or
assigning any indebtedness, contracts or agreements in force as of the date of
the First Capitol Merger Agreement; (vii) increasing in any manner the
compensation or fringe benefits of any of its employees in excess of four
percent, on an aggregated basis, in any 12 month period; (viii) paying any
pension or retirement allowance not required by law or an existing plan or
agreement or becoming party to, amending or committing itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or employment
agreement with or for the benefit of any employee or director; (ix) voluntarily
accelerating the vesting of any stock options or other benefit; (x) amending its
articles of incorporation or its bylaws except as expressly contemplated by the
First Capitol Merger Agreement or as required by law and, in each case, as
concurred in by its counsel; (xi) except as previously disclosed to Susquehanna
or required by changes in generally accepted accounting principles, law or
regulation and concurred in by its independent auditors, changing its method of
accounting from that in effect as of December 31, 1997; or (xii) permitting or
allowing its direct or indirect ownership of the capital stock of any subsidiary
existing as of the date of the First Capitol Merger Agreement to be less than
100% of its total capital stock.
Susquehanna has also agreed that it will not knowingly take any action or
knowingly cause its material subsidiaries to take any action which would
materially adversely affect or delay its ability to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
transactions described in the First Capitol Merger Agreement or that is
reasonably likely to have a material adverse effect on Susquehanna, on a
consolidated basis.
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Warrant Substitution Agreement
On April 16, 1998, the parties identified below entered into a Warrant
Substitution Agreement in order to eliminate the uncertainty as to the timing of
First Capitol director David A. Friedman's exercise of his warrants to acquire
11,250 shares of First Capitol Common Stock (the "Friedman Warrant"), to
eliminate the concomitant effect under the Preemptive Rights Agreement (defined
below) with National Penn Investment Company ("National Penn") of issuing shares
of First Capitol Common Stock to National Penn, to eliminate the need to engage
in such transactions which would have effected an addition to First Capitol's
capital position, and to eliminate the corporate actions required in connection
with the issuance of such shares of stock (particularly because they might occur
at a time when First Capitol Bank is attempting to effectuate the First Capitol
Merger.)
David A. Friedman holds warrants to purchase 11,250 shares of First Capitol
Common Stock and pursuant to a Preemptive Rights Agreement, dated July 25, 1988,
National Penn Investment Company ("National Penn") has the right to acquire
3,210 shares of First Capitol Common Stock in the event that the Friedman
warrants are exercised. Concurrent with the execution of the First Capitol
Merger Agreement, First Capitol, National Penn, Mr. Friedman and Susquehanna
executed the Warrant Substitution Agreement.
Upon the First Capitol Closing, Susquehanna shall transfer and convey to
Mr. Friedman and National Penn 13,809 and 3,084 shares, respectively, of
Susquehanna Common Stock representing the fair value of the warrants and
preemptive rights based on the exchange ratio of 2.028 shares of Susquehanna
common stock as set forth in the First Capitol Merger Agreement (adjusted for
the three for two stock split paid on July 1, 1998). The Warrant Substitution
Agreement expires on December 10, 1998 unless the First Capitol Closing has been
scheduled to occur prior to December 31, 1998.
Because there is a substantial likelihood that the First Capitol Merger
will not close before December 31, 1998, pursuant to the Warrant Substitution
Agreement, it is anticipated that Mr. Friedman will exercise his warrants and
National Penn will exercise its preemptive rights. Accordingly, Mr. Friedman is
anticipated to acquire 11,250 shares of First Capitol Common Stock, and National
Penn is anticipated to acquire 3,210 shares of First Capitol Common Stock. The
shares acquired by Mr. Friedman and National Penn, respectively, would be
exchanged on the same terms as all other shares of First Capitol Common Stock
now outstanding.
Dividends
The First Capitol Merger Agreement provides that First Capitol shall not
declare, pay or set aside any dividend or other distribution in respect of its
capital stock except that it shall have the right, after January 1, 1999, to
declare and pay a dividend corresponding in amount and timing with past
practice.
Conditions Precedent
In addition to the approval by the First Capitol shareholders, the First
Capitol Merger is contingent upon the satisfaction of a number of conditions,
including, among others, (i) all required approvals, consents, or waivers,
including without limitation, approval by the Federal Reserve Board and the
Department of Banking, and all applicable statutory waiting periods shall have
expired except those approvals for which failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect (as defined in
the First Capitol Merger Agreement) on Susquehanna or First Capitol; (ii) all
other requirements prescribed by law which are necessary to the consummation of
the transactions contemplated by the First Capitol Merger Agreement shall have
been satisfied; (iii) the absence of any order, decree or injunction of a court
or agency of competent jurisdiction which would enjoin or prohibit the
consummation of the First Capitol Merger, or any litigation or proceeding
pending against Susquehanna or First Capitol or their subsidiaries by any
governmental agency seeking to prevent consummation of the transactions
described in the First Capitol Merger Agreement; (iv) the absence of any
statute, rule, regulation, order, injunction or decree enacted, entered,
promulgated or enforced by any governmental authority which would prohibit,
restrict or make illegal consummation of the First Capitol Merger; (v) the First
Capitol Merger shall meet the requirements for pooling-of-
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interests accounting treatment under generally accepted accounting principles
and under the accounting rules of the Commission; (vi) the Susquehanna
Registration Statement shall have been filed by Susquehanna with the Commission
under the Securities Act and shall have been declared effective prior to the
time this Proxy Statement/Prospectus is first mailed to the shareholders of
First Capitol, and no stop order with respect to the effectiveness of the
Susquehanna Registration Statement shall have been issued and the Susquehanna
Common Stock to be issued pursuant to the First Capitol Merger Agreement shall
have been registered or qualified under the securities or "blue sky" laws in all
states in which such action is required; (vii) a ruling from the IRS, or an
opinion of counsel, regarding the tax consequences of the First Capitol Merger,
shall have been delivered in accordance with the terms of the First Capitol
Merger Agreement; and (viii) all litigation pending against First Capitol which,
individually or in the aggregate, would have a Material Adverse Effect on First
Capitol's consolidated operations, shall have been settled or otherwise resolved
on terms satisfactory to Susquehanna and First Capitol.
Additionally, the obligations of Susquehanna and Interim Bank to effect the
First Capitol Merger are subject to satisfaction of the following conditions
prior to the First Capitol Effective Time: (i) each of the representations and
warranties of First Capitol contained in the First Capitol Merger Agreement
shall be true and correct in all material respects, as of the First Capitol
Closing, and First Capitol shall have performed each of the covenants and
agreements material to its operations and prospects contained in the First
Capitol Merger Agreement, and certificates to such effect shall have been
delivered to Susquehanna and Interim Bank; (ii) Susquehanna shall have been
furnished an "agreed upon procedures" letter dated as of the First Capitol
Closing, in form and substance satisfactory to Susquehanna to the effect that,
based upon procedures performed with respect to the financial condition of First
Capitol, for a period from December 31, 1997 to a specified date not more than
five days prior to such letter, nothing has come to the attention of the
preparer of the "agreed upon procedures" letter that would indicate that there
has been a change in the capitalization of First Capitol on a consolidated
basis, or any material adjustments would be required to the audited financial
statements for the period ended December 31, 1997 in order for them to be in
conformity with generally accepted accounting principles applied on a consistent
basis with that of prior periods; (iii) Saul, Ewing, Remick & Saul LLP, special
counsel to First Capitol, shall have delivered its opinion to Susquehanna; (iv)
there shall not have occurred any change in the financial condition, properties,
assets, business or results of operation of First Capitol which, individually or
in the aggregate, has had or might reasonably be expected to result in a
Material Adverse Effect on First Capitol other than changes resulting from
changes in banking laws or regulations or changes in generally accepted
accounting principles, or interpretations thereof, that affect the banking or
thrift industries; (v) Susquehanna shall have received from each person
identified by First Capitol to be an affiliate of First Capitol an executed
counterpart of an affiliates agreement in the form contemplated by the First
Capitol Merger Agreement; (vi) except as otherwise provided in the First Capitol
Merger Agreement, all issued and outstanding options, warrants or rights to
acquire First Capitol Common Stock shall have been canceled; (vii) concomitant
with the signing of the First Capitol Merger Agreement, National Penn and each
of the directors of First Capitol shall have executed in favor of and delivered
to Susquehanna, a voting agreement, pursuant to which each shall agree, among
others, to take such action as shall be necessary to cause the shares of First
Capitol Common Stock owned by them to be voted in favor of the First Capitol
Merger Agreement and the First Capitol Merger; and (viii) concomitant with the
signing of the First Capitol Merger Agreement, the parties to the Warrant
Substitution Agreement shall have executed the same.
The obligations of First Capitol to effect the First Capitol Merger are
subject to satisfaction of the following conditions prior to the First Capitol
Effective Time: (i) each of the representations and warranties of Susquehanna
contained in the First Capitol Merger Agreement shall be true and correct in all
material respects as of the First Capitol Closing, and Susquehanna shall have
performed each of the covenants and agreements material to its operations and
prospects contained in the First Capitol Merger Agreement, and a certificate to
such effect shall have been delivered to First Capitol; (ii) Morgan, Lewis &
Bockius LLP, counsel to Susquehanna, shall have delivered its opinion to First
Capitol; (iii) there shall not have occurred any change in the financial
condition, properties, assets, business or results of operations of Susquehanna,
which individually or in the aggregate, had or might reasonably be expected to
result in a Material Adverse Effect on Susquehanna other than such changes
resulting from (A) changes in banking laws or regulations, or (B) changes in
generally accepted accounting principles, or interpretations thereof, that
affect the banking or thrift industries; (iv) First Capitol shall have received
an updated opinion from Danielson dated as of a date no later than the date this
Proxy Statement/Prospectus is mailed to the First Capitol shareholders in
connection with the First
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Capitol Merger and not subsequently withdrawn, to the effect that the First
Capitol Merger Consideration is fair to First Capitol's shareholders from a
financial point of view; (v) the shares of Susquehanna Common Stock to be issued
in the First Capitol Merger shall have been authorized to be listed for
quotation on The Nasdaq Stock Market National Market System; or (vi) a
transaction or event involving Susquehanna or any Susquehanna subsidiary shall
have occurred or be pending that would result in (A) a change to the nature of
the securities described in Susquehanna's articles of incorporation, (B) a
change in the identity of the legal entity of the issuer of the securities to be
issued in the First Capitol Merger to holders of First Capitol Common Stock, or
(C) Susquehanna's ceasing to own a Material Subsidiary (as defined in the First
Capitol Merger Agreement).
Waiver; Amendment
Prior to the First Capitol Effective Time, any provision of the First
Capitol Merger Agreement may be: (i) waived by the party benefitted by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties approved by
their respective boards of directors, except that no amendment or waiver may be
made that would change the form or the amount of the First Capitol Merger
Consideration or otherwise have the effect of prejudicing the First Capitol
shareholders' interest in the First Capitol Merger Consideration following the
First Capitol Meeting.
Closing; Effective Time; Termination
The First Capitol Merger Agreement provides that the First Capitol Closing
shall occur at such time and place, and on such date following three business
days notice to First Capitol, as shall be agreed upon by the parties, but no
later than the 30th business day after (i) the last approval of required
governmental authorities is granted and any related waiting periods expire, (ii)
the lifting, discharge or dismissal of any stay of any such governmental
approval or any injunction against the First Capitol Merger, and (iii) all
shareholder approvals required by the parties pursuant to the First Capitol
Merger Agreement are received. Immediately following the First Capitol Closing,
and provided the First Capitol Merger Agreement has not been terminated or
abandoned pursuant to Article VI of the First Capitol Merger Agreement, Interim
Bank and First Capitol Bank will request that the Department of Banking cause
articles of merger to be delivered and properly filed with the Pennsylvania
Department of State. The First Capitol Merger shall become effective at the
time specified by the Pennsylvania Department of Banking in its transmittal to
the Pennsylvania Department of State, which, at the request of Susquehanna,
shall be at 12:01 a.m. on the business day of the First Capitol Closing.
The First Capitol Merger Agreement provides that, whether before or after
its approval by the shareholders of First Capitol, it may be terminated and the
transactions contemplated in the First Capitol Merger Agreement abandoned at any
time prior to the First Capitol Merger Effective Date (i) by the mutual written
consent of Susquehanna and First Capitol, if the board of directors of each so
determines by majority vote of the members of the entire board; (ii) by First
Capitol if (a) there has been a material breach by Susquehanna of any
representation, warranty, covenant or agreement contained in the First Capitol
Merger Agreement which is not cured within 30 days after written notice of such
breach is given to Susquehanna by First Capitol, (b) any condition precedent to
First Capitol's obligations as set forth in the Article V of the First Capitol
Merger Agreement has not been met or waived by First Capitol at such time as
such condition can no longer be satisfied, (c) the First Capitol Board of
Directors fails to make, withdraws or modifies or changes the favorable
recommendation described at Section 4.2 of the First Capitol Merger Agreement,
or (d) the First Capitol Board of Directors recommends to the shareholders of
First Capitol that an Acquisition Proposal (as defined in the First Capitol
Merger Agreement) is likely to be more favorable, from a financial point of
view, to the shareholders of First Capitol than the First Capitol Merger; (iii)
by Susquehanna in the event (a) of a material breach by First Capitol of any
representation, warranty, covenant or agreement contained in the First Capitol
Merger Agreement which is not cured within 30 days after written notice of such
breach is given to First Capitol by Susquehanna or (b) any condition precedent
to Susquehanna's obligations as set forth in Article V of the First Capitol
Merger Agreement has not been met or waived by Susquehanna at such time as such
condition can no longer be satisfied; (iv) by First Capitol by giving written
notice of such election to Susquehanna within one business day following a
determination that the average closing price per share of Susquehanna Common
Stock before closing is greater than $28.00 per share at the time such
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calculation is required to be made pursuant to the First Capitol Merger
Agreement; (v) by Susquehanna, by giving written notice of such election to
First Capitol within one business day following a determination that the average
closing price per share of Susquehanna Common Stock before closing is less than
$21.33 per share at the time such calculation is required to be made pursuant to
the First Capitol Merger Agreement; or (vi) by Susquehanna or First Capitol if
the First Capitol Merger and the transactions described in the First Capitol
Merger Agreement are not consummated by March 31, 1999, unless the parties agree
to extend the time by which such closing must occur.
Expenses
If the First Capitol Merger Agreement is terminated in accordance with the
terms of the First Capitol Merger Agreement: (i) by the mutual written consent
of First Capitol and Susquehanna; (ii) by First Capitol or Susquehanna in the
event the First Capitol Merger is not consummated by March 31, 1999; (iii) by
First Capitol if the average closing price per share of Susquehanna Common Stock
before closing is greater than $28.00 per share; or (iv) by Susquehanna if the
average closing price per share of Susquehanna Common Stock before closing is
less than $21.33 per share, termination shall be without cost, expense or
liability on the part of any party to the other party. If the First Capitol
Merger Agreement is terminated because the First Capitol Board of Directors
fails to make, withdraws, modifies or changes its favorable recommendation
described at Section 4.2 of the First Capitol Merger Agreement, as a result of a
Material Adverse Change in Susquehanna's financial condition, properties,
assets, liabilities, business or results of operations or the failure of First
Capitol's financial advisor to update its fairness opinion, it shall be without
cost, expense or liability on the part of First Capitol to any other party. If
the First Capitol Merger Agreement is terminated by First Capitol because the
First Capitol Board of Directors (a) failed to make, withdrew, or changed its
favorable recommendation to the First Capitol shareholders to approve the First
Capitol Merger Agreement, or (b) recommends to the First Capitol shareholders
that an Acquisition Proposal (as defined in the First Capitol Merger Agreement)
is more favorable, from a financial point of view, to First Capitol shareholders
than the First Capitol Merger, then First Capitol must pay to Susquehanna,
within two business days after the termination, a fee of $500,000. In all other
circumstances, termination of the agreement shall be without cost, liability or
expense on the part of any party to the other parties, unless the breach of a
representation, warranty or covenant is caused by the willful conduct or gross
negligence of the party, in which event such party will be liable to the other
parties for all out-of-pocket costs and expenses.
Exchange of Stock Certificates
At the First Capitol Effective Time, without any further action on the part
of holders of shares of First Capitol Common Stock, each share of First Capitol
Common Stock that is issued and outstanding at the First Capitol Effective Time
(other than: (i) shares the holders of which (each a "Dissenting Shareholder")
are exercising appraisal rights pursuant to the BCL (the "Dissenters' Shares"),
if any, and (ii) shares held directly or indirectly by Susquehanna, other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) shall become and be converted into the right to receive shares of
Susquehanna Common Stock determined in conformity with the First Capitol
Exchange Ratio. As of the First Capitol Effective Time, each share of First
Capitol Common Stock held directly or indirectly by Susquehanna, other than
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted, shall be canceled and retired and cease to exist, and no exchange or
payment shall be made with respect thereto.
Within five business days after the First Capitol Effective Time,
Susquehanna shall cause to be sent to each person holding shares of First
Capitol Common Stock transmittal materials and instructions for surrendering
their certificates for First Capitol Common Stock in exchange for a certificate
for the number of whole shares of Susquehanna Common Stock to which such person
is entitled along with a cash payment equal to the value of any fractional share
of Susquehanna Common Stock to which the shareholder is entitled. If the record
date of any dividend on Susquehanna Common Stock occurs after the First Capitol
Effective Time but prior to the exchange of certificates, each former
shareholder of First Capitol shall be entitled to receive, upon exchange of the
stock certificates, an amount equal to all such dividends paid with respect to
the number of whole shares of Susquehanna Common Stock received upon exchange of
the certificates of First Capitol Common Stock (without interest) less any taxes
which may have been imposed or paid thereon.
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After the First Capitol Effective Time, there shall not be any more
transfers on the stock transfer books of First Capitol of shares of First
Capitol Common Stock. To the extent permitted by law, in the event that any
certificates representing shares of First Capitol Common Stock have not been
surrendered for exchange on or before the second anniversary of the First
Capitol Effective Time, Susquehanna may, at any time thereafter, with or without
notice to the holders of record of any such shares, sell for the accounts of any
and all such holders the shares of Susquehanna Common Stock which such holders
are entitled to receive. Any such sale may be a public or private sale as
Susquehanna shall determine. The net proceeds of any such sale shall be held
for holders of record of any unsurrendered certificates to be paid to them upon
surrender of such certificates for exchange. Such holders will not be entitled
to receive any interest on such net sale proceeds. If outstanding certificates
for shares of First Capitol Common Stock are not surrendered prior to the date
on which such certificates would otherwise escheat to or become the property of
any governmental unit or agency, the unclaimed items shall, to the extent
permitted by law, become the property of Susquehanna, free and clear of all
claims or interest of any person previously entitled to such items.
First Capitol Stock Option Agreement
Susquehanna typically requires that an entity it is acquiring enter into a
stock option agreement, and has typically taken the position that such an
agreement is necessary to discourage competing offers from other bank holding
companies or other financial institutions inclined to make such offers and to
compensate Susquehanna for the loss of business opportunities because a
potential acquiree terminates an affiliation agreement. Accordingly,
concurrently with the execution and delivery of the First Capitol Merger
Agreement, as a condition and an inducement to Susquehanna's and Interim Bank's
willingness to enter into the First Capitol Merger Agreement, First Capitol,
Susquehanna and Interim Bank entered into the First Capitol Stock Option
Agreement, which is set forth at Appendix I to this Proxy Statement/Prospectus,
granting Susquehanna an irrevocable option (the "First Capitol Option") to
purchase from First Capitol up to 100,681 shares of First Capitol Common Stock,
at a purchase price per share of 95% of the average price per share of First
Capitol Common Stock during the 30 trading days immediately preceding the day
prior to the announcement of a Purchase Event (as herein defined). The effect
of the First Capitol Option Agreement is to discourage other competing offers,
with the effect that even if such a competing offer were accepted and the First
Capitol Merger Agreement terminated, such termination will be at a cost, and a
subsequent purchaser will be burdened with Susquehanna's rights under the First
Capitol Stock Option Agreement.
The First Capitol Option may be exercised by Susquehanna, in whole or in
part, at any time or from time to time after the date of the First Capitol Stock
Option Agreement and prior to earlier to occur of (i) the First Capitol
Effective Time, or (ii) upon a Purchase Event (as defined below), the date six
months following the event, provided that if an exercise notice has been given
on or before the expiration of such six month period and the First Capitol
Option cannot be exercised on such day because of an injunction or similar court
order, the First Capitol Option shall expire on the 10th business day after such
injunction or order has been dismissed or withdrawn.
Under the First Capitol Stock Option Agreement, a Purchase Event means any
of the following: (i) any person (other than Susquehanna or a subsidiary of
Susquehanna) shall have commenced a tender offer or an exchange offer to
purchase First Capitol Common Stock such that, upon consummation of such offer,
the person could own or control ten percent or more of the outstanding First
Capitol Common Stock; (ii) First Capitol shall have authorized, recommended,
proposed or announced an intention to authorize, recommend or propose, or
entered into, an agreement with any person (other than Susquehanna or a
subsidiary of Susquehanna) to (a) merge or consolidate with First Capitol or
enter into a similar transaction, (b) sell, lease or otherwise dispose of all or
substantially all of the assets of First Capitol to such person, or (c) sell or
otherwise dispose of securities representing 10% or more of the voting power of
First Capitol, and as to (a), (b) and (c), the same shall have been scheduled by
First Capitol to close within 365 calendar days following the date of
termination of the First Capitol Merger Agreement; (iii) any person (other than
Susquehanna or a subsidiary of Susquehanna) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange Act) or the
right to acquire beneficial ownership, or a new group has been formed which
beneficially owns, 10% or more of the outstanding First Capitol Common Stock; or
(iv) the shareholders of First Capitol shall have disapproved the First Capitol
Merger after any person (other than Susquehanna or a subsidiary of Susquehanna)
shall have publicly announced a proposal to acquire First Capitol by merger,
consolidation, purchase of all or substantially
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all of its assets or any other similar transaction, and the same shall have been
scheduled by First Capitol to close within 365 calendar days following the date
of termination of the First Capitol Merger.
The First Capitol Stock Option Agreement also grants Susquehanna certain
option share appreciation rights upon a Purchase Event if requested by
Susquehanna and the First Capitol Stock Option Agreement has not expired. Upon
such a request, First Capitol must pay to Susquehanna an amount equal to the
product of (i) the excess, if any of, (a) the greater of (A) the highest price
paid or proposed to be paid in connection with such Purchase Event for any
shares of First Capitol Common Stock and (B) the aggregate consideration paid or
proposed to be paid in connection with such Purchase Event divided by the number
of shares of First Capitol Common Stock then outstanding, over (b) the purchase
price, multiplied by (ii) the total number of First Capitol Option shares as to
which the First Capitol Option has not yet been exercised. If such appreciation
rights are paid to Susquehanna, all other rights of Susquehanna under the First
Capitol Stock Option Agreement shall be extinguished (but the rights of
Susquehanna under the First Capitol Merger Agreement shall not be affected).
Regulatory Approvals of First Capitol
The First Capitol Merger is subject to the approval of the Federal Reserve
Board under the Holding Company Act. An application for approval of the
acquisition of First Capitol was submitted by Susquehanna to the Federal Reserve
Bank of Philadelphia on __________________ 1998. In reviewing the application,
the Federal Reserve Board considers the financial and managerial resources of
Susquehanna and First Capitol, the effect of the transaction on competition in
the markets served by Susquehanna and First Capitol, the convenience and needs
of the public and, among other things, Susquehanna's and First Capitol's record
of performance in helping to meet local credit needs.
In addition to the foregoing, Federal Reserve Board approval is contingent
upon its assessment of the impact of the Year 2000 problem on the parties to the
proposed merger. See, "BUSINESS OF FIRST CAPITOL--Impact of the Year 2000
Issue"; and "IMPACT OF THE YEAR 2000 ISSUE ON SUSQUEHANNA."
The approval of the Department of Banking under the Banking Code must also
be obtained before the First Capitol Merger may be consummated. The Banking
Code requires the Department of Banking to consider the public interests served
by the First Capitol Merger and the financial resources of Susquehanna, First
Capitol and the resulting institution. An application was submitted to the
Department of Banking on ___________ 1998.
The First Capitol Merger cannot proceed in the absence of the requisite
regulatory approvals. To date, however, none of the required approvals have
been obtained in respect of the First Capitol Merger, and there can be no
assurance that all such regulatory approvals will be obtained and, if the First
Capitol Merger is approved, there can be no assurance as to the date of any such
approval. There can also be no assurance that any such approvals will not
contain a condition or requirement which causes such approvals to fail to
satisfy the conditions set forth in the First Capitol Merger Agreement. There
can likewise be no assurance that the U.S. Department of Justice or state
Attorney General will not challenge the First Capitol Merger or, if such
challenge is made, as to the result thereof.
Interests of Certain Persons in the First Capitol Merger
Officers and Directors of First Capitol
Certain of the directors and officers of First Capitol hold shares of First
Capitol Common Stock, stock purchase warrants and/or phantom shares, as the case
may be. See "THE FIRST CAPITOL MEETING - Beneficial Ownership by Officers and
Directors."
In addition, the officers and directors of First Capitol immediately prior
to the First Capitol Effective Time will be the officers and directors of the
Surviving Bank, with such additions and deletions to which senior management of
Susquehanna and First Capitol shall mutually agree.
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At the meeting of the Susquehanna Board of Directors next following the
First Capitol Effective Time, Owen O. Freeman, Jr. shall become a director of
Susquehanna. Owen O. Freeman, Jr. shall remain the Chairman, and Thomas S.
Capello shall remain the President and Chief Executive Officer, of First Capitol
after the First Capitol Effective Time.
Executive Employment Agreements
First Capitol has entered into written employment agreements with Owen O.
Freeman, Jr., the Chairman of the Board, and Thomas S. Capello, President and
Chief Executive Officer of First Capitol. The most recent amendments to these
employment agreements were executed on April 15, 1998, and provide that the
contracts will expire on June 17, 2000 and June 17, 2002, respectively. Under
such contracts, if Mr. Freeman or Mr. Capello is terminated following a change
in control of Susquehanna, as the successor to First Capitol, then Susquehanna
shall be obligated to pay Mr. Freeman or Mr. Capello, as the case may be, a lump
sum amount equal to: (1) his accrued vacation pay; plus, (2) three times his
highest annual direct salary during the 5-year period ending on the date of
termination; plus, (3) the amount of his highest annual incentive compensation
awarded during the 5-year period ending on the date of termination. In
addition, upon termination due to a change in control, Susquehanna would be
obligated to cover Mr. Freeman or Mr. Capello, as the case may be, and his
dependents, until 36 months following the termination date, by all survivor
rights and insurance and benefit programs, and to pay a lump sum to the
terminated executive in an amount equal to additional contributions which would
have been allocated or credited to the executive's accounts under any retirement
plan. If any such payments constitute "excess parachute payments" within the
meaning of Section 280 G of the Internal Revenue Code of 1986, as amended (the
"Code"), and are subject to the excise tax imposed by Section 4999 of the Code
(or any successor sections), Susquehanna shall increase the amounts payable to
the extent necessary to place the recipient executive in the same after-tax
position as he would have been in if no such excise tax had been imposed on
these payments.
First Capitol has also entered into written employment agreements with
Thomas A. Sauer, the Senior Vice President and Senior Lending Officer, and
Timothy K. Ames, the Senior Vice President and Chief Financial Officer. Under
such contracts, if Messrs. Sauer and Ames are terminated from their current
positions with First Capitol during the 24 months following the First Capitol
Effective Time, then they shall receive the termination benefits as a result of
this change in control of First Capitol similar to those that would be provided
to Messrs. Freeman and Capello under their amended employment agreements
discussed above.
Pursuant to Section 4.3(a) of the First Capitol Merger Agreement, Thomas A.
Sauer's employment agreement was to have been amended as of the date of the
First Capitol Merger Agreement to provide for his continued employment with
First Capitol after the Effective Date of the First Capitol Merger without the
receipt of any termination benefits as a result of this change in control of
First Capitol. As of the date of this Proxy Statement/Prospectus, Mr. Sauer has
not executed said amendment.
Severance Agreements
First Capitol has entered into severance agreements with the following
officers of First Capitol:
Name of Officer Title of Position With First Capitol
- --------------- ------------------------------------
Patricia A. Clabaugh Assistant Vice President, Branch Manager and
Assistant Secretary
Marsha A. Stoffa Senior Operations Manager
Lois C. Derry Corporate Secretary
Karen L. Steinfelt Senior Accounting Officer
Kimberly A. Grim Vice President
Under these severance agreements, if there is a change of control (such as
the Merger) and the officer is terminated as a result thereof, then Susquehanna
(as the successor to First Capitol) shall pay to the respective officer
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one-month's then current annual salary for each full or partial year of full
time employment with First Capitol to a maximum of 10 months (the "Severance
Benefit Period"). For example, if an officer was employed by First Capitol for
six years and eight months prior to termination, he or she shall be entitled to
receive seven months of current annual salary. Susquehanna shall also provide,
during the respective officer's Severance Benefit Period, life, medical, health,
accident and disability insurance and a survivor's income benefit in form,
substance and amount which is in each case substantially equivalent to that
provided to him or her prior to the commencement of the Severance Benefit
Period, whichever the respective officer shall select.
First Capitol Employees
As soon as administratively practicable after consummation of the Merger,
employees of First Capitol shall be generally entitled to participate in
Susquehanna's employee benefit, health, welfare and similar plans on
substantially the same terms and conditions as employees of Susquehanna, giving
effect (except for the accrual of benefits under such plans) to years of service
with First Capitol as if such service were with Susquehanna. No employee of
First Capitol presently participating in First Capitol's medical plan shall be
precluded from participating in medical plans of Susquehanna on account of a
preexisting medical condition, and shall receive credit toward any deductible
and co-payments under any welfare benefit plans sponsored by Susquehanna to the
extent such deductibles and co-payments have been satisfied under the respective
First Capitol welfare benefit plans.
Furthermore, Susquehanna has an Employee Stock Purchase Plan. Employees of
First Capitol who remain as employees of Susquehanna will have the opportunity
to participate in the Employee Stock Purchase Plan after the consummation of the
Merger under the terms and provisions of this plan.
Upon consummation of the Merger or as soon thereafter as practicable, all
participants in First Capitol's 401(k) Plan shall be automatically and fully
vested in all amounts contained in or allocable to their accounts in accordance
with the terms of such plan. First Capitol's 401(k) Plan shall be merged into
Susquehanna's 401(k) Plan and (i) First Capitol employees who remain employees
of Susquehanna shall have the right to participate in Susquehanna's 401(k) Plan
on the same terms and conditions as other participating employees, but shall in
all events be fully vested in their accounts transferred from First Capitol's
401(k) Plan in accordance with the terms of such plan; and (ii) all other First
Capitol employees shall be entitled to roll their respective accounts into an
individual retirement account and to all other rights to which they would have
been entitled had they been fully vested and terminated their employment with
First Capitol immediately preceding the First Capitol Effective Time.
First Capitol employees who remain employees of Susquehanna after the First
Capitol Effective Time are eligible to participate in Susquehanna's defined
benefit pension plan and will receive credit for eligibility and vesting
purposes for service with First Capitol, but will receive no credit for benefit
accrual.
Stock Purchase Warrants/Certain Preemptive Rights
David A. Friedman, a director of First Capitol, currently holds 11,250
stock purchase warrants. National Penn has certain preemptive rights to
purchase shares of First Capitol Common Stock upon the exercise of the stock
purchase warrants held by Mr. Friedman. For further information on the
disposition of these stock purchase warrants and preemptive rights prior to the
First Capitol Effective Time, see the caption entitled "Terms of the First
Capitol Merger - Warrant Substitution Agreement."
Stock Appreciation Rights Plan
First Capitol adopted the First Capitol Stock Appreciation Rights Plan
("Stock Appreciation Rights Plan"). Certain officers of First Capitol are
eligible for grants of phantom stock. Each holder of a share under the Stock
Appreciation Rights Plan shall receive in cash for each such share the
difference between $19.75 and the average closing price per share of Susquehanna
Common Stock for a 10-business-day period ending two days before the closing of
the First Capitol Merger multiplied by the Exchange Ratio. For example, if such
average closing price per share is $28.00,
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then a holder will receive $37.03 in cash for each share held under the Stock
Appreciation Rights Plan. ($56.78 -$19.75 = $37.03). The table below states the
name, title and number of shares held by each holder under the Stock
Appreciation Rights Plan, assuming the closing of the First Capitol Merger
occurred on December 31, 1998:
<TABLE>
<CAPTION>
Name Title Number of Shares Held
---- ----- ---------------------
<S> <C> <C>
Thomas S. Capello President and Chief Executive Officer 6,352
Thomas A. Sauer Senior Vice President 3,670
Timothy K. Ames Senior Vice President and Chief Financial Officer 3,170
Karen L. Steinfelt Senior Accounting Officer 870
Kimberly A. Grim Vice President 870
John M. Kelley Vice President 870
</TABLE>
Management and Operations Following the First Capitol Merger
At the First Capitol Effective Time, (i) the articles of incorporation and
bylaws of Interim Bank in effect immediately prior to the First Capitol
Effective Time will be the articles of incorporation and bylaws of the Surviving
Bank, and (ii) the directors and officers of First Capitol immediately prior to
the First Capitol Effective Time will be the directors and officers of the
Surviving Bank, with such additions or deletions to which senior management of
Susquehanna and First Capitol shall mutually agree. Additionally, at the
meeting of the Susquehanna Board of Directors next following the First Capitol
Effective Time, Owen O. Freeman, Jr. shall become a director of Susquehanna.
Owen O. Freeman, Jr.'s principal occupation and business experience during
the past five years has been with First Capitol and Commonwealth State Bank,
Newtown, Pennsylvania, in the capacity as director and chairman of the board of
directors of each bank, neither of which are affiliated with Susquehanna. Mr.
Freeman was a founding director of each bank. Commonwealth State Bank was
acquired in 1997 by Main Line Bank, which itself was acquired by Sovereign Bank,
neither of which has any affiliation with Susquehanna. Mr. Freeman shall hold a
term of office with Susquehanna which shall expire at the Susquehanna annual
meeting in either 1999 or 2000.
Accounting Treatment of the First Capitol Merger
The First Capitol Merger is intended to be treated as a pooling-of-
interests for accounting purposes in accordance with generally accepted
accounting principles and under the accounting rules of the Commission. As a
condition to the consummation of the First Capitol Merger, Susquehanna is to
receive a letter from its independent accountants, Coopers & Lybrand L.L.P.,
that the First Capitol Merger will be treated as a pooling-of-interests. In
order to preserve the intended accounting treatment of the First Capitol Merger
as a pooling-of-interests, the First Capitol Merger Agreement also requires as a
condition to the obligations of Susquehanna and Interim Bank under the First
Capitol Merger Agreement that each person deemed to be an "affiliate" of First
Capitol enter into an agreement not to sell shares of Susquehanna Common Stock
acquired in the First Capitol Merger until financial results covering at least
30 days of post-First Capitol Merger combined operations have been published.
Income Tax Consequences of the First Capitol Merger
The following is a general discussion of the anticipated federal income tax
consequences of the First Capitol Merger. Susquehanna and First Capitol believe
that for federal income tax purposes: (i) the First Capitol Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code and
First Capitol and Susquehanna will each be a "party to a reorganization" within
the meaning of Section 368(b) of the Code; (ii) no gain or loss will be
recognized by First Capitol or Susquehanna by reason of the First Capitol
Merger; (iii) except for cash received in lieu of fractional shares, no income,
gain or loss generally will be recognized by First Capitol shareholders on the
exchange of their shares of First Capitol Common Stock for shares of Susquehanna
Common Stock; (iv) the basis of the Susquehanna Common Stock to be received by
the First Capitol shareholders generally will be, in each instance, the same as
the basis of the First Capitol Common Stock surrendered in exchange therefor;
(v) the holding period of the
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Susquehanna Common Stock to be received by the shareholders of First Capitol
generally will include the period during which the First Capitol Common Stock
surrendered in exchange therefor has been held, provided that the First Capitol
Common Stock surrendered is held as a capital asset on the date of the exchange
pursuant to the First Capitol Merger; and (vi) the payment of cash to the First
Capitol shareholders in lieu of their fractional share interests of Susquehanna
Common Stock generally will be treated as having been received as a distribution
in full payment in exchange for the fractional share interest of Susquehanna
Common Stock which such shareholders would otherwise be entitled to receive and
will qualify as capital gain or loss.
The obligations of the parties to consummate the First Capitol Merger are
conditioned upon receipt of a ruling from the IRS or an opinion of counsel to
Susquehanna substantially to the effect that the federal income tax consequences
of the First Capitol Merger are as summarized above. Unlike a ruling from the
IRS, an opinion of counsel would have no binding effect on the IRS. Such ruling
or opinion would not deal with all of the tax considerations that may be
relevant to particular First Capitol shareholders, such as shareholders who are
dealers in securities, foreign persons, tax-exempt entities or the impact of the
alternative minimum tax. Such ruling or opinion would not address any state,
local or foreign tax considerations, any federal estate, gift, employment,
excise or other non-income tax considerations.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF THE FIRST CAPITOL MERGER, WITHOUT CONSIDERATION OF THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH FIRST CAPITOL SHAREHOLDER'S
SITUATION. EACH FIRST CAPITOL SHAREHOLDER IS ENCOURAGED TO CONSULT HIS OR HER
OWN TAX ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE TO
SUCH SHAREHOLDER AND NOT COMMON TO SHAREHOLDERS AS A WHOLE AND ALSO AS TO ANY
ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE FIRST
CAPITOL MERGER AND/OR ANY SALE OF SUSQUEHANNA COMMON STOCK RECEIVED IN THE FIRST
CAPITOL MERGER.
RESALE RESTRICTIONS
The shares of Susquehanna Common Stock issuable in connection with the
Cardinal Merger and the First Capitol Merger have been registered under the
Securities Act, but such registration does not cover resales by shareholders of
Cardinal or First Capitol who may be deemed to control, be controlled by or be
under common control with Cardinal, First Capitol or Susquehanna at the time of
or after the Cardinal Merger or the First Capitol Merger and who therefore may
be deemed "affiliates" of Cardinal, First Capitol or Susquehanna as that term is
used in Rule 145 under the Securities Act. Such affiliates may not sell their
shares of Susquehanna Common Stock acquired in connection with the Cardinal
Merger or the First Capitol Merger, as applicable, except pursuant to: (i) an
effective registration statement under the Securities Act covering such shares
of Susquehanna Common Stock; (ii) the conditions contemplated by paragraph (d)
of Rule 145; or (iii) another applicable exemption from the registration
requirements of the Securities Act. Rule 145, as currently in effect, imposes
restrictions on the manner in which such affiliates may make resales and also on
the quantities of resales which such affiliates, and others with whom they act
in concert, may make within any three-month period. The management of Cardinal
and First Capitol will notify those persons whom they believe may be such
affiliates. Susquehanna is under no obligation to register any shares acquired
by affiliates of Cardinal or First Capitol in connection with the Cardinal
Merger and the First Capitol Merger.
The Cardinal Merger Agreement and the First Capitol Merger Agreement
require as a condition to the Cardinal Merger and the First Capitol Merger,
respectively, that each such affiliate of Cardinal or First Capitol enter into
an agreement not to sell shares of Susquehanna Common Stock acquired in the
mergers except in accordance with the requirements of the Securities Act and the
regulations thereunder.
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DESCRIPTION OF SUSQUEHANNA AND ITS CAPITAL STOCK
Information Concerning Susquehanna
Susquehanna is a Pennsylvania business corporation registered as a bank
holding company with its headquarters in Lancaster County, Pennsylvania. As a
bank holding company, Susquehanna engages in general commercial and retail
banking and bank-related business through commercial banks, a federal savings
bank, and other subsidiaries.
Susquehanna was organized on March 1, 1982 under the laws of the
Commonwealth of Pennsylvania for the purpose of acquiring Farmers First Bank,
Lititz, Pennsylvania and such other banks and bank-related entities as permitted
by law, desirable and consistent with its corporate purposes. Susquehanna's
sole activity consists of owning and supervising its eight commercial banks, its
federal savings bank, and non-bank subsidiaries engaged in leasing and insurance
activities. Susquehanna's depository subsidiaries are engaged in providing
banking, savings and loan and bank-related services in central and south central
Pennsylvania, principally in the counties of Columbia, Franklin, Lancaster,
Lycoming, Northumberland, Snyder, Union and York, in southeastern Pennsylvania,
principally in the counties of Chester, Delaware and Montgomery, in
northwestern, central and southeastern Maryland, principally in the City of
Baltimore and the Maryland counties of Allegany, Anne Arundel, Baltimore,
Carroll, Cecil, Harford, Washington, Wicomico and Worcester, and in southern New
Jersey, principally in the counties of Burlington, Camden and Gloucester. The
day-to-day management of Susquehanna's subsidiaries is conducted by each
subsidiary's officers, subject to review by their respective board of directors,
thereby permitting each company to retain substantial autonomy to better serve
its market in day-to-day operations. Susquehanna's subsidiary commercial banks
and federal savings bank currently operate 121 depository offices in
Pennsylvania, Maryland and New Jersey. As of March 31, 1998, Susquehanna had
consolidated total assets in excess of 3.7 billion dollars.
For several years Susquehanna has been implementing a plan to strengthen
its position in Pennsylvania markets and to expand beyond Pennsylvania's
borders. Susquehanna initially established a position in the banking markets of
western and central Maryland, extending from Pennsylvania into Baltimore and
western Maryland. In pursuit of this program, Susquehanna acquired strong
financial institutions in contiguous markets. Consistent with its strategy of
geographic diversification, Susquehanna determined to move into areas within the
State of New Jersey which offered economic and demographic markets similar to
those in which it operates in Pennsylvania and Maryland. In accordance with
this plan, Susquehanna acquired Equity National Bank, Marlton, New Jersey and
Farmers National Bank, Mullica Hill, New Jersey in the first quarter of 1997.
Through these acquisitions, Susquehanna established a substantial position in an
area of New Jersey which it believed to be economically stable, which it
expected to continue to prosper, and which supported Susquehanna's community
banking philosophy.
In the third quarter of 1997 Susquehanna acquired Founders' Bank, Bryn
Mawr, Pennsylvania, thereby establishing a position in a market serving the
Philadelphia suburbs. This market is contiguous to its market in Lancaster
County and is in a direct line to its New Jersey markets.
Susquehanna's interest in acquiring First Capitol reflects its plan to
strengthen its existing markets (in this case in York County) while the
acquisition of Cardinal will allow Susquehanna to enter the markets of western
Pennsylvania, an area close to its Franklin County market.
Management of Susquehanna has held forth the belief that to the extent the
management of a bank demonstrates its commitment to the community through
personal and dedicated service, the community will, in turn, support such a
bank. This formula of synergism between depository institution and customer has
been the predicate to Susquehanna's successful community banking philosophy over
the past 16 years.
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General
Susquehanna is authorized to issue 100,000,000 shares of Susquehanna Common
Stock, par value $2.00 per share, and 5,000,000 shares of preferred stock,
without par value ("Susquehanna Preferred Stock").
As of July 1, 1998, Susquehanna had outstanding approximately 33,834,850
shares of Susquehanna Common Stock. No shares of Susquehanna Preferred Stock
are currently outstanding.
Common Stock
Dividends
Holders of Susquehanna Common Stock are entitled to receive such dividends
as may be declared by the Susquehanna Board of Directors out of funds legally
available therefor. Since Susquehanna is a holding company, the funds required
by Susquehanna to enable it to pay dividends are derived predominantly from the
dividends paid to Susquehanna by its subsidiaries. Susquehanna's ability to pay
dividends, therefore, is dependent upon the earnings, financial condition and
ability to pay dividends of Susquehanna's subsidiaries, principally its
commercial bank and savings bank subsidiaries. Payment of dividends by the
banking subsidiaries is subject to a number of regulatory restrictions. See
"REGULATIONS AFFECTING DIVIDENDS." Each of Susquehanna's commercial bank and
savings bank subsidiaries is presently permitted to pay dividends without prior
approval under such regulatory requirements; at December 31, 1997, an aggregate
of $48.7 million was available for the payment of dividends to Susquehanna.
Liquidation
In the event of liquidation, dissolution or winding up of Susquehanna,
holders of Susquehanna Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Susquehanna Preferred Stock, if any, then outstanding.
Voting
Holders of Susquehanna Common Stock are entitled to one vote for each share
held by them at all meetings of the shareholders and are not entitled to
cumulate their votes for the election of directors.
No Preemptive Rights
Holders of Susquehanna Common Stock do not have preemptive rights.
Transfer Agent and Registrar
Farmers First Bank, a subsidiary of Susquehanna, is the transfer agent and
registrar for Susquehanna Common Stock.
Preferred Stock
The Susquehanna Board of Directors has authority, without further vote or
action by the shareholders, to issue the Susquehanna Preferred Stock in one or
more series and to fix and determine the relative rights and preferences of each
such series.
Pennsylvania Anti-Takeover Law Provisions
Susquehanna is subject to various statutory "anti-takeover provisions" of
the BCL, including Subchapters 25E, F, G and H of the BCL.
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Subchapter 25E (relating to control transactions) provides that if any
person or group acquires 20% or more of the voting power of a covered
corporation, the remaining shareholders may demand from such person or group the
fair value of their shares, including a proportionate amount of any control
premium.
Subchapter 25F (relating to business combinations) delays for five years
and imposes conditions upon "business combinations" between an "interested
shareholder" and the corporation. The term "business combination" is defined
broadly to include various transactions utilizing a corporation's assets for
purchase price amortization or refinancing purposes. An "interested
shareholder" is defined generally as the beneficial owner of at least 20% of a
corporation's voting shares.
Subchapter 25G (relating to control-share acquisitions) prevents a person
who has acquired 20% or more of the voting power of a covered corporation from
voting such shares unless the "disinterested" shareholders approve such voting
rights. Failure to obtain such approval exposes the owner to the risk of a
forced sale of the shares to the issuer. If shareholder approval is obtained,
the corporation is also subject to Subchapters 25I and J of the BCL. Subchapter
25I provides for a minimum severance payment to certain employees terminated
within two years of the approval. Subchapter 25J prohibits the abrogation of
certain labor contracts prior to their stated date of expiration.
Subchapter 25H (relating to disgorgement) applies in the event that: (i)
any person or group publicly discloses that the person or group may acquire
control of the corporation; or (ii) a person or group acquires (or publicly
discloses an offer or intent to acquire) 20% or more of the voting power of the
corporation and, in either case, sells shares within 18 months thereafter. Any
profits from sales of equity securities of the corporation by the person or
group during the 18-month period belong to the corporation if the securities
that were sold were acquired during the 18-month period or within 24 months
prior thereto.
Subchapters 25E, F, G and H contain a wide variety of transactional and
status exemptions, exclusions and safe harbors.
In addition, the BCL permits an amendment of the corporation's articles or
other corporate action, if approved by shareholders generally, to provide
mandatory special treatment for specified groups of nonconsenting shareholders
of the same class by providing, for example, that shares of common stock held
only by designated shareholders of record, and no other shares of common stock,
shall be cashed out at a price determined by the corporation, subject to
applicable dissenters' rights.
The BCL also provides that directors may, in discharging their duties,
consider the interests of a number of different constituencies, including
shareholders, employees, suppliers, customers, creditors and the communities in
which the corporation is located. Directors are not required to consider the
interests of shareholders to a greater degree than other constituencies'
interests. The BCL expressly provides that directors do not violate their
fiduciary duties solely by relying on poison pills or the anti-takeover
provisions of the BCL.
Provisions in Susquehanna's Articles of Incorporation and Bylaws
Certain provisions of Susquehanna's articles of incorporation ("Susquehanna
Articles") and bylaws ("Susquehanna Bylaws") may have the effect of making more
difficult non-negotiated tender or exchange offers or other attempts to take
over or acquire Susquehanna's business. These provisions may discourage some
potential acquirors from attempting such a transaction on terms which some
shareholders might favor.
As of July 1, 1998, Susquehanna will have approximately 5,000,000 shares of
authorized but unissued shares of Susquehanna Preferred Stock and 66,165,150
shares of authorized but unissued shares of Susquehanna Common Stock. Following
the Cardinal Merger and the First Capitol Merger, Susquehanna would have
approximately 63,028,513 shares of authorized but unissued shares of Susquehanna
Common Stock. As a general matter, the existence of unissued and unreserved
shares of capital stock provides a board of directors with the ability to cause
the issuance of shares of capital stock under circumstances that might prevent
or render more difficult or costly the completion of
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a takeover. In addition, the rights and preferences of Susquehanna Preferred
Stock as may be established by the Susquehanna Board of Directors could have the
effect of impeding a takeover of Susquehanna.
The Susquehanna Bylaws provide that the number of directors shall be fixed
by the Susquehanna Board of Directors, and that the directors shall be divided
into three classes as nearly equal as possible, with each class serving for
staggered three year terms. Directors may be removed, with or without cause, by
the vote of the holders of 75% of the outstanding shares of Susquehanna stock
entitled to vote for directors generally.
The Susquehanna Bylaws establish advance notice procedures with regard to
the nomination, other than by management, of candidates for election as
directors. Susquehanna shareholders may act only at a shareholders' meeting or
by unanimous written consent.
The Susquehanna Board of Directors is authorized to amend the Susquehanna
Bylaws, subject to the right of the shareholders to change such action by vote
of 75% of the outstanding Susquehanna shares entitled to vote.
Article 10 of the Susquehanna Articles authorizes the Susquehanna Board of
Directors to use defensive measures to oppose acquisition transactions that it
determines are not in the best interests of Susquehanna, and permits the
Susquehanna Board of Directors to consider a broad range of factors in deciding
whether to oppose an acquisition transaction, including effects on employees,
depositors, customers and the communities served by Susquehanna. Article 10 may
not be amended without the vote of 75% of the outstanding Susquehanna shares
entitled to vote.
Article 11 of the Susquehanna Articles, in general, prohibits Susquehanna
from engaging in a broad range of business combinations with any person or group
having beneficial ownership of 20% or more of the Susquehanna shares entitled to
vote generally for the election of directors unless such business combination:
(i) was approved by the Susquehanna Board of Directors prior to the time such
person or group acquired more than 10% of Susquehanna's voting shares; (ii) is
approved by 75% of Susquehanna's voting shares where the transaction satisfies
specified fair price criteria and the 20% shareholder has complied with
specified procedural requirements; or (iii) is approved by 85% of Susquehanna's
voting shares. In addition, where no 20% shareholder is involved, Article 11
requires a merger or consolidation of Susquehanna or a significant sale or
disposition of securities or assets of Susquehanna or its subsidiaries to be
approved by 66 2/3% of the outstanding Susquehanna shares entitled to vote on
such matter. Article 11 may only be amended by a vote of 85% of Susquehanna's
voting shares (75% if the amendment is approved by 85% of a board consisting
only of "Continuing Directors" as such term is defined in Article 11).
Article 14 of the Susquehanna Articles limits the voting rights of any
person or group acquiring more than 10% of Susquehanna's outstanding voting
shares. The voting rights limitations of Article 14, when taken together with
the provisions of Article 11, render it extremely unlikely that a person or
group subject to its provisions will be able to determine the outcome of a vote
on any transaction covered by Article 11. Shares held by such person or group
in excess of 10% of any class or series of Susquehanna stock are entitled to
only 1/10 of a vote per share, and all shares held by such person or group may
not cast more than 35% of the total number of votes which all holders of a class
or series of Susquehanna shares are entitled to cast with respect to a
particular matter. These provisions limiting voting rights may not be waived or
rendered inapplicable by the Susquehanna Board of Directors. Because the voting
rights limitations are imposed on persons or groups owning more than 10% of the
outstanding Susquehanna voting shares (rather than the owners of more than 10%
of the outstanding voting power), the Susquehanna Board of Directors could issue
shares of Susquehanna Preferred Stock with enhanced voting rights that would
permit a person to exercise more than 10% of the voting power while owning 10%
or less of the outstanding voting shares. These voting rights limitations do
not apply to a person or group that consummates a tender offer which was an
offer to acquire all outstanding Susquehanna Common Stock and which tender offer
complied with specified procedural and fair price requirements. Article 14 may
only be amended by vote of 85% of the votes entitled to be cast by all
outstanding Susquehanna voting shares (two-thirds if the amendment is first
approved by two-thirds of a board consisting only of "Continuing Directors" as
such term is defined in Article 14).
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COMPARISON OF SHAREHOLDER RIGHTS
Introduction
Upon the consummation of the Cardinal Merger, holders of Cardinal Common
Stock, whose rights presently are governed by Cardinal's articles of
incorporation (the "Cardinal Articles") and bylaws (the "Cardinal Bylaws") will
become shareholders of Susquehanna. Accordingly, while certain rights will
continue to be governed by the BCL, other rights will be governed by the
Susquehanna Articles and the Susquehanna Bylaws. There are certain differences
between such articles and bylaws. Similarly, upon the consummation of the First
Capitol Merger, holders of First Capitol Common Stock, whose rights presently
are governed by First Capitol's articles of incorporation (the "First Capitol
Articles") and bylaws (the "First Capitol Bylaws") will become shareholders of
Susquehanna, and their rights also will be governed by the Susquehanna Articles
and the Susquehanna Bylaws. In addition, certain First Capitol shareholder
rights currently governed by the Banking Code shall thereafter be governed by
the BCL. The following discussion is not intended to be a complete statement of
all differences affecting the rights of shareholders, but summarizes material
differences and is qualified in its entirety by reference to applicable
Pennsylvania corporate laws and the articles of incorporation and bylaws of
Susquehanna, Cardinal and First Capitol. See "INCORPORATION OF DOCUMENTS BY
REFERENCE" and "AVAILABLE INFORMATION."
While both Cardinal and Susquehanna are subject to the BCL, it is important
to note that Cardinal amended its bylaws to opt out of various "anti-takeover"
provisions of the BCL whereas Susquehanna did not. Consequently, Susquehanna is
protected by significant Pennsylvania anti-takeover law provisions whereas
Cardinal is not. These shareholder protection provisions have been summarized
above. See "DESCRIPTION OF SUSQUEHANNA AND ITS CAPITAL STOCK--Pennsylvania
Anti-Takeover Law Provisions."
Dividends
Pennsylvania law generally permits a corporation to pay dividends unless,
after giving effect thereto, the corporation would be unable to pay its debts as
they become due in the usual course of business or the total assets of the
corporation would be less than the sum of its total liabilities.
As holding companies, the ability of Cardinal and Susquehanna to pay
dividends is largely dependent upon receipt of dividends from their respective
subsidiary depository institutions. Payment of dividends by these subsidiaries
is subject to a number of regulatory restrictions. Similarly, the ability of
First Capitol, as a commercial bank, to pay dividends is subject to a number of
regulatory restrictions. For a summary of these regulatory considerations, see
"REGULATIONS AFFECTING DIVIDENDS."
Classified Board of Directors
The BCL and the Banking Code permit a corporation's or bank's board of
directors to be divided into various classes serving staggered terms of office.
The Susquehanna Bylaws provide that its board is divided into three classes of
directors as nearly equal in number as possible. At each annual meeting of
shareholders, one class of directors is elected for a three-year term.
The Cardinal Bylaws provide that its board of directors is divided into
three classes of directors, elected in a manner similar to the procedure
contained in the Susquehanna Bylaws, but without an express requirement that
classes be generally equal in number.
The First Capitol Bylaws provide that its board of directors is divided
into three classes of directors, elected in a manner similar to the procedure
contained in the Susquehanna Bylaws.
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Number of Directors
The Susquehanna Bylaws establish the minimum number of directors at five
and provide that the number of directors constituting the entire board shall be
determined by resolution of the board of directors. A majority of the
Susquehanna Board of Directors may increase the number of directors between
meetings of the shareholders up to a maximum of two additional directors in any
calendar year. Currently, the Susquehanna Board of Directors consists of 15
directors. This number will increase to 17 upon consummation of the Cardinal
Merger and the First Capitol Merger.
The Cardinal Bylaws establish the minimum and maximum number of directors
at five and 25, respectively, all of whom must be shareholders of Cardinal. The
exact number of directors is determined by majority vote of the entire Cardinal
Board of Directors. Currently, the Cardinal Board of Directors consists of
eight directors.
The First Capitol Bylaws also establish the minimum and maximum number of
directors at five and 25, respectively, all of whom must be shareholders of
First Capitol. The exact number of directors is determined by majority vote of
the entire First Capitol Board of Directors, but cannot be increased by more
than two directors in any one year. Currently the First Capitol Board of
Directors consists of 10 directors and one director emeritus.
Nomination of Directors
Under the Susquehanna Bylaws, a shareholder may not nominate a candidate
for director unless the shareholder provides the Secretary of Susquehanna with a
notice containing specified information regarding the nominee and the
shareholder making the nomination. The Susquehanna Bylaws require such notice
to be given by a shareholder not less than 14 days nor more than 50 days prior
to a meeting or within seven days of notice of the meeting if Susquehanna
provides less than 21 days notice of the meeting.
The Cardinal Bylaws require shareholders to submit nominations for
directors to be elected at any meeting called for the election of directors not
less than 60 days prior to the date of such meeting. The nomination must be in
a writing delivered to the Secretary of Cardinal and disclose certain specific
information with respect to the nominee, among other matters.
The First Capitol Bylaws require shareholders to submit nominations for
directors to be elected at any meeting called for the election of directors not
less than 60 days prior to the date of such meeting. The nomination must be in
a writing delivered to the Secretary of First Capitol and disclose certain
specific information with respect to the nominee, among other matters.
Cumulative Voting
The Susquehanna Articles state that shareholders do not have the right to
cumulate their votes for the election of directors.
The Cardinal Articles state that shareholders do not have the right to
cumulate their votes for the election of directors.
In the election of First Capitol directors, every shareholder has the right
to cumulative voting of such shares. This means that each First Capitol
shareholder may vote the number of shares owned by such shareholder for as many
persons as there are directors to be elected or to cumulate such votes by giving
one candidate as many votes as the number of directors to be elected multiplied
by the number of shares, or by distributing such votes on the same principle
among any number of directors.
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Removal of Directors
Except where the holders of Susquehanna Preferred Stock have the right to
elect one or more Susquehanna directors voting separately as a class,
Susquehanna directors may be removed with cause or without cause by vote of 75%
of all outstanding Susquehanna shares entitled to vote generally for the
election of Susquehanna directors voting as one class.
Cardinal's directors may declare vacant the office of a director if he or
she is declared of unsound mind by an order of court, or convicted of a felony,
or for any other proper cause, or if he or she does not accept office within 30
days after notice of his or her election. Cardinal's shareholders may remove
the board of directors or an individual director without assigning cause.
First Capitol's directors may declare vacant the office of a director if he
or she is declared of unsound mind by an order of court, or convicted of a
felony, or for any other proper cause, or if he or she does not accept office
within 60 days after notice of his or her election. First Capitol's
shareholders may remove the board of directors or any class, or an individual
director without assigning cause, except that if the entire board is not
removed, then no individual director may be so removed if the votes cast against
removal would be sufficient to elect him/her if voted cumulatively at an annual
election.
Filling Vacancies on the Board of Directors
In the case of Susquehanna, Cardinal and First Capitol, vacancies and newly
created directorships may be filled by the vote of a majority of the directors
in office. Any such Susquehanna director so chosen serves until the next annual
shareholders' meeting, at which time a successor is elected to a term of office
consistent with maintaining three classes of Susquehanna directors as equal in
size as possible. Any such Cardinal or First Capitol director so chosen will
complete the term of office of the class of directors to which he was appointed.
Call of Special Shareholders' Meeting
Special meetings of Susquehanna shareholders may be called by the
President, the Susquehanna Board of Directors or upon the written request of the
holders of not less than one-fifth of the Susquehanna shares entitled to vote at
the meeting. Such request must state a proper purpose for the meeting.
Special meetings of Cardinal shareholders may be called by the Chairman of
the Board, the President or a majority of the Cardinal Board of Directors or of
its executive committee or at the written request to the secretary by the
holders of not less than 25% of all votes entitled to be cast at the meeting.
Special meetings of First Capitol shareholders may be called by its
Chairman of the Board, the President, a majority of the First Capitol Board of
Directors, or one or more shareholders entitled to cast at least 51% of the
votes which all shareholders are entitled to cast at the meeting.
Notice of Shareholders' Meetings
Susquehanna shareholders must generally be given at least five days'
written notice of an annual meeting of shareholders. If a meeting is being
called to consider certain fundamental transactions (such as an amendment to the
articles of incorporation or a merger, consolidation or dissolution), the BCL
requires 10 days' prior written notice. Susquehanna shareholders must be given
10 days' prior written notice of a special shareholders' meeting; 20 days' prior
written notice is required if the special meeting was called by or at the
request of a Susquehanna shareholder.
Cardinal and First Capitol shareholders must be given not less than 10
days' written notice prior to any meeting of shareholders.
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Quorum Requirements and Adjournment of Meetings
In the case of each of Susquehanna, Cardinal and First Capitol, a majority
of the outstanding shares entitled to vote, present in person or represented by
proxy, constitutes a quorum at all meetings of shareholders. If a quorum is not
present or represented at a meeting, the shareholders entitled to vote at the
meeting have the power to adjourn the meeting, and at any adjourned meeting at
which a quorum is present or represented any business may be transacted which
might have been transacted at the meeting as originally noticed. Where a
meeting is called for the purpose of electing directors, a majority of the
shares present or represented by proxy may adjourn the meeting for one or more
periods of up to 15 days' duration. Those shareholders present or represented
at the meeting following the original meeting called for the election of
directors which was adjourned for lack of a quorum, although less than a quorum,
shall nevertheless constitute a quorum for the purpose of electing directors.
Shareholder Proposals; New Business at a Meeting
In the case of each of Susquehanna, Cardinal and First Capitol, except for
the director nomination procedures described above, their respective articles
and bylaws do not require advance notice of business that shareholders wish to
raise at an annual shareholders' meeting. Each of their respective bylaws,
however, limit the business to be transacted at a special shareholders' meeting
to the matters specified in the notice of meeting.
Action Without Meeting
In the case of each of Susquehanna, Cardinal and First Capitol,
shareholders may take action without a meeting by unanimous written consent.
Dissenters' Rights
Under the BCL, which governs the rights of Susquehanna shareholders,
shareholders are generally entitled to dissent from, and demand payment of the
fair value of their shares in connection with, a plan of merger, consolidation,
share exchange, asset transfer or division. If a corporation's shares are held
of record by more than 2,000 shareholders or are listed on a national securities
exchange, the BCL generally does not provide dissenters' rights so long as the
consideration received by shareholders pursuant to the plan consists solely of
shares of the acquiring, surviving or new corporation (and money in lieu of
fractional shares). Because Cardinal's and First Capitol's shares are held by
fewer than 2,000 shareholders and are not listed on a national securities
exchange, the shareholders of Cardinal and First Capitol are entitled to
dissenters' rights in this transaction. The BCL provides dissenters' rights
where a charter amendment or other corporate action providing for mandatory
special treatment for a specified group of holders of a class or series of stock
is adopted without a class vote of the affected group. Subchapter 25E of the
BCL, which applies to Susquehanna (but not to Cardinal or First Capitol), also
provides shareholders of a publicly traded Pennsylvania corporation remedies
similar to dissenters' rights where a person or group acquires 20% or more of
the voting power of the corporation.
Preemptive Rights
In the case of each of Susquehanna, Cardinal and First Capitol,
shareholders do not have preemptive rights. Note, however, that pursuant to the
Preemptive Rights Agreement, First Capitol granted limited preemptive rights to
National Penn. See "APPROVAL OF THE FIRST CAPITOL MERGER--Terms of the First
Capitol Merger."
Limitations on Directors' Liability
The BCL permits the shareholders of a Pennsylvania corporation to adopt a
bylaw provision relieving a director (but not an officer) of personal liability
for monetary damages in certain circumstances. The Susquehanna Bylaws do not
contain such a provision. The bylaws of Cardinal and First Capitol provide that
a director shall not be personally
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liable for monetary damages except in the case of breach or failure to perform
statutorily defined duties or if the breach or failure constitutes self-dealing,
willful misconduct or recklessness.
Indemnification
The BCL provides that a business corporation may indemnify directors,
officers and other agents against liabilities they may incur as such provided
that the particular person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. In the case of actions
against a director, officer or other agent by or in the right of the
corporation, the power to indemnify extends only to expenses (not judgments and
amounts paid in settlement) and such power generally does not exist if the
person otherwise entitled to indemnification shall have been adjudged to be
liable to the corporation unless it is judicially determined that, despite the
adjudication of liability but in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnification for specified
expenses. Under the BCL, the corporation is required to indemnify directors,
officers or other agents against expenses they may incur in defending actions
against them in such capacities if they are successful on the merits or
otherwise in the defense of such actions. Under the BCL, a corporation may pay
the expenses of a director, officer or other agent incurred in defending an
action or proceeding in advance of the final disposition thereof upon receipt of
an undertaking from such person to repay the amounts advanced unless it is
ultimately determined that such person is entitled to indemnification from the
corporation. The Susquehanna Bylaws, the Cardinal Bylaws and the First Capitol
Bylaws provide indemnification of directors, officers and other agents and
advancement of expenses as generally permitted by law. The Susquehanna Bylaws
condition any indemnification or advancement of expenses upon a determination,
made in accordance with the procedures specified in the BCL, by Susquehanna's
directors or shareholders that indemnification or advancement of expenses is
proper because the director or officer met the standard of conduct set forth in
the BCL. The Cardinal and First Capitol Bylaws create a presumption that the
officer or employee is entitled to indemnification; this presumption may be
rebutted by requisite vote of disinterested directors or shareholders. If the
presumption is rebutted, final resolution of the question is to be referred to
outside counsel.
The BCL grants a corporation broad authority to indemnify its directors,
officers and other agents for liabilities and expenses incurred in such
capacity, except in circumstances where the act or failure to act giving rise to
the claim for indemnification is determined by a court to have constituted
willful misconduct or recklessness. Pursuant to the authority of the BCL,
Susquehanna has entered into employment agreements with certain principal
officers which also provide for indemnification in connection with the
performance of their offices. As permitted by the BCL and the Susquehanna
Articles, Susquehanna maintains on behalf of its directors and officers
insurance protection against certain liabilities arising out of their service in
such capacities.
First Capitol has entered into employment agreements with certain principal
officers which also provide for indemnification in connection with the
performance of their offices. As permitted by the First Capitol Bylaws, First
Capitol maintains on behalf of its directors and officers insurance protection
against certain liabilities arising out of their service in such capacities.
State Anti-Takeover Law Provisions
Susquehanna, is subject to various statutory "anti-takeover" provisions of
the BCL. Since First Capitol does not have a class of securities registered
under the Exchange Act, such provisions do not apply to it. Since Cardinal
amended its bylaws to opt out of the various "anti-takeover" provisions of the
BCL, such provisions do not apply to Cardinal. Because Susquehanna's securities
are registered under the Exchange Act and because Susquehanna did not elect to
opt out of the various "anti-takeover" provisions, Susquehanna is entitled to
the protection of the BCL's "anti-takeover" provisions. The BCL "anti-takeover"
provisions applicable to Susquehanna have been summarized above. See
"DESCRIPTION OF SUSQUEHANNA AND ITS CAPITAL STOCK--Pennsylvania Anti-Takeover
Law Provisions."
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Pursuant to Subchapter 25F of the BCL, a covered corporation is prohibited
from engaging in specified business combination transactions with an interested
shareholder (defined in general as any beneficial owner of at least 20% of the
outstanding voting stock of a Pennsylvania corporation) during the five-year
period following the date such person became an interested shareholder, unless
the business combination or share acquisition is approved by the corporation's
board of directors prior to the date such person became an interested
shareholder. Susquehanna is subject to this provision; Cardinal and First
Capitol are not.
Subchapter 25F of the BCL would allow a business combination to proceed if
it were approved by unanimous vote of the holders of all outstanding common
stock or, if the interested shareholder owns at least 80% of the Pennsylvania
corporation's voting shares, if the business combination were approved by a
majority of the holders of the Pennsylvania corporation's voting shares (not
including shares held by the interested shareholder) and the interested
shareholder complies with specified procedural and minimum fair price criteria.
Susquehanna is subject to this provision; Cardinal and First Capitol are not.
Under Subchapter 25F of the BCL, after a five-year period, a business
combination may be effected if: (i) the transaction is approved by a majority
of the holders of the Pennsylvania corporation's voting shares (not including
shares held by the interested shareholder); or (ii) the transaction is approved
by a majority of the holders of the Pennsylvania corporation's voting shares
(including shares held by the interested shareholder) and the interested
shareholder complies with specified procedural and minimum fair price criteria.
Susquehanna is subject to this provision; Cardinal and First Capitol are not.
Susquehanna is subject to another somewhat similar Pennsylvania law
provision (BCL Section 2538) which requires transactions with an interested
shareholder to be approved by a majority of the corporation's directors who are
unaffiliated with such shareholder. As described below, Susquehanna has charter
provisions which restrict business combinations with significant shareholders.
Subchapter 25G of the BCL prevents a person who has acquired 20% or more of
the voting power of a covered corporation from voting such shares unless the
"disinterested" shareholders allow otherwise. Article 11 of the Susquehanna
Articles limits the voting rights of persons acquiring more than 10% of
Susquehanna's outstanding voting shares. Article 10 of the Cardinal Articles
allows its board of directors, upon a determination that a person has become a
beneficial owner of 25% or more of its outstanding shares, to issue warrants to
shareholders who are not affiliated with such person. Such warrants invest the
unaffiliated shareholders with the right to purchase substantial amounts of
Cardinal Common Stock at reduced price; if these warrants were exercised, the
position of such 25% shareholder would be significantly diluted. Subchapter
25H of the BCL requires persons who acquire 20% of the voting power of a
corporation or who announce that they may acquire control of the corporation and
then sell shares within 18 months thereafter to disgorge to the corporation
profits made from such transactions. The BCL permits, subject to dissenters'
rights, an amendment of the corporation's articles or other corporate action to
provide mandatory special treatment for specified groups of nonconsenting
shareholders.
The BCL provides that directors may, in discharging their duties, consider
the interests of a number of different constituencies, including shareholders,
employees, suppliers, customers, creditors and the communities in which the
corporation is located. The BCL further provides that directors are not
required to consider the interests of shareholders to a greater degree than
other constituencies' interests. Additionally, the BCL expressly provides that
directors do not violate their fiduciary duties solely by relying on poison
pills or the anti-takeover provisions of the BCL. As described below,
Susquehanna, Cardinal and First Capitol each have a charter provision which
permits directors to consider a broad number of factors in evaluating any
potential acquisition transaction.
Anti-Takeover Provisions in the Susquehanna, Cardinal and First Capitol
Articles; Approval of Certain Transactions
Provisions in the Articles of each of Susquehanna, Cardinal and First
Capitol permit, but do not require, their respective boards of directors to
consider a variety of factors in evaluating whether to oppose, recommend or
remain
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neutral with respect to an acquisition transaction (for example, a tender
offer). These factors include: (i) the adequacy of the consideration being
offered in relation to the current market price of their securities as well as
in relation to other measures of their value; (ii) the economic or social
effects that the transaction might have on their employees, depositors and
customers or subsidiaries and the communities they serve; (iii) the reputations
and business practices of the offeror and its management and affiliates; and
(iv) antitrust or other legal difficulties that might be created by the
transaction. The Cardinal and First Capitol Articles also allow the boards to
consider the business and financial condition and the earnings prospects of the
offeror and whether a more favorable price might be obtained in the future. In
the event that the respective boards of directors determine that an acquisition
transaction should be opposed, any legal action to oppose such transaction is
authorized. As noted above, the BCL specifically permits directors, in
determining what is in the best interests of a corporation, to consider the
effects of a particular action on a broad range of constituencies that might be
affected by such action.
The Susquehanna Articles also contain a "business combination" anti-
takeover provision. Article 11, in general, prohibits Susquehanna from engaging
in a broad range of business combinations with any person or group having
beneficial ownership of 20% or more of the Susquehanna shares entitled to vote
generally for the election of directors unless such business combination: (i)
was approved by the Susquehanna Board of Directors prior to the time such person
or group acquired 10% of Susquehanna's voting shares; (ii) is approved by 75% of
Susquehanna's voting shares where the transaction satisfies specified fair price
criteria and the 20% shareholder has complied with specified procedural
requirements; or (iii) is approved by 85% of Susquehanna's voting shares.
In addition, Article 11 requires that, regardless of whether a 20%
shareholder is involved, the following transactions must be approved by 66 2/3%
of the outstanding Susquehanna shares entitled to vote on such matter: (i) a
merger or consolidation of Susquehanna with or into another corporation; (ii) a
disposition of a Susquehanna subsidiary by means of a merger or consolidation;
(iii) any merger or consolidation of a Susquehanna subsidiary in connection with
which Susquehanna issues shares in excess of 15% of its shares outstanding prior
to the transaction; (iv) any sale, lease, exchange, transfer or other
disposition of all or substantially all of Susquehanna's assets; or (v) any
sale, lease, exchange, transfer or other disposition of all or substantially all
of the assets or stock of a subsidiary accounting for more than 20% of
Susquehanna's consolidated assets.
The Susquehanna Articles also contain a provision which limits the voting
rights of any person or group acquiring more than 10% of Susquehanna's
outstanding voting shares. These limitations render it extremely unlikely that
a person or group subject to its provisions will be able to determine the
outcome of any transaction subject to Article 11. Shares held by such person or
group in excess of 10% of any class or series of Susquehanna stock are entitled
to only 1/10 of a vote per share, and all shares held by such person or group
may not cast more than 35% of the total number of votes which all holders of a
class or series of Susquehanna shares are entitled to cast with respect to a
particular matter. These provisions limiting voting rights may not be waived or
rendered inapplicable by the Susquehanna Board of Directors. These voting
rights limitations do not apply to a person or group that consummates a tender
offer which was an offer to acquire all outstanding Susquehanna Common Stock and
which tender offer complied with specified procedural and fair price
requirements.
In contrast to the array of anti-takeover provisions in the Susquehanna
Articles, the Cardinal Articles contain only three anti-takeover provisions
relating to business combinations. The first has been discussed above and
relates to similar provisions in Susquehanna's Articles which permit the board
of directors to consider a broad range of factors in evaluating an acquisition
proposal and authorizes any lawful action to resist such a proposal if the board
of directors so determines. The second anti-takeover provision appears at
Article 7 of the Cardinal Articles, which sets forth restrictions applicable to
a business combination, defined to include the merger, consolidation,
liquidation or dissolution of the corporation, or any action that would result
in the sale or other disposition of all or substantially all its assets. Any
such business combination requires the affirmative vote of the holders of at
least 75% of the outstanding shares of Cardinal Common Stock. The transactions
contemplated in the Cardinal Merger Agreement, specifically the Cardinal Merger,
are subject to this provision.
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In addition to Article 7, Article 10 of the Cardinal Articles declares that
control of Cardinal is an asset that belongs to all shareholders and that no
shareholder should have, either directly or indirectly, beneficial ownership of
25% or more of the outstanding shares of Cardinal Common Stock. In accordance
with this precept, the Cardinal Board of Directors is vested with the power,
upon a determination that a person has become the beneficial owner of more than
25% of Cardinal Common Stock, to issue warrants to shareholders who are not
affiliated with such person in such numbers as determined by the board of
directors. The warrants are to be issued without charge or cost; the price of
the Cardinal Common Stock which may be purchased in connection with such
warrants is set at 50% of the average transaction price for Cardinal Common
Stock over the preceding 12-month period. This provision would have the effect
of immediately diluting the holdings of such 25% shareholder to the extent such
warrants were exercised.
The First Capitol Articles also contain fewer anti-takeover provisions in
connection with business combinations than the Susquehanna Articles. As noted
above, the First Capitol Articles also permit its board of directors to consider
a broad range of factors in evaluating an acquisition proposal and authorize any
lawful action to resist such a proposal. In addition to this provision, Article
Tenth of the First Capitol Articles requires the affirmative vote of the holders
of at least 80% of the outstanding shares of First Capitol Common Stock in
connection with any merger, consolidation, liquidation or dissolution, or any
action that would result in the sale or other disposition of substantially all
of the assets of First Capitol. There are no other anti-takeover provisions in
the First Capitol Articles.
Amendment of Articles of Incorporation
The Susquehanna Articles generally may be amended by the shareholders by
the affirmative vote of a majority of the votes cast by all shareholders
entitled to vote thereon. The Susquehanna Articles provide, however, that the
provisions set forth in Articles 8 (relating to amendment of the Susquehanna
Bylaws), 9 (relating to shareholder action by written consent), 10 (relating to
the authority to take measures to oppose certain acquisition transactions) and
12 (relating to amendment of the Susquehanna Articles) may not be amended,
altered, changed or repealed without the vote of 75% of the outstanding
Susquehanna shares entitled to vote. Article 11 (relating to certain business
combinations) may only be amended by vote of 85% of the outstanding Susquehanna
shares entitled to vote (75% if the amendment is approved by 85% of a board
consisting only of "Continuing Directors", as such term is defined in Article
11). Article 14 (relating to the voting rights of shares held by certain
substantial shareholders) may only be amended by vote of 85% of the outstanding
Susquehanna shares entitled to vote (two thirds if the amendment is first
approved by two-thirds of a board consisting only of "Continuing Directors," as
such term is defined in Article 14).
The provisions in the Cardinal Articles relating to the vote required to
approve mergers, consolidations and the like (i.e., business combinations), may
only be amended by a 75% approving vote of all the outstanding Cardinal Common
Stock. Similarly, the provisions granting the Cardinal Board of Directors the
right to issue warrants to dilute the holdings of a person acquiring more than
25% of the outstanding Cardinal Common Stock may not be amended except by a 75%
approving vote of all the outstanding Cardinal Common Stock.
The provisions in the First Capitol Articles requiring a supermajority vote
of shareholders to approve a merger, consolidation or the like (i.e., business
combinations) may only be amended by an 80% approving vote of all the
outstanding First Capitol Common Stock.
Amendment of Bylaws
The Susquehanna Board of Directors is authorized to amend the Susquehanna
Bylaws, subject to the right of the shareholders to change such action by vote
of 75% of the outstanding Susquehanna shares entitled to vote (considered for
this purpose as a single class) cast at a meeting of the shareholders called for
that purpose.
The Cardinal Bylaws may be amended, repealed or changed by affirmative vote
of a majority of Cardinal directors, or by the affirmative vote of holders of
75% of the outstanding shares of Cardinal Common Stock at a meeting which
notices such purpose to the shareholders.
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The First Capitol Bylaws may be amended, repealed or changed by
affirmative vote of a majority of First Capitol directors, or by the affirmative
vote of holders of two-thirds of the outstanding shares of First Capitol Common
Stock at a meeting which notices such purpose to the shareholders.
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DIVIDENDS AND MARKET PRICES OF SECURITIES
Susquehanna
Susquehanna Common Stock is traded in the over-the-counter market and
quoted on The Nasdaq Stock Market National Market System under the symbol
"SUSQ." As of July 1, 1998, there were approximately 33,834,850 shares
outstanding and approximately 6,237 shareholders of record. Set forth below are
the high and low sales prices of Susquehanna Common Stock as reported on The
Nasdaq Stock Market for the first two quarters of calendar 1998, and the four
quarters of calendar 1997 and calendar 1996. Common Stock prices and dividends
have been adjusted to reflect Susquehanna's three-for-two stock splits payable
on July 2, 1997, and July 1, 1998. Also set forth below are the cash dividends
declared during such periods. The last sale price on April 10, 1998, the last
trading day before the announcement of the Cardinal Merger, was $23.92 per
share. The last sale price on April 15, 1998, the last trading day before the
announcement of the First Capitol Merger, was $24.67 per share.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
Market Dividends Market Dividends Market Dividends
Price Declared Price Declared Price Declared
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $21.67-26.00 $0.14 $14.33-17.55 $0.13 $11.55-13.33 $0.13
2nd Quarter $24.92-25.88 $0.14 $14.45-18.55 $0.14 $11.89-13.11 $0.13
3rd Quarter N/A N/A $17.25-21.17 $0.14 $11.78-13.61 $0.13
4th Quarter N/A N/A $17.67-25.92 $0.14 $12.89-15.89 $0.13
</TABLE>
Cardinal
There is no established public trading market for Cardinal's Common
Stock and there has been only limited and sporadic trading in Cardinal Common
Stock. However, bids for Cardinal Common Stock are quoted on the
over-the-counter Electronic Bulletin Board Interdealer System. On June 15, 1998,
there were 990,000 shares outstanding and approximately 485 shareholders of
record. Set forth below are the high and low sales prices of Cardinal Common
Stock as reported by Legg Mason Wood Walker, Inc., a market marker of Cardinal's
Common Stock, for the first two quarters of 1998 and the four quarters of
calendar 1997 and 1996. Common Stock prices and dividends have been adjusted to
reflect Cardinal's two-for-one stock split payable on November 14, 1996, to
shareholders of record October 31, 1996. Because of the absence of an
established public trading market, the reported sales are not necessarily
indicative of market value. The most recent sale to which management is aware is
a trade of 200 shares of Cardinal Common Stock that occurred on June 10, 1998
for $44.00 per share. Also set forth below are the cash dividends declared
during such periods.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
Market Dividends Market Dividends Market Dividends
Price Declared Price Declared Price Declared
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $30.50-38.50 $0.16 $19.25-20.875 $0.10 $16.25-17.25 $0.08
2nd Quarter $36.25-44.50 $0.18 $20.00-23.75 $0.11 $17.12-18.00 $0.10
3rd Quarter N/A N/A $20.00-23.50 $0.13 $17.12-18.37 $0.10
4th Quarter N/A N/A $20.00-36.75 $0.15 $17.75-19.75 $0.10
</TABLE>
First Capitol
There is no established public trading market for First Capitol's
Common Stock and there has been only limited and sporadic trading in First
Capitol Common Stock. However, bids for First Capitol Common Stock are quoted on
the over-the-counter Electronic Bulletin Board Interdealers System. On June 15,
1998, there were 505,933 shares outstanding and approximately 361 shareholders
of record. Occasionally, individuals sell and buy shares of First Capitol
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Common Stock in privately negotiated transactions. First Capitol acts as its own
transfer agent and keeps its own stock transfer ledger. According to such
ledger, the following number of shares were transferred during the years
indicated:
Year Number of Shares Transferred
---- ----------------------------
1997 41,788
1996 60,112
1995 71,013
1994 21,276
The lowest and highest prices per share known by the management of
First Capitol for the above years were between $18.00 and $38.00 per share,
respectively. These prices may or may not include any mark-up, mark-down or
commission.
On April 15, 1998, the last business day preceding public announcement
of the Merger, the last known stock price was $38.00 per share.
Set forth below are all cash dividends declared by First Capitol Bank:
Year Declaration Date Dividend Per Share ($)
---- ---------------- ----------------------
1995 4/19/95 0.10
1996 3/20/96 0.15
1997 4/16/97 0.175
1998 1/28/98 0.20
As of March 31, 1998, there were 361 holders of record of First Capitol
Common Stock.
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REGULATIONS AFFECTING DIVIDENDS
Susquehanna
Susquehanna's ability to pay dividends is largely dependent upon receipt of
dividends from its commercial bank and federal savings bank subsidiaries.
Susquehanna's banking subsidiaries include five national banks, a Maryland
state-chartered bank, two Pennsylvania state-chartered banks and a federal
savings bank. Both federal and state laws impose restrictions on the ability of
these banking subsidiaries to pay dividends. The Federal Reserve Board and the
Federal Deposit Insurance Corporation ("FDIC") have issued policy statements
which provide that, as a general matter, insured banks and holding companies may
pay dividends only out of current operating earnings.
National Banks
--------------
Under federal law, the approval of the Comptroller of the Currency
("Comptroller") is required for the payment of dividends in any calendar year by
a subsidiary national bank if the total of all dividends declared by such bank
in a calendar year exceeds that bank's net profits for that year combined with
its retained net profits for the preceding two calendar years. Moreover, no
dividends may be paid by a national bank if its "losses" equal or exceed its
undivided profits account, and no dividend may be paid in an amount in excess of
its "net profits then on hand." In addition, the Comptroller may find a
dividend payment which otherwise meets the criteria specified in the law,
nonetheless to constitute an unsafe or unsound practice.
Federal Savings Banks
---------------------
Federal law and regulations provide that federal savings banks are not
permitted to pay dividends on capital stock if their regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors at the time such savings bank
converted to stock form. (Susquehanna Bank, a successor to two such savings
banks, succeeded to such liquidation account obligations.) In addition, federal
savings banks which are subsidiaries of holding companies (as in the case of
Susquehanna Bank) are required to give the Office of Thrift Supervision (the
"OTS") 30 days' prior notice of any proposed declaration of dividends to the
holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions by federal savings banks. Under these
regulations, a savings bank that, immediately prior to, and on a pro forma basis
after giving effect to a proposed capital distribution, has capital (as defined
by OTS regulation) that is equal to or greater than the amount of its fully
phased-in capital requirements (a "Tier 1 Institution") generally is permitted
without OTS approval to make capital distributions during a calendar year in an
aggregate amount equal to the greater of: (i) up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half the
amount by which its total capital exceeded its fully phased-in risk-based
capital requirements at the beginning of the calendar year; or (ii) up to 75% of
its net income for the previous four quarters. A federal savings bank with
total capital in excess of current minimum capital requirements but not in
excess of the fully phased-in requirements (a "Tier 2 Institution") is permitted
to make capital distributions without OTS approval of up to between 25% and 75%
of its net income for the previous four quarters, less dividends already paid
for such period, depending upon the savings bank's level of risk-based capital.
A federal savings bank that fails to meet current minimum capital requirements
(a "Tier 3 Institution") is prohibited from making any capital distributions
without the prior approval of the OTS. A Tier 1 Institution that has been
notified by the OTS that it is in need of more than normal supervision will be
treated as either a Tier 2 or Tier 3 Institution. Susquehanna expects that its
federal savings bank subsidiary will continue to meet its fully phased-in
capital requirements and to continue to be authorized to pay dividends in
accordance with the provisions of the OTS regulations discussed above as a Tier
1 Institution.
The OTS proposed regulations on January 7, 1998 that would streamline the
dividend distribution rules described in the preceding paragraph and conform the
OTS requirements to those of national banks. The OTS proposal provides that the
total amount of capital distributions (including cash dividends) for any
calendar year generally may
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<PAGE>
not exceed net income for the calendar year plus retained net income for the
preceding two years, provided that after the proposed dividend distributions,
the institution will remain at least adequately capitalized. The OTS proposal
eliminates the Tier 1, Tier 2 and Tier 3 institution classifications (described
in the preceding paragraph) for purposes of capital distributions. Under the OTS
proposal, Susquehanna Bank would still be required to give the OTS 30 days'
prior notice of any proposed declaration of dividends to its holding company.
Pennsylvania Commercial Banks
-----------------------------
Under Pennsylvania law, dividends payable to Susquehanna are restricted to
the extent that each Pennsylvania state-chartered bank is required to set aside
to a surplus fund each year at least 10% of its net earnings until such surplus
equals the amount of its capital. Furthermore, the payment of a dividend may
not be made if it results in the reduction of the surplus available to the bank.
Maryland Commercial Banks
-------------------------
Under Maryland law, dividends may be paid to Susquehanna by its Maryland
state-chartered bank subsidiary out of undivided profits, with the approval of
the Maryland Bank Commissioner, from surplus in excess of 100% of its required
capital stock. If, however, the surplus of a Maryland bank is less than 100% of
its required capital stock, cash dividends may not be paid in excess of 90% of
net earnings.
In accordance with the above regulatory restrictions, each of Susquehanna's
banking subsidiaries has the ability to pay dividends and at December 31, 1997,
approximately $48,700,000 was available for the payment of dividends to
Susquehanna.
Cardinal
Cardinal's ability to pay dividends is largely dependent upon receipt of
dividends from FANBP.
Under federal law, the approval of the Comptroller is required for the
payment of dividends in any calendar year by a subsidiary national bank if the
total of all dividends declared by such bank in a calendar year exceeds that
bank's net profits for that year combined with its retained net profits for the
preceding two calendar years. Moreover, no dividends may be paid by a national
bank if its "losses" equal or exceed its undivided profits account, and no
dividend may be paid in an amount in excess of its "net profits then on hand."
In addition, the Comptroller may find a dividend payment which otherwise meets
the criteria specified in the law, nonetheless to constitute an unsafe or
unsound practice.
In accordance with the regulatory restrictions described above, as of
December 31, 1997, FANBP had approximately $2,500,000 available for the payment
of dividends. The Cardinal Merger Agreement permits Cardinal to make normal
dividend payments to its shareholders, consistent with past practice, prior to
the Cardinal Merger Effective Date.
First Capitol
First Capitol's declaration and payment of cash dividends is subject to
various restrictions set forth in the Banking Code and the Federal Reserve Act.
First Capitol is subject to certain restrictions under Pennsylvania law
relating to the declaration and payment of cash dividends. The Banking Code
provides that dividends may be declared and paid only from accumulated net
earnings (undivided profits) and may be paid in cash or property other than in
First Capitol's own shares. Where surplus is less than 50% of the amount of
First Capitol's capital (defined as par value multiplied by the number of shares
outstanding), no dividend may be paid or declared without the prior approval of
the Department of Banking until surplus is equal to 50% of the total amount of
capital. Where surplus is equal to or greater than 50% but less than 100% of
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<PAGE>
capital, until such time as surplus equals capital, prior to the declaration of
a dividend First Capitol must transfer to surplus an amount that is at least 10%
of its net earnings for the period since the end of the last fiscal year or any
shorter period since the declaration of a dividend. Additionally, the
Department of Banking has the power to issue orders prohibiting the payment of
dividends where such payment is deemed to be an unsafe or unsound banking
practice.
Under the Federal Reserve Act, if a member bank has sustained losses equal
to or exceeding its undivided profits then on hand, no dividend shall be paid,
and no dividends can ever be paid in an amount greater than such bank's net
profits less losses and bad debts. Cash dividends must be approved by the
Federal Reserve Board if the total of all such dividends declared by a member
bank in any calendar year, including the proposed cash dividend, exceeds the
total of the bank's net profits for that year plus its retained net profits from
the preceding two years less any required transfers to surplus or to a fund for
the retirement of preferred stock. Under the Federal Reserve Act, the Federal
Reserve Board has the power to prohibit the payment of cash dividends by a
member bank if it determines that such a payment would be an unsafe or unsound
banking practice.
In accordance with the regulatory restrictions discussed above, as of
December 31, 1997, First Capitol had approximately $1,442,987 available for the
payment of dividends to its shareholders. The First Capitol Merger Agreement
prohibits First Capitol from declaring, paying or setting aside any dividend or
other distribution in respect of the First Capitol Common Stock except, after
January 1, 1999, to declare and pay a dividend corresponding in amount and
timing with past practice.
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<PAGE>
BUSINESS OF CARDINAL
General
Cardinal, a Pennsylvania business corporation, is a bank holding company
whose sole operating subsidiary is FANBP, a national banking association
formerly named The First National Bank of Everett. Cardinal was organized at
the direction of the FANBP Board of Directors in November 1986 to acquire all of
the capital stock of FANBP pursuant to a Plan of Reorganization adopted by the
FANBP Board of Directors and subsequently approved in February 1987 by the
shareholders of FANBP. Under the terms of the Plan of Reorganization, each
outstanding share of common stock of FANBP was converted into shares of Cardinal
Common Stock, and FANBP became a wholly-owned subsidiary of Cardinal, all
effective as of June 1, 1987. Cardinal's only office is located at the main
office of FANBP.
As of December 31, 1997, Cardinal (on a consolidated basis) had assets of
$129,941,247, total deposits of $109,421,069 and total shareholders' equity of
$17,180,213. At March 16, 1998, Cardinal had 487 shareholders of record.
Cardinal acts as a holding company and does not directly engage in any
substantial business activities. Cardinal functions primarily as a holder of
all of FANBP's capital stock. As a bank holding company subject to the
jurisdiction of the Federal Reserve Board, Cardinal has the legal capacity to
acquire or form additional subsidiaries, including other banks and companies
engaged in nonbanking activities which the Federal Reserve Board has found to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Holding companies may also directly engage in such related
nonbanking activities. The types of nonbanking activities which are currently
permissible are subject to change by the Federal Reserve Board. Although
Cardinal has no present plans to engage in such activities, it may choose to do
so in the future.
Services
FANBP, established in 1902, is a national banking association under the
supervision of the Comptroller. FANBP's main office is located at 140 East Main
Street, Everett, Pennsylvania 15537.
FANBP conducts a general commercial banking business embracing
substantially all of the traditional lending and deposit functions of a local
commercial bank in Pennsylvania. FANBP's services include accepting time,
demand and savings deposits, including interest-bearing accounts, regular
savings accounts, money market accounts and fixed and variable rate certificates
of deposit. FANBP's services also include making secured and unsecured
commercial loans, including construction, agricultural and mortgage loans.
Additional services include providing consumer loans, residential mortgage
loans, home equity lines of credit, revolving credit loans, small business
loans, student loans and financing on new car and truck loans.
FANBP also offers travelers checks and safe deposit facilities. In
addition to regular business hours, FANBP offers 24 hour, seven days a week
automated banking services through its MAC system membership. FANBP does not
provide trust or agency facilities, as do some of its competitors, nor does it
currently transact international business.
In addition to its main office and administration center, FANBP has four
full-service branch offices, three in Bedford County, Pennsylvania and one in
Blair County, Pennsylvania. The three in Bedford County are located in Bedford,
Breezewood and Woodbury; the fourth, in Blair County, is located in
Duncansville.
FANBP has one subsidiary, F.N.B. Service, Inc., a Pennsylvania business
corporation, which was organized to hold repossessed property, but which is now
inactive.
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Regulation
Cardinal. Cardinal is registered as a bank holding company under the
Holding Company Act, and is therefore subject to regulation by the Federal
Reserve Board. Cardinal is required to file periodic reports of its operations
with, and is subject to inspection by, the Federal Reserve Board.
Under the policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is deemed to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), a bank holding company is required to guarantee that any
"undercapitalized" (as such term is defined in the statute) insured depository
institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency.
Cardinal, as an "affiliate" of FANBP within the meaning of the Federal
Reserve Act, is subject to certain restrictions under the Holding Company Act
regarding extensions of credit to it by FANBP, investments in the stock or other
securities of Cardinal by FANBP and the use of stock or other securities of
Cardinal as collateral for loans by FANBP to any borrower. Further, under the
Holding Company Act and Federal Reserve Board regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain
arrangements in connection with any extension of credit. These provisions
generally provide that a bank may not extend credit, lease or sell property or
furnish any service or fix or vary the consideration for any of the foregoing to
a customer on the condition or requirement that the customer provide some
additional credit, property or service to the bank, the bank's holding company
or any other subsidiary of the bank's holding company, or on the condition or
requirement that the customer not obtain other credit, property or services from
a competitor of the bank, the bank's holding company or any other subsidiary of
the bank's holding company.
FANBP. FANBP, as a nationally chartered bank, is subject to the National
Bank Act, as amended. It is subject to the supervision of, and to regular
examinations by, the Comptroller and is required to furnish periodic reports to
the Comptroller. The earnings of FANBP are affected by the policies of
regulatory authorities, including the Comptroller, the Federal Reserve Board and
the FDIC. An important function of the Federal Reserve System is to regulate
the money supply and interest rates. Among the instruments used to implement
those objectives are open market operations in United States government
securities, changes in reserve requirements against member bank deposits, and
limitations on interest rates that member banks may pay on time and savings
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and
their use may also affect rates charged on loans or paid for deposits.
FANBP is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have had and will continue
to have a significant effect on its deposits, loans, and investment growth, as
well as the rate of interest earned and paid, and are expected to affect FANBP's
operations in the future. The effect of such policies and regulations upon the
future business and earnings of FANBP cannot be predicted. The Federal Reserve
System also regulates the activities of Cardinal.
FDICIA requires prompt corrective action against undercapitalized
institutions and has established five capital categories. These are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Well capitalized institutions
significantly exceed the required minimum level for each capital measure
(currently, risk-based and leverage). Adequately capitalized includes
depository institutions that meet the required minimum level for each capital
measure. Undercapitalized represents depository institutions that fail to meet
the required minimum level for any relevant capital measure. Significantly
undercapitalized describes depository institutions that are significantly below
the minimum capital requirements. Currently FANBP and Cardinal are considered
well capitalized.
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Under the Community Reinvestment Act, as amended ("CRA"), as implemented by
regulations of the Comptroller, a bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the Comptroller
to assess an institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires public disclosure of an institution's CRA
rating and requires that the Comptroller provide a written evaluation of an
institution's CRA performance utilizing a four-tiered description rating system.
An institution's CRA rating is considered in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. A less than satisfactory performance may be the
basis for denying an application. In 1995, FANBP received a satisfactory
rating.
Competition
FANBP's principal market is in Bedford and Blair counties, which are
located in the west central portion of southern Pennsylvania, where it competes
for deposits and loans. In this area, FANBP competes primarily with other
banks, savings and loan associations, mutual savings banks and credit unions, as
well as brokerage firms and insurance companies. FANBP also competes with
mortgage bankers and finance companies in certain aspects of its lending
business. The primary factors in competing for deposits are the ability to
offer attractive rates and the convenience of office locations. The primary
factors in the competition for loans are interest rates, loan origination fees
and the range of products and services offered. Competition for origination of
real estate loans normally comes from other commercial banks, thrift
institutions, mortgage bankers, mortgage brokers and insurance companies. Many
of its competitors have significantly greater financial resources than FANBP and
larger branch networks. Some of these competitors also have advantages as a
result of the different regulations under which they operate and other factors,
including size and convenience of location.
The business of FANBP is not dependent upon any single customer and the
loss of any single or any few customers would not have a material adverse impact
upon FANBP.
Employees
At December 31, 1997, FANBP had 67 full-time and 11 part-time employees.
FANBP is not subject to a collective bargaining agreement and it believes that
its relations with its employees are good. Cardinal presently has no employees.
Certain Relationships and Related Party Transactions
There have been no material transactions between Cardinal and FANBP nor any
material transactions proposed with any director or executive officer of
Cardinal and FANBP or any associate of the foregoing persons. Cardinal and
FANBP have had, and intend to continue to have, banking and financial
transactions in the ordinary course of business with directors and officers of
Cardinal and FANBP and their associates on comparable terms and with similar
interest rates as those prevailing from time to time for other customers of
Cardinal and FANBP.
Total loans outstanding from Cardinal and FANBP at December 31, 1997, to
Cardinal's and FANBP's officers and directors as a group and members of their
immediate families and companies in which they had an ownership interest of 10%
or more was $2,921,891 or approximately 17% of the total equity capital of
Cardinal. Loans to such persons were made in the ordinary course of business,
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility
or present other unfavorable features. The largest aggregate amount of
indebtedness outstanding at any time during fiscal year 1997 to such group was
$2,921,891. The aggregate amount of
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indebtedness outstanding as of the latest practicable date, February 25, 1998,
to the above described group was $3,042,715.
Litigation
In June 1992, the Comptroller completed an examination of FANBP. As a
result of the examination, the Comptroller advised the FANBP Board of Directors
of its concerns regarding the condition of FANBP and requested that the FANBP
Board of Directors agree to develop and institute certain remedial programs to
respond to the Comptroller's concerns. To memorialize the matter, FANBP entered
into a written agreement with the Comptroller in which the FANBP Board of
Directors agreed, among other things, to conduct a comprehensive management
study, to revise its lending policy, to implement policies and procedures
relating to control of non-accruing loans, to improve loan administration, to
establish a program for maintenance of an adequate allowance for loan and lease
losses and to develop a three-year capital program. As a result of the letter,
FANBP was restricted in its ability to pay dividends. Management responded to
all of the Comptroller's concerns, and in their opinion, have met all mandates
of the letter. Effective November 15, 1994, the Comptroller concluded FANBP had
achieved substantial compliance with the letter. As a result, the Comptroller
removed FANBP from its special supervision program and terminated the letter.
The nature of FANBP's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. At the present
time no material proceedings are pending or are known to be threatened or
contemplated against FANBP by government authorities or any other person or
entity. There is no litigation or material proceedings by government
authorities or any other person or entity pending, or known to be threatened or
contemplated, against Cardinal.
Properties
FANBP owns its main office, which houses the administration center of FANBP
and Cardinal, four branch offices and certain parking facilities related to its
banking offices, all of which are free and clear of any lien. FANBP's main
office is located in the central business district of Everett, Pennsylvania.
Below is a table containing the location and date of acquisition of FANBP's
properties.
Office Address When Acquired
- ------ ------- -------------
Main Office and 140 East Main Street 1902
Administration Center Everett, PA 15537
Bedford Branch Office 601 East Pitt Street 5/13/85
Bedford, PA 15522
Breezewood Branch Office Main Street 8/4/58
Breezewood, PA 15533
Woodbury Branch Office Main Street 1/23/61
Woodbury, PA 16695
Altoona/Hollidaysburg Office 2430 North Business 220 2/28/95
Duncansville, PA 16635
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Impact of the Year 2000 Issue
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on Cardinal of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The "Year 2000 Issue" is the result of some computer programs having been
written using two digits rather than four to define the applicable year.
Computer systems that have date-sensitive software or date-sensitive hardware
may recognize a date using "00" as the Year 1900 rather than the Year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send statements, or engage in similar normal business activities.
Based on formalized assessment and testing, Cardinal has determined that
its mission critical computer systems will properly utilize dates beyond
December 31, 1999. Testing has been conducted of Cardinal's existing core
processing program files utilizing test data, with the results analyzed and
verified for accuracy. Although testing through March 3, 2000, has been
completed, additional testing will be conducted for dates extending beyond 2000
to further ensure compliance. Although all test information generated by the
system into the year 2000 indicates Cardinal's system is fully compliant, if the
system were not compliant, the Year 2000 issue could have a material adverse
impact on the operations of Cardinal.
Cardinal has initiated formal communications with all of its vendors and
large commercial customers to determine the extent to which Cardinal is
vulnerable as a result of the failure of those third parties to remediate their
own Year 2000 Issue. For significant vendors, Cardinal will validate that they
are Year 2000 compliant by December 31, 1998 or make plans to switch to a new
vendor or system that is compliant. For insignificant vendors, Cardinal will
not necessarily validate that they are Year 2000 compliant. However, for any
insignificant vendor who responds that they will not be compliant by December
31, 1998, Cardinal will seek a new vendor or system that is compliant. For
large commercial loan customers, Cardinal will take appropriate action based
upon each customer's response.
Cardinal has utilized both internal and external resources to identify,
reprogram and test its software and hardware for Year 2000 compliance. Cardinal
plans to complete the Year 2000 project no later than December 31, 1998 for all
critical systems. The total cost of the Year 2000 project was determined to be
immaterial and is not expected to have a material effect on the results of
operations of Cardinal.
As a bank holding company, Cardinal and its subsidiary are subject to the
regulation and oversight of various banking regulators. Their oversight
includes the provision of specific timetables, programs and guidance regarding
Year 2000 issues. Regulatory examination of the holding company and its
subsidiary's Year 2000 programs are conducted on a quarterly basis and reports
are submitted by Cardinal's subsidiary to banking regulators on a periodic
basis.
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BUSINESS OF FIRST CAPITOL
General
First Capitol is a commercial bank, chartered under Pennsylvania law, which
commenced operations on November 22, 1988. First Capitol provides retail and
commercial banking services primarily in the greater York area in York County
and currently operates a main office at 2951 Whiteford Road, York, Pennsylvania
and three offices which are located at 49 East Market Street, York,
Pennsylvania, 2290 South George Street, York, Pennsylvania, and 2170 White
Street, West York, Pennsylvania.
As of December 31, 1997, First Capitol had assets of $107,793,491, total
deposits of $80,828,444 and total shareholders' equity of $10,399,599. At March
31, 1998, First Capitol had 361 shareholders of record.
First Capitol offers a broad range of commercial banking services to
businesses and individuals, and focuses on the banking and credit needs of local
small to medium sized businesses, professionals and individual customers. As
part of that focus, First Capitol seeks to practice "relationship banking" which
emphasizes two related strategies. First, it seeks to establish consumer
relationships over a broad range of banking and financial services rather than
establishing relationships based only on a single selected service. Second,
First Capitol seeks to provide banking and financial services on a personal
basis, tailored to the specific needs of the customers, through both senior
management's personal knowledge of the customer's business and financial
situation, and through the direct participation of senior management in
structuring and customizing First Capitol's services to meet the customer's
requirements. First Capitol believes that "relationship banking" provides it
with the ability to be flexible and creative in serving the needs of its
customers and results in a more stable, long-term customer base.
Services
Credit services, offered predominantly to small and medium sized businesses
and their owners, include lines of credit, term loans, mortgage loans, revolving
credit lines and letters of credit. As described above, generally First Capitol
extends loans to existing customers or to qualified persons who are not
otherwise customers of First Capitol in order to seek other banking
relationships with such persons. First Capitol also offers consumer credit
services, including personal credit lines, credit cards, automobile loans, and
home equity lines of credit and loans.
Deposit services include a full range of commercial and personal deposit
services including checking accounts, NOW accounts, money market accounts,
certificates of deposit, telephone transfers, and automatic teller services via
the MAC inter-bank automated teller system.
Regulation
The earnings of First Capitol are affected by the policies of regulatory
authorities, including, the Federal Reserve Board and the FDIC. An important
function of the Federal Reserve System is to regulate the money supply and
interest rates. Among the instruments used to implement those objectives are
open market operations in United States government securities, changes in
reserve requirements against member bank deposits and limitations on interest
rates that member banks may pay on time and savings deposits. These instruments
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.
First Capitol is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have had, and will
continue to have, a significant effect on its deposits, loans and investment
growth, as well as the rate of interest earned and paid, and are expected to
affect First Capitol's operations in the future. The effect of such policies and
regulations upon the future business and earnings of First Capitol cannot be
predicted.
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FDICIA requires prompt corrective action against undercapitalized
institutions and has established five capital categories. These are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Well capitalized institutions
significantly exceed the required minimum level for each capital measure
(currently, risk-based and leverage). Adequately capitalized institutions
include depository institutions that meet the required minimum level for each
capital measure. Undercapitalized institutions represent depository
institutions that fail to meet the required minimum level for any relevant
capital measure. Significantly undercapitalized describes depository
institutions that are significantly below the capital minimum requirements.
Currently, First Capitol is considered well capitalized.
Under the CRA, as implemented by regulations of the Federal Reserve Board,
a bank has a continuing and affirmative obligation, consistent with its safe and
sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the Federal Reserve Board to assess an institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires that the Federal
Reserve Board provide a written evaluation of an institution's CRA performance
utilizing a four-tiered description rating system. An institution's CRA rating
is considered in determining whether to grant charters, branches and other
deposit facilities, relocations, mergers, consolidations and acquisitions. A
less than satisfactory performance may be the basis for denying an application.
In September, 1996, First Capitol received a satisfactory rating.
Competition
First Capitol's principal market is in greater York in York County,
Pennsylvania. In this area, First Capitol competes primarily with other banks,
savings and loan associations, and credit unions, as well as brokerage firms and
insurance companies. First Capitol also competes with mortgage bankers and
finance companies in certain aspects of its lending business. Many of its
competitors have significantly greater financial resources than First Capitol
and larger branch networks. Some of these competitors also have advantages as a
result of the different regulations under which they operate and other factors,
including size and convenience of location.
In commercial loan transactions, First Capitol's lending limit to a single
customer of approximately $1,837,000 enables First Capitol to compete
effectively for the credit needs of small businesses. This lending limit is,
however, considerably below that of various competing institutions, which makes
it difficult, and in some cases impossible, for First Capitol to compete
effectively where the amount of the loan or financing required is in excess of
this amount. In consumer transactions, which typically involve loans in amounts
substantially less than First Capitol's lending limit, First Capitol's believes
it is able to compete on a substantially equal basis with larger financial
institutions. In competing with other banks, as well as savings and loan
associations and other financial institutions, First Capitol seeks to provide
personalized services through officers' and directors' knowledge of First
Capitol's primary service area and customers, and through efforts to understand
fully the financial situation of relatively small borrowers. The size of such
borrowers, in the opinion of First Capitol's management, often inhibits close
attention to their needs by larger institutions.
The business of First Capitol is not dependent upon any single customer and
the loss of any single customer or any few customers would not have a material
adverse impact upon First Capitol.
Employees
At March 31, 1998, First Capitol had 40 full-time employees and 9 part-time
employees. First Capitol believes that its relations with its employees are
good.
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Certain Relationships and Related Party Transactions
There have been no material transactions, proposed or consummated, between
First Capitol and any director or executive officer of First Capitol, or any
associate of the foregoing persons. First Capitol has had and intends to
continue to have banking and financial transactions in the ordinary course of
business with directors and officers of First Capitol and their associates on
comparable terms and with similar interest rates as those prevailing from time
to time for customers of First Capitol.
Total loans outstanding from First Capitol at March 31, 1998, and December
31, 1997, to First Capitol's officers and directors as a group and members of
their immediate families and companies in which they had an ownership interest
of 10% or more was $1,136,429 and $1,247,475, respectively, or approximately
10.1% and 12%, respectively, of First Capitol's total equity capital accounts.
Such loans do not involve more than the normal risk of collectibility nor do
they present other unfavorable features.
Litigation
First Capitol is not involved in any legal proceedings that are material to
its financial condition.
Properties
First Capitol's leases space for its main office located at 2951 Whiteford
Road, York, Pennsylvania, which as an area of approximately 7,500 square feet.
The expirations for the leases at the main office are as follows: first floor
on October 31, 2004; second floor/operations center on October 31, 1999; second
floor/loan department on October 31, 2000; and second floor/boardroom on March
31, 2003. First Capitol also leases space for its branch office located at 492
Market Street, York, Pennsylvania. This branch has an area of approximately
3,500 square feet. The lease expires on April 30, 2004.
First Capitol owns its branches at 2290 South George Street, York,
Pennsylvania and 2170 White Street, West York, Pennsylvania. These branches
occupy 1,378 and 2,530 square feet, respectively.
Impact of the Year 2000 Issue
The following section contains forward-looking statements which involve
risks and uncertainties. First Capitol's actual impact of the Year 2000 issue
could materially differ from that which is anticipated in these forward-looking
statements as a result of certain factors identified below.
The Year 2000 problem arises from the long-standing practice of using two
digits to represent a year in most computer systems. For example, "97" would
represent 1997. Since only two digits are used, any operations in which a date
is used for comparisons, calculations, or sorts will be in error when we
encounter the Year 2000. Computer systems will not be able to handle the
ambiguity in "00" in the Year 2000 when it is compared to the "99" of the year
1999. This condition causes most instances of date use to produce erroneous
results.
First Capitol is sensitive to the growing concern associated with the
inception of the new millennium - Year 2000 and its impact on normal business
activities. In order to protect the integrity and security of its operations,
First Capitol is actively pursuing Year 2000 compliance. First Capitol is
committed to its customers and will continue to provide a high level of customer
service without disruption through this challenging time. Senior management has
created a Year 2000 compliance team of managers from all areas of the
organization.
First Capitol's Year 2000 Plan includes an ongoing assessment of all
computer hardware, software, and embedded microchip systems to determine
necessary renovations and replacements. First Capitol has already completed or
will be making the necessary renovations or replacements to avoid a material
adverse impact on its operations.
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First Capitol has taken a proactive approach in ensuring Year 2000
compliance by its vendors and has formally communicated with all significant
vendors to assure their ability to remediate their own Year 2000 issues.
Results of such communications have determined renovation and contingency
planning requirements. All computer hardware and software programs in use will
be tested by September 1, 1998. A written test plan was completed in June 1998.
Contingency planning will also be addressed during this test plan phase.
Commercial customers have received formal written notification of First
Capitol's Year 2000 compliance requirement, as well as Year 2000 questionnaires.
Individual customer responses will determine appropriate action necessary.
First Capitol has launched a customer awareness campaign, including statement
stuffers, customer seminars, and other means of communication to educate all
First Capitol commercial customers.
First Capitol will be undergoing both internal and external remediation and
testing to achieve Year 2000 compliance. An internal mainframe computer upgrade
is scheduled for June 1998. First Capitol will have most testing and renovation
completed by December 1998, allowing one year for final testing and minor
adjustments as necessary. First Capitol estimates that expenses pertaining to
the Year 2000 project will reach $150,000. This estimate is not a guarantee and
is based on assumptions of results pertaining to a series of events that have
not yet occurred. It represents senior management's best estimate at this time.
First Capitol's Year 2000 compliance program is consistent with the Federal
Financial Institutions Examination Council ("FFIEC") recommendations.
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IMPACT OF THE YEAR 2000 ISSUE ON SUSQUEHANNA
The following section contains forward-looking statements which involve
risks and uncertainties. Susquehanna's actual impact of the Year 2000 issue
could materially differ from that which is anticipated in these forward-looking
statements as a result of certain factors identified below.
The "Year 2000 Issue" is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any of
Susquehanna's computer systems that have date-sensitive software or date-
sensitive hardware may recognize a date using "00" as the Year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements, or engage in similar normal business
activities.
Based on an ongoing assessment, Susquehanna has determined that it will be
required to modify or replace portions of its software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999.
Susquehanna presently believes that as a result of modifications to existing
software and hardware and conversions to new software and hardware, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material adverse impact on the operations of Susquehanna.
Susquehanna has initiated formal communications with all of its vendors and
large commercial customers to determine the extent to which Susquehanna is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. Susquehanna's estimated Year 2000 project costs include the costs and
time associated with the impact of a third party's Year 2000 Issue, and are
based on presently available information.
For significant vendors, Susquehanna will validate that they are Year 2000
compliant by December 31, 1998 or make plans to switch to a new vendor or system
that is compliant. For insignificant vendors, Susquehanna will not necessarily
validate that they are Year 2000 compliant. However, for any insignificant
vendor who responds that they will not be compliant by December 31, 1998,
Susquehanna will seek a new vendor or system that is compliant. For large
commercial loan customers, Susquehanna will take appropriate action based upon
the customer's response.
Susquehanna will utilize both internal and external resources to reprogram,
or replace, and test its software and hardware for Year 2000 modifications.
Concurrent with the Year 2000 project, Susquehanna will also be converting all
its major data processing systems, both hardware and software, to current
technology. Susquehanna plans to complete both the Year 2000 and systems
conversion projects within 18 months or no later than June 30, 1999 for all
critical systems. The total cost of the Year 2000 and systems conversion
projects is estimated at $10 million. Of the total projects' cost,
approximately $7 million is attributable to the purchase of new software and
hardware which will be capitalized. The remaining $3 million will be expensed
as incurred over the next 18 months. These costs are not expected to have a
material effect on the results of operations of Susquehanna.
The costs of the projects and the date on which Susquehanna plans to
complete both the Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
As a bank holding company, Susquehanna and its subsidiaries are subject to
the regulation and oversight of various banking regulators. Their oversight
includes the provision of specific timetables, programs and guidance regarding
Year 2000 issues. Regulatory examination of the holding company and its
subsidiaries' Year 2000 programs
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are conducted on a quarterly basis and reports are submitted by Susquehanna
Bancshares, Inc. to the banking regulators on a periodic basis.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CARDINAL
The following pages of this report present management's discussion and
analysis of the consolidated financial condition and results of operations of
Cardinal Bancorp, Inc., ("Cardinal"), and its wholly-owned subsidiary First
American National Bank of Pennsylvania.
Cardinal Bancorp, Inc. is a one-bank holding company headquartered in
Everett, Pennsylvania. Cardinal's wholly-owned subsidiary is First American
National Bank of Pennsylvania. The subsidiary is engaged in commercial banking
activities which provide financial services to both consumer and commercial
customers. As a national bank, First American National Bank of Pennsylvania is
subject to the supervision, examination and regulation of the Office of the
Comptroller of the Currency. The Bank is a member of the Federal Deposit
Insurance Corporation (FDIC) and the deposits of the Bank's customers are
insured by the agency.
The following discussion is intended to focus on and highlight certain
information regarding Cardinal Bancorp, Inc. This discussion should be read in
conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere in this report.
Certain statements in this document may be considered to be "forward-
looking statements" as that term is defined in the U.S. Private Securities
Litigation Reform Act of 1995, such as statements that include the words
"expect", "estimate", "project", "anticipate", "should", "intend",
"probability", "risk", "target", "objective" and similar expressions or
variations on such expressions. In particular, this document includes forward-
looking statements relating, but not limited to, Cardinal's potential exposures
to various types of market risks, such as interest rate risk and credit risk.
Such statements are subject to certain risks and uncertainties. For example,
certain of the market risk disclosures are dependent on choices about key model
characteristics and assumptions and are subject to various limitations. By
their nature, certain of the market risk disclosures are only estimates and
could be materially different from what actually occurs in the future. As a
result, actual income gains and losses could materially differ from those that
have been estimated. Other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this document include, but are not limited to: general economic conditions in
market areas in which Cardinal has significant business activities or
investments; the monetary and interest rate policies of the Board of Governors
of the Federal Reserve System; inflation; deflation; unanticipated turbulence in
interest rates; changes in laws, regulations and taxes; changes in competition
and pricing environments; natural disasters; the inability to hedge certain
risks economically; the adequacy of loss reserves; acquisitions or
restructurings; technological changes; changes in consumer spending and saving
habits; and the success of Cardinal in managing the risks involved in the
foregoing.
Comparison of Results of Operation for the Three Months Ended March 31, 1998 and
1997
Summary
Cardinal's net income for the first quarter of 1998 was $431,000, a 4.9%
decrease over the net income of $453,000 reported in the first quarter of 1997.
Contributing to this reduction in earnings performance were the expenses
incurred-to-date regarding Cardinal's announced merger with Susquehanna
Bancshares, Inc.
Basic earnings per share ("EPS") decreased 6.5% from $0.46 per share for
the first quarter of 1997 to $0.43 per share for the first quarter of 1998.
Return on average assets ("ROA"), and return on average equity ("ROE"),
decreased from 1.40% and 11.45%, respectively, in the first quarter of 1997 to
1.27% and 9.97%, respectively, in the first quarter of 1998.
Total assets at March 31, 1998 of $137,085,000 were $7,477,000 higher than
one year ago. Loans totaled $76,925,000 at March 31, 1998, compared to
$68,550,000 at March 31, 1997, and deposits were $115,451,000 at March
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31, 1998 compared to $113,306,000 at March 31, 1997. Equity capital was
$17,391,000 at March 31, 1998, or $17.57 per share compared to $15,284,000, or
$15.44 per share at March 31, 1997.
Equity capital increased by 1.2% despite a decline in the fair value of
Cardinal's available-for-sale investment portfolio. Unrealized gains in the
available-for-sale investment portfolio net of tax effect decreased $62,000 from
$82,000 at December 31, 1997, to $20,000 at March 31, 1998. This negative
impact on capital was offset by earnings of $431,000 for the first three months
of 1998, of which $273,000 was retained as part of Cardinal's equity capital
with the balance having been distributed to shareholders as dividends.
Net Interest Income
The major source of operating revenues is net interest income, which rose
to a level of $1,471,000 in the first quarter of 1998 compared to $1,346,000 for
the same period in 1997. The increase was primarily due to an increase in the
volume of interest earning assets, the average volume of which increased from
$120,126,000 for the first quarter of 1997 to $126,308,000 for the first quarter
of 1998, an increase of $6,182,000 or 5.2% Net interest income is the income
which remains after deducting from total income generated by earning assets the
interest expense attributable to the acquisition of the funds required to
support earning assets. Income from earning assets includes income from loans,
income from investment securities and income from short-term investments. The
amount of interest income is dependent upon many factors including the volume of
earning assets, the general level of interest rates, the dynamics of the change
in interest rates, and levels of non-performing assets. The cost of funds
varies with the amount of funds necessary to support earning assets, the rates
paid to attract and hold deposits, rates paid on borrowed funds, and the levels
of non-interest bearing demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expenses and yields earned or paid on these assets and liabilities of Cardinal.
For purposes of calculating taxable equivalent interest income, tax-exempt
interest has been adjusted using a marginal tax rate of 34% in order to equate
the yield to that of taxable interest rates. Net interest income as a percentage
of net interest income and other income was 88% and 91% for the quarters ended
March 31, 1998 and 1997, respectively.
While net interest income increased $125,000 during the first quarter of
1998 compared to the first quarter of 1997, the net interest margin on a taxable
equivalent basis remained at 4.78% for the same periods. During the first
quarter of 1998, Cardinal began an investment program under which fixed rate
securities were converted to variable rate and/or shorter-term securities. The
yield on investment securities on a tax equivalent basis for the first quarter
of 1998 was 6.91% compared to a yield of 7.12% for the same period of 1997.
The increase in the yield is reflective of higher yielding fixed rate securities
purchased in 1997, many of which were then liquidated in the early part of 1998
as part of Cardinal's planned investment strategy. The strategy provides
securities with less price volatility in the event of future rate fluctuations.
Due to interest rates remaining fairly stable throughout 1997 and the
beginning of 1998, the yield on the loan portfolio on a tax equivalent basis
declined slightly from 9.18% in the first quarter of 1997 to 9.15% in the first
quarter of 1998. Cardinal has structured many of its loans with variable
interest rates in order to be able to react to nationwide changes in rates over
which Cardinal has no control. Further, a portion of the investment portfolio
contains securities with rates which adjust to specific indices that change with
the rate environment. As a result, Cardinal is able to reduce interest rate risk
and is more effectively able to maintain a necessary interest spread in a
changing economy.
Due to competitive pressures a slight increase resulted in the rate paid on
interest bearing deposits of 4.33% for the first quarter of 1998, compared to a
rate of 4.28% for the same period of 1997. Despite the increase in the rate
paid on interest bearing deposits, Cardinal's interest spread for the first
three months of 1998 increased slightly to 3.78% from 3.75% for the first three
months of 1997. The increase in interest spread also has had a positive effect
on Cardinal's net interest margin. Cardinal's interest spread for the first
three months of 1998 increased 3 basis points from the first three months of
1997, Cardinal's net interest margin comparison for the same periods shows an
increase of 18 basis points from 4.50% to 4.68%.
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Other Income
Non-interest income increased $70,000 or 50% from $139,000 in the first
quarter of 1997 to $209,000 in the first quarter of 1998. Gain on the sale of
securities was $25,000 in 1998 compared with $0 in 1997. Service charges on
deposits also increased $28,000, or 27% over the prior year. Additionally,
other noninterest income increased to $16,000 during the first three months of
1998 from $1,000 during the same period of 1997, an increase of $15,000. The
increase resulted primarily from additional net periodic pension income of
$12,000 in the first three months of 1998.
Other income as a percentage of net interest income and other income was
12% and 9% for the periods ended March 31, 1998 and 1997, respectively.
Other Expenses
Total other expenses increased $178,000 or 20% from $891,000 in the first
quarter of 1997 to $1,069,000 in the first quarter of 1998. The most
significant increase was in consulting and legal expense relating to the plan of
merger with Susquehanna Bancshares, Inc. in the amount of $118,000. Unrealized
losses on other real estate owned and losses on the sale of loan collateral
repossessed for the first quarter of 1998 was $18,000 compared with $0 for the
same period of 1997.
Income Taxes
Income tax expense increased $39,000 for the first three months of 1998
over the same period of 1997. Cardinal's effective tax rate increased to 29.5%
in the first quarter of 1998 from 23.7% in the first quarter of 1997. This is
the result of a reduction in Cardinal's tax-exempt income.
Risk Assets
Table 2 shows an increase of $265,000 in nonperforming assets from $480,000
at December 31, 1997 to $745,000 at March 31, 1998, while nonperforming assets
to period-end loans and OREO increased from 0.65% at December 31, 1997 to 0.97%
at March 31, 1998. Loan loss reserve to non-performing loans at March 31, 1998
was 158% compared with 308% at December 31, 1997. During the first quarter of
1998, Cardinal restructured a troubled loan that was previously classified as
past due 90 days at December 31, 1997.
Provision and Allowance for Loan Losses
As illustrated in Table 3, the provision was $0 in both the first quarter
of 1998 and the first quarter of 1997. Net charge-offs of $11,000 were realized
in the first quarter of 1998 while net recoveries of $9,000 were realized in the
same period of 1997. The allowance at March 31, 1998 was 1.23% of period-end
loans compared to 1.41% at March 31, 1997.
Capital Resources
Capital for the period ended March 31, 1998, was $17,391,000 while capital
at the end of 1997 totalled $17,180,000. Despite a decrease in the fair value
of securities held by Cardinal which are held as available-for-sale, Cardinal's
earnings during the first three months of 1998 of $431,000 resulted in an
increase in capital. Additionally, under Statement No. 130 of the Financial
Accounting Standards Board which has been adopted by Cardinal, increases and
decreases in comprehensive income and its components will be reported as equity
capital adjustments net of tax effect. During the first quarter of 1998, the
equity capital adjustment required by SFAS No. 130 was a decrease of $62,000.
Capital was also reduced during the first quarter of 1998 by dividend
distributions of $158,000.
Capital elements for Cardinal are segmented into two tiers. Tier I capital
represents shareholders' equity , while total capital includes the general
portion of the allowance for loan losses limited to 1.25% of risk-adjusted
assets. The
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minimum Tier I capital ratio is 4%; Cardinal's ratio at March 31,1998 was 20.5%.
The minimum total capital (Tier II) ratio is 8%; Cardinal's ratio at March 31,
1998 was 21.6%. The minimum leverage ratio is 3%; Cardinal's leverage ratio at
March 31, 1998 was 12.9%.
Market Risks
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations,
only interest rate risk and liquidity risk are significant to Cardinal.
Liquidity and interest rate risk are related but distinctly different from
one another. The maintenance of adequate liquidity -- the ability to meet the
cash requirements of its customers and other financial commitments -- is a
fundamental aspect of Cardinal's asset/liability management strategy.
Cardinal's policy of diversifying its funding sources -- purchased funds, and
deposit accounts -- allows it to avoid undue concentration in any single
financial market and also to avoid heavy funding requirements within short
periods of time.
However, liquidity is not entirely dependent on increasing Cardinal's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year amounted to $303,000 at March 31, 1998. These maturing investments
represent 1% of total investment securities. Additionally, Cardinal's investment
portfolio includes $31,222,000 on in mortgage-backed securities on which a
portion of the principal is repaid each month continually providing funds to
meet liquidity needs. Short-term investments amounted to $9,457,000 and
represent additional sources of liquidity. Consequently, Cardinal's exposure to
liquidity risk is not considered significant.
Closely related to the management of liquidity is the management of
interest rate risk which focuses on maintaining stability in the net interest
margin, an important factor in earnings growth. Interest rate sensitivity is
measured as the difference between the volume of assets and liabilities that are
subject to repricing in a future period of time. These differences are known as
interest sensitivity gaps. Cardinal utilizes gap management as the primary
means of measuring interest rate risk. Gap analysis identifies and quantifies
Cardinal's exposure or vulnerability to changes in interest rates in
relationship to Cardinal's interest rate sensitivity position. A rate sensitive
asset or liability is one which is capable of being repriced (i.e., the interest
rate can be adjusted or principal can be reinvested) within a specified period
of time. Subtracting total rate sensitive liabilities (RSL) from total rate
sensitive assets (RSA) within specified time horizons nets Cardinal's gap
positions. These gaps will reflect Cardinal's exposure to changes in market
interest rates.
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Cardinal Bancorp, Inc.
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL - TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
For the Three Month Period Ended For the Three Month Period Ended
March 31, 1998 March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Short-term investments $8,437 $116 5.50% $1,264 $17 5.38%
Investment securities:
Taxable 40,273 679 6.74% 42,008 697 6.64%
Tax-advantaged 2,539 61 9.61% 9,780 225 9.20%
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 42,812 740 6.91% 51,788 922 7.12%
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 75,064 1,718 9.15% 67,070 1,540 9.18%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest - earning assets 126,313 $2,574 8.15% 120,122 $2,479 8.25%
========================== ==========================
Allowance for loan losses (954) (963)
Other non-earning assets 8,748 9,772
- --------------------------------------------------------- --------------
Total assets $134,107 $128,931
========================================================= ==============
Liabilities & Equity
- --------------------
Deposits:
Interest-bearing demand $16,351 $60 1.47% $17,438 $72 1.65%
Savings 17,955 120 2.67% 19,345 128 2.65%
Time 62,664 853 5.44% 61,081 824 5.40%
Short-term borrowings 3,045 33 4.33% 1,063 20 7.53%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 100,015 $1,066 4.26% 98,927 $1,044 4.22%
========================== ==========================
Demand deposits 15,861 13,291
Other liabilities 958 891
- --------------------------------------------------------- --------------
Total liabilities $116,834 $113,109
- --------------------------------------------------------- --------------
Stockholders' equity 17,273 15,822
- --------------------------------------------------------- --------------
Total liabilities & stockholders' equity $134,107 $128,931
========================================================= ==============
Net interest income/yield on
average earning assets $1,508 4.78% $1,435 4.78%
========================== ==========================
</TABLE>
For purposes of calculating loan yields, the average loan volume
includes non-accrual loans. For purposes of calculating yields on non-taxable
interest income, the taxable equivalent adjustment is made to equate non-taxable
interest on the same basis as taxable interest. The marginal tax rate is 34%.
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Cardinal Bancorp, Inc.
Cardinal Bancorp, Inc.
TABLE 2 - RISK ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) March 31, 1998 December 31, 1997 March 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans $313 $311 $578
Restructured accrual loans 285 -- --
Other real estate owned 147 169 212
- -----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $745 $480 $790
=======================================================================================================================
As a percent of period-end loans and other
real estate owned 0.97% 0.65% 1.15%
Loans contractually past due 90 days and
still accruing $24 $215 --
<CAPTION>
TABLE 3 - ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - Beginning of period $958 $957
Additions charged to operating expenses 0 0
- -----------------------------------------------------------------------------------------------------------------------
958 957
- -----------------------------------------------------------------------------------------------------------------------
Charge-offs (15) (3)
Recoveries 4 12
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs (11) 9
- -----------------------------------------------------------------------------------------------------------------------
Balance - Period end $947 $966
=======================================================================================================================
Net charge-offs as a percent of average loans (annualized) 0.06% --
Allowance as a percent of period-end loans 1.23% 1.41%
Average loans $75,064 $67,070
Period-end loans 76,925 68,550
</TABLE>
Comparison of Results of Operations for the Years Ended December 31, 1997, 1996
and 1995
Summary of 1997 Compared to 1996
Cardinal's net income for the year ended December 31, 1997 increased to
$1,860,000 or 22% above 1996 net income of $1,524,000. Basic earnings per common
share were $1.88 in 1997 compared to $1.54 in 1996. Diluted earnings per share
were $1.85 in 1997 compared to $1.53 in 1996. Per share data has been restated
to reflect a 2 for 1 stock split which was effected in the form of a 100% stock
dividend which was paid November 14, 1996 to shareholders of record on October
31, 1996. Return on average assets, ("ROA"), and return on average equity,
("ROE"), increased from 1.20% and 10.01%, respectively, in 1996 to 1.41% and
11.31%, respectively, in 1997. The return on average assets and the return on
average shareholders' equity are computed based upon average assets and
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average equity without adjustment for the impact of unrealized securities gains
or losses. During 1997, average assets totalled $131,644,000, an increase of
$4,418,000 or 3.5% from the 1996 average asset total of $127,226,000.
The $336 thousand or 22% increase in net income from $1,524,000 in 1996 to
$1,860,000 in 1997 was primarily the result of improved net interest income due
to increased levels of earning assets and reduced salaries and benefits expense.
Net Interest Income
The major source of operating revenues is net interest income which rose to
a level of $5,739,000 in 1997, $305,000 or 5.6% above the $5,434,000 attained in
1996. The net interest margin, on a tax equivalent basis was 4.86% during 1997
compared with 4.83% in 1996. Net interest income is the income which remains
after deducting from total income generated by earning assets the interest
expense attributable to the acquisition of the funds required to support earning
assets. Income from earning assets includes income from loans, income from
investment securities and income from short-term investments. The amount of
interest income is dependent upon many factors including the volume of earning
assets, the general level of interest rates, the dynamics of the change in
interest rates, and levels of non performing loans. The cost of funds varies
with the amount of funds necessary to support earning assets, the rates paid to
attract and hold deposits, rates paid on borrowed funds, and the levels of non-
interest-bearing demand deposits and equity capital.
Table 1 presents average balances, taxable equivalent interest income and
expense and yields earned or rates paid on these assets and liabilities of
Cardinal. For purposes of calculating taxable equivalent interest income, tax-
exempt interest has been adjusted using a marginal tax rate of 34% in order to
equate the yield to that of taxable interest rates. Net interest income as a
percentage of net interest income and other income was 90%, 91% and 92% for the
twelve months ended December 31, 1997, 1996 and 1995, respectively.
Table 2 analyzes changes in interest income by applying either volume or
rate changes to interest sensitive assets and liabilities. Table 2 illustrates
that the growth in interest income in 1997 over 1996 was primarily attributable
to an increase in volume. The average growth in interest-earning assets of
$4,233,000 in 1997 over 1996 was due to loan growth as noted in Table 1. As
illustrated in Table 1, the tax equivalent yield on earning assets for 1997
remained at the 1996 level of 8.29%. The yield on the loan portfolio dropped
from 9.42% in 1996 to 9.36% in 1997, primarily as a result of competitive
pressures. However, an increase of $7,033,000 in average loans outstanding
enabled Cardinal to maintain its prior year tax equivalent yield on earning
assets in 1997 as the mix of earning assets moved to higher yielding loans from
lower yielding investments.
During 1997, the yield on Cardinal's taxable securities increased 17 basis
points from 6.58% to 6.75%. In August of 1997, to reduce the volatility in the
market value of the investment portfolio, securities were sold, including longer
term tax exempt securities, and replaced with shorter term higher yielding
securities. The planned investment transactions will enable Cardinal to
maintain after tax income at the current level while shortening the duration
(life) of the investment portfolio. As a result, the yield on Cardinal's
taxable securities portfolio increased. Furthermore, the sale of some of
Cardinal's higher yielding tax exempt securities caused an overall decline on
the tax-exempt portfolio yield.
Securities income on a tax equivalent basis decreased $540,000 or 14.1% in
1997 from the previous year. In 1997, change in volume resulted in a decrease
in securities income of $598,000 while rate changes increased investment
earnings by $58,000. As noted above, yields on taxable securities increased 17
basis points in 1997 due primarily to replacing certain securities with shorter
term, higher yield securities while taxable equivalent yields on tax-exempt
securities decreased 17 basis points. As noted above, because many of the
higher yielding tax-exempt securities were liquidated in 1997 as part of
Cardinal's planned investment strategy, the remaining tax-exempt securities did
not bear rates as high as those previously held which resulted in an overall
decline in the yield on tax-exempt securities.
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Table 2 also illustrates that the growth in interest expense in 1997 over
1996 was attributable to increased volume. Increased levels of time deposits
and short-term borrowings were primarily the reason for the $115,000 increase in
interest expense. The average funding costs rose slightly in 1997 to 4.25% from
4.21% in 1996 primarily due to reduced levels of interest-bearing demand and
savings and increased levels of higher costing time deposits. The relatively
small changes in rates in 1997 was reflective of the stability in interest rates
throughout the nation resulting from controlled economic growth and a low rate
of inflation.
A positive influence on the ability of Cardinal to maintain its net
interest margin at 4.81 percent or better during 1995 through 1997 has been the
increase in noninterest-bearing demand deposits and earnings retention.
Variances do occur in the net interest margin as an exact repricing of assets
and liabilities is not possible. A further explanation of the impact of asset
and liability repricing is found in the Risk Management section of this
discussion.
Provision and Allowance for Loan Losses
Cardinal's provision for loan losses is an expense charged to earnings in
anticipation of estimated losses attributable to loans based upon the adequacy
of the allowance for loan losses to provide for such losses. The adequacy of
the allowance for loan losses is based upon management's quarterly loan
portfolio review. The purpose of the review is to assess loan quality, identify
impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential
charge-offs and recoveries, and assess general economic conditions in the
markets it serves.
Commercial and commercial real estate loans are rated by loan officers and,
periodically, by loan review personnel. Consumer and residential real estate
loans are generally reviewed in the aggregate as they are of relative small
dollar size and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency and historic loss experience, consideration is also given to
examinations performed by the regulatory authorities.
To determine the allowance for loan losses and corresponding provision, the
amount required for specific allocation is first determined. For all types of
commercial loans, this amount is based upon specific borrower data determined by
reviewing financial status, cash flow and adequacy of collateral of borrowers
with indebtedness to Cardinal in excess of specific dollar amounts as well as
individual nonperforming, delinquent, or potentially troubled credits. In
addition, a general allocation is also determined using percentages derived from
historical loss data. Consumer and residential real estate allowances, which may
include specific allocations, generally are based upon recent charge-off and
delinquency history, other known trends and expected losses over the remaining
lives of these loans, as well as the condition of local, regional and national
economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio. Table 10 presents this
allocation.
The loan portfolio represents loans made primarily within Cardinal's market
area which includes Bedford and Blair Counties and parts of Fulton and
Huntingdon Counties.
Determining the level of the allowance for possible loan losses at any
given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and rapidly
changing and subjective information. The review of the loan portfolio is a
continuing event in light of a changing economy and the dynamics of the banking
and regulatory environment. In management's opinion, the allowance for loan
losses is adequate at December 31, 1997. As illustrated in Table 3, there has
been no provision for loan losses in 1997, 1996, or 1995. Net recoveries, as
seen in Table 3, were $1,000 in 1997 compared with net charge-offs of $376,000
and $161,000 in 1996 and 1995, respectively. As a result, the allowance for
loan losses at December 31, 1997, was 1.30% of period-end loans and leases, or
$958,000 compared with 1.42% or $957,000 at December 31, 1996. The
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allowance for loan losses as a percentage of non-performing loans increased from
164% at December 31, 1996 to 308% at December 31, 1997.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience increased difficulty, and the level of
non-performing loans and assets, charge-offs and delinquencies could rise and
require increases in the provision.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan losses. They
may require additions to allowances based upon their judgment about information
available to them at the time of examination.
It is the policy of Cardinal not to renegotiate the terms of a loan simply
because of a delinquency status. Rather, a loan is transferred to nonaccrual
status if it is not well secured and in the process of collection, and is
delinquent in payment of either principal or interest beyond 90 days. Interest
on nonaccrual loans is recorded when received, but only after receipt of the
entire principal balance of any such loan or after the loan is returned to
accrual status. Loans past due 90 days or more and still accruing interest are
loans that are generally well-secured, in the process of collection and expected
to be restored to a current status in the near future. Restructured loans are
those loans whose terms have been modified to provide for a reduction of
interest or principal payments because of borrower financial difficulties.
Interest income received on non-performing loans in 1997 and 1996 was $13,000
and $7,000, respectively. Interest income which would have been recorded on
nonperforming loans under the original terms was $42,000 for 1997 and $108,000
for 1996. At December 31, 1997, Cardinal had no outstanding commitments to
advance additional funds with respect to these nonperforming loans.
Table 3 is an analysis of the provision levels as well as the activity in
the allowance for loan losses for the past five years. Table 4 reflects the
five-year history of non-performing assets and loans contractually past due 90
days and still accruing. Total nonperforming assets at December 31, 1997 and
1996, of $479,000 and $813,000, respectively, includes $168,000 and $229,000,
respectively, in other real estate acquired through foreclosure. Non-performing
assets as a percentage of period-end loans and other real estate owned was 0.65%
at December 31, 1997, the lowest level this decade. Loans classified as
impaired are also included on Table 4. A loan is considered impaired when,
based upon current information and events, it is probable that Cardinal will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. At December 31, 1997, Cardinal's
impaired loans totalled approximately $289,000 or 55% of total nonperforming
loans as compared to $60,000 or 10% of total nonperforming loans at December 31,
1996.
Table 4 reflects a restructured troubled debt total of $170,000 at December
31, 1995. The loan represented by such amount was restructured in 1993 but was
on nonaccrual status from the date of restructuring until 1995. Based upon the
borrowers sustained period of repayment performance and the reasonable prospect
for repayment under the revised loan terms, the loan was returned to accrual
status in 1995. Cardinal has not restructured any other loans during 1997 or
1996.
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property served as
collateral or the fair market value of the property as determined by a current
appraisal less estimated costs to sell (fair value). Prior to foreclosure, the
recorded amount of the loan is written-down if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income and any losses determined as a result of periodic valuations
are charged to other operating expense.
Loans with principal and/or interest delinquent 90 days or more and are
still accruing interest were $215,000 at December 31, 1997. Although the
economy is stable, softness in certain areas of the economy may adversely affect
certain borrowers and may cause additional loans to become past due beyond 89
days or be placed on non-accrual status because of uncertainty of receiving full
payment of either principal or interest on these loans.
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Potential problem loans consist of loans which are performing but for
which potential credit problems have caused Cardinal to place them on its
internally monitored loan list. At December 31, 1997, such loans, not included
in Table 4, amounted to $930,000. Depending upon the state of the economy and
the impact thereon to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
Other Income
Noninterest income, recorded as other income, consists of service charges
on deposit accounts, commissions, gains and losses on security transactions, net
gains or losses on other real estate owned and other miscellaneous income, such
as safe deposit box rents. Noninterest income as a percentage of net interest
income and other income was 10%, 9% and 8% for 1997, 1996, and 1995,
respectively.
Noninterest income exclusive of net securities gains amounted to $589,000
in 1997, an increase of $61,000 from $528,000 in 1996. This change was
primarily due to an increase in income from service charges on deposit accounts
of $54,000. There were net gains on sales of securities of $31,000 and $5,000
in 1997 and 1996 compared to no gains on sales of securities in 1995.
Noninterest income in 1995 was $476,000.
Other Expenses
Noninterest expenses are categorized into several main groupings: employee-
related expenses, which include salaries, fringe benefits, and employment taxes;
occupancy and equipment expenses, which include depreciation, maintenance,
utilities, and insurance; data processing expenses; FDIC insurance premiums on
deposits; legal and professional fees for services provided to the company;
other real estate expenses; Pennsylvania bank shares tax, supplies and
stationery expenses; and other expenses (detailed in Table 5) incurred in
operating Cardinal's business.
Noninterest expense decreased $291,000, or 7%, in 1997 over 1996, primarily
due to a $278,000 decrease in salaries and employee benefits. Salaries and
employee benefits decreased due to the cost of the retirement of Cardinal's
former Chief Executive Officer. On December 9, 1996, Cardinal, FANBP and James
B. Bexley entered into an Agreement, the effect of which was to provide the
terms of Mr. Bexley's retirement from Cardinal and FANBP as President and Chief
Executive Officer as well as Mr. Bexley's resignation from the Board of
Directors of each of Cardinal and FANBP. Pursuant to the terms of the
Agreement, Cardinal and FANBP agreed to pay Mr. Bexley $279,000, with applicable
taxes withheld, in two separate payments. The first payment of $135,000, less
applicable deductions, was paid in December, 1996; the second payment of
$144,000, less applicable deductions, was paid in January, 1997. Salary and
employee benefits expense for 1996 includes the accrued liability for all
payments made to Mr. Bexley pursuant to this Agreement. The amount of this
payment represents a non-recurring expense. The payments, pursuant to this
Agreement, did not adversely impact liquidity, capital resources or results of
operations during 1997. In addition to the cash amounts paid to Mr. Bexley,
Cardinal agreed to provide certain health and life insurance benefits to Mr.
Bexley through February 14, 1999. The present value of the cost of such
benefits in the amount of $15,000 was also accrued and charged to expense during
1996. It is presently anticipated that such benefits will not adversely impact
future income in a material amount.
Cardinal's noninterest expense was further lessened by the reduction of the
net cost of operation and disposal of other real estate owned in 1997 of
approximately $55,000. The reduction was primarily the result of a net decrease
in the write-down and the associated expenses of one particular other real
estate owned property of approximately $40,000 from 1996 to 1997. The decreases
in noninterest expense were offset with an increase in data processing expense
of approximately $34,000. The increase was due in part to increased transaction
volume of FANBP's customers.
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Income Taxes
Income tax expenses for 1997, 1996 and 1995 were $695,000, $347,000 and
$226,000, respectively. The large increase in income tax expense during 1997
was due in part to an increase in net income for 1997 but was also reflective of
a reduction of tax exempt income in 1997. As tax-advantaged loans and
securities continue to mature, and the opportunities for investment in
additional tax-advantaged enterprises become less attractive due to certain
provisions of the Tax Reform Act of 1986, effective tax rates may increase in
the years ahead. Cardinal's effective tax rate for 1997 was 27.20% compared to
18.56% in 1996.
For 1996, income before income taxes decreased while income tax expense
increased. The increase in income tax expense during 1996 was in part
reflective of a reduction of 1995 income tax expense resulting from adjustment
of a valuation allowance for deferred income taxes. Based upon Cardinal's
earnings in 1995 and prior years and the reasonable expectation of continued
future earnings, during 1995 the realization of the full amount of deferred tax
assets, other than the Alternative Minimum Tax Credit carryforwards, was deemed
more likely than not. Consequently, the valuation allowance was eliminated,
except for an amount equal to the Alternative Minimum Tax Credit carryforwards,
which resulted in a reduction of book income tax expense in 1995 in the amount
of $290,000.
In February 1992, the Financial Accounting Standards Board issued SFAS 109.
This statement establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during the
current and preceding years. It requires an asset and liability approach for
financial accounting and reporting for income taxes.
Under SFAS 109, Cardinal recognizes deferred tax liabilities for taxable
temporary differences (the difference between financial and tax bases), and
deferred tax assets for deductible temporary differences. Management believes
the deferred tax assets recognized at December 31, 1997, will be realized in
future tax returns. While the ultimate realization of deferred tax assets is
dependent on future taxable income, taxable income in prior carryback years and
future reversals of existing taxable temporary differences are sufficient to
offset the future reversals of deductible temporary differences without
implementing any tax strategies or assuming future taxable income.
Financial Condition
Investment Securities
Cardinal follows SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities". This accounting pronouncement requires the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost and except for limited circumstances, may not be sold prior to
maturity. Securities identified as " available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. Securities
identified as "trading account securities" are marked-to-market with the change
recorded in the income statement.
Presently, Cardinal does not engage in trading activity, but does engage in
active portfolio management which requires its security portfolios be identified
as "available-for-sale." While SFAS 115 requires segregation into "held-to-
maturity" and "available-for-sale" categories (see Table 6), it does not change
Cardinal's policy concerning the purchase of only high quality securities.
Strategies employed address liquidity, capital adequacy and net interest margin
considerations. Table 7 illustrates the maturities of these security portfolios
and the weighted average yields based upon amortized costs. Yields are shown on
a tax equivalent basis assuming a 34% federal income tax rate. At December 31,
1997, Cardinal held no securities of one issuer, other than obligations of U. S.
Government agencies or U.S. Government-sponsored agencies, where the aggregate
book value exceeded ten percent of stockholders' equity.
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<PAGE>
During the first quarter of 1996, in anticipation of declining interest
rates, Cardinal's investment strategy was to liquidate some of its variable rate
investments, especially those which were tied to indexes which reacted more
dramatically to declines in interest rates, and to reinvest in fixed rate
securities. Although the Federal Reserve Discount Rate declined 25 basis points
in February of 1996 and remained at that level throughout 1996, because economic
indicators and the inflation rate did not clearly indicate if a rate decrease or
a rate increase was necessary in order to keep the economy from slowing too
dramatically and to keep inflation under control, bond rates gradually increased
through much of 1996. As a result, the market value of Cardinal's investment
portfolio declined.
During the third quarter of 1997, Cardinal liquidated a number of its
longer term fixed rate securities and replaced them with mortgaged-backed
securities. At the time, municipal securities were priced higher than normal
resulting in Cardinal being able to receive a comparatively more attractive
price. Additionally, the mortgage-backed securities purchased to replace the
municipals tend to have a less volatile price in the event of rate changes.
Because economic indicators and the inflation rate did not clearly indicate
whether rates would increase or decrease throughout the last half of 1997, it
was felt securities which reacted with less volatility in the event of rate
changes would be preferred. In fact, the prime rate did not change during the
last three quarters of 1997 and other market rates fluctuated throughout 1997.
However, in general, rates declined during the last six months of the year. As
a result, the market value of Cardinal's investment portfolio increased. At
December 31, 1996, unrealized losses on Cardinal's available-for-sale securities
exceeded unrealized gains by $758,000. By December 31, 1997, Cardinal's
available-for-sale securities portfolio contained an unrealized gain of
$124,000. As a result, after adjusting the net unrealized losses and gains by
applicable deferred income taxes, total equity of Cardinal was positively
impacted by $582,000 in 1997 as the "net unrealized gains or losses for
available-for-sale securities", changed from a negative $501,000 at December 31,
1996 to a positive $81,000 at December 31, 1997. Cardinal's investment
portfolio is utilized in part to manage interest rate risk and to provide
liquidity. As a necessary element of such utilization, Cardinal continually
strives to limit net unrealized losses within the portfolio, however, unrealized
losses may sometimes exist.
Although Cardinal's investment portfolio contains mortgage backed
securities, the portfolio does not contain any collateralized mortgage
obligations (CMO's) and contains only one real estate mortgage investment
conduit (REMIC) with a carrying value of $418,000 at December 31, 1997. The
certificates of the REMIC owned by Cardinal, however, are mortgage pass-through
certificates which, based upon the current interest rate and interest cap, is
considered non high-risk. Cardinal's investment portfolio did not contain any
securities defined as derivatives at December 31, 1997.
Loans
Table 8 presents the loans outstanding, by type of loan, for the past five
years. Loan growth for 1997, was 10.1%, or $6,767,000. At December 31, 1997,
loans net of unearned income represented 61.1% of earning assets as compared to
56.6% at December 31, 1996. Loan growth in 1997 was mainly associated with real
estate mortgage loans which increased $5,593,000.
Cardinal's loan volume has increased steadily over the past three years
while credit quality within the portfolio has been maintained. Cardinal has
improved its lending underwriting standards to reduce the potential for loan
losses. Procedures are in place under which Cardinal conducts a thorough review
of the operations of commercial loan applicants including analyses of balance
sheets, income statements and cash flows of the applicant. In addition to
reviews conducted by a credit analyst and the applicant's loan officer, prior to
approval of loans in excess of specific dollar limits financial data are
evaluated by loan review committees consisting of FANBP's loan officers and/or
members of the Board of Directors. Furthermore, detailed appraisals of
collateral offered to secure loans which are approved are generally required.
These enhancements have been maintained in improving asset quality while
increasing the loan volume. Improvements in Cardinal's credit underwriting
standards continues to impact the dollar amount of mobile home loans contained
within the portfolio which declined in excess of $1,018,000 in 1997.
Loans to consumers consist primarily of installment loans extended for
personal, family and household purposes, but also include student loans and
personal revolving lines of credit. Loans to consumers are generally
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secured by tangible personal property or real estate and, in order to protect
itself from declining asset values, Cardinal generally will lend no more than
80% of the market value of the collateral pledged. Unsecured loans are made to
borrowers who are able to provide financial statements which, upon review by
Cardinal, demonstrate a substantial net worth of the borrower. Such borrowers
must also have an established earnings record which indicates the ability to
repay and must have a favorable credit history.
Cardinal has historically reported a significant amount of loans secured by
real estate, as depicted in Table 8. This includes loans which have real estate
collateral taken as additional security not related to the acquisition of the
real estate pledged. Open-end home equity loans amounted to $1,721,000 at year
end and an additional $2,483,000 was lent against junior liens on residential
properties. Senior liens on 1 - 4 family residential properties totaled
$16,745,000 and the $20,135,000 in loans secured by non-farm, non-residential
properties include real estate collateralization of operating lines, or term
loans that finance equipment, inventory or receivables. Loans secured by
farmland totaled $3,062,000 at December 31, 1997.
As reflected in Table 3 below, net recoveries on residential mortgages for
the years 1993 through 1997 averaged approximately $3,000 per year. Residential
real estate values have been steadily increasing in Cardinal's market area. The
values of the real estate securing such loans are expected to continue to rise
slowly and losses are expected to remain low. Net charge-offs on consumer loans
have averaged $105,000 per year over the last five years. Of such amount,
approximately $93,000 or 88.6% have been attributable to mobile home loans
originated in part through the involvement of a third party servicer. Many of
such loans were granted with more lenient credit standards and with more lenient
collateral loan to value ratios than were required on direct consumer loans. As
alluded to above, Cardinal has redefined its underwriting standards with respect
to this type of loan, however, the full impact of the change in standards will
not be realized for several years. Net charge-offs of consumer loans as a
percentage of average consumer loans for 1995 through 1997 have totalled .71%.
Cardinal also originates loans for commercial and agricultural purposes.
As noted in Table 11, Cardinal's loan portfolio contains no significant
concentrations other than geographic. By limiting concentrations of credit
within any one industry, the risk of loss due to economic changes which may
negatively impact a specific industry is likewise limited. Additionally, most
commercial and agricultural loans which are made by Cardinal are secured by
assets which are assigned to Cardinal or are made subject to a security interest
in favor of Cardinal. Mortgages secured by commercial realty are generally
limited to 70% of market value. Loans secured by business personalty are also
generally limited to 70% of the market value of the underlying collateral,
however, if assets which secure a loan are not readily marketable or are
susceptible to a rapid decline in value, Cardinal may finance a lesser
percentage of the collateral's value. As in the case of consumer loans, loans
which may not be fully secured are made to commercial borrowers which possess
substantial net worth, have established earnings records and have favorable
credit histories.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans. These loans with maturities
after 1998 consist of $3,982,000 with fixed rate pricing and $5,232,000 with
variable rate pricing.
Cardinal makes contractual commitments to extend credit and extends lines
of credit which are subject to Cardinal's credit approval and monitoring
procedures. Commitments to extend credit in the form of commercial lines of
credit increased to $11,356,000 at December 31, 1997, from $8,335,000 at
December 31, 1996. Cardinal also issues stand-by letters of credits to its
commercial customers. The risk associated with stand-by letters of credit is
essentially the same as the credit risk involved in other loan extensions to
commercial customers. Stand-by letters of credit decreased to $210,000 at
December 31, 1997, from $246,000 at December 31, 1996. Commitments to extend
credit to consumers secured by residential real estate increased to $1,874,000
at December 31, 1997, from $1,578,000 at December 31, 1996. Unsecured consumer
credit lines increased to $850,000 at December 31, 1997, from $685,000 at
December 31, 1996.
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<PAGE>
Deposits
Cardinal's deposit base is consumer-oriented, consisting of time deposits,
primarily certificates of deposit of various terms, interest-bearing demand
accounts, money market deposit accounts, savings accounts, and demand deposits.
The average amounts of deposits by type are summarized in Table 12. Although
certificates of deposit of $100,000 and over declined in 1997, such deposits are
generally considered more volatile. Cardinal does not rely upon time deposits
of $100 thousand or more as a principal source of funds as they represent less
than 9% of total deposits. Table 13 presents a breakdown of maturities of time
deposits of $100 thousand or more as of December 31, 1997.
Risk Management
The principal purposes of asset-liability management are to insure adequate
liquidity exists to meet operational needs and to maximize current net interest
income while minimizing the risk to future earnings of negative fluctuations in
net interest margin. In order to maintain an appropriate net interest margin
and reduce the risk associated with interest rate movements, Cardinal actively
manages the interest rate sensitivity of its assets and liabilities.
Cardinal's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Because of the nature of Cardinal's operations,
Cardinal is not subject to currency exchange or commodity price risk and, since
Cardinal has no trading portfolio, it is not subject to trading risk. Currently
Cardinal has equity securities that represent only 1.1% of its investment
portfolio and, therefore, equity price risk is not significant.
Liquidity and interest rate sensitivity are related but distinctly
different from one another. The maintenance of adequate liquidity -- the
ability to meet the cash requirements of its customers and other financial
commitments --is a fundamental aspect of Cardinal's asset/liability management
strategy. Cardinal's policy of diversifying its funding sources (purchased
funds, repurchase agreements, and deposit accounts) allows it to avoid undue
concentration in any single financial market and also to avoid heavy funding
requirements within short periods of time.
However, liquidity is not entirely dependent on increasing Cardinal's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year amounted to $481,000 at December 31, 1997. These maturing investments
represent 1% of total investment securities. Additionally, Cardinal's investment
portfolio includes $20.6 million in mortgage-backed securities of which a
portion of the principal is repaid each month, continually providing funds to
meet liquidity needs. Furthermore, Cardinal's entire investment portfolio has
been deemed available-for-sale. This treatment enables Cardinal to utilize its
entire investment portfolio as an additional source of liquidity. Although
Cardinal's securities are generally purchased with the intention of holding them
until maturity, by holding the investments as available-for-sale Cardinal's
liquidity position is improved. Cash, due from banks and other short-term
investments amounted to $8,304,000 and represent additional sources of
liquidity.
Historically, the overall liquidity of Cardinal has been enhanced by a
relatively stable base of core deposits which has existed even in periods of
changing interest rates. At December 31, 1997, deposits exclusive of time
deposits of $100,000 and over, increased $3,968,000 from the balance of December
31, 1996 and the average balance of these deposits increased approximately
$2,407,000 from 1996 to 1997. Furthermore, there are no known trends or any
known demands, commitments, events or uncertainties that will result in, or are
reasonably likely to result in, liquidity increasing or decreasing in any
material way.
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin,
an important factor in earnings growth.
Interest rate sensitivity is measured as the difference between the volume
of assets and liabilities that are subject to repricing in a future period of
time. These differences are known as interest sensitivity gaps. Cardinal
utilizes gap management as the primary means of measuring interest rate risk.
Gap analysis identifies and quantifies Cardinal's exposure or vulnerability to
changes in interest rates in relationship to Cardinal's interest rate
sensitivity position. A
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rate sensitive asset or liability is one which is capable of being repriced
(i.e., the interest rate can be adjusted or principal can be reinvested) within
a specified period of time. Subtracting total rate sensitive liabilities (RSL)
from total rate sensitive assets (RSA) within specified time horizons nets
Cardinal's gap positions. These gaps will reflect Cardinal's exposure to changes
in market interest rates.
Table 14 illustrates Cardinal's estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated at December 31, 1997. These
estimates are based upon the repricing intervals of variable rate assets and
liabilities and upon contractual maturities of fixed rate instruments with
adjustments for principal amortization of appropriate balance sheet items and
projected prepayments for loans and mortgage-backed securities. Prepayment
projections are developed from historical prepayment data for each type of
asset. An institution with more assets repricing than liabilities over a given
time frame is considered asset sensitive, and one with more liabilities
repricing than assets is considered liability sensitive. An asset sensitive
institution will generally benefit from rising rates, and a liability sensitive
institution will generally benefit from declining rates.
Because many of Cardinal's deposit liabilities are capable of being
immediately repriced, a portion of the investment portfolio consists of rate
sensitive securities and Cardinal offers variable rate loan products in order to
maintain a proper balance in its ability to reprice various interest bearing
assets and liabilities. Furthermore, Cardinal's deposit rates are not tied to
an external index over which Cardinal could exercise no control. As a result,
although changing market interest rates impact repricing, Cardinal has retained
much of its control over repricing.
During 1997, in order to adjust its interest rate sensitivity, Cardinal
reduced its rate sensitive liabilities by allowing shorter term time deposits of
$100,000 and over to run off and eliminated its borrowed funds. Rate sensitive
assets were increased during 1997 with the growth of variable rate loans. The
above strategy was implemented to better position Cardinal for rate changes in
either direction in consideration of conflicting economic forecasts.
Cardinal conducts the rate sensitivity analysis through the use of a
simulation model which also monitors earnings at risk by projecting earnings of
Cardinal based upon an economic forecast of the most likely interest rate
movement obtained through a third party. The model also calculates earnings of
Cardinal based upon what are estimated to be the largest foreseeable rate
increase and the largest foreseeable rate decrease. Such analysis translates
interest rate movements and Cardinal's rate sensitivity position into dollar
amounts by which earnings may fluctuate as a result of rate changes. Based upon
the economic forecasts of the most likely interest rate movement, Cardinal's 12
month percentage deviation of earnings from a flat rate scenario would be .5%.
Because projecting interest rate movements is not an exact science,
Cardinal attempts to maintain its rate sensitivity gap within ranges specified
by policy. Although Cardinal may shift its assets and/or liabilities to become
slightly more or less asset sensitive or liability sensitive, Management
attempts to keep the interest rate gap relatively near 1.00 at all times. This
enables Cardinal to minimize the risk inherent in unexpected, significant
changes in rates. This also enables Cardinal to reposition its interest rate gap
without the potential impact of relying heavily on projections of interest rate
movements which may not occur. Currently, Cardinal's rate sensitive liabilities
exceed rate sensitive assets. Based upon projections of relatively level
interest rates for 1998, Cardinal will attempt to increase its rate sensitive
assets in 1998. Cardinal also actively monitors and reprices its deposits in an
effort to maintain an appropriate net interest margin.
Although inflation can affect performance of all types of businesses, a
bank's asset and liability structure is substantially different from that of an
industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on its
financial results depends principally upon Cardinal's ability to react to
changes in interest rates and, by such reaction, reduce the inflationary impact
on performance. Interest rates do not necessarily move in the same direction or
at the same magnitude as the prices of other goods and services. As discussed
previously, Management seeks to control the relationship between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
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Year 2000
Cardinal is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous date or cause a system to
fail.
Cardinal is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from Cardinal's primarily processing vendors that plans are being
developed to address processing of transactions in the year 2000. Management's
assessment of the year 2000 compliance expense was determined to be immaterial
and not have a material effect on Cardinal's future financial position or
results of operations.
Capital Adequacy
During 1997, capital increased by $1,957,000 or 12.9% above year-end 1996.
Earnings in 1997 of $1,860,000 net of dividends paid of $485,000 increased
capital by $1,374,000. This increase was in addition to a capital adjustment
resulting from an increase in the market value of Cardinal's available-for-sale
investment portfolio which positively impacted capital in the amount of
$582,000.
As noted above, the annual shareholder cash dividend payment in 1997 was
$485,000 compared to $371,000 in 1996. The dividend payout ratio, which
represents the percentage of annual net income returned to the shareholders in
the form of cash dividends, was 26.1% for 1997 compared to 24.3% for 1996. In
setting the level of dividends to be paid, Cardinal considers the need to retain
earnings at a level sufficient to finance future corporate growth, the effect of
dividend payments on stock prices and, if applicable, regulatory restrictions on
dividend payments.
Risk-based capital ratios, based upon guidelines adopted by bank regulators
in 1989, focus upon credit risk. Assets and certain off-balance sheet items are
segmented into one of four broad risk categories and weighted according to the
relative percentage of credit risk assigned by the regulatory authorities. Off-
balance sheet instruments are converted into a balance sheet credit equivalent
before being assigned to one of the four risk-weighted categories. To
supplement the risk-based capital ratios, the regulators issued a minimum
leverage ratio guideline (Tier I capital as a percentage of average assets less
excludable intangibles).
Capital elements are segmented into two tiers. Tier I capital for Cardinal
represents shareholders' equity, while total capital represents Tier I capital
plus the portion of the allowance for loan losses equal to 1.25% of risk
adjusted assets.
The maintenance of a strong capital base is an important aspect of
Cardinal's philosophy. At December 31, 1997, Cardinal's Tier I ratio was 20.7%,
the Total Capital Ratio was 21.8%, and the Leverage Ratio was 13.0%.
Management believes Cardinal's current capital is adequate to support is
operations. At this time, Cardinal is not aware of any recommendations by
regulatory authorities which, if implemented, will have or are reasonably likely
to have a material effect on liquidity, capital resources or operations.
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Summary of 1996 Compared to 1995
Cardinal's net income for the year ended December 31, 1996 decreased to
$1.52 million or 12% below 1995 net income of $1.74 million. Basic earnings per
common share were $1.54 in 1996 compared to $1.76 in 1995. Diluted earnings per
common share were $1.53 in 1996 compared to $1.75 in 1995.
Noninterest expense in 1996 increased $382,000 from 1995. The primary
factors in the increase were a rise in the cost of salaries and employee
benefits of $456,000 and an increase in occupancy and equipment expenses of
approximately $58,000. A decrease in FDIC insurance premiums in the amount of
$115,000 from the 1995 level and a $45,000 decline in the cost of supplies,
stationery and printing contributed to offset the increase.
In 1996 capital increased by $394,000 or 2.7% above year-end 1995. During
1996, Cardinal realized earnings in the amount of $1,524,000 of which $371,000
was paid to shareholders as dividends. The increase in capital of $1,152,000
was partially offset by a capital adjustment resulting from a decline in the
market value of Cardinal's available-for-sale investment portfolio of $758,000.
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<TABLE>
<CAPTION>
Cardinal Bancorp, Inc.
TABLE 1 - DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential - Tax Equivalent Basis
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 6,419 $ 355 5.53% $ 1,611 $ 86 5.34% $ 6,531 $ 384 5.88%
Investment securities:
Taxable 40,451 2,730 6.75% 44,565 2,933 6.58% 38,368 2,358 6.15%
Tax-advantaged 5,968 548 9.18% 9,462 885 9.35% 5,918 628 10.61%
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 46,419 3,278 7.06% 54,027 3,818 7.07% 44,286 2,986 6.74%
Loans (net of unearned income) 69,812 6,537 9.36% 62,779 5,916 9.42% 61,939 6,044 9.76%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 122,650 10,170 8.29% 118,417 9,820 8.29% 112,756 9,414 8.35%
=================================================================================================================================
Allowance for loan losses (968) (1,282) (1,392)
All other non-earning assets 9,962 10,091 8,773
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $131,644 $127,226 $120,137
=================================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest-bearing demand $ 17,345 $ 280 1.61% $ 19,067 $ 382 2.00% $ 17,770 $ 419 2.36%
Savings 18,988 512 2.70% 20,558 578 2.81% 21,073 624 2.96%
Time 61,141 3,338 5.46% 56,834 3,103 5.46% 53,936 2,945 5.46%
Short-term borrowings 1,569 83 5.29% 846 35 4.14% 104 6 5.77%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 99,043 $ 4,213 4.25% $ 97,305 $4,098 4.21% $ 92,883 $3,994 4.30%
- --------------------------------------------------------------------------------------------------------------------------------
Demand deposits 14,919 13,625 12,454
Other liabilities 1,237 1,074 1,004
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 115,199 112,004 106,341
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 16,445 15,222 13,796
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $131,644 $127,226 $120,137
================================================================================================================================
Net interest income/yield on average
earning assets $ 5,957 4.86% $5,722 4.83% $5,420 4.81%
================================================================================================================================
</TABLE>
For purposes of calculating loan yields, the average loan volume includes
nonaccrual loans. For purposes of calculating yields on tax-advantaged interest
income, the taxable equivalent is made to equate tax-advantaged interest on the
same basis as taxable interest. The marginal tax rate is 34%.
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<TABLE>
<CAPTION>
TABLE 2 - Changes in Net Interest Income - Tax Equivalent Basis
- ----------------------------------------------------------------------------------------------------
1997 Versus 1996 1996 Versus 1995
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ----------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Short-term investments $ 238 $ 31 $ 269 ($289) ($9) ($298)
Investment securities:
Taxable (271) 68 (203) 381 194 575
Tax-advantaged (327) (10) (337) 376 (119) 257
- ----------------------------------------------------------------------------------------------------
Total investment securities (598) 58 (540) 757 75 832
Loans (net of unearned income) 663 (42) 621 82 (210) (128)
- ----------------------------------------------------------------------------------------------------
Total interest-earning assets $ 303 $ 47 $ 350 $ 550 ($144) $ 406
====================================================================================================
Interest Expense
Deposits:
Interest-bearing demand ($35) ($68) ($103) $ 31 ($68) ($37)
Savings (44) (21) (65) (15) (31) (46)
Time 235 0 235 158 0 158
Short-term borrowings 40 8 48 37 (8) 29
- ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 196 (81) 115 211 (107) 104
- ----------------------------------------------------------------------------------------------------
Net interest margin $ 107 $ 128 $ 235 $ 339 ($37) $ 302
====================================================================================================
</TABLE>
Changes which are in part to volume and in part to rate are allocated in
proportion to their relationship to the amounts of changes attributed directly
to volume and rate.
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<PAGE>
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $957 $1,333 $1,494 $1,953 $2,239
Additions to provision for loan losses charged to
operations 0 0 0 (300) 125
Loans charged off during the year:
Commercial, financial, agricultural 1 328 15 38 500
Real estate - mortgage 0 13 0 23 0
Consumer 75 149 180 155 18
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 76 490 195 216 518
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial, financial, agricultural 45 76 27 51 86
Real estate - mortgage 28 23 0 0 0
Consumer 4 15 7 6 21
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 77 114 34 57 107
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) (1) 376 161 159 411
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
Allowance for loan losses, December 31 $958 $957 $1,333 $1,494 $1,953
===================================================================================================================================
Average loans outstanding $69,812 $62,779 $61,939 $62,128 $68,892
Period end loans 73,940 67,173 61,601 60,845 64,871
Net charge-offs as a percentage of average loans 0.00% 0.60% 0.26% 0.26% 0.60%
Allowance as a percentage of period-end loans 1.30 1.42 2.16 2.46 3.01
</TABLE>
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<PAGE>
TABLE 4 - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans contractually past due
90 days and still accruing $215 $0 $0 $1 $38
===================================================================================================================================
Non-performing assets:
Nonaccrual loans:
Commercial, financial, and agricultural $9 $0 $24 $14 $114
Real estate - mortgage 201 454 1,427 443 576
Consumer 101 130 223 163 231
Restructured loans -- -- 170 -- --
Other real estate owned 168 229 357 836 1,334
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $479 $813 $2,201 $1,456 $2,255
===================================================================================================================================
Total non-performing assets as a percentage of
period-end loans and other real estate owned 0.65% 1.21% 3.55% 2.36% 3.41%
</TABLE>
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TABLE 5 - ANALYSIS OF OTHER EXPENSES
- -------------------------------------------------------------------
- -------------------------------------------------------------------
For the years ended December 31
Dollars in thousands 1997 1996 1995
- --------------------------------------------------------------------
Advertising, marketing, and public relations $ 47 $ 42 $ 33
Audits and examinations 45 44 43
Communications 40 44 36
Contributions 32 8 73
Directors fees 56 57 64
Dues and subscriptions 32 34 27
Other insurance expenses 43 42 47
Outside services 101 101 97
Postage 90 88 78
Seminars and training 78 61 50
All other 86 111 106
- -------------------------------------------------------------------
Total $650 $632 $654
===================================================================
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<PAGE>
TABLE 6 - Carrying Value of Investment Securities
- --------------------------------------------------------
Year Ended December 31 Available-For-Sale
- --------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------
U.S. Treasury $0 $0 $2,009
U.S. Government agencies 20,492 26,745 13,741
State and municipal 2,624 9,870 6,963
Other securities 0 0 156
Mortgage-backed securities 20,565 14,281 27,529
Equity securities 475 549 601
- --------------------------------------------------------
Total investment securities $44,156 $51,445 $50,999
========================================================
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<PAGE>
TABLE 7 - INVESTMENT SECURITIES
The following table shows the maturities of investment securities at fair
value and amortized cost as of December 31, 1997, and the weighted average
yields of such securities. Those securities that do not have a single maturity
date are shown in total. Yields are shown in total. Yields are shown on a tax
equivalent basis, assuming a 34% federal income tax rate.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------
(In thousands)
After 1 Year After 5 Years Available-
Within but Within but Within After For-Sale
1 Year 5 Years 10 Years 10 Years Total
------ ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
U.S. Government agencies
Fair value............................. $0 $0 $19,997 $495 $20,492
Amortized cost......................... 0 0 19,888 496 20,384
Yield.................................. 0.0% 0.0% 7.0% 6.7% 7.0%
Mortgage-backed securities
Fair value............................. $306 $709 $842 $18,708 $20,565
Amortized cost......................... 308 711 830 18,791 20,640
Yield.................................. 5.8% 5.8% 7.0% 7.1% 7.1%
State and municipal
Fair value............................. $175 $0 $348 $2,101 $2,624
Amortized cost......................... 171 0 348 2,014 2,533
Yield.................................. 10.5% 0.0% 7.0% 10.1% 9.7%
Equity securities
Fair value............................. $475 $475
Amortized cost......................... 475 475
Yield.................................. 6.5% 6.5%
TOTAL SECURITIES
Fair value............................. $481 $709 $21,187 $21,779 $44,156
Amortized cost......................... 479 711 21,066 21,776 44,032
Yield.................................. 6.2% 5.8% 7.0% 7.0% 7.0%
</TABLE>
-131-
<PAGE>
TABLE 8 - LOAN AND LEASE PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $13,992 19.0% $12,933 19.3% $9,954 16.2%
Real estate - construction 0 0.0 0 0.0 0 0.0
Real estate - mortgage 44,169 59.7 38,576 57.4 36,796 59.7
Consumer 15,779 21.3 15,664 23.3 14,851 24.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total $73,940 100.0% $67,173 100.0% $61,601 100.0%
====================================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------
At December 31 1994 1993
- -------------------------------------------------------------------------------------------------------
Percentage Percentage
of Loans to of Loans to
Dollars in thousands Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $11,540 19.0% $14,301 22.0%
Real estate - construction 9 0.0 106 0.2
Real estate - mortgage 35,108 57.7 35,296 54.4
Consumer 14,188 23.3 15,168 23.4
- -------------------------------------------------------------------------------------------------------
Total $60,845 100.0% $64,871 100.0%
=======================================================================================================
</TABLE>
-132-
<PAGE>
TABLE 9 - LOAN MATURITY AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
At December 31
- ----------------------------------------------------------------------------------------------------------------------------------
Under one One to Five Over Five
Maturity Year Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $4,778 $5,078 $4,136 $13,992
Real estate - construction 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
$4,778 $5,078 $4,136 $13,992
==================================================================================================================================
Rate sensitivity of loans with maturities greater than 1 year: Variable rate $5,232
Fixed rate 3,982
- ----------------------------------------------------------------------------------------------------------------------------------
==================================================================================================================================
$9,214
==================================================================================================================================
</TABLE>
-133-
<PAGE>
TABLE 10 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------
At December 31
- -------------------------------------------------------------------------------
Dollars in thousands 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 352 $ 340 $ 592 $ 445 $ 864
Real estate - construction 0 0 0 0 0
Real estate - mortgage 0 16 36 149 208
Consumer 230 282 385 356 318
Unused commitments 10 9 5 10 13
Unallocated 366 310 315 534 550
- -------------------------------------------------------------------------------
TOTAL $ 958 $ 957 $1,333 $1,494 $1,953
===============================================================================
-134-
<PAGE>
TABLE - 11 LOAN CONCENTRATIONS
- --------------------------------------------------------------------------------
All of Cardinal's loans are to enterprises and individuals in Pennsylvania. At
December 31, 1997, Cardinal's portfolio included the following concentrations.
- --------------------------------------------------------------------------------
Total As a % % Nonperforming
Dollars in thousands Amount of Tot. Loans in each category
- --------------------------------------------------------------------------------
Hotels, motels and $4,664 6.3 2.0
restaurants
Mobile homes 4,215 5.7 1.9
Agriculture 4,069 5.5 0.5
Automobile dealers 3,512 4.7 0.0
Timber and lumber 3,424 4.6 0.0
Municipalities 3,346 4.5 0.0
-135-
<PAGE>
TABLE 12 - AVERAGE DEPOSIT BALANCE
- -----------------------------------------------------------------
Dollars in thousands
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------
Demand deposits $ 14,919 $ 13,625 $ 12,454
Interest-bearing demand deposits 17,345 19,067 17,770
Savings deposits 18,988 20,558 21,073
Time deposits 61,141 56,834 53,936
- -----------------------------------------------------------------
Total $112,393 $110,084 $105,233
=================================================================
-136-
<PAGE>
TABLE 13 - DEPOSIT MATURITY
- -----------------------------------------------
Maturity of time deposits of $100 or more at
December 31, 1997
- -----------------------------------------------
Dollars in thousands
- -----------------------------------------------
Three months or less $2,716
Over three months through six months 584
Over six months through twelve months 3,814
Over twelve months 2,701
- -----------------------------------------------
Total $9,815
===============================================
-137-
<PAGE>
TABLE 14 - BALANCE SHEET GAP ANALYSIS
- --------------------------------------------------------------------------------
At December 31, 1997 1-3 3-12 1-3 Over 3
Dollars in thousands months months years years TOTAL
- --------------------------------------------------------------------------------
ASSETS
Short-term investments $ 2,942 $ 2,942
Investments 8,538 4,449 3,293 27,876 44,156
Loans, net of unearned income 37,336 14,148 10,861 11,595 73,940
- --------------------------------------------------------------------------------
Total $48,816 $18,597 $14,154 $39,471 $121,038
================================================================================
LIABILITIES
Interest-bearing demand $15,853 $ 15,853
Savings 18,037 18,037
Time 9,034 22,770 16,005 1,380 49,189
Time in denominations of
$100 or more 2,716 7,099 9,815
Short-term borrowings 2,476 2,476
- --------------------------------------------------------------------------------
Total $48,116 $29,869 $16,005 $ 1,380 $ 95,370
================================================================================
INTEREST SENSITIVITY GAP:
Periodic $ 700 ($11,272) ($1,851) $38,091
Cumulative (10,572) (12,423) 25,668
Cumulative gap as a
percentage of earning assets 1% -9% -10% 21%
-138-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FIRST CAPITOL
The following discussion and analysis of financial condition and results of
operations of First Capitol provides a comparison of the performance of First
Capitol for the periods indicated. The financial information presented should
be reviewed in conjunction with the financial statements of First Capitol,
including the related notes thereto, included elsewhere herein.
Certain statements in this document may be considered to be "forward-
looking statements" as that term is defined in the U.S. Private Securities
Litigation Reform Act of 1995, such as statements that include the words
"expect", "estimate", "project", "anticipate", "should", "intend",
"probability", "risk", "target", "objective" and similar expressions or
variations on such expressions. In particular, this document includes forward-
looking statements relating, but not limited to, First Capitol's potential
exposures to various types of market risks, such as interest rate risk and
credit risk. Such statements are subject to certain risks and uncertainties.
For example, certain of the market risk disclosures are dependent on choices
about key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ
from those that have been estimated. Other factors that could cause actual
results to differ materially from those estimated by the forward-looking
statements contained in this document include, but are not limited to: general
economic conditions in market areas in which First Capitol has significant
business activities or investments; the monetary and interest rate policies of
the Board of Governors of the Federal Reserve System; inflation; deflation;
unanticipated turbulence in interest rates; changes in laws, regulations and
taxes; changes in competition and pricing environments; natural disasters; the
inability to hedge certain risks economically; the adequacy of loss reserves;
acquisitions or restructurings; technological changes; changes in consumer
spending and saving habits; and the success of First Capitol in managing the
risks involved in the foregoing.
Comparison of Results of Operations for the Three Months Ended March 31, 1998
and 1997
Summary
First Capitol's net income for the three months ended March 31, 1998 was
$176,000, 25.4% higher than the $141,000 reported for the same period in 1997.
Basic earnings per share for the first quarter of 1998 was $0.36, a 9.1%
increase over the $0.33 recorded for the first quarter of 1997.
Net income was positively influenced by improvement in net interest income
due to loan growth and a shift to lower cost core deposits. Non-interest
expenses were $756,000 for the three months ended March 31, 1998, an increase of
$22,000 or 3.0% from $734,000 reported for the same period in 1997.
Profitability for financial institutions can be measured by the return on
average assets ("ROA") and the return on average equity ("ROE"). On an
annualized basis, the ROA for the first three months of 1998 was 0.68%, compared
to 0.63% for the same period in 1997. The ROE was 6.66% for the first three
months of 1998 compared to 6.33% for the same period in 1997. In 1998, the ROE
was negatively impacted by an increase in shareholders equity created by the
exercise of outstanding stock purchase warrants.
Net Interest Income - Tax Equivalent Basis
The major source of operating revenues for First Capitol is net interest
income which increased to a level of $971,000 for the first three months of
1998, which is $125,000 or 14.8% above the $846,000 attained in the same period
for 1997.
-139-
<PAGE>
Net interest income is the income which remains after deducting the
interest expense attributable to the acquisition of the funds required to
support earning assets from total income generated by such earning assets.
Income from earning assets includes income from loans, income from investment
securities and income from short-term investments. The amount of interest
income is dependent upon many factors including the volume of earning assets,
the general level of interest rates, the dynamics of changing interest rates,
and levels of non-performing assets. The cost of funds varies with the amount
of funds necessary to support earning assets, the rates paid to attract and hold
deposits, rates paid on borrowed funds, and the levels of noninterest-bearing
demand deposits and equity capital.
Table 1 presents average balances, interest and yields earned or paid on
these assets and liabilities of First Capitol for the periods ended March 31,
1998 and 1997. For purposes of calculating interest income on Table 1, tax-
exempt interest has been adjusted using a marginal tax rate of 34% in order to
equate the yield on tax exempt securities to that of taxable interest rates.
Net interest income as a percentage of net interest income and non-interest
income was 94.3% and 84.5% for the periods ended March 31, 1998 and 1997,
respectively.
Table 1 illustrates that the growth in interest income in the quarter ended
March 31, 1998 over the same quarter in 1997 was due to volume. The average
growth in interest-earning assets of $13 million in the quarter ended March 31,
1998 over the same quarter in 1997, to a large extent, was due to average loan
growth of $4.8 million as well as short-term investments which resulted from an
increase in deposits. As illustrated in Table 1, the tax equivalent yield on
earning assets of 8.51% for the quarter ended March 31, 1998 remained relatively
constant to the level of 8.57% during the same quarter in 1997. The investment
yields rose from a 6.30% average return for the quarter ended March 31, 1997 to
6.70% for the quarter ended March 31, 1998.
Table 1 illustrates that the growth in interest expense for the quarter
ended March 31, 1998 over the same quarter in 1997 was also due to volume. The
average funding costs declined for the quarter ended March 31, 1998 to 5.12%
from 5.18% for the same quarter in 1997. The decline in the average funding
cost is due mainly to an increase in lower cost core deposits.
First Capitol will continue to focus on sustained growth in its loan
portfolio of small business credit which is its mission. Fluctuations in the
net interest margin occur because it is not possible to exactly match the
repricing of First Capitol's assets and liabilities. A further explanation of
the impact of asset and liability repricing is found in the Asset/Liability
Management section of this discussion.
Provision and Allowance for Loan Losses
First Capitol's provision for loan losses is based upon management's
quarterly loan portfolio review. The purpose of the review, among other things,
is to assess loan quality, identify impaired loans, analyze delinquencies,
ascertain loan growth, evaluate potential charge-offs and recoveries, and assess
general economic conditions in the York County market that it primarily serves.
Commercial and real estate loans are rated by loan officers and,
periodically, by loan review personnel. Consumer and residential real estate
loans are generally reviewed in the aggregate, as they are of relatively small
dollar size and homogeneous in nature.
In addition to economic conditions, loan portfolio diversification,
delinquency and historic loss experience, consideration is also given to
examinations performed by the federal and state bank supervisory agencies.
To determine the allowance for loan losses and corresponding provision, the
amount required for specific allocation is first determined. For all types of
loans, this amount is based upon specific borrower data determined by reviewing
individual non-performing, delinquent, or potentially troubled credits. In
addition, all criticized and classified loans are given a specific allocation
based on the lowest quality loan ratings assigned by loan officers, semi-annual
outside loan reviews and regulatory authorities.
-140-
<PAGE>
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the loan portfolio.
The loan portfolio represents loans made primarily within First Capitol's
market area of York County, Pennsylvania.
At March 31, 1998, the amount charged to operating expense for the
provision for possible loan losses was $36,000 compared to $59,000 at March 31,
1997, or a decrease of 39%. This decrease in the provision was due to potential
recoveries based upon an assessment of assets as security for loans. The extra
provision made in the first quarter of 1997 covers specific loans as a result of
the aforementioned assessment. The provision represents management's assessment
of the risks inherent in the loan portfolio while providing amounts necessary to
cover potential charge-offs. The allowance for loan losses as a percentage of
net loans was 1.41% at March 31, 1998 compared to 1.48% at March 31, 1997.
Delinquencies, 30 days or more past due, were 2.1% of total loans at March 31,
1998, compared to 2.7% at March 31, 1997.
Table 3 is an analysis of the provision levels as well as the activity in
the allowance for loan losses for the quarters ended March 31, 1998 and 1997.
Table 2 reflects the March 31, 1998 and 1997 period history of non-performing
assets and loans contractually past due 90 days and still accruing. The total
non-performing assets at March 31, 1998 and 1997 were $484,000 and $357,000,
respectively.
Potential problem loans consist of loans which are performing, but for
which potential credit problems have caused First Capitol to place them on its
internally monitored loan list. At March 31, 1998, such loans, not included in
Table 2, amount to $168,000. Depending upon the state of the economy and the
impact thereon as to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing in the future.
Other Income
Non-interest income for the three months ended March 31, 1998, decreased to
$58,000, a decrease of $97,000 or 62.5%, as compared to the same period in 1997.
This decrease was primarily attributed to a decrease in the service charges on
deposit accounts from $68,000 at March 31, 1997 to $22,000 at March 31, 1998 and
a decrease in the gain from the sale of securities from $71,000 at March 31,
1997 to $2,000 at March 31, 1998. The reason for the decrease in service
charges on deposit accounts was due to a conversion from annual services charges
on small business accounts to monthly. Non-interest income as a percentage of
net interest income and non-interest income was 5.7% and 15.5% for the periods
ended March 31, 1998 and 1997, respectively.
Other Expenses
Non-interest expenses are categorized into four main groupings: salaries
and employee benefits, which include fringe benefits and employment taxes;
occupancy expenses, net, which include depreciation, rents, maintenance,
utilities, and insurance; equipment expenses, which include depreciation, rents
and maintenance; and other operating expenses incurred in the operation of First
Capitol's business.
Non-interest expenses increased to $756,000, an increase of $22,000 or
3.0%, as compared to the same reportable period in 1997. Salaries and employee
benefits, which represented the most significant portion of operating expenses,
increased to $416,000, an increase of $17,000 or 4.2%, compared to the same
reportable period in 1997. This increase was due to cost of living increases
and staff promotions. Occupancy expense, net decreased to $83,000, a decrease
of $5,000 or 5.6%, as compared to the same reportable period in 1997. Other
expenses increased to $203,000, an increase of $8,000 or 4.2%, as compared to
the same reportable period in 1997. The increase in Other Expenses was
attributable to the loss incurred due to a robbery at one of First Capitol's
branches.
-141-
<PAGE>
Income Taxes
The provision for income taxes for the three months ended March 31, 1998
and 1997 was $61,000 and $67,000, respectively. The effective tax rate for the
first quarter of 1998 was 25.6%, as compared to 32.3% in the first quarter of
1997. The reduction in effective tax rate for 1998 was primarily due to the
increase in tax-free investments.
Capital Adequacy
First Capitol had shareholders' equity of $11,250,000 at March 31, 1998,
compared to $8,900,000 at March 31, 1997. This increase was primarily due to
the exercise of outstanding stock purchase warrants.
Risk-based capital ratios, based upon guidelines adopted by bank
regulators, focus on credit risk. Assets and certain off-balance sheet items
are segmented into one of four broad-risk categories and weighted according to
the relative percentage of credit risk assigned by the regulatory authorities.
Off-balance sheet instruments are converted into a balance sheet credit
equivalent before being assigned to one of the four risk-weighted categories.
To supplement the risk-capital ratios, the regulators issued a minimum leverage
ratio guideline (Tier 1 capital as a percentage of quarterly average assets less
excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt and the portion
of the allowance for loan losses which does not exceed 1.25% of risk-adjusted
assets.
The maintenance of a strong capital base is an important aspect of First
Capitol's philosophy. First Capitol is required to have minimum Tier 1 and
total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1
leverage ratio of 4.0%. First Capitol's actual Tier 1 and total capital ratios
as of March 31, 1998 were 14.2% and 15.5%, respectively, and its leverage ratio
was 10.2%. First Capitol's actual Tier 1 and total capital ratios as of March
31, 1997 were 12.8% and 14.1%, respectively, and its leverage ratio was 9.4%
Market Risks
Liquidity and interest rate sensitivity are related but distinctly
different from one another. The maintenance of adequate liquidity - First
Capitol's ability to meet the cash requirements of its customers and other
financial commitments - is a fundamental aspect of First Capitol's
asset/liability management strategy. First Capitol's attempts to diversify its
funding sources - deposit accounts and purchased funds using a mix of short-term
and long-term maturities - allows it to avoid undue concentration in any single
financial market and also to avoid heavy funding requirements within short
periods of time.
However, liquidity is not entirely dependent on increasing First Capitol's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year amounted to $2,145,000 at March 31, 1998 and $1,759,000 at March 31,
1997. These maturing investments represent 8.4% and 8.2% of total investment
securities. Short-term investments amounted to $5,867,000 at December 31, 1998
and $4,875,000 at December 31, 1997, and represent additional sources of
liquidity. Moreover, all of First Capitol's investments are classified
"available-for-sale."
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin,
an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. It is the objective of management to control
the difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. In doing so, First
Capitol endeavors to maximize earnings in an environment of changing interest
rates. However, there is a lag in maintaining the desired matching because the
repricing of products occurs at varying intervals.
-142-
<PAGE>
First Capitol employs a variety of methods to monitor interest rate
sensitivity. By dividing the assets and liabilities into three groups - fixed
rate, floating rate, and those which reprice only at management's discretion -
strategies are developed which are designed to minimize exposure to interest
rate fluctuations. Management also utilizes gap analysis to evaluate rate
sensitivity at a given point in time.
An institution with more assets repricing than liabilities over a given
time frame is considered asset sensitive, and one with more liabilities
repricing than assets is considered liability sensitive. An asset sensitive
institution will generally benefit from rising rates, and a liability sensitive
institution will generally benefit from declining rates. First Capitol has had
and will, into the foreseeable future, experience a negative gap position
(liability sensitive), and, therefore, would be negatively affected by a rise in
interest rates.
-143-
<PAGE>
First Capitol Bank
TABLE 1 - DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Rates and Interest Differential - Tax Equivalent Basis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
--------------------------------- -----------------------------
Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal funds sold............................................... $ 5,300 $ 72 5.43% $ 2,793 $ 37 5.30%
Deposits in banks................................................ 166 2 4.82 92 2 8.70
Investment securities:
U.S. government agencies........................................ 16,627 276 6.64 13,817 218 6.31
State and municipal(2).......................................... 5,257 92 7.00 1,704 27 6.34
Other securities................................................ 1,048 16 6.11 1,678 26 6.20
------------------------------ ---------------------------
Total securities............................................... 22,932 384 6.70 17,199 271 6.30
Loans:
Commercial and industrial....................................... 55,144 1,302 9.44 50,105 1,168 9.32
Real estate..................................................... 12,731 262 8.23 12,499 265 8.48
Consumer........................................................ 2,593 69 10.64 2,896 80 11.05
Overdrafts...................................................... 359 0 0.00 505 0 0.00
------------------------------ ---------------------------
Total loans.................................................... 70,827 1,633 9.22 66,005 1,513 9.17
Allowance for loan losses........................................ (982) 0 0.00 (957) 0 0.00
------------------------------ ---------------------------
Loans, net....................................................... 69,845 1,633 9.35 65,048 1,513 9.30
------------------------------ ---------------------------
Total earning assets............................................. 98,243 $2,091 8.51% 85,132 $1,823 8.57%
Cash and due from banks.......................................... 3,160 2,363
Bank premise and equipment, net.................................. 1,731 1,797
Accrued interest receivable...................................... 547 495
Other assets..................................................... 1,220 1,070
------------------------------ ---------------------------
Total assets..................................................... $104,901 $90,857
============================== ===========================
Liabilities and Shareholders' Equity:
Deposits:
Demand-interest bearing......................................... $ 23,541 $ 263 4.47% $18,606 $ 206 4.43%
Savings......................................................... 12,806 138 4.31 10,746 121 4.50
Time............................................................ 24,706 352 5.70 25,913 364 5.62
Time over $100,000.............................................. 9,195 127 5.52 10,292 138 5.36
------------------------------ ---------------------------
Total interest-bearing deposits................................ 70,248 880 5.01 65,557 829 5.06
Securities sold under agreements to repurchase................... 8,228 116 5.64 2,404 33 5.49
Borrowed funds................................................... 6,682 93 5.57 6,796 106 6.24
------------------------------ ---------------------------
Total interest-bearing liabilities............................. 85,158 $1,089 5.12% 74,757 $ 968 5.18%
Accrued interest payable......................................... 698 681
Demand-noninterest bearing....................................... 7,937 6,224
Other liabilities................................................ 314 233
------------------------------ ---------------------------
Total liabilities................................................ 94,107 81,895
Shareholders' equity............................................. 10,794 8,962
------------------------------ ---------------------------
Total liabilities and shareholders' equity....................... $104,901 $90,857
============================== ===========================
Net interest income.............................................. $1,002 $ 855
Net interest spread.............................................. 3.39% 3.39%
Net interest margin(3)........................................... 4.08% 4.02%
</TABLE>
- -----------------------------------
(1) Average balances have been computed using daily balances. Nonaccrual loans
are included in loan balances.
(2) Interest and yield are presented on a tax equivalent basis using a 34.0%
statutory tax rate for each period.
(3) Represents the difference between interest earned and interest paid,
divided by average total earning assets (annualized).
-144-
<PAGE>
First Capitol Bank
TABLE 2 - NON-PERFORMING ASSETS
- -------------------------------------------------------------------------------
At March 31,
--------------------
(In thousands) 1998 1997
---- ----
Nonaccrual loans......................................... $ 484 $ 357
Foreclosed assets held for sale.......................... 0 0
--------------------
Total non-performing assets.............................. $ 484 $ 357
====================
Loans contractually past due 90 days and still accruing.. $ 129 $ 93
====================
Non-performing assets as a percentage of loans and
foreclosed assets....................................... 0.68% 0.55%
Non-performing assets as a percentage of assets.......... 0.44% 0.37%
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------
At March 31,
--------------------
(In thousands) 1998 1997
---- ----
Balance of allowance for loan losses at beginning of
period............................................... $ 973 $ 947
Charge-offs:
Commercial and industrial........................... 0 45
Real estate......................................... 0 0
Consumer............................................ 0 8
---------------------
Total............................................ 0 53
Recoveries:
Commercial and industrial........................... 0 1
Real estate......................................... 0 0
Consumer............................................ 0 0
---------------------
Total............................................ 0 1
---------------------
Net charge-offs(recoveries)........................... 0 52
Provision for loan losses............................. 36 59
---------------------
Balance at end of period.............................. $1,009 $ 954
=====================
Ratio of net charge-offs during period to average
loans outstanding during period................... 0.00% 0.08%
Ratio of allowance for loan losses to:
Total loans, net of unearned income................. 1.41% 1.48%
Total non-performing loans.......................... 208% 267%
-145-
<PAGE>
Comparison of Results of Operations for the Years Ended December 31, 1997, 1996
and 1995
Overview
Net income for 1997 increased to $672,000, an increase of $119,000 or 21.6%
over 1996. Net income for 1996 was $553,000, an increase of $22,000 or 4.1%
over 1995. On a per share basis, net income was $1.54 (basic) and $1.48
(diluted) in 1997, $1.30 (basic) and $1.24 (diluted) in 1996, and $1.25 (basic)
and $1.22 (diluted) in 1995, respectively. Weighted average shares outstanding
for 1997, 1996 and 1995 were 435,491/455,162 (basic/diluted), 423,569/445,009
(basic/diluted) and 423,569/433,350 (basic/diluted), respectively.
Profitability for financial institutions can be measured by the return on
average assets ("ROA") and the return on average equity ("ROE"). The ROA for
the years 1997, 1996 and 1995 was 0.68%; 0.63% and 0.66%, respectively. The ROE
for the years 1997, 1996 and 1995 was 7.20%, 6.41% and 6.49%, respectively. The
improvement in ROA was a reflection of improvement in interest margins from
lower-cost core deposits. The ROE was negatively impacted by an increase in
shareholders' equity created by the partial exercise of outstanding stock
purchase warrants.
The growth in the net income during 1997 was attributable to improvement in
net interest income, which increased to $3,767,000, an increase of $446,000 or
13.4% over 1996, and which was coupled with an increase in noninterest income to
$277,000, an increase of $133,000 or 92.4% over 1996. This increase more than
offset the increase in noninterest expense to $2,931,000, an increase of
$469,000 or 19.0% over 1996. First Capitol maintained its focus on small
business services within its market area with specific attention given to
increasing market share.
Net income in 1996 was $553,000, an increase of $22,000 or 4.1% over 1995.
Noninterest income in 1996 was $144,000, a decrease of $18,000 or 11.1% from
1995. Noninterest expense in 1996 was $2,462,000, an increase of $68,000 or
2.9% over 1995.
Net Interest Income-Tax Equivalent Basis
Table 1 presents average balances, interest and yields earned or paid on
these assets and liabilities of First Capitol for the years ended December 31,
1997, 1996 and 1995. For purposes of calculating interest income on Table 1,
tax-exempt interest on state and municipal securities has been adjusted using a
marginal tax rate of 34% in order to equate the yield on tax-exempt securities
to that of taxable interest rates. Net interest income as a percentage of net
interest income and noninterest income was 93.2%, 95.8% and 94.9% for the years
ended December 31, 1997, 1996 and 1995, respectively.
Table 2 illustrates that the growth in interest income in 1997 over 1996
was due primarily to volume. The average growth in interest-earning assets of
$9,628,000 in 1997 over 1996, to a large extent, was due to average loan growth
of $5,448,000. As illustrated in Table 1, the tax equivalent yield on
investment securities for 1997 remained constant at the 1996 level of 6.57%.
This stability in the tax equivalent yield on investment securities was
maintained as well as an increase in the yield on total loans from 9.22% in 1996
to 9.44% in 1997, which is attributable to effective management of the
portfolio.
Table 2 illustrates that the growth in interest expense in 1997 over 1996
was also due to volume. The average funding costs decreased in 1997 to 5.16%
from 5.33% in 1996. The drop in the average funding cost is due mainly to
improvement in the lower cost core deposit categories.
First Capitol will be focusing on sustained growth not only in its loan
portfolio, but also in low cost funding sources. Fluctuations in the net
interest margin occur because it is not possible to exactly match the repricing
of First Capitol's assets and liabilities. A further explanation of the impact
of asset and liability repricing is found in the Market Risks section of this
discussion.
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<PAGE>
Provision and Allowance for Loan Losses
The unallocated portion of the allowance for loan losses is the amount
which, when added to these allocated amounts, brings the total to the amount
deemed adequate by management at that time. This unallocated portion is
available to absorb losses sustained anywhere within the loan portfolio. Table
10 presents this allocation for the years ended December 31, 1997, 1996, 1995,
1994 and 1993.
The review of the loan portfolio is a continuing event in light of a
changing economy and the dynamics of the banking and regulatory environment. In
management's opinion, the allowance for loan losses is adequate at December 31,
1997. As illustrated in Table 3, the provision for loan losses was $174,000 for
1997 compared to $182,000 in 1996. Net charge-offs, as seen in Table 3, were
$148,000 for 1997 compared to $189,000 in 1996. As a result, the allowance for
loan losses at December 31, 1997 was 1.37% of period-end loans, or $973,000,
compared with 1.43% or $947,000 at December 31, 1996. The allowance for loan
losses as a percentage of non-performing loans increased from 335% at December
31, 1996 to 341% at December 31, 1997.
Should the economic climate no longer continue to improve or should it
begin to deteriorate, borrowers may experience difficulty, and the level of non-
performing loans and assets, charge-offs, and delinquencies could rise and
require further increase in the provision.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan losses. They
may require additions to allowances based upon their judgments about information
available to them at the time of examination.
It is the policy of First Capitol not to renegotiate the terms of a loan
simply because of its delinquency status. A loan is transferred to non-accrual
status if it is not well secured and in the process of collection and is
delinquent in payment of either principal or interest beyond 90 days. Interest
income which would have been recorded on these loans in 1997 and 1996 under the
original terms was $45,000 and $29,000, respectively. No interest income was
recorded on non-accrual loans for either 1997 or 1996. At December 31, 1997,
First Capitol had no outstanding commitments to advance additional funds with
respect to these non-performing loans.
Table 3 is an analysis of the provision levels as well as the activity in
the allowance for loan losses for the past five years. Table 4 reflects the
five-year history of non-performing assets and loans contractually past due 90
days and still accruing. The total non-performing assets at December 31, 1997
and 1996 were $285,000 and $283,000, respectively.
Real estate acquired through foreclosure is carried at fair value minus
estimated costs to sell at the time of foreclosure. Prior to foreclosure, the
recorded amount of the loan is written-down, if necessary, to fair value by
charging the allowance for loan losses. Subsequent to foreclosure, gains or
losses on the sale of real estate acquired through foreclosure are recorded in
operating income, and any losses determined as a result of periodic valuations
are charged to other operating expense. There were no foreclosed assets held
for sale at December 31, 1997 and 1996.
There were loans at December 31, 1997 and 1996 totaling $194,000 and
$97,000, respectively, with principal and/or interest delinquent 90 days or more
which were still accruing interest. Management continuously monitors all
delinquent loans under 90 days in order to minimize any increase in the 90 day
or over category.
Potential problem loans consist of loans which are performing, but for
which potential credit problems have caused First Capitol to place them on its
internally monitored loan list. At December 31, 1997, such loans, not included
in Table 4, amounted to $138,000. Depending upon the state of the economy and
the impact thereon as to these borrowers, as well as future events such as
regulatory examination assessment, these loans and others not currently so
identified could be classified as non-performing assets in the future.
-147-
<PAGE>
Other Income
Non-interest income consists of service charges on deposit accounts;
mortgage referral fees; fees received for travelers' check sales and money
orders; fees for trust referrals; gains and losses on security transactions; and
other miscellaneous income. Other income as a percentage of net interest income
and other income was 6.8%, 4.2% and 5.1% for 1997, 1996 and 1995, respectively.
Non-interest income in 1997 increased $133,000 or 92.2% over 1996. This
increase was primarily due to an increase in the gains on sale of securities of
$73,000. Non-interest income in 1996 decreased $18,000 or 11.1% from 1995.
This decrease was primarily due to a decrease in the gains on sale of securities
of $31,000.
Other Expenses
Non-interest expenses are categorized into four main groupings: salaries
and employee benefits, which include fringe benefits and employment taxes;
occupancy expenses, net, which include depreciation, rents, maintenance,
utilities, and insurance; equipment expenses, which include depreciation, rents
and maintenance; and other operating expenses (described in Table 5) incurred in
the operation of First Capitol's business.
The salary and employee benefits expenses rose by $307,000 or 23.0% from
1997 to 1996, occupancy and equipment expenses were higher by $101,000 or 21.2%,
while other operating expenses increased $61,000 or 9.4%. Increases in all three
categories were the result of the addition of a new branch in January 1997. The
real estate and equipment were purchased from another institution.
Other operating expenses (see Table 5) decreased $93,000 or 12.4% from 1995
to 1996 due to a restructuring of First Capitol's method of accounting under the
rules established by FASB 91.
Income Taxes
First Capitol's effective tax rate for 1997 was 28.4% compared to 32.7% in
1996 and 7.3% in 1995. The decrease in 1997 was primarily due to the purchase
of municipal securities. In 1995, First Capitol reversed its $132,000 valuation
reserve for deferred taxes.
First Capitol recognizes deferred tax liabilities for taxable temporary
differences (the difference between financial and tax bases), and deferred tax
assets for deductible temporary differences. Management believes the deferred
tax assets, recognized at December 31, 1997, will be realized in future tax
returns.
Financial Condition
Investment Securities
Generally accepted accounting principles require the segregation of
investment securities into three categories, each having a distinct accounting
treatment.
Securities identified as "held-to-maturity" continue to be carried at their
amortized cost and, except for limited circumstances, may not be sold prior to
maturity. Securities identified as "available-for-sale" must be reported at
their market or "fair" value and the difference between that value and their
amortized cost recorded in the equity section, net of taxes. Securities
identified as "trading account securities" are marked-to-market with the change
recorded in the income statement.
In December 1995, First Capitol classified all of its investment securities
as "available-for-sale" and has continued to record all subsequent investment
security purchases as "available-for-sale." The movement in interest rates
between December 31, 1996 and December 31, 1997 has caused the total equity of
First Capitol to be positively
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<PAGE>
impacted by $106,000 as the "unrealized gain on available-for-sale securities,
net of taxes," increased from ($25,000) in 1996 to $82,000 in 1997.
Presently, First Capitol does not engage in trading activity, but does
engage in active portfolio management. In order to provide First Capitol with
maximum flexibility with regards to its investment portfolio, First Capitol has
designated all of its securities as "available-for-sale" (see Table 6).
Investment strategies employed by First Capitol address liquidity, capital
adequacy, and net interest margin considerations. Table 7 illustrates the
maturities of these security portfolios and the weighted averaged yields at
December 31, 1997. Yields are shown on a tax equivalent basis assuming a 34%
federal income tax rate. At December 31, 1997, First Capitol held no securities
of one issuer, other than U.S. Government obligations, where the aggregate book
value exceeded ten percent of shareholders' equity.
Loans
Table 8 presents the loans outstanding by type of loan for the past five
year-ends. In 1997, loans increased to $70,253,000, a $4,779,000 increase or
7.3% over 1996. Commercial and industrial, and real estate loans increased
$4,975,000 and $200,000, respectively, and consumer loans decreased by $386,000
from 1996. The decrease in consumer loans resulted from payoffs and a
discontinuance of third-party installment loans.
The loan portfolio represents loans made primarily within First Capitol's
market area of York County, Pennsylvania.
First Capitol has historically reported a significant amount of commercial
and industrial loans, as depicted in Table 8. Many of these loans have real
estate taken as collateral for additional security for business or personal
purposes not related to the acquisition of the real estate pledged.
Table 9 represents the maturity of commercial, financial, and agricultural
loans as well as real estate construction loans at December 31, 1997.
Deposits
First Capitol's deposit base is consumer-oriented, consisting of time
deposits, primarily certificates of deposit with various terms; interest-bearing
demand accounts; savings accounts; and demand deposits. The average amounts of
deposits by type are summarized in Table 11 for the years presented. Table 12
presents a breakdown of maturities of time deposits of $100,000 or more as of
December 31, 1997.
Capital Adequacy
First Capitol had shareholders' equity of $10,400,000 at December 31, 1997
and $8,905,000 at December 31, 1996. This increase in shareholders' equity was
primarily due to the exercise of outstanding stock purchase warrants.
Risk-based capital ratios, based upon guidelines adopted by bank
regulators, focus on credit risk. Assets and certain off-balance sheet items
are segmented into one of four broad-risk categories and weighted according to
the relative percentage of credit risk assigned by the regulatory authorities.
Off-balance sheet instruments are converted into a balance sheet credit
equivalent before being assigned to one of the four risk-weighted categories.
To supplement the risk-based capital ratios, the regulators issued a minimum
leverage ratio guideline (Tier 1 capital as a percentage of quarterly average
assets less excludable intangibles).
Capital elements are segmented into two tiers. Tier 1 capital represents
shareholders' equity reduced by excludable intangibles, while total capital
represents Tier 1 capital plus certain allowable long-term debt and the portion
of the allowance for loan losses which does not exceed 1.25% of risk-adjusted
assets.
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<PAGE>
The maintenance of a strong capital base is an important aspect of First
Capitol's philosophy. First Capitol is required to have minimum Tier 1 and
total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1
leverage ratio of 4.0%. First Capitol's actual Tier 1 and total capital ratios
at December 31, 1997 were 13.3% and 14.5%, respectively, and its leverage ratio
was 9.6%. Therefore, First Capitol has leverage and risk-weighted ratios in
excess of regulatory minimums and is considered "well-capitalized" under
regulatory guidelines.
Market Risks
The types of market risk exposures generally faced by banking entities
include interest rate risk, liquidity risk, equity market price risk, foreign
currency risk and commodity price risk. Due to the nature of its operations,
only interest rate risk and liquidity risk are significant to First Capitol.
Liquidity and interest rate sensitivity are related but distinctly
different from one another. The maintenance of adequate liquidity - First
Capitol's ability to meet the cash requirements of its customers and other
financial commitments - is a fundamental aspect of First Capitol's
asset/liability management strategy. First Capitol's attempts to diversify its
funding sources - deposit accounts and purchased funds using a mix of short-term
and long-term maturities - allows it to avoid undue concentration in any single
financial market and also to avoid heavy funding requirements within short
periods of time.
However, liquidity is not entirely dependent on increasing First Capitol's
liability balances. Liquidity can also be generated from maturing or readily
marketable assets. The carrying value of investment securities maturing within
one year as of December 31, 1997, 1996 and 1995 amounted to $2,167,000,
$1,511,000 and $2,685,000, respectively. These maturing investments represent
9.5%, 8.1% and 17.0% of total investment securities, respectively. Short-term
investments amounted to $6,958,000, $2,505,000 and $3,468,000, respectively, and
represent additional sources of liquidity. Moreover, all of First Capitol's
investments are classified "available-for-sale" (see Table 6).
Closely related to the management of liquidity is the management of rate
sensitivity which focuses on maintaining stability in the net interest margin,
an important factor in earnings growth. Interest rate sensitivity is the
matching or mismatching of the maturity and rate structure of the interest-
bearing assets and liabilities. It is the objective of management to control
the difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. In doing so, First
Capitol endeavors to maximize earnings in an environment of changing interest
rates. However, there is a lag in maintaining the desired matching because the
repricing of products occurs at varying intervals.
First Capitol employs a variety of methods to monitor interest rate
sensitivity. By dividing the assets and liabilities into three groups - fixed
rate, floating rate, and those which reprice only at management's discretion -
strategies are developed which are designed to minimize exposure to interest
rate fluctuations. Management also utilizes gap analysis to evaluate rate
sensitivity at a given point in time.
Table 13 illustrates First Capitol's estimated interest rate sensitivity
and periodic and cumulative gap positions as calculated at December 31, 1997.
An institution with more assets repricing than liabilities over a given time
frame is considered asset sensitive, and one with more liabilities repricing
than assets is considered liability sensitive. An asset sensitive institution
will generally benefit from rising rates, and a liability sensitive institution
will generally benefit from declining rates. First Capitol has had and will,
into the foreseeable future, experience a negative gap position (liability
sensitive), and, therefore, would be negatively affected by a rise in interest
rates.
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<PAGE>
First Capitol Bank
TABLE 1 - DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Rates and Interest Differential - Tax Equivalent Basis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
--------- -------- ---- --------- -------- ---- --------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal funds sold.............. $ 3,299 $ 181 5.49% $ 1,676 $ 89 5.31% $ 2,850 $ 167 5.86%
Deposits in banks............... 110 7 6.36 60 4 6.67 35 4 11.43
Investment securities:
U.S. government agencies...... 16,904 1,093 6.47 16,103 1,054 6.55 13,157 905 6.88
State and municipal(2)........ 3,929 278 7.08 1,747 122 6.98 2,193 133 6.06
Other securities.............. 1,156 73 6.31 1,621 103 6.35 1,129 73 6.47
---------------------------- ---------------------------- ----------------------------
Total securities........... 21,989 1,444 6.57 19,471 1,279 6.57 16,479 1,111 6.74
Loans:
Commercial and industrial..... 51,913 5,001 9.63 46,941 4,409 9.39 41,556 4,092 9.85
Real estate................... 13,015 1,113 8.55 12,534 1,042 8.31 13,432 1,077 8.02
Consumer...................... 2,753 307 11.15 2,852 320 11.22 2,532 280 11.06
Overdrafts.................... 362 0 0.00 268 0 0.00 231 0 0.00
---------------------------- ---------------------------- ----------------------------
Total loans................ 68,043 6,421 9.44 62,595 5,771 9.22 57,751 5,449 9.44
Allowance for loan losses....... (962) 0 0.00 (951) 0 0.00 (907) 0 0.00
---------------------------- ---------------------------- ----------------------------
Loans, net...................... 67,081 6,421 9.57 61,644 5,771 9.36 56,844 5,449 9.59
---------------------------- ---------------------------- ----------------------------
Total earning assets............ 92,479 $ 8,053 8.71% 82,851 $7,143 8.62% 76,208 $6,731 8.83%
Cash and due from banks......... 2,655 2,188 2,315
Bank premise and equipment, net. 1,774 1,077 585
Accrued interest receivable..... 529 504 510
Other assets.................... 1,109 755 597
---------------------------- ---------------------------- ----------------------------
Total assets.................... $98,546 $87,375 $80,215
============================ ============================ ============================
Liabilities and Shareholders'
Equity:
Deposits:
Demand-interest bearing....... $20,914 $ 932 4.46% $15,092 $ 692 4.59% $11,154 $ 526 4.72%
Savings....................... 12,021 524 4.36 8,726 394 4.52 7,878 385 4.89
Time.......................... 25,223 1,445 5.73 28,045 1,607 5.73 31,275 1,909 6.10
Time over $100,000............ 9,947 543 5.46 9,743 534 5.48 9,706 553 5.70
---------------------------- ---------------------------- ----------------------------
Total interest-bearing
deposits.................. 68,105 3,444 5.06 61,606 3,227 5.24 60,013 3,373 5.62
Securities sold under
agreements to repurchase....... 6,468 372 5.75 2,350 130 5.53 2,351 144 6.13
Borrowed funds.................. 6,591 375 5.69 7,494 450 6.00 2,883 208 7.21
---------------------------- ---------------------------- ----------------------------
Total interest-bearing
liabilities............... 81,164 $ 4,191 5.16% 71,450 $3,807 5.33% 65,247 $3,725 5.71%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Average Average
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
--------- -------- ---- --------- -------- ---- --------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accrued interest payable........ 685 730 845
Demand-noninterest bearing...... 7,089 6,335 5,700
Other liabilities............... 277 235 248
---------------------------- ---------------------------- ----------------------------
Total liabilities............... 89,215 78,750 72,040
Shareholders' equity............ 9,331 8,625 8,175
---------------------------- ---------------------------- ----------------------------
Total liabilities and share-
holders' equity................ $98,546 $87,375 $80,215
============================ ============================ ============================
Net interest income............. $3,862 $3,336 $3,006
Net interest spread............. 3.55% 3.29% 3.12%
Net interest margin(3).......... 4.18% 4.03% 3.94%
</TABLE>
- --------------------------
(1) Average balances have been computed using daily balances. Nonaccrual loans
are included in loan balances.
(2) Interest and yield are presented on a tax equivalent basis using a 34.0%
statutory tax rate for each period.
(3) Represents the difference between interest earned and interest paid,
divided by average total earning assets (annualized).
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<PAGE>
First Capitol Bank
TABLE 2 - CHANGES IN NET INTEREST INCOME - TAX EQUIVALENT BASIS
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
1997 Versus 1996 1996 Versus 1995
Increase (Decrease) Increase (Decrease)
Due to Change in(1) Due to Change in(1)
---------------------- ------------------------
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold............................................... $ 89 $ 3 $ 92 $ (64) $ (14) $ (78)
Deposits in banks................................................ 3 0 3 2 (2) 0
Securities available for sale:
Taxable........................................................ 22 (13) 9 226 (47) 179
Non-taxable.................................................... 154 2 156 (29) 18 (11)
Loans (includes fees)............................................ 512 138 650 449 (127) 322
-------------------------------------------------
Total interest income............................................ 780 130 910 584 (172) 412
Interest Expense:
Demand - interest bearing and savings.......................... 404 (34) 370 220 (45) 175
Time........................................................... (162) 0 (162) (190) (112) (302)
Time - $100,000 and over....................................... 11 (2) 9 2 (21) (19)
Securities sold under agreements to repurchase................. 237 5 242 0 (14) (14)
Borrowed funds................................................. (52) (23) (75) 282 (40) 242
-------------------------------------------------
Total interest expense........................................... 438 (54) 384 314 (232) 82
-------------------------------------------------
Net interest income.............................................. $ 342 $184 $ 526 $ 270 $ 60 $ 330
=================================================
</TABLE>
- ----------------------------------
(1) The proportion of the total change attributable to volume and rate changes
during the period has been allocated to the volume and rate components
based upon the absolute dollar amount of the change in each component prior
to the allocation.
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<PAGE>
First Capitol Bank
TABLE 3 - PROVISION AND ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses at beginning of period.... $947 $954 $894 $839 $563
Charge-offs:
Commercial and industrial................................. 141 157 119 64 30
Real estate............................................... 0 26 0 0 0
Consumer.................................................. 18 18 14 4 2
------------------------------------------------------------------
Total................................................. 159 201 133 68 32
Recoveries:
Commercial and industrial................................. 10 12 27 12 0
Real estate............................................... 0 0 0 0 0
Consumer.................................................. 1 0 7 1 0
------------------------------------------------------------------
Total................................................. 11 12 34 13 0
------------------------------------------------------------------
Net charge-offs(recoveries).................................... 148 189 99 55 32
Provision for loan losses...................................... 174 182 159 110 308
---------------------------------------------------------------
Balance at end of period....................................... $973 $947 $954 $894 $839
=================================================================
Ratio of net charge-offs during period to average
loans outstanding during period............................ 0.22% 0.30% 0.17% 0.10% 0.06%
Ratio of allowance for loan losses to:
Total loans, net of unearned income....................... 1.37% 1.43% 1.64% 1.57% 1.59%
Total non-performing loans................................ 341% 335% 142% 159% 1,678%
</TABLE>
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<PAGE>
First Capitol Bank
TABLE 4 - NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
(In thousands) 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.......................... $ 285 $ 283 $ 557 $ 562 $ 50
Foreclosed assets held for sale........... 0 0 116 0 0
---------------------------------------
Total non-performing assets............... $ 285 $ 283 $ 673 $ 562 $ 50
=======================================
Loans contractually past due 90 days and
still accruing.......................... $ 194 $ 97 $ 96 $ 15 $ 28
=======================================
Non-performing assets as a percentage of
loans and foreclosed assets............. 0.40% 0.43% 1.16% 0.99% 0.09%
Non-performing assets as a percentage of
assets.................................. 0.26% 0.30% 0.83% 0.77% 0.07%
</TABLE>
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<PAGE>
First Capitol Bank
TABLE 5 - ANALYSIS OF OTHER OPERATING EXPENSES
- -------------------------------------------------------------------------------
At December 31,
----------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Audits and examinations....................... $ 64 $ 59 $ 54
Communications................................ 30 34 24
Directors' fees............................... 96 71 77
Legal and professional........................ 32 16 8
Outside services.............................. 31 47 45
Taxes, other than income...................... 93 79 70
Postage....................................... 38 38 34
Stationery and supplies....................... 84 75 81
All other..................................... 243 231 349
----------------------------
Total....................................... $711 $650 $742
============================
TABLE 6 - CARRYING VALUE OF INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
At December 31,
------------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
U.S. Treasury securities...................... $ 2,009 $ 1,996 $ 2,514
U.S. Government and agencies.................. 2,249 3,293 3,621
State and municipal........................... 4,506 1,617 1,758
Other securities.............................. 0 47 50
Mortgage-backed securities.................... 13,099 9,956 7,072
Equity securities............................. 1,048 1,810 947
-------------------------------
Total investment securities................. $22,911 $18,719 $15,962
===============================
- -------------------------
All of First Capitol Bank's securities are classified as available-for-sale.
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<PAGE>
First Capitol Bank
TABLE 7 - INVESTMENT SECURITIES
The following table shows the maturities of investment securities at fair
value and amortized cost as of December 31, 1997, and the weighted average
yields of such securities. Yields are shown on a tax equivalent basis, assuming
a 34% federal income tax rate.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------------------------------------------------------------------------
After 1 Year After 5 Years Available-
Within but Within but Within After For-Sale
(In thousands) 1 Year 5 Years 10 Years 10 Years Total
------ --------------- ----------------- -------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities
Fair value....................... $1,250 $ 759 $ 0 $ 0 $ 2,009
Amortized cost................... 1,247 754 0 0 2,001
Yield............................ 5.98% 6.15% 0.00% 0.00% 6.04%
U.S. Government and agencies
Fair value....................... $ 749 $ 501 $ 999 $ 0 $ 2,249
Amortized cost................... 749 500 1,000 0 2,249
Yield............................ 5.71% 5.98% 7.39% 0.00% 6.52%
State and municipals
Fair value....................... $ 150 $ 283 $ 3,935 $ 138 $ 4,506
Amortized cost................... 150 282 3,861 134 4,427
Yield............................ 5.31% 6.23% 7.26% 7.65% 7.14%
Other securities
Fair value....................... $ 0 $ 0 $ 0 $ 0 $ 0
Amortized cost................... $ 0 $ 0 $ 0 $ 0 $ 0
Yield............................ 0.00% 0.00% 0.00% 0.00% 0.00%
Mortgage-backed securities
Fair value....................... $ 21 $ 4,306 $ 266 $ 8,506 $ 13,099
Amortized cost................... 21 4,280 264 8,497 13,062
Yield............................ 7.00% 6.80% 6.38% 6.86% 6.83%
Equity securities
Fair value....................... $ 0 $ 0 $ 0 $ 1,048 $ 1,048
Amortized cost................... 0 0 0 1,048 1,048
Yield............................ 0.00% 0.00% 0.00% 6.15% 6.15%
TOTAL SECURITIES
Fair value....................... $2,170 $ 5,849 $ 5,200 $ 9,692 $ 22,911
Amortized cost................... 2,167 5,816 5,125 9,679 22,787
Yield............................ 5.85% 6.62% 7.23% 6.80% 6.78%
</TABLE>
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<PAGE>
First Capitol Bank
TABLE 8 - LOAN PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
At December 31,
1997 1996 1995
--------------------- ----------------------- ------------------------
Percentage Percentage Percentage
of Loans to of Loans to of Loans to
(Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial.............. $55,384 78% $50,409 76% $41,731 72%
Real estate................. 13,043 18 12,843 19 13,445 23
Consumer.................... 2,616 4 3,003 5 2,871 5
Overdrafts.................. 183 0 167 0 17 0
----------------- ----------------- -------------------
Total.............. $71,226 100% $66,422 100% $58,064 100%
================= ================= ===================
<CAPTION>
- -------------------------------------------------------------------------------
At December 31,
1994 1993
----------------------- -----------------------
Percentage Percentage
of Loans to of Loans to
(Dollars in thousands) Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial and
industrial............ $40,583 72% $37,399 71%
Real estate............... 13,962 25 13,896 26
Consumer.................. 1,982 3 1,106 2
Overdrafts................ 197 0 424 1
------------------- -------------------
Total............ $56,724 100% $52,825 100%
=================== ===================
</TABLE>
-158-
<PAGE>
First Capitol Bank
TABLE 9 - LOAN MATURITY AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) At December 31, 1997
------------------------------------------------------
Within One Two to Five After Five
Maturity Year Years Years Total
-------- ---------- ----------- ---------- -----
<S> <C> <C> <C> <C>
Commercial and industrial........................... $13,352 $12,914 $29,118 $55,384
Real estate......................................... 201 317 12,525 13,043
Consumer............................................ 117 1,794 705 2,616
------------------------------------------------------
Total...................................... $13,670 $15,025 $42,348 $71,043
======================================================
Fixed interest rate................................. 4,308 10,506 5,067 19,881
Adjustable interest rate............................ 9,362 4,519 37,281 51,162
</TABLE>
TABLE 10 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
At December 31,
--------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and industrial................................. $430 $380 $317 $316 $303
Real estate............................................... 128 111 102 101 65
Consumer.................................................. 122 120 126 109 88
Unallocated............................................... 293 336 409 368 383
------------------------------------------------------------------
Total............................................ $973 $947 $954 $894 $839
==================================================================
</TABLE>
-159-
<PAGE>
First Capitol Bank
TABLE 11 - AVERAGE DEPOSIT BALANCES
- --------------------------------------------------------------------------------
The following is a distribution of the average balances of First Capitol
Bank's deposits for the years ended December 31, 1997, 1996 and 1995.
Years Ended December 31,
------------------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Demand -noninterest-bearing......... $ 7,089 $ 6,335 $ 5,700
Demand -interest-bearing............ 20,914 15,092 11,154
Savings ........................... 12,021 8,726 7,878
Time, $100,000 and over............. 9,947 9,743 9,706
Time, other......................... 25,223 28,045 31,275
-----------------------------------
Total deposits............. $75,194 $67,941 $65,713
===================================
TABLE 12 - DEPOSIT MATURITY
- --------------------------------------------------------------------------------
The following is a breakdown, by maturities, of First Capitol Bank's
time certificates of deposit issued in denominations of $100,000 or more as of
December 31, 1997 (in thousands).
Maturity in:
Three months or less................................ $2,234
Over three months through six months................ 1,685
Over six months through twelve months............... 3,052
Over twelve months.................................. 1,459
------
Total........................................... $8,430
======
-160-
<PAGE>
First Capitol Bank
TABLE 13 - INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, 1997 1-90 90-180 180-365 1 year
(Dollars in thousands) days days days or more TOTAL
- ---------------------- ---- ---- ---- ------- -----
<S> <C> <C> <C> <C> <C>
Assets:
Short-term investments........................... $ 6,958 $ 0 $ 0 $ 0 $ 6,958
Investments...................................... 9,177 500 1,147 12,017 22,841
Loans, net of unearned income(1)................. 23,577 3,006 7,599 37,044 71,226
--------------------------------------------------------------------------
Total....................................... $39,712 $3,506 $ 8,746 $49,061 $101,025
==========================================================================
Liabilities:
Interest-bearing demand.......................... $23,422 $ 0 $ 0 $ 0 $ 23,422
Savings.......................................... 12,484 0 0 0 12,484
Time............................................. 9,339 3,509 6,917 5,536 25,301
Time in denominations of $100 or more............ 2,654 1,266 3,052 1,458 8,430
Short-term borrowings............................ 8,423 0 0 0 8,423
Long-term debt................................... 2,027 565 54 4,425 7,071
--------------------------------------------------------------------------
Total....................................... $58,349 $5,340 $10,023 $11,419 $ 85,131
==========================================================================
Interest Sensitivity Gap:
Periodic.................................... (18,637) (1,834) (1,277) 37,642
Cumulative.................................. (18,637) (20,471) (21,748) 15,894
Cumulative gap as a percentage of interest
earning assets............................... (18.60%) (20.44%) (21.71%) 15.87%
</TABLE>
- -----------------------------------
(1) Does not include nonaccrual loans.
-161-
<PAGE>
ADJOURNMENT OF THE CARDINAL MEETING
Approval of the Cardinal Merger Agreement requires the affirmative vote of
the holders of 75% of all outstanding shares of the Cardinal Common Stock. If
there is an insufficient number of votes cast in person or by proxy at the
Cardinal Meeting to approve the Cardinal Merger Agreement, the Cardinal Board of
Directors intends to adjourn the Cardinal Meeting to a later date to permit
further solicitation of votes in favor of the Cardinal Merger Agreement. The
affirmative vote of a majority of the shares represented and voting at the
Cardinal Meeting is required in order to approve any such adjournment. The
place and date to which the Cardinal Meeting would be adjourned would be
announced at the Cardinal Meeting. Under the Cardinal Bylaws it shall not be
necessary to give any notice of the time and place of the adjourned meeting
other than the announcement at the Cardinal Meeting.
The Cardinal Board of Directors recommends that shareholders vote "FOR" the
proposal to adjourn the Cardinal Meeting if necessary to permit further
solicitation of proxies to approve the Cardinal Merger Agreement.
ADJOURNMENT OF THE FIRST CAPITOL MEETING
Approval of the First Capitol Merger Agreement requires the affirmative
vote of 80% of all outstanding First Capitol Common Stock. If there is an
insufficient number of votes cast in person or by proxy at the First Capitol
Meeting to approve the First Capitol Merger Agreement, the First Capitol Board
of Directors intends to adjourn the First Capitol Meeting to a later date for
the solicitation of additional votes in favor of the First Capitol Merger
Agreement. The affirmative vote of a majority of the shares represented and
voting at the First Capitol Meeting is required in order to approve any such
adjournment. The place and date to which the First Capitol Meeting would be
adjourned would be announced at the First Capitol Meeting. Under the First
Capitol Bylaws it shall not be necessary to give any notice of the time and
place of the adjourned meeting other than the announcement at the First Capitol
Meeting.
The First Capitol Board of Directors recommends that shareholders vote
"FOR" the proposal to adjourn the First Capitol Meeting if necessary to permit
further solicitation of proxies to approve the First Capitol Merger Agreement.
INDEPENDENT ACCOUNTANTS
Susquehanna engaged Coopers & Lybrand L.L.P., independent accountants, to
audit its financial statements for the year ended December 31, 1997.
Susquehanna expects to engage Coopers & Lybrand L.L.P., independent accountants,
to audit its financial statements for the year ended December 31, 1998.
Cardinal engaged S.R. Snodgrass A.C., independent accountants, to audit its
financial statements for the year ended December 31, 1997.
First Capitol engaged KPMG Peat Marwick LLP, independent certified public
accountants, to audit its financial statements as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997.
EXPERTS
Susquehanna
The consolidated balance sheets of Susquehanna as of December 31, 1997 and
1996 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the
-162-
<PAGE>
period ended December 31, 1997, incorporated by reference in this Proxy
Statement/Prospectus, have been incorporated herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given upon the authority of
that firm as experts in accounting and auditing.
Cardinal
The consolidated balance sheet of Cardinal as of December 31, 1997 and 1996
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
appearing as Appendix A in this Proxy Statement/Prospectus, have been included
herein in reliance on the report of S.R. Snodgrass A.C., independent
accountants, given upon the authority of that firm as experts in accounting and
auditing.
First Capitol
The financial statements of First Capitol as of December 31, 1997 and 1996,
and for each of the years in the three year period ended December 31, 1997,
appearing as Appendix B to this Proxy Statement/Prospectus, have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants and upon the authority of said firm as experts in
accounting and auditing.
LEGAL OPINIONS
The legality of the Susquehanna Common Stock to be issued in connection
with the Cardinal Merger and the First Capitol Merger is being passed upon by
Morgan, Lewis & Bockius LLP, Harrisburg, Pennsylvania, counsel to Susquehanna.
Certain legal matters relating to Cardinal will be passed upon at the Cardinal
Merger Effective Date by Shumaker Williams, P.C., Camp Hill, Pennsylvania,
special counsel to Cardinal. Certain legal matters relating to First Capitol
will be passed upon by Saul, Ewing, Remick & Saul LLP, Harrisburg, Pennsylvania,
special counsel to First Capitol.
-163-
<PAGE>
APPENDIX A
CARDINAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CARDINAL BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements (Unaudited)
Balance Sheets As Of March 31, 1998 and March 31, 1997............... A-2
Statements Of Income As Of March 31, 1998 and 1997................... A-3
Statements Of Shareholders' Equity As Of March 31, 1998 and 1997..... A-4
Statements of Cash Flows As of March 31, 1998 and 1997............... A-5
Notes to Consolidated Financial Statement............................ A-6
Financial Statements (Audited)
Report of Independent Certified Public Accountants................... A-8
Balance Sheets As Of December 31, 1997 and 1996...................... A-9
Statements Of Income As Of December 31, 1997, 1996 and 1995.......... A-10
Statements Of Shareholders' Equity As Of December 31, 1997, 1996
and 1995............................................................ A-11
Statements Of Cash Flows As Of December 31, 1997, 1996 and 1995...... A-12
Notes to Financial Statements........................................ A-13
A-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Cash and due from banks $ 4,555 $ 5,361
Interest earning balances 9,069 1,434
Federal funds sold 388 1,508
Securities available-for-sale 42,532 44,156
Loans 78,948 76,172
Less: Unearned discount 2,023 2,232
Allowance for loan losses 947 958
-------- --------
Net Loans 75,978 72,982
Accrued interest receivable 761 887
Premises and equipment, net 2,588 2,632
Foreclosed assets 147 169
Other assets 1,067 812
-------- --------
TOTAL ASSETS $137,085 $129,941
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand (non-interesting bearing) $ 17,116 $ 16,527
NOW, money market and savings 35,491 33,891
Time, less than $100,000 49,008 49,188
Time, $100,000 and over 13,836 9,815
-------- --------
Total Deposits 115,451 109,421
Securities sold under agreements
to repurchase 3,135 2,476
Short term borrowings 0 0
Accrued interest payable 562 558
Other liabilities 546 306
-------- --------
Total Liabilities 119,694 112,761
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $.50,
2,000,000 shares authorized,
990,000 shares issued and outstanding 495 495
Surplus 2,264 2,264
Retained earnings 14,612 14,339
Accumulated other comprehensive income 20 82
-------- --------
Total Shareholders' Equity 17,391 17,180
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $137,085 $129,941
======== ========
The accompanying notes are an integral part of these statements.
A-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
Three Months ended
March 31,
1998 1997
(Unaudited)
INTEREST INCOME
Loans, including fees $1,702 $1,527
Depository institutions 76 11
Federal funds sold 40 6
Securities:
Taxable 672 689
Tax-exempt 40 149
Dividends 7 8
------ ------
Total Interest Income 2,537 2,390
------ ------
INTEREST EXPENSE
Deposits
NOW, money market and savings 180 200
Time, less than $100,000 737 651
Time, $100,000 and over 116 173
Interest on securities sold under
agreements to repurchase 33 5
Short-term borrowings 0 15
------ ------
Total Interest Expense 1,066 1,044
------ ------
Net Interest Income 1,471 1,346
Provision for Loan Losses 0 0
------ ------
Net Interest Income after
Provision for Loan Losses 1,471 1,346
------ ------
OTHER INCOME
Service charges on deposit accounts 132 104
Other service charges and fees 36 34
Net security gains 25 0
Other noninterest income 16 1
------ ------
Total Other Income 209 139
------ ------
OTHER EXPENSES
Salaries and employee benefits 515 502
Occupancy and equipment expenses 106 107
Other operating expenses 448 282
------ ------
Total Other Expenses 1,069 891
------ ------
Income before income taxes 611 594
Income tax expense 180 141
------ ------
NET INCOME $ 431 $ 453
====== ======
EARNINGS PER SHARE:
Basic $ .43 $ .46
Diluted .42 .45
The accompanying notes are an integral part of these statements
A-3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders' Comprehensive
Stock Surplus Earnings Income Equity Income
---------- ------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 495 $ 2,264 $ 14,339 $ 82 $ 17,180 $
Net Income 431 431 431
Other comprehensive income:
Unrealized loss on available for
sale securities, net of
reclassification adjustment (62) (62) (62)
Comprehensive Income $ 369
=======
Cash dividends paid (158) (158)
--------- ------- -------- --------- ---------
Balance March 31, 1998 $ 495 $ 2,264 $ 14,612 $ 20 $ 17,391
========= ======= ======== ========= =========
Disclosure of reclassification
adjustment:
Unrealized holding loss arising during
the period $ (79)
Less: reclassification adjustment for
gain included in net income 17
Net unrealized loss on securities $ (62)
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARDINAL BANCORP, INC. AND SUBSIDIARY
(dollars in thousands)
Three Months Ended
March 31,
1998 1997
(Unaudited)
OPERATING ACTIVITIES
Net income $ 431 $ 453
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 52 51
Net amortization of premiums and discounts 14 3
Net securities gains (25) 0
Loss on sale of assets 3 0
(Increase) decrease in accrued interest
and other assets (97) 164
Increase (decrease) in accrued interest
and other liabilities 244 (54)
-------- --------
Net Cash Provided by Operating Activities 622 617
-------- --------
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale
securities 16,406 0
Redemption of Federal Home Loan Bank Stock 0 74
Proceeds from maturities of available-for-sale
securities 6,420 716
Purchase of available-for-sale securities (21,285) 0
Net loans originated by customers (3,011) (1,370)
Premises and equipment purchases (8) (56)
Proceeds from sales of foreclosed assets 33 19
-------- --------
Net Cash Used by Investing Activities (1,445) (617)
-------- --------
FINANCING ACTIVITIES
Net increase in deposit accounts 2,190 1,158
Net increase in time deposits 3,840 6,394
Dividends paid (158) (99)
Increase (decrease) in other borrowings 659 (7,506)
-------- --------
Net Cash Provided (Used) by Financing Activities 6,531 (53)
(Increase) decrease in Cash and Cash Equivalents 5,708 (53)
-------- --------
Cash and Cash Equivalents at January 1 8,304 6,466
-------- --------
Cash and Cash Equivalents at March 31 $ 14,012 $ 6,413
======== ========
SUPPLEMENTAL INFORMATION
Interest paid on deposits $ 1,062 $ 1,025
Income taxes paid 75 0
Loans transferred to foreclosed assets 15 3
The accompanying notes are an integral part of these statements.
A-5
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Cardinal Bancorp, Inc., includes
its wholly-owned subsidiary, First American National Bank of Pennsylvania. All
significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments which are, in
the opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year.
These statements should be read in conjunction with notes to the financial
statements contained in the 1997 Annual Report to Shareholders.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Corporation adopted the Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." In
adopting Statement No. 130, the Corporation is required to present comprehensive
income and its components in a full set of general purpose financial statements.
The Corporation has elected to report the effects of Statement No. 130 as part
of the Consolidated Statement of Changes in Shareholders' Equity.
NOTE 3 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Statement No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
All earnings per share for all periods have been presented, and where
necessary, restated to conform to the Statement No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share. There were no convertible securities which would effect the
numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income will be used as the
numerator. The following table sets forth a reconciliation of the denominator
of the basic and diluted earnings per share computation.
March 31 March 31
1998 1997
--------- ---------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 990,000 990,000
Stock options 34,482 12,431
--------- ---------
Denominator for diluted earnings per
share-adjusted weighted-average
average assumed conversions 1,024,482 1,002,431
========= =========
NOTE 4 - OTHER MATTERS
On April 13, 1998, the Board of Directors executed a definitive Agreement
and Plan of Merger (the Agreement), which provides for the affiliation of the
Corporation with Susquehanna Bancshares, Inc. (Susquehanna) headquartered in
Lititz, Pennsylvania. The Agreement provides that the affiliation will be
effected by means of a merger of the Corporation and Susquehanna. A merger of
this type will enable the Corporation's subsidiary, First American National Bank
of Pennsylvania, to remain a community-based organization with expanded
financial products and services beneficial in today's rapidly changing
technology-based marketplace.
A-6
<PAGE>
S. R. Snodgrass
Certified Public Accountants and Consultants
101 Bradford Road
Wexford, PA 15090-6909
REPORT OF INDEPENDENT AUDITORS
------------------------------
Shareholders and Board of Directors
Cardinal Bancorp, Inc.
We have audited the consolidated balance sheet of Cardinal Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1995, the Corporation changed its method of accounting for impairment
of loans and related allowance for loan losses.
/s/ S.R. SNODGRASS, A.C.
S.R. SNODGRASS, A.C.
Wexford, PA
January 30, 1998, except for Note 18, as to which
the date is April 13, 1998
A-7
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,361,379 $ 6,452,163
Interest earning balances 1,434,306 13,857
Federal funds sold 1,508,000 0
Securities available-for-sale 44,156,043 51,445,492
Loans 76,171,719 70,103,719
Less: Unearned discount 2,231,598 2,930,655
Allowance for loan losses 958,338 956,685
------------ ------------
Net Loans 72,981,783 66,216,379
Accrued interest receivable 887,427 1,160,991
Premises and equipment, net 2,631,671 2,756,476
Foreclosed assets 168,585 229,357
Other assets 812,053 1,282,017
------------ ------------
TOTAL ASSETS $129,941,247 $129,556,732
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand (non-interest bearing) $ 16,526,799 $ 13,355,981
NOW, money market and
savings accounts 33,890,620 36,520,902
Time, less than $100,000 49,188,555 45,761,145
Time, $100,000 and over 9,815,095 10,116,849
------------ ------------
Total Deposits 109,421,069 105,754,877
Securities sold under agreements to repurchase 2,475,926 105,939
Short term borrowings 0 7,561,000
Accrued interest payable 557,939 531,090
Other liabilities 306,100 380,333
------------ ------------
Total Liabilities 112,761,034 114,333,239
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value $.50, 2,000,000 shares
authorized, issued and outstanding 990,000 shares 495,000 495,000
Surplus 2,263,620 2,263,620
Retained earnings 14,339,806 12,965,373
Net unrealized securities gains/(losses) 81,787 (500,500)
------------ ------------
Total Shareholders' Equity 17,180,213 15,223,493
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS EQUITY $129,941,247 $129,556,732
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-8
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $6,504,371 $5,929,114 $6,081,265
Depository institutions 253,515 28,539 217,723
Federal funds sold 101,991 56,656 165,917
Securities:
Taxable 2,699,279 2,898,444 2,323,923
Tax-exempt 361,928 584,133 414,470
Dividends 30,873 34,854 34,522
---------- ---------- ----------
Total Interest Income 9,951,957 9,531,740 9,237,820
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,130,157 4,062,674 3,988,273
Interest on securities sold under
agreements to repurchase 67,905 8,693 0
Short-term borrowings 14,686 26,788 6,127
---------- ---------- ----------
Total Interest Expense 4,212,748 4,098,155 3,994,400
---------- ---------- ----------
Net Interest Income 5,739,209 5,433,585 5,243,420
Provision for Loan Losses 0 0 0
---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 5,739,209 5,433,585 5,243,420
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit
accounts 427,184 373,595 296,380
Net securities gains 30,875 4,685 0
Other income 161,727 154,868 179,495
---------- ---------- ----------
Total Other Income 619,786 533,148 475,875
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 2,123,534 2,401,427 1,945,413
Occupancy and equipment expenses 431,838 444,792 386,454
Data processing 159,829 125,964 96,891
F.D.I.C. insurance 13,262 2,003 117,010
Legal and professional fees 102,063 100,358 126,314
Net cost of operation and disposal
of other real estate owned 46,103 100,879 86,424
Shares tax 154,923 143,622 111,375
Supplies, stationery and printing 123,371 145,139 189,873
Other expenses 649,611 631,615 654,316
---------- ---------- ----------
Total Other Expenses 3,804,534 4,095,799 3,714,070
---------- ---------- ----------
Income before income taxes 2,554,461 1,870,934 2,005,225
Income tax expense 694,928 347,230 265,522
---------- ---------- ----------
NET INCOME $1,859,533 $1,523,704 $1,739,703
========== ========== ==========
EARNINGS PER SHARE:
Basic $1.88 $1.54 $1.76
Diluted 1.85 1.53 1.75
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-9
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Retained Securities
Stock Surplus Earnings Gains/(Losses) Total
----- ------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $247,500 $2,263,620 $10,617,716 $(1,005,597) $12,123,239
Net income for 1995 1,739,703 1,739,703
Cash dividends declared -- $.30 per share (297,000) (297,000)
Net change in unrealized gains/(losses) on
securities available-for-sale, net of tax benefit
change of $(404,844) 1,263,470 1,263,470
-------- ---------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1995 $247,500 $2,263,620 $12,060,419 $ 257,873 $14,829,412
Net income for 1996 1,523,704 1,523,704
Cash dividends declared -- $.375 per share (371,250) (371,250)
Stock split effected in the form of a 100%
stock dividend 247,500 (247,500)
Net change in unrealized gains/(losses) on
securities available-for-sale, net of tax
liability change of $390,678 (758,373) (758,373)
-------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 $495,000 $2,263,620 $12,965,373 $ (500,500) $15,223,493
Net income for 1997 1,859,533 1,859,533
Cash dividends declared -- $.49 per share (485,100) (485,100)
Net change in unrealized gains/(losses) on
securities available-for-sale, net of tax benefit
change of $(299,966) 582,287 582,287
-------- ---------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 $495,000 $2,263,620 $14,339,806 $ 81,787 $17,180,213
======== ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-10
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,859,533 $ 1,523,704 $ 1,739,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 208,365 222,864 198,995
Net amortization of discounts and premiums 8,649 32,944 112,171
Net securities gains (30,875) (4,685) 0
Provision for loss on foreclosed assets 30,507 70,121 0
Loss on sale of assets 1,190 10,826 12,507
(Increase) decrease in accrued interest and other assets 443,561 (320,162) (681,193)
Increase (decrease) in accrued interest and other liabilities (47,383) 65,097 276,533
------------ ------------ ------------
Net Cash Provided by Operating Activities 2,473,547 1,600,709 1,658,716
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 14,731,238 11,067,779 0
Redemption of Federal Home Loan Bank Stock 73,900 51,500 51,200
Proceeds from maturities of securities available-for-sale 4,422,208 6,588,917 4,598,292
Proceeds from maturities of held-to-maturity securities 0 0 491,091
Purchase of securities available-for-sale (11,033,418) (19,332,099) (14,139,549)
Purchase of held-to-maturity securities 0 0 (99,485)
Net loans (originated) by customers (6,873,656) (6,241,562) (916,515)
Premises and equipment purchases (83,560) (109,033) (969,011)
Proceeds from sales of premises and equipment 0 1,674 500
Proceeds from sales of foreclosed assets 137,328 337,340 665,437
------------ ------------ ------------
Net Cash Provided (Used) by Investing Activities 1,374,040 (7,635,484) (10,318,040)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts $ 540,536 $ (1,078,819) $ (278,209)
Net increase (decrease) in certificates of deposit 3,125,656 (1,962,524) 9,424,302
Dividends paid (485,100) (371,250) (297,000)
Increase (decrease) in other borrowings (5,191,014) 7,666,939 0
------------ ------------ ------------
Net Cash Provided (Used) by Financing Activities (2,009,922) 4,254,346 8,849,093
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 1,837,665 (1,780,429) 189,769
Cash and Cash Equivalents at Beginning of Year 6,466,020 8,246,449 8,056,680
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 8,303,685 $ 6,466,020 $ 8,246,449
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,185,899 $ 4,174,588 $ 3,783,128
Income taxes paid 525,000 369,670 435,000
Loans transferred to foreclosed assets 108,253 293,032 198,659
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-11
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
---------------------
accounts of Cardinal Bancorp, Inc. (the Corporation) and its wholly-owned
subsidiary, First American National Bank of Pennsylvania (the Bank). All
intercompany accounts have been eliminated in consolidation. The investment in
subsidiary on the parent company financial statements is carried at the parent
company's equity in the underlying net assets.
The Corporation is a Pennsylvania corporation organized to become the
holding company of the Bank. The Bank is a Federally chartered National Bank,
located in Pennsylvania. The Bank's principal sources of revenue emanate from
its portfolio of commercial, mortgage and consumer loans, as well as income from
securities issued or secured by the U.S. Government, by States and Political
Subdivisions thereof and by corporations. The Corporation is supervised by the
Board of Governors of the Federal Reserve System, while the Bank is subject to
regulation and supervision by the Office of the Comptroller of the Currency.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
The major accounting policies and practices are summarized below.
Securities Available-for-Sale: Management determines the appropriate
-----------------------------
classification of debt securities at the time of purchase and re-evaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Bank has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Mortgage-related securities include mortgage-
backed securities. Realized gains and losses, and declines in value judged to
be other-than-temporary, are included in net securities gains (losses). The
cost of securities sold is based on the specific identification method.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank
represents ownership in institutions which are wholly-owned by other financial
institutions. These equity securities are accounted for at cost.
Loans: Loans are stated at the amount of unpaid principal, reduced by
-----
unearned discount and the allowance for loan losses. Unearned discount on
certain installment loans is recognized as income over the terms of the loans
by methods approximating the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding.
Generally, loans are placed on nonaccrual status when the payment in full
of principal or interest is not expected or when a loan is past due 90 days or
more unless the loan is well secured and in the process of collection. Any
unpaid interest previously accrued on such loans is reversed from income, and
thereafter, interest is recognized only to the extent of payments received.
Restructured loans are loans whose terms have been modified to provide for a
reduction of either principal or interest due to a deterioration in the
financial condition of the borrower.
Allowance for Loan Losses: The allowance for loan losses represents
-------------------------
the amount which management estimates is adequate to provide for potential
losses in its loan portfolio. The allowance method is used in providing for
loan losses. Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for
loan losses is based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and
volume of the portfolio, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses, including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term.
A-12
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUING)
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Corporation will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Corporation
individually evaluates such loans for impairment and does not aggregate loans by
major risk classifications. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
The Corporation may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, provided the loan is not a commercial or commercial real estate
classification. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of loans is determined by the difference between the present value of the
expected cash flows related to the loan, using the original interest rate, and
its recorded value, or, as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded
amount of the loans. When foreclosure is probable, impairment is measured based
on the fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer
loans are generally of smaller balances, and a homogeneous nature, thus are
measured for impairment collectively. Loans that experience insignificant
payment delays, which is defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment
delays on a case-by-case basis, taking into consideration all of the
circumstances concerning the loan, the credit worthiness and payment history of
the borrower, the length of the payment delay, and the amount of shortfall in
relation to the principal and interest owed.
Foreclosed Assets: Foreclosed assets include real estate acquired and
-----------------
loan collateral repossessed as a result of foreclosure proceedings and
acceptance of deeds-in-lieu of foreclosure. Other real estate owned (OREO)
includes real estate acquired in satisfaction of a loan. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to OREO and recorded
at the lower of cost or fair market value based on appraised value at the date
received. Losses arising from the acquisition of such property are charged
against the allowance for loan losses. Subsequently, OREO is recorded at the
lower of the amount recorded at the date acquired or the then current market
value less disposition costs. Declines in value of the properties subsequent to
acquisition and gains or losses realized upon disposition are charged against
income.
Premises and Equipment: Premises and equipment are stated at cost less
----------------------
accumulated depreciation. Depreciation is computed on both the straight-line
and accelerated methods over the estimated useful lives of the assets.
Income Taxes: The liability method is used in accounting for income
------------
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Earnings Per Share: In February 1997, the Financial Accounting
------------------
Standards Board (the FASB) issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." Statement No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share.
All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements.
Cash Equivalents: For purposes of the Statements of Cash Flows, cash
----------------
and due from banks, interest earning balances and federal funds sold are
considered cash equivalents.
Pending Accounting Pronouncements: In June 1996, the FASB issued Statement
---------------------------------
of Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
The provisions of Statement 125 are effective for transactions occurring after
December 31, 1996, except those provisions relating to repurchase agreements,
securities lending, and other similar transactions and pledged collateral, which
have been delayed until after December 31, 1997, by Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125, an
amendment of FASB Statement No. 125." The adoption of the provisions of
Statement No. 127 is not expected to have a material impact on the financial
position or results of operations.
A-13
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUING)
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The provisions of the
statement are effective for all fiscal years beginning after December 15, 1997.
The adoption of this statement is not expected to have a material impact on
financial position or results of operations.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share. There were no convertible securities which would effect the
numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statements of Income will be used as the
numerator. The following table sets forth a reconciliation of the denominator
of the basic and diluted earnings per share computation.
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per
share-weighted-average shares 990,000 990,000 990,000
Stock options 16,569 6,149 2,269
--------- ------- -------
Denominator for diluted earnings per
share-adjusted weighted-average
average assumed conversions 1,006,569 996,149 992,269
========= ======= =======
</TABLE>
NOTE 3 - COMMON STOCK SPLIT
On October 16, 1996, the Board of Directors approved a two for one stock
split. The additional shares resulting from the split, which was effected in
the form of a 100 percent stock dividend, were distributed on November 14, 1996,
to holders of record on October 31, 1996. All references to the number of
common shares and per share amounts for 1995 have been restated to reflect the
stock split.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank either indirectly through vault cash or directly with the Federal
Reserve. The average daily combined amount of the required reserve balances for
the years ended December 31, 1997 and 1996, were approximately $590,000 and
546,000, respectively.
NOTE 5 - RESTRICTIONS ON LOANS AND DIVIDENDS
Federal law prevents the Corporation from borrowing from the Bank unless
the loans are secured by specified obligations. Further, such loans are limited
in amount to ten percent (10%) of the Bank's total capital. Additionally, the
Office of the Comptroller of the Currency (OCC) must approve a dividend by the
Bank if the total dividends declared for the year exceed net profits for the
year combined with net profits less dividends for the two preceding calendar
years. Without regulatory approval, the amount available for payment of
dividends by the Bank in 1998 was $2,526,795 at December 31, 1997.
A-14
<PAGE>
NOTE 6 - SECURITIES AVAILABLE-FOR-SALE
Amortized cost and estimated fair values of securities available-for-sale are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies $20,383,910 $111,812 $ 3,960 $20,491,762
Mortgage-backed:
U.S. government agencies 18,888,732 83,674 151,862 18,820,544
Other mortgage-backed 1,750,746 0 6,571 1,744,175
Obligations of states and political subdivisions 2,533,436 90,826 0 2,624,262
Stock 475,300 0 0 475,300
----------- -------- ---------- -----------
$44,032,124 $286,312 $ 162,393 $44,156,043
=========== ======== ========== ===========
<CAPTION>
December 31, 1996
--------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies $27,337,328 $ 14,305 $ 606,336 $26,745,297
Mortgage-backed:
U.S. government agencies 12,521,385 17,467 268,914 12,269,938
Other mortgage-backed 2,021,019 0 10,418 2,010,601
Obligations of states and political
subdivisions 9,774,894 220,809 125,247 9,870,456
Stock 549,200 0 0 549,200
----------- -------- ---------- -----------
$52,203,826 $252,581 $1,010,915 $51,445,492
=========== ======== ========== ===========
</TABLE>
The Corporation recognized gross realized gains on sales of securities of
$179,301 and $121,397 in 1997 and 1996, respectively while gross realized losses
on sales of securities totaled $148,426 in 1997 and $116,712 in 1996. Proceeds
from sales of securities were $14,731,238 and $11,067,779 in 1997 and 1996,
respectively. There were no sales of securities in 1995, and therefore, there
was no gross realized gain or loss incurred in that year.
At December 31, 1997 and 1996, securities with a carrying value of
$22,228,054 and $18,850,220, respectively, were pledged to secure public monies
as required by law, and for other purposes.
The maturities of debt securities at December 31, 1997, based upon
contractual maturity dates, are summarized below. Expected maturities will
differ from contractual maturities as the issuers may have the right to prepay
obligations without penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 479,292 $ 480,643
Due from one to five years 710,625 708,717
Due from five to ten years 21,065,830 21,186,784
Due after ten years 21,301,077 21,304,599
----------- -----------
$43,556,824 $43,680,743
=========== ===========
</TABLE>
A-15
<PAGE>
NOTE 7 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Residential Mortgage $21,382,996 $19,534,376
Commercial Mortgage 23,197,168 19,583,590
Consumer 17,574,504 18,050,964
Commercial and Agricultural 14,017,051 12,934,789
----------- -----------
Total Loans 76,171,719 70,103,719
Less: Unearned Discount 2,231,598 2,930,655
Allowance for Loan Losses 958,338 956,685
----------- -----------
Net Loans $72,981,783 $66,216,379
=========== ===========
</TABLE>
The Bank primarily grants loans to customers in South Central Pennsylvania.
The Bank extends credit to customers and requires collateral based upon
Management's evaluation of each customer's financial condition and ability to
satisfy completely the terms of the agreement. While the Bank maintains a
diversified loan portfolio and the ability of its debtors to honor their
contracts is not substantially dependent on any particular economic business
sector, there are several industries in which concentrations of credit exist.
These are agricultural industry, motels/hotels and restaurants, timber and
lumber related industries, and loans to automobile dealerships. At December 31,
1997, loans to these industries as a percent of total loans were approximately
5.50%, 6.31%, 4.63% and 4.75%, respectively. Loans to these groups were
approximately 3.78%, 7.48%, 4.91% and 5.88% of total loans, respectively, at
December 31, 1996.
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $289,252 and $59,705, respectively, of which
$90,965 and $59,705 were on a nonaccrual basis, respectively. These loans have
a related allowance for loan losses of $0 and $16,725 at December 31, 1997 and
1996, respectively.
The average recorded investment in impaired loans during the year ended
December 31, 1997, was $80,676 while the average recorded investment in such
loans at December 31, 1996, was $767,949. For the years ended December 31, 1997
and 1996, the Corporation recognized no interest income on impaired loans.
The Corporation had nonaccrual loans of approximately $311,000 and $584,000
at December 31, 1997, and 1996, respectively. Interest income on loans would
have been increased by approximately $42,000, $108,000 and $128,000 in 1997,
1996 and 1995, respectively, if loans on nonaccrual status had performed in
accordance with their original terms. Interest received and included in
interest income from loans on nonaccrual status amounted to approximately
$13,000, $7,000 and $6,000 in 1997, 1996 and 1995, respectively.
Certain officers and directors of the Corporation and the Bank and their
family members, affiliates and companies in which they have beneficial ownership
were indebted to the Bank at December 31, 1997 and 1996. Such loans are made on
substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans outstanding was
$2,921,891 and $507,796 at December 31, 1997 and 1996, respectively. During
1997, $2,999,061 of new loans were made to or guaranteed by such related parties
and repayments of such loans totaled $584,966. Due to changes in the
composition of officers and directors, advances and payments on loans may not
relate directly to changes in balances outstanding from year to year. In
addition to the balances outstanding, certain borrowers in this category had
credit available on unused lines of credit in amounts of $510,855 and $338,403
at December 31, 1997 and 1996, respectively.
NOTE 8 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three years ended December
31, 1997, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Balance at January 1 $956,685 $1,333,273 $1,494,171
Provision for loan losses 0 0 0
Loans charged off (75,939) (490,458) (195,131)
Recoveries 77,592 113,870 34,233
-------- ---------- ----------
Balance at December 31 $958,338 $ 956,685 $1,333,273
======== ========== ==========
</TABLE>
A-16
<PAGE>
NOTE 9 - PREMISES AND EQUIPMENT
Premises and equipment are as follows:
December 31
----------------------------------
1997 1996
------------ -----------
Land $ 498,534 $ 498,534
Buildings and improvements 3,340,192 3,338,672
Furniture and equipment 1,996,508 1,928,566
----------- -----------
5,835,234 5,765,772
Less: Accumulated depreciation 3,203,563 3,009,296
----------- -----------
$ 2,631,671 $ 2,756,476
=========== ===========
Depreciation expense amounted to $208,365, $222,864 and $198,995 in
1997, 1996 and 1995, respectively.
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
BORROWINGS
The outstanding balances and related information for securities sold
under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Balance at year end $2,475,926 4.58% $ 105,939 5.00%
Average balance outstanding during the year 1,380,950 4.91% 173,852 5.00%
Maximum amount outstanding at any month end 3,408,692 390,228
</TABLE>
Average amounts outstanding during the year represent daily average
balances and average interest rates represent interest expense divided by the
related average balance.
Investment securities with an amortized cost of approximately
$3,000,000 and $2,000,000 and an estimated market value of $3,008,120 and
$1,949,731 at December 31, 1997 and 1996, respectively have been pledged for the
securities sold under agreements to repurchase.
The Bank maintains a Flexline credit arrangement with the Federal Home
Loan Bank of Pittsburgh (FHLB). The arrangement is a revolving line of credit
and is renewable annually. During 1997, the Bank had a borrowing limit of
$1,899,000 with a variable rate of interest, based upon the FHLB's cost of
funds. Additionally, the Bank is capable of borrowing from FHLB under a RepoPlus
borrowing arrangement up to $20,446,000 less any amounts outstanding under the
Flexline credit arrangement, all of which was available as of December 31, 1997.
Certain obligations of U.S. Government corporations and agencies,
mortgage-backed securities and first mortgage loans are pledged to secure such
borrowings. As a member of the Federal Reserve system, the Bank is also capable
of meeting short-term credit needs by borrowing from the Federal Reserve Bank of
Philadelphia.
A-17
<PAGE>
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM
BORROWINGS (CONTINUED)
A summary of the components of the Corporation's short-term borrowings
at the end of the reporting period follows:
1997 1996
---------- ----------
FHLB RepoPlus
Balance at year-end $ 0 $3,824,000
Maximum amount outstanding at any month-end 793,000 3,824,000
Average balance outstanding during the year 134,608 469,950
Weighted average interest rate:
As of year-end - 7.00%
Paid during the year 6.11% 4.96%
Federal Reserve Bank
Balance at year-end $ 0 $3,737,000
Maximum amount outstanding at any month-end 0 3,737,000
Average balance outstanding during the year 23,339 90,732
Weighted average interest rate:
As of year-end - 5.00%
Paid during the year 5.31% 5.00%
NOTE 11 - INCOME TAXES
The total federal income tax expense in the statements of income are as
follows:
1997 1996 1995
--------- --------- ---------
Currently Payable $ 653,911 $ 336,116 $ 274,000
Deferred 45,010 70,221 281,033
Reduction of
Valuation Allowance (3,993) (59,107) (289,511)
--------- --------- ---------
$ 694,928 $ 347,230 $ 265,522
========= ========= =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax assets and liabilities as of
December 31, are as follows:
A-18
<PAGE>
NOTE 11 - INCOME TAXES (CONTINUED)
1997 1996
--------- ---------
Deferred Tax Assets:
Allowance for loan losses $ 149,535 $ 149,535
Real estate owned 34,214 23,841
Depreciation 5,861 8,406
Alternative minimum tax credits 0 3,993
Securities available-for-sale 0 257,834
Accrued interest on loans 57,424 51,526
Other 44,406 93,038
--------- ---------
Total Deferred Tax Assets 291,440 588,173
--------- ---------
Deferred Tax Liabilities:
Pension (41,092) (34,982)
Securities available-for-sale (42,133) 0
--------- ---------
Total Deferred Tax Liabilities (83,225) (34,982)
--------- ---------
208,215 553,191
Valuation Allowance 0 (3,993)
--------- ---------
Net Deferred Tax Assets $ 208,215 $ 549,198
========= =========
At December 31, 1996, the level of the valuation allowance is
attributable to the alternative minimum tax credits carryforward.
The following schedule provides a reconciliation between the statutory
and the effective tax rates for the years ended December 31:
1997 1996 1995
------ ------ ------
Statutory Federal Tax Rate 34.0% 34.0% 34.0%
Adjustments:
Tax exempt interest income (7.3) (12.3) (7.9)
Reduction in valuation
allowance (.2) (3.1) (14.4)
Other, net .7 .0 1.5
------ ------ ------
Effective Tax Rate 27.2% 18.6% 13.2%
====== ====== ======
Income taxes applicable to net security gains amounted to $10,498 and
$1,593 for the years ended December 31, 1997 and 1996, respectively.
NOTE 12 - EMPLOYEE BENEFITS
The Corporation provides an employee stock ownership plan and trust
(with 401(k) provisions) for its employees whereby each eligible participant may
make before tax contributions based upon an election to defer a portion of his
salary. Additionally, the Board of Directors may authorize contributions by the
Corporation to each participant's account based upon a participant's salary
deferral or may authorize profit sharing contributions to the account of each
eligible employee. The plan is an amendment and restatement of the Corporation's
prior profit sharing plan. For the years ended December 31, 1997, 1996 and 1995,
the Corporation made contributions of $25,524, $11,020 and $5,746, respectively,
to the plan. At December 31, 1997 and 1996, the plan held 6,460 and 2,980 shares
of common stock of the Corporation.
The Bank maintains a non-contributory defined benefit pension plan for
its employees. The Bank's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. The plan provides
pension benefits to substantially all employees based on the average base salary
for the last five years of employment and the total number of years of service.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. The plan
assets consist of investments in stocks, bonds and temporary investment common
trust funds. The Bank does not provide any post-retirement or post employment
benefits other than pension for its employees.
A-19
<PAGE>
NOTE 12 - EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the balance sheet at:
December 31
--------------------------
1997 1996
----------- -----------
Accumulated benefit obligation, including
vested benefits of $1,391,246 in 1997
and $1,286,919 in 1996 $ 1,402,252 $ 1,319,981
=========== ===========
Plan assets at fair value 3,249,113 2,776,276
Projected benefit obligation
for service rendered to date (2,078,046) (1,894,467)
----------- -----------
Plan assets in excess of
projected benefit obligation 1,171,067 881,809
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (772,613) (482,687)
Unrecognized net assets at transition
being recognized over approximately 22 years (277,596) (298,327)
----------- -----------
Prepaid pension cost, included
in other assets $ 120,858 $ 100,795
=========== ===========
Net periodic pension benefit included the following components:
1997 1996 1995
--------- --------- ---------
Service cost-benefits earned
during the period $ 99,951 $ 97,738 $ 70,129
Interest cost on projected
benefit obligation 127,417 115,978 106,182
Actual return on plan assets (565,424) (334,671) (546,764)
Net amortization and deferral 317,993 110,661 363,644
--------- --------- ---------
Net periodic pension benefit $ (20,063) $ (10,294) $ (6,809)
========= ========= =========
Actuarial assumptions used in the determination of the projected
benefit obligation were as follows:
December 31
--------------------------------
1997 1996 1995
------ ------ ------
Expected long-term rate of
return on plan assets 8.0% 8.0% 8.0%
Weighted average discount rate 7.0% 7.0% 7.0%
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
NOTE 13 - STOCK OPTIONS
In 1997, the Corporation, through its Board of Directors, approved an
Incentive Stock Option Plan which granted each director an annual option of
1,000 shares of the Corporation's common stock to be exercised within a ten year
period at an option price equal to the fair market value at the date of grant.
For 1996 and 1995, the Corporation approved an incentive Stock Option Plan which
granted each director an annual option of 2,000 shares of the Corporation's
common stock to be exercised within a ten year period at an option price equal
to the fair market value at the date of grant. For 1996 and 1995, the
Corporation's former President and CEO was granted ten year non-qualified
incentive stock options of 4,000 shares of common stock, exercisable within the
ten year period at an exercise price equal to the market value of the common
stock at the date of the grant.
A-20
<PAGE>
NOTE 13 - STOCK OPTIONS (CONTINUED)
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the Corporation
to recognize compensation expense for all awards of equity instruments issued
after December 31, 1994. The statement establishes a fair value based method of
accounting for stock-based compensation plans. The standard applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities in amounts based on the price of the
entity's common stock or other equity instruments. Statement No. 123 permits
companies to continue to account for such transactions under Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," but
requires disclosure in a note to the financial statements pro forma net income
and earnings per share as if the Corporation had applied the new method of
accounting.
Under APB Opinion 25, no compensation expense has been recognized with
respect to the options granted under the stock option plan. Had compensation
expense been determined on the basis of fair value pursuant to Statement No.
123, net income and earnings per share would have been reduced as follows:
1997 1996 1995
----------- ----------- -----------
Net Income:
As reported $ 1,859,533 $ 1,523,704 $ 1,739,703
=========== =========== ===========
Proforma $ 1,430,006 $ 1,387,305 $ 1,704,312
=========== =========== ===========
Earnings Per Share:
As reported
Basic $ 1.88 $ 1.54 $ 1.76
====== ====== ======
Diluted $ 1.85 $ 1.53 $ 1.75
====== ====== ======
Proforma
Basic $ 1.44 $ 1.40 $ 1.72
====== ====== ======
Diluted $ 1.44 $ 1.40 $ 1.72
====== ====== ======
The following table presents share data related to the stock option plan:
Shares Under Option
---------------------
1997 1996
------ ------
Outstanding, January 1 86,000 66,000
Granted 8,000 20,000
Exercised 0 0
Forfeited 0 0
------ ------
Outstanding, December 31 (at prices
ranging from $13.19 - $21.00) 94,000 86,000
====== ======
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as guarantees, commitments to extend credit,
and stand-by letters of credit. These commitments involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the consolidated
financial statements. Loan commitments are made to accommodate the financing
needs of the customers of the Bank. Stand-by letters of credit commit the Bank
to make payments on behalf of customers when certain specified future events
occur. Both arrangements have credit risk essentially the same as that involved
in extending loans to customers and are subject to the Bank's normal credit
policies. Collateral (e.g., securities, receivables, inventory and equipment) is
obtained based on Management's credit assessment of the customer. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.
A-21
<PAGE>
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Because many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. Although the Bank recognizes future cash requirements may be less
than the total commitment amounts, the Bank utilizes the total amounts in
analyzing its liquidity needs.
Loan commitments (unfunded loans and unused lines of credit) and letters of
credit outstanding at December 31 were as follows:
1997 1996
----------- -----------
Loan commitments $11,356,339 $ 8,334,939
Stand-by letters of credit 209,556 245,901
----------- -----------
$11,565,895 $ 8,580,840
=========== ===========
Additionally, in the normal course of business, the Corporation may be
subject to litigation in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, is not aware of any pending
or threatened litigation that will have a material adverse affect on the
corporation's liquidity, capital resources or results of operations.
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary actions by the regulators that,
if undertaken, could have a direct material effect on the Corporation's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The 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 include risk-based capital
adequacy guidelines under which the components of capital are classified into
two tiers. For the Corporation, Tier 1 capital consists of common shareholders'
equity. Total risk-based capital consists of Tier 1 capital plus the allowance
for loan losses up to a maximum of 1.25% of risk-weighted assets. The risk-based
capital ratios are computed by dividing the components of capital by
risk-weighted assets. Risk-weighted assets are determined by assigning credit
risk weighing factors from 0% to 100% to various categories of assets and
off-balance-sheet financial instruments. At December 31, 1997, the required
minimum ratios are 4.0% for the Tier 1 capital ratio and 8.0% for the total
capital ratio. Federal regulations also require all national banks maintain a
total assets leverage ratio of at least 3.0%. Management believes, as of
December 31, 1997, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia have
categorized the Bank and the Corporation as well capitalized as defined under
the applicable regulatory framework. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios at least 100 to 200 basis points above the minimum capital
adequacy ratios set forth in the table. There have been no conditions or events
since that notification that management believes have changed the Corporation's
category.
A-22
<PAGE>
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The following table reflects the Corporation's capital ratios, which are
substantially the same as the Bank's, at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------- ---------------------
Amount Ratio Amount Ratio
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
- --------------------------------------
Actual $18,056,764 21.81% $16,680,678 20.96%
For Capital Adequacy Purposes 6,622,647 8.00% 6,365,795 8.00%
To Be Well Capitalized 8,278,309 10.00% 7,957,244 10.00%
Tier 1 Capital (to Risk Weighted Assets)
- ---------------------------------------
Actual $17,098,426 20.65% $15,723,993 19.76%
For Capital Adequacy Purposes 3,311,324 4.00% 3,182,898 4.00%
To Be Well Capitalized 4,966,985 6.00% 4,774,346 6.00%
Tier 1 Capital (to Average Assets)
- ---------------------------------
Actual $17,098,426 13.02% $ 15,723,993 12.20%
For Capital Adequacy Purposes 3,939,206 3.00% 3,867,921 3.00%
To Be Well Capitalized 6,565,344 5.00% 6,446,534 5.00%
</TABLE>
NOTE 16 - FAIR VALUE DISCLOSURE
The estimated fair values of the Corporation's financial instruments are as
follows:
1997
-----------------------------
Carrying Fair
Value Value
------------ ------------
Financial assets:
Cash and due from banks, interest earning
balances and federal funds sold $ 8,303,685 $ 8,303,685
Investment securities 44,156,043 44,156,043
Net loans 72,981,783 73,214,000
Accrued interest receivable 887,427 887,427
------------ ------------
Total $126,328,938 $126,561,155
============ ============
Financial liabilities:
Deposits $109,421,069 $109,761,069
Securities Sold Under Repurchase
Agreements 2,475,926 2,475,926
Accrued interest payable 557,939 557,939
------------ ------------
Total $112,454,934 $112,794,934
============ ============
A-23
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE (CONTINUED)
1996
------------------------------
Carrying Fair
Value Value
------------ ------------
Financial assets:
Cash and due from banks, interest earning
balances and federal funds sold $ 6,466,020 $ 6,466,020
Investment securities 51,445,492 51,445,492
Net loans 66,216,379 65,447,000
Accrued interest receivable 1,160,991 1,160,991
------------ ------------
Total $125,288,882 $124,519,503
============ ============
Financial liabilities:
Deposits $105,754,877 $106,099,448
Securities Sold Under Repurchase
Agreements 105,939 105,939
Short Term Borrowings 7,561,000 7,561,000
Accrued interest payable 531,090 531,090
------------ ------------
Total $113,952,906 $114,297,477
============ ============
Financial instruments are cash, evidence of an ownership interest in an
entity, or a contract which creates an obligation or right to receive or deliver
cash or another financial instrument from/to a second entity on potentially
favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon Management's judgement regarding
current economic conditions, interest rate risk, expected cash flows, future
estimated losses and other factors, as determined through various option pricing
formulas or simulation modeling. As many of these assumptions result from
judgments made by Management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In addition,
changes in the assumptions on which the estimated fair values are based may have
a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets, and premises and equipment
are not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Corporation.
The Corporation utilized simulation modeling in determining the estimated
fair value of financial instruments for which quoted market prices were not
available, based upon the following assumptions:
Cash and Due From Banks, Interest Earning Balances, Federal Funds Sold, Accrued
- -------------------------------------------------------------------------------
Interest Receivable and Accrued Interest Payable
- ------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
- ---------------------
The fair value of securities available-for-sale is based upon available
quoted market prices.
A-24
<PAGE>
NOTE 16 - FAIR VALUE DISCLOSURE (CONTINUED)
Loans and Deposits
- ------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality and prepayment risk. Demand, savings and
money market deposit accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits is estimated using a discounted cash
flow calculation that applies contractual costs currently being paid on the
existing portfolio to current market rates being offered for deposits of similar
remaining maturities.
Borrowed Money
- --------------
Borrowings consist of overnight advances received from the Federal Reserve
Bank and overnight advances on a line of credit with the Federal Home Loan Bank
together with securities sold under agreements to repurchase. The carrying value
of these liabilities is a reasonable estimate of the fair value.
Commitments to Extend Credit and Standby Letters of Credit
- ----------------------------------------------------------
These financial instruments are generally not subject to sale and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value determined by discounting the remaining contractual fee over
the term of the commitment using fees currently charged to enter into similar
agreements with similar credit risk, are not considered material for disclosure.
The contractual amounts of unfunded commitments and letters of credit are
presented in Note 13.
A-25
<PAGE>
NOTE 17 - CARDINAL BANCORP, INC. (PARENT CORPORATION)
The condensed financial information for the Corporation is as follows:
BALANCE SHEETS
December 31,
------------------------------
ASSETS 1997 1996
----------- -----------
Cash $ 6,017 $ 2,552
Investment in banking subsidiary 17,171,243 15,218,790
Other assets 2,953 2,151
----------- -----------
$17,180,213 $15,223,493
=========== ===========
SHAREHOLDERS' EQUITY
Capital stock $ 495,000 $ 495,000
Surplus 2,263,620 2,263,620
Retained earnings 14,421,593 12,464,873
----------- -----------
$17,180,213 $15,223,493
=========== ===========
STATEMENTS OF INCOME
December 31,
--------------------------------------------
Income 1997 1996 1995
----------- ----------- -----------
Dividends from banking
subsidiary $ 495,100 $ 371,250 $ 347,000
Net equity in undistributed
earnings of subsidiary 1,370,166 1,156,629 1,393,902
----------- ----------- -----------
1,865,266 1,527,879 1,740,902
Operating expenses 8,686 6,326 1,817
----------- ----------- -----------
Net Income before Taxes 1,856,580 1,521,553 1,739,085
Income Tax Benefit (2,953) (2,151) (618)
----------- ----------- -----------
Net Income $ 1,859,533 $ 1,523,704 $ 1,739,703
=========== =========== ===========
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------------------------
Operating Activities 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net Income $ 1,859,533 $ 1,523,704 $ 1,739,703
Adjustment to reconcile net income to net
cash provided by operating activities:
Increase in undistributed earnings (1,370,166) (1,156,629) (1,393,902)
(Increase) Decrease in other assets (802) (1,533) 1,783
----------- ----------- -----------
Net Cash Provided by
Operating Activities 488,565 365,542 347,584
Net Cash Used by
Investing Activities 0 0 (50,000)
Dividends Paid (485,100) (371,250) (297,000)
----------- ----------- -----------
Increase (Decrease) in
Cash and Cash Equivalents 3,465 (5,708) 584
Cash and Cash Equivalents
at Beginning of Year 2,552 8,260 7,676
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 6,017 $ 2,552 $ 8,260
=========== =========== ===========
</TABLE>
A-26
<PAGE>
NOTE 18 - SUBSEQUENT EVENT
On April 13, 1998, the Board of Directors executed an Agreement and Plan of
Affiliation (the "Agreement") among the Corporation, the Bank, and Susquehanna
Bancshares, Inc. ("Susquehanna") headquartered in Lititz, Pennsylvania. The
Agreement provides that the affiliation will be effected by means of a merger of
the Corporation and a subsidiary of Susquehanna. In the merger, each shareholder
of the Corporation will receive 1.92 shares of Susquehanna common stock in
exchange for each share of the Corporation's stock, subject to certain terms,
conditions, and limitations set forth in the Agreement.
Completion of the merger is subject to approval by various regulatory
agencies and the shareholders of the Corporation.
A-27
<PAGE>
APPENDIX B
FIRST CAPITOL BANK
FINANCIAL STATEMENTS
<PAGE>
FIRST CAPITOL BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements (Unaudited)
Balance Sheets As Of March 31, 1998 and March 31, 1997............... B-2
Statements Of Income For The Three Months Ended March 31, 1998 and
1997................................................................ B-3
Statements Of Cash Flows For The Three Months Ended March 31, 1998
and 1997............................................................ B-4
Statements Of Shareholders' Equity For The Three Months Ended March
31, 1998 and 1997................................................... B-5
Notes to Financial Statements........................................ B-6
Financial Statements (Audited)
Report of Independent Auditors....................................... B-7
Balance Sheets As Of December 31, 1997 and 1996...................... B-8
Statements Of Income For The Years Ended December 31, 1997, 1996 and
1995................................................................ B-9
Statements Of Shareholders' Equity For The Years Ended December 31,
1997, 1996 and 1995................................................. B-10
Statements Of Cash Flows For The Years Ended December 31, 1997, 1996
and 1995............................................................ B-11
Notes to Financial Statements........................................ B-12
</TABLE>
B-1
<PAGE>
FIRST CAPITOL BANK
BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Assets
Cash and due from banks......................... $ 4,411,083 $ 2,627,677
Federal funds sold.............................. 5,867,000 4,875,000
------------ -----------
Total cash and cash equivalents............ 10,278,083 7,502,677
Interest bearing deposits with banks............ 27,756 24,883
Securities available for sale................... 25,518,104 21,447,484
Loans........................................... 71,386,145 64,552,877
Less allowance for loan losses................ 1,009,313 953,798
------------ -----------
Net loans.................................. 70,376,832 63,599,079
Bank premises and equipment, net................ 1,718,762 1,794,811
Accrued interest receivable..................... 606,291 540,703
Other assets.................................... 1,293,496 1,243,709
------------ -----------
Total assets............................... $109,819,324 $93,153,346
============ ===========
Liabilities and Shareholders' Equity
Deposits:
Demand - noninterest bearing.................. $ 8,903,674 $ 7,190,803
Demand - interest bearing..................... 25,131,907 20,617,930
Savings....................................... 14,380,223 9,965,785
Time.......................................... 23,845,465 25,649,415
Time - $100,000 and over...................... 9,997,508 9,586,529
------------ -----------
Total deposits............................. 82,258,777 73,010,462
Securities sold under agreements to repurchase.. 8,416,000 7,299,000
Borrowed funds.................................. 6,042,570 6,121,071
Accrued interest payable........................ 597,763 612,797
Other liabilities............................... 1,253,992 209,597
------------ -----------
Total liabilities.......................... 98,569,102 87,252,927
Shareholders' equity:
Preferred stock, $10 par value; Authorized
500,000 shares; none issued................ ---- ----
Common stock, $10 par value; Authorized
2,000,000 shares; issued and outstanding
505,933 shares in 1998 and 423,569
shares in 1997............................. 5,059,330 4,235,690
Surplus....................................... 4,653,920 3,834,227
Retained earnings............................. 1,524,575 999,836
Unrealized gains (loss) on securities
available for sale........................... 12,397 (169,334)
------------ -----------
Total shareholders' equity................. 11,250,222 8,900,419
------------ -----------
Total liabilities and shareholders' equity. $109,819,324 $96,153,346
============ ===========
</TABLE>
B-2
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Interest income:
Interest and fees on loans...................... $1,633,226 $1,513,522
Interest on deposits with banks................. 2,047 1,818
Interest on securities available for sale....... 352,445 262,072
Interest on Federal funds sold.................. 72,175 36,617
---------- ----------
Total interest income...................... 2,059,893 1,814,029
---------- ----------
Interest expense:
Demand - interest bearing and savings........... 401,172 327,339
Time............................................ 351,787 364,278
Time - $100,000 and over........................ 126,470 137,623
Securities sold under agreements to repurchase.. 115,998 33,253
Borrowed funds.................................. 93,286 105,523
---------- ----------
Total interest expense..................... 1,088,713 968,016
---------- ----------
Net interest income........................ 971,180 846,013
Provision for loan losses......................... 36,000 59,100
---------- ----------
Net interest income after provision
for loan losses........................ 935,180 786,913
---------- ----------
Noninterest income:
Service charges on deposit accounts............. 21,910 67,781
Gain on sale of securities...................... 2,080 70,903
Other........................................... 33,997 16,103
---------- ----------
Total noninterest income................... 57,987 154,787
---------- ----------
Noninterest expense:
Salaries and employee benefits.................. 415,814 398,994
Occupancy expense, net.......................... 82,817 87,771
Equipment expense............................... 54,668 52,488
Other........................................... 202,699 194,596
---------- ----------
Total noninterest expense.................. 755,998 733,849
---------- ----------
Income before income tax expense........... 237,169 207,851
Income tax expense................................ 60,770 67,230
---------- ----------
Net income................................. $ 176,399 $ 140,621
========== ==========
Earnings per common share - basic................. $0.36 $0.33
========== ==========
Earnings per common share - diluted............... 0.36 0.32
========== ==========
Weighted average shares outstanding - basic....... 483,089 423,569
========== ==========
Weighted average shares outstanding - diluted..... 495,923 440,310
========== ==========
</TABLE>
B-3
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income 176,398 140,621
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 36,000 59,100
Provision for depreciation 37,004 34,048
Gain on sale of securities (2,080) (70,903)
Accretion of discount, net (3,084) (3,360)
Amortization of premium, net 16,146 17,727
Decrease in interest receivable (32,051) (20,898)
(Increase) decrease in other, net 745,008 (233,429)
Decrease in interest payable (120,606) (26,644)
----------- -----------
Net cash provided by (used in) operating activities 852,735 (103,738)
----------- -----------
Cash flows from investing activities:
Decrease in interest bearing deposits with banks 26,611 1,006,776
Purchase of securities available for sale (8,092,927) (7,428,963)
Proceeds from sales of securities available for sale 3,948,768 3,776,984
Proceeds from maturities and paydowns of securities available
for sale 1,420,642 760,833
Net (increase) decrease in loans (159,783) 1,816,160
Purchases of premises and equipment (25,173) (50,638)
----------- -----------
Net cash used in investing activities (2,881,862) (118,848)
----------- -----------
Cash flows from financing activities:
Net increase in demand and savings deposits 1,317,882 1,477,139
Net increase (decrease) in certificates of deposits 112,451 (1,894,920)
Increase (decrease) from securities sold under agreements to
repurchase (7,000) 5,324,000
Decrease in borrowed funds (1,028,507) (2,434,800)
Dividends paid (94,810) 0
Proceeds from issuance of common stock 838,401 0
----------- -----------
Net cash provided by financing activities 1,138,417 2,471,419
----------- -----------
Net increase (decrease) in cash and cash equivalents (890,710) 2,248,833
Cash and cash equivalents as of beginning of year 11,168,793 5,253,844
----------- -----------
Cash and cash equivalents as of March 31 10,278,083 7,502,677
=========== ===========
</TABLE>
B-4
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, 1997
----------------------------------------------------------------------------------------
Unrealized
Retained gain (loss)
earnings on securities
Common (accumulated available
stock Surplus deficit) for sale Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996......... $ 4,235,690 $ 3,834,227 $ 859,215 $ (24,576) $ 8,904,556
Change in unrealized gain
(loss) on securities
available for sale,
net of income tax......... -- -- -- (144,758) (144,758)
Net income.................... -- -- 140,621 -- 140,621
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997............ $ 4,235,690 $ 3,834,279 $ 999,836 $ (169,334) $ 8,900,419
=========== =========== =========== =========== ===========
<CAPTION>
March 31, 1998
----------------------------------------------------------------------------------------
Unrealized
Retained gain (loss)
earnings on securities
Common (accumulated available
stock Surplus deficit) for sale Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997......... $ 4,635,780 $ 4,239,069 $ 1,442,987 $ 81,763 $ 10,399,599
Cash dividends................ (94,811) (94,811)
Common stock issued:
Warrants exercised
(32,487 shares)........... 324,870 316,423 641,293
Change in unrealized gain
(loss) on securities
available for sale,
net of income tax......... -- -- -- (69,366) (69,366)
Net income.................... -- -- 176,399 -- 176,399
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998............ $ 5,059,330 $ 4,653,920 $ 1,524,575 $ 12,397 $ 11,250,222
============ ============ ============ ============ ============
</TABLE>
B-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES
The information contained in this report is unaudited and is subject to year-
end adjustments. However, in the opinion of management, the information
reflects all adjustments necessary for a fair statement of results for the
periods ended March 31, 1998 and 1997.
The accounting policies of First Capitol Bank, as applied in the interim
financial statements presented herein, are substantially the same as those
followed on an annual basis as presented in the Annual Report for the fiscal
year ended December 31, 1997.
NOTE 2 - SUBSEQUENT EVENTS
On April 15, 1998, the Board of Directors executed a Definitive Agreement and
Plan of Merger (the Agreement), which provides for the affiliation of First
Capitol Bank (FCB) with Susquehanna Bancshares, Inc. (Susquehanna) headquartered
in Lititz, Pennsylvania. The Agreement provides that the affiliation will be
effected by means of a merger of FCB and Susquehanna. A merger of this type
will enable FCB to remain a community-based organization with expanded financial
products and services beneficial in today's rapidly changing technology-based
marketplace.
B-6
<PAGE>
The Board of Directors and Shareholders
First Capitol Bank:
We have audited the accompanying balance sheets of First Capitol Bank as of
December 31, 1997 and 1996, and the related statements of income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Capitol Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, NJ
January 30, 1998
B-7
<PAGE>
FIRST CAPITOL BANK
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Assets
Cash and due from banks (note 2)................ $ 4,210,793 $ 2,748,844
Federal funds sold.............................. 6,958,000 2,505,000
------------ -----------
Total cash and cash equivalents............ 11,168,793 5,253,844
Interest bearing deposits with banks............ 54,367 1,031,659
Securities available for sale (notes 3 and 9)... 22,910,668 18,719,132
Loans (notes 4 and 9)........................... 71,225,840 66,421,921
Less allowance for loan losses (note 5)....... 972,791 947,582
------------ -----------
Net loans.................................. 70,253,049 65,474,339
Bank premises and equipment, net (note 6)....... 1,730,593 1,778,221
Accrued interest receivable..................... 574,240 519,805
Other assets (notes 10 and 14).................. 1,101,781 1,114,931
------------ -----------
Total assets............................... $107,793,491 $93,891,931
============ ===========
Liabilities and Shareholders' Equity
Deposits:
Demand - noninterest bearing.................. $ 11,192,225 $ 7,345,320
Demand - interest bearing..................... 23,422,014 18,038,453
Savings....................................... 12,483,683 10,913,606
Time.......................................... 25,300,777 26,414,617
Time - $100,000 and over...................... 8,429,745 10,716,247
------------ -----------
Total deposits............................. 80,828,444 73,428,243
Securities sold under agreements to repurchase
(note 9)....................................... 8,423,000 1,975,000
Borrowed funds (note 9)......................... 7,071,077 8,555,871
Accrued interest payable........................ 718,369 639,441
Other liabilities............................... 353,002 388,820
------------ -----------
Total liabilities.......................... 97,393,892 84,987,375
Shareholders' equity (note 12):
Preferred stock, $10 par value; Authorized
500,000 shares; none issued................ ---- ----
Common stock, $10 par value; Authorized
2,000,000 shares; issued and outstanding
463,578 shares in 1997 and 423,569
shares in 1996 (note 11)................... 4,635,780 4,235,690
Surplus....................................... 4,239,069 3,834,227
Retained earnings............................. 1,442,987 859,215
Unrealized gains (loss) on securities
available for sale........................... 81,763 (24,576)
------------ -----------
Total shareholders' equity................. 10,399,599 8,904,556
------------ -----------
Total liabilities and shareholders' equity. $107,793,491 $93,891,931
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-8
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans ................................. $6,420,770 $5,795,897 $5,448,957
Interest on deposits with banks ............................ 7,464 4,280 4,138
Interest on securities available for sale:
Taxable ................................................ 1,166,663 1,159,022 945,515
Non-taxable ............................................ 182,866 79,111 122,203
Interest on Federal funds sold ............................. 180,838 89,245 166,933
---------- ---------- ----------
Total interest income ............................. 7,958,601 7,127,555 6,687,746
---------- ---------- ----------
Interest expense:
Demand - interest bearing and savings ...................... 1,456,501 1,085,867 911,218
Time ....................................................... 1,445,141 1,607,294 1,908,726
Time - $100,000 and over ................................... 542,575 533,813 553,417
Securities sold under agreements to repurchase ............. 372,133 129,590 143,557
Borrowed funds ............................................. 374,901 450,435 207,615
---------- ---------- ----------
Total interest expense ............................ 4,191,251 3,806,999 3,724,533
---------- ---------- ----------
Net interest income ............................... 3,767,350 3,320,556 2,963,213
Provision for loan losses (note 5) .............................. 174,200 182,000 159,000
---------- ---------- ----------
Net interest income after provision
for loan losses ............................... 3,593,150 3,138,556 2,804,213
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts ........................ 115,464 86,440 58,185
Gain on sale of securities ................................. 93,291 20,723 51,925
Other ...................................................... 68,416 37,066 52,112
---------- ---------- ----------
Total noninterest income .......................... 277,171 144,229 162,222
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (note 14) ................... 1,642,395 1,335,368 1,217,515
Occupancy expense, net (note 7) ............................ 322,730 266,922 232,437
Equipment expense .......................................... 255,160 209,970 201,549
Other ...................................................... 711,177 649,863 742,398
---------- ---------- ----------
Total noninterest expense ......................... 2,931,462 2,462,123 2,393,899
---------- ---------- ----------
Income before income tax expense .................. 938,859 820,662 572,536
Income tax expense (note 10) .................................... 266,862 268,015 41,893
---------- ---------- ----------
Net income ........................................ $ 671,997 $ 552,647 $ 530,643
========== ========== ==========
Earnings per share:
Basic...................................................... $ 1.54 $ 1.30 $ 1.25
Diluted .................................................... 1.48 1.24 1.22
========== ========== ==========
Weighted average shares outstanding:
Basic ...................................................... 435,491 423,569 423,569
Diluted .................................................... 455,162 445,009 433,350
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
B-9
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------
Unrealized
Retained gain (loss)
earnings on securities
Common (accumulated available
stock Surplus deficit) for sale Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ........ $ 4,235,690 $ 3,814,044 $ (97,999) $ (203,783) $ 7,747,952
Transfer of retained earnings -- 13,183 (13,183) -- --
Cash dividends ............... -- -- (42,357) -- (42,347)
Change in unrealized gain
(loss) on securities
available for sale,
net of income tax ........ -- -- -- 290,210 290,210
Net income ................... -- -- 530,643 0 530,643
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 ........ $ 4,235,690 $ 3,827,227 $ 377,104 $ 86,427 $ 8,526,448
Transfer of retained earnings -- 7,000 (7,000) -- --
Cash dividends ............... -- -- (63,536) -- (63,536)
Change in unrealized gain
(loss) on securities
available for sale,
net of income tax ........ -- -- -- (111,003) (111,003)
Net income ................... -- -- 552,647 -- 552,647
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 ........ $ 4,235,690 $ 3,834,227 $ 859,215 $ (24,576) $ 8,904,556
Transfer of retained earnings -- 14,100 (14,100) -- --
Cash dividends ............... -- -- (74,125) -- (74,125)
Common stock issued:
Warrants exercised
(36,000 shares) ..... 360,000 350,641 -- -- 710,641
Issuance of 3,937 shares . 39,370 38,346 -- -- 77,716
Shares purchased by 401(k)
plan (72 shares) .... 720 1,755 -- -- 2,475
Change in unrealized gain
(loss) on securities
available for sale,
net of income tax ........ -- -- -- 106,339 106,339
Net income ................... -- -- 671,997 -- 671,997
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 ........ $ 4,635,780 $ 4,239,069 $ 1,442,987 $ 81,763 $ 10,399,599
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
B-10
<PAGE>
FIRST CAPITOL BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 671,997 $ 552,646 $ 530,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ............................... 174,200 182,000 159,000
Depreciation ............................................ 128,352 117,234 94,861
Gain on sale of securities .............................. (93,291) (20,723) (51,925)
Amortization of premium, net ............................ 81,166 46,036 (74,016)
Loss on sale of premises and equipment .................. -- -- 430
(Increase) decrease in interest receivable .............. (54,435) 38,689 (93,041)
Increase in other, net .................................. (145,608) (287,322) 116,531
Increase (decrease) in interest payable ................. 78,928 (91,249) 134,689
------------ ------------ ------------
Net cash provided by operating activities ............. 841,309 537,311 817,172
------------ ------------ ------------
Cash flows from investing activities:
(Increase) decrease in interest bearing deposits with banks . 977,292 (1,008,125) --
Proceeds from maturity of interest bearing deposits
with banks ................................................ -- -- 14,569
Purchase of securities available for sale ................... (13,213,335) (10,893,230) (10,588,212)
Proceeds from sales of securities available for sale ........ 4,893,146 1,847,100 1,859,589
Proceeds from maturities and paydowns of securities
available for sale ........................................ 4,208,607 6,074,739 5,236,403
Purchase of investment securities ........................... -- -- (610,000)
Proceeds for maturities and paydowns of investment
securities ................................................ -- -- 230,000
Net increase in loans ....................................... (4,952,910) (8,588,785) (1,524,761)
Purchases of premises and equipment ......................... 80,726 (827,158) (743,858)
Proceeds from sale of premises and equipment ................ -- -- 185
Capitol improvements to other real estate ................... -- -- (30,000)
------------ ------------ ------------
Net cash used in investment activities ................ (8,006,474) (13,395,459) (6,156,085)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand and savings deposits ................. 10,800,543 6,720,969 6,013,965
Net decrease in certificates of deposits .................... (3,400,342) (24,135) (3,281,355)
Proceeds from securities sold under agreements to
repurchase ................................................ 6,448,000 6,000 1,969,000
(Increase) decrease in borrowed funds ....................... (1,484,794) 5,585,705 2,303,323
Dividends paid .............................................. (74,125) (63,535) (42,357)
Proceeds from issuance of common stock ...................... 790,832 -- --
------------ ------------ ------------
Net cash provided by financing activities ............. 13,080,114 12,225,004 6,962,576
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........... 5,914,949 (633,144) 1,623,663
Cash and cash equivalents as of beginning of year .............. 5,253,844 5,886,988 4,263,325
------------ ------------ ------------
Cash and cash equivalents as of end of year .................... $ 11,168,793 $ 5,253,844 $ 5,886,988
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid:
Interest .................................................. $ 4,112,323 $ 3,898,248 $ 3,589,844
Income taxes .............................................. 322,618 215,920 67,092
============ ============ ============
Noncash investing and financing activities:
Transfer of investment securities to securities
available for sale ...................................... $ -- $ -- $ 2,950,200
Transfer of loans, net of charge-offs, to other real estate -- 95,003 85,988
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
B-11
<PAGE>
FIRST CAPITOL BANK
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
Business
First Capitol Bank ("First Capitol") provides banking services to individual
and corporate customers in York County, Pennsylvania.
Basis of financial statement presentation
The financial statements of First Capitol have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses.
A substantial portion of First Capitol's loans are secured by real estate in
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of First Capitol's loan portfolio is susceptible to changes in economic
conditions in Pennsylvania and First Capitol's market area.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in Pennsylvania. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
First Capitol's allowance for loan losses. Such agencies may require First
Capitol to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and
Federal funds sold. Generally, Federal funds are purchased or sold for one-day
periods.
Securities available for sale
First Capitol's securities portfolio is classified into three separate
portfolios; held to maturity, available for sale and trading. Currently, all
First Capitol's securities are classified as available for sale. Securities
classified as available for sale may be used by First Capitol as funding and
liquidity sources and can be used to manage First Capitol's interest rate
sensitivity position. These securities are carried at their market value with
unrealized gains and losses carried, net of income tax, as adjustments to
shareholders' equity. Amortization of premium or accretion of discount are
recognized as adjustments to interest income, on a level yield basis. Gains and
losses on disposition are included in earnings using the specific identification
method.
Interest on loans
Interest income is credited to operations based upon the principal amount
outstanding. Loans are placed on a nonaccrual status when a default or
principal or interest has existed for a period of 90 days except when, in the
opinion of management, the loan is in process of collection and adequate
collateral exists.
B-12
<PAGE>
Allowance for loan losses
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for potential loan losses. The allowance
is increased by provisions charged to operations and reduced by net charge-offs.
The level of the allowance is based on management's evaluation of potential
losses in the portfolio, after consideration of such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrowers' ability to pay.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that First Capitol will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of the collateral. Impairment losses are
included in the allowance for loan losses through provisions charged to
operations.
First Capitol has defined the population of impaired loans to be all
nonaccrual commercial loans. Smaller balance homogeneous loans that are
collectively evaluated for impairment, including mortgage and consumer loans,
are specifically excluded from the impaired loan portfolio
Deferred loan fees
Loan origination and commitment fees less certain costs have been deferred,
and the net amount amortized as an adjustment to the related loan's yield.
Bank premises and equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to operations on the straight-line basis, except for
certain furniture and fixtures for which accelerated methods are used over the
estimated useful lives of the related assets.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings per share
First Capitol adopted SFAS No. 128, "Earnings Per Share" on December 31, 1997.
SFAS No. 128 establishes the new standards for computation and presentation of
net income per common share. Under the new requirements both basic and diluted
net income per common share are presented. All prior period net income per
common share have been restated.
Basic net income per common share is calculated by dividing net income by the
weighted average common shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic net
income per common share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
potential dilutive common shares were issued during the reporting period.
B-13
<PAGE>
(2) Restrictions on Cash and Due from Bank Accounts
First Capitol maintains deposits at the Federal Reserve Bank to satisfy
Federal Regulatory requirements.
(3) Securities Available for Sale
The amortized cost and estimated market value of securities available for
sale as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities ............... $ 2,001,129 $ 7,596 $ (52) $ 2,008,673
U.S. Government and agencies ........... 15,310,360 42,421 (5,257) 15,347,524
Equity securities ...................... 1,048,000 -- -- 1,048,000
Other securities ....................... 4,427,296 79,681 (506) 4,506,471
----------- ----------- ----------- -----------
Total securities available for sale $22,786,785 $ 129,698 $ (5,815) $22,910,668
=========== =========== =========== ===========
<CAPTION>
December 31, 1996
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities ............... $ 1,995,341 $ 2,722 $ (1,891) $ 1,996,172
U.S. Government and agencies ........... 13,285,314 79,888 (115,953) 13,249,249
Equity securities ...................... 1,809,600 -- -- 1,809,600
Other securities ....................... 1,666,114 4,088 (6,091) 1,664,111
----------- ----------- ----------- -----------
Total securities available for sale $18,756,369 $ 86,698 $ (123,935) $18,719,132
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities as of
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay certain obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
----------- -----------
<S> <C> <C>
Due in one year or less .............................................. $ 2,166,631 $ 2,169,612
Due after one year through five years ................................ 5,815,630 5,848,663
Due after five years through ten years ............................... 5,125,585 5,200,648
Due after ten years .................................................. 8,630,939 8,643,745
----------- -----------
Total debt securities ........................................... $21,738,785 $21,862,668
=========== ===========
</TABLE>
As of December 31, 1997 and 1996, Federal Home Loan Bank ("FHLB") stock
with a carrying value of $775,200 and $1,549,000, respectively, was held by
First Capitol as required by the FHLB (note 9).
As of December 31, 1997, securities with a carrying value of $2,209,538
were pledged, as required by law, to secure public deposits.
B-14
<PAGE>
(4) Loans
A summary of loans as of December 31, 1997 and 1996 are as follows:
1997 1996
----------- -----------
Commercial and industrial .......... $55,384,376 $50,408,852
Real estate ........................ 13,042,634 12,843,497
Consumer ........................... 2,615,766 3,002,482
Overdrafts ......................... 183,064 167,090
----------- -----------
Total loans ................... 71,225,840 66,421,921
Allowance for loan losses .......... 972,791 947,582
----------- -----------
Loans, net .................... $70,253,049 $65,474,339
=========== ===========
As of December 31, 1997 and 1996, First Capitol had related party loans to
certain officers, directors and their affiliated interests aggregating $961,102
and $636,333, respectively. First Capitol has not entered into any transactions
with these individuals or entities in which the terms and conditions were less
favorable to First Capitol than they would have been for similar transactions
with other borrowers.
The following is a summary of the activity of such related party loans
during 1997 and 1996:
1997 1996
----------- -----------
Balance, beginning of year ......... $ 636,333 $ 1,208,198
Additions ..................... 679,846 478,407
Repayments .................... (355,077) (1,050,272)
----------- -----------
Balance, end of year ............... $ 961,102 $ 636,333
=========== ===========
Loans on which the accrual of interest has been discontinued amounted to
approximately $286,000 and $282,000 as of December 31, 1997 and 1996,
respectively. If the loans had performed in accordance with their original
terms, net interest income would have increased by approximately $45,000,
$29,000 and $46,000 in 1997, 1996 and 1995, respectively. Loans 90 days past due
or greater on which interest is still accruing amounted to approximately
$194,000 and $97,000 as of December 31, 1997 and 1996, respectively.
The recorded investment in impaired loans was $115,208, and $218,223 and
the related allowance for loan losses was $54,708 and $60,543 as of December 31,
1997 and 1996, respectively.
(5) Allowance for Loan Losses
Changes in the allowance for loan losses as of December 31, 1997, 1996 and
1995 are summarized as follows:
1997 1996 1995
--------- --------- ---------
Balance, beginning of year ......... $ 947,582 $ 954,168 $ 893,503
Provision charged to operations 174,200 182,000 159,000
Loans charged off, net ........ (148,991) (188,586) (98,335)
--------- --------- ---------
Balance, end of year ............... $ 972,791 $ 947,582 $ 954,168
========= ========= =========
B-15
<PAGE>
(6) Bank Premises and Equipment
A summary of bank premises and equipment as of December 31, 1997 and 1996
is as follows:
1997 1996
---------- ----------
Land ......................................... $ 459,000 $ 459,000
Buildings and building improvements .......... 785,179 785,179
Furniture, fixtures and equipment ............ 499,502 472,193
Leasehold .................................... 190,994 188,770
Computer software, hardware and license rights 457,340 406,149
---------- ----------
2,392,015 2,311,291
Less accumulated depreciation and amortization 661,422 533,070
---------- ----------
$1,730,593 $1,778,221
========== ==========
(7) Leases
First Capitol is committed under a number of noncancellable operating
leases with initial or remaining terms in excess of one year. The minimum annual
rental commitments under these leases as of December 31, 1997 are summarized as
follows:
Operating Leases
1998.......................................................... $ 239,000
1999.......................................................... 232,000
2000.......................................................... 224,000
2001.......................................................... 200,000
2002.......................................................... 190,000
2003 and thereafter........................................... 305,000
-----------
Total minimum payments................................... $ 1,390,000
===========
Rent expense for 1997, 1996 and 1995 was approximately $237,000, $215,000
and $203,000, respectively.
B-16
<PAGE>
(8) Deposits
A summary of certificates of deposits as of December 31, 1997 by maturity
is as follows:
Within one year............................................ $25,797,008
One to two years........................................... 4,674,044
Two to three years......................................... 1,665,254
Three to four years........................................ 1,176,930
Four to five years......................................... 155,550
Beyond five years.......................................... 261,736
-----------
$33,730,522
===========
(9) Securities Sold under Agreements to Repurchase and Borrowed Funds
A summary of certain information regarding securities sold under agreements
to repurchase for 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Average amount outstanding for the year.............. $6,468,000 $2,350,000 $2,350,000
Average interest rate for the year................... 5.75% 5.51% 6.11%
Maximum amount outstanding at any month end.......... $9,033,000 $3,029,000 $2,908,000
Average interest rate on year end balance............ 5.76% 5.62% 5.87%
</TABLE>
Borrowed funds as of December 31, 1997 and 1996 consist of term notes
aggregating $7,071,077 and $8,555,871, respectively, with the FHLB of
Pittsburgh, which are secured by a blanket lien on residential mortgages,
mortgage backed securities and U.S. Government and agency securities. The notes
bear interest at rates ranging from 3.25% to 8.53% in 1997 and 1996,
respectively. The weighted average rate on these notes was 5.58% as of December
31, 1997. Of the total borrowed funds, a significant portion were used to match
fund certain loans receivable. The maturity schedule for the notes as of
December 31, 1997 is as follows:
1998.......................................................... $2,655,160
1999.......................................................... 1,624,417
2000.......................................................... 132,562
2001.......................................................... 141,247
2002.......................................................... 1,150,514
2003 and thereafter........................................... 1,367,177
----------
$7,071,077
==========
(10) Income Taxes
Income taxes reflected in the financial statements for the years ended
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statements of Income:
Federal income tax:
Current ................................... $ 235,096 $ 289,291 $ 159,199
Deferred .................................. 31,766 (21,276) (117,306)
--------- --------- ---------
$ 266,862 $ 268,015 $ 41,893
========= ========= =========
Balance Sheets:
Deferred tax on securities available for
sale ...................................... $ 54,781 $ 12,661 $ 44,523
========= ========= =========
</TABLE>
B-17
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for 1997 and
1996 are as follows:
1997 1996
-------- --------
Deferred tax assets:
Loans, principally due to allowance for loan loss
and unearned income ........................... $275,488 $301,181
Partnership equity .............................. 1,223 1,297
Unrealized loss on securities available for
sale .......................................... -- 12,661
Other ........................................... 2,440 --
-------- --------
279,151 315,139
Deferred tax liabilities:
Bank premises and equipment, principally due
to differences in depreciation ................ 20,405 11,966
Unrealized gain on securities available for sale 42,120 --
-------- --------
$216,626 $303,173
======== ========
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax
expense ..................... $ 319,212 $ 279,025 $ 194,662
Tax exempt interest ........... (53,396) (11,618) (28,766)
Change in valuation service ... -- -- (131,944)
Other ......................... 1,046 608 7,941
--------- --------- ---------
$ 266,862 $ 268,015 $ 41,893
========= ========= =========
</TABLE>
First Capitol has determined that it is not required to maintain a
valuation reserve for the deferred tax asset as of December 31, 1997 and 1996
since it is more likely than not that there are sufficient taxes paid in the
statutory carryback period. However, there can be no assurance about the level
of future earnings.
(11) Common Stock
First Capitol has issued 65,625 warrants to the organizers of First Capitol
to purchase common stock. In addition, pursuant to a "Stock Purchase Agreement"
dated July 15, 1988, National Penn Investment Company, a wholly-owned subsidiary
of National Penn BancShares, Inc., was granted warrants representing 14,112
shares of common stock. All such warrants are exercisable at $19.74 per share.
During 1997, 36,000 warrants were exercised. As of December 31, 1997, 43,737
warrants remain outstanding. All warrants expire on January 2, 1999.
Also, the Stock Purchase Agreement provides that in the event First
Capitol, at any time, issues any shares of its common stock, then National Penn
BancShares, Inc. shall have the right to purchase up to such number of shares of
common stock as is necessary so that National Penn BancShares, Inc. will own the
same percentage of shares of common stock of First Capitol immediately after the
issuance as National Penn BancShares, Inc. owned immediately prior to such
issuance, such percentage being twenty percent.
On May 17, 1995, the Board of Directors approved a plan for the purpose of
assisting First Capitol in attracting and retaining highly qualified persons as
employees and to provide such key employees with incentives to contribute to the
growth and development of First Capitol. In general, the plan allows the Board
of Directors to distribute a total of 17,642 awards, based upon certain
financial performance benchmarks established each year by the Chairman of the
Board of Directors of First Capitol, a percentage of which vests each year
during the period 1996 through 1999. The amount payable to each participant will
be based on the number of vested awards credited to his or here account
multiplied by the excess of the "Value" as defined, as of the last day of the
fiscal year preceding a participant's Settlement Date over $19.75. value of an
award means the total book value of First Capitol divided by the number of
shares of common stock outstanding. Notwithstanding the foregoing, if a
participant's Settlement Date occurs by reason
B-18
<PAGE>
of acquisition of First Capitol, the total value of First Capitol shall mean the
selling price consisting of the cash and fair market value of the property
received by the shareholders of First Capitol. The Settlement Date is the
earliest of January 2, 2000, the date on which employment of a participant with
First Capitol terminates for any reason or the date on which all or
substantially all of the common stock or assets of First Capitol is acquired by
another corporation. The amount due each participant on the Settlement Date
shall be payable in cash. Effective December 31, 1997, 10,307 cumulative awards
have been granted under the plan. Compensation expense of $5,000 and $4,940 is
included in salaries and employee benefits in 1997 and 1996, respectively,
related to these awards.
The following table summarizes the computation of basic and diluted net
income per common share for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income available to common shareholders ...... $671,997 $552,647 $530,643
======== ======== ========
Weighted average common shares outstanding ....... 435,491 423,569 423,569
Add: common stock equivalents ................... 19,671 21,440 9,781
-------- -------- --------
Diluted weighted average common shares
outstanding...................................... 455,162 445,009 433,350
======== ======== ========
</TABLE>
(12) Divided Restriction and Regulatory Matters
Pennsylvania banking statutes restrict the amount of dividends paid on
common stock to an amount which, may be paid so long as following the payment of
such dividend, capital would be unimpaired and First Capitol's remaining surplus
would equal not less than 50% of its capital.
First Capitol 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 First Capitol's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, First
Capitol must meet specific capital guidelines that involve quantitative measures
of First Capitol's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. First Capitol's capital
accounts 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 First Capitol to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that First
Capitol meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve and the Commonwealth of Pennsylvania Department of Banking categorized
First Capitol as well capitalized under the regulatory framework for prompt
correction action. To be categorized as well capitalized, First Capitol 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 the
notification that management believes have changed First Capitol's category.
First Capitol actual capital amounts and ratios are also presented in the
table.
B-19
<PAGE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk-weighted assets).. $11,290,627 14.5% $ 6,229,215 8.0% $ 7,787,519 10.0%
Tier I capital (to risk-weighted assets). 10,317,836 13.3 3,114,608 4.0 4,671,912 6.0
Tier 1 capital (to average assets) ...... 10,317,836 9.6 4,306,784 4.0 5,383,480 5.0
As of December 31, 1996:
Total capital (to risk-weighted assets).. 9,808,728 14.0 5,623,974 8.0 7,029,967 10.0
Tier I capital (to risk-weighted assets). 8,929,132 12.7 2,811,987 4.0 4,217,980 6.0
Tier I capital (to average assets) ...... 8,929,132 9.5 3,756,660 4.0 4,695,825 5.0
</TABLE>
(13) Commitments and Contingencies
First Capitol is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuation in interest rates. These
financial instruments include commitments to extent credit, financial guarantees
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet.
First Capitol's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. First Capitol uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
As of December 31, 1997, First Capitol had commitments to extend credit for
approximately $15,366,000, of which approximately $8,547,000 is unused line of
credit commitments.
Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
(14) Benefit Plans
First Capitol has a 401(k) plan which covers substantially all
employees with one or more years of service. The plan permits all eligible
employees to make basic contributions to the plan up to 12% of base
compensation. Under the plan, First Capitol may provide discretionary
contributions to the plan. Contributions to the plan amounted to $36,000 in
1997, $30,000 in 1996 and $30,000 in 1995. First Capitol also has employment
agreements with its chairman, president and two senior vice presidents.
As of December 31, 1996, First Capitol implemented a Supplemental Employees
Retirement Plan ("SERP") for two key executives. The SERP is funded through life
insurance policies with the policy benefits accruing to First Capitol and
executives. The SERP provides for yearly retirement benefits based on the return
on certain insurance policies purchased by First Capitol in excess of the yield
on an alternative investment of an equal amount deemed the opportunity cost as
outlined in the SERP, if any. Upon retirement, the annual earnings in excess of
the opportunity cost, if any, are paid to the executives each year in addition
to the benefit accrued to the retirement date, if any. The cash surrender value
of the policies is approximately $508,000 as of December 31, 1997 and is
included in other assets in the accompanying balance sheet.
B-20
<PAGE>
(15) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
parties.
The following fair value estimates, methods and assumptions were used to
measure the fair value of each class of financial instruments for which it is
practical to estimate that value:
Cash and cash equivalents
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
Securities available for sale
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of longer-term securities, except certain
state and municipal securities, is estimated based on bid prices published
in financial newspapers or bid quotations received from securities dealers.
The fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest
terms.
The fair value of loans, except residential mortgage loans, is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on First
Capitol's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For residential mortgage loans,
fair value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
Deposit liabilities
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings and NOW accounts, and money market and
checking accounts, is considered equal to the amount payable on demand. The
fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and borrowed funds
For securities sold under agreements to repurchase, the carrying amount was
considered to be a reasonable estimate of the fair values. The fair value
of borrowed funds is based on rates currently available to First Capitol
for borrowed funds with similar terms and remaining maturities.
The estimated fair values of First Capitol's financial instruments as of
December 31, 1997 and 1996 are approximately as follows:
B-21
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Book Fair Book Fair
(in thousands) Value Value Value Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............. $11,169 $11,169 $ 5,254 $ 5,254
Interest bearing deposits with banks.. 54 54 1,032 1,032
Securities available for sale......... 22,911 22,911 18,719 18,719
Loans................................. 70,253 72,306 65,474 66,859
Financial liabilities:
Deposits.............................. 80,828 80,988 73,428 73,559
Securities sold under agreements
to repurchase........................ 8,423 8,423 1,975 1,975
Borrowed funds........................ 7,071 7,112 8,556 8,458
</TABLE>
The fair value of commitments to extent credit is estimated using the fees
currently charged to enter into similar agreements, and as the fair value
for these financial instruments were not material, these disclosures are
not included above.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time First Capitol's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of First Capitol's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities include
the deferred tax assets and bank premises and equipment. In addition, the
tax ramifications related to the realization of unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
(16) Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. Under SFAS 130, comprehensive income is divided
into net income and other comprehensive income. Other comprehensive income
includes items previously recorded directly in equity, such as unrealized gains
or losses on securities available for sale. SFAS 130 is effective for interim
periods and annual periods beginning after December 15, 1997. Comparative
financial statements for earlier periods are required to be reclassified to
reflect application of the provisions of SFAS 130. First Capitol has not
determined the impact, if any, that SFAS 130 will have on First Capitol's
financial statement presentation.
B-22
<PAGE>
APPENDIX C
CARDINAL MERGER AGREEMENT
<PAGE>
________________________________________________________________________________
________________________________________________________________________________
AGREEMENT AND PLAN OF AFFILIATION
DATED AS OF THE 13th DAY OF APRIL 1998
BY AND AMONG
SUSQUEHANNA BANCSHARES, INC.,
SUSQUEHANNA BANCSHARES WEST, INC.,
CARDINAL BANCORP, INC.
AND
FIRST AMERICAN NATIONAL BANK OF PENNSYLVANIA
_______________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page(s)
-------
ARTICLE I THE PLAN OF MERGER ................................................C-2
SECTION 1.1 The Merger; Closing; Effective Time .......................C-2
SECTION 1.2 Effect on Outstanding Shares ..............................C-3
SECTION 1.3 Surrender and Exchange of Cardinal Certificates ...........C-3
SECTION 1.4 Dissenters' Rights ........................................C-5
SECTION 1.5 Other Matters .............................................C-5
SECTION 1.6 Cardinal Options ..........................................C-6
ARTICLE II CONDUCT PENDING THE MERGER .......................................C-6
SECTION 2.1 Conduct of Cardinal's and FANBP's Businesses
Prior to the Effective Time ...............................C-6
SECTION 2.2 Forbearance by Cardinal and FANBP .........................C-6
SECTION 2.3 Cooperation ...............................................C-8
SECTION 2.4 Conduct of SBI's Business Prior to the Effective Time .....C-8
ARTICLE III REPRESENTATIONS AND WARRANTIES ..................................C-8
SECTION 3.1 Representations and Warranties of Cardinal and FANBP ......C-8
SECTION 3.2 Representations and Warranties of SBI and its Material
Subsidiaries .............................................C-23
ARTICLE IV COVENANTS .......................................................C-30
SECTION 4.1 Acquisition Proposals ....................................C-30
SECTION 4.2 Securities Registration and Disclosure ...................C-31
SECTION 4.3 Employees ................................................C-32
SECTION 4.4 Access and Information ...................................C-33
SECTION 4.5 Certain Filings, Consents and Arrangements ...............C-35
SECTION 4.6 Takeover Statutes ........................................C-35
SECTION 4.7 Additional Agreements ....................................C-35
SECTION 4.8 Publicity ................................................C-35
SECTION 4.9 Meeting ..................................................C-36
SECTION 4.10 Notification of Certain Matters .........................C-36
SECTION 4.11 Insurance ...............................................C-36
SECTION 4.12 Dividends ...............................................C-36
SECTION 4.13 Directors ...............................................C-36
i
<PAGE>
Page(s)
-------
ARTICLE V CONDITIONS TO CONSUMMATION .......................................C-38
SECTION 5.1 Conditions to Closing ....................................C-38
SECTION 5.2 Conditions to Obligations of SBI and SBI Merger Sub ......C-40
SECTION 5.3 Conditions to the Obligations of Cardinal and FANBP ......C-41
ARTICLE VI TERMINATION .....................................................C-42
SECTION 6.1 Termination ..............................................C-42
SECTION 6.2 Effect of Termination ....................................C-43
SECTION 6.3 Expenses .................................................C-43
ARTICLE VII OTHER MATTERS ..................................................C-44
SECTION 7.1 Certain Definitions; Interpretation ......................C-44
SECTION 7.2 Survival .................................................C-45
SECTION 7.3 Parties in Interest ......................................C-45
SECTION 7.4 Waiver and Amendment .....................................C-45
SECTION 7.5 Counterparts .............................................C-45
SECTION 7.6 Governing Law ............................................C-45
SECTION 7.7 Expenses .................................................C-45
SECTION 7.8 Notices ..................................................C-46
SECTION 7.9 Entire Agreement; Etc ....................................C-47
ii
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION dated as of the 13th day of April,
1998 (this "Plan" or this "Agreement"), is entered into by and among Susquehanna
Bancshares, Inc., a Pennsylvania corporation ("SBI"), Susquehanna Bancshares
West, Inc., a Pennsylvania corporation, ("SBI Merger Sub"), Cardinal Bancorp,
Inc., a Pennsylvania corporation ("Cardinal"), and First American National Bank
of Pennsylvania, a national banking association ("FANBP").
RECITALS:
WHEREAS, SBI is a multi-state, multi-institution bank holding company;
and
WHEREAS, SBI Merger Sub is a wholly-owned subsidiary of SBI created
solely to facilitate the transactions described in this Agreement; and
WHEREAS, Cardinal is a Pennsylvania bank holding company; and
WHEREAS, FANBP is the wholly-owned bank subsidiary of Cardinal with a
strong record of performance; and
WHEREAS, the boards of directors of SBI, SBI Merger Sub, Cardinal and
FANBP have each determined that it is in the best interest of their respective
shareholders for SBI to acquire Cardinal and FANBP by means of a merger of SBI
Merger Sub with and into Cardinal (the "Merger"), as a result of which FANBP
will become a wholly-owned, second tier subsidiary of SBI, all upon the terms
and subject to the conditions set forth herein; and
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and to
set forth the conditions to the Merger; and
WHEREAS, Cardinal, SBI and SBI Merger Sub desire to merge in the
manner provided for herein and to adopt this Agreement as a plan of
reorganization and to consummate such plan in accordance with the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, SBI will continue the separate corporate existence of FANBP
as an operating subsidiary until at least December 31, 2000; and
WHEREAS, concurrently with the execution and delivery of this
Agreement and as a condition and inducement to SBI's willingness to enter into
this Agreement, Cardinal, SBI and SBI Merger Sub have entered into a stock
option agreement of even date herewith (the "Stock Option Agreement") granting
SBI an option to purchase from Cardinal authorized and unissued shares equal to
15% of the shares of Cardinal's common stock outstanding on the date of the
Stock Option Agreement, subject to the terms and conditions set forth therein.
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto adopt and make this Agreement and
prescribe the terms and conditions hereof and the manner and basis of carrying
it into effect, which shall be as follows:
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger; Closing; Effective Time.
-----------------------------------
(a) Subject to the terms and conditions of this Agreement and in
accordance with the applicable laws of the Commonwealth of Pennsylvania, at the
Effective Time (as defined in Section 1.1(c)), SBI Merger Sub shall be merged
with and into Cardinal and the separate corporate existence of SBI Merger Sub
shall thereupon cease. Cardinal shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the Commonwealth of Pennsylvania and
shall continue to be a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, and the separate corporate existence of
Cardinal with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The name of the Surviving Corporation
shall be "Susquehanna Bancshares West, Inc." The Merger shall have the effects
specified in the Pennsylvania Business Corporation Law of 1988, as amended (the
"PBCL").
(b) The closing of the Merger (the "Closing") shall take place at such
place and time and on such date as shall be agreed upon by all parties, which
date shall not be later than the 30th business day after (i) the last approval
of required governmental authorities is granted and any related waiting periods
expire, (ii) the lifting, discharge or dismissal of any stay of any such
governmental approval or of any injunction against the Merger and (iii) all
shareholder approvals required by the parties hereunder are received.
(c) Immediately following the Closing, and provided that this
Agreement has not been terminated or abandoned pursuant to Article VI hereof,
SBI Merger Sub and Cardinal will cause articles of merger (the "Articles of
Merger") to be delivered and properly filed with the Department of State of the
Commonwealth of Pennsylvania (the "Department of State"). The Merger shall
become effective at 11:59 p.m. on the day the Articles of Merger are filed with
the Department of State (the "Effective Time"). The "Effective Date" when used
herein means the day on which the Effective Time for the Merger occurs.
(d) At the Effective Time, the articles of incorporation and bylaws of
SBI Merger Sub in effect immediately prior to the Effective Time shall be the
articles of incorporation and bylaws of the Surviving Corporation. At the
Effective Time, the directors and officers of SBI Merger Sub immediately prior
to the Effective Time shall be and become the directors and officers of the
Surviving Corporation with such additions or deletions as SBI, in its sole
discretion, may determine. At and immediately following the Effective Time, the
directors of FANBP shall consist
C-2
<PAGE>
of (i) the persons who were the directors of FANBP immediately prior to the
Effective Time, and (ii) up to two other persons who shall be recommended for
appointment by SBI; who shall be reasonably acceptable to the FANBP Board; and
who shall be elected to the FANBP Board, effective at Closing, to hold office
until the next annual meeting of FANBP.
SECTION 1.2 Effect on Outstanding Shares.
----------------------------
(a) At the Effective Time, by virtue of the Merger, automatically and
without any action on the part of the holder thereof, subject to the provisions
of Section 1.3 hereof with respect to the payment of fractional shares in cash,
each share of common stock, par value $.50 per share, of Cardinal (the "Cardinal
Common Stock") issued and outstanding at the Effective Time (other than (i)
shares the holders of which (each a "Dissenting Shareholder") are exercising
appraisal rights pursuant to the PBCL (the "Dissenters' Shares"), if any, and
(ii) shares held directly or indirectly by SBI, other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall
become and be converted into the right to receive shares of common stock, par
value $2.00 per share, of SBI ("SBI Common Stock") determined in conformity with
the Exchange Ratio set forth at Schedule 1.2 hereof (such SBI Common Stock,
determined on the basis of the Exchange Ratio, as to each Cardinal shareholder
and, collectively, to all Cardinal shareholders is the "Merger Consideration").
As of the Effective Time, each share of Cardinal Common Stock held directly or
indirectly by SBI, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted, shall be canceled and retired and
cease to exist, and no exchange or payment shall be made with respect thereto.
(b) The shares of common stock of SBI Merger Sub issued and
outstanding immediately prior to the Effective Time, by virtue of and after the
Merger, shall be converted into and thereafter constitute the issued and
outstanding shares of the capital stock of the Surviving Corporation.
(c) If prior to the Effective Time, the outstanding shares of SBI
Common Stock shall have been increased, decreased, changed into or exchanged for
a different number or kind of shares or securities through a reclassification,
stock dividend, stock split or reverse stock split, or other similar change, the
Exchange Ratio shall be adjusted such that each Cardinal shareholder shall be
entitled to receive such number of shares of SBI Common Stock as such
shareholder would have been entitled to receive if the Effective Time had
occurred prior to the happening of such event. (By way of illustration, if SBI
shall declare a stock dividend of 7% payable with respect to a record date on or
prior to the Effective Time and the conditions set forth above are satisfied,
the Exchange Ratio shall be adjusted upward by 7%.)
SECTION 1.3 Surrender and Exchange of Cardinal Certificates.
-----------------------------------------------
(a) Within five (5) business days after the Effective Time, SBI shall
cause to be sent to each person who immediately prior to the Effective Time was
a holder of record of Cardinal Common Stock transmittal materials and
instructions for surrendering certificates for Cardinal
C-3
<PAGE>
Common Stock ("Old Certificates") in exchange for a certificate for the number
of whole shares of SBI Common Stock to which such person is entitled under
Section 1.2 hereof.
(b) No certificates for fractional shares of SBI Common Stock shall be
issued in connection with the Merger. In lieu thereof, SBI shall issue to any
holder of Cardinal Common Stock certificates otherwise entitled to a fractional
share, upon surrender of such certificates in accordance with the instructions
furnished by SBI, a check for an amount of cash equal to the fraction of a share
of SBI Common Stock represented by the certificates so surrendered multiplied by
the Average Price Per Share of SBI Common Stock Before Closing as defined and
determined in conformity with Schedule 1.2.
(c) If the record date of any dividend on SBI Common Stock occurs
after the Effective Time, the declaration shall include dividends on all whole
shares of SBI Common Stock into which shares of Cardinal Common Stock have been
converted under this Agreement, but no former holder of Cardinal Common Stock
shall be entitled to receive payment of any such dividend until surrender of the
shareholder's Old Certificates shall have been effected in accordance with the
instructions furnished by SBI. Upon surrender for exchange of a shareholder's
Old Certificates, such shareholder shall be entitled to receive from SBI an
amount equal to all such dividends, without interest thereon and less the amount
of taxes, if any, which may have been imposed or paid thereon, declared, and for
which the payment date has occurred, on the whole shares of SBI Common Stock
into which the shares represented by such Old Certificates have been converted.
(d) After the Effective Time, there shall be no transfer on the stock
transfer books of Cardinal, Surviving Corporation, or SBI of shares of Cardinal
Common Stock. If Old Certificates are presented for transfer after the Effective
Time, they shall be canceled and certificates representing whole shares of SBI
Common Stock (and a check in lieu of any fractional share) shall be issued in
exchange therefor as provided herein.
(e) In the event that any Old Certificates have not been surrendered
for exchange in accordance with this Section on or before the second anniversary
of the Effective Time, SBI may at any time thereafter, with or without notice to
the holders of record of such Old Certificates, sell for the accounts of any or
all of such holders any or all of the shares of SBI Common Stock which such
holders are entitled to receive under Section 1.2 hereof (the "Unclaimed
Shares"). Any such sale may be made by public or private sale or sale at any
broker's board or on any securities exchange in such manner and at such times as
SBI shall determine. If, in the opinion of counsel for SBI, it is necessary or
desirable, any Unclaimed Shares may be registered for sale under the Securities
Act of 1933, as amended (the "Securities Act") and applicable state laws. SBI
shall not be obligated to make any sale of Unclaimed Shares if it shall
determine not do so, even if notice of sale of the Unclaimed Shares has been
given. The net proceeds of any such sale of Unclaimed Shares shall be held for
holders of the unsurrendered Old Certificates whose Unclaimed Shares have been
sold, to be paid to them upon surrender of the Old Certificates. From and after
any such sale, the sole right of the holders of the unsurrendered Old
Certificates whose Unclaimed Shares have been sold shall be the right to collect
the net sale proceeds held by SBI for their respective accounts,
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plus accrued dividends from the Effective Time to the date of the sale, and such
holders shall not be entitled to receive any interest on such net sale proceeds
or accrued dividends held by SBI.
(f) If outstanding certificates for shares of Cardinal Common Stock
are not surrendered prior to the date on which such certificates would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and any
other applicable law, become the property of SBI (and to the extent not in its
possession shall be paid over to it), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the foregoing,
neither SBI nor its agents or any other person shall be liable to any former
holder of Cardinal Common Stock for any property delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) In the event any Old Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Old Certificate to be lost, stolen or destroyed and the posting by such
person of a bond in such amount as SBI may direct as indemnity against any claim
that may be made against it with respect to such Certificate, SBI will issue in
exchange for such lost, stolen or destroyed Old Certificate, the shares of SBI
Common Stock into which such Old Certificates has been converted pursuant to
this Agreement.
SECTION 1.4 Dissenters' Rights. In accordance with the provisions of
------------------
Section 1571 et. seq. of the PBCL and applicable law, the Cardinal shareholders
--------
are entitled to exercise dissenters rights.
SECTION 1.5 Other Matters.
-------------
(a) Notwithstanding any term of this Agreement to the contrary, SBI
may, in its discretion at any time prior to the Effective Time, designate a
direct or indirect wholly-owned subsidiary to substitute for SBI Merger Sub as
the constituent corporation in the Merger by written notice to Cardinal so long
as the exercise of this right does not materially, adversely affect the
interests or rights of the Cardinal shareholders or cause a material delay in or
otherwise materially adversely affect consummation of the transactions
contemplated herein, such determination to be solely within the exercise of
reasonable judgment by Cardinal. SBI shall also have the right to cause SBI
Merger Sub or such substitute to be the Surviving Corporation of the Merger
described at Section 1.1(a), so long as the exercise of such right does not have
a material adverse effect on the interests or rights of the Cardinal
shareholders or cause a material delay in, or otherwise adversely affect,
consummation of the transactions contemplated herein, such determination to be
solely within the exercise of reasonable judgment by Cardinal. If such right is
exercised, this Agreement shall be deemed to be modified to accord such change.
(b) Subject to the provisions of Section 7.1 of this Agreement,
nothing in this Agreement shall be deemed to restrict the ability of SBI or any
of its subsidiaries to merge with or with and into another entity so long as
such other transaction shall not materially, adversely affect
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the parties' ability to consummate the Merger or cause a material delay in, or
otherwise adversely affect, consummation of the transactions contemplated
herein.
SECTION 1.6 Cardinal Options. All options outstanding at the
----------------
Effective Time under the benefit plans described at Annex 3.1(m) and as fully
listed at Annex 1.6 hereof (individually, a "Cardinal Option" and collectively,
the "Cardinal Options") shall remain outstanding following the Effective Time
for the remainder of their terms and in accordance with the terms of the
respective Cardinal Options. At the Effective Time, the Cardinal Options shall,
by virtue of the Merger and without any action on the part of Cardinal or the
holder of any of the Cardinal Options, whether the same shall be vested or
exercisable, be assumed by SBI and constitute an option to acquire, on the same
terms and conditions as were applicable under such assumed Cardinal Options, a
number of shares of SBI Common Stock equal to the product of the Exchange Ratio
and the number of shares of Cardinal Common Stock subject to such Cardinal
Option. The option exercise price per share of SBI Common Stock shall be equal
to the option exercise price per share of Cardinal Common Stock divided by the
Exchange Ratio (the option price per share, as so determined, being rounded
upward to the nearest full cent). From and after the date of this Agreement, no
additional options of any kind shall be granted by Cardinal, or any of its
respective subsidiaries, under any plan, arrangement, agreement or program
whatsoever.
ARTICLE II
CONDUCT PENDING THE MERGER
SECTION 2.1 Conduct of Cardinal's and FANBP's Businesses Prior to the
---------------------------------------------------------
Effective Time. Except as expressly provided in this Agreement, during the
- --------------
period from the date of this Agreement to the Effective Time, Cardinal and FANBP
shall (and the word "it" in this Article II refers to Cardinal and FANBP and
each subsidiary of either) (i) conduct its business in the usual, regular and
ordinary course consistent with past practice, (ii) maintain and preserve intact
in all material respects its business organization, assets, leases, properties,
investment securities, employees and advantageous business relationships and use
its reasonable efforts to retain the services of its officers and key employees,
(iii) not knowingly take any action which would materially or adversely affect
or delay its ability to obtain any necessary approvals, consents or waivers of
any governmental authority required for the transactions contemplated hereby or
to perform its covenants and agreements on a timely basis under this Agreement,
and (iv) not knowingly take any action that is reasonably likely to have a
Material Adverse Effect (as defined in Section 7.1 hereof) on Cardinal.
SECTION 2.2 Forbearance by Cardinal and FANBP. During the period
---------------------------------
from the date of this Agreement to the Effective Time, Cardinal and FANBP shall
not, without the prior written consent of SBI:
(a) other than in the ordinary course of business consistent with past
practice, make any advance or loan or incur any indebtedness for borrowed money,
assume, guarantee,
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endorse or otherwise as an accommodation become responsible for, the obligations
of any other individual, corporation or other person;
(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend other than the regular quarterly dividend referred
to in Section 4.12 or make any distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
capital stock, or grant any stock appreciation rights or grant, sell or issue to
any individual, corporation or other person any shares of its capital stock
(other than the Stock Option Agreement or in connection with the exercise of
options granted pursuant to the Cardinal Options provided, however, Cardinal
represents hereby that no new or additional options have been granted or issued
since January 1, 1998 or will be granted or issued hereafter pursuant to the
Cardinal Options) or any right to acquire, or securities evidencing a right to
convert into or acquire any shares of its capital stock, or issue any additional
shares of capital stock;
(c) other than in the ordinary course of business consistent with past
practice and pursuant to policies, if any, currently in effect, sell, transfer,
mortgage, encumber or otherwise dispose of any of its properties, leasehold
interests or assets to any individual, corporation or other entity, or cancel,
release or assign any indebtedness of any such person or any contracts or
agreements as in force at the date of this Agreement;
(d) increase in any manner the compensation or fringe benefits of any
of its employees or pay any pension or retirement allowance not required by law
or by any existing plan or agreement to any such employees, or become a party
to, amend or commit itself to any pension, retirement, profit-sharing or welfare
benefit plan or agreement or employment agreement with or for the benefit of any
employee, or voluntarily accelerate the vesting of any stock options or other
compensation or benefit, other than payment of bonuses in the ordinary course of
business consistent with past practice and general increases in compensation to
individual employees in the ordinary course of business consistent with past
practice, provided that any such general increase to any individual employee
made after the date of this Agreement, when combined with such general increases
made to such individual employee prior to the date of this Agreement but after
September 30, 1997, does not exceed 3% of the individual employee's September
30, 1997 compensation (or in the event the employee was hired after September
30, 1997, the employee's date of hire compensation);
(e) amend its articles of incorporation, or charter, or its bylaws,
except as expressly contemplated by this Agreement or required by law or
regulation, in each case as concurred in by its counsel;
(f) change its method of accounting as in effect at December 31, 1997,
except as required by changes in generally accepted accounting principles or
required by law or regulation, in each case as concurred in by its independent
auditors; or
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(g) permit or allow its direct or indirect ownership of the capital
stock of any subsidiary described in the annex hereto to be less than 100% of
its respective total capital stock.
SECTION 2.3 Cooperation. Each of Cardinal and FANBP shall cooperate
-----------
with SBI and SBI Merger Sub and SBI and SBI Merger Sub shall cooperate with
Cardinal and FANBP in completing the transactions contemplated hereby and each
shall not take, cause to be taken or agree or make any commitment to take any
action (i) that would cause any of the representations or warranties of it that
are set forth in Article III hereof not to be true and correct in all material
respects, or (ii) in the case of Cardinal and FANBP, that is inconsistent with
or prohibited by Section 2.1 or Section 2.2.
SECTION 2.4 Conduct of SBI's Business Prior to the Effective Time.
-----------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, SBI shall not knowingly take any action
and shall not knowingly cause its Material Subsidiaries (as defined in Section
3.2(d) hereof) to take any action that is reasonably likely to have a Material
Adverse Effect on SBI, on a consolidated basis.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Cardinal and FANBP.
----------------------------------------------------
Cardinal and FANBP represent and warrant to SBI and SBI Merger Sub (and the word
"it" in this Article III refers to Cardinal, FANBP and each subsidiary of
either) that, except as specifically disclosed in the Annex of disclosure
schedules included herewith, to the best of its knowledge (which knowledge
limitation shall apply to all representations and information described in
annexes attached hereto):
(a) Corporate Organization and Qualification. Cardinal is a
corporation duly incorporated, validly existing and duly subsisting under the
laws of the Commonwealth of Pennsylvania and is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by Cardinal requires such qualification, except for
such failure to qualify or be in such good standing which, when taken together
with all other such failures, would not have a Material Adverse Effect on
Cardinal and its subsidiaries, taken as a whole. FANBP is a national banking
association duly organized and in good standing under the laws of the United
States of America. Cardinal and FANBP each have the requisite corporate and
other power and authority (including all federal, state, local and foreign
governmental authorizations) to carry on their respective businesses as now
being conducted and to own its properties and assets. Cardinal has made
available to SBI a complete and correct copy of the articles of incorporation
and bylaws of Cardinal and FANBP has made available to SBI and SBI Merger Sub a
complete and correct copy of the charter and bylaws of FANBP and such charter or
articles, as applicable, and such bylaws are in full force and effect as of the
date hereof.
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(b) Authorized Capital. The authorized capital stock of Cardinal
consists of 2,000,000 shares of Cardinal Common Stock, $.50 par value per share,
of which 990,000 shares of Cardinal Common Stock were issued and outstanding as
of the date of this Agreement and no shares of Cardinal Common Stock were issued
and held as treasury shares as of the date of this Agreement. The authorized
capital stock of FANBP consists of 1,000,000 shares of common stock, $.50 par
value per share, of which 600,000 shares of common stock were issued and
outstanding as of the date of this Agreement; all of these are held by Cardinal.
All of the outstanding shares of capital stock of Cardinal and FANBP have been
duly authorized and are validly issued, fully paid and nonassessable. Neither
Cardinal nor FANBP has any shares of capital stock reserved for issuance except
pursuant to the Stock Option Agreement and the Cardinal Options and no new or
additional options have been granted since January 1, 1998. Options representing
94,000 shares of Cardinal Common Stock have been granted and remain outstanding
and are all the Cardinal Options. The terms of the Cardinal Options, together
with a list of all holders of options thereunder and the number of shares of
Cardinal Common Stock covered thereby, are described in Annex 3.1 (b) or Annex
1.6 hereto, as the case may be. Neither Cardinal nor FANBP has any outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or convertible into or exercisable for securities having the
right to vote) with shareholders on any matter. The shares of FANBP's common
stock owned by Cardinal are owned free and clear of all liens, pledges, security
interests, claims or other encumbrances. The outstanding shares of capital stock
of Cardinal and FANBP have not been issued in violation of any preemptive
rights. Except as set forth in Annex 3.1(b) and in Annex 3.1(m), and as provided
in the Stock Option Agreement, there are no outstanding subscriptions, options,
warrants, rights, convertible securities or other agreements or commitments of
any character relating to the issued or unissued capital stock or other
securities of Cardinal and FANBP. After the Effective Time, Cardinal will have
no obligation which is being assumed by SBI or SBI Merger Sub which will result
in any obligation to issue, transfer or sell any shares of capital stock
pursuant to any Employee Plan (as defined in Section 3.1(m), other than as
provided at Section 1.6).
(c) Subsidiaries. The only subsidiaries of Cardinal are as listed and
described at Annex 3.1(c). The only subsidiaries of FANBP are as listed and
described at Annex 3.1(c).
Each such subsidiary is duly organized and existing as a corporation,
is in good standing under the laws of the jurisdiction in which it was
organized, and has adequate corporate power to carry on its business as now
conducted. All of the outstanding capital stock of all such subsidiaries has
been validly issued, is fully paid and nonassessable (other than as provided at
12 U.S.C. (S)55) and is owned by Cardinal or FANBP, free and clear of all liens,
security interests and encumbrances. All such subsidiaries are organized under
Pennsylvania law and make no use of fictitious names in the conduct of their
respective businesses.
(d) Corporate Authority. Subject only to approval of this Agreement
by the holders of the number of votes required by Cardinal's articles of
incorporation or bylaws cast by all holders of Cardinal Common Stock (without
any minority, class or series voting requirement), and, subject to all required
regulatory approvals, Cardinal and FANBP each has the requisite corporate
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power and authority, and legal right, and has taken all corporate action
necessary to execute and deliver this Agreement and to consummate the
transactions applicable to either Cardinal or FANBP contemplated hereby. This
Agreement has been duly and validly executed and delivered by Cardinal and FANBP
and constitutes the valid and binding obligations of Cardinal and FANBP
enforceable against each, in accordance with its terms, except to the extent
enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or the application by a court of equitable
principles.
(e) No Violations. The execution, delivery and performance of this
Agreement by it does not, and the consummation of the transactions contemplated
herein by it will not, constitute (i) subject to receipt of all required
regulatory approvals, a breach or violation of, or a default under, any law,
rule or regulation or any judgment, decree, order, governmental permit or
license, to which it (or any of its respective properties) is subject, which
breach, violation or default would have a Material Adverse Effect on it, or
enable any person to enjoin the Merger, (ii) a breach or violation of, or a
default under Cardinal's articles of incorporation, the charter of FANBP, or the
bylaws of either of them, or (iii) except as disclosed in Annex 3.1(e), a breach
or violation of, or a default under (or an event which with due notice or lapse
of time or both would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of it under any of the terms, conditions or provisions of
any note, bond, indenture, deed of trust, loan agreement or other agreement,
instrument or obligation to which it is a party, or to which any of their
respective properties or assets may be bound or affected, except for any of the
foregoing that, individually or in the aggregate, would not have a Material
Adverse Effect on it or enable any person to enjoin the Merger; and the
consummation of the transactions contemplated hereby will not require any
approval, consent or waiver under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the approval, consent or waiver
of any other party to any such agreement, indenture or instrument, other than
(i) all required approvals, consents and waivers of governmental authorities,
(ii) the approval of its shareholders referred to in Section 3.1(d), (iii) any
such approval, consent or waiver that already has been obtained, and (iv) any
other approvals, consents or waivers, the absence of which, individually or in
the aggregate, would not result in a Material Adverse Effect on it or enable any
person to enjoin the Merger.
(f) Reports.
i. Cardinal's consolidated statement of financial condition as
of December 31, 1997 previously provided to SBI and each statement of financial
condition provided after the date hereof to SBI (including in each case any
related notes and schedules) as required by Section 4.4 hereof fairly presents
or will fairly present the financial position of it as of its date and each of
the statements of income and shareholders' equity and of cash flows provided
therewith (including in each case any related notes and schedules), fairly
presents or will fairly present the results of operations, shareholders' equity
and cash flows, as the case may be, of it for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
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adjustments that are not material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein.
ii. Except as disclosed in Annex 3.1(f), it has timely filed
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that it was required to file since
January 1, 1994 with (A) the Office of the Comptroller of the Currency (the
"OCC"), (B) the Federal Deposit Insurance Corporation (the "FDIC"), (C) the
Board of Governors of the Federal Reserve System (the "Board"), (D) the
Securities and Exchange Commission (the "SEC"), (E) any state banking department
or commission or other regulatory authority ("State Regulator") and collectively
with the SEC, the OCC, the FDIC, and the Board, the "Cardinal Regulatory
Agencies", and (F) any other regulatory authority, and all other material
reports and statements required to be filed by it since January 1, 1994
including, without limitation, any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States or any Cardinal
Regulatory Agency and has paid all fees and assessments due and payable in
connection therewith, and no such report, registration or statement contains any
material misstatement or omission or is otherwise in material noncompliance with
any law, regulation or requirement.
(g) Absence of Certain Changes or Events. Since January 1, 1998 to
the date hereof, it has not incurred any material liability, except in the
ordinary course of its business consistent with past practice, nor has there
been any change in the financial condition, properties, assets, business,
results of operations or prospects of it which, individually or in the
aggregate, has had, or might reasonably be expected to result in, a Material
Adverse Effect on it.
(h) Taxes. Its federal income tax returns have been examined and
closed or otherwise closed by operation of law through 1994. All federal, state,
local and foreign tax returns required to be filed by it or on its behalf have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and, to the knowledge of
management, all such filed returns are complete and accurate in all material
respects. All taxes shown on such returns, and all taxes required to be shown on
returns for which extensions have been granted, have been paid in full or
adequate provision has been made for any such taxes on its balance sheet (in
accordance with generally accepted accounting principles) other than those taxes
which are being contested in appropriate forums in proceedings which are being
diligently pursued. Adequate provision has been made on its balance sheet (in
accordance with generally accepted accounting principles consistently applied)
for all federal, state, local and foreign tax liabilities for periods subsequent
to those for which returns have been filed. There is no audit examination,
deficiency, or refund litigation pending or, to the knowledge of Cardinal or
FANBP, threatened, with respect to any taxes that could result in a
determination that would have a Material Adverse Effect on it. All taxes,
interest, additions and penalties due with respect to completed and settled
examinations or concluded litigation relating to it have been paid in full or
adequate provision has been made for any such taxes on its balance sheet (in
accordance with generally accepted
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accounting principles). It has not executed an extension or waiver of any
statute of limitations on the assessment or collection of any tax due that is
currently in effect.
(i) Litigation and Liabilities. Except as set forth in Annex 3.1(i),
there are no (i) civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings before any court, governmental agency or
otherwise pending or, to the knowledge of management, threatened against it or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including, without limitation, those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which its management is aware that could reasonably be expected to result in any
claims against or obligations or liabilities of it, that, alone or in the
aggregate, are reasonably likely to have a Material Adverse Effect on it or to
hinder or delay, in any material respect, consummation of the transactions
contemplated by this Agreement.
(j) Absence of Regulatory Actions. It is not a party to any current
cease and desist order, written agreement or memorandum of understanding with,
or a party to any commitment letter or similar undertaking to, or is subject to
any order or directive by, or is a recipient of any extraordinary supervisory
letter from, or has adopted any board resolutions at the request of, federal or
state governmental authorities, including, without limitation, the Cardinal
Regulatory Agencies, charged with the supervision or regulation of financial or
depository institutions or engaged in the insurance of bank deposits nor has it
been advised by any Cardinal Regulatory Agency that such body is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolution or similar undertaking.
(k) Agreements.
i. Except for the Stock Option Agreement and as set forth in
Annex 3.1(k) attached hereto, as of the date of this Agreement, it is not a
party to, or bound by, any oral or written:
(A) "material contract" as such term is defined in Item
601(b)(10) of Regulation S-K promulgated by the SEC;
(B) consulting agreement not terminable on thirty (30)
days' or less notice involving the payment of more than $10,000 per annum, in
the case of any such agreement;
(C) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction of the nature contemplated by this
Agreement;
(D) agreement with respect to any officer providing any
term of employment or compensation guarantee extending for a period longer than
one year or for a payment in excess of $50,000;
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(E) agreement or plan, including any stock option plan,
stock appreciation rights plan, employee stock ownership plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(F) agreement containing covenants that limit its ability
to compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, it may carry on
its business (other than as may be required by law or any regulatory agency);
(G) agreement, contract or understanding, other than this
Agreement, the Cardinal Options, and the Stock Option Agreement, regarding the
capital stock of Cardinal and/or FANBP or committing to dispose of some or all
of the capital stock or substantially all of the assets of Cardinal and/or
FANBP; or
(H) collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization.
ii. It is not in default under or in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject, other than such defaults or
violations as could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on it.
(l) Labor Matters. It is not the subject of any proceeding asserting
that it has committed an unfair labor practice or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort involving
it pending or threatened.
(m) Employee Benefit Plans. Annex 3.1(m) contains a complete list of
all pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other employee benefits, incentive and
welfare policies, contracts, plans and arrangements, and all trust agreements
related thereto, in respect to any of its present or former directors, officers,
or other employees (hereinafter referred to collectively as the "Employee
Plans").
i. All of the Employee Plans comply in all material respects
with all applicable requirements of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), the Code and other applicable laws; it has not
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Employee Plan
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which is likely to result in any material penalties, taxes or other events under
Section 502(i) of ERISA or Section 4975 of the Code which would have a Material
Adverse Effect on it.
ii. Other than for premiums currently due, no liability to the
Pension Benefit Guaranty Corporation has been or is expected by it to be
incurred with respect to any Employee Plan which is subject to Title IV of ERISA
("Pension Plan"), or with respect to any "single-employer plan" (as defined in
Section 4001(a)(15) of ERISA) currently or formerly maintained by it or any
entity which is considered one employer with Cardinal or FANBP under Section
4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate").
iii. No Pension Plan or single-employer plan of an ERISA
Affiliate had an "accumulated funding deficiency" (as defined in Section 302 of
ERISA (whether or not waived)) as of the last day of the end of the most recent
plan year ending prior to the date hereof; all contributions to any Pension Plan
or single-employer plan of an ERISA Affiliate that were required by Section 302
of ERISA and were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair market value of
the assets of each Pension Plan or single-employer plan of an ERISA Affiliate
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such Pension Plan or single-employer plan of an
ERISA Affiliate as of the end of the most recent plan year with respect to the
respective Pension Plan or single-employer plan of an ERISA Affiliate ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such Pension Plan or single-
employer plan of an ERISA Affiliate as of the date hereof; and no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the 30-day
reporting requirement has not been waived has been required to be filed for any
Pension Plan or single-employer plan of an ERISA Affiliate within the 12-month
period ending on the date hereof.
iv. Neither has it provided, nor is it required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
v. Neither it nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
vi. Each Employee Plan of it which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "Qualified Plan") has received a
favorable determination letter from the Internal Revenue Service ("IRS")
covering the requirements of the Tax Equity and Fiscal Responsibility Act of
1982, the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984
and the Tax Reform Act of 1986; it is not aware of any circumstances likely to
result in revocation of any such favorable determination letter; each such
Employee Plan has been amended to reflect the requirements of subsequent
legislation applicable to such plans; and each Qualified Plan has complied at
all relevant times in all material respects with all applicable requirements of
Section 401(a) of the Code.
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vii. Each Qualified Plan which is an "employee stock ownership
plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the Code and the regulations thereunder.
viii. Neither it nor any ERISA Affiliate has committed any act or
omission or engaged in any transaction that has caused it to incur, or created a
material risk that it may incur, liability for any excise tax under Sections
4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which
heretofore have been paid and fully reflected in its financial statements.
ix. There is no pending or threatened litigation,
administrative action or proceeding relating to any Employee Plan other than
routine claims for benefits.
x. Except as disclosed on Annex 3.1(m)(x), there has been no
announcement or legally binding commitment by it to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such Employee Plan,
and it does not have any obligations for retiree health and life benefits under
any Employee Plan that cannot be terminated without incurring any liability
thereunder.
xi. Except as disclosed on Annex 3.1(m)(xi), the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by Cardinal or FANBP
to any person which is an "excess parachute payment" (as defined in Section 280G
of the Code) under any Employee Plan, increase any benefits payable under any
Employee Plan, or accelerate the time of payment or vesting of any such benefit.
xii. All annual reports have been filed timely with respect to
each Employee Plan, it has made available to SBI a true and correct copy of (A)
reports on the applicable form of the Form 5500 series filed with the IRS for
plan years beginning after 1987, (B) such Employee Plan, including amendments
thereto, (C) each trust agreement and insurance contract relating to such
Employee Plan, including amendments thereto, (D) the most recent summary plan
description for such Employee Plan, including amendments thereto, if the
Employee Plan is subject to Title I of ERISA, (E) the most recent actuarial
report or valuation if such Employee Plan is a Pension Plan and (F) the most
recent determination letter issued by the IRS if such Employee Plan is a
Qualified Plan.
xiii. Except as disclosed on Annex 3.1(m)(xiii), there are no
retiree health benefit plans except as required to be maintained by COBRA.
(n) Title to Assets. It has good and marketable title to its
properties and assets (other than property as to which it is lessee), except for
(i) such items shown in the Cardinal consolidated financial statements or notes
thereto; (ii) liens on real property for current real estate taxes not yet
delinquent or (iii) such defects in title which would not, individually or in
the
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<PAGE>
aggregate, have a Material Adverse Effect on it. With respect to any
property leased by it, there are no defaults by it, or any of the other parties
thereto, or any events which, with the giving of notice or lapse of time or
both, would become defaults by it or any of the other parties thereto, under any
of such leases, except for such defaults or events which would not, individually
or in the aggregate, have a Material Adverse Effect on it; and all such leases
are in full force and effect and are enforceable against it, as the case may be,
and there is no circumstance existing as of the date of this Agreement which
causes or would cause such leases to be unenforceable against any of the other
parties thereto except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally as well as principles of equity to the extent enforcement by a court
of equity is required.
(o) Compliance with Laws. It has all permits, licenses, certificates
of authority, orders and approvals of, and has made all filings, applications
and registrations with, federal, state, local and foreign governmental or
regulatory bodies that are required in order to permit it to carry on its
business as it is presently conducted and the absence of which could,
individually or in the aggregate, have a Material Adverse Effect on it; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and no suspension or cancellation of any of them is
threatened.
(p) Fees. Except as set forth in Annex 3.1(p) attached hereto,
neither it nor any of its respective officers, directors, employees or agents,
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees, and no broker or
finder has acted directly or indirectly for it in connection with this Agreement
or the transactions contemplated hereby.
(q) Environmental Matters. Except as to such matters which, either
individually or in the aggregate, would have a Materially Adverse Effect on
Cardinal or FANBP and any of its subsidiaries taken as a whole:
i. (A) It, its Participation Facilities and its Loan
Properties (each as defined below) are, and have been, in material compliance
with all Environmental Laws (as defined below), except where non-compliance
would, either individually or in the aggregate, not have a Material Adverse
Effect on it or any of its subsidiaries taken as a whole. Except as disclosed in
Annex 3.1(q), there are no Participation Facilities or other real estate owned
("OREO") located in the States of New Jersey, California, Connecticut, Rhode
Island, Vermont, Massachusetts, New Hampshire, or Maine.
(B) It, its Participation Facilities and its Loan
Properties hold all permits, licenses, registrations and other authorizations
(the "Environmental Permits") necessary under the Environmental Laws, and all
such Environmental Permits are currently in effect. The Environmental Permits
are listed in Annex 3.1(q)(B), and any that will expire or terminate as a result
of the transactions contemplated by this Agreement are so designated. It, its
Participation Facilities and its Loan Properties are in material compliance with
all the terms and conditions of such
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Environmental Permits and have not materially violated any of them. Neither it,
its Participation Facilities nor its Loan Properties have received any notice of
any proposal to amend, revoke, reissue or replace any Environmental Permit, nor
have any events occurred (other than a change in applicable law) that could form
a reasonable basis for any such action. It, its Participation Facilities, and
its Loan Properties have filed timely and complete applications for renewal of
any such Environmental Permits that are required prior to the Closing.
(C) There is no suit, claim, action, demand, penalty,
executive or administrative order, directive, investigation or proceeding
pending or threatened before any court, governmental agency or board or other
forum against it or any Participation Facility (x) for alleged noncompliance
(including by any predecessor) with, or liability under, any Environmental Law
or (y) relating to the release into the environment of any Hazardous Material
(as defined below) or oil, whether or not occurring at or on a site owned,
leased or operated by it or any Participation Facility.
(D) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or
threatened before any court, governmental agency or board or other forum
relating to or against any Loan Property (or it in respect of such Loan
Property) (x) relating to alleged noncompliance (including by any predecessor)
with, or liability under, any Environmental Law or (y) relating to the release
into the environment of any Hazardous Material or oil, whether or not occurring
at or on a site owned, leased or operated by any Loan Property, except as to
such matters which, either individually or in the aggregate, would not have a
Material Adverse Effect on Cardinal or FANBP and any of its subsidiaries taken
as a whole.
(E) There is no reasonable basis for any suit, claim,
action, demand, executive or administrative order, directive or proceeding of a
type described in Section 3.1(q)(i)(D) or (C).
(F) The properties currently or formerly owned or operated
(including, without limitation, in a fiduciary capacity) by it (including,
without limitation, soil, groundwater or surface water on, under or adjacent to
the properties, and buildings thereon) do not contain any Hazardous Material
other than as permitted under applicable Environmental Law (provided, however,
that with respect to properties formerly owned or operated by it, such
representation is limited to the period it owned or operated such properties).
(G) It has not received any notice, demand letter,
executive or administrative order, directive or request for information from any
federal, state, local or foreign governmental entity or any third party
indicating that it may be in violation of, or liable under, any Environmental
Law.
(H) Except as disclosed in Annex 3.1(q)(i)(H), there are no
underground storage tanks on, in or under, and during the period of its
ownership and operation no
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<PAGE>
underground storage tanks have been closed or removed from, any properties or
Participation Facility which are or have been in its ownership.
(I) During the period of (l) its ownership or operation
(including without limitation in a fiduciary capacity) of any of its respective
current properties, (m) its participation in the management of any Participation
Facility, or (n) its holding of a security interest in a Loan Property, there
has been no release of Hazardous Material or oil in, on, under or affecting such
properties, except as permitted under applicable Environmental Law. Prior to the
period of (x) its ownership or operation of any of its respective current
properties, (y) its participation in the management of any Participation
Facility, or (z) its holding of a security interest in a Loan Property, there
was no release of Hazardous Material or oil in, on, under or affecting any such
property, Participation Facility or Loan Property, except as permitted under
applicable Environmental Law.
(J) There has not been and is not any Environmental
Condition (as hereinafter defined) at or relating to any property at which
wastes have been deposited or disposed by or at the behest or direction of it,
its Participation Facilities or its Loan Properties, nor has it, its
Participation Facilities or its Loan Properties received written notice of any
such Environmental Condition. For purposes of this Agreement the term
"Environmental Condition" means any condition or circumstance, that (i) requires
abatement or remediation under any Environmental Law currently in effect, (ii)
gives rise to any civil or criminal liability under any Environmental Law
currently in effect, or (iii) constitutes a public or private nuisance based on
the presence of Hazardous Materials, under laws applicable on the date of
Closing.
(K) There are no environmental liens on any properties
owned or leased by it or on its Loan Properties ("Properties") and no government
actions which could subject the Properties to such liens have been taken, are
pending, or threatened.
(L) No notice or restriction relating to the presence of
Hazardous Materials is required to be placed in the deed to any property subject
to this Agreement and no property subject to this Agreement has such a notice or
restriction in its deed.
(M) The only Loan Properties or Participation Facilities in
which it participates in management are those described in Annex 3.1 hereto.
ii. The following definitions apply for purposes of this
Section 3.1(q): (a) "Loan Property" means any property in which it holds a
security interest (except that with respect to loans which are secured by
residential property, all representation in this Section 3.1(q) are given to the
best knowledge, without inquiry), and where required by the context, includes
the owner or operator of such property, but only with respect to such property;
(b) "Participation Facility" means any facility in which it participates in the
management (including all property on which it conducts operations of its
business, or which is held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property; (c) "Environmental Law" means (i) any
federal, state or local law, statute, ordinance,
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rule, regulation, code, license, permit, authorization, approval, consent, legal
doctrine, order, directive, executive or administrative order, judgment, decree,
injunction, requirement or agreement with any governmental entity, relating to
(A) the protection, preservation or restoration of the environment (which
includes, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, structures, soil, surface land, subsurface land, plant
and animal life or any other natural resource), or to human health or safety, or
(B) the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of, Hazardous Materials, in each case as amended and as now in effect;
"Environmental Law" includes, without limitation, the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the federal Clean Air Act, the federal Clean
Water Act, the federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste
Disposal Act and the federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and
Health Act of 1970, the Federal Hazardous Materials Transportation Act, or any
so-called "Superfund" or "Superlien" law enacted by any state having
jurisdiction over any Loan Property or Participation Facility, each as amended
and as now or hereafter in effect, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Material; and (d) "Hazardous Material"
means any substance which is detrimental to human health or safety or to the
environment, currently listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated, under any Environmental
Law, whether by type or by quantity, including any substance containing any such
substance as a component. Hazardous Material includes, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyls, any of which is regulated by, or subject to
regulation under, any Environmental Law.
(r) Allowance. The allowance for loan and lease losses shown on
Cardinal's consolidated statement of financial condition as of December 31, 1997
was, and the allowance for loan and lease losses shown on Cardinal's
consolidated statement of financial condition for periods ending after the date
of this Agreement will be, in the opinion of management of Cardinal and FANBP,
adequate, as of the date thereof, under generally accepted accounting principles
applicable to commercial banks and all other applicable regulatory requirements
for all losses reasonably anticipated in the ordinary course of business as of
the date thereof based on information available as of such date. It has
disclosed to SBI in writing prior to the date hereof the amounts of all loans,
leases, advances, credit enhancements, other extensions of credit, commitments
and interest-bearing assets of it that it has classified internally as "Other
Loans Specially Mentioned," "Special Mention," "Substandard," "Doubtful,"
"Loss," "Classified," "Criticized," "Credit Risk Assets," "Concerned Loans" or
words of similar import, and it shall promptly after the end of each quarter
after the date hereof and on the Effective Date inform SBI of the amount of each
such classification. The OREO
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and in-substance foreclosures included in any of its non-performing assets are
carried net of reserves at the lower of cost or market value based on current
independent appraisals or current management appraisals.
(s) Anti-takeover Provisions Inapplicable. The provisions of Chapter
25 of the PBCL relating to protection of shareholders do not apply to Cardinal,
this Agreement, the Stock Option Agreement, the Merger and the transactions
contemplated hereby.
(t) Material Interests of Certain Persons. Except as noted in Annex
3.1(t), none of its respective officers or directors, or any "associate" (as
such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934
(the "Exchange Act")) of any such officer or director, has any material interest
in any material contract or property (real or personal), tangible or intangible,
used in or pertaining to its business.
(u) Insurance. It is presently insured, and has been insured, in the
amounts, with the companies and since the periods set forth in Annex 3.1(u).
All of the insurance policies and bonds maintained by it are in full force and
effect, it is not in default thereunder and all material claims thereunder have
been filed in due and timely fashion. In the judgment of its management, such
insurance coverage is adequate.
(v) Dividends. The only dividends or other distributions which it has
made on its capital stock since January 1, 1995 are set forth in Annex 3.1(v).
(w) Books and Records. Its books and records have been, and are
being, maintained in accordance with applicable legal and accounting
requirements and reflect in all material respects the substance of events and
transactions that should be included therein.
(x) Board Action. Its board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Merger is advisable and in the best interests of it and its
shareholders, (b) approved this Agreement, the Stock Option Agreement and the
transactions contemplated hereby and thereby and (c) directed that the Agreement
be submitted for consideration by its shareholders at the Cardinal Shareholders'
Meeting (as hereafter defined).
(y) Fairness Opinions. Its board of directors has received a written
opinion, a copy of which has been furnished to SBI, to the effect that the
consideration to be received by its shareholders pursuant to this Agreement, at
the time of its execution, is fair to such holders from a financial point of
view.
(z) INTENTIONALLY OMITTED.
(aa) Fidelity Bonds. Since at least January 1, 1994, FANBP has
continuously maintained fidelity bonds insuring it against acts of dishonesty by
its employees in such amounts
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as is customary for a bank of its size. Since January 1, 1994, the aggregate
amount of all potential claims under such bonds has not exceeded $100,000 and
neither Cardinal nor FANBP is aware of any facts which would reasonably form the
basis of a claim under such bonds. Neither Cardinal nor FANBP has reason to
believe that its fidelity coverage will not be renewed by its carrier on
substantially the same terms as its existing coverage.
(bb) Condition of Tangible Assets. Except as set forth in Annex
3.1(bb), all buildings, structures and improvements on the real property owned
or leased by it are in good condition, ordinary wear and tear excepted, and are
free from structural defects in all material respects. The equipment, including
heating, air conditioning and ventilation equipment owned by it, is in good
operating condition, ordinary wear and tear excepted. The operation and use of
the property in the business conform in all material respects to all applicable
laws, ordinances, regulations, permits, licenses and certificates.
(cc) Loans by FANBP. Since January 1, 1991, and except as shown on
Annex 3.1(cc), in the aggregate, the loans by FANBP have been lawfully made,
constitute valid debts of the obligors, have been incurred in the ordinary
course of business, are subject to the terms of payment as shall have been
agreed upon between FANBP and each customer and FANBP does not know of any
applicable set off or counterclaim which in the aggregate would have a Material
Adverse Effect on it. A list of all loans thirty (30) days or more past due as
of January 31, 1998, and as of the last day of each month for each of the
preceding twelve (12) months thereto is attached hereto as Annex 3.1(cc)-A. No
part of the amount collectible under any loan is contingent upon performance by
FANBP of any obligation and no agreement for participation, in which FANBP has
relinquished or agreed to share control with a participation in management of
the facility, or agreement providing for deductions or discounts have been made
with respect to any part of such debts, except as expressly disclosed in Annex
3.1(cc). FANBP does not know of any pending, threatened or expected actions in
connection with any material loans or commitments presently or previously made
by FANBP relating to claims based on theories of "lenders' liability" or any
other basis.
(dd) Regulatory Compliance - OCC. FANBP is in compliance in all
material respects with the applicable rules and regulations of the OCC, except
as noted in Annex 3.1(dd) and except where the failure to comply would not have
a Material Adverse Effect on FANBP.
(ee) Regulatory Compliance - FDIC. Except as noted on Annex 3.1(ee)
hereto and except where the failure to comply would not have a Material Adverse
Effect on it, it is in compliance in all material respects with the rules and
regulations of the FDIC to the extent such rules and regulations are deemed
applicable by regulatory determination.
(ff) Capital Compliance. As of December 31, 1997, FANBP was in
compliance with the minimum capital requirements applicable to national banking
associations, including as to leverage ratio requirements, tangible capital
requirements and risk based capital requirements.
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(gg) Year 2000 Compliance. Cardinal and FANBP are in material
compliance with all requirements announced or promulgated by the Cardinal
Regulatory Agencies and by the Federal Financial Institutions Examination
Council.
(hh) INTENTIONALLY OMITTED.
(ii) INTENTIONALLY OMITTED.
(jj) INTENTIONALLY OMITTED.
(kk) INTENTIONALLY OMITTED.
(ll) INTENTIONALLY OMITTED.
(mm) Assessments Fully Paid. All payments, fees and charges assessed
by appropriate state and federal agencies against FANBP, and due on or prior to
the date of this Agreement, have been paid in full.
(nn) Annual Reports and Financial Statements. Cardinal has delivered
to SBI true and complete copies of (i) Cardinal's Annual Report on Form 10-K
for Cardinal's fiscal year ended December 31, 1997, containing consolidated
balance sheets of Cardinal at December 31, 1997 and December 31, 1996 and
consolidated statements of earnings, changes in shareholders' equity and cash
flows of Cardinal for the three years ended December 31, 1997, 1996 and 1995 and
such financial statements have been certified by independent public accountants,
and (ii) Cardinal's Quarterly Reports for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997 containing unaudited consolidated balance
sheets of Cardinal as at such dates and unaudited consolidated statements of
earnings and cash flows of Cardinal for the three, six and nine-month periods
reflected therein. Cardinal has also delivered to SBI true and correct copies
of its annual reports on Form 10-K for the years 1996, 1995 and 1994, together
with its annual reports to shareholders for the same periods. All such reports
(collectively, the "Cardinal Reports") (i) comply in all material respects with
the requirements of the Exchange Act and the rules and regulations of the SEC,
(ii) do not contain any untrue statement of a material fact and (iii) do not
omit to state 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. No documents to be filed by Cardinal with the
SEC or any regulatory agency in connection with this Agreement, or the
transactions contemplated hereby will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. All documents which Cardinal is
responsible for filing with the SEC or any regulatory agency in connection with
the Merger will comply as to form in all material respects with the requirements
of applicable law.
(oo) Proxy Statement/Prospectus, Etc. Except for information relating
to SBI and its subsidiaries and pro forma financial information reflecting the
combined operations of SBI and
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Cardinal, neither (i) the Proxy Statement portion of the Registration Statement
(as defined hereinafter at Section 4.2), to the extent prepared by Cardinal or
based on information provided by Cardinal, or any amendment or supplement
thereto, at the time it is filed with the SEC, at the time the Registration
Statement is declared effective, at the time the Proxy Statement/Prospectus is
mailed to the shareholders of Cardinal or at the date of the meeting of the
Cardinal shareholders at which the shareholders will consider this Agreement
(the "Cardinal Shareholders' Meeting") nor (ii) any other documents to be filed
by Cardinal with the SEC or any regulatory agency in connection with this
Agreement, or the transactions contemplated hereby will contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
SECTION 3.2 Representations and Warranties of SBI and its Material
------------------------------------------------------
Subsidiaries. SBI represents and warrants to Cardinal and FANBP (and the word
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"it" in this Article III refers to SBI and each of its Material Subsidiaries, as
that term is defined at Section 3.2(d) hereof), that, except as specifically
disclosed in the Annex of disclosure schedules included herewith, to the best of
its knowledge:
(a) Corporate Organization and Qualification. SBI is a corporation
duly incorporated, validly existing and duly subsisting under the laws of the
Commonwealth of Pennsylvania and is in good standing as a foreign corporation in
each jurisdiction where the properties owned, leased or operated, or the
business conducted, by SBI requires such qualification, except for such failure
to qualify or be in such good standing which, when taken together with all other
such failures, would not have a Material Adverse Effect on SBI. It has the
requisite corporate and other power and authority (including all federal, state,
local and foreign governmental authorizations) to carry on its business as now
conducted and to own its properties and assets. SBI owns, or will own at
Closing, directly or indirectly, all of the outstanding shares of capital stock
of SBI Merger Sub. SBI has made available to Cardinal complete and correct
copies of the articles of incorporation and bylaws of SBI and will make
available to Cardinal complete and correct copies of the articles of
incorporation and bylaws of SBI Merger Sub; such articles and bylaws of SBI are
in full force and effect as of the date hereof.
(b) Corporate Authority. Subject only to the regulatory approvals
specified in Section 5.1(b) hereof, SBI has the requisite corporate power and
authority, and legal right, and has taken all corporate action necessary in
order to execute and deliver this Agreement and to consummate the transactions
applicable to SBI contemplated hereby. This Agreement has been duly and validly
executed and delivered by SBI and constitutes the valid and binding obligations
of SBI, enforceable against SBI in accordance with its terms, except to the
extent enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or the application by a court of equitable
principles.
(c) Capitalization. As of December 31, 1997, SBI Common Stock was
held of record by more than 6,000 shareholders and the authorized capital stock
of SBI consisted of 32,000,000 shares of SBI Common Stock, of which
approximately 22,554,962 shares are issued and
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outstanding (an additional 30,454 shares are held as treasury stock) and
5,000,000 shares of Preferred Stock, no par value per share, of which none are
outstanding. Sufficient shares of authorized, but unissued, shares of SBI Common
Stock to effect the transactions herein contemplated will be reserved by SBI for
such purpose. Except as disclosed in SBI's draft Proxy Statement for its 1998
Annual Meeting, there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other securities
of SBI.
(d) Bank Subsidiaries. SBI owns, directly or indirectly, all of the
issued and outstanding shares of capital stock of Farmers First Bank, a bank and
trust company organized under the laws of the Commonwealth of Pennsylvania;
Farmers & Merchants Bank and Trust, a bank organized under the laws of the State
of Maryland; Citizens National Bank of Southern Pennsylvania, a national banking
association with headquarters in Greencastle, Pennsylvania; First National Trust
Bank, a national banking association with headquarters in Sunbury, Pennsylvania;
Williamsport National Bank, a national banking association with headquarters in
Williamsport, Pennsylvania; Equity National Bank, a national banking association
with headquarters in Marlton, New Jersey; Farmers National Bank, a national
banking association with headquarters in Mullica Hill, New Jersey; and Founders'
Bank, a bank organized under the laws of the Commonwealth of Pennsylvania
(collectively the "Bank Subsidiaries"). All of the issued and outstanding
capital stock of the Bank Subsidiaries is duly and validly authorized and
issued, fully paid and nonassessable (other than as provided at 12 U.S.C.A. (S)
55 with respect to national banks) and is owned by SBI free and clear of any
liens, security interests, encumbrances, restrictions on transfer or other
rights of any third person with respect thereto. SBI owns, directly or
indirectly, all of the issued and outstanding shares of capital stock of
Susquehanna Bank, a federal savings bank operating in Maryland. All of the
issued and outstanding capital stock of the Susquehanna Bank is duly and validly
authorized and issued, free and clear of any liens, security interests,
encumbrances, restrictions on transfer or other rights of any third person with
respect thereto other than rights of account holders to liquidation accounts
maintained by Susquehanna Bank in accordance with the rules of the Office of
Thrift Supervision ("OTS"). The Bank Subsidiaries and Susquehanna Bank are the
"Material Subsidiaries." There are no options, calls, warrants, conversion
privileges or other agreements obligating any Material Subsidiary at present or
upon the occurrence of any event to issue or sell any shares of its capital
stock. Each of Farmers First Bank, Founders' Bank and Farmers & Merchants Bank
and Trust is a bank and trust company duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania or the State of
Maryland and is duly authorized to engage in the banking and trust business as
an insured bank under the Federal Deposit Insurance Act, as amended. Each of
Citizens National Bank of Southern Pennsylvania, First National Trust Bank,
Williamsport National Bank, Equity National Bank and Farmers National Bank is a
national banking association duly organized, validly existing and in good
standing under the laws of the United States and is duly authorized to engage in
the banking and trust business as an insured bank under the Federal Deposit
Insurance Act, as amended. Susquehanna Bank is a federal savings and loan
association, duly organized, validly existing and in good standing under the
laws of the United States and is duly authorized to engage in the savings and
loan business under the Federal Deposit Insurance Act, as amended. Each
Material Subsidiary has corporate power and legal
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authority and governmental authorizations which are material to its respective
operations and to transact the respective businesses in which it is presently
engaged.
(e) No Violations. The execution, delivery and performance of this
Agreement by SBI and SBI Merger Sub does not, and the consummation of the
transactions contemplated hereby by SBI and SBI Merger Sub will not, constitute
(i) a breach or violation of, or a default under, any law, rule or regulation or
any judgment, decree, order, governmental permit or license, or agreement,
indenture or instrument to which SBI or SBI Merger Sub (or any of SBI's
respective properties or assets) is subject, which breach, violation or default
would have a Material Adverse Effect on SBI on a consolidated basis, or enable
any person to enjoin the Merger, (ii) a breach or violation of, or a default
under, SBI's or SBI Merger Sub's articles of incorporation or bylaws or (iii) a
breach or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of SBI's properties or assets under, any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which it is a party, or to which any of
SBI's properties or assets may be bound or affected, except for any of the
foregoing that, individually or in the aggregate, would not have a Material
Adverse Effect on SBI, on a consolidated basis; and the consummation of the
transactions contemplated hereby will not require any approval, consent or
waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any other
party to any such agreement, indenture or instrument, other than (i) the
required approvals, consents and waivers of governmental authorities referred to
in Section 5.1(b), (ii) any such approval, consent or waiver that already has
been obtained, (iii) the approval of SBI as the sole shareholder of SBI Merger
Sub, and (iv) any other approvals, consents or waivers the absence of which,
individually or in the aggregate, would not result in a Material Adverse Effect
on SBI, on a consolidated basis, or enable any person to enjoin the Merger.
(f) Required Consents. SBI has no reason to believe that it will be
unable to obtain consents and approvals, including without limitation all such
consents and approvals of Regulatory Agencies (as hereinafter defined),
necessary to consummate the transactions contemplated by this Agreement by
September 30, 1998 or that any such consents or approvals would contain any
condition or requirement that would result in a Material Adverse Effect on SBI.
(g) Board Action. SBI's board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Merger is advisable and in the best interests of it and its
shareholders, and (b) approved this Agreement and the transactions contemplated
hereby.
(h) SBI Merger Sub.
i. SBI Merger Sub is a corporation duly organized, validly
existing and duly subsisting under the laws of the Commonwealth of Pennsylvania.
All of the outstanding shares
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of capital stock of SBI Merger Sub have been validly issued, are fully paid and
nonassessable and are owned directly by SBI free and clear of any lien, charge
or other encumbrance. SBI Merger Sub possesses no assets nor is subject to any
liabilities and will not acquire assets or incur liabilities prior to the
Effective Time. Since the date of its incorporation, SBI Merger Sub has not
engaged in any activities other than in connection with the consummation of the
Merger or as expressly contemplated by this Agreement.
ii. SBI Merger Sub has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by SBI Merger Sub and the
consummation of the transactions described herein have been duly and validly
authorized by all necessary corporate actions (including without limitation
shareholder action) in respect thereof on the part of SBI Merger Sub. This
Agreement is a valid and binding obligation of SBI Merger Sub, enforceable
against SBI Merger Sub in accordance with its terms.
iii. All of the authorized capital stock of SBI Merger Sub,
which consists solely of 100 shares of common stock, $.01 par value per share,
is presently issued and outstanding.
iv. SBI will, as the sole shareholder of SBI Merger Sub,
vote to approve this Agreement and the Merger.
(i) SBI Reports. SBI has furnished to Cardinal and FANBP true and
complete copies of (i) all of its annual reports on Form 10-K filed with the SEC
since January 1, 1994 and its annual reports to shareholders for each of the
three years ended December 31, 1994, 1995 and 1996, respectively; (ii) all of
its quarterly reports on Form 10-Q and current reports, if any, on Form 8-K
filed with the SEC since January 1, 1996; (iii) each final registration
statement, prospectus or offering circular which SBI has used in connection with
the sale of securities since January 1, 1996; and (iv) each definitive proxy
statement distributed by SBI to its shareholders since January 1, 1996.
All such reports (i) comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, (ii) do not contain any untrue statement of a material fact and
(iii) do not omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(j) SBI Benefit Plans. SBI has furnished to Cardinal and FANBP true,
-----------------
correct and complete copies of the employee pension benefit plans (within the
meaning of ERISA Section 3(2)), employee welfare benefit plans (within the
meaning of ERISA Section 3(1)), stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement plans, annual
incentive plans, group insurance plans, and all other employee benefit plans,
policies, agreements and arrangements, maintained or contributed to by SBI or
any subsidiary of SBI in which any Continued Employee (as defined in Section 4.3
(b)) will be eligible to participate after the
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Effective Time, together with the most recent actuarial report, financial
statements and determination letter for the tax qualified cash balance pension
plan (or its predecessor) sponsored by SBI.
(k) Financial Reports. Each of SBI and its subsidiaries has timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that it was required to
file since January 1, 1994 with (A) the Board, (B) the FDIC, (C) the OCC, (D)
the SEC, (E) the OTS, (F) the Pennsylvania Department of Banking and (G) the
Maryland Banking Commission (the regulatory agencies listed at (A) through (G)
are, collectively, the "SBI Regulatory Agencies"), and (H) any other regulatory
authority, and all other material reports and statements required to be filed by
it since January 1, 1994, including, without limitation, any report or statement
required to be filed pursuant to the laws, rules or regulations of the United
States or any regulatory agency and has paid all fees and assessments due and
payable in connection therewith, and no such report, registration or statement
contains any material misstatement or omission or is otherwise in material
noncompliance with any law, regulation or requirement.
(l) SBI's Balance Sheets. SBI's consolidated balance sheets as of
December 31, 1997 previously provided to Cardinal and each consolidated balance
sheet provided after the date hereof to Cardinal (including in each case any
related notes and schedules) fairly presents or will fairly present SBI and its
subsidiaries' financial position as of the dates thereof and each of the
consolidated statements of income and shareholders' equity and of cash flows
provided therewith (including in each case any related notes and schedules),
fairly presents or will fairly present the results of operations, shareholders'
equity and cash flows, as the case may be, of SBI and its subsidiaries for the
periods set forth therein (subject, in the case of unaudited interim statements,
to normal year-end audit adjustments that are not material in amount or effect),
in each case in accordance with generally accepted accounting principles
consistently applied during the periods involved.
(m) Absence of Certain Changes or Events. Since December 31, 1997,
SBI has not incurred any material liability, except in the ordinary course of
its business consistent with past practice, nor has there been any change in the
financial condition, properties, assets, business, results of operation or
prospects of SBI and its subsidiaries which, individually or in the aggregate,
has had, or might reasonably be expected to result in, a Material Adverse Effect
on SBI and its subsidiaries, taken as a whole.
(n) Fees. Neither SBI nor any of its officers, directors, employees
or agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions, or finder's fees, and no
broker or finder has acted directly or indirectly for it in connection with the
Agreement or the transactions contemplated hereby.
(o) Registration Statement, Etc. Except for information relating to
Cardinal and FANBP, neither (i) the Registration Statement, the Proxy
Statement/Prospectus or any amendment or supplement thereto, or any other
registration statement filed with the SEC during the term of this
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Agreement, at the time it is filed with the SEC, at the time it is declared
effective, at the time the Proxy Statement/Prospectus is mailed to the
shareholders of Cardinal or at the date of the Cardinal Shareholders' Meeting to
consider the approval of this Agreement nor (ii) any other documents to be filed
by SBI with the SEC or any regulatory agency in connection with this Agreement
or the transactions contemplated thereby will contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. All documents which SBI is responsible for
filing with the SEC or any regulatory agency in connection with the Merger will
comply as to form in all material respects with the requirements of applicable
law.
(p) Compliance with Laws. It has the permits, licenses, certificates
of authority, orders and approvals of, and has made all filings, applications
and registrations with, federal, state, local and foreign governmental
authorities, including regulatory agencies that are required in order to permit
it to carry on its business as it is presently conducted and the absence of
which would, individually or in the aggregate, have a Material Adverse Effect on
SBI, on a consolidated basis; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect, and no suspension
or cancellation of any of them is threatened.
(q) Absence of Regulatory Actions. It is not a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or is a recipient of any extraordinary supervisory letter from,
or has adopted any board resolutions at the request of, federal or state
governmental authorities, including, without limitation, the SBI Regulatory
Agencies, charged with the supervision or regulation of banks or bank holding
companies or savings and loan holding companies or engaged in the insurance of
bank and/or savings and loan deposits nor has it been advised by any SBI
Regulatory Agency that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(r) Litigation and Liabilities. Except as set forth in Annex 3.2(r),
there are no (i) civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings before any court, governmental agency or
otherwise pending or, to the knowledge of management, threatened against it or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including, without limitation, those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which its management is aware that could reasonably be expected to result in any
claims against or obligations or liabilities of it, that, alone or in the
aggregate, are reasonably likely to have a Material Adverse Effect on SBI, on a
consolidated basis, or to hinder or delay, in any material respect, consummation
of the transactions contemplated by this Agreement.
(s) Environmental Matters. There is no activity or condition on or in
any property owned, occupied, leased, or held as security by SBI or a Material
Subsidiary which would
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subject SBI or any Material Subsidiary to damages, penalties, injunctive relief
or cleanup costs under any Environmental Law that individually or in the
aggregate would have a Material Adverse Effect on SBI, on a consolidated basis.
(t) Taxes. SBI's federal income tax returns have been examined and
closed or otherwise closed by operation of law through December 31, 1993. All
federal, state, local and foreign tax returns required to be filed by it or on
its behalf have been timely filed or requests for extensions have been timely
filed and any such extensions shall have been granted and not have expired, and,
to the knowledge of management, all such filed returns are complete and accurate
in all material respects. All taxes shown on such returns, and all taxes
required to be shown on returns for which extensions have been granted, have
been paid in full or adequate provision has been made for any such taxes on its
balance sheet (in accordance with generally accepted accounting principles)
other than those taxes which are being contested in appropriate forums in
proceedings which are being diligently pursued. Adequate provision has been
made on its balance sheet (in accordance with generally accepted accounting
principles consistently applied) for all federal, state, local and foreign tax
liabilities for periods subsequent to those for which returns have been filed.
There is no audit examination, deficiency, or refund litigation pending or, to
its knowledge, threatened with respect to any taxes that could result in a
determination that would have a Material Adverse Effect on SBI and its
subsidiaries, taken as a whole. All taxes, interest, additions and penalties
due with respect to completed and settled examinations or concluded litigation
relating to it have been paid in full or adequate provision has been made for
any such taxes on its balance sheet (in accordance with generally accepted
accounting principles). It has not executed an extension or waiver of any
statute of limitations or the assessment or collection of any tax due that is
currently in effect, except as disclosed on Annex 3.2(t).
(u) Agreements. It is not in default under or in violation of any
provision of any note, bond, indenture, mortgage, deed of trust, loan agreement,
lease or other agreement to which it is a party or by which it is bound or to
which any of its respective properties or assets is subject, other than such
defaults or violations as could not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on SBI.
(v) Regulatory Compliance--State Banking Departments, OTS and OCC.
SBI and its state-chartered bank subsidiaries are in compliance in all material
respects with the applicable rules and regulations of the Banking Department, in
the case of Farmers First Bank and Founders' Bank, and the Maryland Banking
Commission, in the case of Farmers & Merchants Bank and Trust, the Material
Subsidiaries which are national banks are in compliance in all material respects
with applicable rules and regulations of the Office of the Comptroller of the
Currency and the Material Subsidiaries which are federally chartered thrifts are
in compliance in all material respects with applicable rules and regulations of
the OTS, except where the failure to comply would not have a Material Adverse
Effect on SBI and its subsidiaries, taken as a whole.
(w) Capital Compliance. As of December 31, 1997, SBI and its Material
Subsidiaries were in compliance with the minimum capital requirements applicable
to them under
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state and federal laws, including as to leverage ratio requirements, tangible
capital requirements and risk-based capital requirements.
(x) Assessments Fully Paid. All payments, fees and charges assessed
by appropriate state and federal agencies against SBI and its Material
Subsidiaries, and due on or prior to the date of this Agreement, have been paid
in full.
(y) Regulatory Compliance--FDIC and Federal Reserve. Except where the
failure to comply would not have a Material Adverse Effect on SBI and its
subsidiaries, taken as a whole and except as disclosed herein, SBI and its
Material Subsidiaries are in compliance in all material respects with the rules
and regulations of the FDIC and Federal Reserve to the extent such rules and
regulations are applicable by regulatory determination.
(z) Year 2000 Compliance. Except as provided in Annex 3.2(z) hereof,
SBI and its Material Subsidiaries are in material compliance with all
requirements announced or promulgated by the SBI Regulatory Agencies and the
Federal Financial Institutions Examination Council.
ARTICLE IV
COVENANTS
SECTION 4.1 Acquisition Proposals. Each of Cardinal and FANBP agrees
---------------------
that it and its officers and directors shall not, and that it shall direct and
use its best efforts to cause its employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it) not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a merger,
consolidation or similar transaction involving, or any purchase, sale or other
disposition of all or any significant portion of the assets or any equity
securities of, Cardinal or FANBP (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or, except to the extent legally
required for the discharge by its board of directors of its fiduciary duties as
determined upon consultation with counsel, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
Each of Cardinal and FANBP agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. Each of Cardinal and
FANBP agrees that it will take the necessary steps to inform the appropriate
individuals or entities referred to in the first sentence hereof of the
obligations undertaken by each of them in this Section 4.1. Each of Cardinal
and FANBP agrees that it will notify SBI immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations, or discussions are sought to be initiated or continued with, it.
Notwithstanding the foregoing, Cardinal, after written notice to SBI, may
respond to unsolicited inquiries of third parties and engage in
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discussions or negotiations with third parties following such unsolicited
inquiries by third parties if, in each case, following consultation with
counsel, the Cardinal Board of Directors determines that failure to respond to
such unsolicited inquiry or to engage in such discussions or negotiation is
likely to be deemed a breach or failure on the part of the Cardinal Board of
Directors to perform the duties of their office under applicable Pennsylvania
law.
SECTION 4.2 Securities Registration and Disclosure. Cardinal and
--------------------------------------
FANBP shall cooperate with SBI in the preparation, in accordance with the
requirements of the proxy rules under the Exchange Act, of the Proxy
Statement/Prospectus and the filing thereof as part of the Registration
Statement. Following the date hereof, SBI will prepare and file with the SEC
under the Securities Act a registration statement for the registration of the
shares of SBI Common Stock to be issued pursuant hereto (the "Registration
Statement"), and Cardinal will file with the SEC under the Exchange Act the
preliminary form of the Proxy Statement/Prospectus included in the Registration
Statement, and each party shall be responsible for providing all information
concerning itself and its subsidiaries required to be included therein. SBI
shall take any action required to be taken under any applicable state securities
or "blue sky" laws in connection with the issuance of shares of SBI Common Stock
pursuant to this Agreement and Cardinal shall furnish SBI all information
concerning Cardinal and its shareholders as SBI may reasonably request in
connection with any such action. At least five (5) business days prior to its
filing with the SEC, SBI shall provide a copy of the Registration Statement to
Cardinal and its counsel for review. Each party will promptly provide the other
with copies of all correspondence, comment letters, notices or other
communications to or from the SEC relating to the Registration Statement, the
Proxy Statement/Prospectus or any amendment or supplement thereto, and SBI will
advise Cardinal promptly after it receives notice thereof, of the effectiveness
of the Registration Statement, of the issuance of any stop order with respect to
the effectiveness thereof, of the suspension of the qualification of the SBI
Common Stock issuable in connection herewith for offering or sale in any
jurisdiction, or the initiation or threat of any proceeding for any such
purpose.
Cardinal will take appropriate action to call the Cardinal
Shareholders' Meeting, to be held not more than sixty (60) days following the
effective date of the Registration Statement (which meeting may be the Annual
Meeting of Shareholders of Cardinal), to consider approval of this Agreement
and, except to the extent legally required for the discharge by Cardinal's board
of directors of its fiduciary duties and subject to receipt of an updated
fairness opinion from its financial advisor dated on or immediately prior to the
date of the Proxy Statement, will use its best efforts to secure such approval.
In connection with the Cardinal Shareholders' Meeting, Cardinal will duly
solicit, in compliance with Section 14(a) of the Exchange Act and the proxy
rules of the SEC thereunder, the vote of its shareholders by mailing or
delivering to each such shareholder, as soon as practicable after the
effectiveness of the Registration Statement, the Proxy Statement/Prospectus, and
as soon as practicable thereafter, any amendments or supplements thereto as may
be necessary to assure that at the date of the Cardinal Shareholders' Meeting
the Proxy Statement/Prospectus shall conform to the requirements of Sections
3.1(oo) and 3.2(o) hereof.
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Cardinal will furnish to SBI a list of all persons known to Cardinal
who at the date of the Cardinal Shareholders' Meeting may be deemed to be
"affiliates" of Cardinal within the meaning of Rule 145 under the Securities
Act. Cardinal will use its best efforts to cause each such person identified in
its list to deliver at or prior to the Closing a written agreement providing
that such person will not sell, pledge, transfer or otherwise dispose of the
shares of SBI Common Stock to be received by such person hereunder except (i) in
compliance with the applicable provisions of the Securities Act and the rules
and regulations thereunder and (ii) after such time as financial results
covering at least thirty (30) days of post-merger combined operations have been
published within the meaning of Section 201.01 of the SEC's Codification of
Financial Reporting Policies.
SECTION 4.3 Employees.
---------
(a) Except as otherwise agreed in writing, SBI and any of its
affiliates shall have the right (but not the obligation) to employ, as officers
or employees of SBI, the Surviving Corporation, FANBP or other affiliates of SBI
immediately following the Effective Time, any persons who are officers or
employees of either of Cardinal and FANBP immediately before the Effective Time.
It shall be a condition to employment by SBI or any of its affiliates that any
former officer or employee of Cardinal or FANBP agree to cancel any existing
employment contract, agreement or understanding between him or herself and
Cardinal or FANBP, including without limitation all benefits related to
severance arrangements upon a change of control or otherwise, prior to accepting
such new employment and without accepting any of the severance benefits or other
benefits or payments associated with such contract, agreement or understanding.
(b) Each person employed by Cardinal or FANBP prior to the Effective
Time who remains an employee of the Surviving Corporation or FANBP following the
Effective Time (each a "Continued Employee") shall be entitled, as an employee
of SBI or an SBI subsidiary, to credit for past service with Cardinal or FANBP
for purposes of eligibility, vesting and accrual and to participate in whatever
employee health, welfare, pension and fringe benefit plans, or whatever stock
option, bonus or incentive plans or other fringe benefit programs that may be in
effect generally for similarly situated employees of SBI or SBI's subsidiaries
from time to time ("SBI's Plans"), if such Continued Employee shall be selected
or otherwise eligible for participation therein; provided, however, that any
Continued Employee who continues to participate in a defined benefit pension
plan sponsored by FANBP or the Surviving Corporation shall not participate in
the cash balance pension plan sponsored by SBI prior to the merger of the two
plans as provided herein, and any Continued Employee who continues to
participate in a 401(k) plan sponsored by FANBP or the Surviving Corporation
shall not participate in the 401(k) plan sponsored by SBI prior to the merger of
the two plans as provided herein. All such participation in SBI's Plans shall be
subject to such terms of such plans as may be in effect from time to time,
provided that Continued Employees will be eligible to participate in SBI's Plans
on the same basis as similarly situated employees of SBI or SBI's subsidiaries
as provided herein. Such Continued Employees will receive credit for past
service with Cardinal or FANBP for purposes of eligibility under SBI's Plans and
calculation of benefits under SBI's severance benefits plan, if applicable, and
vesting under the 401(k) plan sponsored by SBI.
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(c) Cardinal and FANBP shall take all timely and necessary action to
cease participation or accrual of benefits, effective as of the Effective Time,
by each person employed by Cardinal or FANBP prior to the Effective Time in each
Employee Plan (as defined in Section 3.1(m)), and to terminate each Employee
Plan, other than the defined benefit pension plan sponsored by FANBP (the
"Surviving Corporation") [or an Employee Plan containing a cash or deferred
arrangement qualified under Section 401(k) of the Code ("Employee 401(k) Plan"],
effective as of the Effective Time; provided that SBI may, in its sole
discretion, give notice to Cardinal or FANBP not less than twenty (20) days
(sixty-one (61) days in the case of any Pension Plan (as defined in Section
3.1(m)) prior to the Effective Time, that any Employee Plan shall not be
terminated and/or participation or accrual of benefits thereunder shall not
cease pursuant to this Section 4.3(c).
(d) Subject to SBI's satisfaction that the defined benefit pension
plan sponsored by FANBP (the "Defined Benefit Plan") meets the requirements for
tax qualification under sections 401(a) and 501(a) of the Code, the Defined
Benefit Plan shall be merged with and into the cash balance pension plan
sponsored by SBI (the "Cash Balance Plan"), effective January 1, 1999. Each
participant in the Defined Benefit Plan as of December 31, 1998 shall be
credited with an initial balance under the Cash Balance Plan as of January 1,
1999 equal to 105% of the present value of the accrued benefit of such
participant calculated by application of the benefit formula under the
predecessor to the Cash Balance Plan as of December 31, 1998, as if all of the
service and earnings credited to such participant for purposes of calculating
his accrued benefit under the Defined Benefit Plan had been service with and
earnings paid by SBI. The present value of accrued benefits shall be calculated
based on mortality assumptions determined by the actuary for the Cash Balance
Plan and an interest rate equal to average of the annual rates of interest on
30-year Treasury securities for each of the business days of August, 1998.
SECTION 4.4 Access and Information.
----------------------
(a) Upon reasonable notice, and subject to applicable laws relating to
the exchange of information, each of Cardinal and FANBP shall afford to SBI and
its representatives (including, without limitation, directors, officers and
employees of SBI and its affiliates, and counsel, accountants and other
professionals retained) such access during normal business hours throughout the
period prior to the Effective Time to the books, records (including, without
limitation, tax returns and work papers of independent auditors), properties,
personnel and such other information as SBI may reasonably request (other than
reports or documentation which are not permitted to be disclosed under
applicable law); provided, however, that no investigation pursuant to this
Section 4.4 shall affect or be deemed to modify any representation or warranty
made herein. SBI will not, and will cause its representatives not to, use any
information obtained pursuant to this Section 4.4 for any purpose unrelated to
the consummation of the transactions contemplated by this Agreement and in no
event will SBI directly or indirectly use such information for any competitive
or commercial purpose. Subject to the requirements of law, SBI will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 4.4 unless such
information (i) was already known to SBI or an affiliate of SBI, (ii) becomes
available to SBI or an affiliate of SBI from other sources not known by such
person to be
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bound by a confidentiality agreement, (iii) is disclosed with the prior written
approval of Cardinal or FANBP, as the case may be, (iv) is or becomes readily
ascertainable from published information or trade sources or (v) was already
publicly available. Without in any way limiting the foregoing, Cardinal and
FANBP shall provide to SBI within forty-five (45) days of the end of each
calendar quarter consolidated financial statements (including a balance sheet
and income statement) as of the end of, and for, such period that are in
conformance with generally accepted accounting principles and the representation
set forth in Section 3.1(f). In the event that this Agreement is terminated or
the transactions contemplated by this Agreement shall otherwise not be
consummated, each party shall, if so requested, promptly cause all copies of
documents or extracts thereof containing information and data as to another
party hereto (or an affiliate of any party hereto) to be returned to the party
which furnished the same. This Section 4.4 supersedes and terminates any
agreement between the parties relating to the confidentiality of information
which may have been exchanged (the "Confidentiality Agreement").
(b) During the period from the date of this Agreement to the
Effective Date, SBI shall provide to Cardinal and FANBP the following documents
and information:
i. As soon as reasonably available, but in no event more
than forty-five (45) days after the end of each fiscal quarter of SBI ending
after the date of this Agreement, SBI will deliver to Cardinal and FANBP its
quarterly report on Form 10-Q as filed with the SEC.
ii. As soon as reasonably available, but in no event more
than ninety (90) days after the end of each fiscal year of SBI ending after the
date of this Agreement, SBI will deliver to Cardinal and FANBP its annual report
on Form 10-K as filed with the SEC.
iii. SBI will deliver to Cardinal and FANBP, contemporaneously
with its being filed with the SEC, a copy of each current report on Form 8-K
filed by SBI after the date of this Agreement.
iv. At least five (5) business days prior to submission, SBI
will furnish to Cardinal and FANBP the portions which describe the transactions
(including any financial information or pro forma financial information of, or
including, Cardinal or FANBP) contemplated herein of (A) registration
statements, prospectuses or offering circulars used by SBI in connection with
the sale of securities after the date of this Agreement, (B) proxy statements
distributed by SBI to its shareholders after the date of this Agreement, and (C)
all other publicly-available reports, statements or other documents which are
either distributed to shareholders or filed by SBI or any of its subsidiaries
with the SEC. Any comments timely received by SBI from Cardinal in connection
with the foregoing will be reviewed and considered in good faith, but SBI shall
not be bound to comply with the recommendations set forth in such comments. SBI
also shall furnish Cardinal with copies of the foregoing in the form filed with
the SEC or otherwise distributed to shareholders.
v. SBI shall notify Cardinal and FANBP within 5 business
days of any material changes to the SBI Benefit Plans.
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<PAGE>
SECTION 4.5 Certain Filings, Consents and Arrangements. SBI shall
------------------------------------------
use all reasonable efforts to obtain all necessary approvals required to carry
out the transactions contemplated by this Agreement and to consummate the
Merger. Cardinal and FANBP shall cooperate with SBI in connection therewith,
including without limitation furnishing all information concerning Cardinal or
FANBP as may be reasonably requested by SBI in connection with any such action.
SBI shall use all reasonable efforts to provide, five (5) days prior to
submission, Cardinal with copies of all material applications, notices,
petitions or other filings or submissions prepared by SBI in connection with
consummation of the Merger. Any comments timely received by SBI from Cardinal in
connection with the foregoing will be reviewed and considered in good faith, but
SBI shall not be bound to comply with the recommendations set forth in such
comments. SBI will consult with Cardinal with respect to the obtaining of all
permits, consents, approvals and authorizations of all third parties and
governmental authorities necessary or advisable to consummate the transactions
contemplated by this Agreement and SBI will keep Cardinal apprised of the status
of matters relating to completion of the transactions contemplated hereby. SBI
shall promptly furnish Cardinal with copies of applications to any governmental
authority in respect of the transactions contemplated hereby.
SECTION 4.6 Takeover Statutes. No "fair price," "moratorium," or
-----------------
other form of anti-takeover statute or regulation or any similar provision of
Cardinal's articles of incorporation are applicable to the transactions
contemplated by this Agreement and, if any such statute, regulation or
provisions shall become applicable to the transactions contemplated by this
Agreement, Cardinal and FANBP and the members of the boards of directors of
Cardinal and FANBP shall grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
eliminate or minimize the effects of such statute or regulation or provision on
the transactions contemplated hereby.
SECTION 4.7 Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as promptly as
practicable, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
governmental authorities, or other entities, effecting all necessary
registrations, applications and filings and obtaining any required contractual
consents and regulatory approvals.
SECTION 4.8 Publicity. Except as required by law or regulation,
---------
Cardinal and FANBP shall not, without the prior consent of SBI (which consent
shall not be unreasonably withheld), issue any press releases or otherwise make
public filings under securities laws, with respect to this Agreement or the
transactions described herein. Prior to issuing any press release or making any
public filings under securities laws which makes any reference to Cardinal or
FANBP, SBI shall provide a copy to Cardinal for comment and in all such
instances the parties shall cooperate.
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<PAGE>
SECTION 4.9 Meeting. INTENTIONALLY OMITTED.
-------
SECTION 4.10 Notification of Certain Matters. Each party shall give
-------------------------------
prompt notice to the others of: (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its subsidiaries subsequent to
the date of this Agreement and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses, results of
operations or prospects of it to which it is a party or is subject; and (b) any
Material Adverse Change in its financial condition, properties, business, or
results of operations taken as a whole or the occurrence of any event which, so
far as reasonably can be foreseen at the time of its occurrence, is reasonably
likely to result in any such change. Each party shall give prompt notice to the
other parties of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement.
SECTION 4.11 Insurance. Cardinal and FANBP shall use best efforts
---------
to retain no less than the level of insurance coverage presently held by them as
of the date hereof.
SECTION 4.12 Dividends. Cardinal shall not declare, pay or set
---------
aside any dividend or other distribution in respect of its capital stock except
in conformity with past practice as to amount and timing of such dividends, with
increases in conformity with past practices, it being understood on the basis of
Cardinal's representations of past practice that a dividend of $0.16 per share
for the first quarter of 1998, $0.18 per share for the second quarter of 1998,
$0.20 per share for the third quarter of 1998, and $0.22 per share for the
fourth quarter of 1998, is consistent with the past practice of Cardinal as to
amount and timing of dividends.
SECTION 4.13 Directors.
---------
(a) The board of directors of SBI shall elect one person who is a
director of Cardinal as of the date of execution of this Agreement to the board
of directors of SBI as of the Effective Date. Such person shall be nominated by
the Cardinal board of directors and his name forwarded to SBI at least one month
prior to the Effective Date. Subject to the approval of such person by the SBI
board of directors (said approval not to be unreasonably withheld), such person
shall become a director of SBI on the Effective Date. The President and CEO of
SBI shall propose at the 15 April 1998 meeting of the SBI Board that the SBI
Board adopt resolutions providing that upon the expiration of the initial term
of the person elected to the board of directors of SBI pursuant to this Section
4.13(a), the board of directors of SBI shall nominate and recommend to the
shareholders of SBI, at the subsequent SBI Annual Meeting of Shareholders, the
election to the board of directors of SBI of a member of the board of directors
of FANBP who meets the eligibility requirements for directors of SBI, such
person to be proposed by the FANBP Board and agreed to by SBI, which agreement
shall not be unreasonably withheld.
(b) Each person who is a director of FANBP as of the date of the
execution of this Agreement shall remain a director of FANBP for a period of at
least three years from the Effective
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Date and shall receive compensation of $7,980 per year for each year in which
such director attends at least 10 meetings of the FANBP board of directors,
provided that in the event that a FANBP director fails to attend the minimum
number of meetings per year required pursuant to OCC regulations, or otherwise
fails to meet the minimum standards required by the OCC, such director shall be
removed absent a showing of compelling circumstances that would warrant
retention. FANBP directors who fail to attend at least 10 meetings per year
shall receive only $665 per meeting actually attended as compensation during
said year.
(c) On the Effective Date and thereafter, FANBP or its successor(s)
shall continue to meet its obligations under that certain Deferred Compensation
Agreement made and entered into April 1, 1988 by and between Ray E. Koontz and
FANBP, a true and complete copy of which is attached hereto as Annex 4.13(c).
(d) The existing Directors' Deferred Income Agreements, including all
Addenda, with Messrs. Koontz, DeArment, Dodson and Morris, true and complete
copies of which are attached hereto as Annexes 4.13(d)(1)-(4), shall each be
amended prior to June 30, 1998 to provide that on June 30, 1998, the
Compensation (as defined in the Directors' Deferred Income Agreements) provided
under the Directors' Deferred Income Agreements will be equal to the amounts set
forth in Schedule 4.13(d) attached hereto, adjusted to reflect additional
deferrals between January 1, 1998 and June 30, 1998. FANBP shall not amend the
Directors' Deferred Income Agreements, except as provided in this Section
4.13(d). True and complete copies of all other Directors' Deferred Income
Agreements, including all Addenda, are set forth in Annex 4.13(d)(5). From the
Effective Date, FANBP directors shall participate, if at all, only in the
deferred director fee plans established by SBI or SBI Merger Sub, if any, for
which FANBP directors are eligible for participation.
(e) As of the Effective Date and at all times thereafter, no director
of FANBP shall receive health insurance, life insurance or any kind of bonus
compensation and all such arrangements shall terminate without any further
obligation on the part of Cardinal or Surviving Corporation.
(f) On and after the Effective Time, SBI shall indemnify and hold
harmless all former and present directors, officers, employees and agents of
Cardinal and FANBP for all losses, claims, damages, costs, expenses, liabilities
or judgments or amounts that are paid in settlement (with the approval of SBI,
which approval shall not be unreasonably withheld) in connection with any claim,
action, suit, proceeding or investigation based in whole or in part on the
operation of the business of Cardinal or FANBP prior to the Effective Time, to
the fullest extent permitted under the articles of incorporation of Cardinal,
the charter of FANBP, and the bylaws of each, as in effect as of the date of the
execution of this Agreement.
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<PAGE>
ARTICLE V
CONDITIONS TO CONSUMMATION
SECTION 5.1 Conditions to Closing. The respective obligations of the
---------------------
parties to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following conditions:
(a) The Agreement and the transactions contemplated hereby shall
have been approved by the requisite vote of the shareholders of Cardinal and SBI
(if applicable) in accordance with applicable law, as well as the articles of
incorporation and bylaws of each of Cardinal and SBI.
(b) All approvals, consents or waivers required by any of the
Cardinal Regulatory Agencies or the SBI Regulatory Agencies with respect to this
Agreement (including the Merger) and the transactions contemplated hereby
including, without limitation, the approvals, notices to, consents or waivers of
(i) the Board, and (ii) the Pennsylvania Department of Banking (the Cardinal
Regulatory Agencies and the SBI Regulatory Agencies, are, collectively the
"Regulatory Agencies") shall have been obtained and shall remain in full force
and effect, and all applicable statutory waiting periods (including without
limitation all applicable statutory waiting periods relating to the Merger)
shall have expired; and the parties shall have procured all other regulatory
approvals, consents or waivers of governmental authorities or other persons that
are necessary or appropriate to the consummation of the transactions
contemplated by this Agreement except those approvals, consents or waivers, if
any, for which failure to obtain would not, individually or in the aggregate,
have a Material Adverse Effect on SBI, SBI Merger Sub, Cardinal or FANBP (after
giving effect to the transaction contemplated hereby); provided, however, that
no approval, consent or waiver referred to in this Section 5.1(b) shall be
deemed to have been received if it shall include any condition or requirement
that reasonably would result in a Material Adverse Effect on SBI or SBI Merger
Sub.
(c) All other requirements prescribed by law which are necessary to
the consummation of the transactions contemplated by this Agreement shall have
been satisfied.
(d) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger or any other transaction contemplated
by this Agreement, and no litigation or proceeding shall be pending against any
of the parties herein or any of their subsidiaries brought by any governmental
agency seeking to prevent consummation of the transactions contemplated hereby.
(e) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, restricts or makes illegal consummation of the Merger
or any other transaction contemplated by this Agreement.
(f) The Merger shall as of the date of the Closing meet the
requirements for pooling-of-interests accounting treatment under generally
accepted accounting principles and under the accounting rules of the SEC, and
SBI shall have received a letter from Coopers & Lybrand L.L.P. in form and
substance reasonably satisfactory to SBI as to the matters specified in this
Section 5.1(f).
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(g) The Registration Statement shall have been filed (the date of
which is referred to herein as the "Filing Date") by SBI with the SEC under the
Securities Act, and shall have been declared effective prior to the time the
Proxy Statement/ Prospectus is first mailed to the shareholders of Cardinal, and
no stop order with respect to the effectiveness of the Registration Statement
shall have been issued; the SBI Common Stock to be issued pursuant to this
Agreement shall be duly registered or qualified under the securities or "blue
sky" laws of all states in which such action is required for purposes of the
initial issuance of such shares and the distribution thereof to the shareholders
of Cardinal entitled to receive such shares.
(h) A ruling from the IRS or an opinion of Morgan, Lewis & Bockius
LLP, counsel to SBI and SBI Merger Sub, to the effect that:
i. The Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and Cardinal and SBI will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code;
ii. No gain or loss will be recognized by Cardinal or SBI by
reason of the Merger;
iii. Except for cash received in lieu of fractional shares or
with respect to any shareholder of Cardinal who receives cash as a dissenting
shareholder, no gain or loss will be recognized by the shareholders of Cardinal
who receive solely SBI Common Stock upon the exchange of their shares of
Cardinal Common Stock for shares of SBI Common Stock;
iv. The basis of the SBI Common Stock to be received by the
Cardinal shareholders will be, in each instance, the same as the basis of the
Cardinal Common Stock surrendered in exchange therefor;
v. The holding period of the SBI Common Stock received by
a Cardinal shareholder receiving SBI Common Stock will include the period during
which the Cardinal Common Stock surrendered in exchange therefor was held; and
vi. Cash received by a Cardinal shareholder in lieu of a
fractional share interest of SBI Common Stock will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of SBI Common Stock which he would otherwise be entitled to receive and
will qualify as capital gain or loss.
vii. No gain or loss will be recognized by the holders of
the Cardinal Options as a result of the assumption of the Cardinal Options by
SBI pursuant to Section 1.6 of this Agreement.
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<PAGE>
In case a ruling from the IRS is sought, Cardinal and SBI shall
cooperate and each shall furnish to the other and to the IRS such information
and representations as shall, in the opinion of counsel for SBI and Cardinal, be
necessary or advisable to obtain such ruling.
(i) The existing employment contract between Cardinal and FANBP, on
the one side, and Merle W. Helsel, on the other side, shall be canceled
immediately prior to the Effective Time, without prejudice to either side
(including, without limitation, by way of any payment or severance, bonus,
change of control benefit or any other amount) and Mr. Helsel shall have entered
into an agreement with SBI in the form attached hereto as Schedule 5.1 (i).
SECTION 5.2 Conditions to Obligations of SBI and SBI Merger Sub. The
---------------------------------------------------
obligations of SBI and SBI Merger Sub to effect the Merger shall be subject to
the satisfaction or waiver prior to the Effective Time of the following
additional conditions:
(a) Each of the representations and warranties of Cardinal and FANBP
contained in this Agreement shall be true and correct in all material respects
as of the Effective Date as if made on such date (or on the date when made in
the case of any representation or warranty which specifically relates to an
earlier date); each of Cardinal and FANBP shall have performed each of its
covenants and agreements, which are material to its operations and prospects,
contained in this Agreement; and SBI and SBI Merger Sub shall have received
certificates signed by the Chief Executive Officer and the Chief Financial
Officer of FANBP and the President and Treasurer of Cardinal, dated as of the
date of the Closing, to the foregoing effect.
(b) S.R. Snodgrass, A.C. or such other accounting firm as is
acceptable to the parties, shall have furnished to SBI an "agreed upon
procedures" letter, dated the Effective Date, in form and substance satisfactory
to SBI to the effect that, based upon a procedure performed with respect to the
financial condition of Cardinal, FANBP and affiliates, for the period from
December 31, 1997 to a specified date not more than five (5) days prior to the
date of such letter, including but not limited to (a) their inspection of the
minute books of Cardinal, FANBP and affiliates, (b) inquiries made by them of
officers and other employees of Cardinal, FANBP and affiliates responsible for
financial and accounting matters as to transactions and events during the
period, as to consistency of accounting procedures with prior periods and as to
the existence and disclosure of any material contingent liabilities, and (c) of
other specified procedures and inquiries performed by them, nothing has come to
their attention that would indicate that (A) during the period from December 31,
1997 to a specified date not more than five (5) days prior to the date of such
letter, there was any change in the capitalization of Cardinal or FANBP on a
consolidated basis, or (B) any material adjustments would be required to the
audited financial statements for the period ended December 31, 1997 in order for
them to be in conformity with generally accepted accounting principles applied
on a consistent basis with that of prior periods.
(c) SBI shall have received an opinion or opinions dated as of the
Effective Date, from Shumaker Williams, P.C., Camp Hill, Pennsylvania, Special
Counsel to Cardinal and FANBP, substantially in the form attached hereto as
Exhibit 5.2(c).
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<PAGE>
(d) There shall not have occurred any change in the financial
condition, properties, assets, business or results of operation of Cardinal or
FANBP which, individually or in the aggregate, has had or might reasonably be
expected to result in a Material Adverse Effect on Cardinal or FANBP other than
such changes resulting from (i) changes in banking laws or regulations, or (ii)
changes in generally accepted accounting principles, or interpretations thereof,
that affect the banking or thrift industries.
(e) SBI shall have received from each of the persons identified by
Cardinal pursuant to Section 4.2 hereof an executed counterpart of an
affiliate's agreement in the form contemplated by such Section.
(f) Except as otherwise provided in this Agreement at Section 1.6
prior to Closing, all issued and outstanding options, warrants or rights to
acquire Cardinal Common Stock or any capital stock of FANBP ("FANBP Common
Stock") shall have been canceled. No compensation or other rights will be
payable or exchangeable in the Merger in respect of any such rights which remain
unexercised at the Effective Time.
SECTION 5.3 Conditions to the Obligations of Cardinal and FANBP. The
---------------------------------------------------
obligations of Cardinal to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) Each of the representations, warranties and covenants of SBI and
SBI Merger Sub contained in this Agreement shall be true and correct in all
material respects on the Effective Date as if made on such date (or on the date
when made in the case of any representation or warranty which specifically
relates to an earlier date); SBI and SBI Merger Sub shall have performed each of
its covenants and agreements, which are material to its operations and
prospects, contained in this Agreement; and Cardinal shall have received
certificates signed by the President or Vice President and Secretary of SBI and
SBI Merger Sub.
(b) Cardinal shall have received an opinion dated as of the
Effective Date, from Morgan, Lewis & Bockius LLP, Harrisburg, Pennsylvania,
counsel to SBI and SBI Merger Sub, substantially in the form attached hereto as
Exhibit 5.3(b).
(c) There shall not have occurred any change in the financial
condition, properties, assets or business or results of operation of SBI and SBI
Merger Sub which, individually or in the aggregate, has had or might reasonably
be expected to result in a Material Adverse Effect on SBI or the SBI
Subsidiaries taken as a whole.
(d) Cardinal shall have received an updated opinion from Garland
McPherson & Associates, Inc. as of a date no later than the date of the Proxy
Statement/Prospectus mailed to the Cardinal shareholders in connection with the
Merger and not subsequently withdrawn, to the effect that the Merger
consideration is fair to Cardinal's shareholders from a financial point of view.
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(e) The shares of SBI Common Stock to be issued in the Merger shall
have been authorized to be listed for quotation on the NASDAQ National Market
System.
(f) A certificate for the required number of whole shares of the SBI
Common Stock, as determined in accordance with Section 1.2 and Schedule 1.2, and
cash payable for the fractional shares interests shall have been irrevocably
delivered to Farmers First Bank, as Exchange Agent, subject to Section 1.3 of
this Agreement.
(g) No transaction or event involving SBI shall have occurred that
would result in (i) a material change to the nature of the securities described
in SBI's Articles of Incorporation as amended at the 1998 Annual Meeting of
Shareholders, (ii) a change in the identity of the legal entity of the issuer of
the securities to be issued in the Merger to holders of Cardinal Common Stock,
or (iii) SBI's ceasing to own a Material Subsidiary accounting for 10% or more
of SBI's total assets, provided that SBI shall be permitted to reorganize or
merge its Material Subsidiaries in any manner whatsoever within its bank holding
company system.
(h) The side letter in the form attached as Exhibit 5.3(h) hereto
shall be executed and delivered concurrent with the signing of this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.1 Termination. This Agreement may be terminated, and the
-----------
Merger abandoned, prior to the Effective Date, either before or after its
approval by the shareholders of Cardinal:
(a) by the mutual, written consent of Cardinal and SBI if the board
of directors of each so determines by a vote of a majority of the members of the
entire board;
(b) by Cardinal if (i) by written notice to SBI that there has been
a material breach by SBI of any representation, warranty, covenant or agreement
contained herein and such breach is not cured within thirty (30) days after
written notice of such breach is given to SBI by Cardinal, (ii) by written
notice to SBI that any condition precedent to Cardinal's obligations as set
forth in Article V of this Agreement has not been met or waived by Cardinal at
such time as such condition can no longer be satisfied, (iii) the board of
directors of Cardinal fails to make, withdraws or modifies or changes the
favorable recommendation described at Section 4.2, or (iv) receipt of an
Acquisition Proposal that results in a determination by the board of directors
of Cardinal that such Acquisition Proposal is likely to be more favorable to the
shareholders of Cardinal than the Merger.
(c) by SBI by written notice to the other parties, in the event (i)
of a material breach by Cardinal or FANBP of any representation, warranty,
covenant or agreement contained herein and such breach is not cured within
thirty (30) days after written notice of such breach is
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<PAGE>
given to Cardinal by SBI or (ii) any condition precedent to SBI's obligations as
set forth in Article V of this Agreement has not been met or waived by SBI at
such time as such condition can no longer be satisfied.
(d) by SBI or Cardinal by written notice to the other, in the event
that the Merger is not consummated by December 31, 1998, unless the failure to
so consummate by such time is due to the breach of any representation, warranty
or covenant contained in this Agreement by the party seeking to terminate,
provided, however, that such date may be extended by the written agreement of
the parties hereto.
(e) by Cardinal, whether before or after approval of the Merger by
the Cardinal shareholders, by giving written notice of the election described in
Schedule 1.2 to SBI within one (1) business day following a determination that
the Average Closing Price of the SBI Common Stock is greater than $40.00 per
share (subject to adjustment in accordance with Section 1.2 (c) herein) at the
time such calculation is required to be made pursuant to Schedule 1.2 hereof.
(f) by SBI if it chooses to give written notice of the election
described in Schedule 1.2 to Cardinal, but if at all, within one (1) business
day following a determination that the Average Closing Price of SBI Common Stock
is less than $34.00 per share (subject to adjustment in accordance with Section
1.2 (c) herein) at the time such calculation is required to be made pursuant to
Schedule 1.2 hereof.
SECTION 6.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement, as provided above, this Agreement shall thereafter become
void and have no effect, except that the provisions of Sections 3.1(p) and
3.2(n) (Fees), 4.4 (solely as it relates to confidentiality and return of
documents), and 6.3 and 7.7 (Expenses) of this Agreement shall survive any such
termination and abandonment.
SECTION 6.3 Expenses. Any termination of this Agreement pursuant to
--------
Sections 6.1(a), 6.1(d), 6.1(e) or 6.1(f) hereof shall be without cost, expense
or liability on the part of any party to the others and the Stock Option
Agreement shall be null and void. Any termination of this Agreement pursuant to
Section 6.1(b)(i), (ii) or (iv) or 6.1(c)(i) or (ii) hereof shall also be
without cost, liability or expense on the part of any party to the others,
unless the breach of a representation or warranty or covenant is caused by the
willful conduct or gross negligence of a party, in which event said party shall
be liable to the other parties for all out-of-pocket costs and expenses,
including without limitation, reasonable legal, accounting and investment
banking fees and expenses, incurred by such other party in connection with their
entering into this Agreement and their carrying out of any and all acts
contemplated hereunder ("Expenses").
So long as SBI shall not have breached its obligations hereunder, if
this Agreement is terminated by reason of clause (iii) of Section 6.1(b) hereof
other than as a result of a Material Adverse Change in SBI's financial
condition, properties, assets, liabilities (including contingent liabilities),
business or results of operations and other than as a result of the failure of
Cardinal's
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financial advisor to update its fairness opinion as contemplated by Section
5.3(d), Cardinal shall promptly, but in no event later than two (2) business
days after such termination, pay SBI a fee of 1% of the aggregate consideration
that would be paid if the date of the termination were the Effective Date, which
amount shall be payable by wire transfer of same day funds. If Cardinal fails to
promptly pay the amount due pursuant to this Section 6.3, and, in order to
obtain such payment, SBI commences a suit which results in a judgment against
Cardinal for all or a substantial portion of the fee set forth in this Section
6.3, Cardinal shall pay to SBI all costs and expenses (including reasonable
attorneys' fees) incurred by SBI in connection with such suit.
ARTICLE VII
OTHER MATTERS
SECTION 7.1 Certain Definitions; Interpretation. As used in this
-----------------------------------
Agreement, the following terms shall have the meanings indicated:
"material" means material to the party in question (as the case may
be) and its respective subsidiaries, taken as a whole.
"Material Adverse Effect," with respect to a person, means any
condition, event, change or occurrence that has or results in an effect
which is material and adverse to (A) the financial condition, properties,
assets, business or results of operations of such person and its
subsidiaries, taken as a whole, or (B) the ability of such person to
perform its obligations under, and to consummate the transactions
contemplated by, this Agreement. In the case of FANBP, receipt of a CAMELS
rating in connection with a safety and soundness examination or an FDIC
premium assessment for insurance which is, in either case, less favorable
than the rating given to FANBP in connection with the safety and soundness
examination most recently reported prior to the date of this Agreement or
the FDIC premium assessment reported prior to the date of this Agreement,
as the case may be, shall be deemed to have a "Material Adverse Effect" on
FANBP. In the case of SBI, merger by SBI with or into any third party, or
any material change (as determined by Cardinal in its sole discretion) in
or to any of the SBI Plans, shall be deemed to have a "Material Adverse
Effect" on SBI.
"person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
"subsidiary," with respect to a person, means any other person
controlled by such person.
When a reference is made in this Agreement to Exhibits, Sections, Annexes or
Schedules, such reference shall be to a Section of, or Annex or Schedule to,
this Agreement unless otherwise
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indicated. The table of contents, tie sheet and headings contained in this
Agreement are for ease of reference only and shall not affect the meaning or
interpretation of this Agreement. Whenever the words "include," "includes," or
"including" are used in this Agreement, they shall be deemed followed by the
words "without limitation". Any singular term in this Agreement shall be deemed
to include the plural, and any plural term the singular.
SECTION 7.2 Survival. The representations, warranties and agreements
--------
of the parties set forth in this Agreement shall not survive the Effective Time,
and shall be terminated and extinguished at the Effective Time, and from and
after the Effective Time none of the parties hereto shall have any liability to
the other on account of any breach or failure of any of those representations,
warranties and agreement; provided, however, that the foregoing clause shall not
-------- -------
(i) apply to agreements of the parties which by their terms are intended to be
performed either in whole or in part after the Effective Time, including, but
not limited to, the covenants contained in Sections 4.3 and 4.13 of Article IV
hereof, and (ii) shall not relieve any person of liability for fraud, deception
or intentional misrepresentation.
SECTION 7.3 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and their respective
successors and assigns, and, other than the right to receive the consideration
payable in the Merger pursuant to Article I hereof, is not intended to and shall
not confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
SECTION 7.4 Waiver and Amendment. Prior to the Effective Time, any
--------------------
provision of this Agreement may be: (i) waived by the party benefitted by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties hereto approved
by their respective boards of directors, except that no amendment or waiver may
be made that would change the form or the amount of the Merger Consideration or
otherwise have the effect of prejudicing the Cardinal shareholders' interest in
the Merger Consideration following the Cardinal Shareholders' Meeting.
SECTION 7.5 Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
SECTION 7.6 Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the Commonwealth of Pennsylvania,
or, to the extent it may control, federal law, without reference to the choice
of law principles thereof.
SECTION 7.7 Expenses. Subject to the provisions of Section 6.3
--------
hereof, each party hereto will bear all Expenses incurred by it in connection
with this Agreement and the transactions contemplated hereby; provided, however,
that all filing and other fees (other than federal and state income taxes)
required to be paid to any governmental agency or authority in connection with
the consummation of the transactions contemplated hereby shall be paid by SBI.
C-45
<PAGE>
SECTION 7.8 Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to Cardinal, to:
Cardinal Bancorp, Inc.
140 East Main Street
Everett, PA 15537
Attention: Merle W. Helsel
President and Chief Executive Officer
With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
If to FANBP, to:
First American National Bank of Pennsylvania
140 East Main Street
Everett, PA 15537
Attention: Merle W. Helsel
President and Chief Executive Officer
With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
C-46
<PAGE>
If to SBI, to:
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger
President and Chief Executive Officer
With copies to:
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Attention: Charles L. O'Brien, Esquire
If to SBI Merger Sub, to:
Susquehanna Bancshares West, Inc.
c/o Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger
President and Chief Executive Officer
With copies to:
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Attention: Charles L. O'Brien, Esquire
SECTION 7.9 Entire Agreement; Etc. This Agreement, together with
---------------------
such other agreements as are executed by the parties in connection herewith,
including, but not limited to, Exhibit 5.1(i) and Exhibit 5.3(h), on the date
hereof, represent the entire understanding of the parties hereto with reference
to the transactions contemplated hereby and supersede any and all other oral or
written agreements heretofore made. All terms and provisions of this Agreement,
together with such other agreements as are executed by the parties in connection
herewith, on the date hereof, shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Nothing in this Agreement is intended to confer upon any other person any rights
or
C-47
<PAGE>
remedies of any nature whatsoever under or by reason of this Agreement except
as expressly provided.
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
SUSQUEHANNA BANCSHARES, INC.
/s/ Robert S. Bolinger
---------------------------------------------
By: Robert S. Bolinger
Title: President and Chief Executive Officer
SUSQUEHANNA BANCSHARES WEST, INC.
/s/ Robert S. Bolinger
---------------------------------------------
By: Robert S. Bolinger
Title: President and Chief Executive Officer
CARDINAL BANCORP, INC.
/s/ Merle W. Helsel
---------------------------------------------
By: Merle W. Helsel
Title: President and Chief Executive Officer
FIRST AMERICAN NATIONAL BANK
OF PENNSYLVANIA
/s/ Merle W. Helsel
---------------------------------------------
By: Merle W. Helsel
Title: President and Chief Executive Officer
C-48
<PAGE>
SCHEDULE 1.2
Exchange Provisions
-------------------
So long as the Average Price Per Share of SBI Common Stock Before
Closing is at or between $34.00 and $40.00, then 1.28 shares of SBI Common Stock
shall be exchanged for each of the outstanding shares of Cardinal Common Stock
and the Exchange Ratio shall be 1.28.
The Average Price Per Share of SBI Common Stock Before Closing shall
be determined by adding the price at which SBI Common Stock is reported to have
closed by NASDAQ's NMS (or if SBI Common Stock is not quoted on NASDAQ's NMS
then as reported by a recognized source as to the principal trading market on
which such shares are traded) over the period of ten business days ending on the
second business day preceding the date set for Closing, pursuant to Section 1.1
(b) hereof, and dividing such total by 10 (such Average Price Per Share Before
Closing is also referred to as the "Average Closing Price").
If the Average Closing Price is greater than $40.00, then $50,688,000
divided by the Average Closing Price shall be the total number of shares of SBI
Common Stock to be exchanged for all of the outstanding Cardinal Common Stock,
and the Exchange Ratio shall be the total number of shares of SBI Common Stock
to be exchanged for all of the outstanding Cardinal Common Stock divided by the
total number of shares of Cardinal Common Stock outstanding on the Effective
Date.
If the Average Closing Price is less than $34.00, then $43,085,000
divided by the Average Closing Price shall equal the total number of shares of
SBI Common Stock to be exchanged for all of the outstanding Cardinal Common
Stock, and the Exchange Ratio shall be the total number of shares of SBI Common
Stock to be exchanged for all of the outstanding Cardinal Common Stock divided
by the total number of shares of Cardinal Common Stock outstanding on the
Effective Date.
Notwithstanding the foregoing, Cardinal shall have the right to
terminate this Agreement, in accordance with Section 6.1 (e), if the Average
Closing Price is greater than $40.00, and SBI shall have the right to terminate
this Agreement, in accordance with Section 6.1 (f), if the Average Closing Price
is less than $34.00.
The Exchange Ratio in all instances set forth herein is subject to
in accordance with Section 1.2(c).
C-49
<PAGE>
APPENDIX D
FIRST CAPITOL MERGER AGREEMENT
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF AFFILIATION
DATED AS OF THE 16TH DAY OF APRIL, 1998
BY AND AMONG
SUSQUEHANNA BANCSHARES, INC.,
SUSQUEHANNA INTERIM BANK
AND
FIRST CAPITOL BANK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page(s)
-------
ARTICLE I THE PLAN OF MERGER.................................................D-2
SECTION 1.1 The Merger; Closing; Effective Time.......................D-2
SECTION 1.2 Effect on Outstanding Shares..............................D-3
SECTION 1.3 Surrender and Exchange of Bank Certificates...............D-3
SECTION 1.4 Dissenters' Rights........................................D-5
SECTION 1.5 Other Matters.............................................D-5
SECTION 1.6 Bank Warrants.............................................D-5
ARTICLE II CONDUCT PENDING THE MERGER........................................D-6
SECTION 2.1 Conduct of Bank's Businesses Prior to the Effective Time..D-6
SECTION 2.2 Forbearance by Bank.......................................D-6
SECTION 2.3 Cooperation...............................................D-7
SECTION 2.4 Conduct of SBI's Business Prior to the Effective Time.....D-7
ARTICLE III REPRESENTATIONS AND WARRANTIES...................................D-7
SECTION 3.1 Representations and Warranties of Bank....................D-7
SECTION 3.2 Representations and Warranties of SBI and its Material
Subsidiaries............................................D-22
ARTICLE IV COVENANTS........................................................D-29
SECTION 4.1 Acquisition Proposals....................................D-29
SECTION 4.2 Securities Registration and Disclosure...................D-29
SECTION 4.3 Employees................................................D-30
SECTION 4.4 Access and Information...................................D-32
SECTION 4.5 Certain Filings, Consents and Arrangements...............D-33
SECTION 4.6 Takeover Statutes........................................D-33
SECTION 4.7 Additional Agreements....................................D-34
SECTION 4.8 Publicity................................................D-34
SECTION 4.10 Notification of Certain Matters..........................D-34
SECTION 4.11 Insurance................................................D-34
SECTION 4.12 Dividends................................................D-34
SECTION 4.13 Indemnification; Insurance...............................D-34
i
<PAGE>
ARTICLE V CONDITIONS TO CONSUMMATION........................................D-35
SECTION 5.1 Conditions to Closing.....................................D-35
SECTION 5.2 Conditions to Obligations of SBI and Interim Bank.........D-37
SECTION 5.3 Conditions to the Obligations of Bank.....................D-39
ARTICLE VI TERMINATION......................................................D-40
SECTION 6.1 Termination...............................................D-40
SECTION 6.2 Effect of Termination.....................................D-41
SECTION 6.3 Expenses..................................................D-41
ARTICLE VII OTHER MATTERS...................................................D-42
SECTION 7.1 Certain Defined Terms.....................................D-42
SECTION 7.2 Survival..................................................D-46
SECTION 7.3 Parties in Interest.......................................D-46
SECTION 7.4 Waiver and Amendment......................................D-46
SECTION 7.5 Counterparts..............................................D-46
SECTION 7.6 Governing Law.............................................D-46
SECTION 7.7 Expenses..................................................D-46
SECTION 7.8 Notices...................................................D-47
SECTION 7.9 Entire Agreement; Etc.....................................D-48
SECTION 7.10 Intentionally Omitted Sections...........................D-48
ii
<PAGE>
AGREEMENT AND PLAN OF AFFILIATION dated as of the 16th day of April,
1998 (this "Plan" or this "Agreement"), is entered into by and among Susquehanna
Bancshares, Inc., a Pennsylvania corporation ("SBI"), Susquehanna Interim Bank,
a Pennsylvania state chartered bank ("Interim Bank"), and First Capitol Bank,
also a Pennsylvania state chartered bank ("Bank").
RECITALS:
WHEREAS, SBI is a multi-state, multi-institution bank holding company;
and
WHEREAS, Interim Bank will be a wholly-owned bank subsidiary of SBI
created solely for the purpose of facilitating the transactions described in
this Agreement; and
WHEREAS, Bank is an independent financial institution with a strong
record of performance; and
WHEREAS, the boards of directors of SBI and Bank have each determined
that it is in the best interest of their respective shareholders for SBI to
acquire Bank by means of a merger of Interim Bank with and into Bank (the
"Merger") as a result of which Bank will become a wholly-owned subsidiary of
SBI, all upon the terms and subject to the conditions set forth herein; and
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and to
set forth the conditions to the Merger; and
WHEREAS, as a condition and inducement to SBI's and Interim Bank's
willingness to enter into this Agreement, the following agreements of even date
herewith have been concurrently executed and delivered herewith: (i) a stock
option agreement (the "Stock Option Agreement") among SBI, Interim Bank and the
Bank; (ii) a voting agreement (a "Voting Agreement") between each of the
directors of the Bank and National Penn Investment Company ("National Penn") and
SBI; and (iii) a warrant substitution agreement (the "Warrant Substitution
Agreement") among SBI, the Bank, National Penn and David A. Friedman, a director
of the Bank; and
WHEREAS, Bank, SBI and Interim Bank desire to merge in the manner
provided for herein and to adopt this Agreement as a plan of reorganization and
to consummate such plan in accordance with the provisions of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto adopt and make this Agreement and
prescribe the terms and conditions hereof and the manner and basis of carrying
it into effect, which shall be as follows:
<PAGE>
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger; Closing; Effective Time.
-----------------------------------
(a) Subject to the terms and conditions of this Agreement and in
accordance with the applicable laws of the Commonwealth of Pennsylvania, at the
Effective Time (as defined in Section 1.1(c)), Interim Bank shall be merged with
and into Bank and the separate corporate existence of Interim Bank shall
thereupon cease. Bank shall be the surviving bank in the Merger (sometimes
hereinafter referred to as the "Surviving Bank") and shall continue to be
governed by the laws of the Commonwealth of Pennsylvania and shall continue to
be a Pennsylvania state chartered commercial bank, and the separate corporate
existence of Bank with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. The name of the Surviving
Bank shall be "First Capitol Bank." The Merger shall have the effects specified
in the Pennsylvania Banking Code of 1965, as amended ("Banking Code") and the
Pennsylvania Business Corporation Law of 1988, as amended ("PBCL").
(b) The closing of the Merger (the "Closing") shall take place at such
place and time and on such date following three (3) business days' notice to
Bank, as shall be agreed upon by all parties, which date shall not be later than
the 30th business day after (i) the last approval of required governmental
authorities is granted and any related waiting periods expire, (ii) the lifting,
discharge or dismissal of any stay of any such governmental approval or of any
injunction against the Merger and (iii) all shareholder approvals required by
the parties hereunder are received.
(c) Immediately following the Closing, and provided that this
Agreement has not been terminated or abandoned pursuant to Article VI hereof,
Interim Bank and Bank will request that the Pennsylvania Department of Banking
("Banking Department") cause the articles of merger (the "Articles of Merger")
to be delivered and properly filed with the Department of State of the
Commonwealth of Pennsylvania (the "Department of State"). The Merger shall
become effective at the time specified by the Department of Banking in its
transmittal to the Department of State, which, at the request of SBI, shall be
at 12:01 a.m. on the business day of the Closing (the "Effective Time"). The
"Effective Date" when used herein means the day on which the Effective Time for
the Merger occurs.
(d) At the Effective Time, the articles of incorporation and bylaws of
Interim Bank in effect immediately prior to the Effective Time shall be the
articles of incorporation and bylaws of the Surviving Bank. At the Effective
Time, the directors and officers of Bank immediately prior to the Effective Time
shall be and become the directors and officers of the Surviving Bank with such
additions or deletions to which senior management of SBI and Bank shall mutually
agree.
(e) At the meeting of the SBI Board of Directors next following the
Effective Time, Owen O. Freeman, Jr. shall become a director of SBI.
D-2
<PAGE>
SECTION 1.2 Effect on Outstanding Shares.
----------------------------
(a) At the Effective Time, by virtue of the Merger, automatically and
without any action on the part of the holder thereof, subject to the provisions
of Section 1.3 hereof with respect to the payment of fractional shares in cash
and Section 1.4 hereof with respect to dissenters' rights, if any, each share of
common stock, par value $10.00 share, of Bank (the "Bank Common Stock") issued
and outstanding at the Effective Time (other than (i) shares the holders of
which (each a "Dissenting Shareholder") are exercising appraisal rights pursuant
to the PBCL (the "Dissenters' Shares"), if any, and (ii) shares held directly or
indirectly by SBI, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted) shall become and be converted into
the right to receive shares of Common Stock par value $2.00 per share, of SBI
("SBI Common Stock") determined in conformity with the Exchange Ratio set forth
at Schedule 1.2 hereof (such SBI Common Stock, determined on the basis of the
Exchange Ratio, as to each Bank shareholder and, collectively, to all Bank
shareholders is the "Merger Consideration"). As of the Effective Time, each
share of Bank Common Stock held directly or indirectly by SBI, other than shares
held in a fiduciary capacity or in satisfaction of a debt previously contracted,
shall be canceled and retired and cease to exist, and no exchange or payment
shall be made with respect thereto.
(b) The shares of common stock of Interim Bank issued and outstanding
immediately prior to the Effective Time, by virtue of and after the Merger,
shall be converted into and thereafter constitute the issued and outstanding
shares of the capital stock of the Surviving Bank.
(c) If prior to the Effective Time, the number of outstanding shares
of SBI Common Stock shall have been increased or decreased through a
reclassification, stock dividend, stock split or reverse stock split, or other
similar change, appropriate adjustment shall be made to the Exchange Ratio.
SECTION 1.3 Surrender and Exchange of Bank Certificates.
-------------------------------------------
(a) Within five (5) business days after the Effective Time, SBI shall
cause to be sent to each person who immediately prior to the Effective Time was
a holder of record of Bank Common Stock transmittal materials and instructions
for surrendering certificates for Bank Common Stock ("Old Certificates") in
exchange for a certificate for the number of whole shares of SBI Common Stock to
which such person is entitled under Section 1.2 hereof.
(b) No certificates for fractional shares of SBI Common Stock shall be
issued in connection with the Merger. In lieu thereof, SBI shall issue to any
holder of Bank Common Stock certificates otherwise entitled to a fractional
share, upon surrender of such certificates in accordance with the instructions
furnished by SBI, a check for an amount of cash equal to the fraction of a share
of SBI Common Stock represented by the certificates so surrendered multiplied by
the Average Closing Price per share of SBI Common Stock as determined in
conformity with Schedule 1.2 and as defined therein.
D-3
<PAGE>
(c) If the record date of any dividend on SBI Common Stock occurs
after the Effective Time, the declaration shall include dividends on all whole
shares of SBI Common Stock into which shares of Bank Common Stock have been
converted under this Agreement, but no former holder of Bank Common Stock shall
be entitled to receive payment of any such dividend until surrender of the
shareholder's Old Certificates shall have been effected in accordance with the
instructions furnished by SBI. Upon surrender for exchange of a shareholder's
Old Certificates, such shareholder shall be entitled to receive from SBI an
amount equal to all such dividends, without interest thereon and less the amount
of taxes, if any, which may have been imposed or paid thereon, declared, and for
which the payment date has occurred, on the whole shares of SBI Common Stock
into which the shares represented by such Old Certificates have been converted.
(d) After the Effective Time, there shall be no transfer on the stock
transfer books of Bank, Surviving Bank or SBI of shares of Bank Common Stock.
If Old Certificates are presented for transfer after the Effective Time, they
shall be canceled and certificates representing whole shares of SBI Common Stock
(and a check in lieu of any fractional share) shall be issued in exchange
therefor as provided herein.
(e) In the event that any Old Certificates have not been surrendered
for exchange in accordance with this Section on or before the second anniversary
of the Effective Time, SBI may at any time thereafter, with or without notice to
the holders of record of such Old Certificates, sell for the accounts of any or
all of such holders any or all of the shares of SBI Common Stock which such
holders are entitled to receive under Section 1.2 hereof (the "Unclaimed
Shares"). Any such sale may be made by public or private sale or sale at any
broker's board or on any securities exchange in such manner and at such times as
SBI shall determine. If, in the opinion of counsel for SBI, it is necessary or
desirable, any Unclaimed Shares may be registered for sale under the Securities
Act of 1933, as amended (the "Securities Act") and applicable state laws. SBI
shall not be obligated to make any sale of Unclaimed Shares if it shall
determine not do so, even if notice of sale of the Unclaimed Shares has been
given. The net proceeds of any such sale of Unclaimed Shares shall be held for
holders of the unsurrendered Old Certificates whose Unclaimed Shares have been
sold, to be paid to them upon surrender of the Old Certificates. From and after
any such sale, the sole right of the holders of the unsurrendered Old
Certificates whose Unclaimed Shares have been sold shall be the right to collect
the net sale proceeds held by SBI for their respective accounts, and such
holders shall not be entitled to receive any interest on such net sale proceeds
held by SBI.
(f) If outstanding certificates for shares of Bank Common Stock are
not surrendered prior to the date on which such certificates would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and any
other applicable law, become the property of SBI (and to the extent not in its
possession shall be paid over to it), free and clear of all claims or interest
of any person previously entitled to such claims. Notwithstanding the
foregoing, neither SBI nor its agents or any other person shall be liable to any
former holder of Bank Common Stock for any property delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
D-4
<PAGE>
(g) In the event any Old Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Old Certificate to be lost, stolen or destroyed and the posting by such
person of a bond in such amount as SBI may direct as indemnity against any claim
that may be made against it with respect to such Certificate, SBI will issue in
exchange for such lost, stolen or destroyed Old Certificate, the shares of SBI
Common Stock into which such Old Certificates has been converted pursuant to
this Agreement.
SECTION 1.4 Dissenters' Rights. In accordance with the provisions of
------------------
Sections 1607 and 1222 of the Banking Code and Section 1571 of the PBCL, the
Bank shareholders are entitled to exercise dissenters rights.
SECTION 1.5 Other Matters.
-------------
(a) Notwithstanding any term of this Agreement to the contrary, SBI
may, in its discretion at any time prior to the Effective Time, designate a
direct or indirect wholly-owned subsidiary to substitute for Interim Bank as a
constituent corporation in the Merger by written notice to Bank so long as the
exercise of this right does not materially, adversely affect the interests of
the Bank shareholders or cause a material delay in consummation of the
transactions contemplated herein. For purposes of this Section 1.5(a), the
directors of the Bank shall solely determine whether the exercise of this right
by SBI would constitute a material adverse effect on the interests of the Bank
shareholders. SBI shall also have the right to cause Interim Bank or such
substitute to be the Surviving Bank of the Merger described at Section 1.1(a),
so long as the exercise of such right does not have a material adverse effect on
the interests of the holders of the capital stock of Bank or cause a material
delay in, or otherwise adversely affect, consummation of the transactions
contemplated herein; if such right is exercised, this Agreement shall be deemed
to be modified to accord such change.
(b) Subject to Section 5.3, nothing in this Agreement shall be deemed
to restrict the ability of SBI or any of its subsidiaries to merge with or with
and into another entity so long as such other transaction shall not materially,
adversely affect the parties' ability to consummate the Merger or cause a
material delay in, or otherwise adversely affect, consummation of the
transactions contemplated herein.
SECTION 1.6 Bank Warrants. Bank hereby represents and warrants that
-------------
no warrants, options or other right to acquire capital stock of Bank are
presently outstanding other than warrants to purchase 11,250 shares of Bank
Common Stock which are held by David A. Friedman (the "Friedman Warrant") and by
virtue of a stock purchase agreement dated July 25, 1988 by and between Bank and
National Penn, pursuant to which National Penn has preemptive rights to purchase
shares of Bank Common Stock if the Friedman Warrant is exercised ("Preemptive
Rights Agreement"). In order to induce SBI to execute this Agreement, the
Warrant Substitution Agreement has been executed and delivered, in the form
attached hereto as Exhibit 1.6, for the purpose of superseding and governing the
rights of the parties under the Friedman Warrant and the Preemptive Rights
Agreement.
D-5
<PAGE>
ARTICLE II
CONDUCT PENDING THE MERGER
SECTION 2.1 Conduct of Bank's Businesses Prior to the Effective Time.
--------------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, Bank shall (and the word "it" in this
Article II refers to Bank and each subsidiary of Bank) (i) conduct its business
in the usual, regular and ordinary course consistent with past practice, (ii)
use reasonable efforts to maintain and preserve intact in all material respects
its business organization, assets, leases, properties, employees and
advantageous business relationships and use its reasonable efforts to retain the
services of its officers and key employees, and (iii) not knowingly take any
action which would materially or adversely affect or delay its ability to obtain
any necessary approvals, consents or waivers of any governmental authority
required for the transactions contemplated hereby or to perform its covenants
and agreements on a timely basis under this Agreement, and (iv) not knowingly
take any action that is reasonably likely to have a Material Adverse Effect (as
defined in Section 7.1 hereof) on Bank.
SECTION 2.2 Forbearance by Bank. During the period from the date of
-------------------
this Agreement to the Effective Time, Bank shall not, without the prior written
consent of SBI:
(a) other than in the ordinary course of business consistent with past
practice in all material respects, (i) make any advance or loan, (ii) incur any
indebtedness for borrowed money, except in replacement of existing or maturing
debt, or (iii) assume, guarantee, endorse or otherwise as an accommodation
become responsible for, the obligations of any other individual, corporation or
other person;
(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend or make any distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock, or grant any stock appreciation rights or grant,
sell or issue to any individual, corporation or other person any shares of its
capital stock (other than in connection with the agreements and a stock purchase
warrant set forth on Annex 2.2(b)) or any right to acquire, or securities
evidencing a right to convert into or acquire any shares of its capital stock;
(c) other than in the ordinary course of business, consistent with
past practice and pursuant to policies, if any, currently in effect, (i) sell,
transfer, mortgage, encumber or otherwise dispose of any of its properties,
leasehold interests or assets which are material to Bank or its subsidiaries, to
any individual, corporation or other entity, (ii) cancel, release or assign any
indebtedness of any such person, or (iii) assign any contracts or agreements as
in force at the date of this Agreement;
(d) increase in any manner the compensation or fringe benefits of any
of its employees or pay any pension or retirement allowance not required by law
or by any existing plan
D-6
<PAGE>
or agreement to any such employees, or become a party to, amend or commit itself
to any pension, retirement, profit-sharing or welfare benefit plan or agreement
or employment agreement with or for the benefit of any employee, other than
general or individual increases in compensation in the ordinary course of
business consistent with past practice not in excess of 4%, on an aggregated
basis, in any 12-month period, and payment of bonuses in the ordinary course, or
voluntarily accelerate the vesting of any stock options or other compensation or
benefit;
(e) amend its articles of incorporation, or its bylaws, except as
expressly contemplated by this Agreement or required by law or regulation, in
each case as concurred in by its counsel;
(f) except as set forth in Annex 2.2(f) hereto, change its method of
accounting as in effect at December 31, 1997, except as required by changes in
generally accepted accounting principles or required by law or regulation, in
each case, as concurred in by its independent auditors; or
(g) permit or allow its direct or indirect ownership of the capital
stock of any subsidiary described in the annex hereto to be less than 100% of
their respective total capital stock.
SECTION 2.3 Cooperation. Bank shall cooperate with SBI and SBI shall
-----------
cooperate with Bank in completing the transactions contemplated hereby and each
shall not knowingly take, or cause to be taken, or knowingly agree or make any
commitment to take, any action (i) that would cause any of the representations
or warranties of it that are set forth in Article III hereof not to be true and
correct in all material respects, or (ii) in the case of Bank, that is
inconsistent with or prohibited by Section 2.1 or Section 2.2.
SECTION 2.4 Conduct of SBI's Business Prior to the Effective Time.
-----------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, SBI shall not knowingly take any action
and shall not knowingly cause its Material Subsidiaries (as hereinafter defined
in Section 3.2(d) hereof) to take any action that is reasonably likely to have a
Material Adverse Effect on SBI, on a consolidated basis.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Bank. Bank represents
--------------------------------------
and warrants to SBI (and the word "it" in this Article III refers to Bank and
each subsidiary of Bank), that, except as specifically disclosed in the Annex of
disclosure schedules included herewith, to the best of its knowledge:
(a) Corporate Organization and Qualification. Bank is a corporation
duly incorporated, validly existing and duly subsisting under the laws of the
Commonwealth of
D-7
<PAGE>
Pennsylvania and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by Bank requires such qualification, except for such failure to
qualify or be in such good standing which, when taken together with all other
such failures, would not have a Material Adverse Effect on Bank and its
subsidiaries, taken as a whole. Bank is a Pennsylvania state chartered bank and
is a member of the Federal Reserve System. Bank has the requisite corporate and
other power and authority (including all federal, state, local and foreign
governmental authorizations) to carry on its businesses as now being conducted
and to own its properties and assets. Bank has made available to SBI a complete
and correct copy of the articles of incorporation and bylaws of Bank and such
articles and bylaws are in full force and effect as of the date hereof.
(b) Authorized Capital. The authorized capital stock of Bank consists
of 2,000,000 shares of common stock, par value $10.00 per share, of which
505,933 shares were issued and outstanding as of the date of this Agreement and
500,000 shares of preferred stock, par value $10.00 per share, of which none
were issued as of the date of this Agreement. No other equity securities are
authorized for issuance by the Bank. All of the outstanding shares of capital
stock of Bank have been duly authorized and are validly issued, fully paid and
nonassessable. Bank does not have any shares of capital stock reserved for
issuance except pursuant to the Friedman Warrant, the Preemptive Rights
Agreement and the Stock Option Agreement. Bank does not have any outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or convertible into or exercisable for securities having the
right to vote) with shareholders on any matter. The outstanding shares of
capital stock of Bank have not been issued in violation of any preemptive
rights. Except as set forth in Annex 3.1(b) or in Annex 3.1(m) and as provided
in the Stock Option Agreement, there are no outstanding subscriptions, options,
warrants, rights, convertible securities or other agreements or commitments of
any character relating to the issued or unissued capital stock or other
securities of Bank. After the Effective Time neither SBI nor Interim Bank will
have any obligation to issue, transfer or sell any shares of capital stock
pursuant to any Employee Plan (as defined in Section 3.1(m)).
(c) Subsidiaries. The Bank has no subsidiaries.
(d) Corporate Authority. Subject only to approval of this Agreement
by the holders of the number of votes required by Bank's articles of
incorporation or bylaws cast by all holders of Bank Common Stock (without any
minority, class or series voting requirement), and, subject to the regulatory
approvals specified in Section 5.1(b) hereof, Bank has the requisite corporate
power and authority, and legal right, and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate the
transactions applicable to Bank contemplated hereby. This Agreement has been
duly and validly executed and delivered by Bank and constitutes the valid and
binding obligations of Bank, enforceable against Bank in accordance with its
terms, except to the extent enforcement is limited by bankruptcy, insolvency and
other similar laws affecting creditors' rights or the application by a court of
equitable principles.
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(e) No Violations. The execution, delivery and performance of this
Agreement by it does not, the execution, delivery and performance of the Stock
Option Agreement by it will not, and the consummation of the transactions
contemplated hereby by it will not, constitute (i) subject to receipt of the
required regulatory approvals specified in Section 5.1(b), a breach or violation
of, or a default under, any law, rule or regulation or any judgment, decree,
order, governmental permit or license, to which it (or any of its respective
properties) is subject, which breach, violation or default would have a Material
Adverse Effect on it, or enable any person to enjoin the Merger, (ii) a breach
or violation of, or a default under Bank's articles of incorporation or bylaws,
(iii) a breach of any duty owed by Bank to any person holding an interest in
Bank, or (iv) except as disclosed in Annex 3.1(e), a breach or violation of, or
a default under (or an event which with due notice or lapse of time or both
would constitute a default under), or result in the termination of, accelerate
the performance required by, or result in the creation of any lien, pledge,
security interest, charge or other encumbrance upon any of the properties or
assets of it under any of the terms, conditions or provisions of any note, bond,
indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which it is a party, or to which any of their respective
properties or assets may be bound or affected, except for any of the foregoing
that, individually or in the aggregate, would not have a Material Adverse Effect
on it or enable any person to enjoin the Merger; and the consummation of the
transactions contemplated hereby or, upon its execution and delivery, the Stock
Option Agreement, will not require any approval, consent or waiver under any
such law, rule, regulation, judgment, decree, order, governmental permit or
license or the approval, consent or waiver of any other party to any such
agreement, indenture or instrument, other than (i) the required approvals,
consents and waivers of governmental authorities referred to in Section 5.1(b)
and (ii) the approval of its shareholders referred to in Section 3.1(d), (iii)
any such approval, consent or waiver that already has been obtained and (iv) any
other approvals, consents or waivers, the absence of which, individually or in
the aggregate, would not result in a Material Adverse Effect on it or enable any
person to enjoin the Merger.
(f) Reports.
i. Bank's audited statement of financial condition as of
and for the year ended December 31, 1997, and the unaudited statement of
financial condition as of and for the nine-month period ended September 30,
1997, previously provided to SBI and each statement of financial condition
provided after the date hereof to SBI (including in each case any related notes
and schedules) as required by Section 4.4 hereof fairly presents or will fairly
present the financial position of Bank as of its date and each of the statements
of income and stockholders' equity and of cash flows provided therewith
(including in each case any related notes and schedules), fairly presents or
will fairly present the results of operations, stockholders' equity and cash
flows, as the case may be, of Bank for the periods set forth therein (subject,
in the case of unaudited interim statements, to year-end audit adjustments that
are not material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein.
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ii. Except as set forth in Annex 3.1(f), it has timely filed
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that it was required to file since
January 1, 1993 with (A) the Banking Department, (B) the Federal Deposit
Insurance Corporation (the "FDIC"), (C) the Board of Governors of the Federal
Reserve System (the "Board"), and (D) any other regulatory authority
(collectively, the "Bank Regulatory Agencies"), and all other material reports
and statements required to be filed by it since January 1, 1993, including,
without limitation, any report or statement required to be filed pursuant to the
laws, rules or regulations of the United States or any Bank Regulatory Agency
and has paid all fees and assessments due and payable in connection therewith,
and no such report, registration or statement contains any material misstatement
or omission or is otherwise in material noncompliance with any law, regulation
or requirement.
(g) Absence of Certain Changes or Events. Since January 1, 1998, to
the date hereof, it has not incurred any material liability, except in the
ordinary course of its business consistent with past practice, nor has there
been any change in the financial condition, properties, assets, business,
results of operations or prospects of it which, individually or in the
aggregate, has had, or might reasonably be expected to result in, a Material
Adverse Effect on it.
(h) Taxes. Its federal income tax returns have been examined and
closed or otherwise closed by operation of law through December 31, 1993. All
federal, state, local and foreign tax returns required to be filed by it or on
its behalf have been timely filed or requests for extensions have been timely
filed and any such extension shall have been granted and not have expired, and,
to the knowledge of management, all such filed returns are complete and accurate
in all material respects. All taxes shown on such returns, and all taxes
required to be shown on returns for which extensions have been granted, have
been paid in full or adequate provision has been made for any such taxes on its
balance sheet (in accordance with generally accepted accounting principles)
other than those taxes which are being contested in appropriate forums in
proceedings which are being diligently pursued. Adequate provision has been
made on its balance sheet (in accordance with generally accepted accounting
principles consistently applied) for all federal, state, local and foreign tax
liabilities for periods subsequent to those for which returns have been filed.
There is no audit examination, deficiency, or refund litigation pending or, to
the knowledge of Bank, threatened, with respect to any taxes that could result
in a determination that would have a Material Adverse Effect on it. All taxes,
interest, additions and penalties due with respect to completed and settled
examinations or concluded litigation relating to it have been paid in full or
adequate provision has been made for any such taxes on its balance sheet (in
accordance with generally accepted accounting principles). It has not executed
an extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
(i) Litigation and Liabilities. Except as set forth in Annex 3.1(i),
there are no (i) civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings before any court, governmental agency or
otherwise pending or, to the knowledge of management, threatened against it or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including, without limitation, those relating to environmental and
occupational safety and health
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<PAGE>
matters, or any other facts or circumstances of which its management is aware
that could reasonably be expected to result in any claims against or obligations
or liabilities of it, that, alone or in the aggregate, are reasonably likely to
have a Material Adverse Effect on it or to hinder or delay, in any material
respect, consummation of the transactions contemplated by this Agreement.
(j) Absence of Regulatory Actions. It is not a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or is a recipient of any extraordinary supervisory letter from,
or has adopted any board resolutions at the request of, federal or state
governmental authorities, including, without limitation, the Bank Regulatory
Agencies, charged with the supervision or regulation of financial or depository
institutions or engaged in the insurance of bank deposits nor has it been
advised by any Bank Regulatory Agency that such body is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolution or similar
undertaking.
(k) Agreements.
i. Except for the Stock Option Agreement and as set forth
in Annex 3.1(k) attached hereto, as of the date of this Agreement it is not a
party to, or bound by, any oral or written:
(A) "material contract" as such term is defined in Item
601(b)(10) of Regulation S-K promulgated by the Securities and Exchange
Commission (the "SEC");
(B) consulting agreement not terminable on thirty (30)
days' or less notice involving the payment of more than $10,000 per annum, in
the case of any such agreement;
(C) agreement with any officer or other key employee
the benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction of the nature contemplated by this
Agreement;
(D) agreement with respect to any officer providing any
term of employment or compensation guarantee extending for a period longer than
one year or for a payment in excess of $50,000;
(E) agreement or plan, including any stock option plan,
stock appreciation rights plan, employee stock ownership plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
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<PAGE>
(F) agreement containing covenants that limit its ability to
compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, it may carry on
its business (other than as may be required by law or any regulatory agency);
(G) agreement, contract or understanding, other than this
Agreement, regarding the capital stock of Bank or committing to dispose of some
or all of the capital stock or substantially all of the assets of Bank; or
(H) collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor organization.
ii. It is not in default under or in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject, other than such defaults or
violations as could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on it.
(l) Labor Matters. It is not the subject of any proceeding asserting that
it has committed an unfair labor practice or seeking to compel it to bargain
with any labor organization as to wages and conditions of employment, nor is
there any strike, other labor dispute or organizational effort involving it
pending or threatened.
(m) Employee Benefit Plans. Annex 3.1(m) contains a complete list of all
pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other employee incentive and welfare
contracts and plans, and all trust agreements related thereto, that it maintains
or to which it contributes for any of its present or former directors, officers,
or other employees (hereinafter referred to collectively as the "Employee
Plans").
i. All of the Employee Plans comply in all material respects
with all applicable requirements of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), the Code and other applicable laws; it has not
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Employee Plan which is likely to
result in any material penalties, taxes or other events under Section 502(i) of
ERISA or Section 4975 of the Code which would have a Material Adverse Effect on
it.
ii. No liability to the Pension Benefit Guaranty Corporation has
been or is expected by it to be incurred with respect to any Employee Plan which
is subject to Title IV of ERISA ("Pension Plan"), or with respect to any
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or
formerly maintained by it or any entity which is considered one employer with
Bank under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate").
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<PAGE>
iii. No Pension Plan or single-employer plan of an ERISA
Affiliate had an "accumulated funding deficiency" (as defined in Section 302 of
ERISA (whether or not waived)) as of the last date of the end of the most recent
plan year ending prior to the date hereof; all contributions to any Pension Plan
or single-employer plan of an ERISA Affiliate that were required by Section 302
of ERISA and were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair market value of
the assets of each Pension Plan or single-employer plan of an ERISA Affiliate
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such Pension Plan or single-employer plan of an
ERISA Affiliate as of the end of the most recent plan year with respect to the
respective Pension Plan or single-employer plan of an ERISA Affiliate ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such Pension Plan or single-
employer plan of an ERISA Affiliate as of the date hereof; and no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the reporting
requirement has not been waived has been required to be filed for any Pension
Plan or single-employer plan of an ERISA Affiliate within the 12-month period
ending on the date hereof.
iv. Neither has it provided, nor is it required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
v. Neither it nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
vi. Each Employee Plan of it which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "Qualified Plan") has received a
favorable determination letter from the Internal Revenue Service ("IRS")
covering the requirements of the Tax Equity and Fiscal Responsibility Act of
1982, the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984
and the Tax Reform Act of 1986; it is not aware of any circumstances likely to
result in revocation of any such favorable determination letter; each such
Employee Plan has been amended to reflect the requirements of subsequent
legislation applicable to such plans; and each Qualified Plan has complied at
all relevant times in all material respects with all applicable requirements of
Section 401(a) of the Code.
vii. Each Qualified Plan which is an "employee stock ownership
plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the Code and the regulations thereunder.
viii. Neither it nor any ERISA Affiliate has committed any act or
omission or engaged in any transaction that has caused it to incur, or created a
material risk that it may incur, liability for any excise tax under Sections
4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which
heretofore have been paid and fully reflected in its financial statements.
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<PAGE>
ix. There is no pending or threatened litigation, administrative
action or proceeding relating to any Employee Plan other than routine claims for
benefits.
x. Except as disclosed in Annex 3.1(m), there has been no
announcement or legally binding commitment by it to create an additional
Employee Plan, or to amend an Employee Plan except for amendments required by
applicable law which do not materially increase the cost of such Employee Plan,
and it does not have any obligations for retiree health and life benefits under
any Employee Plan that cannot be terminated without incurring any liability
thereunder except as required to be maintained by the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA").
xi. Except as disclosed in Annex 3.1(m), the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by Bank to any
person which is an "excess parachute payment" (as defined in Section 280G of the
Code) under any Employee Plan, increase any benefits payable under any Employee
Plan, or accelerate the time of payment or vesting of any such benefit.
xii. Except as disclosed in Annex 3.1(m), all required annual
reports have been filed timely with respect to each Employee Plan, and it has
made available to SBI a true and correct copy of (A) reports on the applicable
form of the Form 5500 series filed with the IRS for plan years beginning after
1987, (B) such Employee Plan, including amendments thereto, (C) each trust
agreement and insurance contract relating to such Employee Plan, including
amendments thereto, (D) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the Employee Plan is subject to
Title I of ERISA, and (E) the most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (F) the most recent determination letter
issued by the IRS if such Employee Plan is a Qualified Plan.
(n) Title to Assets. It has good and marketable title to its properties
and assets (other than property as to which it is lessee), except for (i) such
items shown in the Bank consolidated financial statements or notes thereto; (ii)
liens on real property for current real estate taxes not yet delinquent or (iii)
such defects in title which would not, individually or in the aggregate, have a
Material Adverse Effect on it. With respect to any property leased by it, there
are no defaults by it, or any of the other parties thereto, or any events which,
with the giving of notice or lapse of time or both, would become defaults by it
or any of the other parties thereto, under any of such leases, except for such
defaults or events which would not, individually or in the aggregate, have a
Material Adverse Effect on it; and all such leases are in full force and effect
and are enforceable against it, as the case may be, and there is no circumstance
existing as of the date of this Agreement which causes or would cause such
leases to be unenforceable against any of the other parties thereto except as
the same may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally as well as principles
of equity to the extent enforcement by a court of equity is required.
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<PAGE>
(o) Compliance with Laws. It has all permits, licenses, certificates
of authority, orders and approvals of, and has made all filings, applications
and registrations with, federal, state, local and foreign governmental or
regulatory bodies that are required in order to permit it to carry on its
business as it is presently conducted and the absence of which could,
individually or in the aggregate, have a Material Adverse Effect on it; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and no suspension or cancellation of any of them is
threatened.
(p) Fees. Except as set forth in Annex 3.1(p) attached hereto,
neither it nor any of its respective officers, directors, employees or agents,
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees, and no broker or
finder has acted directly or indirectly for it in connection with the Agreement
or the transactions contemplated hereby.
(q) Environmental Matters.
i. Except as disclosed in Annex 3.1(q):
(A) It, its Participation Facilities and its Loan Properties
(each as defined at subparagraph (ii) below) are, and have been, in material
compliance with all Environmental Laws (as defined below), except where non-
compliance would, either individually or in the aggregate, not have a Material
Adverse Effect on Bank or any of its subsidiaries taken as a whole. There are no
Participation Facilities or other real estate owned ("OREO") located in the
States of California, Connecticut, Rhode Island, Vermont, Massachusetts, New
Hampshire, or Maine.
(B) It, its Participation Facilities and its Loan Properties
hold all permits, licenses, registrations and other authorizations (the
"Environmental Permits") necessary under the Environmental Laws, and all such
Environmental Permits are currently in effect. The Environmental Permits for
properties owned or leased by it and for its Participation Facilities are listed
in Annex 3.1(q)(B), and any thereof that will expire or terminate as a result of
the transactions contemplated by this Agreement are so designated. It, its
Participation Facilities and its Loan Properties are in material compliance with
all the terms and conditions of such Environmental Permits and have not
materially violated any of them. Neither it, its Participation Facilities nor
its Loan Properties have received any notice of any proposal to amend, revoke,
reissue or replace any Environmental Permit, nor have any events occurred (other
than a change in applicable law) that could form a reasonable basis for any such
action. It, its Participation Facilities, and its Loan Properties have filed
timely and complete applications for renewal of any such Environmental Permits
that are required prior to the Closing.
(C) There is no suit, claim, action, demand, penalty,
executive or administrative order, directive, investigation or proceeding
pending or threatened before any court, governmental agency or board or other
forum against it or any Participation Facility (x) for alleged
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<PAGE>
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the release into the environment of any
Hazardous Material (as defined below) or oil, whether or not occurring at or on
a site owned, leased or operated by it or any Participation Facility.
(D) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or
threatened before any court, governmental agency or board or other forum
relating to or against any Loan Property (or it in respect of such Loan
Property) (x) relating to alleged noncompliance (including by any predecessor)
with, or liability under, any Environmental Law or (y) relating to the release
into the environment of any Hazardous Material or oil, whether or not occurring
at or on a site owned, leased or operated by any Loan Property, except as to
such matters which, either individually or in the aggregate, would not have a
Material Adverse Effect on Bank and any of its subsidiaries taken as a whole.
(E) There is no reasonable basis for any suit, claim, action, demand,
executive or administrative order, directive or proceeding of a type described
in Section 3.1(q)(i)(D) or (C).
(F) The properties currently or formerly owned or operated (including,
without limitation, in a fiduciary capacity) by it (including, without
limitation, soil, groundwater or surface water on, under or adjacent to the
properties, and buildings thereon) do not contain any Hazardous Material other
than as permitted under applicable Environmental Law (provided, however, that
with respect to properties formerly owned or operated by it, such representation
is limited to the period it owned or operated such properties).
(G) It has not received any notice, demand letter, executive or
administrative order, directive or request for information from any federal,
state, local or foreign governmental entity or any third party indicating that
it may be in violation of, or liable under, any Environmental Law.
(H) There are no underground storage tanks on, in or under, and during
the period of its ownership and operation no underground storage tanks have been
closed or removed from, any properties or Participation Facility which are or
have been in its ownership.
(I) During the period of (l) its ownership or operation (including
without limitation in a fiduciary capacity) of any of its respective current
properties, (m) its participation in the management of any Participation
Facility, or (n) its holding of a security interest in a Loan Property, there
has been no release of Hazardous Material or oil in, on, under or affecting such
properties, except as permitted under applicable Environmental Law. Prior to
the period of (x) its ownership or operation of any of its respective current
properties, (y) its participation in the management of any Participation
Facility, or (z) its holding of a security interest in a Loan Property, there
was no release of Hazardous Material or oil in, on, under or affecting any such
property, Participation Facility or Loan Property, except as permitted under
applicable Environmental Law.
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<PAGE>
(J) There has not been and is not any Environmental Condition (as
hereinafter defined) at or relating to any property at which wastes have been
deposited or disposed by or at the behest or direction of it, its Participation
Facilities or its Loan Properties, nor has it, its Participation Facilities or
its Loan Properties received written notice of any such Environmental Condition.
For purposes of this Agreement the term "Environmental Condition" means any
condition or circumstance, that (i) requires abatement or remediation under any
Environmental Law currently in effect, (ii) gives rise to any civil or criminal
liability under any Environmental Law currently in effect, or (iii) constitutes
a public or private nuisance based on the presence of Hazardous Materials, under
laws applicable on the date of Closing.
(K) There are no environmental liens on any properties owned or leased
by it or on its Loan Properties ("Properties") and no government actions which
could subject the Properties to such liens have been taken, are pending, or
threatened.
(L) No notice or restriction relating to the presence of Hazardous
Materials is required to be placed in the deed to any property subject to this
Agreement and no property subject to this Agreement has such a notice or
restriction in its deed.
(M) The only Loan Properties or Participation Facilities in which it
participates in management are those described in Annex 3.1(q) hereto.
ii. The following definitions apply for purposes of this Section 3.1(q):
(a) "Loan Property" means any property in which it holds a security interest, as
to which property all representations in this Section 3.1(q) are given to the
best knowledge, without inquiry, and where required by the context, include the
owner or operator of such property, but only with respect to such property; (b)
"Participation Facility" means any facility in which it participates in the
management (including all property on which it conducts operations of its
business, or which is held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property; (c) "Environmental Law" means (i) any
federal, state or local law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, legal doctrine, order,
directive, executive or administrative order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (A) the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, structures, soil, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety, or (B) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of, Hazardous Materials, in each case as amended and as now in effect;
"Environmental Law" includes, without limitation, the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the federal Clean Air Act, the federal Clean
Water Act, the federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste
Disposal Act and the federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
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Safety and Health Act of 1970, the Federal Hazardous Materials Transportation
Act, or any so-called "Superfund" or "Superlien" law enacted by any state having
jurisdiction over any Loan Property or Participation Facility, each as amended
and as now or hereafter in effect, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Material; and (d) "Hazardous Material"
means any substance which is detrimental to human health or safety or to the
environment, currently listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated, under any Environmental
Law, whether by type or by quantity, including any substance containing any such
substance as a component. Hazardous Material includes, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyls, any of which is regulated by, or subject to
regulation under, any Environmental Law.
(r) Allowance. The allowance for loan and lease losses shown on
Bank's statement of financial condition as of December 31, 1997 was, and the
allowance for loan and lease losses shown on Bank's statement of financial
condition for periods ending after the date of this Agreement and before the
Closing Date will be, in the opinion of management of Bank, adequate, as of the
date thereof, under generally accepted accounting principles applicable to
commercial banks and all other applicable regulatory requirements for all losses
reasonably anticipated in the ordinary course of business as of the date thereof
based on information available as of such date. It has disclosed to SBI in
writing prior to the date hereof the amounts of all loans, leases, advances,
credit enhancements, other extensions of credit, commitments and interest-
bearing assets of it that it has classified internally as "Other Loans Specially
Mentioned," "Special Mention," "Substandard," "Doubtful," "Loss," "Classified,"
"Criticized," "Credit Risk Assets," "Concerned Loans" or words of similar
import, and it shall promptly after the end of each quarter after the date
hereof and on the Effective Date inform SBI of the amount of each such
classification. The OREO and in-substance foreclosures included in any of its
non-performing assets are carried net of reserves at the lower of cost or market
value based on current independent appraisals or current management appraisals.
(s) Anti-takeover Provisions Applicable. The provisions of Chapter 25
of the PBCL relating to protection of shareholders do not apply to Bank, this
Agreement, the Merger and the transactions contemplated hereby.
(t) Material Interests of Certain Persons. Except as noted in Annex
3.1(t), none of its respective officers or directors, or any "associate" (as
such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934
(the "Exchange Act")) of any such officer or director, has any material interest
in any material contract or property (real or personal), tangible or intangible,
used in or pertaining to its business.
D-18
<PAGE>
(u) Insurance. It is presently insured, and has been insured, in the
amounts, with the companies and since the periods set forth in Annex 3.1(u).
All of the insurance policies and bonds maintained by it are in full force and
effect, it is not in default thereunder and all material claims thereunder have
been filed in due and timely fashion. In the judgment of its management, such
insurance coverage is adequate.
(v) Dividends. The only dividends or other distributions which it has
made on its capital stock since January 1, 1994 are set forth in Annex 3.1(v).
(w) Books and Records. Its books and records have been, and are
being, maintained in accordance with applicable legal and accounting
requirements and reflect in all material respects the substance of events and
transactions that should be included therein.
(x) Board Action. Its board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Merger is advisable and in the best interests of it and its
shareholders, (b) approved this Agreement and the transactions contemplated
hereby and thereby and (c) directed that the Agreement be submitted for
consideration by its shareholders at the Bank Meeting (as hereafter defined).
(y) Fairness Opinions. Its board of directors has received a written
opinion, a copy of which has been furnished to SBI, to the effect that the
consideration to be received by its shareholders pursuant to this Agreement, as
of the date of this Agreement, is fair to such holders from a financial point of
view.
(z) INTENTIONALLY OMITTED.
(aa) Fidelity Bonds. Since at least January 1, 1994, Bank has
continuously maintained fidelity bonds insuring it against acts of dishonesty by
its employees in such amounts as is customary for a bank of its size. Since
January 1, 1994, the aggregate amount of all potential claims under such bonds
has not exceeded $10,000 and Bank is not aware of any facts which would
reasonably form the basis of a claim under such bonds. It has no reason to
believe that its fidelity coverage will not be renewed by its carrier on
substantially the same terms as its existing coverage.
(bb) Condition of Tangible Assets. Except as set forth in Annex
3.1(bb), in all material respects: (i) all buildings, structures and
improvements on the real property owned or leased by it are in good condition,
ordinary wear and tear excepted, and are free from structural defects, and (ii)
the equipment, including heating, air conditioning and ventilation equipment
owned by it, is in good operating condition, ordinary wear and tear excepted.
The operation and use of the property in the business conform in all material
respects to all applicable laws, ordinances, regulations, permits, licenses and
certificates.
(cc) Loans by Bank. Since January 1, 1993, and except as shown on
Annex 3.1(cc), in the aggregate, the loans by Bank have been lawfully made,
constitute valid debts of the
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<PAGE>
obligors, have been incurred in the ordinary course of business, are subject to
the terms of payment as shall have been agreed upon between Bank and each
customer and Bank does not know of any applicable setoff or counterclaim which
in the aggregate would have a Material Adverse Effect on it. A list of all loans
thirty (30) days past due, as of March 25, 1998, together with a list of all
loans thirty (30) days past due on the last day of each of the preceding eleven
(11) months is attached hereto at Annex 3.1(cc). No part of the amount
collectible under any loan is contingent upon performance by Bank of any
obligation and no agreement for participation, in which Bank has relinquished or
agreed to share control with a participation in management of the facility, or
agreement providing for deductions or discounts have been made with respect to
any part of such debts, except as expressly disclosed in Annex 3.1(cc). Except
as disclosed in Annex 3.1(cc), Bank does not know of any pending, threatened or
expected actions in connection with any material loans or commitments presently
or previously made by Bank relating to claims based on theories of "lenders'
liability" or any other basis.
(dd) Regulatory Compliance - Banking Department. Bank is in
compliance in all material respects with the applicable rules and regulations of
the Banking Department, except as noted in Annex 3.1(dd) and except where the
failure to comply would not have a Material Adverse Effect on Bank.
(ee) Regulatory Compliance - FDIC and Board. Except as noted on Annex
3.1(ee) hereto and except where the failure to comply would not have a Material
Adverse Effect on it, it is in compliance in all material respects with the
rules and regulations of the FDIC and Board to the extent such rules and
regulations are deemed applicable by regulatory determination.
(ff) Capital Compliance. As of December 31, 1997, Bank was in
compliance with the minimum capital requirements applicable to a Pennsylvania
chartered commercial bank, including as to leverage ratio requirements, tangible
capital requirements and risk based capital requirements.
(gg) Year 2000 Compliance. Except as provided in Annex 3.1(gg)
hereof, Bank has undertaken an assessment of its software and hardware in order
to reveal those portions thereof which will require modification or replacement
to utilize properly dates beyond December 31, 1999, and has contracted with
appropriate third parties to modify or replace existing software and hardware to
mitigate against any Material Adverse Effect upon its computer programs and
systems caused by the change in the Year 2000. Bank has contacted its vendors
and borrowers in order to assess their efforts to mitigate any adverse effects
to their computer programs and systems beyond December 31, 1999. Furthermore,
Bank has taken all actions required to be taken to be in compliance with
announced or promulgated directives by or from the Bank Regulatory Agencies and
the Federal Financial Institutions Examination Council relating to Year 2000
compliance including, but not limited to, the adoption of a formal Year 2000
plan which includes a contingency plan in the event internal or external
computer programs and systems, as the case may be, will not be in compliance
beyond December 31, 1999. The most recent regulatory examination of Bank
relating to Year 2000
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<PAGE>
compliance was conducted on December 4, 1997. The findings of this examination
have been separately disclosed to SBI.
(hh) Assessments Fully Paid. All payments, fees and charges assessed
by appropriate state and federal agencies against Bank, and due on or prior to
the date of this Agreement, have been paid in full. Bank's assessment category
with the Board and Banking Department is well-capitalized.
(ii) Annual Reports and Financial Statements. Bank has delivered to
SBI (i) Bank's audited report for Bank's fiscal year ended December 31, 1997,
containing balance sheets of Bank at December 31, 1997 and December 31, 1996 and
statements of earnings, changes in shareholders' equity and cash flows of Bank
for the three years ended December 31, 1997, 1996, and 1995 and such financial
statements have been certified by independent public accountants, and (ii)
Bank's Quarterly Reports for the quarters ended March 31, 1997, June 30, 1997
and September 30, 1997 containing unaudited balance sheets of Bank as at such
dates and unaudited statements of earnings and cash flows of Bank for the three,
six and nine-month periods reflected therein. Bank has also delivered to SBI
true and correct copies of its Annual Reports for the years ended December 31,
1996, 1995 and 1994, together with all Annual Reports to Shareholders for the
same periods. All such reports (collectively, the "Bank Reports") (i) comply in
all material respects with the requirements of the rules and regulations of the
Board, (ii) do not contain any untrue statement of a material fact and (iii) do
not omit to state 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. No documents to be filed by Bank with the Board
or any regulatory agency in connection with this Agreement, or the transactions
contemplated hereby will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are made,
not misleading. All documents which Bank is responsible for filing with the
Board or any regulatory agency in connection with the Merger will comply as to
form in all material respects with the requirements of applicable law.
(jj) Proxy Statement/Prospectus, Etc. Except for information relating
to SBI and its subsidiaries and pro forma financial information reflecting the
combined operations of SBI and Bank, neither (i) the Proxy Statement/Prospectus
(as defined hereinafter at Section 4.2) or any amendment or supplement thereto,
at the time it is filed with the SEC, at the time the Registration Statement (as
defined hereinafter at Section 4.2) is declared effective, at the time the Proxy
Statement/Prospectus is mailed to the shareholders of Bank or at the date of the
Bank Shareholders' Meeting to consider this Agreement nor (ii) any other
documents to be filed by Bank with the FDIC or any regulatory agency in
connection with this Agreement, or the transactions contemplated hereby will
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading.
D-21
<PAGE>
SECTION 3.2 Representations and Warranties of SBI and its Material
------------------------------------------------------
Subsidiaries. SBI represents and warrants to Bank (and the word "it" in this
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Article III refers to SBI and each of its Material Subsidiaries, as that term is
defined at Section 3.2(d) hereof), that, except as specifically disclosed in the
Annex of disclosure schedules included herewith, to the best of its knowledge:
(a) Corporate Organization and Qualification. SBI is a corporation
duly incorporated, validly existing and duly subsisting under the laws of the
Commonwealth of Pennsylvania and is in good standing as a foreign corporation in
each jurisdiction where the properties owned, leased or operated, or the
business conducted, by SBI requires such qualification, except for such failure
to qualify or be in such good standing which, when taken together with all other
such failures, would not have a Material Adverse Effect on SBI. It has the
requisite corporate and other power and authority (including all federal, state,
local and foreign governmental authorizations) to carry on its business as now
conducted and to own its properties and assets. SBI owns, or will own at
Closing, directly or indirectly, all of the outstanding shares of capital stock
of Interim Bank. SBI has made available to Bank complete and correct copies of
the articles of incorporation and bylaws of SBI and will make available to Bank
complete and correct copies of the articles of incorporation and bylaws of
Interim Bank; such articles and bylaws of SBI are in full force and effect as of
the date hereof.
(b) Corporate Authority. Subject only to the regulatory approvals
specified in Section 5.1(b) hereof, SBI has the requisite corporate power and
authority, and legal right, and has taken all corporate action necessary in
order to execute and deliver this Agreement and to consummate the transactions
applicable to SBI contemplated hereby. This Agreement has been duly and validly
executed and delivered by SBI and constitutes the valid and binding obligations
of SBI enforceable against SBI, in accordance with its terms, except to the
extent enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or the application by a court of equitable
principles.
(c) Capitalization. As of December 31, 1997, SBI Common Stock was
held of record by more than 6,000 shareholders and the authorized capital stock
of SBI consisted of 32,000,000 shares of SBI Common Stock, of which
approximately 22,554,962 shares are issued and outstanding (an additional 30,454
shares are held as treasury stock) and 5,000,000 shares of Preferred Stock, no
par value per share, of which none are outstanding. Sufficient shares of
authorized, but unissued, shares of SBI Common Stock to effect the transactions
herein contemplated will be reserved by SBI for such purpose.
(d) Bank Subsidiaries. SBI owns, directly or indirectly, all of the
issued and outstanding shares of capital stock of Farmers First Bank, a bank and
trust company organized under the laws of the Commonwealth of Pennsylvania;
Farmers & Merchants Bank and Trust, a bank organized under the laws of the State
of Maryland; Citizens National Bank of Southern Pennsylvania, a national banking
association with headquarters in Greencastle, Pennsylvania; First National Trust
Bank, a national banking association with headquarters in Sunbury, Pennsylvania;
Williamsport National Bank, a national banking association with headquarters in
Williamsport,
D-22
<PAGE>
Pennsylvania; Equity National Bank, a national banking association with
headquarters in Marlton, New Jersey; Farmers National Bank, a national banking
association with headquarters in Mullica Hill, New Jersey; and Founders' Bank, a
bank organized under the laws of the Commonwealth of Pennsylvania (collectively
the "Bank Subsidiaries"). All of the issued and outstanding capital stock of the
Bank Subsidiaries is duly and validly authorized and issued, fully paid and
nonassessable (other than as provided at 12 U.S.C.A. (S) 55 with respect to
national banks) and is owned by SBI free and clear of any liens, security
interests, encumbrances, restrictions on transfer or other rights of any third
person with respect thereto. SBI owns, directly or indirectly, all of the issued
and outstanding shares of capital stock of Susquehanna Bank, a federal savings
bank operating in Maryland (the "Savings Bank Subsidiary"). All of the issued
and outstanding capital stock of the Savings Bank Subsidiary is duly and validly
authorized and issued, free and clear of any liens, security interests,
encumbrances, restrictions on transfer or other rights of any third person with
respect thereto other than rights of account holders to liquidation accounts
maintained by the Savings Bank Subsidiary in accordance with the rules of the
Office of Thrift Supervision ("OTS"). The Bank Subsidiaries and the Savings Bank
Subsidiary are the "Material Subsidiaries." There are no options, calls,
warrants, conversion privileges or other agreements obligating any Material
Subsidiary at present or upon the occurrence of any event to issue or sell any
shares of its capital stock. Each of Farmers First Bank, Founders' Bank and
Farmers & Merchants Bank and Trust is a bank and trust company duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania or the State of Maryland and is duly authorized to engage in the
banking and trust business as an insured bank under the Federal Deposit
Insurance Act, as amended. Each of Citizens National Bank of Southern
Pennsylvania, First National Trust Bank, Williamsport National Bank, Equity
National Bank and Farmers National Bank is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States and is duly authorized to engage in the banking and trust business as an
insured bank under the Federal Deposit Insurance Act, as amended. Susquehanna
Bank is a federal savings and loan association, duly organized, validly existing
and in good standing under the laws of the United States and is duly authorized
to engage in the savings and loan business under the Federal Deposit Insurance
Act, as amended. Each Material Subsidiary has corporate power and legal
authority and governmental authorizations which are material to its respective
operations and to transact the respective businesses in which it is presently
engaged.
(e) No Violations. The execution, delivery and performance of this
Agreement by SBI and Interim Bank does not, and the consummation of the
transactions contemplated hereby by SBI and Interim Bank will not, constitute
(i) a breach or violation of, or a default under, any law, rule or regulation or
any judgment, decree, order, governmental permit or license, or agreement,
indenture or instrument to which SBI or Interim Bank (or any of SBI's respective
properties or assets) is subject, which breach, violation or default would have
a Material Adverse Effect on SBI on a consolidated basis, or enable any person
to enjoin the Merger, (ii) a breach or violation of, or a default under, SBI's
or Interim Bank's articles of incorporation or bylaws or (iii) a breach or
violation of, or a default under (or an event which with due notice or lapse of
time or both would constitute a default under), or result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
pledge, security interest, charge or other encumbrance upon any
D-23
<PAGE>
of SBI's properties or assets under, any of the terms, conditions or provisions
of any note, bond, indenture, deed of trust, loan agreement or other agreement,
instrument or obligation to which it is a party, or to which any of SBI's
properties or assets may be bound or affected, except for any of the foregoing
that, individually or in the aggregate, would not have a Material Adverse Effect
on SBI, on a consolidated basis; and the consummation of the transactions
contemplated hereby will not require any approval, consent or waiver under any
such law, rule, regulation, judgment, decree, order, governmental permit or
license or the approval, consent or waiver of any other party to any such
agreement, indenture or instrument, other than (i) the required approvals,
consents and waivers of governmental authorities referred to in Section 5.1(b),
(ii) any such approval, consent or waiver that already has been obtained and
(iii) any other approvals, consents or waivers the absence of which,
individually or in the aggregate, would not result in a Material Adverse Effect
on SBI, on a consolidated basis, or enable any person to enjoin the Merger.
(f) Required Consents. SBI has no reason to believe that it will be
unable to obtain consents and approvals, including without limitation all such
consents and approvals of Regulatory Agencies (as hereinafter defined),
necessary to consummate the transactions contemplated by this Agreement by
September 30, 1998 or that any such consents or approvals would contain any
condition or requirement that would result in a Material Adverse Effect on SBI.
(g) Board Action. SBI's board of directors (at a meeting duly called
and held) has been duly convened and by the requisite vote of all directors (a)
determined that the Merger is advisable and in the best interests of it and its
shareholders, and (b) approved this Agreement and the transactions contemplated
hereby.
(h) Interim Bank.
i. Interim Bank is a Pennsylvania state chartered bank duly
organized, validly existing and duly subsisting under the laws of the
Commonwealth of Pennsylvania. All of the outstanding shares of capital stock of
Interim Bank have been validly issued, are fully paid and nonassessable and are
owned directly by SBI free and clear of any lien, charge or other encumbrance.
Interim Bank possesses no assets nor is subject to any liabilities and will not
acquire assets or incur liabilities prior to the Effective Time. Since the date
of its incorporation, Interim Bank has not engaged in any activities other than
in connection with the consummation of the Merger or as expressly contemplated
by this Agreement.
ii. Interim Bank has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by Interim Bank and the
consummation of the transactions described herein have been duly and validly
authorized by all necessary corporate actions (including without limitation
shareholder action) in respect thereof on the part of Interim Bank. This
Agreement is a valid and binding obligation of Interim Bank, enforceable against
Interim Bank in accordance with its terms.
D-24
<PAGE>
iii. All of the authorized capital stock of Interim Bank, which
consists solely of 100 shares of common stock, $.01 par value per share, is
presently issued and outstanding.
iv. SBI will, as the sole shareholder of Interim Bank, vote
to approve this Agreement and the Merger.
(i) SBI Reports. SBI has furnished to Bank true and complete copies
of (i) all of its annual reports on Form 10-K filed with the SEC since January
1, 1994 and its annual reports to shareholders for each of the three years ended
December 31, 1994, 1995 and 1996, respectively; (ii) all of its quarterly
reports on Form 10-Q and current reports, if any, on Form 8-K filed with the SEC
since January 1, 1996; (iii) each final registration statement, prospectus or
offering circular which SBI has used in connection with the sale of securities
since January 1, 1996; and (iv) each definitive proxy statement distributed by
SBI to its shareholders since January 1, 1996.
All such reports (i) comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, (ii) do not contain any untrue statement of a material fact and
(iii) do not omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(j) SBI Benefit Plans. SBI has furnished to Bank true, correct and
complete copies of all of SBI's bonus, deferred compensation, pension, profit-
sharing, retirement, medical, group life, disability income, stock purchase,
stock option, other "employee benefit plans" (as that term is used within the
meaning of Section 3(3) of ERISA) or any other fringe benefit plan, agreement,
arrangement or practice, all amendments thereto and all summary plan
descriptions thereof, or, in the alternative, SBI has provided materials
generally descriptive of the foregoing, and in such case, SBI will provide such
specific additional information as may reasonably be requested. The foregoing
are collectively referred to as the "SBI Benefit Plans."
(k) Financial Reports. SBI has timely filed all material reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that it was required to file since January 1, 1994 with
(A) the Board, (B) the FDIC, (C) the OCC, (D) the SEC, (E) the OTS, (F) the
Pennsylvania Department of Banking and (G) the Maryland Banking Commission (the
regulatory agencies listed at (A) through (G) are, collectively, the "SBI
Regulatory Agencies"), and (H) any other regulatory authority, and all other
material reports and statements required to be filed by it since January 1,
1994, including, without limitation, any report or statement required to be
filed pursuant to the laws, rules or regulations of the United States or any
regulatory agency and has paid all fees and assessments due and payable in
connection therewith, and no such report, registration or statement contains any
material misstatement or omission or is otherwise in material noncompliance with
any law, regulation or requirement.
(l) SBI's Balance Sheets. SBI's balance sheets as of December 31,
1997 previously provided to Bank and each balance sheet provided after the date
hereof to Bank
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<PAGE>
(including in each case any related notes and schedules) fairly presents or will
fairly present SBI's financial position as of its date and each of the
statements of income and shareholders' equity and of cash flows provided
therewith (including in each case any related notes and schedules), fairly
presents or will fairly present the results of operations, shareholders' equity
and cash flows, as the case may be, of it for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments that are not material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved.
(m) Absence of Certain Changes or Events. Since December 31, 1997,
SBI has not incurred any material liability, except in the ordinary course of
its business consistent with past practice, nor has there been any change in the
financial condition, properties, assets, business, results of operation or
prospects of it which, individually or in the aggregate, has had, or might
reasonably be expected to result in, a Material Adverse Effect on it.
(n) Fees. Neither SBI nor any of its officers, directors, employees
or agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions, or finder's fees, and no
broker or finder has acted directly or indirectly for it in connection with the
Agreement or the transactions contemplated hereby.
(o) Registration Statement, Etc. Except for information relating to
Bank, neither (i) the Registration Statement, the Proxy Statement/Prospectus or
any amendment or supplement thereto, or any other registration statement filed
with the SEC during the term of this Agreement, at the time it is filed with the
SEC, at the time it is declared effective, at the time the Proxy Statement/
Prospectus is mailed to the shareholders of Bank or at the date of the Bank
Shareholders' Meeting to consider the approval of this Agreement nor (ii) any
other documents to be filed by SBI with the SEC or any regulatory agency in
connection with this Agreement or the transactions contemplated thereby will
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading. All
documents which SBI is responsible for filing with the SEC or any regulatory
agency in connection with the Merger will comply as to form in all material
respects with the requirements of applicable law.
(p) Compliance with Laws. It has the permits, licenses, certificates
of authority, orders and approvals of, and has made all filings, applications
and registrations with, federal, state, local and foreign governmental
authorities, including regulatory agencies that are required in order to permit
it to carry on its business as it is presently conducted and the absence of
which would, individually or in the aggregate, have a Material Adverse Effect on
SBI, on a consolidated basis; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect, and no suspension
or cancellation of any of them is threatened.
(q) Absence of Regulatory Actions. It is not a party to any cease and
desist order, written agreement or memorandum of understanding with, or a party
to any commitment letter or
D-26
<PAGE>
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any board
resolutions at the request of, federal or state governmental authorities,
including, without limitation, the SBI Regulatory Agencies, charged with the
supervision or regulation of banks or bank holding companies or savings and loan
holding companies or engaged in the insurance of bank and/or savings and loan
deposits nor has it been advised by any SBI Regulatory Agency that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, directive, written agreement, memorandum
of understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(r) Litigation and Liabilities. Except as set forth in Annex 3.2(r),
there are no (i) civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings before any court, governmental agency or
otherwise pending or, to the knowledge of management, threatened against it or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including, without limitation, those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which its management is aware that could reasonably be expected to result in any
claims against or obligations or liabilities of it, that, alone or in the
aggregate, are reasonably likely to have a Material Adverse Effect on SBI, on a
consolidated basis, or to hinder or delay, in any material respect, consummation
of the transactions contemplated by this Agreement.
(s) Environmental Matters. SBI is unaware of any activity or
conditions on or in any property owned, occupied, leased, or held as security by
SBI or a Material Subsidiary which would subject SBI or any Material Subsidiary
to damages, penalties, injunctive relief or cleanup costs under any
Environmental Law that individually or in the aggregate would have a Material
Adverse Effect on SBI, on a consolidated basis.
(t) Taxes. SBI's federal income tax returns have been examined and
closed or otherwise closed by operation of law through December 31, 1993. All
federal, state, local and foreign tax returns required to be filed by it or on
its behalf have been timely filed or requests for extensions have been timely
filed and any such extensions shall have been granted and not have expired, and,
to the knowledge of management, all such filed returns are complete and accurate
in all material respects. All taxes shown on such returns, and all taxes
required to be shown on returns for which extensions have been granted, have
been paid in full or adequate provision has been made for any such taxes on its
balance sheet (in accordance with generally accepted accounting principles)
other than those taxes which are being contested in appropriate forums in
proceedings which are being diligently pursued. Adequate provision has been
made on its balance sheet (in accordance with generally accepted accounting
principles consistently applied) for all federal, state, local and foreign tax
liabilities for periods subsequent to those for which returns have been filed.
There is no audit examination, deficiency, or refund litigation pending or, to
its knowledge, threatened with respect to any taxes that could result in a
determination that would have a Material Adverse Effect on SBI and its
subsidiaries, taken as a whole. All taxes, interest, additions and penalties
due with respect to completed and settled examinations or concluded litigation
relating to it have been paid
D-27
<PAGE>
in full or adequate provision has been made for any such taxes on its balance
sheet (in accordance with generally accepted accounting principles). It has not
executed an extension or waiver of any statute of limitations or the assessment
or collection of any tax due that is currently in effect, except as disclosed on
Annex 3.2(t).
(u) Agreements. It is not in default under or in violation of any
provision of any note, bond, indenture, mortgage, deed of trust, loan agreement,
lease or other agreement to which it is a party or by which it is bound or to
which any of its respective properties or assets is subject, other than such
defaults or violations as could not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on SBI.
(v) Regulatory Compliance--State and Federal Regulators. SBI and its
state-chartered bank subsidiaries are in compliance in all material respects
with the applicable rules and regulations of the Banking Department, in the case
of Farmers First Bank and Founders' Bank, and the Maryland Banking Commission,
in the case of Farmers & Merchants Bank and Trust, the Material Subsidiaries
which are national banks are in compliance in all material respects with
applicable rules and regulations of the Office of the Comptroller of the
Currency and the Material Subsidiaries which are federally chartered thrifts are
in compliance in all material respects with applicable rules and regulations of
the OTS, except where the failure to comply would not have a Material Adverse
Effect on SBI and its subsidiaries, taken as a whole.
(w) Capital Compliance. As of December 31, 1997, SBI and its Material
Subsidiaries were in compliance with the minimum capital requirements applicable
to them under state and federal laws, including as to leverage ratio
requirements, tangible capital requirements and risk-based capital requirements.
(x) Assessments Fully Paid. All payments, fees and charges assessed
by appropriate state and federal agencies against SBI and its Material
Subsidiaries, and due on or prior to the date of this Agreement, have been paid
in full.
(y) Regulatory Compliance--FDIC and Board. Except where the failure
to comply would not have a Material Adverse Effect on SBI and its subsidiaries,
taken as a whole, and except as discussed herein SBI and its Material
Subsidiaries are in compliance in all material respects with the rules and
regulations of the FDIC and Board to the extent such rules and regulations are
deemed applicable by regulatory determination.
(z) Year 2000 Compliance. Except as provided in Annex 3.2(z) hereof,
SBI and its Material Subsidiaries are in material compliance with all
requirements announced or promulgated by the Bank Regulatory Agencies and the
Federal Financial Institutions Examination Council relating to Year 2000
compliance.
D-28
<PAGE>
ARTICLE IV
COVENANTS
SECTION 4.1 Acquisition Proposals. Bank agrees that it and its
---------------------
officers and directors shall not, and that it shall direct and use its best
efforts to cause its employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to its shareholders) with respect to a merger, consolidation or similar
transaction involving, or any purchase, sale or other disposition of all or any
significant portion of the assets or any equity securities of, Bank (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal")
or, except to the extent legally required for the discharge by its board of
directors of its fiduciary duties as determined upon consultation with counsel,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. Bank agrees that it will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. Bank agrees
that it will take the necessary steps to inform the appropriate individuals or
entities referred to in the first sentence hereof of the obligations undertaken
by each of them in this Section 4.1. Bank agrees that it will notify SBI
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations, or discussions are
sought to be initiated or continued with, it.
SECTION 4.2 Securities Registration and Disclosure. Bank shall
--------------------------------------
cooperate with SBI in the preparation, in accordance with the requirements of
the proxy rules under the Exchange Act and the rules and regulations of the
Board, of the Proxy Statement/Prospectus and the filing thereof as part of the
Registration Statement. Following the date hereof, SBI will prepare and file
with the SEC under the Securities Act a registration statement for the
registration of the shares of SBI Common Stock to be issued pursuant hereto (the
"Registration Statement"). Each party shall be responsible for providing all
information concerning itself and its subsidiaries required to be included
therein. SBI shall take any action required to be taken under any applicable
state securities or "blue sky" laws in connection with the issuance of shares of
SBI Common Stock pursuant to this Agreement and Bank shall furnish SBI all
information concerning Bank and its shareholders as SBI may reasonably request
in connection with any such action.
SBI shall use reasonable efforts to provide ten (10) business days
prior to its filing with the SEC, a copy of the Registration Statement to Bank
and its counsel for review. Each party will promptly provide the other with
copies of all correspondence, comment letters, notices or other communications
to or from the SEC or the Board relating to the Registration Statement, the
Proxy Statement/Prospectus or any amendment or supplement thereto, and SBI will
advise Bank promptly after it receives notice thereof, of the effectiveness of
the Registration Statement, of the issuance of any stop order with respect to
the effectiveness thereof, of the suspension of the qualification of the
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<PAGE>
SBI Common Stock issuable in connection herewith for offering or sale in any
jurisdiction, or the initiation or threat of any proceeding for any such
purpose.
Bank will take appropriate action to call the Bank Shareholders'
Meeting, to be held not more than forty-five (45) days following the effective
date of the Registration Statement, to consider approval of this Agreement and,
except to the extent it would result in a reasonable likelihood that the Bank's
board of directors would breach its fiduciary duties under the PBCL and Banking
Code and subject to receipt of an updated fairness opinion from its financial
advisor dated on or immediately prior to the date of the Proxy Statement, will
use its best efforts to secure such approval. In connection with the Bank
Shareholders' Meeting, Bank will duly solicit, in compliance with the proxy
rules of the Board, the vote of its shareholders by mailing or delivering to
each such shareholder, as soon as practicable after the effectiveness of the
Registration Statement, the Proxy Statement/Prospectus, and as soon as
practicable thereafter, any amendments or supplements thereto as may be
necessary to assure that at the date of the Bank Shareholders' Meeting the Proxy
Statement/Prospectus shall conform to the requirements of Sections 3.1(oo) and
3.2(o) hereof.
Bank will furnish to SBI a list of all persons known to Bank who at
the date of the Bank Shareholders' Meeting may be deemed to be "affiliates" of
Bank within the meaning of Rule 145 under the Securities Act. Bank will use its
best efforts to cause each such person identified in its list to deliver at or
prior to the Closing a written agreement providing that such person will not
sell, pledge, transfer or otherwise dispose of the shares of SBI Common Stock to
be received by such person hereunder except (i) in compliance with the
applicable provisions of the Securities Act and the rules and regulations
thereunder and (ii) after such time as financial results covering at least
thirty (30) days of post-merger combined operations have been published within
the meaning of Section 201.01 of the SEC's Codification of Financial Reporting
Policies.
SECTION 4.3 Employees.
---------
(a) SBI and any of its affiliates shall have the right (but not the
obligation) to employ, as officers and employees of SBI, the Surviving Bank,
Bank or other affiliates of SBI immediately following the Effective Time, any
persons who are officers and employees of Bank immediately before the Effective
Time. It shall be a condition to employment by SBI or any of its affiliates
that any former officer or employee of Bank agrees to cancel any existing
employment contract, agreement or understanding between him or herself and Bank,
including without limitation all benefits related to severance arrangements upon
a change of control or otherwise, prior to accepting such new employment and
without accepting any of the severance benefits or other benefits or payments
associated with such contract, agreement or understanding.
Notwithstanding the foregoing, SBI shall assume the Executive
Employment Agreement of Timothy K. Ames dated November 6, 1997; the Executive
Employment Agreement of Owen O. Freeman, Jr., dated June 18, 1997, and amended
as of the date of this Agreement; the Executive Employment Agreement of Thomas
S. Capello dated April 28, 1993, as amended June 18, 1997 and amended as of the
date of this Agreement; the Executive Employment Agreement of
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<PAGE>
Thomas A. Sauer dated November 6, 1997, and amended as of the date of this
Agreement; the Severance Agreements of Patricia A. Claubaugh, Marsha J. Stoffa,
Lois C. Derry, Karen L. Steinfelt, and Kimberly Grim; and the stock appreciation
rights awarded pursuant to the Bank's Stock Appreciation Rights Plan as
previously discussed with and disclosed to SBI. A copy of each of the referenced
Employment Agreements, with all amendments, the Severance Agreements and the
Stock Appreciation Rights Plan (including a schedule of Stock Appreciation
Rights through 1997) are attached hereto as Annex 4.3(a). After the date of this
Agreement, there shall be no further amendment, modification or alteration to
any of the aforedescribed agreements or grants made under the plan without the
express written consent of SBI.
(b) Each person employed by Bank prior to the Effective Time who
remains an employee of the Surviving Bank, Bank or other SBI subsidiary
following the Effective Time (each a "Continued Employee") shall be entitled, as
an employee of SBI or an SBI subsidiary, to participate in whatever employee
benefit plans, as defined in Section 3(3) of ERISA, or whatever stock option,
bonus or incentive plans or other fringe benefit programs that may be in effect
generally for employees of SBI or SBI's subsidiaries from time to time ("SBI's
Plans"), if such Continued Employee shall be eligible or selected for
participation therein and otherwise shall not be participating in a similar plan
which continues to be maintained by the Surviving Bank or Bank for such
employee. All such participation shall be subject to such terms of such plans
as may be in effect from time to time provided, further that Continued Employees
will be eligible to participate in SBI's plans on the same basis as similarly
situated employees of SBI or SBI's subsidiaries. Such Continued Employees will
receive credit for past service with Bank for purposes of eligibility and
vesting, but not benefit accrual, under SBI's Plans.
(c) Bank shall take all timely and necessary action to cease
participation or accrual of benefits, effective as of the Effective Time, by
each person employed by Bank prior to the Effective Time in each Employee Plan
(as defined in Section 3.1(m)), including timely notice to all participants
under Section 204(h) of ERISA, if applicable, and to terminate each Employee
Plan, other than an Employee Plan containing a cash or deferred arrangement
qualified under Section 401(k) of the Code ("Employee 401(k) Plan") and other
than those specified in Annex 4.3(c), effective as of the Effective Time;
provided that SBI may, in its sole discretion, give notice to Bank not less than
twenty (20) days (sixty-one (61) days in the case of any employment contract or
other employee plan which by its terms requires thirty (30) or more days'
advance notice of termination) prior to the Effective Time, that any Employee
Plan shall not be terminated and/or participation or accrual of benefits
thereunder shall not cease pursuant to this Section 4.3(c). At the sole
discretion of SBI, any Employee 401(k) Plan shall be merged with any similar
such plan maintained and designated by SBI, effective at or after the Effective
Time, as elected by SBI, and Bank shall take any and all timely and necessary
action to effect such merger.
D-31
<PAGE>
SECTION 4.4 Access and Information.
----------------------
(a) Upon reasonable notice, and subject to applicable laws relating to
the exchange of information, Bank shall afford to SBI and its representatives
(including, without limitation, directors, officers and employees of SBI and its
affiliates, and counsel, accountants and other professionals retained) such
access during normal business hours throughout the period prior to the Effective
Time to the books, records (including, without limitation, tax returns and work
papers of independent auditors), properties, personnel and such other
information as SBI may reasonably request (other than reports or documentation
which are not permitted to be disclosed under applicable law); provided,
however, that no investigation pursuant to this Section 4.4 shall affect or be
deemed to modify any representation or warranty made herein. SBI will not, and
will cause its representatives not to, use any information obtained pursuant to
this Section 4.4 or Section 3.1 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement and in no event will SBI
directly or indirectly use such information for any competitive or commercial
purpose. Subject to the requirements of law, SBI will keep confidential, and
will cause its representatives to keep confidential, all information and
documents obtained pursuant to this Section 4.4 and Section 3.1 unless such
information (i) was already known to SBI or an affiliate of SBI, (ii) becomes
available to SBI or an affiliate of SBI from other sources not known by such
person to be bound by a confidentiality agreement, (iii) is disclosed with the
prior written approval of Bank (iv) is or becomes readily ascertainable from
published information or trade sources or (v) was already publicly available.
Without in any way limiting the foregoing, Bank shall provide to SBI within
forty-five (45) days of the end of each calendar quarter consolidated financial
statements (including a balance sheet and income statement) as of the end of,
and for, such period that are in conformance with generally accepted accounting
principles and the representation set forth in Section 3.1(f). In the event
that this Agreement is terminated or the transactions contemplated by this
Agreement shall otherwise not be consummated, each party shall, if so requested,
promptly cause all copies of documents or extracts thereof containing
information and data as to another party hereto (or an affiliate of any party
hereto) to be returned to the party which furnished the same. This Section 4.4
supersedes and terminates any agreement between the parties relating to the
confidentiality of information which may have been exchanged (the
"Confidentiality Agreement").
(b) During the period from the date of this Agreement to the Effective
Date, SBI shall provide to Bank the following documents and information:
i. As soon as reasonably available, but in no event more than
forty-five (45) days after the end of each fiscal quarter of SBI ending after
the date of this Agreement, SBI will deliver to Bank its quarterly report on
Form 10-Q as filed with the SEC.
ii. As soon as reasonably available, but in no event more than
ninety (90) days after the end of each fiscal year of SBI ending after the date
of this Agreement, SBI will deliver to Bank its annual report on Form 10-K as
filed with the SEC.
D-32
<PAGE>
iii. SBI will deliver to Bank, contemporaneously with its being
filed with the SEC, a copy of each current report on Form 8-K filed by SBI after
the date of this Agreement.
iv. At least five (5) business days prior to submission, SBI
will furnish to Bank the portions which describe the transactions (including any
financial information or pro forma financial information of, or including, Bank)
contemplated herein of (A) registration statements, prospectuses or offering
circulars used by SBI in connection with the sale of securities after the date
of this Agreement, (B) proxy statements distributed by SBI to its shareholders
after the date of this Agreement, and (C) all other publicly-available reports,
statements or other documents which are either distributed to shareholders or
filed by SBI or any of its subsidiaries with the SEC. Any comments timely
received by SBI from Bank in connection with the foregoing will be reviewed and
considered in good faith, but SBI shall not be bound to comply with the
recommendations set forth in such comments. SBI also shall furnish Bank with
copies of the foregoing in the form filed with the SEC or otherwise distributed
to shareholders.
v. SBI will promptly notify Bank of any material changes to the
SBI Benefit Plans.
SECTION 4.5 Certain Filings, Consents and Arrangements. SBI shall
------------------------------------------
use all reasonable efforts to obtain all necessary approvals required to carry
out the transactions contemplated by this Agreement and to consummate the
Merger. Bank shall cooperate with SBI in connection therewith, including
without limitation furnishing all information concerning Bank as may be
reasonably requested by SBI in connection with any such action. SBI shall use
all reasonable efforts to provide, five (5) days prior to submission, Bank with
copies of all material applications, notices, petitions or other filings or
submissions prepared by SBI in connection with consummation of the Merger. Any
comments timely received by SBI from Bank in connection with the foregoing will
be reviewed and considered in good faith, but SBI shall not be bound to comply
with the recommendations set forth in such comments. SBI will consult with Bank
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and governmental authorities necessary or
advisable to consummate the transactions contemplated by this Agreement and SBI
will keep Bank apprised of the status of matters relating to completion of the
transactions contemplated hereby. SBI shall promptly furnish Bank with copies
of applications to any governmental authority in respect of the transactions
contemplated hereby.
SECTION 4.6 Takeover Statutes. No "fair price," "moratorium," or
-----------------
other form of anti-takeover statute or regulation or any similar provision of
Bank's articles of incorporation are applicable to the transactions contemplated
by this Agreement and, if any such statute, regulation or provisions shall
become applicable to the transactions contemplated by this Agreement, Bank and
the members of its board of directors shall grant such approvals and take such
actions as are necessary so that the transactions contemplated hereby and
thereby may be consummated as promptly as practicable on the terms contemplated
hereby and thereby and otherwise act to eliminate or minimize the effects of
such statute or regulation or provision on the transactions contemplated hereby
and thereby.
D-33
<PAGE>
SECTION 4.7 Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as promptly as
practicable, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
governmental authorities, or other entities, effecting all necessary
registrations, applications and filings and obtaining any required contractual
consents and regulatory approvals.
SECTION 4.8 Publicity. Except as required by law, Bank shall not,
---------
without the prior consent of SBI (which consent shall not be unreasonably
withheld), issue any press releases or otherwise make public filings under
securities laws, with respect to this Agreement or the transactions described
herein. Prior to issuing any press release or making any public filings under
securities laws which makes any reference to Bank, SBI shall provide a copy to
Bank for comment and in all such instances the parties shall cooperate.
SECTION 4.9 INTENTIONALLY OMITTED.
SECTION 4.10 Notification of Certain Matters. Each party shall give
-------------------------------
prompt notice to the others of: (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its subsidiaries subsequent to
the date of this Agreement and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses, results of
operations or prospects of it to which it is a party or is subject; and (b) any
material adverse change in its financial condition, properties, business, or
results of operations taken as a whole or the occurrence of any event which, so
far as reasonably can be foreseen at the time of its occurrence, is reasonably
likely to result in any such change. Each party shall give prompt notice to the
other parties of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement.
SECTION 4.11 Insurance. Bank shall use its best efforts to retain no
---------
less than the level of insurance coverage presently held by it as of the date
hereof.
SECTION 4.12 Dividends. Bank shall not declare, pay or set aside any
---------
dividend or other distribution in respect of its capital stock except that it
shall have the right, after January 1, 1999, to declare and pay a dividend
corresponding in amount and timing with past practice.
SECTION 4.13 Indemnification; Insurance.
--------------------------
(a) From and after the Effective Time, SBI agrees to indemnify and
hold harmless each present and former director and officer of Bank and each
officer or employee of Bank that is serving as a director or trustee of another
entity expressly at Bank's request or direction (each, an "Indemnified Party"),
against any costs or expenses (including reasonable attorneys' fees),
D-34
<PAGE>
judgments, fines, losses, claims, damages or liabilities (collectively, the
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, and
whether or not the Indemnified Party is a party thereto, arising out of matters
existing or occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement), whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent permitted under the
Articles of Incorporation or the Bylaws of Bank in effect on the date hereof.
(b) SBI shall maintain the Bank's existing directors' and officers'
liability insurance policy (or a policy providing comparable coverage amounts on
terms generally no less favorable, including SBI's existing policy if it meets
the foregoing standard) covering persons who are currently covered by such
insurance for a period of two years after the Effective Time; provided, however,
that in no event shall SBI be obligated to expend, in order to maintain or
provide insurance coverage pursuant to this Section 4.13(b), any amount per
annum in excess of 150% of the amount of the annual premiums paid as of the date
hereof by the Bank for such insurance (the "Maximum Amount"). If the amount of
the annual premiums necessary to maintain or procure such insurance coverage
exceeds the Maximum Amount, SBI shall use all reasonable efforts to maintain the
most advantageous policies of directors' and officers' insurance obtainable for
an annual premium equal to the Maximum Amount. In the event that SBI acts as
its own insurer for all of its directors and officers with respect to matters
typically covered by a directors' and officers' liability insurance policy,
SBI's obligations under this Section 4.13(b) may be satisfied by such self
insurance, so long as its senior ratings by Standard & Poor's Corporation and
Moody's Investors Services, Inc. are not lower than such ratings as of the date
hereof.
(c) In the event that SBI or any of its respective successors or
assigns (i) consolidate with or merge into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, the successors and assigns of such entity
shall assume the obligations set forth in this Section 4.13.
ARTICLE V
CONDITIONS TO CONSUMMATION
SECTION 5.1 Conditions to Closing. The respective obligations of the
---------------------
parties to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following conditions:
(a) The Agreement and the transactions contemplated hereby shall have
been approved by the requisite vote of the shareholders of Bank in accordance
with applicable law.
(b) All of the required approvals, consents or waivers of governmental
authorities with respect to this Agreement (including the Merger) and the
transactions contemplated hereby
D-35
<PAGE>
including, without limitation, the approvals, notices to, consents or waivers of
(i) the Board, and (ii) the Banking Department (together with the Bank
Regulatory Agencies and the SBI Regulatory Agencies, the "Regulatory Agencies")
shall have been obtained and shall remain in full force and effect, and all
applicable statutory waiting periods (including without limitation all
applicable statutory waiting periods relating to the Merger) shall have expired;
and the parties shall have procured all other regulatory approvals, consents or
waivers of governmental authorities that are necessary or appropriate to the
consummation of the transactions contemplated by this Agreement except those
approvals, consents or waivers, if any, for which failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect on SBI or Bank
(after giving effect to the transaction contemplated hereby); provided, however,
that no approval, consent or waiver referred to in this Section 5.1(b) shall be
deemed to have been received if it shall include any condition or requirement
that reasonably would result in a Material Adverse Effect on SBI.
(c) All other requirements prescribed by law which are necessary to
the consummation of the transactions contemplated by this Agreement shall have
been satisfied.
(d) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger, or any other transaction contemplated
by this Agreement, and no litigation or proceeding shall be pending against any
of the parties herein or any of their subsidiaries brought by any governmental
agency seeking to prevent consummation of the transactions contemplated hereby.
(e) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, restricts or makes illegal consummation of the
Merger, or any other transaction contemplated by this Agreement.
(f) The Merger shall as of the date of the Closing meet the
requirements for pooling-of-interests accounting treatment under generally
accepted accounting principles and under the accounting rules of the SEC, and
SBI shall have received a letter from Coopers & Lybrand L.L.P. in form and
substance reasonably satisfactory to SBI as to the matters specified in this
Section 5.1(f).
(g) The Registration Statement shall have been filed (the date of
which is referred to herein as the "Filing Date") by SBI with the SEC under the
Securities Act, and shall have been declared effective prior to the time the
Proxy Statement/Prospectus is first mailed to the shareholders of Bank, and no
stop order with respect to the effectiveness of the Registration Statement shall
have been issued; the SBI Common Stock to be issued pursuant to this Agreement
shall be duly registered or qualified under the securities or "blue sky" laws of
all states in which such action is required for purposes of the initial issuance
of such shares and the distribution thereof to the shareholders of Bank entitled
to receive such shares.
D-36
<PAGE>
(h) SBI and Bank shall have received a ruling from the IRS or an
opinion of Morgan, Lewis & Bockius LLP, counsel to SBI and Interim Bank, to the
effect that:
i. The Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code and Bank and SBI will each be a "party to
a reorganization" within the meaning of Section 368(b) of the Code;
ii. No gain or loss will be recognized by Bank or SBI by reason
of the Merger;
iii. Except for cash received in lieu of fractional shares, no
gain or loss will be recognized by the shareholders of Bank who receive solely
SBI Common Stock upon the exchange of their shares of Bank Common Stock for
shares of SBI Common Stock;
iv. The basis of the SBI Common Stock to be received by the Bank
shareholders will be, in each instance, the same as the basis of the Bank Common
Stock surrendered in exchange therefor;
v. The holding period of the SBI Common Stock received by a Bank
shareholder receiving SBI Common Stock will include the period during which the
Bank Common Stock surrendered in exchange therefor was held; and
vi. Cash received by a Bank shareholder in lieu of a fractional
share interest of SBI Common Stock will be treated as having been received as a
distribution in full payment in exchange for the fractional share interest of
SBI Common Stock which he would otherwise be entitled to receive and will
qualify as capital gain or loss.
In case a ruling from the IRS is sought, Bank and SBI shall
cooperate and each shall furnish to the other and to the IRS such information
and representations as shall, in the opinion of counsel for SBI and Bank, be
necessary or advisable to obtain such ruling.
(i) All litigation pending against Bank which, individually or in the
aggregate, would have a Material Adverse Effect on Bank's consolidated
operations, shall have been settled or otherwise resolved on terms satisfactory
to SBI and Bank.
(j) INTENTIONALLY OMITTED.
SECTION 5.2 Conditions to Obligations of SBI and Interim Bank. The
-------------------------------------------------
obligations of SBI and Interim Bank to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) Each of the representations and warranties of Bank contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date as if made on such
D-37
<PAGE>
date (or on the date when made in the case of any representation or warranty
which specifically relates to an earlier date); Bank shall have performed each
of its covenants and agreements, which are material to its operations and
prospects, contained in this Agreement; and SBI and Interim Bank shall have
received certificates signed by the Chief Executive Officer and the Controller
of the Bank, dated the Closing Date, to the foregoing effect.
(b) KMPG Peat Marwick LLP, or such other accounting firm as is
acceptable to the parties, shall have furnished to SBI an "agreed upon
procedures" letter, dated the Closing Date, in form and substance satisfactory
to SBI to the effect that, based upon a procedure performed with respect to the
financial condition of Bank for the period from December 31, 1997 to a specified
date not more than five (5) days prior to the date of such letter, including but
not limited to (a) their inspection of the minute books of Bank, (b) inquiries
made by them of officers and other employees of Bank and affiliates responsible
for financial and accounting matters as to transactions and events during the
period, as to consistency of accounting procedures with prior periods and as to
the existence and disclosure of any material contingent liabilities, and (c) of
other specified procedures and inquiries performed by them, nothing has come to
their attention that would indicate that (A) during the period from December 31,
1997 to a specified date not more than five (5) days prior to the date of such
letter, there was any change in the capitalization of Bank on a consolidated
basis, or (B) any material adjustments would be required to the audited
financial statements for the period ended December 31, 1997 in order for them to
be in conformity with generally accepted accounting principles applied on a
consistent basis with that of prior periods.
(c) SBI shall have received an opinion or opinions dated as of the
Closing Date, from Saul, Ewing, Remick & Saul LLP, counsel to Bank,
substantially in the form attached hereto as Exhibit 5.2(c).
(d) There shall not have occurred any change in the financial
condition, properties, assets, liabilities (including contingent liabilities),
business or results of operation of Bank which, individually or in the
aggregate, has had or might reasonably be expected to result in a Material
Adverse Effect on Bank other than such changes resulting from (i) changes in
banking laws or regulations, or (ii) changes in generally accepted accounting
principles, or interpretations thereof, that affect the banking or thrift
industries.
(e) SBI shall have received from each of the persons identified by
Bank pursuant to Section 4.2 hereof an executed counterpart of an affiliate's
agreement in the form contemplated by such Section.
(f) Except as otherwise provided in this Agreement, prior to Closing
all issued and outstanding options, warrants or rights to acquire Bank Common
Stock or any capital stock of Bank shall have been exercised or cancelled. No
compensation or other rights will be payable or exchangeable in the Merger in
respect of any such rights which remain unexercised at the Effective Time.
D-38
<PAGE>
(g) Concomitant with the signing of this Agreement, each of the
directors of Bank and National Penn shall have executed in favor of, and
delivered to, SBI a Voting Agreement, substantially in the form attached hereto
as Exhibit 5.2(g). Furthermore, concomitant with the signing of this Agreement,
the parties to the Warrant Substitution Agreement shall have executed such
agreement substantially in the form attached hereto as Exhibit 1.6
SECTION 5.3 Conditions to the Obligations of Bank. The obligations
-------------------------------------
of Bank to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following additional conditions:
(a) Each of the representations, warranties and covenants of SBI
contained in this Agreement shall be true and correct in all material respects
on the Closing Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically relates to an earlier
date); SBI shall have performed each of its covenants and agreements, which are
material to its operations and prospects, contained in this Agreement; and Bank
shall have received certificates signed by the President or Vice President and
Secretary of SBI, dated the Closing Date, to the foregoing effect.
(b) Bank shall have received an opinion dated as of the Closing Date,
from Morgan, Lewis & Bockius LLP, Harrisburg, Pennsylvania, counsel to SBI and
Interim Bank, substantially in the form attached hereto as Exhibit 5.3(b).
(c) There shall not have occurred any change in the financial
condition, properties, assets, liabilities (including contingent liabilities),
business or results of operation of SBI which, individually or in the aggregate,
has had or might reasonably be expected to result in a Material Adverse Effect
on SBI other than such changes resulting from (i) change in banking laws or
regulations or (ii) changes in generally accepted accounting principles, or
interpretations thereof, that affect the banking or thrift industries.
(d) Bank shall have received an updated opinion from Danielson
Associates, Inc. of Rockville, Maryland, dated as of a date no later than the
date of the Proxy Statement/Prospectus mailed to the Bank shareholders in
connection with the Merger and not subsequently withdrawn, to the effect that
the Merger Consideration is fair to Bank's shareholders from a financial point
of view.
(e) The shares of SBI Common Stock to be issued in the Merger shall
have been authorized to be listed for quotation on the NASDAQ National Market
System.
(f) No transaction or event involving SBI or any subsidiary of SBI
shall have occurred or be pending which would result in a change in the nature
of the securities as the same are described in SBI Articles of Incorporation as
in effect on the date of this Agreement or in the issuer of the securities to be
issued in the Merger to holders of Bank Common Stock or which would result in
SBI's ceasing to own any Material Subsidiary.
D-39
<PAGE>
ARTICLE VI
TERMINATION
SECTION 6.1 Termination. This Agreement may be terminated, and the
-----------
Merger abandoned, prior to the Effective Date, either before or after its
approval by the shareholders of Bank:
(a) by the mutual, written consent of Bank and SBI if the board of
directors of each so determines by a vote of a majority of the members of the
entire board;
(b) by Bank if (i) by written notice to SBI that there has been a
material breach by SBI of any representation, warranty, covenant or agreement
contained herein and such breach is not cured or not curable within thirty (30)
days after written notice of such breach is given to SBI by Bank, (ii) by
written notice to SBI that any condition precedent to Bank's obligations as set
forth in Article V of this Agreement has not been met or waived by Bank at such
time as such condition can no longer be satisfied, (iii) the board of directors
of Bank fails to make, withdraws or modifies or changes the favorable
recommendation described at Section 4.2, or (iv) the board of directors of Bank
recommends to the stockholders of Bank that an Acquisition Proposal is likely to
be more favorable, from a financial point of view, to the stockholders of Bank
than the Merger;
(c) by SBI by written notice to the other parties, in the event (i) of
a material breach by Bank of any representation, warranty, covenant or agreement
contained herein and such breach is not cured or not curable within thirty (30)
days after written notice of such breach is given to Bank by SBI or (ii) any
condition precedent to SBI's obligations as set forth in Article V of this
Agreement has not been met or waived by SBI at such time as such condition can
no longer be satisfied.
(d) by SBI or Bank by written notice to the other, in the event that
the Merger is not consummated by March 31, 1999, unless the failure to so
consummate by such time is due to the breach of any representation, warranty or
covenant contained in this Agreement by the party seeking to terminate;
provided, however, that such date may be extended by the written agreement of
the parties hereto.
(e) by Bank, whether before or after approval of the Merger by Bank's
shareholders, by giving written notice of such election to Susquehanna within
one (1) business day following determination of the Average Closing Price per
share of SBI Common Stock before Closing if such Average Closing Price is
greater than $42.00 per share (subject to adjustment in accordance with Section
1.2 herein) at the time such calculation is required to be made pursuant to
Schedule 1.2 hereof.
(f) by Susquehanna, whether before or after approval of the Merger by
Bank's shareholders, by giving written notice of such election to Bank within
one (1) business day following determination of the Average Closing Price per
share of SBI Common Stock before Closing if such
D-40
<PAGE>
Average Closing Price is less than $32.00 per share (subject to adjustment in
accordance with Section 1.2 herein) at the time such calculation is required to
be made pursuant to Schedule 1.2 hereof.
SECTION 6.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement, as provided above, this Agreement shall thereafter become
void and have no effect, except that the provisions of Sections 3.1(p) and
3.2(n) (Fees), 4.4 (relating to confidentiality and return of documents), 4.8
(Publicity) and 6.3 and 7.7 (Expenses) of this Agreement shall survive any such
termination and abandonment.
SECTION 6.3 Expenses. Any termination of this Agreement pursuant to
--------
Section 6.1(a), 6.1(d), 6.1(e) or 6.1(f) hereof shall be without cost, expense
or liability on the part of any party to the others. Any termination of this
Agreement pursuant to clause (iii) of Section 6.1(b) shall be without cost,
expense or liability on the part of Bank to any other party, if the board of
directors of Bank failed to make, withdrew, modified or changed its favorable
recommendation described in Section 4.2 as a result of a material adverse change
in SBI's financial condition, properties, assets, liabilities (including
contingent liabilities), business or results of operations, or failed to make
such favorable recommendation due to its financial advisor's failure to update
its fairness opinion as contemplated by Section 4.2. Any termination of this
Agreement pursuant to Section 6.1(b)(i) or (ii) or 6.1(c) hereof shall also be
without cost, liability or expense on the part of any party to the others,
unless the breach of a representation or warranty or covenant is caused by the
willful conduct or gross negligence of a party, in which event said party shall
be liable to the other parties for all out-of-pocket costs and expenses,
including without limitation, reasonable legal, accounting and investment
banking fees and expenses, incurred by such other party in connection with their
entering into this Agreement and their carrying out of any and all acts
contemplated hereunder ("Expenses").
If this Agreement is terminated by the Bank, because the board of
directors of the Bank: (a) failed to make, withdrew, modified or changed its
favorable recommendation to the Bank shareholders to approve this Agreement and
the transactions contemplated thereby or (b) recommends to the Bank shareholders
that an Acquisition Proposal is more favorable, from a financial point of view,
to the Bank Shareholders than the Merger, then the Bank shall promptly, but in
no event later than two (2) business days after such termination, pay SBI a fee
of $500,000 which amount shall be payable by wire transfer of same day funds.
If Bank fails to promptly pay the amount due pursuant to this Section 6.3, and,
in order to obtain such payment, SBI commences a suit which results in a
judgment against Bank for all or a substantial portion of the fee set forth in
this Section 6.3, Bank shall pay to SBI all costs and expenses (including
reasonable attorneys' fees) incurred by SBI in connection with such suit.
D-41
<PAGE>
ARTICLE VII
OTHER MATTERS
SECTION 7.1 Certain Defined Terms. As used in the Agreement, the
---------------------
following terms shall have the meanings indicated:
"Acquisition Proposal" shall be defined as at Section 4.1.
"Articles of Merger" shall be defined as at Section 1.1(c).
"Average Closing Price" means the average closing price per share of
SBI Common Stock as determined in conformity with Schedule 1.2 and as defined
therein.
"Bank" or "Surviving Bank" is First Capitol Bank, a Pennsylvania state
chartered bank, and shall be defined as at Section 1.1(a).
"Bank Common Stock" shall be defined as at Section 1.2(a).
"Bank Warrants" and "Bank Warrants Plans" shall be defined as
identified on Annex 3.1(b) and Annex 3.1(m).
"Bank Regulatory Agencies" shall be defined as at Section 3.1(f)(ii).
"Bank Reports" shall be defined as at Section 3.1(nn).
"Bank Subsidiaries" shall be defined as at Section 3.2(d).
"Banking Code" is the Pennsylvania Banking Code of 1965, as amended
and defined as at Section 1.1(a).
"Banking Department" is the Pennsylvania Department of Banking and
defined as at Section 1.1(c).
"Board" is the Board of Governors of the Federal Reserve System and
shall be defined as at Section 3.1(f)(ii).
"COBRA" is the Consolidated Omnibus Budget Reconciliation Act of 1985
and shall be defined as at Section 3.1(m)(xiii).
"Closing" shall be defined as at Section 1.1(b).
"Code" is Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended.
D-42
<PAGE>
"Continued Employee" shall be defined as at Section 4.3(b).
"corporate affiliate" shall mean, with respect to a person, any other
corporation controlling, controlled by, or under common control with, such
person.
"Department of State" is the Pennsylvania Department of State and
shall be defined as at Section 1.1(c).
"Dissenters' Rights" shall be defined as at Section 1.4.
"Dissenters' Shares" shall be defined as at Section 1.2(a).
"Dissenting Shareholder" shall be defined as at Section 1.2(a).
"ERISA" is the Employee Retirement Income Security Act and defined as
at Section 3.1(m)(i).
"ERISA Affiliate" shall be defined as at Section 3.1(m)(ii).
"Effective Date" is the day in which the Effective Time for the Merger
occurs and shall be defined as at Section 1.1(c).
"Effective Time" is at 12:01 a.m. on the business day of the Closing
and defined as at Section 1.1(c).
"Employee 401(k) Plan" shall be defined as at Section 4.3(c).
"Environmental Condition" shall be defined as at Section 3(q)(J).
"Environmental Laws" shall be defined as at Section 3.1(q)(M)(ii).
"Environmental Permits" shall be defined as at Section 3(q)(B) and
identified on Annex 3.1(q)B.
"Exchange Act" is the Securities Exchange Act of 1934 and defined as
at Section 3.1(t).
"Exchange Ratio" shall be described on Schedule 1.2 hereof.
"FDIC" is the Federal Deposit Insurance Corporation and shall be
defined as at Section 3.1(f)(ii).
"Filing Date" shall be defined as at Section 5.1(g).
D-43
<PAGE>
"Hazardous Material" shall be defined as at Section 3(q)(M)(ii).
"IRS" is the Internal Revenue Service and shall be defined as at
Section 3.1(m)(vii).
"Interim Bank" shall be Susquehanna Interim Bank, a Pennsylvania state
chartered bank.
"Loan Properties" shall be defined as at Section 3.1(q)(ii) and
identified on Annex 3.1(q).
"material" means material to the party in question (as the case may
be) and its respective subsidiaries, taken as a whole.
"Material Adverse Effect," with respect to a person, means any
condition, event, change or occurrence that has or results in a material adverse
effect upon (A) the financial condition, properties, assets, liabilities
(including contingent liabilities), business or results of operations of such
person and its subsidiaries and corporate affiliates, taken as a whole, or (B)
the ability of such person to perform its obligations under, and to consummate
the transactions contemplated by, this Agreement. In the case of Bank, receipt
of a CAMELS rating in connection with a safety and soundness examination which
is lower than the rating given to Bank in connection with the safety and
soundness examination most recently reported prior to the date of this Agreement
shall be deemed to have a "Material Adverse Effect" on Bank.
"Material Subsidiaries" shall be defined as at Section 3.2(d).
"Merger" shall be the acquisition by Susquehanna Bancshares, Inc. of
First Capitol Bank by means of a merger of Susquehanna Interim Bank with and
into First Capitol Bank.
"Merger Consideration" shall be determined on the basis of the
Exchange Ratio set forth at Schedule 1.2 hereof, and shall be defined as at
Section 1.2(a).
"OCC" is the Office of the Comptroller of the Currency and defined as
at Section 3.2(k).
"OREO" is other real estate owned and shall be defined as at Section
3.1(q)(A).
"OTS" is the Office of Thrift Supervision and shall be defined as at
Section 3.2(d).
"Old Certificates" shall be defined as at Section 1.3(a).
"PBCL" is the Pennsylvania Business Corporation Law of 1988, as
amended.
D-44
<PAGE>
"Participation Facilities" shall be defined as at Section 3.1(q)(ii)
and identified on Annex 3.1(q).
"Pension Plan" is an employee benefit plan subject to Title IV of
ERISA and shall be defined as at Section 3.1(m)(ii).
"person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
"Plan" or "Agreement" shall be this Agreement and Plan of Affiliation
dated as of the 15th day of April, 1998 by and among Susquehanna Bancshares,
Inc., Susquehanna Interim Bank and First Capitol Bank.
"Properties" shall be defined as at Section 3.1(q)(i)(K).
"Qualified Plan" shall be defined as at Section 3.1(m)(vi).
"Registration Statement" shall be defined as at Section 4.2.
"Regulatory Agencies" shall be defined as at Section 5.1(b).
"SBI" shall be Susquehanna Bancshares, Inc., a Pennsylvania
corporation and a multi-state, multi-institutional bank holding company.
"SBI Benefit Plans" shall be defined as at Section 3.2(j).
"SBI Common Stock" shall be defined as at Section 1.2(a).
"SBI Plans" shall be defined as at Section 4.3(b).
"SBI Regulatory Agencies" shall be defined as at Section 3.2(k).
"SEC" is the Securities and Exchange Commission and shall be defined
as at Section 3.1(i)(A).
"Savings Bank Subsidiary" shall be defined as at Section 3.2(d).
"Securities Act" is the Securities Act of 1933, as amended, and shall
be defined as at Section 1.3(e).
"subsidiary" with respect to a person, means any other person
controlled by such person.
D-45
<PAGE>
"Unclaimed Shares" shall be defined as at Section 1.3(e).
When a reference is made in this Agreement to Exhibits, Sections, Annexes or
Schedules, such reference shall be to a Section of, or Exhibit, Annex or
Schedule to, this Agreement unless otherwise indicated. The table of contents,
tie sheet and headings contained in this Agreement are for ease of reference
only and shall not affect the meaning or interpretation of this Agreement.
Whenever the words "include," "includes," or "including" are used in this
Agreement, they shall be deemed followed by the words "without limitation." Any
singular term in this Agreement shall be deemed to include the plural and any
plural term the singular.
SECTION 7.2 Survival. The representations, warranties and agreements
--------
of the parties set forth in this Agreement shall not survive the Effective Time,
and shall be terminated and extinguished at the Effective Time, and from and
after the Effective Time none of the parties hereto shall have any liability to
the other on account of any breach or failure of any of those representations,
warranties and agreement; provided, however, that the foregoing clause shall not
(i) apply to agreements of the parties which by their terms are intended to be
performed either in whole or in part after the Effective Time, and (ii) shall
not relieve any person of liability for fraud, deception or intentional
misrepresentation.
SECTION 7.3 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and their respective
successors and assigns, and, other than the right to receive the consideration
payable in the Merger pursuant to Article I hereof, is not intended to and shall
not confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
SECTION 7.4 Waiver and Amendment. Prior to the Effective Time, any
--------------------
provision of this Agreement may be: (i) waived by the party benefitted by the
provision; or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties hereto approved
by their respective boards of directors, except that no amendment or waiver may
be made that would change the form or the amount of the Merger Consideration or
otherwise have the effect of prejudicing the Bank shareholders' interest in the
Merger Consideration following the Bank Shareholders' Meeting.
SECTION 7.5 Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
SECTION 7.6 Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the Commonwealth of Pennsylvania,
or, to the extent it may control, federal law, without reference to the choice
of law principles thereof.
SECTION 7.7 Expenses. Subject to the provisions of Section 6.3
--------
hereof, each party hereto will bear all expenses incurred by it in connection
with this Agreement and the transactions
D-46
<PAGE>
contemplated hereby; provided, however, that all filing and other fees (other
than federal and state income taxes) required to be paid to any governmental
agency or authority in connection with the consummation of the transactions
contemplated hereby shall be paid by SBI.
SECTION 7.8 Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to Bank, to:
First Capitol Bank
2951 Whiteford Road
York, PA 17402
Attention: Owen O. Freeman, Jr., Chairman
With copies to:
Saul, Ewing, Remick & Saul LLP
Penn National Insurance Tower
2 North Second Street, 7th Floor
Harrisburg, PA 17101
Attention: John B. Lampi, Esquire
If to SBI, to:
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger, President and Chief Executive
Officer
With copies to:
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Attention: Charles L. O'Brien, Esquire
D-47
<PAGE>
If to Interim Bank, to:
Susquehanna Interim Bank
c/o Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, PA 17543
Attention: Robert S. Bolinger, President and Chief Executive
Officer
With copies to:
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Attention: Charles L. O'Brien, Esquire
SECTION 7.9 Entire Agreement; Etc. This Agreement, together with
---------------------
such other agreements as are executed by the parties in connection herewith, on
the date hereof, represent the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and thereby and supersede any
and all other oral or written agreements heretofore made. All terms and
provisions of this Agreement, together with such other agreements as are
executed by the parties in connection herewith, on the date hereof, and thereof,
shall be binding upon and shall inure to the benefit of the parties hereto and
thereto and their respective successors and assigns. Nothing in this Agreement
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement except as expressly provided.
SECTION 7.10 Intentionally Omitted Sections. The term "Intentionally
------------------------------
Omitted" appearing after certain sections of this Agreement has been used for
convenience only, and does not in any way limit or alter the provisions hereof.
D-48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
-----------------------------------------
Title: Robert S. Bolinger, President
SUSQUEHANNA INTERIM BANK
By: /s/ Robert S. Bolinger
-----------------------------------------
Title: Robert S. Bolinger, President
FIRST CAPITOL BANK
By: /s/ Owen O. Freeman
-----------------------------------------
Title: Owen O. Freeman, Jr., Chairman
D-49
<PAGE>
SCHEDULE 1.2
Exchange Provisions
-------------------
So long as the Average Price Per Share of SBI Common Stock Before
Closing is at or between $32.00 and $42.00, then 1.352 shares of SBI Common
Stock shall be exchanged for each of the outstanding shares of Bank Common Stock
and the Exchange Ratio shall equal 1.352.
The Average Price Per Share of SBI Common Stock Before Closing shall
be determined by adding the price at which SBI Common Stock is reported to have
closed by NASDAQ's NMS (or if SBI Common Stock is not quoted on NASDAQ's NMS
then as reported by a recognized source as to the principal trading market on
which such shares are traded) over the period of ten business days ending on the
second business day preceding the date set for Closing, pursuant to Section 1.1
(b) hereof, and dividing such total by 10 (such Average Price Per Share Before
Closing is also referred to as the "Average Closing Price").
If the Average Closing Price is greater than $42.00, then 28,729,000
divided by the Average Closing Price shall be the total number of shares of SBI
Common Stock to be exchanged for all of the outstanding Bank Common Stock, and
the Exchange Ratio shall equal the total number of shares of SBI Common Stock to
be exchanged for all of the outstanding Bank Common Stock divided by the total
number of shares of Bank Common Stock outstanding on the Effective Date.
If the Average Closing Price is less than $32.00, then 21,889,000
divided by the Average Closing Price shall equal the total number of shares of
SBI Common Stock to be exchanged for all of the outstanding Bank Common Stock,
and the Exchange Ratio shall equal the total number of shares of SBI Common
Stock to be exchanged for all of the outstanding Bank Common Stock divided by
the total number of shares of Bank Common Stock outstanding on the Effective
Date.
Notwithstanding the foregoing, Bank shall have the right to terminate
this Agreement, in accordance with Section 6.1 (e), if the Average Closing Price
is greater than $42.00, and SBI shall have the right to terminate this
Agreement, in accordance with Section 6.1(f), if the Average Closing Price is
less than $32.00.
The Exchange Ratio in all instances set forth herein is subject to
adjustment in accordance with Section 1.2(c).
D-50
<PAGE>
APPENDIX E
OPINION OF GARLAND MCPHERSON & ASSOCIATES, INC.
<PAGE>
Appendix E
FORM OF FAIRNESS OPINION
______________, 1998
Board of Directors
Cardinal Bancorp, Inc.
140 East Main Street
Everett, PA 15537
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Cardinal Bancorp, Inc. ("Cardinal") of the
Agreement and Plan of Affiliation (the "Agreement") dated April 13, 1998
pursuant to which Cardinal will combine with Susquehanna by means of the merger
("Merger") of Cardinal with and into Susquehanna Bancshares, Inc.
("Susquehanna"). The Exchange Provisions are defined in Schedule 1.2 of the
Agreement.
Garland McPherson & Associates, Inc., as part of its investment banking and bank
consulting business, is engaged in the valuation of financial institution
securities for a variety of purposes, including mergers and acquisitions, and
the determination of adequate consideration in merger and acquisition
transactions.
For purposes of this opinion, we reviewed and analyzed information pertaining to
the financial and operating condition of Cardinal and Susquehanna. This review
included, but was not limited to: (i) the Agreement and Plan of Affiliation;
(ii) financial and other information which was publicly available or provided to
us by Cardinal and Susquehanna; (iii) certain financial information relating to
the banking industry in general; (iv) the respective history of dividends paid
by the two institutions; (v) our evaluation of future prospects for the merged
institution; (vi) terms and conditions of comparable merger transactions and
(vii) such other financial reviews, analyses and investigations as we deemed
appropriate.
In rendering our opinion, we conducted discussions with members of senior
management of Cardinal and Susquehanna concerning their respective businesses
and prospects and have relied on the accuracy and completeness of the
information and representations delivered to us by Cardinal and Susquehanna and
their officers, directors, counsel, and other agents. We have not independently
verified the information reviewed by us (either publicly available or provided
to us by Cardinal and Susquehanna) and, in rendering this opinion, have relied
upon such information as being complete and accurate in all material respects.
We have assumed that the allowances for loan losses and other contingencies
indicated on the balance sheets of Cardinal and Susquehanna as of December 31,
1997 are adequate to cover such losses. We have not reviewed the loan files of
Cardinal or Susquehanna, nor did we make an independent valuation or appraisal
of the assets and liabilities of Cardinal and Susquehanna.
We assume that in the course of obtaining the necessary regulatory approvals for
the Merger, no restrictions will be imposed on Susquehanna that would have a
material adverse effect on the contemplated benefits of the Merger to Cardinal.
We further assume that no change will occur in applicable law or regulation that
will cause a material adverse change in the prospects or operations of
Susquehanna after the Merger. We express no opinion as to the tax consequences
of the Merger to Cardinal and its shareholders.
Our conclusion is based on the market, economic and other conditions prevailing
as of the date hereof and the current conditions and prospects of Cardinal and
Susquehanna. Events occurring subsequent to this date could materially affect
E-1
<PAGE>
Board of Directors
_______________, 1998
Page 2
the assumptions and conclusions contained in our opinion. We express no opinion
as to what the value of Susquehanna common stock will be at the time the Merger
is consummated, nor do we express an opinion regarding the relative merits of
the Merger as compared to alternative business strategies or other business
combinations in which Cardinal might engage. Our opinion pertains only to the
financial consideration of the Merger and does not constitute a recommendation
to the Board of Cardinal nor a recommendation as to how Cardinal shareholders
should vote with regard to the Merger.
Based upon and subject to the foregoing, it is our opinion as of the date
hereof, that the Exchange Provisions and the merger consideration to be received
by the Cardinal shareholders pursuant to the Agreement are fair, from a
financial point of view, to the shareholders of Cardinal Bancorp, Inc.
Sincerely,
Garland McPherson & Associates, Inc.
E-2
<PAGE>
APPENDIX F
OPINION OF DANIELSON ASSOCIATES, INC.
<PAGE>
Appendix F
FORM OF FAIRNESS OPINION
__________________, 1998
Board of Directors
First Capitol Bank
2951 Whiteford Road
York, Pennsylvania 17402
Dear Members of the Board:
Set forth herein is the updated opinion of Danielson Associates Inc. ("Danielson
Associates") as to the "fairness" of the offer by Susquehanna Bancshares, Inc.
("Susquehanna") of Lititz, Pennsylvania to acquire all of the common stock and
options and warrants to buy common stock of First Capitol Bank ("First Capitol")
of York, Pennsylvania. The "fair" sale value is defined as the price at which
all of the shares of First Capitol's common stock would change hands between a
willing seller and a willing buyer, each having a reasonable knowledge of the
relevant facts. In opining as to the "fairness" of the offer, it also must be
determined if the Susquehanna common stock that is to be exchanged for First
Capitol stock is "fairly" valued.
In preparing the original opinion, First Capitol's market was analyzed and its
business and prospects were reviewed. We also conducted such other financial
analyses as we deemed appropriate such as comparable company analyses,
comparable transactions and pro forma dilution. Any unique characteristics also
were considered.
This opinion was based partly on data supplied to Danielson Associates by First
Capitol, but it relied on some public information all of which was believed to
be reliable, but neither the completeness nor accuracy of such information could
be guaranteed. In particular, the opinion assumed, based on its management's
representation, that there were no significant asset quality problems beyond
what was stated in recent reports to regulatory agencies and in the monthly
report to the directors.
In determining the "fair" sale value of First Capitol, the primary emphasis was
on prices paid relative to earnings for Pennsylvania and Northeast banks that
had similar financial, structural and market characteristics. These prices were
then related to assets and equity capital, also referred to as "book."
The "fair" market value of Susquehanna's common stock to be exchanged for First
Capitol stock was determined by a comparison with other similar bank holding
companies and included no in person due diligence of Susquehanna. This
comparison showed Susquehanna stock to be valued consistent with the comparable
banks.
In the original opinion, based on the analysis of First Capitol's recent
performance and its future potential, comparisons with similar transactions and
unique characteristics, it was determined that its "fair" sale value was between
$18.9 and $20.5 million, or $37.84 to $41.14 per share. Thus, Susquehanna's
offer of $25.2 million, or $50.57 per share, was a "fair" offer from a financial
point of view for First Capitol and its shareholders.
There has been no subsequent change in Susquehanna's performance and its stock
is trading within 5% of where it was at the time of the offer. Since the value
of the offer has not changed significantly and there has been no subsequent
negative change to Susquehanna, this offer is still "fair" from a financial
point of view to First Capitol and its shareholders.
Respectfully submitted,
Arnold G. Danielson
Chairman
Danielson Associates Inc.
F-1
<PAGE>
APPENDIX G
DISSENTERS' RIGHTS PROVISIONS
<PAGE>
Appendix G
PROVISIONS OF
PENNSYLVANIA BUSINESS CORPORATION LAW RELATING TO
DISSENTERS' RIGHTS OF SHAREHOLDERS
----------------------------------
15 Pa. C.S.A. Sections 1571 through 1580, inclusive.
(S)1571. Application and effect of subchapter
(a) General rule.-Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedures).
(b) Exceptions.-
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting
at which a plan specified in any of section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
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(i) Shares converted by a plan if the shares are not
converted solely into shares of the acquiring, surviving, new or
other corporation or solely into such shares and money in lieu of
fractional shares.
(ii) Shares of any preferred or special class unless
the articles, the plan or the terms of the transaction entitle all
shareholders of the class to vote thereon and require for the
adoption of the plan or the effectuation of the transaction the
affirmative vote of a majority of the votes cast by all shareholders
of the class.
(iii) Shares entitled to dissenters rights under section
1906(c) (relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase,
lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of
shares, obligations or otherwise, with or without assuming the liabilities
of the other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more of
the directors of the corporation.
(c) Grant of optional dissenters rights.-The bylaws or a resolution of
the board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights.-Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.-The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.-This subchapter may not
be relaxed by any provision of the articles.
(g) Cross references.-See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S)1572. Definitions
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
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"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects, taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans.
(S) 1573. Record and beneficial holders and owners
(a) Record holders of shares.-A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that
event, his rights shall be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
(b) Beneficial owners of shares.-A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
(S) 1574. Notice of intention to dissent
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed
corporate action shall constitute the written notice required by this section.
(S) 1575. Notice to demand payment
(a) General rule.-If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action
is to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer
of shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
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(b) Time for receipt of demand for payment.-The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.-A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.-If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.-The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
(S) 1577. Release of restrictions or payment for shares
(a) Failure to effectuate corporate action.-Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice of demand payment.-When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.-Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer
of the shares held or owned by the dissenter for a fiscal year ending not
more than 16 months before the date of remittance or notice together with
the latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of
the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.-If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had after
making demand for payment of their fair value.
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(S) 1578. Estimate by dissenter of fair value of shares
(a) General rule.-If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect or failure to file estimate.-Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
(S) 1579. Valuation proceedings generally
(a) General rule.-Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters.-All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international
procedure)./1/
(c) Jurisdiction of the court.-The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.-Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.-If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
(S) 1580. Costs and expenses of valuation proceedings
(a) General rule.-The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are
- ----------------------------------
/1/ 42 Pa.C.S.A. (S) 5301 et. seq.
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parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.-Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided in this subchapter.
(c) Award of fees for benefits to other dissenters.-If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
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APPENDIX H
CARDINAL STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
----------------------
STOCK OPTION AGREEMENT, dated as of April 13, 1998 (the "Agreement"), among
Susquehanna Bancshares, Inc., a Pennsylvania corporation ("SBI"), Susquehanna
Bancshares West, Inc., a Pennsylvania corporation and a wholly-owned subsidiary
of SBI ("SBI Merger Sub"), and Cardinal Bancorp, Inc., a Pennsylvania
corporation ("Cardinal").
WHEREAS, SBI, SBI Merger Sub, Cardinal and First American National Bank of
Pennsylvania, a national banking association and wholly-owned subsidiary of
Cardinal ("FANBP"), propose to enter into an Agreement and Plan of Affiliation
dated the date hereof (the "Merger Agreement"), which provides, among other
things, that upon the terms and subject to the conditions thereof, SBI will
acquire all of the outstanding shares of common stock of Cardinal (the "Cardinal
Common Stock"), Cardinal will be merged with SBI Merger Sub pursuant to the
merger contemplated in the Merger Agreement (the "Merger") and, thereafter,
FANBP will be a second tier subsidiary of SBI; and
WHEREAS, as a condition to the willingness of SBI and SBI Merger Sub to
enter into the Merger Agreement, SBI and SBI Merger Sub have requested that
Cardinal agree and, in order to induce SBI and SBI Merger Sub to enter into the
Merger Agreement, Cardinal has agreed to grant SBI an option to purchase up to
that number of shares of Cardinal Common Stock as shall equal 15% of Cardinal's
shares of common stock issued and outstanding immediately prior to the purchase,
all in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Grant of Stock Option. Subject to the terms set forth herein,
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Cardinal hereby grants to SBI an irrevocable option (the "Option") to purchase
up to that number of shares of Cardinal Common Stock as shall equal 15% of
Cardinal's shares of common stock outstanding immediately prior to the purchase,
at a purchase price that is the average price per share of Cardinal Common Stock
during the five (5) trading days immediately preceding the date of execution of
the Merger Agreement. For purposes of the 15% calculation all shares of
Cardinal Common Stock beneficially held by SBI, as that term is defined under
Rule 13d-3 under the Exchange Act, on the date of purchase shall be deducted
from Cardinal's shares outstanding.
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2. Exercise of Option.
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(a) Subject to the conditions set forth in paragraph 3 hereof, the
Option may be exercised by SBI, in whole or in part, at any time or from
time to time after the date hereof and prior to the earlier to occur of (a)
the Effective Time of the Merger or (b) upon a Purchase Event (as defined
below), the date six months following such Purchase Event, provided that if
an Exercise Notice (as hereinafter defined) had been given on or before the
expiration of such six-month period and if the Option cannot be exercised
on such day because of any injunction, order or similar restraint issued by
a court of competent jurisdiction, the Option shall expire on the tenth
business day after such injunction, order or restraint shall have been
dismissed, been withdrawn or become permanent and no longer subject to
appeal, as the case may be (the "Termination Date"). In the event SBI
wishes to exercise the Option, SBI shall send a written notice (an
"Exercise Notice") to Cardinal specifying the total number of shares of
Cardinal Common Stock it wishes to purchase. Each closing of a purchase of
Option Shares (a "Stock Option Closing") shall take place at the executive
offices of Cardinal at the address referred to in Section 12(d) hereof, on
a date and at a time designated by SBI in its Exercise Notice (which date
and time may be as early as one day after the Exercise Notice or earlier if
reasonably practicable).
(b) As used in this Agreement, a "Purchase Event" shall mean any of
the following events:
(1) any person (other than SBI or any subsidiary of SBI) shall
have commenced (as such term is defined in Rule 14d-2 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), a
tender offer or exchange offer to purchase Cardinal Common Stock such
that, upon consummation of such offer, such person could own or
control ten percent (10%) or more of the outstanding Cardinal Common
Stock;
(2) Cardinal shall have authorized, recommended, proposed or
announced an intention to authorize, recommend or propose, or entered
into, an agreement with any person (other than SBI or any subsidiary
of SBI) to (A) merge or consolidate with Cardinal or enter into any
similar transaction with such person, (B) sell, lease or otherwise
dispose of all or substantially all of the assets of Cardinal to such
person, or (C) sell or otherwise dispose of (including by way of
merger, consolidation, share exchange or similar transaction)
securities representing ten percent (10%) or more of the voting power
of Cardinal, and as to (A), (B) and (C), the same shall have been
scheduled by Cardinal to close within 365 calendar days following the
date of termination of the Merger Agreement; or
(3) any person (other than SBI or any subsidiary of SBI) shall
have acquired beneficial ownership (as such term is defined in Rule
13d-3 under the
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Exchange Act) or the right to acquire beneficial ownership of, or a
new group has been formed which beneficially owns, ten percent (10%)
or more of the outstanding Cardinal Common Stock.
As used in this Agreement, "person" shall have the meanings specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
3. Stock Option Closings. At each Stock Option Closing, Cardinal will
---------------------
deliver to SBI a certificate or certificates representing the number of Option
Shares being purchased upon exercise of the Option in the denominations
designated by SBI in its Exercise Notice up to that number of shares authorized
pursuant to Section 1, hereof, and SBI will purchase such Option Shares from
Cardinal at the Purchase Price per share. Any payment made by SBI to Cardinal
pursuant to this Section 3 shall be paid in New York Clearing House funds by
wire transfer or certified or official bank check or checks payable to the order
of Cardinal in an amount equal to the aggregate Purchase Price of the Option
Shares purchased at the Stock Option Closing.
4. Option Share Appreciation Right. If a Purchase Event shall occur at
-------------------------------
any time prior to the expiration of the Stock Option, at SBI's request Cardinal
shall promptly pay to SBI in New York Clearing House funds by wire transfer or
certified or official bank check payable to the order of SBI an amount equal to
the product of (a) the excess, if any of (i) the greater of (A) the highest
price paid or proposed to be paid in connection with such Purchase Event for any
shares of Cardinal Common Stock and (B) the aggregate consideration paid or
proposed to be paid in connection with such Purchase Event divided by the number
of shares of Cardinal Common Stock then outstanding (the value of any
consideration other than cash to be determined, in the case of consideration
with a readily ascertainable market value, by reference to such market value
and, in the case of any consideration other than cash, by agreement in good
faith between SBI and Cardinal) over (ii) the Purchase Price, as adjusted
pursuant to Section 7, multiplied by (b) the total number of Option Shares as to
which the Option has not theretofore been exercised, as adjusted pursuant to
Section 7. Such payment shall extinguish all other rights of SBI under this
Agreement, but shall not affect the rights of SBI under the Merger Agreement or
otherwise.
5. Representations and Warranties of Cardinal. Cardinal hereby
------------------------------------------
represents and warrants to SBI and SBI Merger Sub as follows:
(a) Authority Relative to this Agreement. Cardinal has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Cardinal and no other corporate proceedings on the part of
Cardinal are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Cardinal and, assuming this Agreement has been
duly executed and
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delivered by SBI and SBI Merger Sub, this Agreement constitutes a valid and
binding agreement of Cardinal enforceable in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.
(b) Authority to Issue Shares. Cardinal has taken all necessary
-------------------------
corporate action to authorize and reserve and to permit it to issue, and at
all times from the date hereof through the Termination Date will have
reserved, all of the Option Shares issuable pursuant to this Agreement, all
of which, upon their issuance and delivery in accordance with the terms of
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests of any nature whatsoever and not
subject to any preemptive rights.
(c) No Conflict. The execution and delivery of this Agreement by
-----------
Cardinal do not, and the performance of this Agreement by Cardinal will
not, (i) require the consent, waiver, approval, license or authorization of
or any filing with any person or public authority, (ii) violate the
Articles of Incorporation or Bylaws or other organizational or governance
documents of Cardinal, (iii) with or without the giving of notice or the
lapse of time, or both, conflict with or result in a breach of any terms or
provisions of, or constitute a default or give rise to a right of
acceleration under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of Cardinal under, any
indenture, mortgage, agreement or other instrument to which Cardinal is a
party or by which any of its property is bound, or (iv) violate any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental instrumentality or court having jurisdiction over Cardinal or
any of its property.
6. Representations and Warranties of SBI. SBI hereby represents and
-------------------------------------
warrants to Cardinal as follows:
(a) SBI has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of SBI and no other corporate
proceedings on the part of SBI are necessary to authorize this Agreement or
to consummate the transactions so contemplated. This Agreement has been
duly and validly executed and delivered by SBI and, assuming this Agreement
has been duly executed and delivered by Cardinal, this Agreement
constitutes a valid and binding agreement of SBI enforceable in accordance
with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including
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specific performance, is subject to the discretion of the court before
which any proceeding therefor may be brought.
(b) No Conflict. The execution and delivery of this Agreement do
-----------
not, and the performance of this Agreement by SBI will not, (i) require the
consent, waiver, approval, license or authorization of or any filing with
any person or public authority, (ii) violate the articles of incorporation
or bylaws or other organizational or governance documents of SBI, (iii)
with or without the giving of notice or the lapse of time, or both,
conflict with or result in a breach of any terms or provisions of, or
constitute a default or give rise to a right of acceleration under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of SBI under, any indenture, mortgage,
agreement or other instrument to which SBI is a party or by which any of
their respective property is bound or (iv) violate any existing applicable
law, rule, regulation, judgment, order or decree of any governmental
instrumentality or court having jurisdiction over SBI or any of their
respective property.
(c) Investment Intent. SBI hereby represents and warrants to
-----------------
Cardinal that it will acquire the Option Shares for investment purposes
only and not with a view to any resale or distribution thereof, and will
not sell any Option Shares purchased pursuant to the Option except in
compliance with the Securities Act of 1933, as amended (the "Securities
Act").
7. Adjustment Upon Changes in Capitalization. In the event of any change
-----------------------------------------
in the number of issued and outstanding shares of Cardinal Common Stock by
reason of any stock dividend, split-up, merger, recapitalization, combination,
conversion, exchange of shares or the like, or any other change in the corporate
or capital structure of Cardinal which would have the effect of diluting SBI's
rights hereunder, the number and kind of Option Shares and the consideration
payable in respect of such Option Shares shall be appropriately adjusted to
restore to SBI its rights hereunder; provided, however, that nothing in this
-------- -------
Agreement shall be construed as permitting Cardinal to take any action or enter
into any transaction prohibited by the Merger Agreement.
8. Listing. If the Cardinal Common Stock is then listed on any stock
-------
exchanges, Cardinal, upon the request of SBI, will promptly file an application
to list the Cardinal Common Stock to be acquired upon exercise of the Option on
such stock exchanges and will use its best efforts to obtain approval of such
listing as soon as practicable.
9. Further Assurances. Cardinal, SBI and SBI Merger Sub will execute and
------------------
deliver all such further documents and instruments and take all such further
action as may be necessary in order to consummate the transactions contemplated
hereby.
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10. Specific Performance. The parties hereto acknowledge that damages
--------------------
would be an inadequate remedy for a breach of this Agreement and that the
obligations of the parties hereto shall be specifically enforceable.
11. Expenses. Except as otherwise explicitly stated herein and in the
--------
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
12. Miscellaneous.
-------------
(a) Entire Agreement. This Agreement and the Merger Agreement,
----------------
together with such other agreements as are executed by the parties in
connection therewith, constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, among the parties or
any of them with respect to the subject matter hereof.
(b) Assignment. Except that SBI shall be permitted to assign this
----------
Agreement to any subsidiary of SBI, this Agreement shall not be assigned by
operation of law or otherwise.
(c) Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any
other provisions of this Agreement, which shall remain in full force and
effect.
(d) Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram or telex, or by registered or
certified mail (postage prepaid, return receipt requested) to the
respective parties at their addresses as specified in the Merger Agreement.
(e) Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of the
Commonwealth of Pennsylvania, applicable to contracts made and to be
performed in that state.
(f) Descriptive Headings; Definitions. The descriptive headings
---------------------------------
herein are inserted for convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement.
All capitalized terms used herein but not defined herein shall have the
meaning ascribed to them in the Merger Agreement.
(g) Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this
Agreement.
H-6
<PAGE>
(h) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officer thereunto duly authorized, all as of the
day and year first above written.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
-----------------------------------
Name: Robert S. Bolinger
Title: President
SUSQUEHANNA BANCSHARES WEST, INC.
By: /s/ Robert S. Bolinger
-----------------------------------
Name: Robert S. Bolinger
Title: President
CARDINAL BANCORP, INC.
By: /s/ Merle W. Helsel
-----------------------------------
Name: Merle W. Helsel
Title: President/CEO
H-7
<PAGE>
APPENDIX I
FIRST CAPITOL STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of April 16, 1998 (this "Agreement"),
among Susquehanna Bancshares, Inc., a Pennsylvania corporation ("SBI"),
Susquehanna Interim Bank, a Pennsylvania state chartered bank and a wholly-owned
subsidiary of SBI (the "Interim Bank"), and First Capitol Bank, a Pennsylvania
state chartered bank ("First Capitol").
WHEREAS, SBI, the Interim Bank and First Capitol propose to enter into an
Agreement and Plan of Affiliation dated the date hereof (the "Merger
Agreement"), which provides, among other things, that upon the terms and subject
to the conditions thereof, SBI will acquire all of the outstanding shares of
common stock of First Capitol (the "First Capitol Common Stock"), First Capitol
will be merged with the Interim Bank pursuant to the merger contemplated in the
Merger Agreement (the "Merger") and, thereafter, First Capitol will be a
subsidiary of SBI; and
WHEREAS, as a condition to the willingness of SBI and the Interim Bank to
enter into the Merger Agreement, SBI and the Interim Bank have requested that
First Capitol agree and, in order to induce SBI and the Interim Bank to enter
into the Merger Agreement, First Capitol has agreed to grant SBI an option to
purchase up to 100,681 shares of First Capitol Common Stock, all in accordance
with the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Grant of Stock Option. First Capitol hereby grants to SBI an
---------------------
irrevocable option (the "Option") to purchase up to 100,681 shares of First
Capitol Common Stock (the "Option Shares") at a purchase price per share of 95%
of the average price per share of First Capitol Common Stock during the 30
trading days immediately preceding the day prior to the announcement date of a
Purchase Event (as defined below) (the "Purchase Price").
2. Exercise of Option.
------------------
(a) Subject to the conditions set forth in paragraph 3 hereof, the
Option may be exercised by SBI, in whole or in part, at any time or from
time to time after the date hereof and prior to the earlier to occur of (a)
the Effective Time of the Merger or (b) the date six months following such
Purchase Event, provided that if an Exercise Notice (as hereinafter
defined) had been given on or before the expiration of such six-month
period and if the Option cannot be exercised on such day because of any
injunction, order or similar restraint issued by a court of competent
jurisdiction, the Option shall expire on the tenth business day after such
injunction, order or restraint shall have been dismissed, been withdrawn or
become permanent and no longer subject to appeal, as the case may be (the
I-1
<PAGE>
"Termination Date"). In the event SBI wishes to exercise the Option, SBI
shall send a written notice (an "Exercise Notice") to First Capitol
specifying the total number of shares of First Capitol Common Stock it
wishes to purchase. Each closing of a purchase of Option Shares (a "Stock
Option Closing") shall take place at the executive offices of First Capitol
at the address referred to in Section 12(d) hereof, on a date and at a time
designated by SBI in its Exercise Notice (which date and time may be as
early as one day after the Exercise Notice or earlier if reasonably
practicable).
(b) As used in this Agreement, a "Purchase Event" shall mean any of
the following events:
(1) any person (other than SBI or any subsidiary of SBI) shall
have commenced (as such term is defined in Rule 14d-2 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), a
tender offer or exchange offer to purchase First Capitol Common Stock
such that, upon consummation of such offer, such person could own or
control ten percent (10%) or more of the outstanding First Capitol
Common Stock;
(2) First Capitol shall have authorized, recommended, proposed
or announced an intention to authorize, recommend or propose, or
entered into, an agreement with any person (other than SBI or any
subsidiary of SBI) to (A) merge or consolidate with First Capitol or
enter into any similar transaction with such person, (B) sell, lease
or otherwise dispose of all or substantially all of the assets of
First Capitol to such person, or (C) sell or otherwise dispose of
(including by way of merger, consolidation, share exchange or similar
transaction) securities representing ten percent (10%) or more of the
voting power of First Capitol, and as to (A), (B) and (C), the same
shall have been scheduled by First Capitol to close within 365
calendar days following the date of termination of the Merger
Agreement;
(3) any person (other than SBI or any subsidiary of SBI and
National Penn Investment Company) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange
Act) or the right to acquire beneficial ownership of, or a new group
has been formed which beneficially owns, ten percent (10%) or more of
the outstanding First Capitol Common Stock; or
(4) the shareholders of First Capitol shall have disapproved
the Merger after any person (other than SBI or any subsidiary of SBI)
shall have publicly announced a proposal to acquire First Capitol by
merger, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, and the same shall have been
scheduled by First Capitol to close within 365 calendar days following
the date of termination of the Merger Agreement.
I-2
<PAGE>
As used in this Agreement, "person" shall have the meanings specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
3. Stock Option Closings. At each Stock Option Closing, First Capitol
---------------------
will deliver to SBI a certificate or certificates representing the number of
Option Shares being purchased upon exercise of the Option in the denominations
designated by SBI in its Exercise Notice, and SBI will purchase such Option
Shares from First Capitol at the Purchase Price per share. Any payment made by
SBI to First Capitol pursuant to this Section 3 shall be paid in New York
Clearing House funds by wire transfer or certified or official bank check or
checks payable to the order of First Capitol in an amount equal to the aggregate
Purchase Price of the Option Shares purchased at the Stock Option Closing.
4. Option Share Appreciation Right. If a Purchase Event shall occur at
-------------------------------
any time prior to the expiration of the Stock Option, at SBI's request First
Capitol shall promptly pay to SBI in New York Clearing House funds by wire
transfer or certified or official bank check payable to the order of SBI an
amount equal to the product of (a) the excess, if any of (i) the greater of (A)
the highest price paid or proposed to be paid in connection with such Purchase
Event for any shares of First Capitol Common Stock and (B) the aggregate
consideration paid or proposed to be paid in connection with such Purchase Event
divided by the number of shares of First Capitol Common Stock then outstanding
(the value of any consideration other than cash to be determined, in the case of
consideration with a readily ascertainable market value, by reference to such
market value and, in the case of any consideration other than cash, by agreement
in good faith between SBI and First Capitol) over (ii) the Purchase Price, as
adjusted pursuant to Section 7, multiplied by (b) the total number of Option
Shares as to which the Option has not theretofore been exercised, as adjusted
pursuant to Section 7. Such payment shall extinguish all other rights of SBI
under this Agreement, but shall not affect the rights of SBI under the Merger
Agreement or otherwise.
5. Representations and Warranties of First Capitol. First Capitol hereby
-----------------------------------------------
represents and warrants to SBI and the Interim Bank as follows:
(a) Authority Relative to this Agreement. First Capitol has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of First Capitol and no other corporate proceedings on the part
of First Capitol are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by First Capitol and, assuming this Agreement has
been duly executed and delivered by SBI and the Interim Bank, this
Agreement constitutes a valid and binding agreement of First Capitol
enforceable in accordance with its terms except as enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability
of equitable
I-3
<PAGE>
remedies, including specific performance, is subject to the discretion of
the court before which any proceeding therefor may be brought.
(b) Authority to Issue Shares. First Capitol has taken all necessary
-------------------------
corporate action to authorize and reserve and to permit it to issue, and at
all times from the date hereof through the Termination Date will have
reserved, all of the Option Shares issuable pursuant to this Agreement, all
of which, upon their issuance and delivery in accordance with the terms of
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests of any nature whatsoever and not
subject to any preemptive rights.
(c) No Conflict. The execution and delivery of this Agreement by
-----------
First Capitol do not, and the performance of this Agreement by First
Capitol will not, (i) require the consent, waiver, approval, license or
authorization of or any filing with any person or public authority, (ii)
violate the Articles of Incorporation or Bylaws or other organizational or
governance documents of First Capitol, (iii) with or without the giving of
notice or the lapse of time, or both, conflict with or result in a breach
of any terms or provisions of, or constitute a default or give rise to a
right of acceleration under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of First Capitol
under, any indenture, mortgage, agreement or other instrument to which
First Capitol is a party or by which any of its property is bound (except
for the Agreement, dated July 25, 1988, between First Capitol and National
Penn Investment Company, successor to National Penn Bancshares, Inc.), or
(iv) violate any existing applicable law, rule, regulation, judgment, order
or decree of any governmental instrumentality or court having jurisdiction
over First Capitol or any of its property.
6. Representations and Warranties of SBI. SBI hereby represents and
-------------------------------------
warrants to First Capitol as follows:
(a) SBI has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of SBI and no other corporate
proceedings on the part of SBI are necessary to authorize this Agreement or
to consummate the transactions so contemplated. This Agreement has been
duly and validly executed and delivered by SBI and, assuming this Agreement
has been duly executed and delivered by First Capitol, this Agreement
constitutes a valid and binding agreement of SBI enforceable in accordance
with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including specific performance, is subject to the discretion of the court
before which any proceeding therefor may be brought.
I-4
<PAGE>
(b) No Conflict. The execution and delivery of this Agreement do
-----------
not, and the performance of this Agreement by SBI will not, (i) require the
consent, waiver, approval, license or authorization of or any filing with
any person or public authority, (ii) violate the articles of incorporation
or bylaws or other organizational or governance documents of SBI, (iii)
with or without the giving of notice or the lapse of time, or both,
conflict with or result in a breach of any terms or provisions of, or
constitute a default or give rise to a right of acceleration under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of SBI under, any indenture, mortgage,
agreement or other instrument to which SBI is a party or by which any of
their respective property is bound or (iv) violate any existing applicable
law, rule, regulation, judgment, order or decree of any governmental
instrumentality or court having jurisdiction over SBI or any of their
respective property.
(c) Investment Intent. SBI hereby represents and warrants to First
-----------------
Capitol that it will acquire the Option Shares for investment purposes only
and not with a view to any resale or distribution thereof, and will not
sell any Option Shares purchased pursuant to the Option except in
compliance with the Securities Act of 1933, as amended (the "Securities
Act").
7. Adjustment Upon Changes in Capitalization. In the event of any change
-----------------------------------------
in the number of issued and outstanding shares of First Capitol Common Stock by
reason of any stock dividend, split-up, merger, recapitalization, combination,
conversion, exchange of shares or the like, or any other change in the corporate
or capital structure of First Capitol which would have the effect of diluting
SBI's rights hereunder, the number and kind of Option Shares and the
consideration payable in respect of such Option Shares shall be appropriately
adjusted to restore to SBI its rights hereunder; provided, however, that nothing
-------- -------
in this Agreement shall be construed as permitting First Capitol to take any
action or enter into any transaction prohibited by the Merger Agreement.
8. Listing. If the First Capitol Common Stock is then listed on any stock
-------
exchanges, First Capitol, upon the request of SBI, will promptly file an
application to list the First Capitol Common Stock to be acquired upon exercise
of the Option on such stock exchanges and will use its best efforts to obtain
approval of such listing as soon as practicable.
9. Further Assurances. First Capitol, SBI and the Interim Bank will
------------------
execute and deliver all such further documents and instruments and take all such
further action as may be necessary in order to consummate the transactions
contemplated hereby.
10. Specific Performance. The parties hereto acknowledge that damages
--------------------
would be an inadequate remedy for a breach of this Agreement and that the
obligations of the parties hereto shall be specifically enforceable.
I-5
<PAGE>
11. Expenses. Except as otherwise explicitly stated herein and in the
--------
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
12. Miscellaneous.
-------------
(a) Entire Agreement. This Agreement and the Merger Agreement,
----------------
together with such other agreements as are executed by the parties in
connection therewith, constitute the entire agreement between the parties
with respect to the subject matter hereof and thereof and supersede all
other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof and
thereof.
(b) Assignment. Except that SBI shall be permitted to assign this
----------
Agreement to any subsidiary of SBI, this Agreement shall not be assigned by
operation of law or otherwise.
(c) Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any
other provisions of this Agreement, which shall remain in full force and
effect.
(d) Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram or telex, or by registered or
certified mail (postage prepaid, return receipt requested) to the
respective parties at their addresses as specified in the Merger Agreement.
(e) Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of the
Commonwealth of Pennsylvania, applicable to contracts made and to be
performed in that state.
(f) Descriptive Headings; Definitions. The descriptive headings
---------------------------------
herein are inserted for convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement.
All capitalized terms used herein but not defined herein shall have the
meaning ascribed to them in the Merger Agreement.
(g) Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this
Agreement.
I-6
<PAGE>
(h) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officer thereunto duly authorized, all as of the
day and year first above written.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
------------------------------
Name: Robert S. Bolinger
Title: President and CEO
SUSQUEHANNA INTERIM BANK
By: /s/ Robert S. Bolinger
------------------------------
Name: Robert S. Bolinger
Title: President
FIRST CAPITOL BANK
By: /s/ Owen O. Freeman, Jr.
------------------------------
Owen O. Freeman, Jr.
Chairman
I-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"), provide that a business corporation may indemnify
directors and officers against liabilities they may incur as such provided that
the particular person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. In the case of actions against a director or
officer by or in the right of the corporation, the power to indemnify extends
only to expenses (not judgments and amounts paid in settlement) and such power
generally does not exist if the person otherwise entitled to indemnification
shall have been adjudged to be liable to the corporation unless it is judicially
determined that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnification for specified expenses. Under Section 1743 of the BCL, the
corporation is required to indemnify directors and officers against expenses
they may incur in defending actions against them in such capacities if they are
successful on the merits or otherwise in the defense of such actions. Under
Section 1745 of the BCL, a corporation may pay the expenses of a director or
officer incurred in defending an action or proceeding in advance of the of the
final disposition thereof upon receipt of an undertaking from such person to
repay the amounts advanced unless it is ultimately determined that such person
is entitled to indemnification from the corporation. Article XIV of
Susquehanna's Bylaws provides indemnification of directors, officers and other
agents of Susquehanna and advancement of expenses to the extent otherwise
permitted by Sections 1741, 1742 and 1745 of the BCL.
Section 1746 of the BCL grants a corporation broad authority to indemnify
its directors, officers and other agents for liabilities and expenses incurred
in such capacity, except in circumstances where the act giving rise to the claim
for indemnification is determined by a court to have constituted willful
misconduct or recklessness. Pursuant to the authority of Section 1746 of the
BCL, Susquehanna has also entered into employment agreements with certain
principal officers which also provide for indemnification in connection with the
performance of their offices.
Article XIV conditions any indemnification or advancement of expenses upon
a determination, made in accordance with the procedures specified in Section
1744 of the BCL, by Susquehanna's directors or shareholders that indemnification
or advancement of expenses is proper because the director or officer met the
standard of conduct set forth in Section 1741 or 1742 of the BCL, as applicable.
As authorized by Section 1747 of the BCL and Article XIV, Susquehanna
maintains, on behalf of its directors and officers, insurance protection against
certain liabilities arising out of the discharge of their duties, as well as
insurance covering Susquehanna for indemnification payments made to its
directors and officers for certain liabilities. The premiums for such insurance
are paid by Susquehanna.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
2.1* Agreement and Plan of Affiliation, Dated as of the 13th day of April,
1998, By and Among Susquehanna Bancshares, Inc., Susquehanna Bancshares
West, Inc., Cardinal Bancorp, Inc. and First American National Bank of
Pennsylvania. (1)
2.2* Agreement and Plan of Affiliation Dated as of the 16th day of April,
1998, By and Among Susquehanna Bancshares, Inc., Interim Bank and First
Capitol Bank. (1)
3.1** Articles of Incorporation of Susquehanna Bancshares, Inc. (2)
3.2** Bylaws of Susquehanna Bancshares, Inc. (2)
4.1* Subchapters 25E, 25F, 25G and 25H of the Pennsylvania Business
Corporation Law of 1988, as amended.
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
Susquehanna Bancshares, Inc. Common Stock being registered.
23.1* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5.1 hereto).
23.2* Consent of Coopers & Lybrand L.L.P. regarding Susquehanna Bancshares,
Inc.
23.3* Consent of S.R. Snodgrass, A.C. regarding Cardinal Bancorp, Inc.
23.4* Consent of KPMG Peat Marwick LLP regarding First Capitol Bank.
23.5* Consent of Garland McPherson & Associates, Inc.
23.6* Consent of Danielson Associates, Inc.
24.6* Powers of Attorney (included on the signature page).
99.1* Form of Cardinal Bancorp, Inc. Proxy.
99.2* Form of First Capitol Bank Proxy.
- ------------------
* Filed herewith.
** Filed previously.
(1) Furnished as Appendices C and D to the Proxy Statement/Prospectus which is
included in Part I of this Registration Statement.
(2) Exhibit incorporated herein by reference to the registrant's Registration
Statement on Form S-4 (registration no. 33-53608) filed October 22, 1992
and to the registrant's Annual Proxy Statement on Schedule 14A for the May
29, 1998 Annual Meeting of Shareholders.
(b) Financial Statement Schedules:
None.
(c) Opinions of Financial Advisors.
Furnished as Appendices E and F to the Proxy Statement/Prospectus which is
included in Part I of this Registration Statement.
II-2
<PAGE>
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the 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;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) 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.
(3) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) 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.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
II-3
<PAGE>
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Lititz, Pennsylvania on
June 29, 1998.
SUSQUEHANNA BANCSHARES, INC.
By: /s/ Robert S. Bolinger
-------------------------------------
ROBERT S. BOLINGER
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below in so signing also makes, constitutes and appoints Robert S. Bolinger and
Richard M. Cloney, and each of them acting alone, his true and lawful
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities and Exchange
Commission any or all amendments and post-effective amendments to this
Registration Statement, with exhibits thereto and other documents in connection
therewith, and hereby ratifies and confirms all that said attorney-in-fact or
his substitute or substitutes may do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Robert S. Bolinger President and Chief Executive June 29, 1998
- ------------------------ Officer and a Director
ROBERT S. BOLINGER
/s/ Drew K. Hostetter Vice President, Treasurer and June 29, 1998
- ------------------------ Chief Financial Officer
DREW K. HOSTETTER (Principal Financial and
Accounting Officer)
/s/ Richard M. Cloney Vice President, Secretary and a June 29, 1998
- ------------------------ Director
RICHARD M. CLONEY
/s/ John M. Denlinger Director June 29, 1998
- ------------------------
JOHN M. DENLINGER
/s/ Henry H. Gibbel Director June 29, 1998
- ------------------------
HENRY H. GIBBEL
/s/ Richard E. Funke Director June 29, 1998
- ------------------------
RICHARD E. FUNKE
/s/ George J. Morgan Director June 29, 1998
- ------------------------
GEORGE J. MORGAN
S - 1
<PAGE>
/s/ James G. Apple Director June 29, 1998
- --------------------------
JAMES G. APPLE
/s/ Edward W. Helfrick Director June 29, 1998
- --------------------------
EDWARD W. HELFRICK
/s/ Roger V. Wiest Director June 29, 1998
- --------------------------
ROGER V. WIEST
/s/ Marley R. Gross Director June 29, 1998
- --------------------------
MARLEY R. GROSS
/s/ T. Max Hall Director June 29, 1998
- --------------------------
T. MAX HALL
/s/ Raymond M. O'Connell Director June 29, 1998
- --------------------------
RAYMOND M. O'CONNELL
/s/ C. William Hetzer, Jr. Director June 29, 1998
- --------------------------
C. WILLIAM HETZER, JR.
/s/ Robert C. Reymer, Jr. Director June 29, 1998
- --------------------------
ROBERT C. REYMER, JR.
/s/ Trudy B. Cunningham Director June 29, 1998
- --------------------------
TRUDY B. CUNNINGHAM
/s/ Robert S. Bolinger Attorney-in-Fact June 29, 1998
- --------------------------
ROBERT S. BOLINGER
/s/ Richard M. Cloney Attorney-in-Fact June 29, 1998
- --------------------------
RICHARD M. CLONEY
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2.1* Agreement and Plan of Affiliation, Dated as of the 13th day of April,
1998, By and Among Susquehanna Bancshares, Inc., Susquehanna
Bancshares West, Inc., Cardinal Bancorp, Inc. and First American
National Bank of Pennsylvania. (1)
2.2* Agreement and Plan of Affiliation Dated as of the 13th day of April,
1996, By and Among Susquehanna Bancshares, Inc., Interim Bank and
First Capitol Bank. (1)
3.1** Articles of Incorporation of Susquehanna Bancshares, Inc. (2)
3.2** Bylaws of Susquehanna Bancshares, Inc. (2)
4.1* Subchapters 25E, 25F, 25G and 25H of the Pennsylvania Business
Corporation Law of 1988, as amended.
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
Susquehanna Bancshares, Inc. Common Stock being registered.
23.1* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
as Exhibit 5.1 hereto).
23.2* Consent of Coopers & Lybrand L.L.P. regarding Susquehanna Bancshares,
Inc.
23.3* Consent of S.R. Snodgrass, A.C. regarding Cardinal Bancorp, Inc.
23.4* Consent of KPMG Peat Marwick LLP regarding First Capitol Bank.
23.5* Consent of Garland McPherson & Associates, Inc.
23.6* Consent of Danielson Associates, Inc.
24.6* Powers of Attorney (included on the signature page).
99.1* Form of Cardinal Bancorp, Inc. Proxy.
99.2* Form of First Capitol Bank Proxy.
- ------------------
* Filed herewith.
** Filed previously.
(1) Furnished as Appendices C and D to the Proxy Statement/Prospectus which is
included in Part I of this Registration Statement.
(2) Exhibit incorporated herein by reference to the registrant's Registration
Statement on Form S-4 (registration no. 33-53608) filed October 22, 1992
and to the registrant's Annual Proxy Statement on Schedule 14A for the May
29, 1998 Annual Meeting of Shareholders.
<PAGE>
EXHIBIT 2.1
<PAGE>
Included as Appendix C to the Proxy Statement/Prospectus
<PAGE>
EXHIBIT 2.2
<PAGE>
Included as Appendix D to the Proxy Statement/Prospectus
<PAGE>
EXHIBIT 4.1
<PAGE>
PENNSYLVANIA Business Corporation Law
Subchapter E. Control Transactions
2541 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.-- Except as
otherwise provided in this section, this subchapter apply to a registered
corporation unless:
(1) the registered corporation is one described in section 2502(1)(ii) or
(2)(relating to registered corporation status):
(2) the bylaws, by amendment adopted either:
(i) by March 23, 1984; or
(ii) on or after March 23, 1988, and on or before June 21, 1988;
and, in either event, not subsequently rescinded by an article amendment,
explicitly provide that this subchapter shall not be applicable to the
corporation in the case of a corporation which on June 21, 1988, did not have
outstanding one or more classes or series of preference shares entitled, upon
the occurrence of a default in the payment of dividends or another similar
contingency, to elect a majority of the members of the board of directors (a
bylaw adopted on or before June 21, 1988, by a corporation excluded from the
scope of this paragraph by the restriction of this paragraph to certain
outstanding preference shares shall be ineffective unless ratified under
paragraph (3));
(3) the bylaws of which explicitly provide that this subchapter shall to
be applicable to the corporation by amendment ratified by the board of directors
on or after December 19, 1990, and on or before March 19, 1991, in the case of a
corporation:
(i) which on June 21, 1988, had outstanding one or more classes or series
of preference shares entitled, upon the occurrence of a default in the payment
of dividends or another similar contingency, to elect a majority of the members
of the board of directors; and
(ii) the bylaws of which on that date contained a provision described in
paragraph (2); or
(4) the articles explicitly provide that this subchapter shall not be
applicable to the corporation by a provision included in the original articles,
by an article amendment adopted prior to the date of the control transaction and
prior to or on March 23, 1988, pursuant to the procedures then applicable to the
corporation, or by an article amendment adopted prior to the date of the control
transaction and subsequent to March 23, 1988, pursuant to both:
(i) the procedures then applicable to the corporation; and
(ii) unless such proposed amendment has been approved by the board of
directors of the corporation, in which event this subparagraph shall not be
applicable, the affirmative vote of the shareholders entitled to cast at least
80% of the votes which all shareholders are entitled to cast thereon.
A reference in the articles or bylaws to former section 910 (relating to right
of shareholders to receive payment for shares following a control transaction)
of the act of May 5, 1933 (P.L. 364, No. 106), known as the Business Corporation
Law of 1933, shall be a reference to this subchapter for the purposes of this
section. See section 101(c) (relating to references to prior statutes).
(b) Inadvertent transactions. --This subchapter shall not apply to any
person or group that inadvertently becomes a controlling person or group if that
controlling person or group, as soon as practicable, divests itself of a
sufficient amount of its voting shares so that it is no longer a controlling
person or group.
(c) Certain subsidiaries.--This subchapter shall not apply to any
corporation that on December 23, 1983, was a subsidiary of any other
corporation. (Last amended by Act 169, L. `92, eff. 2-16-93.)
2542 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Control transaction." The acquisition by a person or group of the status
of a controlling person or group.
"Controlling person or group." A controlling person or group as defined in
section 2543 (relating to controlling person or group).
"Fair value." A value not less than the highest price paid per share by
the controlling person or group at any time during the 90-day period ending on
and including the date of the control transaction plus an increment representing
any value, including, without limitation, any proportion of any value payable
for acquisition of control of the corporation, that may not be reflected in such
price.
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"Partial payment amount." The amount per share specified in section
2545(c)(2) (relating to contents of notice).
"Subsidiary." Any corporation as to which any other corporation has or has
the right to acquire, directly or indirectly, through the exercise of all
warrants, options and rights and the conversion of all convertible securities,
whether issued or granted by the subsidiary or otherwise, voting power over
voting shares of the subsidiary that would entitle the holders thereof to cast
in excess of 50% of the votes that all shareholders would be entitled to cast in
the election of directors of such subsidiary, except that a subsidiary will not
be deemed to cease being a subsidiary as long as such corporation remains a
controlling person or group within the meaning of this subchapter.
"Voting shares." The term shall have the meaning specified in section 2552
(relating to definitions). (Last amended by Act 36, L. '89, eff. 4-27-90.)
2543 CONTROLLING PERSON OR GROUP.--(a) General rule.--For the purpose of
this subchapter, a "controlling person or group" means a person who has, or a
group of persons acting in concert that has, voting power over voting shares of
the registered corporation that would entitle the holders thereof to cast at
least 20% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation.
(b) Exceptions generally.--Notwithstanding subsection (a):
(1) A person or group which would otherwise be a controlling person or
group within the meaning of this section shall not be deemed a controlling
person or group unless, subsequent to the later of March 23, 1988, or the date
this subchapter becomes applicable to a corporation by bylaw or article
amendment or otherwise, that person or group increases the percentage of
outstanding voting shares of the corporation over which it has voting power to
in excess of the percentage of outstanding voting shares of the corporation over
which that person or group had voting power on such later date, and to at least
the amount specified in subsection (a), as the result of forming or enlarging a
group or acquiring, by purchase, voting power over voting shares of the
corporation.
(2) No person or group shall be deemed to be a controlling person or
group at any particular time if voting power over any of the following voting
shares is required to be counted at such time in order to meet the 20% minimum:
(i) Shares which have been held continuously by a natural person since
January 1, 1983, and which are held by such natural person at such
time.
(ii) Shares which are held at such time by any natural person or trust,
estate, foundation or other similar entity to the extent the shares were
acquired solely by gift, inheritance, bequest, devise or other testamentary
distribution or series of these transactions, directly or indirectly, from a
natural person who had acquired the shares prior to January 1, 1983.
(iii) Shares which were acquired pursuant to a stock split, stock
dividend, reclassification or similar recapitalization with respect to shares
described under this paragraph that have been held continuously since their
issuance by the corporation by the natural person or entity that acquired them
from the corporation or that were acquired, directly or indirectly, from such
natural person or entity, solely pursuant to a transaction or series of
transactions described in subparagraph (ii), and that are held at such time by a
natural person or entity described in subparagraph (ii).
(iv) Control shares as defined in section 2562 (relating to definitions)
which have not yet been accorded voting rights pursuant to section 2564(a)
(relating to voting rights of shares acquired in a control-share acquisition).
(v) Shares, the voting rights of which are attributable to a person under
subsection (d) if:
(A) the person acquired the option or conversion right directly from or
made the contract, arrangement or understanding or has the relationship directly
with the corporation; and
(B) the person does not at the particular time own or otherwise
effectively possess the voting rights of the shares.
(vi) Shares acquired directly from the corporation or an affiliate or
associate, as defined in section 2552 (relating to definitions), of the
corporation by a person engaged in business as an underwriter of securities who
acquires the shares through his participation in good faith in a firm commitment
underwriting registered under the Securities Act of 1933.
(3) In determining whether a person or group is or would be a controlling
person or group at any particular time, there shall be disregarded voting power
arising from a contingent right of the holders of one or more classes or series
of preference shares to elect one or more members of the board of directors upon
or during the continuation of a default in the payment of dividends on such
shares or another similar contingency.
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(c) Certain record holders.--A person shall not be a controlling person
under subsection (a) if the person holds voting power, in good faith and not for
the purpose of circumventing this subchapter, as an agent, bank, broker, nominee
or trustee for one or more beneficial owners who do not individually or, if they
are a group acting in concert, as a group have the voting power specified in
subsection (a), or who are not deemed a controlling person or group under
subsection (b).
(d) Existence of voting power.--For the purposes of this subchapter, a
person has voting power over a voting share if the person has or shares,
directly or indirectly, through any option, contract, arrangement,
understanding, conversion right or relationship, or by acting jointly or in
concert or otherwise, the power to vote, or to direct the voting of, the voting
share. (Last amended by Act 198, L. `90, eff. 12-19-90.)
2544 RIGHT OF SHAREHOLDERS TO RECEIVE PAYMENT FOR SHARES.--Any holder of
voting shares of a registered corporation that becomes the subject of a control
transaction who shall object to the transaction shall be entitled to the rights
and remedies provided in this subchapter.
2545 NOTICE TO SHAREHOLDERS.--(a) General rule.--Prompt notice that a
control transaction has occurred shall be given by the controlling person or
group to:
(1) Each shareholder of record of the registered corporation holding
voting shares.
(2) To the court, accompanied by a petition to the court praying that the
fair value of the voting shares of the corporation be determined pursuant to
section 2547 (relating to valuation procedures) if the court should receive
pursuant to section 2547 certificates from shareholders of the corporation or an
equivalent request for transfer of uncertificated securities.
(b) Obligations of the corporation.--If the controlling person or group so
requests, the corporation shall, at the option of the corporation and at the
expense of the person or group, either furnish a list of all such shareholders
to the person or group or mail the notice to all such shareholders.
(c) Contents of notice.--The notice shall state that:
(1) All shareholders are entitled to demand that they be paid the fair
value of their shares.
(2) The minimum value the shareholder can receive under this subchapter is
the highest price paid per share by the controlling person or group within the
90-day period ending on and including the date of the control transaction, and
stating that value.
(3) If the shareholder believes the fair value of his shares is higher,
that this subchapter provides an appraisal procedure for determining the fair
value of such shares, specifying the name of the court and its address and the
caption of the petition referenced in subsection (a)(2), and stating that the
information is provided for the possible use by the shareholder in electing to
proceed with a court-appointed appraiser under section 2547. There shall be
included in, or enclosed with, the notice a copy of this subchapter.
(d) Optional procedure.--The controlling person or group may, at its
option, supply with the notice referenced in subsection (c) a form for the
shareholder to demand payment of the partial payment amount directly from the
controlling person or group without utilizing the court-appointed appraiser
procedure of section 2547, requiring the shareholder to state the number and
class or series, if any, of the shares owned by him, and stating where the
payment demand must be sent and the procedures to be followed.
2546 SHAREHOLDER DEMAND FOR FAIR VALUE.--(a) General rule.--after the
occurrence of the control transaction, any holder of voting shares of the
registered corporation may, prior to or within a reasonable time after the
notice required by section 2545 (relating to notice to shareholders) is given,
which time period may be specified in the notice, make written demand on the
controlling person or group for payment of the amount provided in subsection (c)
with respect to the voting shares of the corporation held by the shareholder,
and the controlling person or group shall be required to pay that amount to the
shareholder pursuant to the procedures specified in section 2547 (relating to
valuation procedures).
(b) Contents of demand.--The demand of the shareholder shall state the
number and class or series, if any, of the shares owned by him with respect to
which the demand is made.
(c) Measure of value.--A shareholder making written demand under this
section shall be entitled to receive cash for each of his shares in an amount
equal to the fair value of each voting share as of the date on which the control
transaction occurs, taking into account all relevant factors, including an
increment representing a proportion of any value payable for acquisition of
control of the corporation.
(d) Purchases independent of subchapter.--The provisions of this
subchapter shall not preclude a controlling person or group subject to this
subchapter from offering, whether in the notice required by section 2545
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or otherwise, to purchase voting shares of the corporation at a price other than
that provided in subsection (c), and the provisions of this subchapter shall not
preclude any shareholder from agreeing to sell his voting shares at that or any
other price to any person.
2547 VALUATION PROCEDURES.--(a) General rule.--If, within 45 days (or
such other time period, if any, as required by applicable law) after the date of
the notice required by section 2545 (relating to notice to shareholders), or, if
such notice was not provided prior to the date of the written demand by the
shareholder under section 2546 (relating to shareholder demand for fair value),
then within 45 days (or such other time period, if any, required by applicable
law) of the date of such written demand, the controlling person or group and the
shareholder are unable to agree on the fair value of the shares or on a binding
procedure to determine the fair value of the shares, then each shareholder who
is unable to agree on both the fair value and on such a procedure with the
controlling person or group and who so desires to obtain the rights and remedies
provided in this subchapter shall, no later than 30 days after the expiration
of the applicable 45-day or other period, surrender to the court certificates
representing any of the shares that are certificated shares, duly endorsed for
transfer to the controlling person or group, or cause any uncertificated shares
to be transferred to the court as escrow agent under subsection (c) with a
notice stating that the certificates or uncertificated shares are being
surrendered or transferred, as the case may be, in connection with the petition
referenced in section 2545 or, if no petition has theretofore been filed, the
shareholder may file a petition within the 30-day period in the court praying
that the fair value (as defined in this subchapter) of the shares be determined.
(b) Effect of failure to give notice and surrender certificates.--Any
shareholder who does not so give notice and surrender any certificates or cause
uncertificated shares to be transferred within such time period shall have no
further right to receive, with respect to shares the certificates of which were
not so surrendered or the uncertificated shares which were not so transferred
under this section, payment under this subchapter from the controlling person or
group with respect to the control transaction giving rise to the rights of the
shareholder under this subchapter.
(c) Escrow and notice.--The court shall hold the certificates surrendered
and the uncertificated shares transferred to it in escrow for, and shall
promptly, following the expiration of the time period during which the
certificates may be surrendered and the uncertificated shares transferred,
provide a notice to the controlling person or group of the number of shares of
surrendered or transferred.
(d) Partial payment for shares.--The controlling person or group shall
then make a partial payment for the shares so surrendered or transferred to the
court, within 10 business days of receipt of the notice from the court, at a per
share price equal to the partial payment amount. The court shall then make
payment as soon as practicable, but in any event within 10 business days, to the
shareholders who so surrender or transfer their shares to the court of the
appropriate per-share amount received from the controlling person or group.
(e) Appointment of appraiser.--Upon receipt of any share certificate
surrendered or uncertificated share transferred under this section, the court
shall, as soon as practicable but in any event within 30 days, appoint an
appraiser with experience in appraising share values of companies of like nature
to the registered corporation to determine the fair value of the shares.
(f) Appraisal procedure.--The appraiser so appointed by the court shall,
as soon as reasonably practicable, determine the fair value of the shares
subject to its appraisal and the appropriate market rate of interest on the
amount then owed by the controlling person or group to the holders of the
shares. The determination of any appraiser so appointed by the court shall be
final and binding on both the controlling person or group and all shareholders
who so surrendered their share certificates or transferred their shares to the
court, except that the determination of the appraiser shall be subject to review
to the extent and within the time provided or prescribed by law in the case of
other appointed judicial officers. See 42 Pa.C.S.(S)(S)5105(a)(3)(relating to
right to appellate review) and 5571(b) (relating to appeals generally).
(g) Supplemental payment.--Any amount owed, together with interest, as
determined pursuant to the appraisal procedures of this section shall be payable
by the controlling person or group after it is so determined and upon and
concurrently with the delivery or transfer to the controlling person or group by
the court (which shall make delivery of the certificate or certificates
surrendered or the uncertificated shares transferred to it to the controlling
person or group as soon as practicable but in any event within 10 business days
after the final determination of the amount owed) of the certificate or
certificates representing shares surrendered or the uncertificated shares
transferred to the court, and the court shall then make payment, as soon as
practicable but in any event within 10 business days after receipt of payment
from the controlling person or group, to the shareholders
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who so surrendered or transferred their shares to the court of the appropriate
per-share amount received from the controlling person or group.
(h) Voting and dividend rights during appraisal proceedings.--Shareholders
who surrender their share to the court pursuant to this section shall retain the
right to vote their shares and receive dividends or other distributions thereon
until the court receives payment in full for each of the shares so surrendered
or transferred of the partial payment amount (and, thereafter, the controlling
person or group shall be entitled to vote such shares and receive dividends or
other distributions thereon.) The fair value (as determined by the appraiser)
of any dividends or other distributions so received by the shareholders shall be
subtracted from any amount owing to such shareholders under this section.
(i) Powers of the court.--The court may appoint such agents, including the
transfer agent of the corporation, or any other institution, to hold the share
certificates so surrendered and the shares surrendered or transferred under this
section, to effect any necessary change in record ownership of the shares after
the payment by the controlling person or group to the court of the amount
specified in subsection (h), to receive and disburse dividends or other
distributions, to provide notices to shareholders and to take such other actions
as the court determines are appropriate to effect the purposes of this
subchapter.
(j) Costs and expenses.--The costs and expenses of any appraiser or other
agents appointed by the court shall be assessed against the controlling person
or group. The costs and expenses of any other procedure to determine fair value
shall be paid as agreed to by the parties agreeing to the procedure.
(k) Jurisdiction exclusive.--The jurisdiction of the court under this
subchapter is plenary and exclusive and the controlling person or group and all
shareholders who so surrendered or transferred their shares to the court shall
be made a party to the proceeding as in an action against their shares.
(l) Duty of corporation.--The corporation shall comply with requests for
information, which may be submitted pursuant to procedures maintaining the
confidentiality of the information, made by the court or the appraiser selected
by the court. If any of the shares of the corporation are not represented by
certificates, the transfer, escrow or retransfer of those shares contemplated by
this section shall be registered by the corporation, which shall give the
witness notice required by section 1528(f) (relating to uncertificated shares)
to the transferring shareholder, the court and the controlling shareholder or
group, as appropriate in the circumstances.
(m) Payment under optional procedure.--Any amount agreed upon between the
parties or determined pursuant to the procedure agreed upon between the parties
shall be payable by the controlling person or group after it is agreed upon or
determined and upon and concurrently with the delivery of any certificate or
certificates representing such shares or the transfer of any uncertificated
shares to the controlling person or group by the shareholder.
(n) Title to shares.--Upon full payment by the controlling person or group
of the amount owed to the shareholder or to the court, as appropriate, the
shareholder shall cease to have any interest in the shares.
2548 COORDINATION WITH CONTROL TRANSACTION.--(a) General rule.--A person
or group that proposes to engage in a control transaction may comply with the
requirements of this subchapter in connection with the control transaction, and
the effectiveness of the rights afforded in this subchapter to shareholders may
be conditioned upon the consummation of the control transaction.
(b) Notice.--The person or group shall give prompt written notice of the
satisfaction of any such condition to each shareholder who has made demand as
provided in this subchapter.
Subchapter F. Business Combinations
2551 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except as
otherwise provided in this section, this subchapter shall apply to every
registered corporation.
(b) Exceptions.--The provisions of this subchapter shall not apply to any
business combination:
(1) Of a registered described in section 2502(1)(ii) or (2) (relating to
registered corporation status).
(2) Of a corporation whose articles have been amended to provide that the
corporation shall be subject to the provisions of this subchapter, which was not
a registered corporation described in section 2502(1)(i) on the effective date
of such amendment, and which is a business combination with an interest
shareholder whose share acquisition date is prior to the effective date of such
amendment.
(3) Of a corporation:
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(i) The bylaws of which, by amendment adopted by June 21, 1988, and not
subsequently rescinded either by an article amendment or by a bylaw amendment
approved by at least 85% of the whole board of directors, explicitly provide
that this subchapter shall not be applicable to the corporation; or
(ii) The articles of which explicitly provide that this subchapter shall
not be applicable to the corporation by a provision included in the original
articles, or by an article amendment adopted pursuant to both:
(A) The procedures then applicable to the corporation; and
(B) The affirmative vote of the holders, other than interested
shareholders and their affiliates and associates, of shares entitling the
holders to cast a majority of the votes that all shareholders would be entitled
to cast in an election of directors of the corporation, excluding the voting
shares of interested shareholders and their affiliates and associates, expressly
electing not to be governed by this subchapter.
The amendment to the articles shall not be effective until 18 months after the
vote of the shareholders of the corporation and shall not apply to any business
combination of the corporation with an interested shareholder whose share
acquisition date is on or prior to the effective date of the amendment.
(4) Of a corporation with an interested shareholder of the corporation
which became an interested shareholder inadvertently, if the interested
shareholder:
(i) As soon as practicable, divests itself of a sufficient amount of the
voting shares of the corporation so that it no longer is the beneficial owner,
directly or indirectly, of shares entitling the person to cast at least 20% of
the votes that all shareholders would be entitled to cast in an election of
directors of the corporation; and
(ii) Would not at any time within the five-year period preceding the
announcement date with respect to the business combination have been an
interested shareholder but for such inadvertent acquisition.
(5) With an interested shareholder who was the beneficial owner, directly
or indirectly, of shares entitling the person to cast at least 15% of the votes
that all shareholders would be entitled to cast in an election of directors of
the corporation on March 23, 1988, and remain so to the share acquisition date
of the interested shareholder.
(6) Of a corporation that on March 23, 1988, was a subsidiary of any other
corporation. A corporation that was a subsidiary on such date will not be
deemed to cease being a subsidiary as long as the other corporation remains a
controlling person or group of the subsidiary within the meaning of subchapter E
(relating to control transactions).
A reference in the articles or bylaws to former section 911 (relating to
requirements relating to certain business combinations) of the act of May 5,
1933 (P.L. 364, No. 106), known as the Business Corporation Law of 1933, shall
be deemed a reference to this subchapter for the purposes of this section. See
section 101(c) (relating to references to prior statutes).
(c) Continued applicability.--A registered corporation that is organized
under the laws of this Commonwealth shall not cease to be subject to this
subchapter by reason of events occurring or actions taken while the corporation
is subject to the provisions of this subchapter. See section 4146 (relating to
provisions applicable to all foreign corporations). (Last amended by Act 169,
L. `92, eff. 2-16-93.)
2552 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Affiliate." A person that directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
a specified person.
"Announcement date." When used in reference to any business combination,
the date of the first public announcement of the final, definitive proposal for
such business combination.
"Associate." When used to indicate a relationship with any person:
(1) Any corporation or organization of which such person is an officer,
director or partner or is, directly or indirectly, the beneficial owner of
shares entitling that person to cast at least 10% of the votes that all
shareholders would be entitled to cast in an election of directors of the
corporation or organization;
(2) Any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity; and
(3) Any relative or spouse of such person, or any relative of the spouse,
who has the same home as such person.
"Beneficial owner." When used with respect to any shares, a person:
(1) that, individually or with or through any of its affiliates or
associates, beneficially owns such shares, directly or indirectly:
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(2) that, individually or with or through any of its affiliates or
associates, has:
(i) the right to acquire such shares (whether the right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding (whether or not in writing), or upon the exercise
of conversation rights, exchange rights, warrants or options, or otherwise,
except that a person shall not be deemed the beneficial owner of shares tendered
pursuant to a tender or exchange offer made by such person or the affiliates or
associates of any such person until the tendered shares are accepted for
purchase or exchange; or
(ii) the right to vote such shares pursuant to any agreement, arrangement
or understanding (whether or not in writing), except that a person shall not be
deemed the beneficial owner of any shares under this subparagraph if the
agreement, arrangement or understanding to vote such shares:
(A) arises solely from a revocable proxy or consent given in response to a
proxy or consent solicitation made in accordance with the applicable rules and
regulations under the exchange act; and
(B) is not then reportable on a schedule 13D under the exchange act, (or
any comparable or successor report); or
(3) that has any agreement, arrangement or understanding (whether or not
in writing), for the purpose of acquiring, holding, voting (except voting
pursuant to a revocable proxy or consent as described in paragraph (2)(ii), or
disposing of such shares with any other person that beneficially owns, or whose
affiliates or associates beneficially own, directly or indirectly, such shares.
"Business combination." A business combination as defined in section 2554
(relating to business combination).
"Common shares." Any shares other than preferred shares.
"Consummation date." With respect to any business combination, the date of
consummation of the business combination, or, in the case of a business
combination as to which a shareholder vote is taken, the later of the business
day prior to the vote or 20 days prior to the date of consummation of such
business combination.
"Control," "controlling," "controlled by" or "under common control with."
The possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting shares, by contract, or otherwise. A person's beneficial
ownership of shares entitling that person to cast at least 10% of the votes that
all shareholders would be entitled to cast in an election of directors of the
corporation shall create a presumption that such person has control of the
corporation. Notwithstanding the foregoing, a person shall not be deemed to
have control of a corporation if such person holds voting shares, in good faith
and not for the purpose of circumventing this subchapter, as in agent, bank,
broker, nominee, custodian or trustee for one or more beneficial owners who do
not individually or as a group have control of the corporation.
"Interested shareholder." An interested shareholder as defined in section
2553 (relating to interested shareholder).
"Market value." When used in reference in shares or property of any
corporation:
(1) In the case of shares, the highest closing sale price during the 30-
day period immediately preceding the date in question of the share of the
composite tape for New York Stock Exchange-listed shares, or, if the shares are
not quoted in the composite tape or if the shares are not listed on the
exchange, on the principal United States securities exchange registered under
the exchange act, on which such shares are listed, or, if the shares are not
listed on any such exchange, the highest closing bid quotation with respect to
the share during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations System or
any system then in use, or if no quotations are available, the fair market value
on the date in question of the share as determined by the Board of directors of
the corporation in good faith.
(2) In the case of property other than cash or shares, the fair market
value of the property on the date in question as determined by the board of
directors of the corporation in good faith.
"Preferred shares." Any class or series of shares of a corporation which,
under the bylaws or articles of the corporation, is entitled to receive payment
of dividends prior to any payment of dividends on some other class or series of
shares, or is entitled in the event of any voluntary liquidation, dissolution or
winding up of the corporation to receive payment or distribution of a
preferential amount before any payments or distributions are received by some
other class or series of shares.
"Share acquisition date." With respect to any person and any registered
corporation, the date that such person first becomes an interested shareholder
of such corporation.
"Shares." (1) Any shares or similar security, any certificate of
interest, any participation in any profit-sharing agreement, any voting trust
certificate, or any certificate of deposit for shares.
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(2) Any security convertible, with or without consideration, into shares,
or any option right, conversion right or privilege of buying shares without
being bound to do so, or any other security carrying any right to acquire,
subscribe to or purchase shares.
"Subsidiary." Any corporation as to which any other corporation is the
beneficial owner, directly or indirectly, of shares of the first corporation
that would entitle the other corporation to cast in excess of 50% of the votes
that all shareholders would be entitled to cast in the election of directors of
the first corporation.
"Voting shares." Shares of a corporation entitled to vote generally in the
election of directors. (Last amended by Act 198, `90, eff. 12-19-90.)
2553 INTERESTED SHAREHOLDER.--(a) General rule.--The term "interested
shareholder," when used in reference to any registered corporation, means any
person (other than the corporation or any subsidiary of the corporation) that:
(1) Is the beneficial owner, directly or indirectly, of shares entitling
that person to cast at least 20% of the votes that all shareholders would be
entitled to cast in an election of directors of the corporation; or
(2) Is an affiliate or associate of such corporation and at any time
within the five-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of shares entitling that person to
cast at least 20% of the votes that all shareholders would be entitled to cast
in an election of directors of the corporation.
(b) Exception.--For the purpose of determining whether a person is an
interested shareholder:
(1) The number of votes that would be entitled to be cast in an election
of directors of the corporation shall be calculated by including shares deemed
to be beneficially owned by the person through application of the definition of
"beneficial owner" in section 2552 (relating to definitions), but excluding any
other unissued shares of such corporation which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion or
option rights, or otherwise; and
(2) There shall be excluded from the beneficial ownership of the
interested shareholder any:
(i) Shares which have been held continuously by a natural person since
January 1, 1983, and which are then held by that natural person;
(ii) Shares which are then held by any natural person or trust, estate,
foundation or other similar entity to the extent such shares were acquired
solely by gift, inheritance, bequest, devise or other testamentary distribution
or series of those transactions, directly or indirectly, from a natural person
who had acquired such shares prior to January 1, 1983; or
(iii) Shares which were acquired pursuant to a stock split, stock
dividend, reclassification or similar recapitalization with respect to shares
described under this paragraph that have been held continuously since their
issuance by the corporation by the natural person or entity that acquired them
from the corporation, or that were acquired, directly or indirectly, from the
natural person or entity, solely pursuant to a transaction or series of
transactions described in subparagraph (ii), and that are then held by a natural
person or entity described in subparagraph (ii).
2554 BUSINESS COMBINATION.--The term "business combination," when used in
reference to any registered corporation and any interested shareholder of the
corporation, means any of the following:
(1) A merger, consolidation, share exchange or division of the corporation
or any subsidiary of the corporation:
(i) with the interested shareholder; or
(ii) with, involving or resulting in any other corporation (whether or not
itself an interested shareholder of the registered corporation) which is, or
after the merger, consolidation, share exchange or division would be, an
affiliate or associate of the interested shareholder.
(2) A sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with the
interested shareholders or any affiliate or associate of such interested
shareholder of assets of the corporation or any subsidiary of the corporation.
(i) Having an aggregate market value equal to 10% or more of the aggregate
market value of all the assets, determined on a consolidated basis, of such
corporation;
(ii) Having an aggregate market value equal to 10% or more of the
aggregate market value of all the outstanding shares of such corporation; or
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(iii) Representing 10% or more of the earning power or net income,
determined on a consolidated basis, of such corporation.
(3) The issuance or transfer by the corporation or any subsidiary of the
corporation (in one transaction or a series of transactions) of any shares of
corporation or any subsidiary of such corporation which has an aggregate market
value equal to five percent or more of the aggregate market value of all the
outstanding shares of the corporation to the interested shareholder or any
affiliate or associate of such interested shareholder except pursuant to the
exercise of option rights to purchase shares, or pursuant to the conversion of
securities having conversion rights, offered, to a dividend or distribution paid
or made, pro rata to all shareholders of the corporation.
(4) The adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by, or pursuant to any agreement,
arrangement or understanding (whether or not in writing) with, the interested
shareholder or any affiliate or associate of such interested shareholder.
(5) A reclassification of securities (including, without limitation, any
split of shares, dividend or shares, or other distribution of shares in respect
of shares, or any reverse split of shares), or recapitalization of the
corporation, or any merger or consolidation of the corporation with any
subsidiary of the corporation, or any other transaction (whether or not with or
into or otherwise involving the interested shareholder), proposed by, or
pursuant to any agreement, arrangement or understanding (whether or not in
writing) with, the interested shareholder of any affiliate or associate of the
interested shareholder, which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class or
series of voting shares or securities convertible into voting shares of the
corporation or any subsidiary of the corporation which is, directly or
indirectly, owned by the interested shareholder or any affiliate or associate of
the interested shareholder, except as a result of immaterial changes due to
fractional share adjustments.
(6) The receipt by the interested shareholder or any affiliate or
associate of the interested shareholder of the benefit, directly or indirectly
(except proportionately as a shareholder of such corporation), of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by or through the corporation. (Last amended
by Act 198, L. `90, eff. 12-19-90.)
2555 REQUIREMENTS RELATING TO CERTAIN BUSINESS COMBINATIONS.--
Notwithstanding anything to the contrary contained in this subpart (except the
provisions of section 2551 (relating to application and effect of subchapter)),
a registered corporation shall not engage at any time in any business
combination with any interested shareholder of the corporation other than:
(1) A business combination approved by the board of directors of the
corporation prior to the interested shareholder's share acquisition date, or
where the purchase of shares made by the interested shareholder on the
interested shareholder's share acquisition date had been approved by the board
of directors of the corporation prior to the interested shareholder's share
acquisition date.
(2) A business combination approved:
(i) By the affirmative vote of the holders of shares entitling such
holders to cast a majority of the votes that all shareholders would be entitled
to cast in an election of directors of the corporation, not including any voting
shares beneficially owned by the interested shareholder or any affiliate or
associate of such interested shareholder, at a meeting called for such purpose
no earlier than three months after the interested shareholder became, and if at
the time of the meeting the interested shareholder is, the beneficial owner,
directly or indirectly, of shares entitling the interested shareholder to cast
at least 80% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation, and if the business combination
satisfies all the conditions of section 2556 (relating to certain minimum
conditions); or
(ii) By the affirmative vote of all of the holders of all of the
outstanding common shares.
(3) A business combination approved by the affirmative vote of the holders
of shares entitling such holders to cast a majority of the votes that all
shareholders would be entitled to cast in an election of directors of the
corporation, not including any voting shares beneficially owned by the
interested shareholder or any affiliate or associate of the interested
shareholder, at a meeting called for such purpose no earlier than five years
after the interested shareholder's share acquisition date.
(4) A business combination approved at a shareholders' meeting called for
such purpose no earlier than five years after the interested shareholder's share
acquisition date that meets all of the conditions of section 2556.
2556 CERTAIN MINIMUM CONDITIONS.--A business combination conforming to
section 2555(2)(i) or (4) (relating to requirements relating to certain business
combinations) shall meet all of the following conditions:
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(1) The aggregate amount of the cash and the market value as of the date
consummation date of consideration other than cash to be received per share by
holders of outstanding common shares of such registered corporation in the
business combination is at least equal to the higher of the following:
(i) The highest per share price paid by the interested shareholder at a
time when the shareholder was the beneficial owner, directly or indirectly, of
shares entitling that person to cast at least five percent of the votes that all
shareholders would be entitled to cast in an election of directors of the
corporation, for any common shares of the same class or series acquired by it:
(A) within the five-year period immediately prior to the announcement date
with respect to such business combination; or
(B) within the five-year period immediately prior to, or in, the
transaction in which the interested shareholder became an interested
shareholder;
whichever is higher; plus, in either case, interest compounded annually from the
earlier date on which the highest per-share acquisition price was paid through
the consummation date at the rate for one year United States treasury
obligations from time to time in effect; less the aggregate amount of any cash
dividends paid, and the market value of any dividends paid other than in cash,
per common share since such earliest date, up to the amount of the interest.
(ii) The market value per common share on the announcement date with
respect to the business combination or on the interested shareholder's share
acquisition date, whichever is higher; plus interest compounded annually from
such date through the consummation date at the rate for one-year United States
treasury obligations from time to time in effect; less the aggregate amount of
any cash dividends paid, and the market value of any dividends paid other than
in cash, per common share since such date, up to the amount of the interest.
(2) The aggregate amount of the cash and the market value as of the
consummation date of consideration other than cash to be received per share by
holders of outstanding shares of any class or series of shares, other than
common shares, of the corporation is at least equal to the highest of the
following (whether or not the interested shareholder has previously acquired any
shares of such class or series of shares);
(i) The highest per-share price paid by the interested shareholder at a
time when the shareholder was the beneficial owner, directly or indirectly, of
shares entitling that person to cast at least five percent of the votes that all
shareholders would be entitled to cast in an election of directors of such
corporation, for any shares of such class or series of shares acquired by it;
(A) within the five-year period immediately prior to the announcement date
with respect to such business combination; or
(B) within the five-year period immediately prior to, or in, the
transaction in which the interested shareholder became an interested
shareholder;
whichever is higher; plus, in either case, interest compounded from the earliest
date on which the highest per-share acquisition price was paid through the
consummation date at the rate for one year United States treasury obligations
from time to time in effect; less the aggregate amount of any cash dividends
paid, and the market value of any dividends paid other than in cash, per common
share since such earliest date, up to the amount of the interest.
(ii) The market value per common share on the announcement date with
respect to the business combination or on the interested shareholder's share
acquisition date, whichever is higher; plus interest compounded annually from
such date through the consummation date at the rate for one-year United States
treasury obligations from time to time in effect; less the aggregate amount of
any cash dividends paid, and the market value of any dividends paid other than
in cash, per common share since such earliest date, up to the amount of the
interest.
(2) The aggregate amount of the cash and the market value as of the
consummation date of consideration other than cash to be received per share by
holders of outstanding shares of any class or series of shares, other than
common shares, of the corporation is at least equal to the highest of the
following (whether or not the interested shareholder has previously acquired any
shares of such class or series of shares);
(i) The highest per-share price paid by the interested shareholder at a
time when the shareholder was the beneficial owner, directly or indirectly, of
shares entitling that person to cast at least five percent of the votes that all
shareholders would be entitled to cast in an election of directors of such
corporation, for any shares of such class or series of shares acquired by it;
(A) within the five-year period immediately prior to the announcement date
with respect to the business combination; or
(B) within the five-year period immediately prior to, or in, the
transaction in which the interested shareholder became an interested
shareholder;
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whichever is higher: plus, in either case, interest compounded annually from
the earliest date on which the highest per-share acquisition price was paid
through the consummation date at the rate for one-year United States treasury
obligations from time to time in effect; less the aggregate amount of any cash
dividends paid, and the market value of any dividends paid other than in cash,
per share of such class or series of shares since such earliest date, up to the
amount of the interest.
(ii) The highest preferential amount per share to which the holders of
shares of such class or series of shares are entitled in the event of any
voluntary liquidation, dissolution or winding up of the corporation, plus the
aggregate amount of any dividends declared or due as to which such holders are
entitled prior to payment of dividends on some other class or series of shares
(unless the aggregate amount of the dividends is included in such preferential
amount).
(iii) The market value per share of such class or series of shares on the
announcement date with respect to the business combination or on the interested
shareholder's share acquisition date, whichever is higher; plus interest
compounded annually from such date through the consummation date at the rate for
one-year United States treasury obligations from time to time in effect; less
the aggregate amount of any cash dividends paid and the market value of any
dividends paid other than in cash, per share of such class or series of shares
since such date, up to the amount of the interest.
(3) The consideration to be received by holders of a particular class or
series of outstanding shares (including common shares) of the corporation in the
business combination is in cash or in the same form as the interested
shareholder has used to acquire the largest number of shares of such class or
series of shares previously acquired by it, and the consideration shall be
distrusted promptly.
(4) The holders of all outstanding shares of the corporation not
beneficially owned by the interested shareholder immediately prior to the
consummation of the business combination are entitled to receive in the business
combination cash or other consideration for such shares in compliance with
paragraphs (1), (2) and (3).
(5) After the interested shareholder's share acquisition date and prior to
the consummation date with respect to the business combination, the interested
shareholder has not become the beneficial owner of any additional voting shares
of such corporation except:
(i) As part of the transaction which resulted in such interested
shareholder becoming an interested shareholder,
(ii) By virtue of proportionate splits of shares, share dividends or other
distributions of shares in respect of shares not constituting a business
combination as defined in this subchapter;
(iii) Through a business combination meeting all of the conditions of
section 2555(1), (2) (3) or (4);
(iv) Through purchase by the interested shareholder at any price which, if
the price had been paid in an otherwise permissible business combination the
announcement date and consummation date of which were the date of such purchase,
would have satisfied the requirements of paragraphs (1), (2) and (3); or
(v) Through purchase required by and pursuant to the provisions of, and at
no less than the fair value (including interest to the date of payment) as
determined by a court-appointed appraiser under section 2547 (relating to
valuation procedures) or, if such fair value was not then so determined, then at
a price that would satisfy the conditions in subparagraph (iv).
Subchapter G. Control-Share Acquisitions
(Added by Act 36, L. `89, eff. 4-27-90.)
2561 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except as
otherwise provided in this section, this subchapter shall apply to every
registered corporation.
(b) Exceptions.--This subchapter shall not apply to any control-share
acquisition:
(1) Of a registered corporation described in section 2502(1)(ii) or (2)
(relating to registered corporation status).
(2) Of a corporation:
(i) the bylaws of which explicitly provide that this subchapter shall not
be applicable to the corporation by amendment adopted by the board of directors
on or before July 26, 1990, in the case of a corporation:
(A) which on April 27, 1990, was a registered corporation described in
section 2502(1)(i); and
(B) did not on that date have outstanding one or more classes or series of
preference shares entitled, upon the occurrence of a default in the payment of
dividends or another similar contingency, to elect a majority of the members of
the board of directors adopted on or before July 26, 1990, by a corporation
excluded from the scope of this subparagraph by this clause shall be ineffective
unless ratified under subparagraph (ii);
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(ii) the bylaws of which explicitly provide that this subchapter shall not
be applicable to the corporation by amendment ratified by the board of directors
on or after December 19, 1990, and on or before March 19, 1991, in the case of a
corporation:
(A) which on April 27, 1990, was a registered corporation described in
section 2502(1)(i);
(B) which on that date had outstanding one or more classes or series of
preference shares entitled, upon the occurrence of a default in the payment of
dividends or another similar contingency, to elect a majority of the members of
the board of directors; and
(C) the bylaws of which on that date contained a provision described in
subparagraph (i); or
(iii) in any other case, the articles of which explicitly provide that
this subchapter shall not be applicable to the corporation by a provision
included in the original articles, or by an articles amendment adopted at any
time while it is a corporation other than a registered corporation described in
section 2502(1)(i) prior or before 90 days after the corporation first becomes a
registered corporation described in section 2502(1)(i).
(3) Consummated before October 17, 1989.
(4) Consummated pursuant to contractual rights or obligations existing
before:
(i) October 17, 1989, in the case of a corporation which was a registered
corporation described in section 2502(1)(i) on that date; or
(ii) in any other case, the date this subchapter becomes applicable to the
corporation.
(5) Consummated:
(i) Pursuant to a gift, devise, bequest or otherwise through the laws of
inheritance of descent.
(ii) By a settlor to a trustee under the terms of a family, testamentary
or charitable trust.
(iii) By a trustee to a trust beneficiary or a trustee to a successor
trustee under the terms of, or the addition, withdrawal or demise of a
beneficiary or beneficiaries of, a family, testamentary or charitable trust.
(iv) Pursuant to the appointment of a guardian or custodian.
(v) Pursuant to a transfer from one spouse to another by reason of
separation or divorce or pursuant to community property laws or other similar
laws of any jurisdiction.
(vi) Pursuant to the satisfaction of a pledge or other security interest
created in good faith and not for the purpose of circumventing this subchapter.
(vii) Pursuant to a merger, consolidation or plan of share exchange
effected in compliance with the provisions of this chapter if the corporation is
a party to the agreement of merger, consolidation or plan of share exchange.
(viii) Pursuant to a transfer from a person who beneficially owns voting
shares of the corporation that would entitle the holder thereof to cast at least
20% of the votes that all shareholders would be entitled to cast in an election
of directors of the corporation and who acquired beneficial ownership of such
shares prior to October 17, 1989.
(ix) By the corporation or any of its subsidiaries.
(x) By any savings, stock ownership, stock option or other benefit plan of
the corporation or any of its subsidiaries, or by any fiduciary with respect to
any such plan when acting in such capacity.
(xi) By a person engaged in business as an underwriter of securities who
acquires the shares directly from the corporation or an affiliate or associate
of the corporation through his participation in good faith in a firm commitment
underwriting registered under the Securities Act of 1933.
(xii) Or commenced by a person who first became an acquiring person:
(A) after April 27, 1990; and
(II) on or before 10 business days after the first public announcement by
the corporation that this subchapter is applicable to the corporation, if this
subchapter was not applicable to the corporation on July 27, 1990.
(c) Effect of distributions.--For purposes of this subchapter, voting
shares of a corporation acquired by a holder as a result of a stock split, stock
dividend or other similar distribution by a corporation of voting shares issued
by the corporation and not involving a sale of such voting shares shall be
deemed to have been acquired by the holder in the same transaction (at the same
time, in the same manner and from the same person) in which the holder acquired
the shares with respect to which such voting shares were subsequently
distributed by the corporation.
(d) Status of certain shares and effect of formation of group on status.--
(1) No share over which voting power, or of which beneficial ownership, was or
is acquired by the acquiring person in or in connection with a control-share
acquisition described in subsection (b) shall be deemed to be a control share.
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(2) In the case of affiliate, disinterested or existing shares, the
acquisition of a beneficial ownership interest in a voting share by a group
shall not, by itself, affect the status of an affiliate, disinterested or
existing share, as such, if and so long as the person who had beneficial
ownership of the share immediately prior to the acquisition of the beneficial
ownership interest in the share by the group (or a direct or indirect transferee
from the person to the extent such shares were acquired by the transferee solely
pursuant to a transfer or series of transfer under subsection (b)(5)(i) through
(vi)):
(i) is a participant in the group; and
(ii) continues to have at least the same voting and dispositive power over
the share as the person had immediately prior to the acquisition of the
beneficial ownership interest in the share by the group.
(3) Voting shares which are beneficially owned by a person described in
paragraph (1), (2) or (3) of the definition of "affiliate shares" in section
2562 (relating to definitions) shall continue to be deemed affiliate shares,
notwithstanding paragraph (2) of this subsection or the fact that such shares
are also beneficially owned by a group.
(4) No share of a corporation over which voting power, or of which
beneficial ownership, was or is acquired by the acquiring person after April 27,
1990, at a time when this subchapter was or is not applicable to the corporation
shall be deemed to be a control share.
(e) Application of duties.--The duty of the board of directors, committees
of the board and individual directors under section 2565 (relating to procedure
for establishing voting rights of control shares) is solely to the corporation
and may be enforced directly by the corporation or may be enforced by a
shareholder, as such, by an action in the right of the corporation, and may not
be enforced directly by a shareholder or by any other person or group. (Last
amended by Act 198, L. '90, eff. 12-19-90.)
2562 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Acquiring person." A person who makes or proposes to make a control-share
acquisition. Two or more persons acting in concert, whether or not pursuant to
an express agreement, arrangement, relationship or understanding, including as a
partnership, limited partnership, syndicate, or through any means of affiliation
whether or not formally organized, for the purpose of acquiring, holding, voting
or disposing of shares of a registered corporation, shall also constitute a
person for the purposes of this subchapter. A person, together with its
affiliates and associates, shall constitute a person for the purposes of this
subchapter.
"Affiliate," "associate" and "beneficial owner." The terms shall have the
meanings specified in section 2552 (relating to definitions). The corporation
may adopt reasonable provisions to evidence beneficial ownership, specifically
including requirements that holders of voting shares of the corporation provide
verified statements evidencing beneficial ownership and attesting to the date of
acquisition thereof.
"Affiliate shares." All voting shares of a corporation beneficially owned
by:
(1) an acquiring person;
(2) executive officers or directors who are also officers (including
executive officers); or
(3) employee stock plans in which employee participants do not have, under
the terms of the plan, the right to direct confidentially the manner in which
shares held by the plan for the benefit of the employee will be voted in
connection with the consideration of the voting rights to be accorded control
shares.
The term does not include existing shares beneficially owned by executive
officers or directors who are also officers (including executive officers) if
the shares are shares described in paragraph (2) of the definition of "existing
shares" that were beneficially owned continuously by the same person or entity
described in such paragraph since January 1, 1988, or are shares described in
paragraph (3) of that definition that were acquired with respect to such
existing shares.
"Control." The term shall have the meaning specified in section 2573
(relating to definitions).
"Control-share acquisition." An acquisition, directly or indirectly, by
any person of voting power over voting shares of a corporation that, but for
this subchapter, would, when added to all voting power of the person over other
voting shares of the corporation (exclusive of voting power of the person with
respect to existing shares of the corporation), entitle the person to cast or
direct the casting of such a percentage of the votes for the first time with
respect to any of the following ranges that all shareholders would be entitled
to cast in an election of directors of the corporation:
(1) at least 20% but less than 33 1/3%;
(2) at least 33 1/3 but less than 50%; or
(3) 50% or more.
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"Control shares." Those voting shares of a corporation that, upon
acquisition of voting power over such shares by an acquiring person, would
result in a control-share acquisition. Voting shares beneficially owned by an
acquiring person shall also be deemed to be control shares where such beneficial
ownership was acquired by the acquiring person:
(1) within 180 days of the day the person makes a control-share
acquisition; or
(2) with the intention of making a control-share acquisition.
"Disinterested shares." All voting shares of a corporation that are not
affiliate shares and that were beneficially owned by the same holder (or a
direct or indirect transferee from the holder to the extent such shares were
acquired by the transferee solely pursuant to a transfer or series of transfers
under section 2561(b)(5)(i) through (vi) (relating to application and effect of
subchapter)) continuously during the period from:
(1) the last to occur of the following dates:
(i) 12 months preceding the record date described in paragraph (2);
(ii) five business days prior to the date on which there is first publicly
disclosed or caused to be disclosed information that there is a person
(including the acquiring person) who intends to engage or may seek to engage in
a control-share acquisition or that there is a person (including the acquiring
person) who has acquired shares as part of, or with the intent of making, a
control-share acquisition, as determined by the board of directors of the
corporation in good faith considering all the evidence that the board deems to
be relevant to such determination, including, without limitation, media reports,
share trading volume and changes in share prices; or
(iii) (A) October 17, 1989, in the case of a corporation which was a
registered corporation on that date; or
(B) in any other case, the date this subchapter becomes applicable to the
corporation; through
(2) the record date established pursuant to section 2565(c) (relating to
notice and record date).
"Executive officer." When used with reference to a corporation, the
president, any vice-president in charge of a principal business unit, division
or function (such as sales, administration or finance), any other officer who
performs a policy-making function or any other person who performs similar
policy-making functions. Executive officers of subsidiaries shall be deemed
executive officers of the corporation if they perform such policy-making
functions for the corporation.
"Existing shares."
(1) Voting shares which have been beneficially owned continuously by the
same natural person since January 1, 1988.
(2) Voting shares which are beneficially owned by any natural person or
trust, estate, foundation or other similar entity to the extent the voting
shares were acquired solely by gift, inheritance, bequest, devise or other
testamentary distribution or series of these transactions, directly or
indirectly, from a natural person who had beneficially owned the voting shares
prior to January 1, 1988.
(3) Voting shares which were acquired pursuant to a stock split, stock
dividends, or other similar distribution described in section 2561(c) (relating
to effect of distributions) with respect to existing shares that have been
beneficially owned continuously since their issuance by the corporation by the
natural person or entity that acquired them from the corporation or that were
acquired, directly or indirectly, from such natural person or entity, solely
pursuant to a transaction or series of transactions described in paragraph (2),
and that are held at such time by a natural person or entity described in
paragraph (2).
"Proxy." Includes any proxy, consent or authorization.
"Proxy solicitation" or "Solicitation of proxies." Includes any
solicitation of a proxy, including a solicitation of a revocable proxy of the
nature and under the circumstances described in section 2563(b)(3) (relating to
acquiring person safe harbor).
"Publicly disclosed or caused to be disclosed." Includes, but is not
limited to, any disclosure (whether or not required by law) that becomes public
made by a person:
(1) with the intent or expectation that such disclosure become public; or
(2) to another where the disclosing person knows, or reasonably should
have known, that the receiving person was not under an obligation to refrain
from making such disclosure, directly or indirectly, to the public and such
receiving person does make such disclosure, directly or indirectly, to the
public.
"Voting shares." The term shall have the meaning specified in section 2552
(relating to definitions). (Last amended by Act 198, L. `90, eff. 12-19-90.)
2563 ACQUIRING PERSON SAFE HARBOR .--(a) Nonparticipant.--For the
purposes of this subchapter, a person shall not be deemed an acquiring person,
absent significant other activities indicating that a
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person should be deemed an acquiring person, by reason of voting or giving a
proxy or consent as a shareholder of the corporation if the person is one who:
(1) did not acquire any voting shares of the corporation with the purpose
of changing or influencing control of the corporation, seeking to acquire
control of the corporation or influencing the outcome of a vote of shareholders
under section 2564 (relating to voting rights of shares acquired in a control-
share acquisition) or in connection with or as a participant in any agreement,
arrangement, relationship, understanding or otherwise having any such purpose;
(2) if the control-share acquisition were consummated, would not be a
person that has control over the corporation and will not receive, directly or
indirectly, any consideration from a person that has control over the
corporation other than consideration offered proportionately to all holders of
voting shares of the corporation; and
(3) If a proxy or consent is given, executes a revocable proxy or consent
given without consideration in response to a proxy or consent solicitation made
in accordance with the applicable rules and regulations under the Exchange Act
under circumstances not then reportable on Schedule 13D under the Exchange Act
(or any comparable or successor report) by the person who gave the proxy or
consent.
(b) Certain holders.--For the purpose of this subchapter, a person shall
not be deemed an acquiring person if such person holds voting power within any
of the ranges specified in the definition of "control-share acquisition":
(1) in good faith and not for the purpose of circumventing this
subchapter, as an agent, bank, broker, nominee or trustee for one or more
beneficial owners who do not individually or, if they are a group acting in
concert, as a group have the voting power specified in any of the ranges in the
definition of "control-share acquisition";
(2) in connection with the solicitation of proxies or consents by or on
behalf of the corporation in connection with shareholder meetings or actions of
the corporation;
(3) as a result of the solicitation of revocable proxies or consents with
respect to voting shares if such proxies or consents both:
(i) are given without consideration in response to a proxy or consent
solicitation made in accordance with the applicable rules and regulations under
the Exchange Act; and
(ii) do not empower the holder thereof, whether or not this power is
shared with any other person, to vote such shares except on the specific matters
described in such proxy or consent and in accordance with the instructions of
the giver or such proxy or consent; or
(4) to the extent of voting power arising from a contingent right of the
holders of one or more classes or series of preference shares to elect one or
more members of the board of directors upon or during the continuation of a
default in the payment of dividends on such shares or another similar
contingency. (Last amended by Act 198, L. `90, eff. 12-19-90.)
1. In general.--The District Court for the Eastern District of
Pennsylvania held that, in tabulating the votes in a corporate election, the
judge of elections correctly relied upon Pennsylvania's Control Shares Act (15
Pa. Cons. Stat. Ann. (S)(S)2561 et seq.) to disenfranchise votes for an
insurgent group of shareholders where the votes were granted by a proxy which
vested discretionary authority in the proxyholders. The Control Shares Act
regulates control share acquisitions of corporations, occurring when any person
acquires voting power over specific percentages of control shares. Although it
provides a "safe harbor" for voting power acquired through proxies if they are
given in response to proxy solicitation in accordance with SEC rules and if the
proxy does not vest the holder with discretionary authority, the proxyholders
here failed to meet the second requirement for exemption from the statute's
provisions. The court went on to hold, however, that for purposes of
establishing a quorum for the meeting, the shares ineffectively cast by proxy
must still be considered to be outstanding shares. This being the case, a
quorum was not present, and all action taken at the meeting was null and void.
The Committee for New Management of Guaranty Bancshares Corp v Dimeling, 772
FSupp 230 (ED Pa 1991).
2564 VOTING RIGHTS OF SHARES ACQUIRED IN A CONTROL-SHARE ACQUISITION.--(a)
General rule.--Control shares shall not have any voting rights unless a
resolution approved by a vote of shareholders of the registered corporation at
an annual or special meeting of shareholders pursuant to this subchapter
restores to the control elections of directors and all other matters coming
before the shareholders. Any such resolution may be approved only by the
affirmative vote of the holders of a majority of the voting power entitled to
vote in two separate votes as follows:
(1) all the disinterested shares of the corporation; and
(2) all voting shares of the corporation.
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(b) Lapse of voting rights.--Voting rights accorded by approval of a
resolution of shareholders shall lapse and be lost if any proposed control-share
acquisition which is the subject of the shareholder approval is not consummated
within 90 days after shareholder approval is obtained.
(c) Restoration of voting rights.--Any control shares that do not have
voting rights accorded to them by approval of a resolution of shareholders as
provided in subsection (a) or the voting rights of which lapse pursuant to
subsection (b) shall regain voting rights on transfer to a person other than the
acquiring person or any affiliate or associate of the acquiring person (or
direct or indirect transferee from the acquiring person or such affiliate or
associate solely pursuant to a transfer or series of transfers under section
2561 (b)(5)(i) through (vi) (relating to application and effect of subchapter))
unless such shares shall constitute control shares of the other person, in which
case the voting rights of those shares shall again be subject to this
subchapter. (Last amended by Act 198, L. '90, eff. 12-19-90.)
2565 PROCEDURE FOR ESTABLISHING VOTING RIGHTS OF CONTROL SHARES.--(a)
Special Meeting.--A special meeting of the shareholders of a registered
corporation shall be called by the board of directors of the corporation for the
purpose of considering the voting rights to be accorded to the control shares if
an acquiring person:
(1) files an information statement fully conforming to section 2566
(relating to information statement of acquiring person);
(2) makes a request in writing for a special meeting of the shareholders
at the time of delivery of the information statement;
(3) makes a control-share acquisition or a bona fide written offer to make
a control-share acquisition; and
(4) gives a written undertaking at the time of delivery of the information
statement to pay or reimburse the corporation for the expenses of a special
meeting of the shareholders.
The special meeting requested by the acquiring person shall be held on the date
set by the board of directors of the corporation, but in no event later than 50
days after the receipt of the information statement by the corporation, unless
the corporation and the acquiring person mutually agree to a later date. If the
acquiring person so requests in writing at the time of delivery of the
information statement to the corporation, the special meeting shall not be held
sooner than 30 days after receipt by the corporation of the complete information
statement.
(b) Special meeting not requested.--If the acquiring person complies with
subsection (a)(1) and (3), but no request for a special meeting is made or no
written undertaking to pay or reimburse the expenses of the meeting is given,
the issue of the voting rights to be accorded to control shares shall be
submitted to the shareholders at the next annual or special meeting of the
shareholders of which notice had not been given prior to the receipt of such
information statement, unless the matter of the voting rights becomes moot.
(c) Notice and record date.--The notice of any annual or special meeting
at which the issue of the voting rights to be accorded the control shares shall
be submitted to shareholders shall be given at least 10 days prior to the date
named for the meeting and shall be accompanied by:
(1) A copy of the information statement of the acquiring person.
(2) A copy of any amendment of such information statement previously
delivered to the corporation at least seven days prior to the date on which such
notice is given.
(3) A statement disclosing whether the board of directors of the
corporation recommends approval of, expresses no opinion and remains neutral
toward, recommends rejection of, or is unable to take a position with respect to
according voting rights to control shares. In determining the position that it
shall take with respect to according voting rights to control shares, including
to express no opinion and remain neutral or to be unable to take a position with
respect to such issue, the board of directors shall specifically consider, in
addition to any other factors it deems appropriate, the effect of according
voting rights to control shares upon the interests of employees and of
communities in which offices or other establishments of the corporation are
located.
(4) Any other matter required by this subchapter to be incorporated into
or to accompany the notice of meeting of shareholders or that the corporation
elects to include with such notice.
Only shareholders of record on the date determined by the board of
directors in accordance with the provisions of section 1763 (relating to
determination of shareholders of record) shall be entitled to notice of and to
vote at the meeting to consider the voting rights to be accorded to control
shares.
(d) Special meeting or submission of issue at annual or special meeting
not required.--Notwithstanding subsections (a) and (b), the corporation is not
required to call a special meeting of shareholders or otherwise present
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the issue of the voting rights to be accorded to the control shares at any
annual or special meeting of shareholders unless:
(1) the acquiring person delivers to the corporation a complete
information statement pursuant to section 2566; and
(2) at the time of delivery of such information statement, the acquiring
person has:
(i) entered into a definitive financing agreement or agreements (which
shall not include best efforts, highly confident or similar undertakings but
which may have the usual and customary conditions including conditions requiring
that the control-share acquisition be consummated and that the control shares be
accorded voting rights) with one or more financial institutions or other persons
having the necessary financial capacity as determined by the board of directors
of the corporation in good faith to provide for any amounts of financing of the
control-share acquisition not to be provided by the acquiring person; and
(ii) delivered a copy of such agreements to the corporation. (Last
amended by Act 198, L. `90, eff. 12-19-90.)
2566 INFORMATION STATEMENT OF ACQUIRING PERSON.--(a) Delivery of
information statement.--An acquiring person may deliver to the registered
corporation at its principal executive office an information statement which
shall contain all of the following:
(1) The identify of the acquiring person and the identity of each
affiliate and associate of the acquiring person.
(2) A statement that the information statement is being provided under
this section.
(3) The number and class or series of voting shares and of any other
security of the corporation beneficially owned, directly or indirectly, prior to
the control-share acquisition and at the time of the filing of this statement by
the acquiring person.
(4) The number and class or series of voting shares of the corporation
acquired or proposed to be acquired pursuant to the control-share acquisition by
the acquiring person and specification of the following ranges of votes that the
acquiring person could cast or direct the casting of relative to all the votes
that would be entitled to be cast in an election of directors of the corporation
that the acquiring person in good faith believes would result from consummation
of the control-share acquisition:
(i) At least 20% but less than 33 1/3%.
(ii) At least 33 1/3% but less than 50%.
(iii) 50% or more.
(5) The terms of the control-share acquisition or proposed control-share
acquisition, including:
(i) The source of moneys or other consideration and the material terms of
the financial arrangements for the control-share acquisition and the plans of
the acquiring person for meeting its debt-service and repayment obligations with
respect to any such financing.
(ii) A statement identifying any pension fund of the acquiring person or
of the corporation which is a source or proposed source of money or other
consideration for the control-share acquisition, proposed control-share
acquisition or the acquisition of any control shares and the amount of such
money or other consideration which has been or is proposed to be used, directly
or indirectly, in the financing of such acquisition.
(6) Plans or proposals of the acquiring person with regard to the
corporation, including plans or proposals of under consideration to:
(i) Enter into a business combination or combinations involving the
corporation.
(ii) Liquidate or dissolve the corporation.
(iii) Permanently or temporarily shut down any plant, facility or
establishment, or substantial part thereof, of the corporation, or sell any such
plant, facility or establishment, or substantial part thereof, to any other
person.
(iv) Otherwise sell all or a material part of the assets of , or merge,
consolidate, divide or exchange the shares of the corporation to or with any
other person.
(v) Transfer a material portion of the work, operations or business
activities of any plant, facility or establishment of the corporation to a
different location or to a plant, facility or establishment owned, as of the
date the information statement is delivered, by any other person.
(vi) Change materially the management or policies of employment of the
corporation or the policies of the corporation with respect to labor relations
matters, including, but not limited to, the recognition of or negotiations with
any labor organization representing employees of the corporation and the
administration of collective bargaining agreements between the corporation and
any such organization.
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(vii) Change materially the charitable or community involvement or
contributions or policies, programs or practices relating thereto of the
corporation.
(viii) Change materially the relationship with suppliers or customers of,
or the communities in which there are operations of, the corporation.
(ix) Make any other material change in the business, corporate structure,
management or personnel of the corporation.
(7) The funding or other provisions the acquiring person intends to make
with respect to all retiree insurance and employee benefit plan obligations.
(8) Any other facts that would be substantially likely to affect the
decision of a shareholder with respect to voting on the control-share
acquisition pursuant to section 2564 (relating to voting rights of shares
acquired in a control-share acquisition).
(b) Amendment of information statement.--If any material change occurs in
the facts set forth in the information statement, including any material
increase or decrease in the number of voting shares of the corporation acquired
or proposed to be acquired by the acquiring person, the acquiring person shall
promptly deliver, to the corporation at its principal executive office, an
amendment to the information statement fully explaining such material change.
(Last amended by Act 198, L. `90, eff. 12-19-90.)
2567 REDEMPTION.--Unless prohibited by the terms of the articles of a
registered corporation in effect before a control-share acquisition has
occurred, the corporation may redeem all control shares from the acquiring
person at the average of the high and low sales price of shares of the same
class and series as such prices are specified on a national securities exchange,
national quotation system or similar quotation listing service on the date the
corporation provides notice to the acquiring person of the call for redemption:
(1) at any time within 24 months after the date on which the acquiring
person consummates a control-share acquisition, if the acquiring person does
not, within 30 days after consummation of the control-share acquisition,
properly request that the issue of voting rights to be accorded control shares
be presented to the shareholders under section 2565(a) or (b) (relating to
procedure for establishing voting rights of control shares); and
(2) at any time within 24 months after the issue of voting rights to be
accorded such shares is submitted to the shareholders pursuant to section
2565(a) or (b); and
(i) such voting rights are not accorded pursuant to section 2564(a)
(relating to voting rights of shares acquired in control-share acquisition); or
(ii) such voting rights are accorded and subsequently lapse pursuant to
section 2564(b) (relating to lapse of voting rights). (Last amended by Act 198,
L. `90, eff. 12-19-90.)
2568 BOARD DETERMINATIONS.--All determinations made by the board of
directors of the registered corporation under this subchapter shall be presumed
to be correct unless shown by clear and convincing evidence that the
determination was not made by the directors in good faith after reasonable
investigation or was clearly erroneous. (Last amended by Act 198, L. `90, eff.
12-19-90.)
Subchapter H.
Disgorgement by Certain Controlling Shareholders
Following Attempts to Acquire Control
(Added by Act 36, L. `89, eff. 4-27-90.)
2571 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except as
otherwise provided in this section, this subchapter shall apply to every
registered corporation.
(b) Exceptions.--This subchapter shall not apply to any transfer of an
equity security:
(1) Of a registered corporation described in section 2502(1)(ii) or (2)
(relating to registered corporation status).
(2) Of a corporation:
(i) (A) the bylaws of which explicitly provide that this subchapter shall
not be applicable to the corporation by amendment adopted by the board of
directors on or before July 26, 1990, in the case of a corporation:
(I) which on April 27, 1990, was a registered corporation described in
section 2502(1)(i); and
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(II) did not on that date have outstanding one or more classes or series
of preference shares entitled, upon the occurrence of a default in the payment
of dividends or another similar contingency, to elect a majority of the members
of the board of directors;
(B) a bylaw adopted on or before July 26, 1990, by a corporation excluded
from the scope of this subparagraph by clause (A)(II) shall be ineffective
unless ratified under subparagraph (ii);
(ii) the bylaws of which explicitly provide that this subchapter shall not
be applicable to the corporation by amendment ratified by the board of directors
on or after (in printing this act in the Laws of Pennsylvania and the
Pennsylvania Consolidated Statutes, the Legislative Reference Bureau shall
insert here, in lieu of this statement, the date which is the date of enactment
of this amendatory act) and on or before (in printing this act in the Laws of
Pennsylvania and the Pennsylvania Consolidated Statutes, the Legislative
Reference Bureau shall insert here, in lieu of this statement, the date which is
90 days after the date of enactment of this amendatory act) in the case of a
corporation:
(A) which on April 27, 1990, was a registered corporation described in
section 2502(1)(i);
(B) which on that date had outstanding one or more classes or series of
preference shares entitled, upon the occurrence of a default in the payment of
dividends or another similar contingency, to elect a majority of the members of
the board of directors; and
(C) the bylaws of which on that date contained a provision described in
subparagraph (i); or
(iii) in any other case, the articles of which explicitly provide that
this subchapter shall not be applicable to the corporation by a provision
included in the original articles, or by an articles amendment adopted at any
time while it is a corporation other than a registered corporation described in
section 2502(1)(i) or on or before 90 days after the corporation first becomes a
registered corporation described in section 2502(1)(i).
(3) Consummated before October 17, 1989, if both the acquisition and
disposition of each equity security were consummated before October 17, 1989.
(4) Consummated by a person or group who first became a controlling person
or group prior to:
(i) October 17, 1989, if such person or group does not after such date
commence a tender or exchange offer for or proxy solicitation with respect to
voting shares of the corporation, in the case of a corporation which was a
registered corporation described in section 2502(1)(i) on that date; or
(ii) in any other case, the date this subchapter becomes applicable to the
corporation.
(5) Constituting:
(i) In the case of a person or group that, as of October 17, 1989,
beneficially owned shares entitling the person or group to cast at least 20% of
the votes that all shareholders would be entitled to cast in an election of
directors of the corporation:
(A) The disposition of equity securities of the corporation by the person
or group.
(B) Subsequent dispositions of any or all equity securities of the
corporation disposed of by the person or group where such subsequent
dispositions are effected by the direct purchaser of the securities from the
person or group if as a result of the acquisition by the purchaser of the
securities disposed of by the person or group, the purchaser, immediately
following the acquisition, is entitled to cast at least 20% of the votes that
all shareholders would be entitled to cast in an election of directors of the
corporation.
(ii) The transfer of the beneficial ownership of the equity security by:
(A) Gift, devise, bequest or otherwise through the laws of inheritance or
descent.
(B) A settlor to a trustee under the terms of a family, testamentary or
charitable trust.
(C) A trustee to a trust beneficiary or a trustee to a successor trustee
under the terms of a family, testamentary or charitable trust.
(iii) The addition, withdrawal or demise of a beneficiary or beneficiaries
of a family, testamentary or charitable trust.
(iv) The appointment of a guardian or custodian with respect to the equity
security.
(v) The transfer of the beneficial ownership of the equity security from
one spouse to another by reason of separation or divorce or pursuant to
community property laws or other similar laws of any jurisdiction.
(vi) The transfer of record or the transfer of a beneficial interest or
interests in the equity security where the circumstances surrounding the
transfer clearly demonstrate that no material change in beneficial ownership has
occurred.
(6) Consummated by:
(i) The corporation or any of its subsidiaries.
(ii) Any savings, stock ownership, stock option or other benefit plan of
the corporation or any of its subsidiaries, or any fiduciary with respect to any
such plan when acting in such capacity, or by any participant in
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any such plan with respect to any equity security acquired pursuant to any such
plan or any equity security acquired as a result of the exercise or conversion
of any equity security (specifically including any options, warrants or rights)
issued to such participant by the corporation pursuant to any such plan.
(iii) A person engaged in business as an underwriter of securities who
acquires the equity securities directly from the corporation or an affiliate or
associate, as defined in section 2552 (relating to definitions), of the
corporation through his participation in good faith in a firm commitment
underwriting registered under the Securities Act of 1933.
(7)(i) where the acquisition of the equity security has been approved by a
resolution adopted prior to the acquisition of the equity security; or
(ii) where the disposition of the equity security has been approved by a
resolution adopted prior to the disposition of the equity security if the equity
security at the time of the adoption of the resolution is beneficially owned by
a person or group that is or was a controlling person or group with respect to
the corporation and is in control of the corporation if:
the resolution in either subparagraph (i) or (ii) is approved by the board of
directors and ratified by the affirmative vote of the shareholders entitled to
cast at least a majority of the votes which all shareholders are entitled to
cast thereon and identifies the specific person or group that proposes such
acquisition or disposition, the specific purpose of such acquisition or
disposition and the specific number of equity securities that are proposed to be
acquired or disposed of by such person or group.
(8) Acquired at any time by a person or group who first became a
controlling person or group:
(i) after April 27, 1990; and
(ii) (A) at a time when this subchapter was or is not applicable to the
corporation; or
(B) on or before 10 business days after the first announcement by the
corporation that this subchapter is applicable to the corporation, if this
subchapter was not applicable to the corporation on July 27, 1990.
(c) Effect of distributions.--For purposes of this subchapter, equity
securities acquired by a holder as a result of a stock split, stock dividend or
other similar distribution by a corporation of equity securities issued by the
corporation not involving a sale of the securities shall be deemed to have been
acquired by the holder in the same transaction (at the same time, in the same
manner and from the same person) in which the holder acquired the existing
equity security with respect to which the equity securities were subsequently
distributed by the corporation.
(d) Formation of group.--For the purposes of this subchapter, if there is
no change in the beneficial ownership of an equity security held by a person,
then the formation of or participation in a group involving the person shall not
be deemed to constitute an acquisition of the beneficial ownership of such
equity security by the group. (Last amended by Act 198, L. `90, eff. 12-19-90.)
2572 POLICY AND PURPOSE.--(a) General rule.--The purpose of this
subchapter is to protect certain registered corporations and legitimate
interests of various groups related to such corporations from certain
manipulative and coercive actions. Specifically, this subchapter seeks to:
(1) Protect registered corporations from being exposed to and paying
"greenmail."
(2) Promote a stable relationship among the various parties involved in
registered corporations, including the public whose confidence in the future of
a corporation tends to be undermined when a corporation is put "in play."
(3) Ensure that speculators who put registered corporations "in play" do
not misappropriate corporate values for themselves at the expense of the
corporation and groups affected by corporate actions.
(4) Discourage such speculators from putting registered corporations "in
play" through any means, including, but not limited to, offering to purchase at
least 20% of the voting shares of the corporation or threatening to wage or
waging a proxy contest in connection with or as a means toward or part of a plan
to acquire control of the corporation, with the effect of reaping short-term
speculative profits.
Moreover, this subchapter recognizes the right and obligation of the
Commonwealth to regulate and protect the corporations it creates from abuses
resulting from the application of its own laws affecting generally corporate
governance and particularly director obligations, mergers and related matters.
Such laws, and the obligations imposed on directors or others thereunder, should
not be the vehicles by which registered corporations are manipulated in certain
instances for the purpose of obtaining short-term profits.
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(b) Limitations.--The purpose of this subchapter is not to affect
legitimate shareholder activity that does not involve putting a corporation "in
play" or involve seeking to acquire control of the corporation. Specifically,
the purpose of this subchapter is not to:
(1) curtail proxy contests on matters properly submitted for shareholder
action under applicable State or other law, including, but not limited to,
certain elections of directors, corporate governance matters such as cumulative
voting or staggered boards, or other corporate matters such as environmental
issues or conducting business in a particular country, if, in any such instance,
such proxy contest is not utilized in connection with or as a means toward or
part of a plan to put the corporation "in play" or to seek to acquire control of
the corporation; or
(2) affect the solicitation of proxies or consents by or on behalf of the
corporation in connection with the shareholder meetings or actions of the
corporation.
2573 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Beneficial owner." The term shall have the meaning specified in section
2552 (relating to definitions).
"Control." The power, whether or not exercised, to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting shares, by contract or otherwise.
"Controlling person or group."
(1)(i) A person or group who has acquired, offered to acquire or, directly
or indirectly, publicly disclosed or caused to be disclosed (other than for the
purpose of circumventing the intent of this subchapter) the intention of
acquiring voting power over voting shares of a registered corporation that would
entitle the holder thereof to cast at least 20% of the votes that all
shareholders would be entitled to cast in an election of directors of the
corporation; or
(ii) a person or group who has otherwise, directly or indirectly, publicly
disclosed or caused to be disclosed (other than for the purposes of
circumventing the intent of this subchapter) that it may seek to acquire control
of a corporation through any means.
(2) Two or more persons acting in concert, whether or not pursuant to an
express agreement, arrangement, relationship or understanding, including a
partnership, limited partnership, syndicate, or through any means of affiliation
whether or not formally organized, for the purpose of acquiring, holding, voting
or disposing of equity securities of a corporation shall be deemed a group for
purposes of this subchapter. Notwithstanding any other provision of this
subchapter to the contrary, and regardless of whether a group has been deemed to
acquire beneficial ownership of an equity security under this subchapter, each
person who participates in a group, where such group is a controlling person or
group as defined in this subchapter, shall also be deemed to be a controlling
person or group for the purposes of this subchapter, and a direct or indirect
transferee solely pursuant to a transfer or series of transfers under section
2571 (b)(5)(ii) through (vi) (relating to application and effect of subchapter)
of an equity security acquired from any person or group that is or becomes a
controlling person or group, shall be deemed to have acquired such equity
security in the same transaction (at the same time, in the same manner and from
the same person) as its acquisition by the controlling person or group.
"Equity security." Any security, including all shares, stock or similar
security, and any security convertible into (with or without additional
consideration) or exercisable for any such shares, stock or similar security, or
carrying any warrant, right or option to subscribe to or purchase such shares,
stock or similar security or any such warrant, right, option or similar
instrument.
"Profit." The positive value, if any, of the difference between:
(1) the consideration received from the disposition of equity securities
less only the usual and customary broker's commissions actually paid in
connection with such disposition; and
(2) the consideration actually paid for the acquisition of such equity
securities plus only the usual and customary broker's commissions actually paid
in connection with such acquisition.
"Proxy." Includes any proxy, consent or authorization.
"Proxy solicitation" or "solicitation of proxies." Includes any
solicitation of a proxy, including a solicitation of a revocable proxy of the
nature and under the circumstances described in section 2573.1(b)(3) (relating
to controlling person or group safe harbor).
"Publicly disclosed or caused to be disclosed." The term shall have the
meaning specified in section 2562 (relating to definitions).
"Transfer." Acquisition or disposition.
"Voting shares." The term shall have the meaning specified in section 2552
(relating to definitions). (Last amended by Act 169, L. '92, eff. 2-16-93.)
-21-
<PAGE>
2574 CONTROLLING PERSON OR GROUP SAFE HARBOR.--(a) Nonparticipant.--For the
purpose of this subchapter, a person or group shall not be deemed a controlling
person or group, absent significant other activities indicating that a person or
group should be deemed a controlling person or group, by reason of voting or
giving a proxy or consent as a shareholder of the corporation if the person or
group is one who or which:
(1) did not acquire any voting shares of the corporation with the purpose
of changing or influencing control of the corporation or seeking to acquire
control of the corporation or in connection with or as a participant in any
agreement, arrangement, relationship, understanding or otherwise having any such
purpose;
(2) if control were acquired, would not be a person or group or a
participant in a group that has control over the corporation and will not
receive, directly or indirectly, any consideration from a person or group that
has control over the corporation other than consideration offered
proportionately to all holders of voting shares of the corporation; and
(3) if a proxy or consent is given, executes a revocable proxy or consent
given without consideration in response to a proxy or consent solicitation made
in accordance with the applicable rules and regulations under the Exchange Act
under circumstances not then reportable in Schedule 13D under the Exchange Act
(or any comparable or successor report) by the person or group who gave the
proxy or consent.
(b) Certain holders.--For the purpose of this subchapter, a person or
group shall not be deemed a controlling person or group under subparagraph
(1)(i) of the definition of "controlling person or group" in section 2573
(relating to definitions) if such person or group holds voting power:
(1) in good faith and not for the purpose of circumventing this
subchapter, as an agent, bank, broker, nominee or trustee for one or more
beneficial owners who do not individually or, if they are a group acting in
concert, as a group have the voting power specified in subparagraph (1)(i) of
the definition of "controlling person or group" in section 2573;
(2) in connection with the solicitation of proxies or consents by or on
behalf of the corporation in connection with shareholder meetings or actions of
the corporation; or
(3) in the amount specified in subparagraph (1)(i) of the definition of
"controlling person or group" in section 2573 as a result of the solicitation of
revocable proxies or consents with respect to voting shares if such proxies or
consents both:
(i) are given without consideration in response to a proxy or consent
solicitation made in accordance with the applicable rules and regulations under
the exchange act; and
(ii) do not empower the holder thereof, whether or not this power is shared
with any other person, to vote such shares except on the specific matters
described in such proxy or consent and in accordance with the instructions of
the giver of such proxy or consent.
(c) Preference shares.--In determining whether a person or group would be
a controlling person or group within the meaning of this subchapter, there shall
be disregarded voting power, and the seeking to acquire control of a corporation
to the extent based upon voting power arising from a contingent right of the
holders of one or more classes or series of preference shares to elect one or
more members of the board of directors upon or during the continuation of a
default in the payment of dividends on such shares or another similar
contingency. (Last amended by Act 198, L. '90, eff. 12-19-90.)
2575 OWNERSHIP BY CORPORATION OF PROFITS RESULTING FROM CERTAIN
TRANSACTIONS.--Any profit realized by any person or group who is or was a
controlling person or group with respect to a registered corporation from the
disposition of any equity security of the corporation to any person (including
under Subchapter E (relating to control transactions) or otherwise), including,
without limitation, to the corporation (including under Subchapter G (relating
to control-share acquisitions) or otherwise) or to another member of the
controlling person or group, shall belong to and be recoverable by the
corporation where the profit is realized by such person or group:
(1) from the disposition of the equity security within 18 months after the
person or group obtained the status of a controlling person or group; and
(2) the equity security had been acquired by the controlling person or
group within 24 months prior to or 18 months subsequent to the obtaining by the
person or group of the status of a controlling person or group.
Any transfer by a controlling person or group of the ownership of any equity
security may be suspended on the books of the corporation, and certificates
representing such securities may be duly legended, to enforce the rights of the
corporation under this subchapter. (Last amended by Act 198, L. '90, eff. 12-19-
90.)
-22-
<PAGE>
2576 ENFORCEMENT ACTIONS.--(a) Venue.--Actions to recover any profit due
under this subchapter may be commenced in any court of competent jurisdiction by
the registered corporation issuing the equity security or by any holder of any
equity security of corporation in the name and on behalf of the corporation if
the corporation fails or refuses to bring the action within 60 days after
written request by a holder or shall fail to prosecute the action diligently. If
a judgment requiring the payment of any such profits is entered, the party
bringing such action shall recover all costs, including reasonable attorney
fees, incurred in connection with enforcement of this subchapter.
(b) Jurisdiction.--By engaging in the activities necessary to become a
controlling person or group and thereby becoming a controlling person or group,
the person or group and all persons participating in the group consent to
personal jurisdiction in the courts of this Commonwealth for enforcement of this
subchapter. Courts of this Commonwealth may exercise personal jurisdiction over
any controlling person or group in actions to enforce this subchapter. The terms
of this section shall be supplementary to the provisions of 42 Pa.C.S.
(S)(S)5301 (relating to persons) through 5322 (relating to bases of personal
jurisdiction over persons outside this Commonwealth) and, for the purpose of
this section, 42 Pa.C.S. (S)5322(7)(iv) shall be deemed to include a controlling
person or group as defined in section 2573 (relating to definitions). Service of
process may be made upon such persons outside this Commonwealth in accordance
with the procedures specified by 42 Pa.C.S. (S)5323 (relating to service of
process on persons outside this Commonwealth).
(c) Limitation.--Any action to enforce this subchapter shall be brought
within two years from the date any profit recoverable by the corporation was
realized. (Last amended by Act 198, L. `90, eff. 12-19-90.)
-23-
<PAGE>
EXHIBIT 5.1
<PAGE>
MORGAN, LEWIS & BOCKIUS LLP
ONE COMMERCE SQUARE
417 WALNUT STREET
HARRISBURG, PA 17101-1904
717-237-4000
FAX: 717-237-4004
FORM OF ML&B OPINION
____________, 1998
Susquehanna Bancshares, Inc.
26 North Cedar Street
Lititz, Pennsylvania 17543
Re: Susquehanna Bancshares, Inc. Joint Proxy/Prospectus on Form S-4
---------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Susquehanna Bancshares, Inc., a Pennsylvania
corporation (the "Company"), in connection with (i) the proposed merger (the
"Cardinal Merger") of Cardinal Bancorp, Inc. a Pennsylvania corporation
("Cardinal"), with and into Susquehanna Bancshares West, Inc. ("SBI Merger
Sub"), a Pennsylvania corporation and wholly-owned subsidiary of the Company
pursuant to the terms and conditions of the Agreement and Plan of Affiliation by
and between the Company, SBI Merger Sub, Cardinal and First American National
Bank of Pennsylvania, a national banking association and wholly-owned subsidiary
of Cardinal (the "Cardinal Merger Agreement") dated as of April 13, 1998, (ii)
the proposed merger (the "First Capitol Merger") of First Capitol Bank, a
Pennsylvania chartered bank ("First Capitol"), with and into Susquehanna Interim
Bank ("Interim Bank"), a Pennsylvania chartered bank and wholly-owned subsidiary
of the Company, pursuant to the terms and conditions of the Agreement and Plan
of Affiliation by and between the Company, Interim Bank and First Capitol (the
"First Capitol Merger Agreement") dated as of April 16, 1998, and (iii)
preparation of the subject Registration Statement on Form S-4 (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), relating to the offering,
subject to certain adjustments, of up to 3,136,637 shares (the "Shares") of the
Company's common stock, par value $2.00 per share ("Common Stock").
We understand that the issuance of the Shares pursuant to the Cardinal Merger
Agreement and First Capitol Merger Agreement (the "Merger Agreements") is
contingent upon, the requisite approval of the Merger Agreements by the
respective shareholders of Cardinal and First Capitol. In rendering the opinion
set forth below, we have reviewed (a) the Registration Statement; (b) the
Company's Articles of Incorporation and Bylaws, as amended and restated; (c)
certain records of the Company's corporate proceedings as reflected in its
minute and stock books; (d) the Merger Agreements; and (e) such records,
documents, statutes and decisions as we have deemed relevant. In our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity with the
original of all documents submitted to us as copies thereof.
Our opinion set forth below is limited to the Pennsylvania Business Corporation
Law of 1988, as amended.
Based upon the foregoing, we are of the opinion that, when the Registration
Statement has become effective under the Act, and the Shares are issued as
described in the Registration Statement and in accordance with the terms and
conditions of the Cardinal Merger Agreement and First Capitol Merger Agreement,
the Shares will be validly issued, fully paid and nonassessable.
<PAGE>
Susquehanna Bancshares, Inc.
__________________, 1998
Page 2
We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration
Statement. In giving such opinion, we do not thereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
Act or the rules or regulations of the Securities and Exchange Commission
thereunder.
The opinion expressed herein is solely for your benefit, and may be relied upon
only by you.
Very truly yours,
Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 23.1
<PAGE>
Included in Exhibit 5.1
<PAGE>
EXHIBIT 23.2
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-4 of our report dated January 26, 1998, on our audits of the consolidated
financial statements of Susquehanna Bancshares, Inc. We also consent to the
references to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P
Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
June 30, 1998
<PAGE>
EXHIBIT 23.3
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Susquehanna Bancshares,
Inc. on Form S-4 of our report dated January 30, 1998 (relating to the
consolidated financial statements of Cardinal Bancorp, Inc. as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997) appearing as Appendix A in the Proxy Statement/Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such Proxy
Statement/Prospectus.
/s/ S.R. Snodgrass, A.C.
S.R. Snodgrass, A.C.
Wexford, Pennsylvania
June 24, 1998
<PAGE>
EXHIBIT 23.4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
First Capitol Bank:
We consent to inclusion of our report dated January 30, 1998, with respect to
the balance sheets of First Capitol Bank as of December 31, 1997 and 1996, and
the related statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, in the proxy
statement/prospectus of First Capitol Bank which forms a part of the
registration statement on Form S-4 of Susquehanna Bancshares, Inc., and to the
reference to our firm under the heading "Experts".
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
June 26, 1998
<PAGE>
EXHIBIT 23.5
<PAGE>
CONSENT OF GARLAND MCPHERSON & ASSOCIATES, INC.
We hereby consent to the use of our opinion dated ___________, 1998, to the
Board of Directors of Cardinal Bancorp, Inc. and to the references to our firm
in the Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed acquisition of Cardinal Bancorp,
Inc. by Susquehanna Bancshares, Inc.
Garland McPherson & Associates, Inc.
Baltimore, Maryland
____________, 1998
<PAGE>
EXHIBIT 23.6
<PAGE>
CONSENT OF DANIELSON ASSOCIATES INC.
We hereby consent to the reference in the Joint Proxy Statement/Prospectus
forming a part of this Registration Statement on Form S-4 of Susquehanna
Bancshares, Inc. to our opinion, dated ______________, 1998, and to our firm,
respectively, and to the inclusion of such opinion as an annex to the Joint
Proxy Statement/Prospectus.
DANIELSON ASSOCIATES INC.
By
-------------------------------
Arnold G. Danielson, Chairman
Rockville, Maryland
____________, 1998
<PAGE>
EXHIBIT 99.1
<PAGE>
CARDINAL BANCORP, INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON ____________, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints ______________,
______________, and ____________, and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all of the shares of
Cardinal Bancorp, Inc. (the "Company") that the undersigned may be entitled to
vote at the Special Meeting of Shareholders of the Company to be held at
______________, _______________, Pennsylvania on _______________, _____, ___,
1998, commencing at __:__ _.m., prevailing time, and at any adjournment or
postponement thereof, as follows:
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF AFFILIATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
2. POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL MEETING TO ANOTHER TIME AND/OR
PLACE FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES, IN THE EVENT THAT
THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE SPECIAL MEETING TO
APPROVE AND ADOPT THE AGREEMENT AND PLAN OF AFFILIATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment or
postponement thereof.
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 AND FOR PROPOSAL 2.
Date: , 1998
Signature of Shareholder
Signature of Shareholder
Number of Shares Held of Record
on _____________, 1998:
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED PROMPTLY
TO THE BANK IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE. IF MORE THAN ONE
TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD JOINTLY, EACH OWNER SHOULD SIGN.
------------------------------------------------
<PAGE>
EXHIBIT 99.2
<PAGE>
FIRST CAPITOL BANK
PROXY
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON ___________, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Lois C. Derry and John M.
Kelley and each or any of them, proxies of the undersigned, with full power of
substitution, to vote all of the shares of First Capitol Bank (the "Bank") that
the undersigned may be entitled to vote at the Special Meeting of Shareholders
of the Bank to be held at the Bank's principal executive office, 2951 Whiteford
Road, York, Pennsylvania 17402, on Wednesday, ______________, 1998, at 10:00
a.m., prevailing time, and at any adjournment or postponement thereof as
follows:
1. Approval of the Agreement and Plan of Affiliation, dated April 16,
1998, among Susquehanna Bancshares, Inc. ("Susquehanna"), Susquehanna Interim
Bank and the Bank ("First Capitol Merger Agreement"), whereby the Bank will
become a wholly-owned subsidiary of Susquehanna and each shareholder of the Bank
will receive, subject to certain adjustments, 2.028 shares of Susquehanna common
stock for each share of Bank common stock held.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
---
2. Adjournment of the Special Meeting, if necessary to permit further
solicitation of proxies in the event there are not sufficient votes at the time
of the Special Meeting to constitute a quorum or to approve the First Capitol
Merger Agreement as more fully described in the accompanying Proxy
Statement/Prospectus.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
---
3. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Special Meeting and any
adjournment or postponement thereof.
This Proxy, when properly signed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy will
be voted for Proposals 1 and 2.
Number of Shares Held of Dated ____________________, 1998
Record on ______________, 1998:
_______________________________ ________________________________
Signature
________________________________
Signature
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED PROMPTLY
TO THE BANK IN THE ENCLOSED SELF-ADDRESSED , POSTAGE PREPAID ENVELOPE. WHEN
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD
JOINTLY, EACH OWNER SHOULD SIGN.
