FILED PURSUANT TO PARAGRAPH (b) OF RULE 424
REGISTRATION NO. 33-58945
OLD YORK ROAD BANCORP, INC.
York and Easton Roads
Willow Grove, Pennsylvania 19090-3282
May 31, 1995
To Our Shareholders:
Old York Road Bancorp, Inc. ("Old York") has entered into an Agreement and
Plan of Merger dated as of December 29, 1994 (the "Agreement"), by and among Old
York, Old York's bank subsidiary, Bank and Trust Company of Old York Road (the
"Bank"), Midlantic Corporation ("Midlantic"), and Midlantic's national bank
subsidiary, Midlantic Bank, National Association ("MB"), providing for the
merger of Old York with and into Midlantic. Pursuant to the merger, Old York's
shareholders will be entitled to receive either $10.00 in cash or 0.3721 of a
share of Midlantic's common stock in exchange for each share of Old York's
common stock that they own on the effective date of the merger, subject to
adjustment and to the limitations and election and allocation provisions set
forth in the Agreement, pursuant to which no more than 49% of the number of
shares of Old York common stock outstanding (subject to downward adjustment
pursuant to the Agreement) may be exchanged for cash.
The special meeting of the shareholders of Old York to consider and act
upon the Agreement will be held on June 28, 1995. If the merger is not approved
at the special meeting, an annual meeting of shareholders of Old York will
thereafter be scheduled for the election of directors. If the merger is
approved, Old York anticipates dispensing with the annual meeting for 1995.
In the accompanying material, you will find the Notice of Special Meeting
of Shareholders of Old York and a Proxy Statement/Prospectus setting forth
actions to be taken at the meeting, the details of the proposed merger, the
conditions to consummation of the merger and information concerning Midlantic,
MB, Old York and the Bank, together with a proxy form.
The Board of Directors of Old York has carefully considered this
transaction and believes that consummation of the merger in accordance with the
Agreement to be fair to Old York's shareholders and in their best interests. THE
BOARD OF DIRECTORS OF OLD YORK HAS UNANIMOUSLY APPROVED THE AGREEMENT AND
RECOMMENDS A VOTE FOR THE AGREEMENT. The executive officers and directors of Old
York intend to vote all of their shares in favor of the Agreement.
Because of the importance of the merger to the shareholders of Old York, we
urge you to complete and sign the enclosed proxy form and return it as soon as
possible in the enclosed postage-prepaid return envelope so that your shares
will be represented in the meeting. You may nevertheless attend Old York's
meeting and vote in person if you wish to do so.
The enclosed Proxy Statement also constitutes a Prospectus of Midlantic
with respect to the shares of Midlantic's common stock to be issued to the
shareholders of Old York if the merger is consummated.
Sincerely,
James M. Mack
President and Chief Executive
Officer
<PAGE>
OLD YORK ROAD BANCORP, INC.
York and Easton Roads
Willow Grove, Pennsylvania 19090-3282
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 28, 1995
To Our Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Old York Road Bancorp, Inc. ("Old York") will be held at
Williamson Restaurant, Easton Road and Blair Mill Road, Horsham, Pa 19044 on
June 28, 1995 at 6:00 p.m. Eastern Time for the purpose of considering and
voting upon the following matters:
1. A proposal to approve an Agreement and Plan of Merger, dated as of
December 29, 1994 (the "Agreement"), by and among Old York, Old York's bank
subsidiary, Bank and Trust Company of Old York Road (the "Bank"), Midlantic
Corporation ("Midlantic"), and Midlantic's national bank subsidiary,
Midlantic Bank, National Association ("MB"), providing for the merger (the
"Merger") of Old York with and into Midlantic. Pursuant to the Merger, Old
York shareholders will be entitled to receive either $10.00 in cash or
0.3721 of a share of Midlantic's common stock in exchange for each share of
Old York's common stock that they own on the effective date of the Merger,
subject to adjustment and to the limitations and election and allocation
provisions set forth in the Agreement, pursuant to which no more than 49%
of the outstanding shares of Old York common stock (subject to downward
adjustment pursuant to the Agreement) may be exchanged for cash.
2. The transaction of such other business as may properly come before
the Meeting or any adjournment thereof.
Only those shareholders of record as of the close of business on May 25,
1995 will be entitled to notice of, and to vote at, the Meeting. A list of such
shareholders will be available at the Meeting.
Consummation of the Merger is subject to certain conditions, including
approval of the Merger by the affirmative vote at the Meeting of holders of at
least a majority of the shares of Old York common stock voting at the Meeting,
whether in person or by proxy. Your vote is important regardless of the number
of shares that you own. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT AS SOON AS POSSIBLE IN THE
ENCLOSED STAMPED ENVELOPE. You may revoke the proxy at any time prior to its
exercise.
By Order of the Board of Directors,
James M. Mack
President and Chief Executive Officer
Willow Grove, Pennsylvania
May 31, 1995
THE MERGER IS OF MAJOR IMPORTANCE TO THE SHAREHOLDERS OF OLD YORK.
ACCORDINGLY, SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THE ATTACHED PROXY STATEMENT.
<PAGE>
PROXY STATEMENT
OLD YORK ROAD BANCORP, INC.
for
Special Meeting of Shareholders of Old York Road Bancorp, Inc.
to be held on June 28, 1995
PROSPECTUS
MIDLANTIC CORPORATION
Common Stock (Par Value $3.00)
------------
This Prospectus of Midlantic Corporation ("Midlantic") and Proxy Statement
of Old York Road Bancorp, Inc. ("Old York") (such Proxy Statement/Prospectus
being hereinafter referred to as the "Proxy Statement") is being furnished in
connection with the solicitation of proxies by the Board of Directors of Old
York to be used at a special meeting of its shareholders (the "Meeting") to be
held on June 28, 1995. The purpose of the Meeting is to consider and vote upon
an Agreement and Plan of Merger dated as of December 29, 1994 (the "Agreement"),
by and among Old York, Old York's bank subsidiary, Bank and Trust Company of Old
York Road (the "Bank"), Midlantic and Midlantic's national bank subsidiary,
Midlantic Bank, National Association ("MB"), pursuant to which Old York will be
merged with and into Midlantic. In addition, the Bank will be merged with and
into MB. A copy of the Agreement is attached as Appendix A to this Proxy
Statement.
This Proxy Statement, the accompanying Notice of Special Meeting and form
of proxy are first being mailed to the shareholders of record of Old York on or
about May 31, 1995.
In accordance with the terms of the Agreement, upon approval of the
Agreement by the shareholders of Old York, receipt of all requisite regulatory
approvals and satisfaction or waiver of all conditions, Old York will merge into
Midlantic (the "Merger"), which will be the surviving entity in the Merger. In
connection with the Merger, each share of common stock of Old York, $1.00 par
value per share (the "Old York Common Stock"), issued and outstanding
immediately prior to the Effective Time (as hereinafter defined), will be
exchanged for the right to receive either $10.00 in cash or 0.3721 of a share
(the "Exchange Ratio") of common stock of Midlantic, $3.00 par value (the
"Midlantic Common Stock"), subject to the limitations and election and
allocation provisions set forth in the Agreement, pursuant to which no more than
49% of Old York Common Stock outstanding (subject to downward adjustment
pursuant to the Agreement) may be exchanged for cash, and subject to certain
adjustments as more fully described in this Proxy Statement. See "THE MERGER--
Consideration," "--Election Procedure" and "--Allocation Procedure." In
connection with the Merger, the Bank will also be merged into MB (the "Bank
Merger"), with MB continuing to operate thereafter as a wholly-owned subsidiary
of Midlantic.
Midlantic has filed a Registration Statement pursuant to the Securities Act
of 1933, as amended (the "Act"), covering the shares of Midlantic Common Stock
which will be issued in connection with the Merger. In addition to constituting
the Old York Proxy Statement for the Meeting, this document constitutes a
Prospectus of Midlantic with respect to Midlantic Common Stock to be issued if
the Merger is consummated.
OLD YORK STOCK CERTIFICATES SHOULD NOT BE SENT WITH THE ENCLOSED PROXY FORM
AND SHOULD NOT BE FORWARDED until after receipt of an election form and a letter
of transmittal which will be provided to Old York shareholders on or prior to
the Effective Time (as hereinafter defined) of the Merger.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO SELL, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT
AT ANY TIME, NOR ANY DISTRIBUTION OF SHARES OF MIDLANTIC COMMON STOCK, SHALL
UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
The date of this Proxy Statement is May 31, 1995.
<PAGE>
AVAILABLE INFORMATION
Midlantic and Old York are both subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
Midlantic has filed with the Commission a Registration Statement on Form
S-4 under the Act (together with all amendments and supplements thereto, the
"Registration Statement"), with respect to the securities being offered by this
Proxy Statement. As permitted by the rules and regulations of the Commission,
this Proxy Statement omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information with respect to
Midlantic and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto.
Statements contained in this Proxy Statement or in any document
incorporated by reference in this Proxy Statement, as to the contents of any
document referred to herein or therein, are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement or such other document, each such document being
qualified in all respects by such reference.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by Midlantic with the Commission are
incorporated herein by reference:
1. Midlantic's Annual Report on Form 10-K for the year ended December 31,
1994.
2. Midlantic's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1995.
3. The description of Midlantic Common Stock set forth in Midlantic's
Registration Statement on Form 8-A filed by Midlantic pursuant to Section
12 of the Exchange Act, and any amendment or report filed for the purpose
of updating such description.
All documents filed by Midlantic pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Meeting shall be deemed incorporated by reference into this Proxy
Statement and a part hereof from the date of filing of such documents.
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 to the extent that a statement contained
herein or in any other subsequently filed document which 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.
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<PAGE>
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THOSE DOCUMENTS PERTAINING TO MIDLANTIC,
OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST MADE TO CORPORATE SECRETARY, MIDLANTIC CORPORATION,
METRO PARK PLAZA, 499 THORNALL STREET, P.O. BOX 600, NEW JERSEY 08818; TELEPHONE
NUMBER (908) 321-2793.
All information contained or incorporated by reference in this Proxy
Statement with respect to Midlantic and MB was supplied by Midlantic and all
information contained in this Proxy Statement with respect to Old York and the
Bank was supplied by Old York. Although neither Midlantic nor Old York have any
knowledge that would indicate that any statements or information relating to the
other party contained or incorporated herein are inaccurate or incomplete,
neither Midlantic nor Old York can warrant the accuracy or completeness of such
information or statements as they relate to the other entity or its
subsidiaries.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF MIDLANTIC OR OLD YORK SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
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<PAGE>
TABLE OF CONTENTS Page
----
Available Information................................................... 2
Information Incorporated by Reference................................... 2
Summary of Proxy Statement.............................................. 5
Meeting of Old York Shareholders ..................................... 5
The Merger ........................................................... 5
Comparative Per Share Data ........................................... 10
Principal Businesses.................................................. 11
Certain Information Regarding Midlantic................................. 12
General .............................................................. 12
Midlantic Bank, National Association.................................. 12
Certain Information Regarding Old York.................................. 12
General .............................................................. 12
Recent Developments .................................................. 13
Market Price Data....................................................... 14
Selected Financial Information.......................................... 15
Selected Financial Information of Midlantic........................... 15
Selected Financial Information of Old York............................ 16
Introductory Statement.................................................. 17
Purpose of Meeting.................................................... 17
Vote Required; Shares Entitled to Vote................................ 17
Solicitation, Voting and Revocation of Proxies........................ 17
The Proposed Merger..................................................... 18
General Description................................................... 18
Consideration ........................................................ 18
Election Procedure ................................................... 19
Allocation Procedure ................................................. 20
Payment of Cash and Delivery of Shares................................ 21
Federal Income Tax Consequences....................................... 22
Rights of Dissenting Old York Shareholders............................ 24
Background of and Reasons for the Merger.............................. 25
Interests of Management in the Merger................................. 27
Fairness Opinion ..................................................... 27
Resale Considerations with Respect to Midlantic Common Stock.......... 30
Conditions to the Merger.............................................. 30
Regulatory Approvals.................................................. 32
Management and Operations After the Merger............................ 32
Effective Time; Amendments; Termination; Price Adjustment............. 32
Stock Option for Shares of Old York Common Stock...................... 35
Description of Midlantic Capital Stock.................................. 37
General .............................................................. 37
Common Stock.......................................................... 37
Preferred Stock....................................................... 38
Provisions Relating to Certain Business Transactions.................. 39
Shareholder Nomination of Directors................................... 41
Limitation of Liability of Directors and Officers..................... 42
Comparison of the Rights of Shareholders under Pennsylvania
and New Jersey Law ................................................... 42
Old York Management's Discussion and Analysis of Financial
Condition and Results of Operations of Old York Road Bancorp, Inc. ... 48
Description of the Business of Old York Road Bancorp, Inc. ............. 71
Security Ownership of Certain Beneficial Owners and Management of
Old York .............................................................. 92
Shareholder Proposals................................................... 93
Legal Opinion........................................................... 93
Experts ................................................................ 93
Index to Consolidated Financial Statements and
Schedules of Old York Road Bancorp, Inc. ............................. 94
APPENDICES:
Appendix A:
Agreement and Plan of Merger among Midlantic Corporation,
Midlantic Bank, National Association, Old York Road Bancorp,
Inc. and Bank and Trust Company of Old York Road, dated as of
December 29, 1994 .................................................. A-1
Appendix B:
Stock Option Agreement between Midlantic Corporation and Old York
Road Bancorp, Inc. dated as of December 29, 1994 ................... B-1
Appendix C:
Fairness Opinion of Sandler O'Neill & Partners, L.P. ................. C-1
Appendix D:
Subchapter 15D of the Pennsylvania Business Corporation Law .......... D-1
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<PAGE>
SUMMARY OF PROXY STATEMENT
The following information is a brief summary of certain information with
respect to the matters to be considered at the Meeting of Old York. This summary
is necessarily incomplete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement. Shareholders should
read carefully the details of this Proxy Statement. Certain capitalized terms
used in this Summary are defined elsewhere in this Proxy Statement.
MEETING OF OLD YORK SHAREHOLDERS
Date, Time and Place of
Meeting of Old York................... June 28, 1995, 6:00 p.m. at Williamson
Restaurant, Easton Road and Blair Mill
Road, Horsham, Pa. 19044.
Record Date .......................... May 25, 1995.
Shares Outstanding on Record
Date and Entitled to Vote............. 2,825,312 Shares of Old York Common
Stock
Purpose of Meeting.................... (i) To consider and vote upon a
proposal to approve the Agreement and
Plan of Merger dated as of December 29,
1994, by and among Old York, Old York's
bank subsidiary, Bank and Trust Company
of Old York Road, Midlantic and
Midlantic's national bank subsidiary,
Midlantic Bank, National Association,
providing for the merger of Old York
with and into Midlantic and (ii) to
transact any other business that
properly may be brought before the
Meeting.
THE MERGER
Description of the Merger............. Pursuant to the Agreement (a copy of
which is attached as Appendix A to this
Proxy Statement at page A-1), Old York
will be merged into Midlantic with
Midlantic as the surviving corporation.
In addition, the Bank will be merged
into MB, with MB as the surviving
entity and which will continue to
operate as a subsidiary of Midlantic.
See "THE PROPOSED MERGER -- General
Description" and "-- Consideration."
Consideration......................... At the Effective Time (as hereinafter
defined), each outstanding share of Old
York Common Stock (except for shares
owned by shareholders of Old York who
perfect dissenters' rights in
accordance with applicable law) will be
converted into the right to receive
either $10.00 in cash or 0.3721 of a
share of Midlantic Common Stock,
subject to adjustment and to the
limitations and election and allocation
provisions set forth in the Agreement.
Under the terms of the Agreement, no
more than 49% of Old York Common Stock
outstanding (subject to downward
adjustment pursuant to the Agreement)
may be exchanged for cash. Accordingly,
if the holders of more than 49% of Old
York Common Stock elect cash, then the
shareholders so electing will receive a
combination of cash and Midlantic
Common Stock in exchange for their
shares of Old York Common Stock as
determined in accordance with the
allocation procedures set forth in the
Agreement. In addition, under the
Agreement the price which Old York
shareholders are entitled to receive in
exchange for their shares of Old York
Common Stock will be adjusted downward
if Old York does not meet certain
minimum capital (as adjusted in
accordance with the Agreement)
requirements. The Exchange Ratio is
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<PAGE>
also subject to adjustment in certain
other circumstances, as more fully
described in this Proxy Statement. No
fractional shares of Midlantic Common
Stock will be issued in the Merger.
Cash payments in exchange for shares of
Old York Common Stock and in lieu of
fractional shares will be received
without interest. See "THE PROPOSED
MERGER -- Consideration," "--Election
Procedure," "-- Allocation Procedure"
and "-- Effective Time; Amendments;
Termination; Price Adjustment."
Election
and Allocation Procedures ............ Each record holder of Common Stock will
receive an election form (the "Election
Form") after the Meeting date and prior
to the Election Date (as defined
below). The Election Form is to be used
by Old York shareholders to submit
their Old York share certificates and,
if they wish, to specify whether they
elect to have their shares converted
into the right to receive cash or into
Midlantic Common Stock. SUCH
SPECIFICATIONS WILL BE EFFECTIVE ONLY
IF SUCH SPECIFICATIONS, ACCOMPANIED BY
THE SHARE CERTIFICATES FOR THE SHARES
TO WHICH THEY RELATE, ARE RECEIVED BY
THE EXCHANGE AGENT, NO LATER THAN 5:00
P.M. ON THE DATE ANNOUNCED BY
MIDLANTIC, IN A NEWS RELEASE DELIVERED
TO THE DOW JONES NEWS SERVICE ("THE
"ELECTION DATE"). The Election Date
must be at least twenty days following
the date of such news release and may
be no more than five business days
prior to the Effective Time and no
later than the date on which the
Effective Time occurs. Except with
respect to shareholders who hold shares
for two or more beneficial owners, a
shareholder may not specify a
preference that part of such
shareholder's shares be converted into
cash and part into Midlantic Common
Stock and must include in his Election
Form all shares of Old York Common
Stock owned by such holder. See "THE
MERGER -- Election Procedures." ANY
SHAREHOLDER WHO DOES NOT SUBMIT A
PROPERLY COMPLETED ELECTION FORM ON OR
PRIOR TO THE ELECTION DATE WILL BE
DEEMED TO HAVE MADE A STOCK ELECTION.
OLD YORK STOCK CERTIFICATES SHOULD NOT
BE SENT WITH THE ENCLOSED PROXY FORM
AND SHOULD NOT BE FORWARDED until after
receipt of an Election Form and a
letter of transmittal which will be
provided to Old York shareholders on or
prior to the effective time of the
Merger. The Agreement contains
provisions governing the allocation of
cash and Midlantic Common Stock, based
upon the tabulation of the Election
Forms submitted to the Exchange Agent.
In general, the allocation procedures
contemplate that the preferences set
forth in the Election Forms will be
honored to the maximum extent
consistent with the cash limitations
provided for in the Agreement. Under
the terms of the Agreement, no more
than 49% of Old York Common Stock
outstanding (subject to downward
adjustment pursuant to the Agreement)
may be exchanged for cash. Accordingly,
if the holders of more than 49% of Old
York Common Stock outstanding elect
cash, then the shareholders so electing
will receive a combination of cash and
Midlantic Common Stock in exchange for
their shares of Old York Common Stock
as determined in accordance with the
allocation procedures set forth in the
Agreement. See "THE MERGER --
Allocation Procedure".
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<PAGE>
Certain Federal Income
Tax Consequences...................... The Merger is conditioned upon the
receipt of an opinion of counsel to
Midlantic to the effect that the Merger
will constitute a tax-free
reorganization as defined in Section
368(a)(1) of the Internal Revenue Code
of 1986, as amended, and that,
accordingly, (i) no gain or loss will
be recognized by the shareholders of
Old York upon the exchange of their
shares of Old York Common Stock solely
for shares of Midlantic Common Stock
pursuant to the Merger; (ii) in the
case of Old York shareholders who
receive cash in whole or in part in
exchange for their Old York Common
Stock, gain, if any, realized by the
recipient on the exchange will be
recognized, but in an amount not in
excess of the amount of such cash; and
(iii) in the case of Old York
shareholders who recognize gain on the
exchange of their Old York Common Stock
and in whose hands such stock was a
capital asset, such gain will be
treated as a capital gain (except in
the case of any shareholder as to which
the exchange has the effect of a
dividend by reason of the applicability
of certain attribution rules described
in this Proxy Statement. For a more
detailed discussion regarding federal
income tax matters, including the tax
treatment of cash received in lieu of
fractional shares, see "The Proposed
Merger -- Federal Income Tax
Consequences."
Vote Required for Approval
of Merger............................. The affirmative vote, in person or by
proxy, of the holders of at least a
majority of the shares of Old York
Common Stock voting at the Meeting is
required to approve the Agreement. The
holders of a majority of the
outstanding shares of Old York Common
Stock entitled to vote will constitute
a quorum at the Meeting. See
"Introductory Statement -- Vote
Required; Shares Entitled to Vote."
Rights of Dissenting
Old York Shareholders................. Pursuant to the provisions of Section
1571 of the Pennsylvania Business
Corporation Law (the "PaBCL"),
shareholders of Old York have the right
to dissent from the Merger and obtain
payment of the "fair value" of their
shares by giving notice in writing
prior to the Meeting to the presiding
officer of Old York that they dissent
from the Merger and thereafter not
effecting a change in the beneficial
ownership of their shares and not
voting in favor of the Merger. If the
Merger is consummated, dissenting Old
York shareholders who fully comply with
the requirements of Subchapter 15D of
the PaBCL will be entitled to receive
from Midlantic a cash payment equal to
the fair value of their Old York shares
as of the Effective Time. Old York
shareholders wishing to dissent from
the Merger are urged to carefully read
"The Proposed Merger -- Rights of
Dissenting Old York Shareholders" and
Appendix D to this Proxy Statement and
to consult with their own legal
advisers.
Recommendation of the
Board of Directors of Old York........ The Board of Directors of Old York has
unanimously approved the Merger and
recommends that shareholders vote "FOR"
the Agreement. See "Introductory
Statement -- Purpose of Meeting" and
"The Proposed Merger -- Reasons for the
Merger."
Interests of Management
in the Merger......................... As of January 31, 1995, the directors
and executive officers of Old York
beneficially owned in the aggregate
360,566 shares of Old York Common
Stock, or 12.76% of the then issued and
outstanding shares of Old York Common
Stock.
Fairness Opinion...................... The Board of Directors of Old York has
retained Sandler O'Neill & Partners,
L.P. ("Sandler O'Neill") to evaluate
the terms of the Merger.
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<PAGE>
Sandler O'Neill has delivered a written
opinion dated as of May 23, 1995 to the
Board of Directors of Old York to the
effect that the consideration to be
received by the Old York shareholders
pursuant to the Agreement is, as of the
date of such opinion, fair to such
shareholders from a financial point of
view. A copy of Sandler O'Neill's
opinion is attached as Appendix C to
this Proxy Statement at page C-1. For
information concerning the matters
reviewed, assumptions made and factors
considered by Sandler O'Neill, see "THE
PROPOSED MERGER -- Fairness Opinion."
Resale Considerations with Respect
to Midlantic Common Stock............. The shares of the Midlantic Common
Stock to be issued in the Merger will
be registered under the Act and will be
freely transferable, except for shares
received by persons, including
directors and executive officers of Old
York, who may be deemed to be
"affiliates" of Midlantic under Rule
145 promulgated under the Act. See "THE
PROPOSED MERGER -- Resale
Considerations with Respect to the
Midlantic Common Stock."
Conditions to the Merger.............. Consummation of the Merger is
contingent upon a number of conditions,
including receiving all necessary
regulatory approvals; the approval of
the Merger by the holders of at least a
majority of the shares of Old York
Common Stock voting at the Meeting; an
opinion of counsel to Midlantic
relating to the tax aspects of the
Merger; and an opinion of Sandler
O'Neill, advisors to Old York, that the
Merger is fair to the shareholders of
Old York from a financial point of
view. Sandler O'Neill's opinion is
included as Appendix C. In addition, as
a condition to the Merger, Old York
must maintain certain minimum capital
(as adjusted in accordance with the
Agreement) requirements and certain
representations and warranties made by
Old York and the Bank in the Agreement
must be true in all material respects
at the Effective Time of the Merger.
The final outcome of a class action
suit filed against Old York, which was
dismissed without prejudice on
April 25, 1995, may impact
whether certain conditions necessary
for the Merger to occur will be
satisfied. See "THE PROPOSED MERGER --
Fairness Opinion," "-- Conditions to
the Merger" and "--Regulatory
Approvals."
Regulatory Approvals.................. Consummation of the Merger requires the
approval or waiver of the Board of
Governors of the Federal Reserve System
(the "Federal Reserve Board") and the
approval of the Department of Banking
of the Commonwealth of Pennsylvania
(the "Pennsylvania Banking
Department"). Consummation of the Bank
Merger requires the approval of the
Comptroller of the Currency (the
"OCC"). Applications for such approvals
or waivers have been filed by
Midlantic. While Midlantic and Old York
anticipate receiving the approvals or
waivers, there can be no assurance that
they will be granted, or that they will
be granted on a timely basis without
conditions unacceptable to Midlantic or
Old York. See "THE PROPOSED MERGER --
Regulatory Approvals."
Closing............................... The Merger will be consummated (the
"Closing") on the later of (i) the date
on which the Merger is approved by Old
York shareholders and (ii) three days
after all conditions required for
consummation of the Merger have been
satisfied (or waived), or on such other
date as the parties may agree. The
Merger requires that a Certificate of
Merger be filed with the New Jersey
Secretary of State and Articles of
Merger be filed with the Secretary of
the Commonwealth of Pennsylvania. The
effective time of
-8-
<PAGE>
the Merger (the "Effective Time") will
be the time at which the foregoing
documents have become effective. The
Merger is expected to close late in the
second quarter or early in the third
quarter of 1995. See "THE PROPOSED
MERGER -- Effective Time; Amendments;
Termination."
Termination Rights and Price
Adjustment............................ The Agreement may be terminated by
either Midlantic or Old York if the
Closing has not occurred by December
31, 1995. The Agreement may be
terminated by Old York if the price of
Midlantic Common Stock over a specified
period of time is less than
approximately $22.84 ($26.87 multiplied
by 0.85) and also less than an index
ratio based upon a selected peer group
of other bank holding companies;
provided, however, that in such event
Midlantic, in its sole discretion, may
elect to increase the Exchange Ratio to
avoid such termination. In addition, if
Old York's capital (as adjusted in
accordance with the terms of the
Agreement) falls below a specified
level, Midlantic is not obligated to
effect the Merger. The Agreement also
provides that if Old York does not meet
certain minimum capital (as adjusted in
accordance with the Agreement)
requirements, the price which Old York
shareholders are entitled to receive in
exchange for their shares of Old York
Common Stock will be adjusted downward.
See "-- Effective Time; Amendments;
Termination; Price Adjustment." For a
more complete description of other
termination rights available to
Midlantic and Old York and the price
adjustment provisions, see "THE
PROPOSED MERGER -- Effective Time;
Amendments; Termination" and "--
Conditions to the Merger."
Stock Option to Midlantic
for Old York Shares................... Midlantic and Old York entered into a
Stock Option Agreement dated December
29, 1994 (the "Stock Option
Agreement"), in connection with the
negotiation by Midlantic and Old York
of the Agreement. Pursuant to the Stock
Option Agreement, Old York has granted
to Midlantic an option (the "Option"),
exercisable only under certain limited
and specifically defined circumstances,
to purchase up to 19.9% of the shares
of Old York Common Stock which would be
outstanding immediately following the
exercise of the Option, for an exercise
price of $7.25 per share. Midlantic
does not have any voting rights with
respect to the shares of Old York
Common Stock subject to the Option
prior to exercise of the Option.
Midlantic has the right to exercise the
Option only upon the occurrence of
certain events including, but not
limited to, the acquisition of
beneficial ownership of at least 20% of
the outstanding shares of Old York
Common Stock by a person or group other
than Midlantic or an affiliate. The
Stock Option Agreement is attached as
Appendix B hereto at page B-1. See "THE
PROPOSED MERGER -- Stock Option for
Shares of Old York Common Stock."
Certain Differences in
Shareholders' Rights.................. On the Effective Date, shareholders of
Old York, except those who receive cash
in the Merger (including those who
perfect dissenters' rights in
accordance with the PaBCL),
automatically will become shareholders
of Midlantic. The rights of
shareholders of Midlantic are
determined by the New Jersey Business
Corporation Act and by Midlantic's
Certificate of Incorporation and
By-laws. The rights of shareholders of
Midlantic differ from the rights of
shareholders of Old York with respect
to certain matters. For a summary of
these differences, see "COMPARISON OF
SHAREHOLDERS RIGHTS UNDER PENNSYLVANIA
AND NEW JERSEY LAW."
-9-
<PAGE>
COMPARATIVE PER SHARE DATA (Unaudited)
The following table sets forth the income and dividends per common share
and period-end book value per common share of Midlantic Common Stock and Old
York Common Stock for the year ended December 31, 1994 and the three months
ended March 31, 1995, on an historical and pro forma basis. The historical per
share data have been derived from the financial statements of Midlantic which
are incorporated by reference herein and the financial statements of Old York
which are included in this Proxy Statement. The pro forma combined per share
data have been derived after giving effect to the Merger as if it occurred at
the beginning of the period presented. See "SELECTED FINANCIAL INFORMATION --
Selected Financial Information of Midlantic Corporation" and "-- Selected
Financial Information of Old York Road Bancorp, Inc."
Three Months Ended Year Ended
March 31, 1995 December 31, 1994
------------------ -----------------
Midlantic Common Stock
Income Per Share From Continuing
Operations:
Primary
Historical $ .98 $ 5.18
Pro Forma --Midlantic and Old York .97 5.10
Fully Diluted
Historical .97 5.11
Pro Forma -- Midlantic and Old York .96 5.03
Cash Dividends Declared Per Share (1)
Historical .22 .40
Pro Forma -- Midlantic and Old York .22 .40
Book Value Per Share at Period-end
Historical 25.93 25.19
Pro Forma -- Midlantic and Old York 25.26 24.42
Old York Common Stock
Income (Loss) Per Share From Continuing
Operations:
Historical (Primary and Fully Diluted) .03 $(1.24)
Pro Forma Equivalent (Primary)--
Midlantic and Old York (2) .36 1.90
Pro Forma Equivalent (Fully Diluted)--
Midlantic and Old York (2) .35 1.87
Cash Dividends Declared Per Share
Historical -- --
Pro Forma Equivalent -- Midlantic
and Old York (2) .08 .15
Book Value Per Share at Period-end
Historical 4.53 4.44
Pro Forma Equivalent -- Midlantic
and Old York (2) 9.40 9.09
- -----------
(1) The amount of future dividends payable by Midlantic, if any, is subject to
the discretion of the Board of Directors of Midlantic. Midlantic's Board of
Directors normally considers the cash requirements of Midlantic and its
subsidiaries, general business conditions, the dividend paying capacity of
MB and applicable governmental regulations and policies. Pro forma amounts
assume that Midlantic would have declared cash dividends per share of
Midlantic Common Stock equal to the historical cash dividends declared per
share of Midlantic Common Stock.
(2) Equivalent pro forma income, cash dividends declared and book value per
share of Old York Common Stock represent the income, cash dividends and
book value per share of Midlantic Common Stock on a pro forma basis
multiplied by 0.3721. Such multiplier represents the exchange ratio
(assuming no adjustment) for those shareholders of Old York who elect to
receive Midlantic Common Stock in exchange for Old York Common Stock.
-10-
<PAGE>
The following table presents the closing sale price reported by Nasdaq per
share of Midlantic Common Stock and the last sale price reported by Nasdaq per
share of Old York Common Stock on December 29, 1994, the last full trading day
prior to the public announcement that Midlantic and Old York had entered into
the Agreement and May 22, 1995, a date shortly prior to the mailing of this
Proxy Statement. Midlantic Common Stock is traded on The Nasdaq National
Market(R). Old York Common Stock is traded on The Nasdaq SmallCap Market(SM).
See "MARKET PRICE DATA." The table also presents the equivalent value of
Midlantic Common Stock per Old York share which has been calculated by
multiplying the market price of Midlantic Common Stock on the dates indicated by
the Exchange Ratio of 0.3721. Old York shareholders are urged to obtain current
market quotations for Midlantic Common Stock. Because the Exchange Ratio is
fixed (subject to adjustment), Old York shareholders are not assured of
receiving any specific market value of Midlantic Common Stock. See "THE MERGER
- -- Conditions to the Merger" and "-- Effective Time; Amendments; Termination;
Price Adjustment." The price of Midlantic Common Stock at the Effective Time may
be higher or lower than the market price at either the time of entering into the
Agreement, the time of mailing this Proxy Statement or at the time of the
Meeting.
Pro Forma
Equivalent Per
Midlantic Old York Share of Old
Common Common York Common
Stock Stock Stock
-------- -------- -----------
December 29, 1994 $26.75 $ 7.25 $ 9.95
May 22, 1995 $38.88 $12.75 $14.47
------ ------ ------
PRINCIPAL BUSINESSES
Midlantic............................. Midlantic is a regional bank holding
company organized under the laws of the
State of New Jersey and registered
under the Bank Holding Company Act of
1956, as amended (the "Bank Holding
Company Act"). Midlantic has one bank
subsidiary, Midlantic Bank, National
Association, which operates 261
branches in New Jersey and 63 branches
in southeastern Pennsylvania. At
March 31, 1995, Midlantic on a
consolidated basis had total assets of
$13.6 billion. Midlantic's principal
executive offices are located at Metro
Park Plaza, 499 Thornall Street, P.O.
Box 600, Edison, New Jersey 08818, and
its telephone number is (908) 321-8000.
See "AVAILABLE INFORMATION,"
"INFORMATION INCORPORATED BY REFERENCE"
and "CERTAIN INFORMATION REGARDING
MIDLANTIC."
Old York.............................. Old York is a bank holding company
organized under the laws of the
Commonwealth of Pennsylvania and
registered under the Bank Holding
Company Act. Old York has one bank
subsidiary, Bank and Trust Company of
Old York Road, which operates 14
banking offices in Montgomery, Bucks
and Philadelphia counties,
Pennsylvania. At March 31, 1995, Old
York had total assets of $226.3
million. Old York's principal executive
offices are located at York & Easton
Roads, P.O. Box W, Willow Grove,
Pennsylvania 19090-3282, and its
telephone number is (215) 659-3400. See
"AVAILABLE INFORMATION," "CERTAIN
INFORMATION REGARDING OLD YORK," "OLD
YORK MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF OLD YORK
ROAD BANCORP, INC." and "DESCRIPTION
OF THE BUSINESS OF OLD YORK ROAD
BANCORP, INC."
Recent Developments................... Certain changes in the management of
Old York have occurred in recent
months. In addition, a class action
lawsuit has been filed against Old
York, the outcome of which may impact
whether certain conditions necessary
for the Merger to occur will be
satisfied. See "CERTAIN INFORMATION
REGARDING OLD YORK -- Recent
Developments" for a more detailed
discussion of these matters.
-11-
<PAGE>
CERTAIN INFORMATION REGARDING MIDLANTIC
General
Midlantic is a regional bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act. In addition to MB, Midlantic directly or indirectly
through MB, owns additional nonbank subsidiaries. Nonbank subsidiaries owned
directly by Midlantic are engaged in the discount brokerage business and
credit-related reinsurance. MB's direct subsidiaries primarily hold properties
acquired through foreclosure. MB also directly owns a subsidiary engaged in the
leasing of motor vehicles. The corporate headquarters of Midlantic is located in
Edison, New Jersey.
As of March 31, 1995, Midlantic was the fourth largest bank holding company
headquartered in New Jersey based on total assets. At March 31, 1995, Midlantic
reported on a consolidated basis total assets of $13.6 billion, total loans (net
of unearned income) of $8.2 billion, total deposits of $10.7 billion and
shareholders' equity of $1.4 billion.
Midlantic Bank, National Association
MB, headquartered in Newark, New Jersey, is a commercial bank established
under the laws of the United States. As of December 31, 1994, MB operated 261
branches in 20 counties of New Jersey and 63 branches in Bucks, Chester,
Delaware, Montgomery and Philadelphia counties of Pennsylvania. In August 1994,
Continental Bank, which was headquartered in Norristown, Pennsylvania and which
had been a wholly-owned subsidiary of Midlantic, merged with and into MB, with
MB the surviving entity in the merger.
MB provides a full range of commercial and retail bank services, as well as
trust services, which are provided through several offices located within MB's
market area. At December 31, 1994, MB constituted in excess of 95 percent of
Midlantic's consolidated total assets.
Additional information about Midlantic and MB is included in documents
incorporated by reference in this Proxy Statement. See "INFORMATION DELIVERED
AND INCORPORATED BY REFERENCE."
CERTAIN INFORMATION REGARDING OLD YORK
General
Old York is a bank holding company registered with the Federal Reserve
Board under the Bank Holding Company Act and subject to examination by the
Federal Reserve Board. Old York is headquartered in Willow Grove, Pennsylvania
and was incorporated under the laws of the Commonwealth of Pennsylvania for the
purposes of acting as a holding company for the Bank which is Old York's sole
operating subsidiary. At March 31, 1995, Old York had total assets of $226.3
million.
-12-
<PAGE>
The Bank, which is a commercial bank incorporated under the laws of the
Commonwealth of Pennsylvania, provides a full range of commercial banking
services and trust and other fiduciary services. The Bank presently operates 14
banking offices located in the Pennsylvania counties of Montgomery, Bucks and
Philadelphia. The Bank owns, in whole or in part, additional nonbank
subsidiaries which primarily hold properties that were acquired in satisfaction
of debts previously contracted.
Recent Developments
(a) On March 2, 1995, the Bank entered into a termination agreement (the
"Termination Agreement") with Erwin K. Wenner pursuant to which Mr. Wenner's
employment as President and Chief Executive Officer of the Bank and Old York was
terminated effective that day. On March 2, 1995, the Bank also entered into an
employment agreement with James M. Mack to serve as President and Chief
Executive Officer of the Bank. Subsequent thereto, Mr. Mack was elected to serve
as President and Chief Executive Officer of Old York and became a director of
Old York in place of Mr. Wenner. See "THE MERGER -- Interests of Management in
the Merger" for a more detailed discussion of these agreements.
(b) In early 1995, Richard Goldberg, an Old York shareholder, filed an
alleged class action suit (the "Goldberg Litigation") against Old York and
various directors and officers of Old York alleging, among other things, that
the price to be received by Old York shareholders in the Merger is unfair and
that Old York shareholders will be damaged if the Merger is consummated, and
further seeking to enjoin the Merger. On April 25, 1995, the complaint in the
Goldberg Litigation was dismissed without prejudice to the right of the
plaintiff to appeal the dismissal or to reinstitute the matter at a future date.
Prior to the dismissal of the complaint, Mr. Goldberg filed an amended complaint
as to which the Court is now considering dismissal. The status of the Goldberg
Litigation immediately prior to the anticipated Closing may directly impact
whether certain conditions necessary for the Merger to occur will be satisfied.
See "THE MERGER -- Conditions to the Merger."
For a more detailed discussion of the Goldberg Litigation and other legal
proceedings involving Old York and the Bank, see "DESCRIPTION OF THE BUSINESS OF
OLD YORK ROAD BANCORP, INC.--Legal Proceedings."
-13-
<PAGE>
MARKET PRICE DATA
Midlantic Common Stock is traded on The Nasdaq National Market(R) under the
symbol "MIDL". Old York Common Stock is traded on The Nasdaq SmallCap Market(SM)
under the symbol "BOYR". The following table presents information concerning the
market price of Midlantic Common Stock and Old York Common Stock, for the
periods indicated, and the cash dividends declared per share of Midlantic
Common Stock. Old York has not declared any cash dividends since 1990.
Midlantic Old York
Common Stock Common Stock
--------------------------- --------------
Price Dividends Bid/Price
High Low Declared High Low
------- ------- --------- ------ ------
1993
1st Quarter ................ $ 22.38 $ 18.13 $ -- $ 6.00 $ 3.00
2nd Quarter ................ 25.13 17.50 -- 6.50 4.00
3rd Quarter ................ 27.75 21.13 -- 4.50 3.75
4th Quarter ................ 28.63 22.25 -- 4.50 3.75
1994
1st Quarter ................ $ 30.88 $ 24.25 $ -- $ 5.00 $ 4.50
2nd Quarter ................ 31.88 27.50 .10 5.50 4.25
3rd Quarter ................ 30.63 27.63 .13 7.50 5.50
4th Quarter ................ 28.63 24.00 .17 9.13 6.00
1995
1st Quarter ................ $ 34.88 $ 26.25 $.22 $ 9.50 $ 8.25
2nd Quarter (through
May 22, 1995) ............ 39.38 33.88 .32 12.75 9.25
------- ------- ------- ------ ------
The following table presents the closing sale price reported by Nasdaq per
share of Midlantic Common Stock and the last sale price reported by Nasdaq per
share of Old York Common Stock on December 29, 1994, the last full trading day
prior to the public announcement that Midlantic and Old York had entered into
the Agreement and May 22, 1995, a date shortly prior to the mailing of this
Proxy Statement. The table also presents the equivalent value of Midlantic
Common Stock per Old York share which has been calculated by multiplying the
market price of Midlantic Common Stock on the dates indicated by the Exchange
Ratio of 0.3721. Old York shareholders are urged to obtain current market
quotations for Midlantic Common Stock. Because the Exchange Ratio is fixed
(subject to adjustment), Old York shareholders are not assured of receiving any
specific market value of Midlantic Common Stock. See "THE MERGER -- Conditions
to the Merger" and "-- Effective Time; Amendments; Termination; Price
Adjustment." The price of Midlantic Common Stock at the Effective Time may be
higher or lower than the market price at either the time of entering into the
Agreement, the time of mailing this Proxy Statement or at the time of the
Meeting.
<TABLE>
<CAPTION>
Pro Forma
Equivalent Per
Midlantic Old York Share of Old
Common Common York Common
Stock Stock Stock
--------- -------- --------------
<S> <C> <C> <C>
December 29, 1994 ............................... $26.75 $ 7.25 $ 9.95
May 22, 1995 .................................... $38.88 $12.75 $14.47
------ ------ ------
</TABLE>
-14-
<PAGE>
SELECTED FINANCIAL INFORMATION (Unaudited)
The following table presents certain selected consolidated financial
information of Midlantic. The selected financial information for the three month
periods ended March 31, 1995 and 1994 for Midlantic is derived in part from the
unaudited consolidated financial statements included in Midlantic's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995. During 1990,
1991 and 1992, Midlantic sold several bank and nonbank subsidiaries as well as
certain assets which, in the aggregate, reduced total assets by nearly $6
billion. The information should be reviewed in conjunction with Midlantic's
Annual Report on Form 10-K for the year ended December 31, 1994 and Midlantic's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995
which are incorporated by reference. The selected financial data for the three
months ended March 31, 1995 is not necessarily indicative of the results of
operations that may be expected for any other period. (See "Information
Incorporated by Reference").
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION OF MIDLANTIC CORPORATION(1)
Three Months Ended
March 31, Years Ended December 31,
------------------------ ---------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollar amounts in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Statement of Income Data:
Total interest income ................... $ 237,194 $ 204,948 $ 863,484 $ 825,547 $ 1,062,207 $ 1,742,380 $ 2,208,119
Total interest expense .................. 81,888 67,651 278,947 310,857 542,012 1,104,779 1,370,822
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income ..................... 155,306 137,297 584,537 514,690 520,195 637,601 837,297
Provision for loan losses ............... 1,500 8,156 23,335 146,305 170,299 724,393 742,904
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income (loss) after
provision for loan losses ............. 153,806 129,141 561,202 368,385 349,896 (86,792) 94,393
Total noninterest income ................ 48,444 47,329 214,210 186,453 290,365 244,361 284,591
Total noninterest expenses .............. 116,852 120,849 471,407 534,485 630,389 744,348 674,823
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of accounting
changes................................ 85,398 55,621 304,005 20,353 9,872 (586,779) (295,839)
Income tax expense (benefit) ............ 32,074 2,268 24,900 (111,043) 2,844 (43,476) (100,834)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect
of accounting changes ................. 53,324 53,353 279,105 131,396 7,028 (543,303) (195,005)
Cumulative effect of accounting
changes ............................... -- (7,528) (7,528) 38,962 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $ 53,324 $ 45,825 $ 271,577 $ 170,358 $ 7,028 $ (543,303) $ (195,005)
=========== =========== =========== =========== =========== =========== ===========
Selected Balance Sheet Data:
Total assets ............................ $13,634,216 $13,670,747 $13,293,538 $13,909,178 $14,397,138 $18,132,081 $23,530,149
Investment securities ................... 3,289,136 2,414,409 2,756,543 2,455,410 2,114,812 2,655,712 2,738,093
Loans(2) ................................ 8,222,887 8,495,037 8,256,375 8,445,129 9,331,494 13,025,045 17,208,604
Allowance for loan losses ............... 337,170 387,374 349,520 400,311 670,545 847,998 742,172
Other interest-earning assets ........... 956,215 1,522,002 1,113,659 1,778,821 1,995,681 1,108,896 1,237,452
Deposits ................................ 10,657,304 11,346,924 10,807,334 11,587,801 12,560,029 16,089,823 20,151,931
Short-term borrowings ................... 1,009,002 622,699 584,489 674,497 370,718 588,132 1,307,698
Obligations under capital leases ........ 8,240 8,740 8,473 8,861 9,386 9,627 9,814
Long-term debt .......................... 372,940 375,000 373,000 386,752 437,112 463,989 448,178
Shareholders' equity .................... 1,409,474 1,167,087 1,374,186 1,122,564 843,462 727,299 1,272,775
Weighted average common shares (primary). 53,243,838 52,820,798 52,978,041 50,943,324 41,569,086 38,094,934 38,097,294
Weighted average common shares
(fully diluted) ........................ 54,899,917 54,403,058 54,521,851 52,568,539 41,953,805 38,094,934 38,097,294
Per Common Share Data:
Income (loss)--primary:
Before cumulative effect of
accounting changes .................... $ .98 $ .99 $ 5.18 $ 2.51 $ .08 $(14.36) $ (5.22)
Cumulative effect of accounting changes.. -- (.14) (.14) .76 -- -- --
Net income (loss)........................ .98 .85 5.04 3.27 .08 (14.36) (5.22)
Income (loss)--fully diluted:
Before cumulative effect of
accounting changes .................... .97 .98 5.11 2.51 .08 (14.36) (5.22)
Cumulative effect of accounting changes.. -- (.14) (.14) .74 -- -- --
Net income (loss)........................ .97 .84 4.97 3.25 .08 (14.36) (5.22)
Book value .............................. 25.93 21.38 25.19 20.56 17.19 17.78 32.10
Dividends ............................... .22 -- .40 -- -- -- 1.19
Financial Ratios:
Return on average assets ................ 1.65% 1.34% 2.02% 1.24% .04% (2.49)% (.82)%
Return on average shareholders' equity .. 15.51 16.25 21.95 17.50 .92 (52.58) (13.44)
Net interest margin ..................... 5.23 4.44 4.78 4.07 3.41 3.14 3.82
Liquidity and Capital Ratios:
Average loans to average deposits(2) .... 76.31% 73.38% 74.91% 74.40% 80.30% 84.17% 91.80%
Tier 1 risk based ....................... 13.58 9.95 13.07 9.28 6.83 4.29 5.93
Total risk based ........................ 17.77 13.98 17.22 13.29 10.76 7.69 8.86
Leverage ................................ 9.43 7.35 9.43 6.81 5.19 3.43 4.81
Asset Quality Ratios:
Nonaccrual loans to total loans(2) ...... 1.88% 3.38% 2.22% 3.56% 11.69% 12.99% 8.40%
Nonaccrual assets to total assets ....... 1.57 2.74 1.86 2.86 8.76 9.99 6.30
Allowance for loan losses to total
loans(2)............................... 4.10 4.56 4.23 4.74 7.19 6.51 4.31
Allowance for loan losses to nonaccrual
loans ................................. 218.23 135.00 190.56 133.11 61.48 50.14 51.32
Net charge-offs to average loans(2)(3)... .69 .64 .80 2.67 2.67 3.50 2.14
- -----------------
<FN>
(1) In the first quarter of 1995, Midlantic adopted Statement of Finanical
Accounting Standard's ("FAS") No. 114 "Accounting by Creditors for
Impairment of a Loan." One of the provisions of FAS No. 114 requires the
reclassification of all in-substance foreclosures from other real estate
owned to the loan portfolio as nonaccrual loans at their current carrying
value. This reclassification was made on January 1, 1995 and Midlantic also
elected to reclassify all appropriate historical data.
(2) Loans are stated net of unearned income.
(3) Ratios for the three months ended March 31, 1995 and 1994 are annualized.
</FN>
</TABLE>
-15-
<PAGE>
The following table presents certain selected consolidated financial
information of Old York. The selected financial information for the three month
periods ended March 31, 1995 and 1994 for Old York is derived in part from the
unaudited consolidated financial statements included elsewhere in this Proxy
Statement. The information should be reviewed in conjunction with the
Consolidated Financial Statements and Notes thereto for Old York included
elsewhere in this Proxy Statement and the other information contained herein.
The selected financial data for the three months ended March 31, 1995 is not
necessarily indicative of the results of operations that may be expected for any
other period.
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION OF OLD YORK ROAD BANCORP, INC.(1)
Three Months Ended
March 31, Years Ended December 31,
------------------------ ---------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollar amounts in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Statement of Income Data:
Total interest income ................... $ 4,163 $ 3,637 $ 15,485 $ 15,089 $ 18,285 $ 22,150 $ 24,915
Total interest expense .................. 1,478 1,291 5,562 5,245 8,026 12,495 14,142
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income ..................... 2,685 2,346 9,923 9,844 10,259 9,655 10,773
Provision for loan losses ............... 97 300 2,474 1,953 4,222 5,273 2,127
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses .............. 2,588 2,046 7,449 7,891 6,037 4,382 8,646
Total noninterest income ................ 429 453 1,766 2,356 2,023 1,946 1,309
Total noninterest expenses .............. 2,933 2,377 12,714 10,623 11,609 12,284 10,132
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes ....... 84 122 (3,499) (376) (3,549) (5,956) (177)
Income tax expense (benefit) ............ 3 2 -- 28 724 (991) (179)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ....................... $ 81 $ 120 $ (3,499) $ (404) $ (4,273) $ (4,965) $ 2
=========== =========== =========== =========== =========== =========== ===========
Selected Balance Sheet Data:
Total assets ............................ $ 226,275 $ 230,101 $ 231,185 $ 223,603 $ 222,697 $ 260,813 $ 269,165
Investment securities ................... 57,385 55,302 57,948 49,073 33,450 27,258 32,763
Loans(2)................................. 144,799 143,275 150,513 143,230 157,340 205,359 206,688
Allowance for loan losses ............... 6,132 5,878 5,026 5,502 4,044 5,271 3,963
Other interest-earning assets ........... 4,500 13,250 4,400 13,200 6,500 3,925 4,650
Deposits ................................ 211,484 211,481 216,673 206,076 210,397 243,015 245,818
Shareholders' equity .................... 12,790 16,335 12,537 16,305 10,541 14,722 19,487
Weighted average common shares
(primary and fully diluted) ............ 2,825,312 2,825,312 2,825,312 1,428,525 1,301,545 1,301,545 1,301,861
Per Common Share Data:
Net income (loss)--primary and
fully diluted ......................... $ .03 $ .04 $ (1.24) $ (.28) $ (3.28) $ (3.81) $ --
Book value .............................. 4.53 5.78 4.44 5.77 8.10 11.31 14.97
Dividends ............................... -- -- -- -- -- -- .50
Financial Ratios:
Return on average assets ................ .15% .21% (1.52)% (.19)% (1.75)% (1.87)% --%
Return on average shareholders'
equity ................................. 2.51 2.66 (21.93) (3.30) (30.42) (26.29) --
Net interest margin ..................... 5.25 4.66 4.90 5.38 4.84 4.26 4.78
Liquidity and Capital Ratios:
Average loans to average deposits(2)..... 71.17% 67.83% 67.58% 71.95% 81.30% 83.55% 84.36%
Tier 1 risk based ....................... 8.25 10.25 7.90 10.32 6.30 6.30 8.07
Total risk based ........................ 9.53 11.53 9.17 11.60 7.57 7.83 9.58
Leverage ................................ 5.80 7.26 5.50 7.51 4.70 5.71 7.28
Asset Quality Ratios:
Nonaccrual loans to total loans(2) ...... 6.05% 8.32% 6.05% 5.38% 5.50% 7.43% 4.34%
Nonaccrual assets to total assets ....... 6.19 8.29 6.36 7.14 7.78 8.61 6.57
Allowance for loan losses
to total loans(2) ...................... 4.23 4.10 3.34 3.84 2.57 2.57 1.92
Allowance for loan losses
to nonaccrual loans .................... 69.97 49.30 55.16 71.43 46.72 34.55 44.21
Net (recoveries) charge-offs to average
loans(2)(3) ............................ (2.05) (.22) 1.91 .34 2.93 1.36 .83
- --------------------------
<FN>
(1) In the first quarter of 1995, Old York adopted Statement of Finanical
Accounting Standard's ("FAS") No. 114 "Accounting by Creditors for
Impairment of a Loan." One of the provisions of FAS No. 114 requires the
reclassification of all in-substance foreclosures from other real estate
owned to the loan portfolio as nonaccrual loans at their current carrying
value. This reclassification was made on January 1, 1995 and Old York also
elected to reclassify all appropriate historical data.
(2) Loans are stated net of unearned income.
(3) Ratios for the three months ended March 31, 1995 and 1994 are annualized.
</FN>
</TABLE>
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<PAGE>
INTRODUCTORY STATEMENT
All information contained in or incorporated by reference into this Proxy
Statement with respect to Old York and the Bank was supplied by Old York for
inclusion herein. All information contained herein or incorporated by reference
herein with respect to Midlantic and MB was supplied by Midlantic. The first
date on which this Proxy Statement, the accompanying Notice of Special Meeting
and the enclosed form of proxy are being sent to the shareholders of Old York is
on or about May 31, 1995.
This Proxy Statement does not cover any resales of shares of Midlantic
Common Stock to be received by shareholders of Old York upon consummation of the
transactions described herein. Affiliates of Old York may be subject to
restrictions on their ability to resell the Midlantic Common Stock received by
them in the Merger. See "THE PROPOSED MERGER -- Resale Considerations with
Respect to the Midlantic Common Stock."
Purpose of Meeting
At the Meeting, the Old York shareholders will (i) consider and vote upon a
proposal to approve the Agreement; and (ii) act on such other matters as may be
properly brought before the Meeting. A copy of the Agreement is attached as
Appendix A to this Proxy Statement and is incorporated herein by reference. The
Agreement provides for the right to receive either $10.00 in cash or 0.3721 of a
share of Midlantic Common Stock in exchange for each share of Old York Common
Stock outstanding at the time the Merger becomes effective, subject to the
limitations and election and allocation provisions set forth in the Agreement,
and subject to adjustment in certain circumstances. See "THE PROPOSED MERGER."
THE BOARD OF DIRECTORS OF OLD YORK RECOMMENDS THAT THE SHAREHOLDERS OF OLD YORK
VOTE IN FAVOR OF THE MERGER.
Vote Required; Shares Entitled to Vote
Only holders of record of Old York Common Stock at the close of business on
May 25, 1995 (the "Record Date") are entitled to notice of and to vote at the
Meeting. The holders of a majority of the outstanding shares of Old York Common
Stock entitled to vote will constitute a quorum at the Meeting. The number of
shares of Old York Common Stock issued, outstanding and entitled to vote at the
close of business on the Record Date was 2,825,312. The Agreement must be
approved by the affirmative vote at the Meeting, either in person or by proxy,
of the holders of at least a majority of the votes cast at the meeting.
Holders of Old York Common Stock of record on the Record Date are entitled
to one vote per share on any matter that may properly come before the Meeting.
Solicitation, Voting and Revocation of Proxies
The enclosed proxy is designed to permit each shareholder of record on the
Record Date to vote on all matters to come before the Meeting. This proxy is
solicited by the Board of Directors of Old York. Any proxy may be revoked at any
time before its exercise by giving written notice of revocation to the Secretary
of Old York, at the main office of Old York at York & Easton Roads, Willow
Grove, Pennsylvania 19090-3282. A subsequently dated and duly executed proxy, if
properly presented, will revoke a prior proxy. Shareholders entitled to vote who
have previously executed a proxy may attend the Meeting and vote in person,
provided they have filed a written notice of revocation of such proxy with the
Secretary of the Meeting prior to the voting of such proxy. Where a shareholder
specifies a choice in the form of proxy with respect to a matter being voted
upon, the shares represented by the proxy will be voted in accordance with such
specification. If no such
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<PAGE>
specification is made, the shares represented by proxies will be voted for the
Agreement and in the discretion of the proxyholder as to any matters which may
properly come before the Meeting.
The Board of Directors of Old York knows of no matters, other than the
proposed Merger described in this Proxy Statement, that will be presented for
consideration at the Meeting. However, if other matters properly come before the
Meeting, it is intended that the persons designated as proxies will vote upon
such additional matter(s) in accordance with their best judgment.
The cost of soliciting proxies for the Meeting will be borne by Old York.
In addition to the use of the mails, proxies may be solicited personally, by
telephone or telegram, and by directors, officers and employees of Old York
acting without additional compensation. Arrangements may also be made with
brokers, dealers, nominees and other custodians for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and such persons may be reimbursed by Old York for reasonable
out-of-pocket expenses.
THE PROPOSED MERGER
General Description
DESCRIPTIONS OF THE MERGER AND THE AGREEMENT (WHICH IS ATTACHED AS APPENDIX
A TO THIS PROXY STATEMENT) ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
AGREEMENT WHICH IS HEREBY INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE.
SHAREHOLDERS ARE URGED TO CAREFULLY REVIEW THE AGREEMENT.
The Agreement provides that, at the Effective Time, Old York will be merged
with and into Midlantic and Midlantic will be the surviving corporation (the
"Surviving Corporation") and all the property, rights, powers and franchises of
each of Old York and Midlantic will vest in the Surviving Corporation.
Immediately following the Effective Time, the Bank will be merged into MB (the
"Bank Merger") and MB will be the surviving bank (the "Surviving Bank"). The
separate identity and existence of the Bank will cease upon consummation of the
Merger and all property, rights, powers and franchises of each of the Bank and
MB will vest in the Surviving Bank and the Surviving Bank will continue to
operate as a wholly-owned subsidiary of Midlantic. At the Effective Time, each
share of Old York Common Stock outstanding immediately prior to the Effective
Time (except for shares, if any, owned by shareholders of Old York who duly
exercise dissenting rights pursuant to Section 1571 of the Pennsylvania Business
Corporation Law ("PaBCL")) will be converted into the right to receive either
$10.00 in cash or 0.3721 of a share (the "Exchange Ratio") of newly issued
Midlantic Common Stock, subject to the limitations and election and allocation
provisions set forth in the Agreement, and subject to certain adjustments, as
more fully described under "-- Consideration," "-- Election Procedures," "--
Allocation Procedures" and "-- Rights of Dissenting Old York Shareholders."
Consideration
At the Effective Time, each share of Old York Common Stock outstanding
(except for shares, if any, owned by shareholders of Old York who perfect their
rights of dissent from the Merger pursuant to, and who are entitled to the
rights and remedies provided in, Subchapter 15D of the PaBCL) will automatically
be converted into the right to receive (i) 0.3721 of a share of Midlantic Common
Stock, or (ii) if an Old York shareholder specifically elects to receive cash,
$10.00 in cash, subject to the limitations and election and allocation
provisions set forth in the Agreement, and subject to certain adjustments. The
Agreement provides that no more than 49% of Old York Common Stock outstanding
(subject to downward adjustment pursuant to the Agreement) may be exchanged for
cash. Accordingly, if the holders of more than 49% of Old York Common Stock
elect cash, then the shareholders so electing will receive a combination of cash
and Midlantic Common Stock in exchange for their shares of Old York Common Stock
as determined in accordance with the allocation
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<PAGE>
procedures set forth in the Agreement. See "--Election Procedure" and "--
Allocation Procedure." Also, see "--Rights of Dissenting Old York Shareholders."
The Agreement provides that if Old York does not meet certain minimum
capital (as adjusted in accordance with the Agreement) requirements, the price
which Old York shareholders are entitled to receive in exchange for their shares
of Old York Common Stock will be adjusted downward. In addition, in the event
Old York's capital (as adjusted in accordance with the terms of the Agreement)
falls below a specified level, Midlantic is not obligated to effect the Merger.
See "-- Conditions to the Merger," and "-- Effective Time; Amendments;
Termination; Price Adjustment."
In addition, the Exchange Ratio is subject to adjustment to take into
account any stock split, stock dividend, stock combination, reclassification or
similar transaction by Midlantic with respect to the Midlantic Common Stock. In
addition, Old York has the right to terminate the Agreement if the price of
Midlantic Common Stock over a specified period of time is less than
approximately $22.84 ($26.87 multiplied by 0.85) and less than an index ratio
based upon a selected peer group of other bank holding companies. See "MARKET
PRICE DATA" for information concerning the market price of Midlantic Common
Stock and Old York Common Stock. Midlantic could avoid such termination by
agreeing to increase the Exchange Ratio in accordance with the terms of the
Agreement, however, Midlantic is under no obligation to adjust the Exchange
Ratio in such circumstances. See "-- Effective Time; Amendments; Termination;
Price Adjustment" for a more complete description of the termination rights
available to Midlantic and Old York.
No holder of Old York Common Stock will be entitled to receive any
fractional shares of Midlantic Common Stock, but instead will be entitled to
receive, without interest, a cash payment in the amount equal to the value of
such fractional share interest, based on the Last Price (as hereinafter defined)
of Midlantic Common Stock. All shares of Midlantic Common Stock that individual
Old York shareholders are entitled to receive in exchange for each share of Old
York Common Stock held will be aggregated to constitute as many whole shares of
Midlantic Common Stock as possible before determining the amount of a cash
payment for fractional shares.
Election Procedure
An election form ("Election Form") will be mailed to each Old York
shareholder after the Meeting and prior to the Election Date (as hereinafter
defined). An Election Form will also be mailed to persons who become
shareholders of record of Old York after the Record Date and before the business
day immediately prior to the Election Date.
The Election Form will enable record holders of Old York Common Stock to
specify that they desire to have all of their shares of Old York Common Stock
converted into the right to receive cash in the Merger (a "Cash Election") or
the right to receive Midlantic Common Stock in the Merger (a "Stock Election").
Any shareholder who (i) validly submits an Election Form and does not make a
Cash Election in such Election Form, (ii) or who does make a Cash Election and
thereafter validly revokes such Cash Election, (iii) or who does not validly
submit an Election Form, shall be deemed to have made a Stock Election.
An election in an Election Form will be effective only if the Form is
properly completed and signed and accompanied by certificates for the shares of
Old York Common Stock to which such Election Form relates, received by MB, the
Exchange Agent, at 499 Thornall Street, Edison, New Jersey 08837 if sent by mail
or overnight delivery, and at 111 Wood Avenue South, Iselin, New Jersey 08830 if
delivered by hand, no later than 5:00 p.m., New Jersey local time, on the
Election Date. Old York share certificates should not be sent with the enclosed
proxy form and should not be forwarded until after receipt of the Election Form
and letter of transmittal.
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<PAGE>
The method of delivery of the Election Form and the certificates for the
shares of Old York Common Stock to which it relates is at the election and risk
of the shareholder submitting them. If delivery is by mail, insured registered
mail, return receipt requested, should be considered.
Any Election Form relating to shares of Old York Common Stock with respect
to which the record holder thereof has filed and not withdrawn as of the
Effective Time a written demand for payment of the fair value of Old York Common
Stock pursuant to Subchapter 15D of the PaBCL will be deemed to have been
automatically revoked as of the Election Date.
A combined Election Form containing a single election (a "Combined Election
Form") may be submitted by two or more record holders of Old York Common Stock
if either holder may be deemed constructively to own the holders' shares of Old
York Common Stock by reason of the ownership attribution rules of Section 318 of
the Internal Revenue Code of 1986, as amended. Any Combined Election Form and
any change or revocation in such Combined Election Form must be signed by or on
behalf of all record holders of the Old York Common Stock covered thereby. All
shares of Old York Common Stock covered by a single Combined Election Form held
by record holders of Old York Common Stock submitting such Combined Election
Form will be treated as being held by a single record holder.
Any record holder of Old York Common Stock who holds such stock as nominee
for two or more beneficial owners may submit separate Election Forms for the
shares owned by each beneficial owner, each Election Form to contain a different
specification of preference (or non-preference). For purposes of the allocation
procedures referred to below, each such separate Election Form will be deemed to
be submitted by a separate Old York stockholder.
Any record holder of Old York Common Stock may at any time prior to the
Election Date change such holder's election by written notice received by the
Exchange Agent at or prior to the Election Date accompanied by a properly
completed, revised Election Form. Any record holder of Old York Common Stock may
at any time prior to the Election Date revoke such record holder's election by
(i) written notice received by the Exchange Agent at or prior to the Election
Date or (ii) withdrawal prior to the Election Date of (x) such record holder's
certificates for Old York Common Stock or (y) of the guarantee of delivery of
such certificates, previously deposited with the Exchange Agent.
Allocation Procedure
The allocation among Old York shareholders (other than holders of shares of
Old York Common Stock who have filed and not withdrawn a written demand for
payment of the fair value of their Old York Common Stock pursuant to Subchapter
15D of the PaBCL) of rights to receive cash or Midlantic Common Stock in the
Merger will be effected as follows:
(I) IF THE NUMBER OF SHARES OF OLD YORK COMMON STOCK FOR WHICH CASH
ELECTIONS ARE RECEIVED ("CASH ELECTION SHARES") IS EQUAL TO OR LESS THAN
(A) 49% OF THE NUMBER OF SHARES OF OLD YORK COMMON STOCK OUTSTANDING
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME MINUS (B) THE SUM OF (i) THE SHARES
OF OLD YORK COMMON STOCK PURCHASED BY MIDLANTIC OR ANY SUBSIDIARY OF
MIDLANTIC ON OR AFTER THE DATE OF THE AGREEMENT, (ii) THE SHARES OF OLD
YORK COMMON STOCK REDEEMED BY OLD YORK, IF ANY, FROM THE DATE OF THE
AGREEMENT TO THE EFFECTIVE TIME, (iii) THE SHARES OF OLD YORK COMMON STOCK
WHICH WERE SUBJECT TO AN OPTION AS TO WHICH A CASH AMOUNT IS TO BE PAID TO
ERWIN K. WENNER IN ACCORDANCE WITH THE TERMS OF THE TERMINATION AGREEMENT
BETWEEN THE BANK AND MR. WENNER, AND (iv) THE SHARES OF OLD YORK COMMON
STOCK, IF ANY, AS TO WHICH THE HOLDERS OF SUCH SHARES HAVE FILED AND NOT
WITHDRAWN A WRITTEN DEMAND FOR PAYMENT OF THE FAIR VALUE OF THEIR OLD YORK
COMMON STOCK PURSUANT TO SUBCHAPTER 15D OF THE PABCL AT OR BEFORE THE
MEETING. (THE "MAXIMUM CASH CONVERSION NUMBER"), THEN:
(a) all shares of Old York Common Stock for which Stock Elections
have been made or deemed made ("Stock Election Shares") and all shares
of Old York Common Stock as to which an election is not in effect on
the Election Date ("Non-Electing Common Shares") will be converted
into Midlantic Common Stock (except as otherwise provided for
fractional shares); and
(b) all Cash Election Shares will be converted into the right to
receive cash.
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<PAGE>
(II) IF THE NUMBER OF CASH PREFERENCE SHARES IS GREATER THAN THE
MAXIMUM CASH CONVERSION NUMBER, THEN:
(a) all Stock Election Shares and Non-Electing Common Shares will
be converted into Midlantic Common Stock (except as otherwise provided
for fractional shares); and
(b) each Cash Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the product
of (x) $10.00 and (y) a fraction (the "Cash Fraction"), the numerator
of which shall be the Maximum Cash Conversion Number and the
denominator of which shall be the total number of Cash Election
Shares, and (ii) a number of shares of Midlantic Common Stock equal to
the product of (x) the Exchange Ratio and (y) a fraction equal to one
minus the Cash Fraction.
Midlantic will have the right to make rules, not inconsistent with the
terms of the Agreement, governing the manner and extent to which Election Forms
are to be taken into account, the issuance and delivery of certificates for
Midlantic Common Stock into which Old York Common Stock is converted in the
Merger and the payment for shares of Old York Common Stock converted into the
right to receive cash in the Merger. All such rules and determinations
thereunder shall be final and binding on all holders of shares of Old York
Common Stock.
Payment of Cash and Delivery of Shares
As soon as practicable after the Effective Time, the required allocations
will be completed and distributions of cash (by check of the Exchange Agent) and
delivery of certificates for Midlantic Common Stock will be effected; provided,
however, that no cash or new certificates will be delivered to or for the
account of any holder of Old York Common Stock until the Merger is consummated
and the holder has surrendered to the Exchange Agent (to the extent not
previously surrendered with an Election Form) the old certificates for such
holder's Old York Common Stock, accompanied by a duly executed letter of
transmittal in proper form. A reminder notice will be sent by the Exchange Agent
after the Effective Time of the Merger to all Old York shareholders of record
who have not submitted an Election Form.
Holders of outstanding certificates for Old York Common Stock (other than
those who have perfected their dissenters' rights or those receiving cash in
exchange for their shares), upon proper surrender of such certificates to
Midlantic, will receive, promptly after the Effective Time, a certificate
representing the full number of shares of Midlantic Common Stock into which the
shares of Old York Common Stock previously represented by the surrendered
certificates have been converted. At the time of issuance of a new stock
certificate, each shareholder so entitled will receive a check for the amount of
the fractional share interest, if any, to which such shareholder may be
entitled.
Each share of Midlantic Common Stock for which shares of Old York Common
Stock are exchanged will be deemed to have been issued at the Effective Time.
Accordingly, Old York shareholders who receive Midlantic Common Stock in the
Merger will be entitled to receive any dividend or other distribution which may
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<PAGE>
be payable to holders of record of Midlantic Common Stock as of dates on or
after the Effective Time. However, no dividend or other distribution will
actually be paid with respect to any shares of Midlantic Common Stock exchanged
for Old York Common Stock until the certificate or certificates formerly
representing shares of Old York Common Stock have been surrendered, at which
time any accrued dividends and other distributions on such shares of Midlantic
Common Stock will be paid without interest. See "-- Consideration."
Holders of Old York Common Stock should not send in their certificates
until they receive instructions from Midlantic.
Federal Income Tax Consequences
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL
INFORMATION ONLY. IT MAY NOT BE APPLICABLE TO CERTAIN CLASSES OF TAXPAYERS,
INCLUDING INSURANCE COMPANIES, SECURITIES DEALERS, FINANCIAL INSTITUTIONS,
FOREIGN PERSONS AND PERSONS WHO ACQUIRED SHARES OF OLD YORK COMMON STOCK AS
COMPENSATION. OLD YORK SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS
AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.
GENERAL. It is intended that the Merger will be treated as a tax-free
reorganization as defined in Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that, accordingly, no gain or loss will be
recognized by Midlantic, Old York, MB or the Bank pursuant to the Merger.
Counsel to Midlantic is required, as a condition of closing, to provide an
opinion to Midlantic and to Old York with respect to the matter covered by the
foregoing sentence and certain other tax matters discussed below. As of the date
of this Proxy Statement, counsel has indicated that, based upon the
circumstances as they presently exist, it expects to be able to render the
required opinion.
CONSEQUENCES TO SHAREHOLDERS RECEIVING STOCK ONLY. No gain or loss will be
recognized by the shareholders of Old York upon the exchange for their shares of
Old York Common Stock solely for shares of Midlantic Common Stock pursuant to
the Merger. The basis of Midlantic Common Stock received by an Old York
shareholder who receives solely Midlantic Common Stock will be the same
immediately after the exchange as the basis of such shareholder's Old York
Common Stock exchanged therefor. See below as to the receipt of cash in lieu
of fractional shares.
CONSEQUENCES TO SHAREHOLDERS RECEIVING CASH ONLY. Shareholders (including
shareholders who perfect dissenters' rights) who receive only cash for their
shares of Old York Common Stock will recognize gain or loss for federal income
tax purposes measured by the difference, if any, between their basis in the
stock and the amount received by them for their stock. The gain or loss will be
characterized for federal income tax purposes as a capital gain or loss or as
ordinary income. The gain or loss will be characterized as a capital gain if (a)
the holder's shares of Old York Common Stock are held as capital assets and (b)
the holder receives cash with respect to all shares of Old York Common Stock
which the holder owns actually and by application of the attribution rules of
Section 318 of the Code discussed below. If a shareholder is not considered as
having disposed of all of his stock by reason of such attribution rules, the
characterization of the gain as ordinary income or as capital gain will depend
upon whether the receipt of the cash has the "effect of the distribution of a
dividend." The application of this standard is discussed below. See
"--Consequences to Shareholders Receiving Cash and Midlantic Common Stock."
Section 318 of the Code provides, in part, that a shareholder will be
considered to be the owner of shares which are owned by corporations,
partnerships, trusts and estates in which the shareholder has a beneficial
ownership interest, shares which such shareholder has an option to acquire, and
shares owned by certain members of such shareholders family (not including
brothers and sisters of the shareholder). Under certain
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<PAGE>
circumstances, the attribution rules with respect to shares attributed from a
family member may be waived by the shareholder.
CONSEQUENCES TO SHAREHOLDERS RECEIVING CASH AND MIDLANTIC COMMON STOCK.
Shareholders who receive or are considered to have received not only cash in
exchange for their Old York Common Stock but also Midlantic Common Stock
(through application of the allocation procedures described above, the
attribution rules of Section 318 of the Code or otherwise) must recognize any
gain realized (measured by the excess of (a) the sum of the cash received and
the fair market value of the Midlantic Common Stock received over (b) the
shareholder's basis), but not in excess of the cash received. No loss may be
recognized. The characterization of the gain as either a dividend or as capital
gain will be determined on a shareholder-by-shareholder basis. In general, if
the distribution of the cash is considered as having the "effect of the
distribution of a dividend," then any gain recognized will be taxed as a
dividend. If the cash is considered as not having the "effect of the
distribution of a dividend," then any gain recognized will be taxed as a capital
gain if the Old York Common Stock was held as a capital asset.
The Internal Revenue Service (the "Service") applies two tests to determine
whether a distribution has the "effect of the distribution of a dividend."
Capital gains treatment will apply if the exchange is either "not essentially
equivalent to a dividend" or "substantially disproportionate" with respect to
the shareholder's interest.
Whether a distribution is "not essentially equivalent to a dividend"
depends on the facts and circumstances concerning the individual shareholder. It
is difficult to rely upon this test because it is not subject to objective
measure and because the Service takes the view that only in very special
circumstances (generally, circumstances unrelated to the Merger) will this test
be considered to be met. The "substantially disproportionate" test, according to
the Service, apparently would be satisfied if an Old York shareholder exchanged
a portion of his Old York Common Stock for cash under circumstances in which
there has been a significant reduction in such shareholder's percentage interest
in Old York. The percentage reduction which is required by the Service involves
an analysis in which there has been a hypothetical redemption by Old York. The
analysis is complex but, in general, the Service would assume that the Old York
shareholder received solely Midlantic Common Stock and then immediately redeemed
a portion of the Midlantic Common Stock for cash. The shareholder's percentage
of all of the Midlantic Common Stock after this hypothetical redemption would be
compared to the percentage owned by the shareholder immediately before the
hypothetical redemption. If the first percentage is less than 80% of the second
percentage, no dividend will be present. If the first percentage is equal to or
greater than 80% of the second percentage, the cash, according to the Service,
will be taxed as a dividend. All hypothetical measurements will include shares
constructively owned by application of the attribution rules. Any shareholder
who seeks to rely on this test should exercise extreme caution in light of the
complex analysis involved.
Where an Old York shareholder receives both Midlantic Common Stock and
cash, the basis of the Old York Common Stock received will equal (i) the basis
of the Old York Common Stock exchanged therefor, (ii) decreased by the amount of
cash received and (iii) increased by the amount of gain recognized, if any, on
the exchange.
CONSEQUENCES OF RECEIPT OF CASH IN LIEU OF FRACTIONAL SHARES. In general,
cash paid in lieu of fractional share interests in corporate reorganizations is
treated as having been received in part or full payment in exchange for the
fractional share interest (and therefore subject to capital gains treatment if
the related shares are held as capital assets) if the cash distribution is
undertaken solely for purposes of saving the corporation the expense and
inconvenience of issuing and transferring fractional shares and is not
separately bargained for consideration.
HOLDING PERIOD. The holding period of Midlantic Common Stock received by an
Old York shareholder will include the holding period for the Old York Common
Stock exchanged therefor.
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<PAGE>
Rights of Dissenting Old York Shareholders
Pursuant to the provisions of Section 1571 of the PaBCL, dissenting
shareholders of Old York who follow the procedures specified in Subchapter 15D
of the PaBCL ("Subchapter 15D") will be entitled to the rights and remedies of
dissenting shareholders as provided in Subchapter 15D. Pursuant to Subchapter
15D, shareholders of Old York have the right to dissent from the Merger and to
obtain payment of the "fair value" (determined as provided herein) of their
shares of Old York Common Stock if the Merger is consummated.
SHAREHOLDERS OF OLD YORK WHO CONTEMPLATE EXERCISING THEIR RIGHT TO DISSENT
ARE URGED TO READ CAREFULLY THE APPLICABLE PROVISIONS OF SUBCHAPTER 15D, WHICH
ARE ATTACHED AS APPENDIX D TO THIS PROXY STATEMENT. THE FOLLOWING IS A SUMMARY
OF THE STEPS TO BE TAKEN IF THE RIGHT TO DISSENT IS TO BE EXERCISED. THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF APPENDIX D TO THIS
PROXY STATEMENT.
Each step must be taken in the indicated order and in strict compliance
with the applicable provisions of Subchapter 15D in order to perfect dissenter's
rights. Any deviations from such steps may result in the forfeiture of
dissenter's rights.
Prior to the Meeting, Old York shareholders who wish to dissent and obtain
payment of the fair value of their shares must (1) file with Old York a written
notice of intention to demand that they be paid the fair value for their shares
if the Merger is consummated (addressed to James M. Mack, President and Chief
Executive Officer, Old York Road Bancorp, Inc., York and Easton Roads, Willow
Grove, Pennsylvania 19090-3282), (2) effect no change in the beneficial
ownership of their shares from the date of such filing continuously through the
Effective Time and (3) refrain from voting their shares in approval of the
Merger. DISSENTERS WHO FAIL TO COMPLY WITH THE FOREGOING IN ANY RESPECT WILL NOT
ACQUIRE ANY RIGHT TO PAYMENT OF THE FAIR VALUE OF THEIR SHARES UNDER SUBCHAPTER
15D. NEITHER A PROXY NOR A VOTE AGAINST THE MERGER WILL CONSTITUTE THE WRITTEN
NOTICE REQUIRED BY SUBCHAPTER 15D.
If the Merger is approved by the affirmative vote at the Meeting, either in
person or by proxy, of the holders of at least a majority of the votes cast at
the meeting, Old York will 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 Merger. Such notice will (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 and (4) be accompanied by a copy of
Subchapter 15D.
The time set for receipt of the demand for payment and the deposit of
certificated shares will not be less than 30 days from the mailing of the notice
by Old York. SHAREHOLDERS WHO FAIL TO TIMELY DEMAND PAYMENT, OR FAIL (IN THE
CASE OF CERTIFICATED SHARES) TO TIMELY DEPOSIT CERTIFICATES AS REQUIRED BY THE
NOTICE SENT BY OLD YORK WILL NOT HAVE ANY RIGHT TO RECEIVE PAYMENT OF THE FAIR
VALUE OF THEIR SHARES OF OLD YORK COMMON STOCK UNDER SUBCHAPTER 15D.
Promptly after the consummation of the Merger, or upon timely receipt of
demand for payment if the Merger has already been consummated, Old York will
either (i) remit to dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that Old York
estimates to be the fair value of the shares, or (ii) give written notice that
no remittance will be made under Section 1577 of the PaBCL. The remittance or
notice will be accompanied by: (1) the closing balance sheet and statement of
income of Old York for the fiscal year ending December 31, 1994 together with
the latest available interim financial statements, (2) a statement of Old York's
estimate of the fair value of the shares, and (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 Subchapter 15D. If dissenters believe that the amount
stated or remitted is less than the fair value of their shares, they may send to
Old York their own respective estimates of the fair value of the shares, which
will be deemed a demand for payment of the amount or the deficiency.
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See Sections 1579 and 1580 of the PaBCL with respect to valuation
proceedings and the manner in which costs and expenses of valuation proceedings
are determined and assessed.
Background of and Reasons for the Merger
In early 1993, the Board of Directors of Old York considered the
prospects for the Bank and whether it would have been, at that time, better to
remain independent or seek a merger partner. At that time, the Board determined
to remain independent and to proceed with a rights offering for the issuance of
its common stock. Pursuant to the rights offering, 1,523,767 shares of common
stock were issued. The rights offering expired on November 18, 1993.
Thereafter, the Board did not again consider a merger until some time in
June, 1994. At that time, one of the directors wrote to the entire Board to
encourage the Board to reconsider the future direction of Old York, and
accordingly, the Board, as a group, discussed the future of Old York. Shortly
thereafter, an unsolicited inquiry arrived with respect to a foreign investor
who was interested in acquiring a financial institution in the United States.
Although a confidentiality agreement was negotiated and signed, the foreign
institution did not pursue due diligence or make any offer and that matter
was dropped. Although other similar inquiries were received, none of them
materialized into offers.
In August, 1994, the Bank learned that Royal Bank had purchased
approximately 8.2% of the common stock of Old York and, although it indicated
that it was purchasing the shares for investment at that time, it did not
preclude the possibility that it would seek to acquire more shares or Old York
in its entirety. The Board of Directors resolved to pursue a determination of
how to maximize shareholder value on a methodical basis. Accordingly,
considering the then recent unprofitability of the Bank, the long-range
prospects for the Bank, and the desire to realize the value of the business
franchise for the area in which the Bank is located, the Board determined to
interview investment bankers for the purpose of seeking advice on how to
proceed. In early September, after interviewing three investment bankers, a
Mergers and Acquisitions Committee of the Board (including Messrs. Hankin,
Fiorillo, Hunn, Nappen, Poley and Wenner) formed for the purpose, recommended
Sandler O'Neill to the Board of Directors. The Board then permitted Sandler
O'Neill to review materials relating to Old York, interviewed Sandler O'Neill,
received a presentation by Sandler O'Neill concerning the alternatives available
to Old York, and, in late September, determined to retain Sandler O'Neill.
Sandler O'Neill was requested to provide general guidance as to possible courses
of action which could be taken by Old York, including remaining independent or
merging with another financial institution.
Initially, after executing a retainer agreement in early October, Sandler
O'Neill met with the Executive Committee of the Board of Directors and
determined that in order to effectively consider all options, the Committee and
the Board would need to know possible ranges of values that could be obtained in
an acquisition transaction. Sandler O'Neill developed a list of financial
institutions to be approached to inquire as to the institution's interest in
acquiring Old York in a negotiated transaction. The Executive Committee
reviewed the identity of the financial institutions that would be initially
approached, which had been selected on the basis of the Company's market
area, financial ability to complete a transaction, and either a prior history of
making acquisitions or prior indication of possible interest in making an
acquisition. During the months of October and November, 1994, Sandler O'Neill
contacted various financial institutions to ascertain possible interest and
permitted certain of those financial institutions which had executed a
confidentiality agreement to conduct due diligence on the premises of the Bank
and to meet with representatives of the Company either by telephone or in
person. Each of the institutions was asked to submit an indication of interest
indicating a proposed price and a proposed transaction structure. Royal Bank,
although having negotiated a confidentiality agreement, did not sign a
confidentiality agreement and, accordingly, did not conduct any due diligence.
However, it did make an offer along with other offerors.
In late November, as a result of the request for indications of interest,
five institutions (including Midlantic) submitted indications of interest with
various prices and ranges of prices. Other than the proposal from Midlantic, the
proposed transactions were for all cash with a price range of $4.00 to $10.02
per share, each with various terms which could have an impact on the ultimate
price paid. Only the offer by
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Midlantic held open the possibility of a tax-free exchange. Midlantic's
offer of $10.00 per share with the possibility of stock as well as cash, did not
appear to the Board to be subject to any significant conditions which would
cause the $10.00 per share to be significantly reduced. Conversely, the offers
from the other institutions were either at a price significantly less than
$10.00 per share, or subject to conditions which the Board thought might not be
met and, if not met, would have likely resulted in a purchase price
significantly less than $10.00 per share.
Accordingly, the Board determined to pursue the Midlantic offer as being
the best offer and instructed its Merger Negotiation Committee (consisting of
Messrs. Hankin, Fiorillo and Reibman) to enter into final negotiations with
Midlantic for a definitive agreement. Between December 5 and December 29, 1994,
representatives of Old York and Midlantic engaged in arms-length negotiations
regarding the terms and conditions of a definitive agreement, which ultimately
resulted in Midlantic's final offer of $10.00 per share, payable in either cash
or stock with certain adjustments and limitations.
On December 27, 1994, the Board convened a special meeting to consider the
proposed agreement and other details of the proposed transaction. The Board of
Directors reviewed the procedure that had been used to reach the proposed
agreements, the valuation of Old York as an independent entity, and the value
of the indications of interest received by Old York. The Board of Directors
considered the value of the proposal based on current market prices, the
exchange ratio, the anticipated relative initial earnings impact that the
acquiror might experience with an acquisition of Old York, and the effect the
transaction would have on the prospective acquiror's stock price. The Board also
reviewed extensive information presented by Sandler O'Neill on the prospective
acquiror, including its past financial performance, historical common stock
dividends, stock price performance, stock liquidity and other financial
characteristics. The Board took particular note of the fact that Midlantic had
submitted the highest diligence adjusted offer and that it was proposing a
flexible cash/stock mix at the discretion of the shareholders within limits
provided. Finally, Sandler O'Neill presented an extensive analysis of each
proposal and indicated that Midlantic's offer was, in Sandler O'Neill's
judgment, superior to the other proposals from a financial point of view. The
Board also noted that the Bank would effectively become part of a larger entity
that would compete more effectively in the communities served by the Bank by
offering a number of new or expanded services to residents of such communities.
At the meeting, Sandler O'Neill rendered its oral opinion, subsequently
confirmed in writing, that, as of that date, the Merger consideration proposed
to be received by the shareholders pursuant to the Agreement was fair, from a
financial point of view. The oral opinion of Sandler O'Neill was based on
similar facts and analysis considered in rendering its written Fairness Opinion
discussed below.
The Board of Directors concluded that the $10.00 cash/stock offer made by
Midlantic was superior to all other proposals based on the following factors:
(1) the offer as adjusted by contingency charges was higher than all other final
proposals; (2) the offer was a choice of cash or stock subject to certain
limitations; (3) the likelihood of closing the proposed Merger was substantial
because Midlantic has a history of completing other acquisitions; and (4) the
downward price protection provided by the adjustment formula.
THE BOARD OF DIRECTORS OF OLD YORK HAS UNANIMOUSLY APPROVED THE AGREEMENT,
BELIEVES IT TO BE FAIR TO THE SHAREHOLDERS OF OLD YORK AND IN THEIR BEST
INTERESTS, AND RECOMMENDS THAT OLD YORK SHAREHOLDERS VOTE "FOR" THE AGREEMENT.
All the Directors of Old York have indicated their intent to vote all of the
shares of Old York Common Stock held by them for the Merger.
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On December 21, 1994, Midlantic's Board of Directors approved the Merger.
After approval of the Merger by Old York's Board of Directors, Midlantic
announced its participation in the Merger with Old York and, pursuant to a stock
repurchase plan approved by its Board of Directors, announced that it expected
to repurchase from time to time in the open market outstanding shares of
Midlantic Common Stock in a number equal to the approximate number of shares of
Midlantic Common Stock estimated to be issued in the Merger. The stock
repurchase plan was thereafter amended. The stock repurchase plan now permits
the repurchase of up to 5,000,000 shares of Midlantic Common Stock in connection
with acquisitions, for Midlantic's dividend reinvestment plan, for Midlantic's
stock-based benefit plans and for use in satisfying the requirements of certain
corporate securities issued by Midlantic. Accordingly, Midlantic intends to
purchase from time to time shares of Midlantic Common Stock in the open market
in an amount in excess of the number of shares estimated to be issuable to Old
York shareholders in the Merger, subject to restrictions applicable to such
purchases under the Exchange Act and regulations thereunder.
Interests of Management in the Merger
As of January 31, 1995, the directors and executive officers of Old York
beneficially owned in the aggregate 360,566 shares of Old York Common Stock, or
12.76% of the shares of Old York Common Stock outstanding.
The Agreement and Plan of Merger provides for Erwin K. Wenner, former
President and Chief Executive Officer of the Bank and Old York, to receive
certain options to purchase Old York Common Stock and, at the Effective Time,
for such options to be cashed out for an amount equal to the excess, if any, of
$10.00 over the applicable exercise price of the options. However, in lieu
thereof, and with Midlantic's consent, Mr. Wenner entered into the Termination
Agreement with the Bank pursuant to which Mr. Wenner's employment with Old York
and the Bank has been terminated. The Termination Agreement terminated and
cancelled such options, obligates the Bank to pay Mr. Wenner approximately
$29,000 in severance pay and provides that, at the Effective Time, Mr. Wenner
will be paid a lump sum of $75,000, subject to adjustment under certain
circumstances, in lieu of all of the aforementioned Old York options and in
satisfaction of all other obligations that may be owed to Mr. Wenner by Old York
or the Bank. In the event that the Merger is not consummated, Mr. Wenner will
not receive any payment for the cancellation of the options. Upon Mr. Wenner's
termination, pursuant to an employment agreement, effective March 2, 1995, the
Bank hired James M. Mack as its President and Chief Executive Officer at a
salary of $125,000. Mr. Mack is also to serve as President and Chief Executive
Officer of Old York. At the Effective Time, Mr. Mack's employment with the Bank
will automatically be terminated and he will receive a cash payment of $100,000,
subject to adjustment under certain circumstances.
In addition to the foregoing, the Agreement requires Midlantic to provide
the directors and officers of Old York indemnification against all claims,
liabilities, damages and losses arising out of any claim, action, suit or
proceeding pending at any time within a period of six years from the Effective
Time to the full extent permitted by law (but not beyond the indemnification
that would have been available to such directors and officers from Old York as
of the date of the Agreement).
Fairness Opinion
On October 7, 1994, Old York's Board of Directors retained the services of
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") as Old York's financial
advisor in connection with a possible acquisition transaction and requested that
Sandler O'Neill render its opinion with respect to the fairness, from a
financial point of view, of the consideration to be received by the shareholders
of Old York in any such transaction.
Sandler O'Neill is a nationally recognized investment banking firm whose
principal business specialty is banks and other financial institutions, and in
that connection, is regularly engaged in the valuation of such businesses and
their securities in connection with mergers and acquisitions and other corporate
transactions. As
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the financial advisor to Old York, Sandler O'Neill was involved in every stage
of the discussions with various financial institutions that culminated in the
offer by Midlantic, as well as the negotiations with Midlantic that resulted in
the Agreement. There were no limitations imposed by Old York on Sandler O'Neill
in connection with its rendering of the Fairness Opinion.
Sandler O'Neill has delivered a written opinion, dated as of May 23, 1995,
to the Old York Board of Directors that the consideration to be received by the
holders of Old York Common Stock pursuant to the Agreement is fair, from a
financial point of view, to such shareholders. The full text of Sandler
O'Neill's fairness opinion, which sets forth assumptions made and matters
considered, is attached as Appendix C to this Proxy Statement. Old York's
shareholders are urged to read such opinion in its entirety. Sandler O'Neill's
opinion is directed only to the financial terms of the Merger and does not
constitute a recommendation to any Old York shareholder as to how such
shareholder should vote at the Meeting. The summary information regarding
Sandler O'Neill's opinion and the procedures followed in rendering such opinion
set forth in this Proxy Statement is qualified in its entirety by reference to
the full text of such opinion.
In connection with this opinion, Sandler O'Neill reviewed among other
things: (i) the Agreement, (ii) the Stock Option Agreement dated as of December
29, 1994 by and between Old York and Midlantic, (iii) the audited consolidated
financial statements and management's discussion and analysis of the financial
condition and results of operations of each of Old York and Midlantic for the
three years ended December 31, 1994; (iv) the unaudited consolidated financial
statements and management's discussion and analysis of the financial condition
and results of operations for the interim period ending March 31, 1995 of each
of Old York and Midlantic; (v) financial analyses and forecasts of Old York
prepared by and/or reviewed with the management of Old York, (vi) the views of
senior management of each of Old York and Midlantic of their respective past and
current business operations, results thereof, financial condition and future
prospects, (vii) the reported price and trading activity for Old York Common
Stock and Midlantic Common Stock, including a comparison of certain financial
and stock market information for Old York and Midlantic with similar information
for certain other companies the securities of which are publicly traded; (viii)
the financial terms of recent business combinations in the banking industry,
(ix) the pro forma impact of the transaction on Midlantic; (x) the current
market environment generally and the banking environment in particular, and (xi)
such other information, financial studies, analyses and investigations and
financial, economic and market criteria as we considered relevant.
In performing its review, Sandler O'Neill assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
information, analyses and other information reviewed by and discussed with
Sandler O'Neill, and Sandler O'Neill did not make any independent evaluation or
appraisal of specific assets, the collateral securing assets or the liabilities
of Old York or Midlantic or any of their subsidiaries, or the collectibility of
any such assets (relying, where relevant, on the analyses and estimates of Old
York and Midlantic). With respect to the financial projections reviewed with
management, Sandler O'Neill assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of each
of Old York and Midlantic, and that such performances will be achieved. Sandler
O'Neill also assumed that there has been no material change in Old York's or
Midlantic's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements made available to us.
Sandler O'Neill further assumed that Old York will remain as a going concern for
all periods relevant to the analysis, and that the conditions precedent in the
Agreement are not waived.
In connection with rendering its fairness opinion to the Old York Board of
Directors, Sandler O'Neill performed a variety of financial analyses. The
following is a summary of such analyses, but does not purport to be a complete
description of Sandler O'Neill's analysis. The preparation of a fairness opinion
is a complex process involving subjective judgments and is not necessarily
susceptible to partial analyses or summary description. Sandler O'Neill believes
that its analyses must be considered as a whole and that selecting portions of
such analyses and the factors considered therein, without considering all
factors and analyses, could create an incomplete view of the analyses and the
processes underlying Sandler O'Neill's opinion. In performing its analyses,
Sandler O'Neill made numerous assumptions with respect to industry performance,
business and economic conditions and various other matters, many of which cannot
be predicted and are beyond the control of Old York, Midlantic or Sandler
O'Neill. Any estimates contained in Sandler O'Neill's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of values of companies do
not purport to be appraisals or necessarily reflect the prices at which
companies or their securities may actually be sold. Because such estimates are
inherently subject to uncertainty, Sandler O'Neill assumes no responsibility for
their accuracy.
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STOCK TRADING HISTORY. Sandler O'Neill examined the history of the trading
prices and volume of Old York Common Stock and the historical performance of Old
York Common Stock relative to the Standard & Poor's 500 Index, The NASDAQ
banking stocks index and the following composite group of twenty-one publicly
traded Maryland, New Jersey and Pennsylvania banking institutions (the "Peer
Institutions").
Since the secondary offering in November 1993 but prior to August 1994, Old
York Common Stock has primarily traded in the $4.25 to $5.75 range. In late
August, there was a significant price appreciation and the stock began trading
in the $5.50 to $7.50 range. In the year prior to the acquisition announcement,
the largest volume (28.3%) of trades took place in the $5.375 to $6.125 range,
while 23.1% of the trading volume was in the $6.875 to $7.625 range. Since the
announcement of the transaction, Old York Common Stock has traded between $7.25
and $12.75.
Relative to the comparative indices, Old York Common Stock traded at par
until August of 1994 where it began to consistently outperform all of the
indices.
COMPARABLE GROUP ANALYSIS. Sandler O'Neill also prepared a comparable group
analysis, which analyzed the historical performance of the bank over the last
five years, and compared such performance to two groups of institutions. The
first group was composed of regional commercial banks in Maryland, New Jersey,
and Pennsylvania with asset size similar to that of Old York. The second group
included the most highly valued, nationwide commercial banks as of the date of
the acquisition announcement within the same asset range. The analysis looked at
key operating, balance sheet, capitalization, credit quality, profitability and
valuation ratios. Of particular note was the capitalization of the bank which
was significantly below that of its peers and the highly valued group. It also
compared the asset quality ratios such as non-performing assets ("NPAs") to
total assets and nonperforming loans to total loans; both statistics showed that
Old York was well above the median for both groups. Old York did maintain strong
net interest margins throughout 1993 and 1994, margins that were above its
regional peers and even the highly valued group. Overall, Old York's efficiency
ratio was extremely high and profitability low. Old York, however, had high
expense ratios for the last four years relative to the peer groups.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Sandler O'Neill reviewed 152
transactions (of which 109 were consummated and 43 were pending) announced
January 1, 1994 to May 19, 1995 involving public commercial banks as targets
with transactions value over $15 million ("All Transactions"), 14 transactions
(of which 8 were consummated and 6 were pending) announced from January 1, 1994
to May 19, 1995, involving public commercial banks in Delaware, Maryland, New
Jersey and Pennsylvania ("Regional Transactions"), and 12 transactions (of
which 10 were consummated and 2 were pending) announced from January 1, 1993 to
May 19, 1995, involving public commercial banks with NPAs to total assets
greater than 5.00% ("NPAs/Assets > 5.0% Transactions"). The NPAs/Assets > 5%
Transactions were reviewed because of the fact that key features of this group
of transactions, including a high level of non-performing assets and a high
level of expenses associated with non-performing assets, were the predominant
characteristics indicative of Old York. Sandler O'Neill calculated the ratios of
price to earnings (based on net income), price to book value, price to tangible
book value, price to deposits, price to total assets, and deposit premium paid
in each such transaction and computed high, low, mean and median ratios for each
such ratio and for the respective groups of transactions. Based upon the median
multiples for All Transactions, Sandler O'Neill derived an imputed range of
values per share of Old York Common Stock of $1.96 to $14.80. Based upon the
median multiples for Regional Transactions, Sandler O'Neill derived an imputed
range of value per share of Old York Common Stock of $2.76 to $15.60. Based upon
the median multiples for NPAs/Assets > 5.00% Transactions, Sandler O'Neill
derived an imputed range of values per share of Old York Common Stock of $2.76
to $9.95. Because the characteristics of this last group were most similar to
those of Old York, within the context of the analysis of Selected Merger
Transactions, Sandler O'Neill placed more weight on this analysis.
DISCOUNTED CASH FLOW ANALYSIS. Sandler O'Neill performed an analysis which
estimated the future cash flows of Old York through 1999 under various
circumstances, assuming Old York performed in accordance with the earnings
forecasts of its management and certain variations thereof (including variations
with respect to the growth rate of assets, net interest spread, non-interest
income, noninterest expenses and dividend payout ratio). To approximate the
terminal value of Old York Common Stock at the end of the five year period,
Sandler O'Neill applied price to earnings multiples ranging from 8.0x to 21.5x
and applied multiples of book value ranging from 80% to 260%. The terminal
values were then discounted to present values using different discount rates
(ranging from 9% to 14%) chosen to reflect different assumptions regarding the
required rates of return of
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holders or prospective buyers of Old York Common Stock. This analysis indicated
a range of value per share of Old York Common Stock of $0.85 to $9.00. In
connection with this analysis, Sandler O'Neill extensively used sensitivity
tables to illustrate the effects that changes in the underlying assumptions
would have on the resulting present value.
Sandler O'Neill's retainer agreement provides that Old York will pay
Sandler O'Neill a transaction fee in connection with the Merger, a substantial
portion of which is contingent upon consummation of the Merger. Under the terms
of the agreement, Old York has agreed to pay Sandler O'Neill a fee equal to 1%
of the aggregate consideration paid to Shareholders and option holders in the
Merger, or approximately $400,000 (based on the number of shares of Old York
Common Stock outstanding on the Record Date and assuming no adjustment to the
Merger consideration). Under the terms of the agreement, Old York has also
agreed to pay Sandler O'Neill an initial quarterly retainer fee of $15,000 and
$10,000 per quarter thereafter for general advisory services, of which $15,000
has been paid as of the date hereof, and a fee of $50,000 in connection with the
rendering of the fairness opinion, which has also been paid, with all such fees
credited against the 1% Transaction Fee. Sandler O'Neill will receive
reimbursement of its reasonable out-of-pocket expenses, and Old York has agreed
to indemnify Sandler O'Neill against certain liabilities under federal
securities laws.
Resale Considerations With Respect to the Midlantic Common Stock
The shares of Midlantic Common Stock that will be issued if the Merger is
consummated have been registered under the Act and will be freely transferable,
except for shares received by persons, including directors and executive
officers of Old York, who may be deemed to be "affiliates" of Old York under
Rule 145 promulgated under the Act. An "affiliate" of an issuer is defined
generally as a person who "controls" the issuer. Directors, executive officers
and 10% shareholders are generally presumed by the Commission to control the
issuer. Affiliates may not sell their shares of Midlantic Common Stock acquired
pursuant to the Merger, except pursuant to an effective registration statement
under the Act covering the Midlantic Common Stock or in compliance with Rule 145
or another applicable exemption from the registration requirements of the Act.
Persons who may be deemed to be "affiliates" of Old York have delivered
letters to Midlantic in which they have agreed to certain restrictions on their
ability to sell, transfer or otherwise dispose of ("transfer") any Old York
Common Stock owned by them and any Midlantic Common Stock acquired by them in
the Merger.
Pursuant to Rule 145, the affiliates have also agreed to refrain from
transferring Midlantic Common Stock acquired by them in the Merger, except in
compliance with certain restrictions imposed by Rule 145. Certificates
representing the shares of Midlantic Common Stock acquired by each such person
pursuant to the Merger will bear a legend reflecting that the shares are
restricted in accordance with the letter signed by such person and may not be
transferred except in compliance with such restrictions. However, the
restrictions of Rule 145 are only applicable for a 2-year period, unless the Old
York affiliate becomes an affiliate of Midlantic. Moreover, as a practical
matter, the limitations of Rule 145 are minimized in that during any three-month
period, so long as Midlantic is current in its reporting obligations under the
Exchange Act, Old York affiliates may effect in any 3-month period, in normal
brokers' transactions, the sale of the greater of (i) 1% of the outstanding
Midlantic Common Stock or (ii) the average weekly trading volume of Midlantic
Common Stock during a specified 4-week period.
Conditions to the Merger
Consummation of the Merger is subject to the satisfaction or waiver of
certain conditions, including (i) approval by the affirmative vote of the
holders of a majority of the outstanding shares of Old York Common Stock voting
at the meeting, whether in person or by proxy; (ii) the receipt of all consents,
orders, approvals and authorizations of all necessary government authorities and
expiration of all required waiting periods, necessary for the consummation of
the Merger (see "-- Regulatory Approvals"); and (iii) the effectiveness of the
registration statement covering the shares of Midlantic Common Stock to be
issued to Old York shareholders, which shares shall also have been approved for
designation on The Nasdaq National Market(R). In addition, consummation
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of the Merger is conditioned upon receipt by the parties of an opinion of
counsel to Midlantic to the effect that the exchange of Old York Common Stock
for Midlantic Common Stock is a tax-free reorganization within the meaning of
Section 368 of the Code. See "-- Federal Income Tax Consequences."
Consummation of the Merger is also conditioned on, among other things, (i)
the continued accuracy in all material respects of the representations and
warranties of Old York, the Bank, Midlantic and MB contained in the Agreement;
(ii) the performance by Old York, the Bank, Midlantic and MB, in all material
respects, of all of their respective obligations under the Agreement; (iii) the
absence of any temporary restraining order, preliminary or permanent injunction
or other court order that would prevent the consummation of the Merger; (iv) no
loan or commitment to make a loan by Old York or the Bank to any principal
shareholder of Old York or any director or executive officer of Old York or the
Bank, since September 30, 1994, having been modified to extend or postpone any
maturity date or the prepayment of any portion thereof (except in compliance
with the Bank's underwriting standards, not in violation of any law or
regulation and with notice to MB), increase any principal, release any
collateral or otherwise adversely change its collectibility or the security
thereof and no guarantee with respect to any such loan or commitment, whether
currently effective or to become effective at any time or upon any condition,
having been released or modified in any way to adversely change the guarantee or
the availability of any collateral therefor; and (v) receipt by the Board of
Directors of Old York of a Fairness Opinion of Sandler O'Neill. See "-- Fairness
Opinion." In addition, consummation of the Merger is conditioned upon Old York
satisfying certain minimum capital (as adjusted in accordance with the
Agreement) requirements. If Old York's capital (as adjusted in accordance with
the terms of the Agreement) falls below a specified level, Midlantic is not
obligated to effect the Merger. The Agreement also provides that if Old York
does not meet certain minimum capital (as adjusted in accordance with the
Agreement) requirements, the price which Old York shareholders are entitled to
receive in exchange for their shares of Old York Common Stock will be adjusted
downward. See "-- Effective Time; Amendments; Termination; Price Adjustment."
In addition, Old York may terminate the Agreement in the event that the
price of Midlantic Common Stock over a specified period of time is less than
approximately $22.84 ($26.87 multiplied by 0.85) and less than an index ratio
based upon a selected agreed upon peer group of other bank holding companies.
Midlantic could avoid such termination by agreeing to increase the Exchange
Ratio in accordance with the terms of the Agreement, however, Midlantic is under
no obligation to adjust the Exchange Ratio in such circumstances. For purposes
of determining the value of Midlantic Common Stock necessary to determine the
application of the foregoing termination rights, the Agreement has been amended
to provide that the measuring period will be the later of the 20 trading days
prior to the date of the last federal regulatory approval or the 20 trading days
ending on the 19th day after the commencement of the solicitation period. The
Agreement previously provided that the measuring period would be the 20 trading
days prior to the date on which the last federal regulatory approval is
received. Further, either Midlantic or Old York may terminate the Agreement (i)
if the Effective Time shall not have occurred on or prior to December 31, 1995;
(ii) if the shareholders of Old York fail to approve the Agreement at the
Meeting; or (iii) if any application for any necessary regulatory or
governmental approval is denied or withdrawn at the recommendation of the
applicable regulatory agency or governmental authority. Either Midlantic or Old
York may also terminate the Agreement if (i) there has occurred a material
adverse change in the business, operations, assets or financial condition of any
other party; (ii) any other party materially breaches any of its
representations, warranties, covenants, agreements or obligations under the
Agreement; or (iii) any closing condition cannot reasonably be met by any other
party after the other party has had a reasonable opportunity to cure such
condition. The Agreement may also be terminated with the written consent of all
of the parties. See "-- Effective Time; Amendments; Termination; Price
Adjustment."
On April 25, 1995, the complaint in the Goldberg Litigation was dismissed
without prejudice to the right of the plaintiff to appeal the dismissal or to
reinstitute the matter at a future date. Prior to the dismissal of the
complaint, Mr. Goldberg filed an amended complaint as to which the Court is now
considering dismissal. It is possible that the status of the Goldberg Litigation
immediately prior to the anticipated Closing may have a direct impact upon
whether Old York will be able to satisfy all of the conditions precedent to
consummation of the Merger. If a court were to enjoin the Merger, neither Old
York nor Midlantic would be obligated under the Agreement to effect the Merger.
See "CERTAIN INFORMATION REGARDING OLD YORK--Recent Developments" and
"DESCRIPTION OF THE BUSINESS OF OLD YORK ROAD BANCORP, INC.--Legal Proceedings"
for a description of the Goldberg Litigation.
No assurance can be given that all of the conditions necessary to
consummate the Merger, as provided for in the Agreement, will be satisfied or
waived.
Old York has agreed that prior to the Effective Time, except as otherwise
approved by Midlantic in writing or as permitted or required by the Agreement,
it will not, among other things, (i) change any provision of its Articles of
Incorporation or By-laws or any similar governing documents; (ii) change the
number of shares of, or issue any more shares of or grant any option or right
with respect to, Old York Common Stock, or split, combine or reclassify any
shares of, or declare, set aside or pay any dividend, or other distribution in
respect of, Old York Common Stock, or redeem or otherwise acquire any shares of
Old York Common Stock; (iii) grant any severance or termination pay (other than
pursuant to policies of Old York in effect on the date of the Agreement or as
agreed to by Midlantic in writing) to, or enter into or amend any employment
agreement with, any of its directors, officers or employees; adopt any new
employee benefit plan or arrangement of any type or amend any such existing
benefit plan or arrangement; or award any increase in compensation or benefits
(except for increases pursuant to commitments existing on the date of the
Agreement) to its directors, officers or employees; (iv) sell or dispose of any
substantial amount of assets or incur any significant liabilities other than in
the ordinary course of business consistent with past practices and policies; (v)
take any action outside of the ordinary course of business or take any action
that would interfere with its ability to perform its obligations under the
Agreement; or (vi) agree to do any of the foregoing.
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Old York has further agreed that it shall not, directly or indirectly,
encourage or solicit or hold discussions or negotiations with, or provide any
information to, any person, entity or group (other than Midlantic) concerning
any merger or sale of shares of capital stock or sale of substantial assets or
liabilities not in the ordinary course of business, or similar transactions
involving Old York (an "Acquisition Transaction"), except that Old York may
enter into discussions or negotiations or provide information in connection with
an unsolicited possible Acquisition Transaction if the Board of Directors of Old
York, after consulting with counsel, determines that such discussions or
negotiations should be commenced in the exercise of its fiduciary
responsibilities or such information should be furnished in the exercise of its
fiduciary responsibilities. Old York has agreed to promptly communicate to
Midlantic the terms of any proposal, whether written or oral, which it may
receive in respect of any Acquisition Transaction and the fact that it is having
discussions or negotiations with, or supplying information to, a third party in
connection with a possible Acquisition Transaction.
The Agreement permits Midlantic to pursue business combinations other than
the Merger and to issue securities in connection therewith. Midlantic may
consider and pursue such other acquisition opportunities from time to time and
may consummate one or more acquisition transactions prior to or after the
consummation of the Merger. Such future acquisition opportunities could involve
the issuance by Midlantic of cash, Midlantic Common Stock or other securities of
Midlantic, or any combination thereof.
Regulatory Approvals
Consummation of the Merger is subject, among other things, to prior receipt
of all necessary regulatory approvals. On March 22, 1995, Midlantic submitted a
letter to the Federal Reserve Board seeking a waiver of the requirement for
approval of the Merger under Section 3 of the Bank Holding Company Act as well
as a waiver of the requirements of filing an application thereunder. On March
22, 1995, Midlantic filed an application with the Pennsylvania Banking
Department. On March 22, 1995, MB filed an application with the OCC for approval
of the Bank Merger under the Bank Merger Act. The approval or waiver of the
Federal Reserve Board and the approval of the Pennsylvania Banking Department
and the OCC are required in order for the Merger and the Bank Merger to be
consummated. While both Midlantic and Old York anticipate receiving such
required approvals or waivers, there can be no assurance that the approvals or
waivers will be granted, or that they will be granted on a timely basis and
without conditions that Midlantic or Old York find unacceptable.
Management and Operations After the Merger
At the Effective Time, as a result of the Merger, Old York will be merged
into Midlantic, which will be the surviving entity in the Merger. In addition,
immediately after the Effective Time, the Bank will merge into MB, with MB as
the surviving entity. MB will continue to operate as a subsidiary of Midlantic.
Effective Time; Amendments; Termination; Price Adjustment
Consummation of the Merger (the "Closing") will occur the later of (i) the
day on which the Merger is approved by Old York shareholders and (ii) three days
after all conditions required for consummation of the Merger have been satisfied
(or waived), or on such other date agreed to by Midlantic and Old York. The
Effective Time of the Merger will be the close of business on the day in which
both the New Jersey Certificate of Merger and the Pennsylvania Articles of
Merger have been filed. See "-- Conditions to the Merger." At the Closing,
documents required to satisfy the conditions to the Merger of the respective
parties will be exchanged.
The Agreement may be amended, modified or supplemented with respect to any
of its terms or terminated by the mutual consent of Midlantic, MB, Old York and
the Bank at any time prior to the Effective Time.
The Agreement may be terminated at any time prior to the Effective Time if:
(a) any representation or warranty of either party in the Agreement is not true
and correct in all material respects, (b) either party breaches any covenant or
agreement made by it in the Agreement, or (c) the Closing has not occurred on or
prior to December 31, 1995. In addition, in the event Old York's Adjusted
Capital (as hereinafter defined) falls below $12 million, as determined by
Midlantic, Midlantic is not obligated to effect the Merger. "Adjusted Capital"
of Old York is defined under the Agreement as the sum of shareholders' equity
and the allowance for loan loss calculated by the method utilized in computing
shareholders' equity and the allowance for loan loss for the Old York Financial
Statements at September 30, 1994 (provided that shareholders' equity as so
calculated
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shall not be less than $7.3 million), increased by amounts up to (i)
$300,000 paid to or accrued after the date of the Agreement for services
rendered to Old York by Sandler O'Neill, in connection with the Agreement, (ii)
$150,000 paid to or accrued after the date of the Agreement for legal services
incurred by Old York in connection with the negotiation and consummation of the
Agreement, (iii) $185,000 for the accrual of expenses incurred in connection
with cancellation of Erwin Wenner's options to be cancelled pursuant to the
Agreement, and (iv) $150,000 additional adjustment to the investment portfolio
of the Bank incurred by reason of the application of certain accounting rules
(FASB 115) relating to certain securities held for sale in addition to such
amount as shown in the Old York Financial Statements as of September 30, 1994,
without regard to any adjustments which are made pursuant to Section 5.2.6 of
the Agreement. As of March 31, 1995, the Adjusted Capital of Old York computed
as set forth above (assuming the maximum amounts referred to in clauses (i)-(iv)
above have been accrued as of March 31, 1995) was $19,431,000.
Pursuant to the Agreement, if Old York does not meet certain minimum
capital requirements, the price which Old York shareholders are entitled to
receive in exchange for their shares of Old York Common Stock will be adjusted
downward. Specifically, the Agreement provides that in the event Midlantic
determines that Old York's Adjusted Capital is less than $17.6 million, the
amount of cash and the number of shares of Midlantic Common Stock into which Old
York Common Stock will be converted into the right to receive shall be adjusted
as follows:
(i) after determining the amount of cash and the number of shares of
Midlantic Common Stock to which the holders of Old York Common Stock would
otherwise be entitled to receive without regard to this condition,
(ii) the amount of cash to be received by shareholders of Old York entitled
to receive solely cash will be reduced below the amount of such cash by the
amount of $0.01 per share for each full $100,000 by which such Adjusted Capital
is less than $17.6 million, provided, however, if the Adjusted Capital is less
than $15.5 million, the amount of such cash will be reduced by $0.22 plus $0.02
for each full $100,000 by which such Adjusted Capital is less than $15.5
million, provided further, if the Adjusted Capital is less than $12 million,
Midlantic may elect, in its sole discretion, to determine that the minimum
capital requirements condition of the Agreement has not been met or to decrease
such cash amount by $0.92 plus $0.02 for each full $100,000 by which such
Adjusted Capital is less than $12 million, and
(iii) after determining the amount of cash to be paid to the shareholders
of Old York entitled to receive solely cash, the shares of Midlantic Common
Stock to be received by shareholders of Old York entitled to receive solely
Midlantic Common Stock will be reduced by reducing the Exchange Ratio by
multiplying the Exchange Ratio by a fraction (the "Reduction Fraction"), the
numerator of which shall be the cash amount as so determined pursuant to the
provisions in clause (ii) above and the denominator of which shall be the amount
of cash to which the shareholders of Old York entitled to receive solely cash
shall be entitled to without regard to the provisions in clause (ii) above, and
(iv) after so determining the amount of cash to be paid to the shareholders
of Old York entitled to receive solely cash, and the amount of Midlantic Common
Stock to be received by the shareholders of Old York entitled to receive solely
Midlantic Common Stock, the amount of cash and the amount of Midlantic Common
Stock to be received by the shareholders of Old York entitled to receive both
cash and Midlantic Common Stock shall be reduced by multiplying the amount of
such cash (determined without regard to the provisions in clause (ii)) by the
Reduction Fraction and the Exchange Ratio (determined without regard to the
provisions of clause (iii) above) by the Reduction Fraction.
The following examples illustrate the price adjustment provided for by the
above formulas (for purposes of these examples, it is assumed that the amount of
cash which would be received in exchange for each share of Old York Common Stock
without applying the price adjustment is $10.00 and that the Exchange Ratio
without applying the price adjustment is 0.3721):
(a) If Old York's Adjusted Capital were determined to be $16.6 million,
then for each share of Old York Common Stock exchanged in the Merger, Old York
shareholders entitled to receive solely cash would be entitled
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to receive $9.90 (instead of $10.00) and Old York shareholders entitled to
receive solely Midlantic Common Stock would be entitled to receive approximately
0.3684 (instead of 0.3721) of a share of Midlantic Common Stock. The amount of
cash and Midlantic Common Stock to be received by Old York shareholders entitled
to receive a combination of cash and stock as a result of the election and
allocation procedures would be similarly proportionally reduced.
(b) If Old York's Adjusted Capital were determined to be $15 million, then
for each share of Old York Common Stock exchanged in the Merger, Old York
shareholders entitled to receive solely cash would be entitled to receive $9.68
(instead of $10.00) and Old York shareholders entitled to receive solely
Midlantic Common Stock would be entitled to receive approximately 0.3602
(instead of 0.3721) of a share of Midlantic Common Stock. The amount of cash and
Midlantic Common Stock to be received by Old York shareholders entitled to
receive a combination of cash and stock as a result of the election and
allocation procedures would be similarly proportionally reduced.
(c) If Old York's Adjusted Capital were determined to be at a level less
than $12 million, then Midlantic could determine, in its sole discretion, not to
effect the Merger or to effect the Merger. If Midlantic so determined to effect
the Merger and assuming, for example, Old York's Adjusted Capital had been
determined to be $11.5 million, then, for each share of Old York Common Stock
exchanged in the Merger, Old York shareholders entitled to receive solely cash
would be entitled to receive $8.98 (instead of $10.00) and Old York shareholders
entitled to receive solely Midlantic Common Stock would be entitled to receive
approximately 0.3341 (instead of 0.3721) of a share of Midlantic Common Stock.
The amount of cash and Midlantic Common Stock to be received by Old York
shareholders entitled to receive a combination of cash and stock as a result of
the election and allocation procedures would be similarly proportionally
reduced.
The following chart shows the amount of cash and the number of shares of
Midlantic Common Stock into which Old York Common Stock will be converted into
the right to receive based upon the above examples:
<TABLE>
<CAPTION>
Then each share of Old York Common Stock
If the Adjusted would be converted into either:
Capital Level were: Cash or Shares of Midlantic Common Stock
- ------------------- ---- --------------------------------
<S> <C> <C>
$ 17.6 million or more.................. $10.00 0.3721
16.6 million.......................... 9.90 0.3684*
15.0 million.......................... 9.68 0.3602*
11.5 million**........................ 8.98 0.3341*
</TABLE>
- ------------------
* Approximate.
** If Adjusted Capital is determined to be less than $12 million, Midlantic
has the option to determine that the minimum capital requirements condition
of the Agreement has not been met.
Neither the above illustrations nor the several assumed Adjusted Capital
levels are intended to reflect what any shareholder of Old York necessarily will
receive or what Old York's Adjusted Capital will be when finally determined in
accordance with the Agreement. Management of Old York is unable as of the date
of this Proxy Statement to determine whether there will be a price adjustment in
accordance with the formulas described above.
In addition, Old York may terminate the Agreement if both of the following
conditions are satisfied: (a) the Acquiror Final Price (as hereinafter defined
below) is less than $26.87 multiplied by 0.85 (which is approximately $22.84)
and (b)(i) the number obtained by subtracting from 1.0 a fraction, in which the
numerator is the Acquiror Final Price and the denominator is 26.87 (the
"Acquiror Starting Price"), is greater than (ii) the
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number obtained by (x) subtracting from 1.0 a fraction (the "Index Ratio"), in
which the numerator is the Index Final Price (as defined below) and the
denominator is 100 (the "Index Starting Price"), and (y) multiplying the result
by 1.15. Midlantic could avoid such termination by electing, in its sole
discretion, to increase the Exchange Ratio to equal the lesser of (i) a number
equal to a quotient, the numerator of which is 0.85 multiplied by the Acquiror
Starting Price multiplied by the Exchange Ratio (as then in effect) and the
denominator of which is the Acquiror Final Price, and (ii) a number equal to a
quotient, the numerator of which is the Exchange Ratio (as then in effect)
multiplied by the Acquiror Starting Price and by the number which results from
(x) 0.15 multiplied by (the Index Ratio subtracted from 1.0) (y) subtracted from
the Index Ratio, and the denominator of which is the Acquiror Final Price. See
"-- Conditions to the Merger."
The "Acquiror Final Price" is defined in the Agreement as the average of
Last Prices of Midlantic Common Stock for the 20 consecutive full trading days
ending at the close of trading on the later of (i) the 19th business day after
the commencement of the solicitation period or (ii) the date on which the last
required federal regulatory approval or waiver is received. "Last Price" is
defined in the Agreement as the closing price per share of Midlantic Common
Stock as quoted on The Nasdaq National Market(R) and published in the Wall
Street Journal for each day trading in the relevant measuring period.
The "Index Final Price" is defined in the Agreement as the average of the
Index Prices (as defined below) for the 20 consecutive full trading days ending
at the close of trading on the later of (i) the 19th business day after the
commencement of the solicitation period or (ii) the date on which the last
required federal regulatory approval or waiver is received. "Index Price" on a
given date is defined in the Agreement as the weighted average (weighted as
provided for in the Agreement) of the common stock closing prices of a selected
agreed upon peer group of publicly traded bank holding companies.
Upon the termination of the Agreement, the transactions contemplated
thereby (other than the confidentiality provisions contained therein) will be
abandoned without further action by any party and each party will bear its own
expenses. In the event of a termination, each party will retain all rights and
remedies it may have at law or equity under the Agreement.
Stock Option for Shares of Old York Common Stock
Midlantic and Old York entered into a Stock Option Agreement dated December
29, 1994 (the "Stock Option Agreement"), in connection with the negotiation of
the Agreement. THE STOCK OPTION AGREEMENT IS SET FORTH AS APPENDIX B HERETO.
DESCRIPTIONS OF THE STOCK OPTION AGREEMENT IN THIS PROXY STATEMENT ARE QUALIFIED
IN THEIR ENTIRETY BY REFERENCE TO THE STOCK OPTION AGREEMENT. Pursuant to the
terms of the Stock Option Agreement, Old York has granted to Midlantic an option
(the "Option") to purchase up to 19.9% of the shares of Old York Common Stock
which would be outstanding immediately following the exercise of the Option, at
a price of $7.25 per share (based upon the number of outstanding shares of Old
York on December 29, 1994, the Option represents the right to purchase up to
701,919 shares). Midlantic does not have any voting rights with respect to
shares of Old York Common Stock subject to the Option prior to exercise of the
Option.
In the event that certain specifically enumerated Triggering Events (as
hereinafter described) occur, including, but not limited to, the acquisition of
beneficial ownership of at least 20% of the outstanding shares of Old York
Common Stock by a person or group other than Midlantic or an affiliate of
Midlantic, Midlantic may exercise the Option in whole or in part. In the event
that a Triggering Event occurs and the Merger is not consummated, Midlantic
would recognize a gain on the sale of the shares of Old York Common Stock
received pursuant to the exercise of the Option if such shares of Old York
Common Stock were sold at prices exceeding $7.25 per share.
The term "Triggering Event" is defined to mean the occurrence of any of the
following events: a person or group, as such terms are defined in the Exchange
Act and the rules and regulations thereunder, other than Midlantic or an
affiliate of Midlantic, (i) acquires beneficial ownership (as such term is
defined in Rule 13d-3
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promulgated under the Exchange Act) of at least 20% of the then outstanding
shares of Old York Common Stock; (ii) enters into a letter of intent or an
agreement with Old York pursuant to which such person or any affiliate of such
person would (a) merge or consolidate, or enter into any similar transaction,
with Old York, (b) acquire all or a significant portion of the assets or
liabilities or Old York, or (c) acquire beneficial ownership of securities
representing, or the right to acquire the beneficial ownership or to vote
securities representing, 20% or more of the then outstanding shares of Old York
Common Stock; (iii) makes a filing with the Commission or bank regulatory
authorities or publicly announces a bona fide proposal (a "Proposal") for (a)
any merger, consolidation or acquisition of all or a significant portion of all
the assets or liabilities of Old York or any other business combination
involving Old York, or (b) a transaction involving the transfer of beneficial
ownership of securities representing, or the right to acquire beneficial
ownership or to vote securities representing, 20% or more of the outstanding
shares of Old York Common Stock, and thereafter, if such Proposal has not been
publicly withdrawn (as defined below) at least 15 days prior to the Meeting and
Old York's shareholders fail to approve the Merger by the vote required by
applicable law at the Meeting; or (iv) makes a bona fide proposal and
thereafter, but before such Proposal has been publicly withdrawn, Old York
willfully takes any action in a manner that would materially interfere with its
ability to consummate the Merger or materially reduce the value of the
transaction to Midlantic. The definition of "Triggering Event" also includes (i)
the taking of any direct or indirect action by Old York or any of its directors,
officers or agents, to invite, encourage or solicit any proposal which has as
its purpose a tender offer for the shares of Old York Common Stock, a merger,
consolidation, plan of exchange, plan of acquisition or reorganization of Old
York, or a sale of a significant number of shares of Old York Common Stock or
any significant portion of its assets or liabilities. Under the Stock Option
Agreement, a significant number means 10% of the outstanding shares of Old York
Common Stock and a significant portion means 25% of the assets or liabilities of
Old York. "Publicly withdrawn" for purposes of the Stock Option Agreement means
an unconditional bona fide withdrawal of a Proposal coupled with a public
announcement of no further interest in pursuing such Proposal or acquiring any
controlling influence over Old York or in soliciting or inducing any other
person (other than Midlantic or any affiliate) to do so.
Midlantic may not sell, assign or otherwise transfer its rights and
obligations under the Stock Option Agreement in whole or in part to any person
or any group of persons other than to an affiliate of Midlantic, except upon the
occurrence of a Triggering Event. The Option may not be exercised (i) in the
absence of any required governmental or regulatory approval or consent necessary
for Old York to issue the Old York Common Stock subject to the Option or
Midlantic to exercise the Option, or prior to the expiration or termination of
any waiting period required by law, or (ii) so long as any injunction or other
order, decree or ruling issued by any federal or state court of competent
jurisdiction is in effect which prohibits the sale or delivery of the Old York
Common Stock subject to the Option.
The Stock Option Agreement further provides that after the occurrence of a
Triggering Event and upon receipt of a written request from Midlantic, Old York
shall prepare and file a registration statement with the Commission covering the
Option and such number of shares of Old York Common Stock subject thereto as
Midlantic shall specify in its request, and shall use its best efforts to cause
such registration statement to become effective; provided, however, that in no
event will Midlantic have the right to have more than one such registration
statement become effective.
The Stock Option Agreement terminates upon either the termination of the
Agreement or the consummation of the transactions contemplated thereby; provided
that if the Agreement terminates after the occurrence of a Triggering Event, the
Stock Option Agreement will not terminate until the later of 18 months following
the date of termination of the Agreement or the consummation of any proposed
transactions which constitute the Triggering Event.
The ability of Midlantic to exercise the Option and to cause up to an
additional 701,919 shares of Old York Common Stock to be issued may be
considered a deterrent to other potential acquisitions of control of Old York
because they are likely to increase the cost of an acquisition of all of the
shares of Old York Common Stock that would be outstanding.
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The exercise of the Option by Midlantic may also make
"pooling-of-interests" accounting treatment unavailable to a subsequent
acquiror.
DESCRIPTION OF MIDLANTIC CAPITAL STOCK
General
The authorized capital stock of Midlantic consists of 150,000,000 shares of
Common Stock and 40,000,000 shares of preferred stock. As of December 31, 1994,
52,564,346 shares of Common Stock were issued and outstanding and 500,000 shares
of preferred stock were issued and outstanding. Midlantic's preferred stock is
divided into two classes, Term Adjustable Rate Cumulative Preferred
Stock--Series A ("Preferred Stock--A"), having no par value, consisting of
500,000 authorized shares, all of which are issued and outstanding, and Series B
Junior Participating Preferred Stock ("Preferred Stock--B"), having no par
value, consisting of 500,000 authorized shares, none of which are outstanding.
From the authorized but unissued capital stock at December 31, 1994, 1,520,833
shares of Common Stock are reserved for issuance upon conversion of Midlantic's
8 1/4% Convertible Subordinated Debentures Due July 1, 2010 and 2,974,357 shares
of Common Stock are reserved for issuance under Midlantic's employee stock
option and stock award plans. See the last paragraph under "Background of and
Reasons for the Merger" for a discussion of Midlantic's stock repurchase plan.
The following description of Midlantic Common Stock sets forth certain
general terms of the Midlantic Common Stock.
Common Stock
DIVIDEND RIGHTS. Holders of Midlantic Common Stock are entitled to
dividends when, as and if declared by Midlantic's Board of Directors out of
funds legally available for the payment of dividends. Any declaration of
dividends will depend on the earnings of Midlantic and its subsidiaries, their
financial condition and need for funds and other relevant factors, including
restrictions imposed on the payment of dividends by (i) applicable law,
governmental policies and regulations, and agreements or other arrangements with
banking regulators, and (ii) the long-term obligations of Midlantic and its
subsidiaries. The only statutory limitation is that such dividends may not be
paid if Midlantic is insolvent. Because funds for the payment of dividends by
Midlantic must come primarily from the earnings of Midlantic's bank subsidiary,
as a practical matter, any restrictions on the ability of MB to pay dividends
will act as restrictions on the amount of funds available for payment of
dividends by Midlantic.
As a national banking association, MB is subject to limitation on the
amount of dividends it may pay to Midlantic, MB's only shareholder. Prior
approval by the OCC is required to the extent the total of all dividends to be
declared by MB in any calendar year exceeds net income for that year combined
with MB's retained net income for the preceding two calendar years. Under this
limitation, MB could declare dividends at December 31, 1994 without prior
approval of the OCC of up to $384.2 million.
Midlantic is also subject to certain Federal Reserve Board policies which
may, in certain circumstances, limit its ability to pay dividends. These
policies require, among other things, that a bank holding company maintain
certain minimum capital ratios. The Federal Reserve Board would most likely seek
to prohibit any dividend payment which would reduce a holding company's capital
below these minimum ratios.
VOTING RIGHTS. At meetings of shareholders, holders of Midlantic Common
Stock are entitled to one vote per share and do not have cumulative voting
rights with respect to the election of directors. The quorum for shareholders'
meeting is a majority of the outstanding shares. Generally, actions and
authorizations to be taken or given by shareholders require the approval of a
majority of the votes cast by holders of Midlantic Common Stock at a meeting at
which a quorum is present.
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LIQUIDATION RIGHTS. In the event of liquidation, dissolution or winding up
of Midlantic, holders of Midlantic Common Stock are entitled to share equally
and ratably in assets available for distribution after payment of debts and
liabilities, subject to the prior rights of holders of shares of any preferred
stock which may be issued and outstanding.
STOCK PURCHASE RIGHTS. On February 23, 1990, Midlantic's Board declared a
distribution of one Stock Purchase Right (a "Right") for each outstanding share
of Midlantic Common Stock to shareholders of record at the close of business on
March 12, 1990 (the "record date"), and authorized the issuance of one Right for
each share of Midlantic Common Stock (including the Midlantic Common Stock
offered by this Proxy Statement) issued between the record date and the
Distribution Date (described herein). The Rights will separate from the
Midlantic Common Stock upon the date (the "Distribution Date") which is the 10th
business day after a person or group acquires beneficial ownership of 15% or
more of the outstanding Midlantic Common Stock or voting securities of
Midlantic, or commences a tender or exchange offer that would result in such
person or group acquiring beneficial ownership of 15% or more of the outstanding
Midlantic Common Stock or voting securities of Midlantic. Each Right initially
will entitle its holder to buy one one-hundredth of a share of Preferred
Stock--B at an exercise price of $125. In the event that a person or group
acquires 15% or more of Midlantic Common Stock or voting securities (except in
transactions approved by the Board) and thereafter (i) Midlantic is acquired in
a merger or other business combination or (ii) more than 50% of Midlantic's
assets, earning power or cash flow is sold, each Right will entitle its holder
to acquire shares of Midlantic or the acquiring person, as the case may be,
having a value of twice the exercise price of the Right. Midlantic may redeem
the Rights at $.01 per Right any time until the tenth business day following
public announcement by Midlantic or an acquiring person or group that such a
person or group has acquired a 15% position in Midlantic. The Rights will expire
on March 12, 2000.
OTHER COMMON STOCK. Midlantic's Board may issue authorized but unissued
Midlantic Common Stock without shareholder approval, except as otherwise
required by applicable law, to such persons and for such consideration as
Midlantic's Board may determine for any corporate purposes, including
acquisitions by Midlantic or its subsidiaries.
Midlantic has outstanding two series of debt securities which, by the terms
of their indenture, are to be exchanged at maturity for Midlantic Common Stock
or perpetual preferred stock of Midlantic having a market value, at the
respective maturity date of each series, equal to the aggregate principal amount
of these debt securities or, upon the satisfaction of certain conditions, may be
repaid in cash. The aggregate principal amount of the debt securities is $200
million, one-half of which is due on December 1, 1999 and the balance of which
is due on August 1, 2001. Inasmuch as the number of shares which may be issued
in connection with any such exchange is not presently determinable, no shares of
Midlantic Common Stock or preferred stock are reserved for issuance with respect
to any such exchange.
PRE-EMPTIVE AND CONVERSION RIGHTS. The holders of Midlantic Common Stock do
not have pre-emptive rights with respect to any securities or any conversion
rights.
ASSESSMENT AND REDEMPTION. All outstanding shares of Midlantic Common Stock
are fully paid and nonassessable. The Midlantic Common Stock is not redeemable
at the option of the issuer or the holders thereof.
OTHER MATTERS. The transfer agent and registrar for Midlantic Common Stock
is currently Midlantic Bank, National Association. Midlantic Common Stock is
traded on The Nasdaq National Market(R) and is registered with the Commission
under Section 12(g) of the Exchange Act.
Preferred Stock
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PREFERRED STOCK--A. The Preferred Stock--A has an annual dividend rate
based on $100 stated value per share. For all dividend periods commencing on or
after April 1, 1992 through the dividend period commencing on January 1, 1997,
the dividend rate is 7.25%. Thereafter the dividend rate will become adjustable
by reference to the rates of certain U.S. Treasury obligations, but in no event
will the annual dividend be less than 6% or more than 12%. The Preferred
Stock--A can be redeemed solely at the option of Midlantic at a redemption price
of $100 per share plus accrued and unpaid dividends to the date of redemption
provided, however, that Midlantic obtains prior approval for redemption from the
Federal Reserve Bank of New York. On liquidation, holders of Preferred Stock--A
are entitled to receive $100 per share plus accrued and unpaid dividends to the
date of final distribution prior to any distribution to holders of Midlantic
Common Stock. No dividends may be paid on the Midlantic Common Stock unless full
cumulative dividends on all outstanding Preferred Stock--A have been paid or
declared and set aside for payment for all dividend periods.
Midlantic executed an agreement dated as of July 21, 1992 with the sole
holder (the "Holder") of the Preferred Stock--A to pay the full cumulative
dividends then in arrears on the Preferred Stock--A by issuing Midlantic Common
Stock in lieu of a cash payment. The agreement also permits Midlantic to pay
future dividends in either cash or Midlantic Common Stock so long as any such
issuance of Midlantic Common Stock would not cause the Holder to be the
beneficial owner of more than 4.99% of the outstanding shares of Midlantic
Common Stock. On July 22, 1992, Midlantic issued shares of Midlantic Common
Stock to the Holder in full satisfaction of dividends accrued to the Preferred
Stock--A through June 30, 1992. For the dividend period from July 1992 through
December 1993, Midlantic issued additional shares of Midlantic Common Stock to
the Holder in full satisfaction of dividends accrued to the Preferred Stock--A
during such dividend periods. Dividends payable on the Preferred Stock--A were
paid by Midlantic in cash for all subsequent dividend periods.
PREFERRED STOCK--B. The Preferred Stock--B is reserved for issuance in
connection with the Rights distributed to holders of record of Midlantic Common
Stock on March 12, 1990. See "-- Common Stock -- Stock Purchase Rights." Holders
of Preferred Stock--B, if and when issued, subject to the dividend rights of any
series of preferred stock ranking prior and superior to the Preferred Stock--B,
are entitled to receive quarterly dividends, and no dividends may be paid on
Midlantic Common Stock unless all dividends on all outstanding shares of
Preferred Stock--B have been paid or declared and set aside for payment for all
dividend periods.
OTHER PREFERRED STOCK. Midlantic's Board is empowered without shareholder
approval to cause Midlantic to issue additional shares of preferred stock, from
time to time, in series and, with respect to each series, the Certificate of
Incorporation of Midlantic (the "Midlantic Certificate of Incorporation")
authorizes Midlantic's Board to determine (i) the number of shares to constitute
such series; (ii) the dividend rate on the shares of each series and whether the
dividend is to be cumulative; (iii) whether the shares of each series will be
redeemable and the terms of such redemption rights; (iv) whether the shares will
be convertible into any other class of stock and the terms of such conversion
rights; (v) the rights of the holders of shares in case of liquidation or
dissolution of Midlantic; (vi) the relative rights and preferences of such
series (vii) the extent of voting powers, if any, of shares of each series; and
(vii) generally any other rights and privileges not in conflict with the
Midlantic Certificate of Incorporation for each series and any qualifications,
limitations or restrictions thereof. See also "-- Common Stock -- Other Common
Stock."
Provisions Relating to Certain Business Transactions
The Midlantic Certificate of Incorporation contains a "Supermajority
Provision", and a "Fair Price Provision." The Supermajority Provision requires
the affirmative vote of not less than 80% of the combined voting power (voting
as one class) of all outstanding voting stock of Midlantic to approve certain
business transactions, unless the transaction is approved by three-fourths of
the "Disinterested Directors" (described below). The Fair Price Provision
requires the same 80% vote of shareholders to approve certain business
transactions involving an "Interested Shareholder" (described below) unless the
transaction is approved by three-
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fourths of the "Continuing Directors" (described below) or meets certain minimum
price and procedural criteria. The Supermajority Provision does not cover
transactions that are subject to the Fair Price Provision.
GENERAL DESCRIPTION OF SUPERMAJORITY PROVISION. The Supermajority Provision
prescribes a higher shareholder vote than would otherwise be required by the New
Jersey Business Corporation Act (the "NJBCA") to authorize certain business
transactions, unless a specified minimum number of Disinterested Directors
approve the transaction. Specifically, in addition to any shareholder vote
required by the NJBCA or otherwise, the affirmative vote of not less than 80% of
the votes entitled to be cast by the holders of all then outstanding shares of
voting stock of Midlantic, voting together as a single class (an "80%
Shareholder Vote"), is required to authorize certain transactions, including a
merger or consolidation of Midlantic, or a sale of all or substantially all
assets. An 80% Shareholder Vote is not required, however, if the transaction is
approved by the greater of (i) three-fourths of the Disinterested Directors or
(ii) three Disinterested Directors. The Midlantic Certificate of Incorporation
requires an 80% Shareholder Vote to amend or repeal, or adopt any provision
inconsistent with, the Supermajority Provision.
For purposes of the Supermajority Provision, a "Disinterested Director" is
any member of the Board, while such person is a member of the Board, who is not
affiliated with the other party to the transaction and who was either named as a
director in the Midlantic Certificate of Incorporation filed in the office of
the Secretary of State of New Jersey on March 20, 1986, or was recommended for
election to the Board, or elected to fill a vacancy on the Board, by a majority
of the Disinterested Directors at the time of such election.
GENERAL DESCRIPTION OF FAIR PRICE PROVISION. Under the Fair Price
Provision, the terms of a "Business Combination" (described below) between
Midlantic or a subsidiary of Midlantic and an Interested Shareholder must (i)
satisfy certain "fair price" criteria and procedural requirements which are
discussed below, (ii) be approved by an 80% Shareholder Vote or (iii) be
approved by the affirmative vote of three-fourths of the Continuing Directors.
Even if a proposed Business Combination satisfies one of these three tests, it
remains subject to the voting requirements otherwise applicable under the NJBCA,
which, for most types of Business Combinations, is the affirmative vote of a
majority of the votes cast at a meeting of the shareholders called to vote on
the matter.
For purposes of the Fair Price Provision, an "Interested Shareholder"
includes any person or group of persons that is the beneficial owner of 10% or
more of Midlantic's voting stock other than Midlantic, its subsidiaries or
employee benefit plans and the trustees of such plans. As of the date of this
Proxy Statement, Midlantic is not aware of any shareholder or group of
shareholders that satisfies this definition. A "Business Combination" subject to
the Fair Price Provision includes any merger or consolidation of Midlantic or
any of its subsidiaries, or other disposition involving any assets or securities
of Midlantic, to, with or by any Interested Shareholder or any "Affiliate" or
"Associate" (as defined in the Midlantic Certificate of Incorporation) of an
Interested Shareholder.
"FAIR PRICE" CRITERIA AND PROCEDURAL REQUIREMENTS. In a Business
Combination, the consideration required to be paid to the shareholders of
Midlantic must be either cash or the same type of consideration used by the
Interested Shareholder to acquire beneficial ownership of the largest portion of
Midlantic's capital stock. In the case of a Business Combination that provides
for the payment of cash or other consideration to holders of Midlantic Common
Stock, such shareholders must receive at least the fair market value of their
Midlantic Common Stock, determined pursuant to a specified formula which was
designed to ensure that such holders receive the economic benefit of the highest
prices paid or agreed to be paid for Midlantic Common Stock during defined time
periods. In addition to meeting the foregoing price criteria, the Interested
Shareholder must satisfy the procedural requirements described below.
If a Business Combination does not involve the receipt of any cash or other
property by any shareholders, such as a sale of assets or an issuance of
Midlantic's securities to an Interested Shareholder, then
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the fair price criteria will not apply and the Business Combination must satisfy
one of the two remaining tests--approval by an 80% Shareholder Vote or by
three-fourths of the Continuing Directors.
The procedural requirements in the Fair Price Provision are intended to
inhibit transactions which might favor an Interested Shareholder. These
requirements ensure that other shareholders continue to receive the benefits of
their stock ownership prior to the consummation of a Business Combination, and
obtain full information, in the form of a proxy or information statement,
regarding the proposed transaction. An Interested Shareholder proposing a
Business Combination must satisfy these requirements, as well as the fair price
criteria described above, unless the Business Combination is approved by
three-fourths of the Continuing Directors or an 80% Shareholder Vote.
CONTINUING DIRECTOR APPROVAL. If a Business Combination is approved by
three-fourths of the Continuing Directors, neither the fair price criteria and
procedural requirements nor the 80% Shareholder Vote requirement will be
applicable. A "Continuing Director" is any member of Midlantic's Board, while
such person is a member of the Board, who is not affiliated with an Interested
Shareholder and who was either named as a director in Midlantic's Certificate of
Incorporation filed in the office of the Secretary of State of New Jersey on
March 20, 1986, or was recommended for election to the Board, or elected to fill
a vacancy on the Board, by a majority of the Continuing Directors at the time of
such election.
80% SHAREHOLDER VOTE. If a Business Combination is approved by an 80%
Shareholder Vote, it will not be subject to the fair price criteria and
procedural requirements or the requirement of approval by three-fourths of the
Continuing Directors.
OTHER LEGAL REQUIREMENTS. Even if a Business Combination satisfies the fair
price criteria and procedural requirements, or is approved by the Continuing
Directors or an 80% Shareholder Vote, it remains subject to voting and other
requirements under the NJBCA. Under current provisions of the NJBCA, certain
mergers, consolidations, reclassifications of capital stock, sales of
substantially all of the assets of a corporation or the adoption of a plan of
dissolution must be approved by the affirmative vote of a majority of the votes
cast by the holders of shares entitled to vote thereon. Certain other
transactions, such as sales of less than substantially all assets, mergers
involving a 90%-owned subsidiary and recapitalizations not involving any
amendment to a certificate of incorporation, do not require shareholder approval
under the NJBCA, although such transactions may constitute Business Combinations
subject to the Fair Price Provision.
AMENDMENT OF FAIR PRICE PROVISION. Any amendment or repeal of the Fair
Price Provision, or the adoption of inconsistent provisions, must be approved by
an 80% Shareholder Vote, unless such amendment, repeal or adoption is
unanimously recommended by Midlantic's Board, all of whom are Continuing
Directors. In that case, only the provisions of the NJBCA will apply, and the
amendment may be approved by the affirmative vote of a majority of the votes
cast by the holders of Midlantic's capital stock entitled to vote thereon.
Shareholder Nomination of Directors
The By-laws of Midlantic (the "Midlantic By-laws") prescribe procedures for
shareholders wishing to nominate persons to serve as directors of Midlantic. The
Midlantic By-laws specify that, subject to any rights of holders of stock having
a preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of directors may be made by Midlantic's Board, by a
committee appointed by the Board or by any shareholder entitled to vote in the
election of directors generally. Any shareholder entitled to vote in the
election of directors generally may nominate one or more persons for election as
directors at a shareholders' meeting only if written notice of such
shareholder's intention to make such nomination or nominations was given, either
by personal delivery or by United States mail, postage prepaid, to the Secretary
of Midlantic not later than (i) with respect to any election to be held at an
annual meeting of shareholders, 90 days prior to the anniversary date of the
immediately preceding annual meeting and (ii) with respect to an election to be
held at a special
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meeting of shareholders for the election of directors, the close of business on
the tenth day following the date on which notice of such meeting is first given
to shareholders. Each notice shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated; (b) each nominee's age and principal occupation or employment; (c)
the number of shares of equity securities of Midlantic beneficially owned by
each nominee; (d) a representation that the shareholder is a holder of record of
stock of Midlantic entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice; (e) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (f) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Commission; and (g) the consent of each
nominee to serve as a director of Midlantic if so elected. A shareholder who
does not comply with this procedure may be precluded from nominating a candidate
for election as a director at a meeting of the shareholders.
Limitation of Liability of Directors and Officers
The Midlantic Certificate of Incorporation contains a provision eliminating
the personal liability of Midlantic's directors and officers to Midlantic or its
shareholders for monetary damages to the full extent from time to time permitted
by law. Under this provision and existing law, a shareholder of Midlantic may
prosecute an action against a director or officer for monetary damages only if
the shareholder can show a breach of the duty of loyalty, a failure to act in
good faith, a knowing violation of law or a breach of duty resulting in receipt
of an improper personal benefit. A shareholder may not prosecute such an action
(including an action relating to an attempted takeover of Midlantic) based on
"negligence" or "gross negligence" of a director or officer in the performance
of such person's duties. However, the Midlantic Certificate of Incorporation
does not limit or eliminate the right of Midlantic or any of its shareholders to
seek an injunction, rescission or other form of nonmonetary relief in the event
of a breach of the duty of care by a director or officer. In addition, the
limited liability provision applies only to claims against directors or officers
arising out of their service in such capacity and, depending upon judicial
interpretation, it may not be effective to relieve a director or officer from
liability under the laws of jurisdictions other than New Jersey. The Midlantic
Certificate of Incorporation does not affect a director's or officer's
liabilities based upon violations of the federal securities laws and has no
effect on tort or other claims by third parties against directors or officers.
COMPARISON OF THE RIGHTS OF SHAREHOLDERS
UNDER PENNSYLVANIA AND NEW JERSEY LAW
Midlantic is a New Jersey corporation subject to the provisions of the
NJBCA. Old York is a Pennsylvania corporation subject to the provisions of the
PaBCL. The rights of current shareholders of Old York are governed by Old York's
Articles of Incorporation (the "Old York Articles of Incorporation") and By-laws
(the "Old York By-laws") and the PaBCL. Upon consummation of the Merger,
shareholders of Old York who receive Midlantic Common Stock in exchange for
their shares of Old York Common Stock will become shareholders of Midlantic and,
at the Effective Time, their rights as shareholders will be determined by the
Midlantic Certificate of Incorporation and the Midlantic By-laws and the NJBCA.
The following is a summary of the material differences in the rights of
shareholders of Old York under the Old York Articles of Incorporation, Old York
By-laws and the PaBCL, on the one hand, and the rights of shareholders of
Midlantic under the Midlantic Certificate of Incorporation, the Midlantic
By-laws and the NJBCA, on the other hand. The following discussion does not
purport to be a complete discussion of, and is qualified in its entirety by
reference to, the governing law and the Articles or Certificate of Incorporation
and By-laws of each corporation.
Voting Requirements
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Under the PaBCL, a plan of merger, consolidation, share exchange, division,
conversion, or asset transfer (in respect of a sale, lease, exchange or other
disposition of all, or substantially all, the assets of a corporation other than
in the usual and regular course of business) generally must be proposed by the
board of directors and approved by the affirmative vote of a majority of the
votes cast by all shareholders of any class or series of shares entitled to vote
thereon as a class.
The Midlantic Certificate of Incorporation contains a "Supermajority
Provision," which prescribes a higher shareholder vote than would otherwise be
required by the NJBCA to authorize certain business transactions. See
"DESCRIPTION OF MIDLANTIC CAPITAL STOCK -- Provisions Relating to Certain
Business Transactions."
The PaBCL generally provides that an amendment of the articles of
incorporation must be proposed by the board of directors and may be adopted by
the affirmative vote of a majority of the votes cast by all shareholders
entitled to vote thereon and by a majority of the votes cast by the shareholders
of any class or series of shares entitled to vote thereon. Notwithstanding the
foregoing, if a proposed amendment would alter or change the preferences,
limitations or special rights of the shares of a class or series of shares, so
as to adversely affect them, then the holders of the outstanding shares of the
class or series are entitled to vote as a class in respect to the amendment
regardless of any limitations stated in the articles of incorporation or bylaws
on the voting rights of any class or series.
Under the NJBCA, the holders of a class or series of shares are entitled to
vote as a class upon a proposed amendment to the certificate of incorporation,
whether or not entitled to vote thereon by the provisions of the certificate of
incorporation, if the amendment would exclude or limit their right to vote on
any matter, limit or deny their preemptive rights, cancel or otherwise adversely
affect their dividends which have accrued but have not been declared, create a
new class or series having or convertible into shares having rights or
preferences superior to the class or increase the rights or preference of any
class or series. In addition, notwithstanding any provision of the certificate
of incorporation, the holders of a class or series of shares whose rights or
preferences would be subordinated or otherwise adversely affected by a proposed
amendment are entitled to vote as a class if the amendment would affect their
shares in the following manner: (i) decrease the par value; (ii) effect a
conversion, exchange or reclassification of their shares; (iii) effect a
conversion or exchange of any shares of another class or series into their class
or series; (iv) change the designation, preferences, limitations or relative
rights of their shares; (v) change the shares into a different number of shares,
or into the same number of another class or series; or (vi) divide their shares
into a series or determine the designation, preferences, limitation or relative
rights of any such series, or authorize the board to take any such action.
All shareholder voting rights of Old York are vested in the holders of Old
York Common Stock. All shareholder voting rights of Midlantic are vested in the
holders of the Midlantic Common Stock.
Cumulative Voting
The voting rights of the holders of Old York Common Stock and the holders
of Midlantic Common Stock are similar in that in each instance each holder of a
share of common stock is entitled to one vote for per share held and that there
are no cumulative voting rights in the election of directors.
Classified Board of Directors
The Old York By-laws provide for a classified Board of Directors, with the
total number of the Board of Directors to be classified according to the time
for which they hold office, with each class as nearly equal in number as
possible, with the term of office of at least one class to expire each year. Any
class of directors of Old York are not to be elected for a term shorter than a
period of one year, nor for a term in excess of four years.
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The NJBCA permits a New Jersey corporation to provide for a classified
board of directors in its certificate of incorporation. The Midlantic
Certificate of Incorporation does not provide for a classified Board of
Directors; the entire Board is elected each year.
Rights of Dissenting Shareholders
Under the PaBCL, a shareholder of a Pennsylvania corporation is generally
entitled to receive payment for the fair value of such shareholder's shares if
such shareholder duly exercises its dissenters rights with respect to a plan of
merger or consolidation, share exchange or asset transfer, to which such
corporation is a party, except if the shares are (i) listed on a national
securities exchange or (ii) held by more than 2,000 shareholders. The foregoing
market exceptions do not apply to Old York. See "THE PROPOSED MERGER -- Rights
of Dissenting Old York Shareholders."
Under the NJBCA, shareholders of a New Jersey corporation who dissent from
a merger, consolidation, sale of all or substantially all of the corporation's
assets or certain other corporate transactions are generally entitled to
appraisal rights. No statutory right of appraisal exists, however, where the
stock of the New Jersey corporation is (i) listed on a national securities
exchange, (ii) is held of record by not less than 1,000 holders, or (iii) where
the consideration to be received pursuant to the merger, consolidation or sale
consists of cash or securities or other obligations which, after the
transaction, will be listed on a national securities exchange or held of record
by not less than 1,000 holders. The exception in clause (ii) currently applies
to Midlantic.
Shareholder Consent to Corporate Action
Unless otherwise restricted in the bylaws (and the Old York By-laws are
silent on this issue), the PaBCL permits any action required or permitted to be
taken at a meeting of the corporation's shareholders (or a class of
shareholders) to be taken without a meeting if, prior or subsequent to the
action, a consent or consents thereto by all of the shareholders who would be
entitled to vote at a meeting for such purpose is filed with the secretary of
the corporation.
Except as otherwise provided by the certificate of incorporation (and the
Midlantic Certificate of Incorporation currently is silent on this issue), the
NJBCA permits any action required or permitted to be taken at any meeting of a
corporation's shareholders, other than the annual election of directors, to be
taken without a meeting upon the written consent of shareholders who would have
been entitled to cast the minimum number of votes necessary to authorize such
action at a meeting of shareholders at which all shareholders entitled to vote
were present and voting. The annual election of directors, if not conducted at a
shareholders' meeting, may only be effected by unanimous written consent. Under
the NJBCA, a shareholder vote on a plan of merger or consolidation, if not
conducted at a shareholders' meeting, may only be effected by either: (i)
unanimous written consent of all shareholders entitled to vote on the issue with
advance notice to any other shareholders, or (ii) written consent of
shareholders who would have been entitled to cast the minimum number of votes
necessary to authorize such action at a meeting, together with advance notice to
all other shareholders.
Dividends and Other Distributions to Shareholders
Unless otherwise restricted in the bylaws, the PaBCL provides that a
Pennsylvania corporation may pay dividends or purchase, redeem or otherwise
acquire its own shares unless, after giving effect thereto, (i) the corporation
would be unable to pay its debts as they become due in the usual course of
business or (ii) the corporation's total assets would be less than the sum of
its total liabilities plus the amount that would be needed to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distributions. The authorized capital stock
of Old York consists of only Old York Common Stock. The Old York By-laws
authorize the Board of Directors to declare a dividend out of the profits of Old
York as the Board deems advisable, subject to the limitations prescribed by the
PaBCL.
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Subject to any restrictions contained in the certificate of incorporation,
the NJBCA provides that a New Jersey corporation may pay dividends or purchase,
redeem or otherwise acquire its own shares unless, after giving effect thereto,
(i) the corporation would be unable to pay its debts as they become due in the
usual course of business or (ii) the corporation's total assets would be less
than its total liabilities. The Midlantic Certificate of Incorporation provides
that no dividends may be paid on Midlantic Common Stock unless all accrued and
unpaid dividends on Midlantic's preferred stock have been paid or declared with
funds set apart for the payment thereof. However, Midlantic is permitted to pay
dividends on its Preferred Stock--A in Midlantic Common Stock in lieu of a cash
payment. See "DESCRIPTION OF MIDLANTIC CAPITAL STOCK -- Preferred Stock." Any
declaration of dividends on Midlantic Common Stock will depend on the earnings
of Midlantic and its subsidiaries, their financial condition and need for funds
and other relevant factors. For a description of the regulatory restrictions on
dividend payments by Midlantic, see "DESCRIPTION OF MIDLANTIC CAPITAL STOCK --
Common Stock--Dividend Rights."
By-laws
The Old York By-laws grant the Board of Directors the power to make, amend
and repeal (by a vote of the majority of all the directors) the Old York
By-laws, except those By-laws that fix the Board's qualifications,
classification or term of office and subject to the power of Old York's
shareholders to change or repeal such By-laws. In addition, the PaBCL prohibits
the board of directors of a Pennsylvania corporation from adopting or changing
bylaws on subjects committed expressly to the shareholders by the PaBCL.
Under the NJBCA, the board of directors of a New Jersey corporation has the
power to adopt, amend, or repeal the corporation's bylaws, unless such powers
are reserved in the certificate of incorporation to the shareholders, which the
Midlantic Certificate of Incorporation presently does not do.
Preemptive Rights
Except as otherwise provided in the articles of incorporation (and the Old
York Articles of Incorporation are silent on this issue), the PaBCL permits a
Pennsylvania corporation to provide its shareholders with preemptive rights.
Under the NJBCA, shareholders of New Jersey corporations have only such
preemptive rights as may be provided in the certificate of incorporation. The
Midlantic Certificate of Incorporation does not provide the holders of Midlantic
Common Stock preemptive rights with respect to any securities.
Transactions Involving Officers or Directors
Under the NJBCA, a New Jersey corporation may loan money to, or guarantee
any obligation incurred by, its officers, employees or directors if in the
judgment of the directors such loan or guarantee may reasonably be expected to
benefit the corporation. With respect to any other contract or transaction
between the corporation and one or more of its directors (or any other
corporation or entity in which such director or directors are otherwise
interested), such transactions are neither void nor voidable if either (i) the
director's or officer's interest is made known to the disinterested directors or
the shareholders of the corporation, who thereafter approve the transaction, or
(ii) the contract or transaction is fair to the corporation as of the time it is
approved or ratified by either the board of directors, a committee thereof, or
the shareholders.
Under the PaBCL, a contract or transaction between a Pennsylvania
corporation and one or more of its directors or officers (or any other
corporation or entity in which such director(s) or officer(s) are directors or
officers or have a financial or other interest) is not void or voidable if (i)
the material facts as to the relationship or interest and as to the contract or
transaction are disclosed or are known to the board of directors and a majority
of the disinterested directors authorizes the contract or transaction (even
though the disinterested directors are less than a quorum), (ii) the material
facts as to the relationship or interest of the director(s) or
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officer(s) and as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon and the contract or transaction is
specifically approved in good faith by vote of those shareholders, or (iii) the
contract or transaction is fair as to the corporation as of the time it is
authorized, approved or ratified by the board of directors or the shareholders.
Limitations of Liability of Directors and Officers
Under the PaBCL, the shareholders of a Pennsylvania corporation may adopt a
bylaw that would eliminate the personally liability of a director, subject to
the limitations described below. The PaBCL provides that a director cannot be
relieved of liability (i) for a breach or failure to perform the duties of such
person's office under Subchapter 17B of the PaBCL and (ii) where the breach or
failure to perform constitutes self-dealing, willful misconduct or recklessness.
In addition, a director may not be relieved of the (i) responsibility or
liability pursuant to any criminal statute or (ii) liability for the payment of
taxes pursuant to Federal, state or local law. The Old York By-laws contain a
provision that limits a director's liability to the full extent permitted by the
PaBCL.
Under the NJBCA, a New Jersey corporation may include in its certificate of
incorporation a provision that would, subject to the limitations described
below, eliminate or limit directors' or officers' liability to the corporation
or its shareholders for monetary damage for breaches of their fiduciary duty of
care. The NJBCA provides that a director or officer cannot be relieved from
liability or otherwise indemnified for any breach of duty based upon an act or
omission (i) in breach of such person's duty of loyalty to the corporation or
its shareholders, (ii) not in good faith or involving a knowing violation of
law, or (iii) resulting in receipt by such person or an improper personal
benefit. The Midlantic Certificate of Incorporation contains a provision that
limits a director's or officer's liability to the full extent permitted by the
NJBCA.
Shareholder Protection Legislation
Old York is subject to some, but not all, of various provisions of the
PaBCL which are triggered, in general, if any person or group acquires, or
discloses an intent to acquire, 20% or more of the voting power of a covered
corporation, other than pursuant to a registered firm commitment underwriting
or, in certain cases, pursuant to the approving vote of the board of directors.
The relevant provisions are contained in Subchapters 25E through 25H of the
PaBCL.
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. For this purpose, 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 25J. 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.
-46-
<PAGE>
Subchapter 25H (relating to disgorgement) applies in the event that (i) any
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 through 25H contain a wide variety of transactional and
status exemptions, exclusions and safe harbors. As permitted under the PaBCL,
Old York has opted out of the provisions of Subchapters 25E through 25G but is
subject to the provisions of Subchapters 25H.
In addition, the fiduciary duty standards applicable to Old York's Board of
Directors under the PaBCL (i) explicitly give the Board of Directors the
authority to weigh (in addition to consideration of employees, suppliers,
customers and creditors of the corporation, the communities in which the
corporation is located and other pertinent factors) the short and long-term
interests of the corporation and the possibility that they may be best served by
the independence of the corporation, and the resources, intent and past and
potential conduct of the prospective acquiror, (ii) relieve the board from any
duty to regard the shareholder interest as dominant or controlling, (iii)
explicitly give the board the discretion to refuse to redeem a shareholder
rights plan or to refuse to take certain specified actions with respect to
potential acquisitions of control of the corporation, (iv) declare actions by
directors with respect to a takeover bid to be subject to the same standard of
conduct for directors that is applicable to all other conduct and (v) establish
a presumption that actions with respect to a takeover bid by the "disinterested
directors" (a term defined to include essentially all directors except certain
officers and persons associated with the prospective acquiror) are lawful unless
it is proved under a clear and convincing evidence standard that the director
did not act in good faith after reasonable investigation.
Under a provision of the Pennsylvania Banking Code of 1965 designed to
protect shareholders of Pennsylvania banking institutions, subject to certain
exceptions, no person may offer to acquire, or acquire, control of more than 10%
of the outstanding shares of a Pennsylvania banking institution or 5% of the
outstanding shares of a Pennsylvania banking institution if such institution had
net operating loss carry forwards in excess of 20% of its total shareholders'
equity as reported in its most recent publicly available annual financial
statements, without the prior written approval of the Pennsylvania Department of
Banking.
The New Jersey Shareholders Protection Act (the "NJSPA") prohibits certain
transactions involving an "interested shareholder" and a "resident domestic
corporation." An "interested shareholder" is one that is directly or indirectly
a beneficial owner of 10% or more of the voting power of the outstanding voting
stock of a resident domestic corporation. The NJSPA prohibits certain business
combinations between an interested shareholder and a resident domestic
corporation for a period of five years after the date the interested shareholder
acquired its stock, unless the business combination was approved by the resident
domestic corporation's board of directors prior to the stock acquisition date.
After the five-year period expires, the prohibition on certain business
combinations continues unless the combination is approved by the affirmative
vote of two-thirds of the voting stock not beneficially owned by the interested
shareholder, the combination is approved by the board prior to the interested
shareholder's stock acquisition date or certain fair price provisions are
satisfied.
Both New Jersey and Pennsylvania law include a business combination statute
and a provision that permits, in certain circumstances, directors to consider
factors other than any effects of an action on the shareholders in discharging
their fiduciary duties as a director.
-47-
<PAGE>
OLD YORK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF OLD YORK ROAD BANCORP, INC.
Results of Operations--Quarter ended March 31, 1995 Versus March 31, 1994
For the quarter ended March 31, 1995, Old York reported net income of $81,000
compared with net income of $120,000 for the first quarter of 1994, a decrease
of $39,000. This decrease was mainly the result of increases in other operating
expenses offset by increases in net interest income and decreases in the
provision for possible loan losses.
Net Interest Income
For the quarter ended March 31, 1995, net interest income totaled $2.7 million
which was an increase of $339,000 or 14.5% from $2.3 million for the quarter
ended March 31, 1994. This increase was the result of an increase in average
earning assets of $3.2 million from $204.2 million at March 31, 1994 to $207.4
million at March 31, 1995; additionally, the yield on earning assets increased
90 basis points from 7.17% at March 31, 1994 to 8.07% at March 31, 1995.
For the quarter ended March 31, 1995 total interest income on loans amounted to
$3.3 million or $453,000 higher than reported for the quarter ended March 31,
1994. The increase in interest income earned on loans was the result of an
increase in average loans outstanding of $8.8 million in addition to a 74 basis
point increase on loan yields from March 31, 1994 to March 31, 1995. Interest
income on investment securities increased from $645,000 for the three months
ended March 31, 1994 to $815,000 for the same period in 1995, an increase of
$170,000. This increase is attributable to an increase of $8.5 million in the
average balance, in addition to an increase in yields on investment securities
from 5.24% at March 31, 1994 to 5.64% at March 31, 1995, an increase of 40 basis
points. Interest on Federal Funds decreased $97,000 mainly attributable to a
decline in average balances of federal funds from $15.1 million at March 31,
1994 to $1.0 million at March 31, 1995, as federal funds were used to fund loan
and investment securities growth.
For the quarter ended March 31, 1995, total interest expense amounted to $1.5
million or $187,000 higher than reported for the quarter ended March 31, 1994 as
total average interest bearing deposits increased $3.1 million in addition to an
average yield increase of 39 basis points.
Provision for Possible Loan Losses
The provision for credit losses totaled $97,000 for the quarter ended March 31,
1995, which was a decrease of $203,000 from the $300,000 reported for the
quarter ended March 31, 1994. The decrease from 1994 to 1995 was due to
substantial additions to the reserve for possible loan losses of $1.7 million
during the third quarter of 1994.
48
<PAGE>
OTHER INCOME
Major Components of Other Income
Three Months Ended March 31
(Dollars in Thousands)
1995 1994
---- ----
Service Charges on Deposit Accounts ............ $421 $437
Trust Department Income ........................ 0 3
Other Income ................................... 8 13
---- ----
TOTAL ........................................ $429 $453
==== ====
For the quarter ended March 31, 1995, total other income decreased $24,000 to
$429,000 compared with $453,000 for the quarter ended March 31, 1994. This
decrease was primarily due to a decrease on service charge income on deposit
accounts.
OTHER EXPENSES
Major Components of Other Expenses
Three Months Ended March 31
(Dollars in Thousands)
EXPENSE 1995 1994
- ------- ---- ----
Salaries and Wages ............................. $ 997 $ 923
Employee Benefits .............................. 220 250
Occupancy Expense .............................. 285 340
Equipment Expense .............................. 172 198
Net Loss on Holding OREO Held-for-Sale ......... 192 44
Other Operating Expenses:
FDIC Insurance Expense ......................... 152 146
Printing and Stationary ........................ 38 54
Legal .......................................... 385 54
Postage ........................................ 57 57
Taxes Other Than Income ........................ 49 51
All Other ...................................... 386 260
------ ------
TOTAL .......................................... $2,933 $2,377
====== ======
Other expenses totaled $2.9 million for the first quarter ended March 31, 1995,
representing an increase of $556,000 or 23.4% over the same period in 1994. The
net loss on holding OREO Held-for-Sale increased $148,000 for the first quarter
1995 compared to the first quarter of 1994. This increase was mainly due to
additional writedowns of existing properties of $55,000 during the first quarter
of 1995. Salary and benefits expenses increased $44,000, or 3.7% due to ordinary
salary increase. The aggregate of all other expenses reflect an increase of
$364,000 which include costs resulting from the expected merger. These costs
include increased legal expenses, broker costs and deconversion costs.
49
<PAGE>
Financial Condition
At March 31, 1995, total assets were $226.3 million which represented a decrease
of $4.9 million or 2.1% over the $231.2 million at December 31, 1994. This
decrease in total assets was due to a decrease in net loans of $6.8 million
partially offset by an increase in cash and due from banks.
Investment securities decreased $.6 million or 1.0% from $57.9 million as of
December 31, 1994. This decrease is due to normal prepayments of mortgage backed
securities, which comprise the majority of the investment portfolio.
Old York has identified investment securities that will be held for indefinite
periods of time, including securities that will be used as part of Old York's
asset/liability management strategy and that may be sold in response to changes
in interest rates, prepayments and similar factors. The securities are
classified as available-for-sale and accounted for on a market value basis with
changes in value recorded as an adjustment to stockholder's equity. These
securities are primarily U.S. Government Treasury and Agency securities with
amortized cost and market values of $7,160,000 and $7,062,000, respectively, at
March 31, 1995.
As of March 31, 1995 the loan portfolio totaled $144.8 million representing a
decline of $6.0 million compared to $150.8 million at December 31, 1994 as
repayments on outstanding loans exceeded loan originations.
The allowance for credit losses totaled $6.1 million at the end of the first
quarter of 1995, an increase of $.8 million compared to $5.3 million recorded at
December 31, 1994. As of March 31, 1995 management believes the allowance for
possible loan losses is adequate to absorb any problem loans identified in the
loan portfolio. Beginning in 1995, the recognition of impaired loans and
specific allowances that must be determined for such loans are also factored
into the Company's determination of an adequate Allowance for Possible Loan
Losses (see Note 15 Recent Accounting Developments in "Notes to Consolidated
Financial Statements"). However there can be no assurance that if asset quality
deteriorates in future periods, additional provisions to the allowance for
credit losses will not be required.
Total deposits decreased $5.2 million from $216.7 million at December 31, 1994
to $211.5 million at March 31, 1995. There have been changes in the deposit mix
from December 31, 1994 to March 31, 1995. Demand, Savings and Interest Bearing
Checking accounts have declined by $5.1 million, $3.4 million and $4.3 million
respectively, while Time deposits have increased by $7.7 million.
Nonperforming Assets
At March 31, 1995, Old York's nonperforming assets, (consisting of loans on
nonaccrual status, restructured loans and foreclosed real estate), totaled $14.0
million, or 9.5% of total loans and other real estate owned at March 31, 1995.
This compares to $15.0 million or 9.7% of total loans and other real estate at
December 31, 1994. The decrease was primarily attributable to payoffs of
non-accrual loans and additions to the reserve for possible OREO losses. Loans
are generally reported as nonaccrual if they are past due as to maturity or
payment of principal and/or interest for a period of more than ninety days. At
March 31, 1995, there were $9.4 million of loans impaired under the guidelines
pursuant to FAS No. 114 (see Note 15 "Recent Accounting Developments" in the
"Notes to Consolidated Financial Statements"). During the first three months of
1995, Old York did not restructure any loans that would have been accounted
for under the provisions of FAS No. 114. In addition, pursuant to FAS No. 114,
Insubstance Foreclosures were reclassified from OREO to loans for all periods
presented.
March 31, December 31,
1995 1994
--------- ------------
Nonaccruing Loans .......................... $ 8,764 $ 9,378
Restructured ............................... 2,526 2,538
Other Real Estate Owned, net ............... 2,708 3,061
------- -------
TOTAL Nonperforming Assets ................. $13,998 $14,977
======= =======
50
<PAGE>
Liquidity
As of March 31, 1995, Old York maintained $18.8 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements)
and overnight federal funds sold. This represented 8.3% of the total assets at
March 31, 1995 as compared to 7.2% at December 31, 1994.
Old York had outstanding commitments to extend credit of $25.0 million at
March 31, 1995. Since many commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Old York has obtained a $9 million line of credit available from its
correspondent banks. Additionally Old York has available certain securities on
deposit at the Federal Reserve Bank of Philadelphia ("Philadelphia FED") which
could be pledged against borrowings at the Philadelphia FED discount window, if
needed. As a general rule, discount window credit is granted at the discretion
of the Philadelphia FED. If Old York capital ratios decline further, such
borrowing privileges could be limited or restricted under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA").
Capital Resources
At March 31, 1995, the stockholders equity totaled $12.8 million, an increase of
$253,000 from December 31, 1994. This increase was primarily due to a net income
recognized for the quarter of $81,000, in addition to a decrease in the
unrealized loss on securities available for sale. Old York had a Tier I risk
based capital ratio of 8.25% and a total risk-based capital ratio of 9.53% at
March 31, 1995 as compared to 7.90% and 9.17% respectively, at December 31,
1994. Old York achieved a leverage ratio of 5.80% at March 31, 1995 compared to
5.50% at December 31, 1994. Old York's federal banking regulators require Old
York to maintain a Leverage Capital Ratio of 6.50% by February 1994. At December
31, 1994 and March 31, 1995, Old York was not in compliance with this mandate.
51
<PAGE>
Results of Operations--Year Ended December 31, 1994
For the year ended December 31, 1994, the Company reported a net loss of
$3.5 million or $1.24 per share compared with a net loss of $404,000 or $.28 per
share for the year ended December 31, 1993. The decline in the Bank's results
during 1994 were characterized by increases in the provisions for credit losses
and increases in other expenses associated with losses on holding foreclosed
assets. Additionally, 1993 included a gain of $491,000 resulting from the sale
of investment securities.
For the year ended December 31, 1993, the Company reported a net loss of
$404,000 or $.28 per share compared with a net loss of $4.3 million or $3.28 per
share for the year ended December 31, 1992. The improvement in the Bank's
results during 1993 were characterized by increases in other income, reductions
in other expenses as well as a significant decrease in the Company's provision
for possible loan losses, which declined to $2 million in 1993, from $4.2
million during 1992.
Net Interest Income
The principal source of revenue for the Company is net interest income. Net
interest income is the difference between income earned on loans and securities
and the interest paid on deposits and borrowed funds. For the year ended
December 31, 1994, net interest income totaled $9.9 million, which was an
increase of $79,000 from the $9.8 million for the year ended 1993. This increase
was the result of an improvement in average interest earning assets of $17.6
million which increased from $192.0 million for the year ended December 31, 1993
to $209.6 million for the year ended December 31, 1994, partially offset by a
decrease in the net interest spread from 4.86% to 4.33%. In addition, total
average loans decreased from $144.3 million during 1993 to $143.8 million for
the year ended December 31, 1994.
For the year ended December 31, 1994, total interest income amounted to
$15.5 million or $396,000 higher than reported for the year ended December 31,
1993. This increase resulted from a $0.5 million decrease in average total loans
outstanding and an increase of $22.2 million in investment securities. Average
total securities were $58.3 million for the year ended December 31, 1994,
compared with $36.0 million for the same period in 1993, resulting in an
increase in interest income on securities of $920,000.
For the year ended December 31, 1994, total interest expense amounted to
$5.6 million or $317,000 higher than reported for the year ended December 31,
1993. This increase is attributable to an $11.1 million increase in average
interest bearing deposits. The greater portion of the increased expense resulted
from an increase in volume of interest bearing checking deposits of $7.7
million.
Net interest income totaled $9.8 million in 1993, a decrease of $415,000 or
4.05% from the 1992 level of $10.3 million. This reduction is the result of
declines in average loans outstanding which were $40.5 million lower partially
offset by increases in investment securities of $5.4 million. The investment of
loan repayments into lower yielding investment securities further reduced the
net interest margins.
Total interest income for 1993 amounted to $15.1 million or $3.2 million
lower than in 1992. This decrease resulted from a reduction in total average
loans outstanding as well as reduction in the yield earned on loans and
investments attributable to a decline in market interest rates.
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income from interest-earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average cost;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average
52
<PAGE>
daily balances during the indicated periods. For purposes of this table,
non-accrual loans have been included in the appropriate average balance loan
category, but accrued interest on non-accrual loans has not been included for
purposes of determining interest income.
53
<PAGE>
OLD YORK ROAD BANCORP, INC.
INCOME AND RATES ON A FULLY TAX EQUIVALENT BASIS (In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------ ----------------------------- -----------------------------
Average Average Average
Daily Average Daily Average Daily Average
Balance Interest Rate/Yield Balance Interest Rate/Yield Balance Interest Rate/Yield
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets
Securities
U.S. Treasuries & Agencies ....... $ 56,784 $ 2,920 5.14% $ 34,948 $ 2,031 5.81% $ 24,015 $ 1,684 7.01%
State Political Sudivisions ...... 100 9 9.09% 100 9 9.09% 100 9 9.00%
Other ............................ 1,371 49 3.57% 996 44 4.42% 6,525 520 7.97%
-------- ------- -------- ------- -------- -------
Total Securities ................... 58,255 2,978 5.11% 36,044 2,084 5.78% 30,640 2,213 7.22%
-------- ------- -------- ------- -------- -------
Loans:
Tax Exempt ....................... 7,496 1,008 13.44% 10,534 1,432 13.59% 12,267 1,734 14.14%
All Other Loans, net
discounts where applicable ..... 136,345 11,565 8.48% 133,790 11,709 8.75% 172,521 14,622 8.48%
-------- ------- -------- ------- -------- -------
Total Loans ........................ 143,841 12,573 8.74% 144,324 13,141 9.11% 184,788 16,356 8.85%
-------- ------- -------- ------- -------- -------
Federal Funds Sold ................. 7,513 280 3.73% 11,595 351 3.03% 8,386 308 3.67%
-------- ------- -------- ------- -------- -------
Total Earning Assets ................. 209,609 15,831 7.55% 191,963 15,576 8.11% 223,814 18,877 8.43%
Other Assets ....................... 20,698 22,333 19,838
-------- -------- --------
TOTAL ASSETS ......................... $230,307 $214,296 $243,652
======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposits:
Interest Bearing Checking ........ $ 73,049 $ 1,945 2.66% $ 65,313 $ 1,786 2.73% $ 71,616 $ 2,451 3.42%
Savings .......................... 41,629 1,267 3.04% 39,736 1,192 3.00% 31,532 1,266 4.01%
Time Deposits Over 100M .......... 4,220 178 4.22% 4,810 156 3.24% 9,324 421 4.52%
Time Deposits Under 100M ......... 53,797 2,172 4.04% 51,690 2,111 4.08% 72,923 3,888 5.33%
-------- ------- -------- ------- -------- -------
Total Interest Bearing Deposits .... 172,695 5,562 3.22% 161,549 5,245 3.25% 185,395 8,026 4.33%
Federal Funds Purchased ............ 0 0 0.00% 0 0 0.00% 0 0 0.00%
-------- ------- -------- ------- -------- -------
Total Interest Bearing Liabilities ... 172,695 5,562 3.22% 161,549 5,245 3.25% 185,395 8,026 4.33%
Demand Deposits .................... 40,135 39,032 41,909
Other Liabilities .................. 1,525 1,480 2,297
Shareholders' Equity ............... 15,952 12,235 14,051
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................. $230,307 $214,296 $243,652
======== ======== ========
Interest Income/Earning Assets ....... $209,609 $15,831 7.55% $191,963 $15,576 8.11% $223,814 $18,877 8.43%
Interest Expense/Earning Assets ...... $209,609 $ 5,562 2.65% $191,963 $ 5,245 2.73% $223,814 $ 8,026 3.59%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Effective Interest Differential ...... $10,269 4.90% $10,331 5.38% $10,851 4.84%
------- ---- ------- ---- ------- ----
Net Interest Spread (4) .............. 4.33% 4.86% 4.10%
Interest Earning Assets/Interest
Earning Liabilities ................ 121% 119% 121%
</TABLE>
54
<PAGE>
Changes in Net Interest Income Volume and Rate Variance
The following table sets forth changes in net interest income attributable to
changes in volume (average balances) or to changes in average rates for interest
earning assets and interest bearing liabilities.
The change in net interest income (expense) due to rate\volume variance has been
allocated to the change due to volume and change due to rate in proportion to
the relationship of the absolute dollar amounts of the change in each.
<TABLE>
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID (in thousands):
<CAPTION>
1994 Compared to 1993 1993 Compared to 1992
Increase (decrease) due to: Increase (decrease) due to:
Volume Rate Net Volume Rate Net
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Taxable Investment Securities ............... $1,100 ($206) $894 $ 949 ($1,078) ($ 129)
Non Taxable Investment Securities ........... 0 0 0 0 0 0
Loans ....................................... (44) (524) (568) (3,708) 493 (3,215)
Federal Funds Sold .......................... (212) 142 (70) 80 (37) 43
------ ----- ---- ------- ------- -------
Total Interest Earning Assets ............... $ 844 ($588) $256 ($2,679) ($ 622) ($3,301)
====== ===== ==== ======= ======= =======
Interest Bearing Checking ................... $ 204 ($ 45) $159 ($ 203) ($ 462) ($ 665)
Savings Deposits ............................ 57 18 75 (2,213) 2,139 (74)
Time Deposits Over $100,000 ................. (15) 37 22 (168) (97) (265)
Time Deposits Under $100,000 ................ 85 (24) 61 (985) (792) (1,777)
Capital Lease ............................... 0 0 0 0 0 0
Federal Funds Purchased ..................... 0 0 0 0 (2) (2)
------ ----- ---- ------- ------- -------
Total Interest Bearing Liabilities .......... $ 331 ($14) $317 ($3,569) $ 786 ($2,783)
====== ==== ==== ======= ====== =======
</TABLE>
55
<PAGE>
Provision for Possible Loan Losses
Old York determines the provision for possible loan losses through a
regular review of the loan portfolio. Factors such as declining trends, the
volume of loan concentrations, adverse situations that may affect the borrowers
ability to pay, prior loss experience within the various categories of the
portfolio and current economic conditions are considered when reviewing the loan
portfolio. Loans greater than $300,000 are analyzed individually by Old York's
Loan Review Committee. The adequacy of the loan loss allowance is reviewed
monthly by the Board of Directors.
The provision for possible loan losses totaled $2.5 million for the year
ended December 31, 1994, which was a $521,000 increase from the $2.0 million
reported for the year ended December 31, 1993. The higher provision of 1994
resulted from a deterioration in Old York's commercial loan and commercial real
estate portfolios as well as Old York's anticipated bulk sale of certain
nonperforming loans. At December 31, 1994, management believes the allowance for
possible loan losses is adequate for losses inherent in the loan portfolio at
that date. However, there can be no assurance that if asset quality deteriorates
in future periods, substantial additional provisions to the allowance for
possible loan losses will be required.
The provision for possible loan losses totaled $2.0 million in 1993
compared to $4.2 million in 1992. Old York experienced deterioration in its
commercial loan and commercial real estate loan portfolios in 1992, and,
therefore, the provisions in 1992 was at an historically high level. In
addition, partially as a result of substantial charge-offs during 1992 and 1991,
and the results of examinations by the FDIC and the Pennsylvania Department of
Banking, Old York's regulators required Old York to record substantial
provisions for possible loan losses in the second quarter of 1992. The provision
of $3.1 million provided by Old York in the second quarter of 1992, primarily
represented an increase in Old York's unallocated (i.e. general) reserves.
Other Income
The following table sets forth, for the periods indicated, the major
components of other income:
Year Ended December 31,
---------------------------
1994 1993 1992
---- ---- ----
(Dollars in Thousands)
Gain on sale of investment securities ...... $ 0 $ 491 $ 45
Service charges on deposit accounts ........ $1,676 $1,804 $1,915
Trust department income .................... $ 7 $ 22 $ 14
Other income ............................... $ 83 $ 39 $ 49
------ ------ ------
Total ................................. $1,766 $2,356 $2,023
====== ====== ======
For the year ended December 31, 1994, total other income decreased $590,000
to $1.8 million over total other income of $2.4 million for the year ended
December 31, 1993. The decrease is associated with a gain on sale of investment
securities of $491,000 which resulted from the sale of U.S. Treasury securities
in 1993. Service charges on deposit accounts decreased due to a higher earnings
credit during 1994, used to offset service charges related to certain demand
accounts.
The decline in service charges on deposit accounts between 1992 and 1993
was attributed to a decline in deposit accounts.
56
<PAGE>
Other Expenses
The following table sets forth, for the periods indicated, the major
components of other expenses:
Year Ended December 31,
----------------------------
1994 1993 1992
---- ---- ----
(Dollars in Thousands)
Salaries and wages ......................... $ 4,053 $ 3,580 $ 3,572
Employee benefits .......................... 953 950 935
Occupancy .................................. 1,192 1,288 1,242
Equipment .................................. 848 729 761
Net Loss on holding foreclosed assets ...... 2,130 1,165 1,306
FDIC insurance ............................. 587 611 532
Printing and stationery .................... 249 217 239
Legal ...................................... 519 350 803
Postage .................................... 222 204 193
Taxes other than income .................... 194 213 200
Other ...................................... 1,767 1,316 1,826
------- ------- -------
Total ................................ $12,714 $10,623 $11,609
======= ======= =======
Other expenses totaled $12.7 million for the year ended December 31, 1994,
representing an increase of $2.1 million or 19.7% from the $10.6 million of
other expense incurred for the same period in 1993. Salary and employee benefit
expenses reflected increases related to increased staffing cost associated with
the development of the retail business as well as merit increases. Additionally,
salary and wages included $183,000 in expense attributed to the executive
options associated with the announced merger of Old York with Midlantic.
Occupancy expense, consisting of costs related to office rentals and branch
maintenance decreased $96,000 as a result of decreases in rent and certain
operating efficiencies. The net loss on holding foreclosed assets was $2.1
million for the year ended December 31, 1994, compared with $1.2 million for the
same period in 1993. This increase was the result of a higher level of declines
in the market value of OREO in 1994, which required an addition to the provision
for possible losses on real estate owned. Legal expense increased $169,000
related to expenses associated with the merger agreement announced by Old York
in December, 1994. Other expenses reflected a $451,000 increase, as a result of
new retail loan development as well as expenses associated with the Midlantic
merger.
Other expenses totaled $10.6 million for the year ended December 31, 1993,
representing a decrease of $1 million or 8.5% from the $11.6 million of other
expense incurred for the same period in 1992. Salary and Employee benefit
expenses reflected minimal increases as the Bank reduced certain costs to offset
the increased staffing in business areas. The net loss on holding foreclosed
assets was $1.2 million for the year ended December 31, 1993, compared with $1.3
million for the same period in 1992. This slight decrease was the result of a
higher level of decline in the market value of OREO in 1992, which required an
addition to the provision for possible losses on real estate owned. FDIC
insurance expense increased $79,000 as a result of an increase in the assessment
rate. Legal expense decreased $453,000 due to the substantial expense of
defending a lawsuit in 1992. Other expenses reflected a $494,000 decline, as a
result of management's efforts to control operating expenses.
57
<PAGE>
Income Taxes
Old York adopted Financial Accounting Standards Board ("FASB") Statement
No. 109 ("SFAS 109") on January 1, 1993. Income taxes for 1994 were attributable
to the alternative minimum tax. The reduction in taxes from 1993 is the result
of the net loss for 1994.
Income tax expense of $724,000 was recorded for 1992, as the result of Old
York not being able to record an income tax benefit for 1992, due to a
limitation on its net operating loss carryback for financial reporting purposes.
In addition, Old York evaluated its ability to realize its deferred tax asset,
and determined that the deferred tax asset should be written off, thus creating
the 1992 income tax expense.
The following table summarizes Old York's Return on Assets (ROA), Return on
Equity (ROE), and other selected ratios for the years ended December 31, 1994.
58
<PAGE>
<TABLE>
RETURN ON EQUITY AND ASSETS
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets ................ (1.52)% (0.19)% (1.75)% Percentage of Net income (loss)
to average total assets
Return on average equity ................ (21.93)% (3.30)% (30.42)% Percentage of Net income (loss)
to average equity
Dividend payout ratio ................... -- -- -- Percentage of cash dividends
declared per share divided by
net income per share
Average equity to average assets ........ 6.93% 5.71% 5.77% Average equity divided by
====== ====== ====== average assets
</TABLE>
Financial Condition
At December 31, 1994, Old York's total assets were $231.2 million, which
represented an increase of $7.6 million or 3.4% from the $223.6 million reported
at December 31, 1993. This increase in total assets consisted of an increase in
loans outstanding as well as an increase in the level of investment securities.
These improvements were partially offset by a decline in federal funds sold.
INVESTMENTS
The book value of investment securities at the dates indicated are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
U.S. Government Obligations ....................................... $57,862 $48,610 $33,178
State and Political Subdivisions .................................. 100 100 100
Other Bonds, Notes and Debentures ................................. 255 363 172
Less: Unrealized Loss on Investment Securities .................... (269) 0 0
------- ------- -------
Total ........................................................ $57,948 $49,073 $33,450
======= ======= =======
</TABLE>
Investment securities increased $8.9 million or 18.1% from $49.1 million at
December 31, 1993 to $57.9 million at December 31, 1994, as excess federal funds
were reinvested in securities. Investment securities are a source of liquidity
as well as an alternative source of income for funds which have not been
employed in loan originations. At December 31, 1994, Old York has identified
investment securities that will be held for indefinite periods of time,
including securities that will be used as part of Old York's asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayments and similar factors. The securities are classified as
available for sale and are accounted for on a market value basis with changes in
value recorded as an adjustment to shareholders' equity. These securities are
primarily U.S. Government Treasury and agency securities with book and market
values of $7.2 million and $7.0 million respectively.
The following table shows the maturities of investment securities at
amortized cost, at December 31, 1994, the weighted average yields (for tax
exempt obligations on a fully taxable basis of such securities in thousands)
59
<PAGE>
<TABLE>
<CAPTION>
Within One After One But After Five But After Ten
Year Within Five Within Ten Years
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
U.S. Government Obligations
Book Value ............................... $2,000 $16,054 $10,356 $29,452
Yield .................................... 4.04% 5.19% 5.63% 5.40%
State and Political Subdivisions
Book Value ............................... 100
Yield .................................... 8.87%
Other Equity Securities
Book Value ............................... 255
Yield .................................... 8.06%
Total Book Value ........................... $2,255 $16,054 $10,356 $29,552
Total Yield ................................ 4.49% 5.19% 5.63% 5.41%
==== ==== ==== ====
</TABLE>
All yields represent weighted average yields expressed on a tax equivalent
basis. They are calculated on the basis of cost adjusted for amortization of
premium and accretion of discount and effective yields weighted for the
scheduled maturity of each security. The taxable equivalent adjustment
represents the difference between annual income from tax exempt obligations and
the taxable equivalent of such income at the standard 34% tax rate (derived by
dividing tax exempt interest by .66)
60
<PAGE>
Loan Portfolio
Composition.
The following table sets forth Old York's loans by major categories at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial and financial $ 11,125 $ 14,899 $ 23,742 $ 39,546 $ 50,802
Real estate mortgage(1) ........................ $103,361 $109,074 $114,827 $133,594 $112,342
Real estate construction ....................... $ 4,540 $ 3,352 $ 10,198 $ 15,434 $ 17,924
Consumer and other ............................. $ 29,248 $ 12,751 $ 5,133 $ 11,652 $ 25,620
-------- -------- -------- -------- --------
Loans net of unearned income
and deferred fees ............................ $148,274 $140,076 $153,900 $200,226 $206,688
======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) A significant portion of these loans are commercial real estate loans.
Total loans net of deferred fees and unearned income at December 31, 1994,
totaled $148.3 million, an increase of $8.2 million or 5.9% from $140.1 million
at December 31, 1993. Consumer and other loans increased $16.5 million as Old
York has emphasized consumer auto loan originations. Partially offsetting this
increase were the declines in the real estate and mortgage loan portfolios
resulting from Old York de-emphasizing this portion of the business primarily as
a result of market conditions. Additionally, the commercial loan portfolio
declined $3.8 million as principal repayments outpaced new loan originations.
The amount of loans outstanding by category at December 31, 1994, which are
due in (i) one year or less, (ii) more than one year through five years, and
(iii) over five years, are shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates. The
numbers under the columns entitled "Fixed Interest Rates" and "Adjustable
Interest Rates" exclude loans that mature within one year. In addition, the loan
maturity table is based upon contractual loan terms. In the ordinary course of
business, loans maturing within one year are often renewed, in whole or in part,
as to principal amount, at interest rates prevailing at the date of renewal.
61
<PAGE>
<TABLE>
<CAPTION>
One Year But Fixed
Within Five Over Five Interest Adjustable
Within One Year Years Years Total Rates Interest Rates
--------------- ------------ --------- ----- -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Construction ............. $ 3,177 $ 1,363 $ 0 $ 4,540 $ 60 $ 1,303
Mortgage ................. $16,165 $17,088 $70,108 $103,361 $41,152 $46,044
Commercial ................. $ 6,184 $ 3,158 $ 1,782 $ 11,124 $ 2,276 $ 2,664
</TABLE>
At December 31, 1994, 53.5% of total real estate and commercial loans with
maturity dates beyond one year carried floating rates compared to 55.5% at
December 31, 1993. At December 31, 1994 and December 31, 1993, the total amount
of extensions of credit by Old York to all of its directors and executive
officers and to any of their associates, affiliates or related companies was
approximately $8.9 million or 71.3% and $10.5 million or 64.6% respectively, of
Old York's equity capital at those respective dates.
Old York 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.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amount of those instruments reflects the extent of involvement Old York
has in particular classes of financial instruments. The total contract amount of
commitments to extend credit at December 31, 1994 was $24.2 million and standby
letters of credit totaled $747,000.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. Old York holds collateral
supporting those letters of credit commitments for which collateral is deemed
necessary. Approximately 70% of the total letters of credit at December 31,
1994 were collateralized.
Non-Performing Assets
---------------------
At December 31, 1994, Old York's non-performing assets (consisting of loans
on non-accrual status, restructured loans and foreclosed real estate, including
in-substance foreclosures) totaled $14.7 million or 9.60% of total loans and
OREO. This compares to $16 million or 14.2% of total loans and OREO at December
31, 1993.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total loan delinquency (past due 30 to 89 days) ....... $ 5,796 $ 4,319 $ 3,298 $ 7,946 $ 9,428
======= ======= ======= ======= =======
Past Due 90 days and still accruing interest .......... 0 0 143 332 787
======= ======= ======= ======= =======
Total non-accrual loans ............................... 6,872 4,585 5,215 10,124 8,964
Total restructured loans .............................. 2,538 3,010 2,715 2,681 1,182
Total Other Real Estate Owned ......................... 5,300 8,380 9,404 9,650 7,546
------- ------- ------- ------- -------
Total non-performing assets ........................... $14,710 $15,975 $17,334 $22,455 $17,692
======= ======= ======= ======= =======
</TABLE>
62
<PAGE>
Non-Accrual Loans
Non-accrual loans were $6.9 million at December 31, 1994, compared with
$4.6 million at December 31, 1993. The Bank has a policy that generally accrual
of interest will be discontinued when the principal or interest of a loan (with
the exception of installment loans) is in default for 90 days or more. Reversal
of interest accrued prior to the completion of the 90 day period is not required
if the principal and interest are well secured and in the process of collection.
Management has attempted to identify substantially all problem loans in its
portfolio, all of which are included in non-performing categories at year end
1994. Total non-accrual loans do not take into consideration the amount of and
quality of pledged collateral.
The Bank grants business, commercial, and residential loans to customers
throughout the state. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the real estate economic sector. Non-accrual Real Estate loans
approximated $4,801,000, $3,593,000, $2,630,000, $2,256,000 and $3,275,000 as of
December 1994, 1993, 1992, 1991, 1990 respectively.
If interest has been recorded at the original rate on non-accrual loans,
such interest would have approximated $827,000, $767,000, $1,206,000,
$1,308,000, and $812,000 for the years ended December 31, 1994, 1993, 1992,
1991, and 1990 respectively. Interest income on such loans, which is recorded
when received, amounted to approximately $33,000, $73,000, $522,000, $86,000,
and $426,000 for the years ended December 31, 1994, 1993, 1992, 1991, and 1990
respectively.
Restructured Loans
There was no significant change in the amount of restructured loans from
December 31, 1993 to December 31, 1994. These loans total $2.5 million or 1.7%
of the total loans at December 31, 1994.
Other Real Estate Owned
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as OREO until it is sold. The OREO is
initially recorded at the lower of the related loan balance or fair value of the
property less costs of disposal, at the date acquired. Other real estate held
for sale also consists of loans "in-substance" foreclosed, which are accounted
for as a foreclosed property even though actual foreclosure has not occurred.
These assets are initially recorded at the lower of the related loan balance or
the fair value of the property at the time the loan is deemed "in-substance"
foreclosed. Although the collateral underlying the loans has not been
repossessed, the borrower has little or no equity in the collateral at its
current estimated fair value, and proceeds for repayment are expected to come
only from the operations or sale of collateral. At December 31, 1994 and
December 31, 1993, Old York had $2.2 million and $3.1 million, respectively, of
loans "in-substance" foreclosed.
Allowance for Possible Loan Losses
Old York determines the provision for possible loan losses through a
regular review of the loan portfolio. Factors such as declining economic trends,
the volume of non-performing loans, concentrations of credit risk, adverse
situations that may affect the borrowers' ability to pay, prior loss experience
within the various categories of the portfolio and current economic condition
are considered when reviewing the risks in the portfolio. Larger exposures are
analyzed individually. While management believes the allowance for possible loan
losses is currently adequate, future additions to the allowance may be necessary
based on changes in economic condition. The adequacy of the allowance is
reviewed monthly by the Board of Directors. Old York has no credit exposure to
foreign countries or foreign borrowers or highly leveraged transactions.
63
<PAGE>
The following table sets forth for each of the past five years, period-end
balances, changes in the allowance for possible loan losses and certain ratios
for the Years Ended December 31:
64
<PAGE>
OLD YORK ROAD BANCORP, INC.
SUMMARY OF LOAN LOSS EXPERIENCE
Years ended December 31,
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .................... $5,502 $4,044 $5,271 $3,963 $3,505
Charge Offs:
Commercial Loans ................................ 790 245 2,303 2,290 1,282
Real Estate Loans ............................... 1,982 435 3,143 562 980
Consumer Loans .................................. 224 22 39 28 292
------ ------ ------ ------ ------
Total Charge Offs ................................. 2,996 702 5,485 2,880 2,554
------ ------ ------ ------ ------
Less Recoveries
Commercial Loans ................................ 88 166 12 93 711
Real Estate Loans ............................... 135 19 50 0 0
Consumer Loans .................................. 31 22 3 22 174
------ ------ ------ ------ ------
Total Recoveries .................................. 254 207 65 115 885
------ ------ ------ ------ ------
Net Charge Offs ................................... 2,742 495 5,420 2,765 1,669
------ ------ ------ ------ ------
Addition to Allowance
Charged to Operations ........................... 2,474 1,953 4,222 5,273 2,127
------ ------ ------ ------ ------
"In-substance" Foreclosures ....................... (208) 0 (29) (1,200) 0
------ ------ ------ ------ ------
Balance at End of Period .......................... $5,026 $5,502 $4,044 $5,271 $3,963
====== ====== ====== ====== ======
Ratio of net charge offs during the period as a
percentage of average loans outstanding
during the period ............................... 1.91% 0.34% 2.93% 1.36% 0.83%
</TABLE>
<TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
1994 1993 1992 1991 1990
-------------- ------------- --------------- ------------- --------------
% of % of % of % of % of
Total Total Total Total Total
Amt Amt Amt Amt Amt Amt Amt Amt Amt Amt
--- ----- --- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans $2,181 43.39% $2,719 49.42% $1,862 46.04% $2,056 39.01% $1,834 46.28%
Consumer Loans 180 3.58% 206 3.74% 80 1.98% 105 1.99% 290 7.32%
Commercial Loans 2,665 53.03% 2,577 46.84% 2,102 51.98% 3,110 59.00% 1,839 46.40%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$5,026 100.00% $5,502 100.00% $4,044 100.00% $5,271 100.00% $3,963 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The allowance for credit losses includes an unallocated portion of the
allowance which is also allocated on a product level. This portion of the
reserve totaled $1,200,000, $1,800,000, $1,337,000, $886,000, and $283,000 for
the years ended December 31, 1994, 1993, 1992, 1991, and 1990 respectively.
65
<PAGE>
Management bases its judgement for determining the addition of the
allowance for loan losses which is charged to operating expense upon several
factors: Economic conditions, loan portfolio composition, past charge-off
experience and reports of examination of the loan portfolio by the Pennsylvania
State Banking Department and the Federal Deposit Insurance Corporation.
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors
for Impairment of a Loan." The standard requires that an impaired loan be
measured based upon the present value of expected future cash flows discounted
at the loan's effective interest rate, observable market price or fair value of
the collateral if the loan is collateral dependent. The standard as amended by
SFAS No. 118 issued late 1994 is effective for fiscal years beginning after
December 15, 1994. Old York intends to adopt the standard in its fiscal year
beginning January 1, 1995. As of December 31, 1994, Old York has not determined
the effect on its financial statements which will result from implementation of
these standards.
Deposits
Old York considers its current deposit base to be stable and generally
consumer oriented in nature. The deposit mix is generally equally distributed
among all products without significant concentrations. During the past three (3)
years, there was a distinct shift in Old York's deposit base out of large CDs
and toward "core" deposits (DDA's, NOWs, MMDAs, Savings). Nonetheless, Old York
still views its current CD portfolio to be stable, and primarily consumer in
nature.
Total deposits increased to $216.7 million at December 31, 1994 from $206.1
million at December 31, 1993. The increases in deposits is reflected as a $9.2
million increase in time deposits as well as an increase in NOW Accounts of $6.0
million. The increase in time deposits and NOW Accounts was partially offset by
decreases in savings and money market account deposits of $407,000 and $4.8
million respectively.
Old York maintains a minimal amount of certificates greater than $100,000
at December 31, 1994. Old York had $5.4 million of such deposits representing
8.7% of time deposits and 2.5% of total deposits.
The following is a breakdown by maturities of time certificates of deposits
of $100,000 or more as of December 31, 1994 (in thousands)
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------------------------------
Three Months Six Months
Three Months or Through Six Through Twelve Over Twelve
Less Months Months Months Total
--------------- ------------ -------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Amount $3,070 $1,200 $555 $603 $5,428
====== ====== ==== ==== ======
</TABLE>
Liquidity
Liquidity management is required to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
service payments, investment commitments, commercial and consumer loan demand,
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short-and
long-term borrowings and repurchase agreements. Regular loan payments are a
dependable source of funds, while the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and the level of interest rates.
At December 31, 1994, Old York maintained $14.7 million in cash and cash
equivalents in the form of cash and due from banks (after reserve requirements),
and overnight federal funds sold. Old York had $2.0 million of investment
securities (other than mortgage-backed securities and CMO's) scheduled to mature
within one year. This combined total of $16.7 million of liquid assets
represented approximately 7.2% of total assets at December 31, 1994, as compared
to $25.5 million or
66
<PAGE>
11.4% of the total assets at December 31, 1993. In addition, the Company
generates approximately $3.6 million of cash annually from the scheduled
amortization of its mortgage backed securities portfolio. Old York's average
loans to average deposit ratio declined from 71.95% at December 31, 1993, to
67.6% at December 31, 1994. Finally, Old York maintains federal funds lines of
credit with correspondent banks that total $9 million. Old York believes that
its liquidity is adequate.
Old York had outstanding commitments to extend credit of $24.2 million at
December 31, 1994. Since many commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Old York has available certain securities on deposit at the
Federal Reserve Bank of Philadelphia ("Philadelphia FED") which could be pledged
against borrowings at the Philadelphia FED discount window, if needed. However,
as a general rule, discount window credit is granted at the discretion of the
Philadelphia FED.
Asset/Liability Management
Management of interest rate sensitivity involves matching the maturity and
repricing dates of interest-earning assets with those of interest-bearing
liabilities in an effort to manage the impact of fluctuating interest rates on
net interest margins.
Old York's Asset/Liability Committee (the "Committee") generally meets four
(4) times a year to establish, communicate, coordinate and control
asset/liability management procedures. The purpose of the Committee is to
monitor the volume and mix of Old York's interest sensitive assets and deposits
consistent with Old York's overall liquidity, capital, growth, risk and
profitability goals.
Interest rate sensitivity is measured as the difference between the
percentage of assets and liabilities in Old York's existing portfolio that are
subject to repricing within specified time periods. These differences, known as
interest sensitivity gaps, are usually calculated cumulatively for blocks of
time.
Companies that are asset-sensitive (a positive gap) have more assets than
liabilities subject to repricing within specified time periods and these
companies are likely to benefit in periods of rising interest rates, but suffer
as rates decrease.
Old York's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This accomplished through the measurement of the relationship between interest
rate sensitive assets and interest rate sensitive liabilities. The goal of
maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through Old York's
asset/liability management program.
At December 31, 1994, Old York maintained a one year cumulative GAP of
negative $37.2 million or 17.62% of total interest earning assets. The effect of
this GAP position provided a negative mismatch which exposes Old York to
interest rate risk in a period of rising interest rates.
An interest sensitivity table is not a complete picture of the possible
effect of interest rate changes on net interest income. First, changes in the
general level of interest rates will not affect all categories of assets and
liabilities equally or simultaneously. Second, the table represents a one-day
position; variations occur daily as Old York adjusts it interest sensitivity
position throughout the year. Third, the repricing distribution of interest
sensitive assets on this table may not be indicative of the liquidity of those
assets. Finally, since this table is based on contractual maturities, it does
not include required principal payments or estimates of early principal payments
on residential mortgages, installment loans and investment securities. The
following table represents the Bank's repricing characteristic of it's interest
sensitive assets and liabilities.
67
<PAGE>
<TABLE>
BANK AND TRUST COMPANY OF OLD YORK ROAD
INTEREST RATE SENSITIVITY GAP
"DECEMBER 31, 1994"
<CAPTION>
LESS GREATER
THAN THAN
6 6 - 12 1 - 2 2 - 5 5
Assets: MONTHS MONTHS YEARS YEARS YEARS TOTAL
------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Securities:
US Treasuries & Agencies 3,501 19,965 5,083 10,970 18,343 57,862
State & Political
Subdivisions ......... 0 0 0 0 100 100
Other .................. 255 0 0 0 0 255
------- ------ ------ ------ ------ -------
Total Securities ......... 3,756 19,965 5,083 10,970 18,443 58,217
Federal Funds Sold ....... 4,400 0 0 0 0 4,400
------- ------ ------ ------ ------ -------
Loans:
All Other Loans,
Net Discounts
Where Applicable ...... 79,273 8,582 15,345 23,840 21,234 148,274
------- ------ ------ ------ ------ -------
Total Loans .............. 79,273 8,582 15,345 23,840 21,234 148,274
Repricable Assets ........ 87,429 28,547 20,428 34,810 39,677 210,891
====== ====== ====== ====== ====== =======
Liabilities:
MMDA's ................... 25,202 25,202
NOW's .................... 46,079 46,079
Savings .................. 39,201 39,201
-------
Total Core Deposits * .... 110,482 110,482
CD's ..................... 24,751 17,898 10,090 9,667 0 62,406
------- ------ ------ ------ ------ -------
Repriciable Liabilities .. 135,233 17,898 10,090 9,667 0 172,888
Asset Liability Gap ...... (47,804) 10,649 10,338 25,143 39,677 38,003
Gap/Assets ............... -22.67% 5.05% 4.90% 11.92% 18.81% 18.02%
Cummulative Gap .......... -22.67% -17.62% -12.72% -0.79% 18.02%
RSA/RSL .................. 0.65 0.76 0.84 0.99 1.22 1.22
</TABLE>
For purposes of calculating Interest Rate Sensitivity GAP, 100% of Core Deposits
are assumed to reprice within the first six months of an interest rate change.
Pre-payments of Loans and Securities are assumed to be $6.0 Million within the
one year time bucket.
The cummulative one year interest sensitive GAP is (17.62%), within the Bank's
guideline of a +/- 20.00%. However, the one year cummulative RSA/RSL ratio of
0.76 is not within the Bank's guidelines of 0.80 to 1.20.
68
<PAGE>
Capital Resources
The capital adequacy of Old York is reviewed on an ongoing basis by
management and the Board of Directors with respect to asset size, balance sheet
composition and risk profile characteristics which include asset quality,
interest rate risk and liquidity. An adequate capital base is important to
support growth and expansion, and to protect against unforeseen and unexpected
losses that cannot be covered by current earnings.
At December 31, 1994, total consolidated shareholders' equity totaled $12.5
million, a decrease of $3.8 million from December 31, 1993. This decrease was
due to the net loss of $3.5 million as well as an unrealized loss of 269,000 for
securities available for sale. This improvement was partially offset by the
reduction resulting from the net loss for the year.
Old York's leveraged and Risk Based Capital Ratio decreased from 7.51% and
11.6% at December 31, 1993 to 5.50% and 9.17% as of December 31, 1994,
respectively.
Old York is required to comply with the FRB's risk-based capital
guidelines. Pursuant to the FRB regulations, Old York is required to maintain
(i) Tier I risk-based capital equal to 4.0% of risk weighted assets and (ii)
total risk-based capital equal to 8.0% of risk weighted assets. In addition to
the risk-based capital guidelines, the FRB requires a bank holding company to
maintain a minimum leverage ratio (defined to be Tier I capital to average total
assets, net of intangible assets) of 3.0% for those bank holding companies which
have the highest regulatory examination ratings, with other institutions
required to maintain a ratio of at least 1.0% or 2.0% above the stated minimum.
The FRB has not specified any specific leverage ratio applicable to Old York,
but because the FDIC and the Department required the Bank to maintain a leverage
ratio of 6.0% by August, 1993 and 6.5% by February, 1994, Old York believes it
may be required to maintain the same leverage ratio.
The Bank is required to comply with risk-based capital guidelines
promulgated by the FDIC. Pursuant to the FDIC regulations, the Bank is required
to maintain a Tier I risk-based capital ratio and total risk-based capital ratio
of 4.0% and 8.0% respectively. Pursuant to the Regulatory Agreements, the Bank
was required to maintain a leverage ratio of 6.0% by August, 1993 and 6.5% by
February, 1994.
At December 31, 1994, Old York's and the Bank's Tier I capital amounted to
$12.8 million or 7.90% of risk weighted assets, its total risk-based capital
amounted to $14.9 million or 9.17% of risk weighted assets and Old York had a
leverage ratio of 5.50%. Old York and the Bank are in compliance with the
regulatory authorities mandated risk based capital requirements but are not in
compliance with the leveraged capital ratio.
Financial Condition - 1993 Versus 1992
At December 31, 1993, Old York's total assets were $223.6 million, which
represents an increase of $906,000 or .4% from the $222.7 million reported at
December 31, 1992. This increase in total assets consisted of a decline in loan
originations along with an increase in loan repayments, more than offset by an
increase in the level of investment securities and Federal Funds sold.
Investment securities increased $15.6 million or 46.7% from $33.4 million
at December 31, 1992, to $49.1 million at December 31, 1993, as loan repayments
were reinvested in securities. Investment securities are a source of liquidity
as well as an alternative source of income for funds which have not been
employed in loan originations. At December 31, 1993, Old York had identified
investment securities that will be held for indefinite periods of time,
including securities that will be used as part of Old York's asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayments and similar factors. The securities were classified as held
for sale and accounted for at the lower of cost or market value. These
securities were U.S. Government Treasury Securities with book and market values
of $8.2 million.
Total loans net of deferred fees and unearned income at December 31, 1993,
totaled $140.1 million, a decrease of $13.8 million or 9.0% from $153.9 million
at December 31, 1992. The
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decline in the real estate construction loan portfolio resulted from Old York
de-emphasizing this portion of the business primarily as a result of market
conditions. Additionally, the commercial and financial loan portfolio declined
$8.8 million as principal repayments outpaced new loan originations. Consumer
and other loans increased $7.7 million as Old York emphasized consumer auto loan
originations.
Deposits
Total deposits decreased to $206.1 million at December 31, 1993 from $210.4
million at December 31, 1992. The most significant change in deposits is
reflected in the $11.1 million decrease in time deposits resulting from Old York
pricing deposits to better conform its rates with the rates offered by its
competitors and the overall low market rate environment. The decrease in time
deposits was partially offset by increase in savings account deposits from $37.8
million at December 31, 1992 to $42.1 million at December 31, 1993 as a result
of Old York's marketing of these deposits products. Old York believed its plans
for marketing new products during 1993 provided increased opportunities for
moderate deposit growth.
December 31, 1993, total consolidated shareholders' equity totaled $16.3
million, an increase of $5.8 million from December 31, 1992. This increase was
due to a successful Community Rights Offering which netted Old York $6.2 million
in additional capital after issuance costs and broker fees. This improvement was
partially offset by the reduction resulting from the net loss for the year.
Recent Developments-Results of Operations, Fourth Quarter 1994
For the quarter ended December 31, 1994, Old York reported a net loss of
$671,000 or $.24 per share compared to a loss of $1.5 million or $.84 per share
for the same period in 1993. The fourth quarter 1994 loss resulted primarily
from expenses associated with the merger announced in December, 1994 with
Midlantic, a $13.3 billion bank holding company. These expenses approximated
$500,000.
For the quarter ended December 31, 1994, net interest income totaled $2.5
million representing a $175,000 increase compared to the same period in 1993.
The provision for loan losses totaled $150,000 resulting in a decrease of $1.2
million compared to the same period in 1993 due to the additional charges
associated with associated with the downgrading of certain loans and other real
estate required by state and federal banking agencies in 1993. Other expenses
were $3.5 million for 1994 an increase of $452,000 related expenses associated
with the merger.
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DESCRIPTION OF THE BUSINESS OF OLD YORK ROAD BANCORP, INC.
General
Old York Road Bancorp, Inc. ("Bancorp"), a Pennsylvania business
corporation, is a bank holding company, registered with and supervised by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Bancorp was incorporated on May 8, 1990, and commenced operations on January 2,
1991, upon consummation of the acquisition of all of the outstanding stock of
the Bank and Trust Company of Old York Road (the "Bank"). Since commencing
operations, Bancorp's business has consisted primarily of managing and
supervising the Bank, and its principal source of income, if any, has been
dividends paid by the Bank. Bancorp has one wholly-owned subsidiary, the Bank.
At December 31, 1994, Bancorp had total consolidated assets, deposits and
stockholders' equity of approximately $231,185,000, $216,673,000 and
$12,537,000, respectively.
The Bank was organized in 1952. The Bank is a Pennsylvania-chartered
banking institution, the deposits of which are insured by the Federal Deposit
Insurance Corporation (the "FDIC"). In 1964, the Bank established a trust
department. The Bank, having 13 full-service offices and two limited service
offices in Montgomery, Bucks and Philadelphia Counties, is a full service
commercial bank providing a wide range of services to individuals and small to
medium sized businesses in its Southeastern Pennsylvania market area, including
accepting time, demand, and savings deposits and making secured and unsecured
commercial, real estate and consumer loans.
Proposed Merger
On December 29, 1994 Bancorp, the Bank, Midlantic, and Midlantic's national
bank subsidiary, Midlantic Bank, National Association, executed an Agreement and
Plan of Merger (the "Agreement") providing for the merger (the "Merger") of
Bancorp with and into Midlantic. Pursuant to the Merger, Bancorp shareholders
will be entitled to receive either $10.00 in cash or 0.3721 of a share of
Midlantic's common stock in exchange for each share of Bancorp's common stock
that they own on the effective date of the Merger, subject to the limitations
and election and allocation provisions set forth in the Agreement, pursuant to
which no more than 49% of Bancorp's common stock may be exchanged for cash. If
the holders of more than 49% of Old York Common Stock elect cash, then the
shareholders so electing will receive a combination of cash and Midlantic Common
Stock in exchange for their shares of Bancorp Common Stock as determined in
accordance with the allocation procedures set forth in the Agreement. In
addition, under the Agreement the price which Bancorp shareholders are entitled
to receive in exchange for their shares of Old York Common Stock will be
adjusted downward if Bancorp does not meet certain minimum capital requirements.
No fractional shares of Midlantic Common Stock will be issued in the Merger.
Cash payments in exchange for shares of Old York Common Stock and in lieu of
fractional shares will be received without interest.
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Supervision and Regulation--Bancorp
Bancorp is subject to the jurisdiction of the Securities and Exchange
Commission (the "SEC") and of state securities laws administrators for matters
relating to the offering and sale of its securities. Bancorp is currently
subject to the SEC's rules and regulations relating to periodic and insider
reporting in accordance with Section 13 of the Securities Exchange Act of 1934.
Furthermore, Bancorp qualifies as a "small business issuer" as that term is
defined under Item 10 of Regulation S-B of the SEC, and has elected to make its
SEC filings under the disclosure requirements afforded to small business
issuers.
Bancorp is also subject to the provisions of the Bank Holding Company Act
of 1956, as amended ("Bank Holding Company Act"), and to supervision by the
Federal Reserve Board. The Bank Holding Company Act will require Bancorp to
secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than 5% of the voting shares of
substantially all of the assets of any institution, including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting shares of, or interest in, or substantially all of the assets of, any
bank located outside Pennsylvania unless such an acquisition is specifically
authorized by laws of the state in which such bank is located.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than 5% of the voting shares of any company engaged
in non-banking activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination, the Federal Reserve Board considers whether the performance of
these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of control of a
bank holding company, such as Bancorp, without prior notice to the Federal
Reserve Board. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a bank holding company or to
vote twenty-five percent (25%) (or ten percent (10%), if no other person or
persons acting in concert, holds a greater percentage of the Common Stock) or
more of Bancorp's Common Stock.
Bancorp is required to file an annual report with the Federal Reserve Board
and any additional information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may also
make examinations of Bancorp and any or all of its subsidiaries. Further, under
Section 106 of the 1970 amendments to the Bank Holding Company Act and the
Federal Reserve Board's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of credit or provision of any property or
services. The so-called "Anti-tie-in" provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
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Permitted Non-Banking Activities
The Federal Reserve Board permits bank holding companies to engage in
non-banking activities so closely related to banking, managing or controlling
banks as to be a proper incident thereto. While the types of permissible
activities are subject to change by the Federal Reserve Board, the principal
non-banking activities that presently may be conducted by a bank holding company
are:
1. Making, acquiring or servicing loans and other extensions of credit for
its own account or for the account of others, such as would be made by the
following types of companies: consumer finance, credit card, mortgage,
commercial finance and factoring;
2. Operating as an industrial bank, Morris Plan or industrial loan company
in the manner authorized by state law so long as the institution does not accept
demand deposits or make commercial loans;
3. Operating as a trust company in the manner authorized by federal or
state law so long as the institution does not make certain types of loans or
investments or accept deposits, except as may be permitted by the Federal
Reserve Board;
4. Subject to certain limitations, acting as an investment or financial
advisor to investment companies and other persons;
5. Leasing personal and real property or acting as agent, broker, or
advisor in leasing property, provided that it is reasonably anticipated that the
transaction will compensate the lessor for not less than the lessor's full
investment in the property and provided further that the lessor may rely on
estimated residual values of up to 100% of the acquisition cost of the leased
property;
6. Making equity and debt investments in corporations or projects designed
primarily to promote community welfare;
7. Providing to others financially oriented data processing or bookkeeping
services;
8. Subject to certain limitations, acting as an insurance principal, agent
or broker in relation to insurance for itself and its subsidiaries or for
insurance directly related to extensions of credit by the bank holding company
system;
9. Owning, controlling or operating a savings association, if the savings
association engages only in deposit taking activities and lending, and other
activities permissible for bank holding companies;
10. Providing courier services of a limited character;
11. Subject to certain limitations, providing management consulting advice
to nonaffiliated banks and nonbank depository institutions;
12. Selling money orders having a face value of $1,000 or less, travelers'
checks and United States savings bonds;
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13. Performing appraisals of real estate and personal property, including
securities;
14. Subject to certain conditions, acting as intermediary for the financing
of commercial or industrial income-producing real estate by arranging for the
transfer of the title, control and risk of such a real estate project to one or
more investors;
15. Subject to certain limitations, providing full-service brokerage and
financial advisory activities; and selling, solely as an agent or broker for
customers, shares of investment companies advised by an affiliate of the bank
holding company or providing investment advice to customers about the purchase
and sale of shares of investment companies advised by an affiliate of the bank
holding company;
16. Underwriting and dealing in obligations of the United States, general
obligations of states and their political subdivisions and other obligations
such as bankers' acceptances and certificates of deposits;
17. Subject to certain limitations, providing by any means, general
information and statistical forecasting with respect to foreign exchange
markets; advisory services designed to assist customers in monitoring,
evaluating and managing their foreign exchange exposures; and certain
transactional services with respect to foreign exchange;
18. Subject to certain limitations, acting as a futures commission merchant
in the execution and clearance on major commodity exchanges of futures contracts
and options on futures contracts for bullion, foreign exchange, government
securities, certificates of deposit and other money market instruments;
19. Subject to certain limitations, providing commodity trading and futures
commission merchant advice, including counsel, publications, written analysis
and reports;
20. Providing consumer financial counseling that involves counseling,
educational courses and distribution of instructional materials to individuals
on consumer-oriented financial management matters, including debt consolidation,
mortgage applications, bankruptcy, budget management, real estate tax shelters,
tax planning, retirement and estate planning, insurance and general investment
management, so long as this activity does not include the sale of specific
products or investments;
21. Providing tax planning and preparation advice such as strategies
designed to minimize tax liabilities and includes, for individuals, analysis of
the tax implications of retirement plans, estate planning and family trusts. For
a corporation, tax planning includes the analysis of the tax implications of
mergers and acquisitions, portfolio mix, specific investments, previous tax
payments and year-end tax planning. Tax preparation involves the preparation of
tax forms and advice concerning liability based on records and receipts supplied
by the client;
22. Providing check guaranty services to subscribing merchants;
23. Subject to certain limitations, operating a collection agency; and
24. Operating a credit bureau that maintains files on the past credit
history of consumers and providing such information to a lender that is
considering a borrower's application for credit, provided that the credit bureau
does not grant preferential treatment to an affiliated bank in the bank holding
company system.
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Bancorp did not and does not intend to commence or conduct any of the
above-delineated activities during calendar years 1994 and 1995, respectively.
Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended (the "Code"),
Bancorp is permitted to control an unlimited number of banks. However, Bancorp
would be required, under the Bank Holding Company Act, to obtain the prior
approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank, if, after such acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank. The Bank Holding Company Act does not permit the Federal Reserve Board to
approve the acquisition by Bancorp or any subsidiary of any voting shares of, or
interest in, or all or substantially all of the assets of, any bank located
outside the Commonwealth of Pennsylvania, unless the acquisition is specifically
authorized by the laws of the state in which that bank is located.
In addition, the Code authorizes reciprocal interstate banking without any
geographic limitation. Reciprocity between states exists when a foreign state's
law authorizes Pennsylvania bank holding companies to acquire banks or bank
holding companies located in that state on terms and conditions substantially no
more restrictive than those applicable to such an acquisition by a bank holding
company located in that state. Assuming that the state banking statutes in
Alaska, Delaware, Idaho, Indiana, Kentucky, Maine, Maryland, Michigan, New
Jersey, Ohio, New York, Oregon, Rhode Island, Utah, Vermont, Washington, West
Virginia and Wyoming are not amended, interstate ownership of banks and bank
holding companies in each of those states and Pennsylvania is authorized. Other
states are also considering legislation to authorize reciprocal interstate
banking. Congress may pass interstate banking legislation that would accelerate
the authorization for interstate banking.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary bank. Certain
changes of potential significance to Bancorp which have been enacted recently
and others which are currently under consideration by Congress or various
regulatory agencies are discussed below.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e., FIRREA,
was enacted into law in order to restructure the regulation of the thrift
industry, to address the financial condition of the Federal Savings and Loan
Insurance Corporation and to enhance the supervisory and enforcement powers of
the Federal bank and thrift regulatory agencies. The FDIC, as the primary
Federal regulator of the Bank, is primarily responsible for supervision of the
Bank. The FDIC has far greater flexibility to impose supervisory agreements on
an
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institution that fails to comply with its regulatory requirements, particularly
with respect to the capital requirements. Possible enforcement actions include
the imposition of a capital plan, termination of deposit insurance and removal
or temporary suspension of an officer, director or other institution-affiliated
party.
Under FIRREA, civil penalties are classified into three levels, with
amounts increasing with the severity of the violation. The first tier provides
for civil penalties of up to $5,000 per day for any violation of law or
regulation. A civil penalty of up to $25,000 per day may be assessed if more
than a minimal loss or a pattern of misconduct is involved. Finally, a civil
penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for continuing
violations or up to the actual amount of gain or loss. These monetary penalties
may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991
General. The FDICIA was enacted in December, 1991, and reformed a variety
of bank regulatory laws. Some of these reforms have a direct impact on the Bank.
Certain of these new provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site examinations are
required for all FDIC-insured institutions with assets of $500 million or more
for bank holding companies with $500 million or more in assets, the independent
accountants of such companies shall attest to the accuracy of management's
report. Such accountants shall also monitor management's compliance with
governing laws and regulations. Such companies are also required to select an
independent audit committee composed of outside directors who are independent of
management, to review with management and the independent accountants the
reports that must be submitted to the appropriate bank regulatory agencies. If
the independent accountants resign or are dismissed, written notification must
be given to the FDIC and to the appropriate federal and state bank regulatory
agency.
Prompt Corrective Action. In order to reduce losses to the deposit
insurance funds, the FDICIA established a format to more closely monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDICIA established five "Capital" categories. They are: (1)
well-capitalized; (2) adequately capitalized; (3) undercapitalized; (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital measures is to impose more scrutiny and operational
restrictions on depository institutions as they descend the capital categories
from well capitalized to critically undercapitalized.
On September 15, 1992, the FDIC, the Office of the Comptroller of the
Currency (OCC), the FRB and the Office of Thrift Supervision issued jointly the
final regulations relating to these capital categories and prompt corrective
action. The regulations became effective December 19, 1992. These capital
measures for prompt corrective action are defined as follows:
A "well-capitalized" institution would be one that has at least a 10% total
risk-based capital ratio, a 6% or greater Tier I risk-based capital ratio, a 5%
or greater Tier I leverage capital ratio, and is not subject to any written
order or final directive by the FDIC to meet and maintain a specific capital
level.
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An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or more of the
required minimum capital levels for an "adequately capitalized" institution. An
"undercapitalized" institution must file a capital restoration plan and is
automatically subject to restrictions on dividends, management fees and asset
growth. In addition, the institution is prohibited from making acquisitions,
opening new branches or engaging in new lines of business without the prior
approval of its primary federal regulator. A number of other discretionary
restrictions also may be imposed on a case-by-case basis, and harsher
restrictions that otherwise would apply to "significantly undercapitalized"
institutions may be imposed on an "undercapitalized" institution that fails to
file or implement an acceptable capital restoration plan.
A "significantly undercapitalized" institution would have a total
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a Tier I leverage capital ratio of less than 3%, as the case
may be. Institutions in this category would be subject to all the restrictions
that apply to "undercapitalized" institutions. Certain other mandatory
prohibitions also would apply, such as restrictions against the payment of
bonuses or raises to senior executive officers without the prior approval of the
institution's primary federal regulator. A number of other restrictions may be
imposed.
A "critically undercapitalized" institution would be one with a tangible
equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses certain other provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.
At a minimum, any institution that becomes "critically undercapitalized" is
prohibited from taking the following actions without the prior written approval
of its primary federal supervisory agency: engaging in any material transactions
other than in the usual course of business; extending credit for highly
leveraged transactions ("HLTs"); amending its charter or bylaws; making any
material changes in accounting methods; engaging in certain transactions with
affiliates; paying excessive compensation or bonuses; and paying interest on
liabilities exceeding the prevailing rates in the institution's market area. In
addition, a "critically undercapitalized" institution is prohibited from paying
interest or principal on its subordinated debt and is subject to being placed in
conservatorship or receivership if its tangible equity capital level is not
increased within certain mandated time frames.
At any time, an institution's primary federal supervisory agency may
reclassify it into a lower capital category. All institutions are prohibited
from declaring any dividends, making any other capital distribution, or paying a
management fee if it would result in downward movement into any of the three
undercapitalized categories. The FDICIA provides an exception to this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial condition, if the appropriate federal supervisory
agency has consulted with the FDIC and approved the redemption.
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The regulation requires institutions to notify the FDIC following any
material event that would cause such institution to be placed in a lower
category. Additionally, the FDIC monitors capital levels through call reports
and examination reports.
Deposit Insurance. On January 1, 1993, the FDIC began to implement a
risk-related premium schedule for all insured depository institutions that will
result in the assessment of premiums based on capital and supervisory measures,
with the strongest institutions paying premiums of $.23 for every $100 of
deposits and the weakest institutions paying up to $.31 for every $100 of
deposits. The risk-related premium schedule was implemented during 1993; the
permanent system, currently proposed by the FDIC, will be implemented commencing
January 1, 1994.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
will assign each institution to one of three capital groups (well-capitalized,
adequately capitalized or undercapitalized, in each case as these terms are
defined for purposes of prompt corrective action rules described above) and
further assign such institution to one of three subgroups within a capital group
corresponding to the FDIC's judgment of its strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.00% or
greater, a Tier I capital to risk-adjusted assets ratio of 5% or greater and a
Tier I leverage ratio of 5% or greater, are assigned to the well-capitalized
group. After the risk-based premium schedule is fully phased in, the weakest
institutions will face semi-annual premium increases until their premium
classification is upgraded or they merge with a stronger institution or fail.
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC and other
federal banking agencies adopted real estate lending guidelines which would set
loan-to-value ("LTV") ratios for different types of real estate loans. A LTV
ratio is generally defined as the total loan amount divided by the appraised
value of the property at the time the loan is originated. If the institution
does not hold a first lien position, the total loan amount would be combined
with the amount of all senior liens when calculating the ratio. These guidelines
became effective on March 19, 1993. In addition to establishing the LTV ratios,
the guidelines require all real estate loans to be based upon proper loan
documentation and a recent appraisal of the property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a separate
subtitle called the "Bank Enterprise Act of 1991." The purpose of this Act is to
encourage banking institutions to establish "basic transaction services for
consumers" or so-called "lifeline accounts." The FDIC assessment rate is reduced
for all lifeline depository accounts. This Act establishes ten (10) factors
which are the minimum requirements to qualify as a lifeline depository account.
Some of these factors relate to minimum opening and balance amounts, minimum
number of monthly withdrawals, the absence of discriminatory practices against
low-income individuals and minimum service charges and fees. More over, the
Housing and Community Development Act of 1972 requires that the FDIC's
risk-based assessment system include provisions regarding life-line accounts.
Assessment rates applicable to life-line accounts are to be established by FDIC
rule.
Truth in Savings Act. The FDICIA also contains the Truth in Savings Act
("TSA"). The FRB adopted regulations ("Regulation DD") under the TSA that were
effective on June 21, 1993. The purpose of TSA is to require the clear and
uniform disclosure of the rates of interest which are payable on deposit
accounts by depository institutions and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful comparison between the
competing claims of banks with regard to deposit accounts and products. In
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addition to disclosures to be provided when a customer establishes a deposit
account, TSA requires the depository institution to include, in a clear and
conspicuous manner, the following information with each periodic statement of a
deposit account: (1) the annual percentage yield earned, (2) the amount of
interest earned, (3) the amount of any fees and charges imposed and (4) the
number of days in the reporting period. TSA allows for civil lawsuits to be
initiated by customers if the depository institution violates any provision or
regulation under TSA.
Regulatory Capital Requirements
The following table presents Bancorp's capital ratios at December 31, 1994:
Tier I Capital................................................ $ 12,792,000
Tier II Capital............................................... 2,062,000
Total Capital................................................. 14,854,000
Total Average Quarterly Assets................................ $232,664,000
Total Risk-Weighted Assets(1)................................. $162,020,000
Tier I Risk-Based Capital Ratio(2)............................ 7.90%
Required Tier I Risk-Based Capital Ratio...................... 4.00%
Excess Tier I Risk-Based Capital Ratio........................ 3.90%
Total Risk-Based Capital Ratio(3)............................. 9.17%
Required Total Risk-Based Capital Ratio....................... 8.00%
Excess Total Risk-Based Capital Ratio......................... 1.17%
Tier I Leverage Ratio(4)...................................... 5.50%
Required Tier I Leverage Ratio(5)............................. 6.50%
(Deficit) Tier I Leverage Ratio............................... (1.00%)
- ------------------------------
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital to
Total Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier II
Capital to Total Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted
Total Average Quarterly Assets.
(5) In accordance with the Regulatory Agreements, the Bank must maintain a 6.5%
Tier I Leverage Ratio by February, 1994. Although the FRB has not set a
leverage ratio for Bancorp, Bancorp believes it would also be required to
maintain these leverage ratios. There can be no assurance that Bancorp or
the Bank will be able to maintain these minimum ratios for any length of
time.
Bancorp's ability to maintain the required levels of capital is
substantially dependent upon the success of Bancorp's capital and business
plans, the impact of future economic events on Bancorp's loan customers, and
Bancorp's ability to manage its interest rate risk and control its growth and
other operating expenses.
Effect of Government Monetary Policies
The earnings of Bancorp are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.
The monetary policies of the Federal Reserve Board have had, and will
likely continue to have, an important impact on the operating results of
commercial banks through its power to implement
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national monetary policy in order, among other things, to curb inflation or
combat a recession. The Federal Reserve Board has a major effect upon the levels
of bank loans, investments and deposits through its open market operations in
United States government securities and through its regulations of, among other
things, the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal policies.
Memorandum of Understanding between Bancorp and the Federal Reserve Board
("FRB")
A Memorandum of Understanding ("MOU") was entered into on December 8, 1992,
between the Federal Reserve Bank of Philadelphia ("Philadelphia FED"), acting
under delegated authority from the FRB, and Bancorp. The MOU requires that the
Bank and Bancorp take certain actions as defined, subject to regulatory
approval, to provide for safe and sound banking practices and improve the
overall financial condition of the Bank and Bancorp. The key provisions of the
MOU include requirements to:
1. Seek prior written approval from the Philadelphia FED prior to any
declaration of dividends, any issuance of debt not in the course of ordinary
business, or any redemption of Bancorp's capital stock;
2. Submit a Capital Restoration Plan and various quarterly financial
reports relating to Bancorp and the Bank; and
3. In addition, a requirement that the Board of Directors hold monthly
Board meetings and appoint a committee which will be responsible for monitoring
Bancorp's compliance with the provisions set forth in the MOU as well as any
supervisory enforcement actions issued by the FDIC and/or the Department.
Moreover, under the provisions of Section 32 of the Federal Deposit
Insurance Act, Bancorp and the Bank may not add any individual to their
respective Boards of Directors or employ any individual as a senior executive
officer if the appropriate Federal banking agency issues a notice of disapproval
of such addition or employment before the end of a 30-day notice period to such
agency.
Business--Bank
The Bank's legal headquarters are located at 126 Easton Road, Willow Grove,
Pennsylvania 19090-3282.
As of December 31, 1994, the Bank had total assets of $231,185,000 total
shareholders' equity of $12,537,000 and total deposits and other liabilities of
$218,648,000.
The Bank engages in a full-service commercial banking business, including
accepting time and demand deposits, and making secured and unsecured commercial
and consumer loans. The Bank's business is not seasonal in nature. Its deposits
are insured by the FDIC to the extent provided by law.
As of December 31, 1994 the Bank had one hundred thirty-four (134)
full-time employees and seventeen (17) part-time employees. In the opinion of
management, the Bank enjoys a satisfactory relationship with its employees. The
Bank is not a party to any collective bargaining agreement.
Competition--Bank
The Bank competes actively with other area commercial banks and savings and
loan associations, many of which are larger than the Bank, as well as with major
regional banking and financial institutions headquartered in Philadelphia,
Pennsylvania. The Bank considers its main competitors to be: Fidelity Bank, PNC
Bank, First Pennsylvania-CoreStates, Harleysville National Bank & Trust Co.,
Meridian Bank and Mellon/PSFS. The Bank is generally competitive with all
competing financial institutions in its service area with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
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Supervision and Regulation of the Bank
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the Commonwealth of
Pennsylvania, whose deposits are insured by the FDIC. Bank operations are also
subject to regulations of the Federal Reserve Board.
The primary supervisory authorities of the Bank are the Pennsylvania
Department of Banking ("Department") and the FDIC, that regularly examine the
Bank. The FDIC has the authority under the Financial Institutions Supervisory
Act to prevent a state, non-member bank from engaging in an unsafe or unsound
practice in conducting its business.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches. All banks in Pennsylvania are permitted to
maintain branch offices in any county of the state. Branches may be established
only after approval by the Department and the FDIC. These regulatory agencies
are required to grant approval only if they find that there is a need for
banking services or facilities such as are contemplated by the proposed branch.
These regulatory agencies may disapprove the application if the bank does not
have the capital and surplus deemed necessary to operate a new branch.
Multi-bank holding companies are permitted in Pennsylvania within certain
limitations. See section entitled "Pennsylvania Banking Law."
A subsidiary bank of a bank holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a holding company may
obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulations of, and restrictions on,
the business of the Bank. It cannot be predicted whether any such legislation
will be adopted or how such legislation would affect the business of the Bank.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the costs of
doing business.
Under the Federal Deposit Insurance Act, the FDIC possesses the power to
prohibit institutions regulated by it (such as the Bank) from engaging in any
activity that would be an unsafe and unsound banking practice and in violation
of the law. Moreover, the Financial Institutions and Interest Rate Control Act
of 1987 ("FIRA") generally expands the circumstances under which officers or
directors of a bank may be removed by the institution's federal supervisory
agency; restricts lending by a bank to its executive officers, directors,
principal shareholders or related interests thereof; restricts management
personnel of a bank from serving as directors in other management positions with
certain depository institutions whose assets exceed a specified amount or which
have an office within a specified geographic area; and restricts management
personnel from borrowing from another institution that has a correspondent
relationship with their bank. Additionally, FIRA requires that no person may
acquire control of a bank unless the appropriate federal supervisory agency has
been given 60-days prior written notice and within that time has not disapproved
the acquisition or extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report to the
Internal Revenue Service currency transactions of more than $10,000 or multiple
transactions of which the Bank is aware in any one day that aggregate in excess
of $10,000. Civil and criminal penalties are provided under the
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BSA for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
The Garn-St Germain Depository Institutions Act of 1982 ("1982 Act"),
removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above) by
eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.
Under the CRA, the FDIC is required to assess the record of all financial
institutions regulated by it to determine if these institutions are meeting the
credit needs of the community (including low- and moderate-income neighborhoods)
which they serve and to take this record into account in its evaluation of any
application made by any such institutions for, among other things, approval of a
branch or other deposit facility, office relocation, a merger or an acquisition
of bank shares. FIRREA amended the CRA to require, among other things, that the
FDIC make publicly available an evaluation of the Bank's record of meeting the
credit needs of its entire community including low- and moderate-income
neighborhoods. This evaluation includes a descriptive rating ("outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance") and a
statement describing the basis for the rating. The FDIC has assigned a rating of
"needs to improve" to the Bank.
Concentration
Bancorp and the Bank are not dependent for deposits to a single customer or
to a small group of customers the loss of any one or more of which would have a
materially adverse effect on the financial condition of Bancorp or the Bank.
However, the Bank has been criticized by the Department and the FDIC for having
an undue concentration of the Bank's loan portfolio in commercial and real
estate related loans. The Bank management has commenced an effort to divert
funds available for investment in the loan portfolio from these areas of
concentration into a consumer loan portfolio. This diversion will take some time
because any abrupt change in lending practices could have a detrimental affect
on the Bank's existing customers and its earnings.
Regulatory Agreements with the Department and the FDIC
On February 2, and February 16, 1993, the Board of Directors of the Bank
entered into a Stipulation and Consent to the Issuance of an Order to Cease and
Desist with the Department and the FDIC, respectively. The Bank neither admitted
nor denied the allegations of unsafe or unsound banking practices and violations
of law or regulations, as the case may be. These Regulatory Agreements relate
generally to the administration and operation of the Bank. Under the Regulatory
Agreements, the Bank must, among other things, within specified time periods set
forth in the Regulatory Agreements: (1) appoint a 3-member compliance committee
of which all members must be outside directors, to monitor and coordinate the
Bank's compliance with the Regulatory Agreements; (2) have and retain qualified
management personnel to comply with the Regulatory Agreements, operate the Bank
and restore the Bank's condition with respect to capital adequacy, asset
quality, managerial effectiveness, earnings and liquidity; (3) charge-off or
collect all loans classified as "loss" and 50% of loans classified as
"doubtful;" (4) reduce remaining assets and contingent liabilities classified as
"doubtful" and "substandard" to a level initially of no greater than 100% of
Tier I capital and then ultimately to a level no greater than 50% of Tier I
capital; (5) adopt and implement a program to eliminate the basis of criticism
of assets characterized as "doubtful," "substandard," or "other assets
especially mentioned;" (6) subject to certain conditions, cease any further
extensions of credit to any borrower whose loans have been charged-off or
classified; (7) improve and strengthen collection efforts; (8) review and revise
its program for the maintenance of an adequate allowance for loan and lease
losses; (9) adopt and implement a program to diversify its asset portfolio; (10)
develop a capital plan to maintain its regulatory capital ratios at acceptable
levels, specifically to have a Tier I leverage capital ratio equal to or greater
than 6% by August, 1993, and 6.5% by February, 1994. The capital plan requires,
among other things, the Company and the Bank to raise additional capital and to
review other alternatives than capital raising, such as the sale of branch
offices and possible merger or combination with
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another financial institution. Moreover, the Bank may not declare and pay any
dividends to the Company without the prior written approval of the Department
and the FDIC; (11) adopt and implement plans, programs and policy to improve
earnings, liquidity, controls over internal operations and loan organization,
documentation, review and administration; and (12) revise and implement an
asset/liability management policy.
Description of Property
As of December 31, 1994, the Bank owned four (4) properties in fee and
leased twelve (12). The properties owned in fee are free and clear of liens and
encumbrances and include the principal office of Bancorp and the Bank located at
York and Easton Roads, Willow Grove, Pennsylvania. All owned and leased offices
are used in banking activity. The leases terminate from time-to-time through
2002. Rent expense amounted to $616,000, $610,000 and $683,000 in 1994, 1993 and
1992, respectively.
The Bank has, in the aggregate, 15 branches, two of which are limited
service facilities, located in three Pennsylvania counties: Bucks, Montgomery
and Philadelphia. In addition to its branches, the Bank owns six automated
teller machines located throughout the 3-county market area, none of which are
"free-standing" (not located at a branch).
Bancorp holds no property. Bancorp's and the Bank's principal executive
offices are located at York and Easton Roads, Willow Grove, Pennsylvania 19090.
Bancorp has limited space requirements, and, therefore, does not reimburse the
Bank for such use.
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Legal Proceedings
On June 19, 1992, an action (the "Goldberg Action") was filed in the United
States District Court for the Eastern District of Pennsylvania (Civil Action No.
92-3582), by Richard Goldberg, on behalf of himself as a "purchaser" of the
shares of the Common Stock and derivatively on behalf of Bancorp, against each
of the then incumbent directors of Bancorp (with the exception of one of the
directors who is the brother-in-law of Richard Goldberg) and other parties
(collectively, the "Goldberg Defendants"). The Goldberg Action, among other
things, alleged that it was a class action on behalf of purchasers of the shares
of the Common Stock between February 6, 1990 and June 7, 1992, arising under the
federal securities laws for untrue statements of material facts and the omission
to state material facts necessary in order to make the statements made, in the
light of the circumstances under which they were made not misleading, by Bancorp
in public reports, financial statements, releases and proxy statements.
Additionally, the Goldberg Action alleged state law claims which were a
derivative action on behalf of Bancorp against the Goldberg Defendants for the
alleged breach of fiduciary duty, waste of corporate assets and alleged
negligent misrepresentation of the Goldberg Defendants. The Goldberg Action
sought, among other things, damages, removal of the members of the Board of
Directors and appointment of a conservator for the Bank, a declaration that the
election of directors at Bancorp's 1992 Annual Meeting of Shareholders was null
and void, and counsel fees and costs.
On June 26, 1992, an action (the "Blum Action") was filed in the United States
District Court for the Eastern District of Pennsylvania (Civil Action No.
92-3735), by Byron Blum, on behalf of himself as an owner of shares of the
Common Stock and derivatively on behalf of Bancorp, against each of the then
incumbent directors of Bancorp and other parties (collectively, the "Blum
Defendants"). The Blum Action, among other things, alleged that it was a class
action on behalf of owners of the shares of the Common Stock who were eligible
to vote at the 1990, 1991 and 1992 Annual Meetings of Shareholders of Bancorp
and its predecessor, the Bank, arising under the federal securities laws for
untrue statements of material facts and the omission to state material facts
necessary in order to make the statements made, in the light of the
circumstances under which they were made not misleading, by Bancorp in public
reports, financial statements, releases and proxy statements. Additionally, the
Blum Action alleged state law claims which were a derivative action on behalf of
Bancorp against the Blum Defendants for the alleged breach of fiduciary duty and
waste of corporate assets by the Blum Defendants. The Blum Action sought, among
other things, damages, the institution of procedural safeguards to prevent
alleged wrongdoing by the Blum Defendants, the institution of disciplinary
action against certain Blum Defendants, and counsel fees and costs.
The Goldberg and Blum Actions were consolidated for adjudication. The Goldberg
and Blum plaintiffs filed amended complaints in January, 1993. In February,
1993, the Goldberg and Blum Defendants filed motions to dismiss and/or for
summary judgment with respect to the amended complaints. An oral argument was
held in August, 1993, on the motions filed by the Goldberg and Blum Defendants.
On September 30, 1993, the District Court entered an Order dismissing
plaintiff's Federal claims with prejudice and dismissing plaintiff's state
claims without prejudice. On October 22, 1993, plaintiffs appealed this Order to
the United States Court of Appeals for the Third Circuit. On May 24, 1994 the
Third Court affirmed the District Court's September 30, 1993 order to dismiss.
On July 22, 1994 Richard Goldberg filed a class action lawsuit against various
directors and officers of Bancorp in the Court of Common Pleas of Montgomery
County, Pennsylvania (No. 94-14297). The
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complaint asserts claims against various directors and officers of Bancorp and
the Bank, as a nominal defendant. The complaint alleges:
Fraud against all defendants with respect to disclosure; a derivative claim
on behalf of the Bancorp for breach of fiduciary duty and waste of corporate
assets against the individual defendants; and direct and derivative claims for
negligent misrepresentations against all defendants.
The plaintiffs purport to sue on behalf of a class of persons who purchased
publicly traded securities of Old York during the period of approximately
February 6, 1990 through June 7, 1992 and who sustained damages as a result of
such purchases and/or were holders of shares of Bancorp with respect to voting
in the 1990, 1991 and 1992 Annual Meeting proxy solicitations.
The complaint does not demand a specified amount of damages. The complaint
seeks: compensatory damages including establishing a constructive trust for any
monies generated by the disposal of the Bay Properties asset; judgments removing
the Board of Directors from Old York and appointing a conservator for the Bank;
judgments awarding Old York compensatory damages; a judgment declaring the
election of directors and other business consummated at the 1990, 1991 and 1992
annual shareholder meetings null and void and ordering a new election; and an
award of counsel fees, interest and costs of suits to Plaintiffs and their
counsel.
While Bancorp is a nominal defendant in the lawsuits, there may be a liability
to Bancorp for indemnification of expenses, liability and loss (including
without limitation attorneys' fees, judgments, fines, taxes, penalties and
amounts paid or to be paid in settlement) reasonably incurred or suffered in
connection with these cases, under Pennsylvania law and provisions of the bylaws
of Bancorp and the Bank. Such amounts may be material. The Goldberg and Blum
Defendants previously agreed to reimburse Old York all such monies advanced by
Bancorp, if the presiding Court found that they breached or failed to perform
their duties as a director or officer, as the case may be, of Bancorp and the
Bank and that the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. Bancorp does not have any directors' and officers'
liability insurance for these legal actions.
Management of Bancorp, including directors and officers named as defendants in
these cases, has stated their intention to contest these cases vigorously and
believe that the Defendants have strong factual and legal defenses to the claims
asserted. The outcome of the litigation or an estimate of the range of damages
claimed cannot be predicted.
In early 1995, Richard Goldberg, the plaintiff in the action described above,
filed another class action against Old York and various directors and officers
of Bancorp in the Court of Common Pleas for Montgomery County, Pennsylvania.
Goldberg brought this alleged class action on behalf of himself and on behalf of
all other persons similarly situated who owned shares of Bancorp on December 31,
1994. According to the complaint filed in this action, the plaintiff and other
class members are being bought out of Bancorp at an "unconscionably low price"
by defendants and "purchasers" and "owners" of Bancorp Common Stock will be
damaged if the proposed merger between Bancorp and Midlantic is consummated.
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The Complaint alleges that the officers and directors of Bancorp have breached
their fiduciary duty of care, loyalty, disclosure and fairness to the
shareholders of Bancorp by entering into the merger agreement with Midlantic and
seeks to enjoin such merger.
Among other allegations, the complaint averred that, since January 1990, the
Bank suffered from poor financial performance due to, among other things, gross
mismanagement, imprudent lending practices, and resulting waste of corporate
assets with a resulting dilution of the shareholders' interest in Bancorp.
The complaint requested that the Court order the following relief against the
defendants (including Bancorp):
a. declaring the class described in the complaint to be a proper class and
naming Goldberg to be the representative of this class.
b. ordering defendants to carry out their fiduciary duties to plaintiff and the
class members, including the duty of care, loyalty, disclosure and entire
fairness;
c. granting preliminary and permanent injunctive relief against the consummation
of the transaction between Bancorp and Midlantic, as described in the complaint;
d. if the transaction described above is consummated, rescinding the tender
offer, merger or other similar transaction effectuated by defendants and/or
awarding rescissionary damages;
e. ordering defendants (including Bancorp), jointly and severally, to pay the
plaintiff and the other class members all damages suffered and to be suffered by
them as the result of the acts and transactions alleged in the complaint;
f. ordering defendants (including Bancorp), jointly and severally, to account to
plaintiff and the other class members for all profits realized and to be
realized by them as a result of the transaction complained of and, pending such
accounting, to hold such profits in a constructive trust for the benefit of
plaintiff and other class members;
g. ordering defendants to permit a stockholders' committee, comprised of class
members and their representatives only, to ensure a fair procedure, adequate
procedural safeguards and independent input by plaintiff and the class members
in connection with any buy-out proposals;
h. awarding plaintiff the cost and disbursement of the action including
allowances for plaintiff's reasonable attorneys and expert fees; and
i. granting such other and further relief as may be just and proper.
On April 25, 1995, the Common Pleas Court dismissed the complaint without
prejudice to the right of the plaintiff to appeal the dismissal or to
reinstitute the matter at a future date. Prior to the dismissal of the
complaint, the plaintiff filed an amended complaint as to which the Court is now
considering dismissal.
On June 22, 1988, Bank made a loan to Sylvia Hankin and her son, Dr. Robert
Krakovitz. The loan was secured by Dr. Krakovitz's interest in a certain
long-term lease of federal real estate in Colorado which he was operating as a
health/dude ranch. Dr. Krakovitz leased and gave an option to purchase the ranch
to another individual. Bank received a Collateral Assignment and Security
Agreement of the Lease and Option to Purchase and has exercised its interest so
as to receive lease payments directly because the loan is in default. An action,
in the nature of a foreclosure proceeding, has been instituted by Bank's local
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counsel in Colorado to take title to Krakovitz's interest in the ranch. An
action to establish receivership for the leased property has also been initiated
by the Bank in Colorado and is presently pending with the court there. Dr.
Krakovitz has filed a Counterclaim against the Bank in the Colorado action.
A. Sylvia Hankin. Sylvia Hankin is the widow of former Bank Chairman, Perch
P. Hankin. When Perch P. Hankin died, the Bank Board of Directors resolved to
provide Sylvia Hankin with pension benefits in the amount of the Chairman's last
salary. Similar type payments had been provided to other Bank Officer/Director
widows. These payments, in the net amount of approximately $130,000.00 a year,
continued until 1993. In July 1993, the Bank, Sylvia Hankin and Dr. Krakovitz
entered into a Loan Modification Agreement releasing Mrs. Hankin as a co-signer
on the above described loan while immediately reducing her pension benefits to
$80,000.00 a year and making them subject to further review, reduction and/or
termination. As described above, Dr. Krakovitz and his lessee have defaulted on
the Loan Agreement and the Collateral Assignment providing lease payments
directly to the Bank from lessee.
On January 20, 1995, Sylvia Hankin filed an action against the Bank in the Court
of Common Pleas for Montgomery County, Pennsylvania (Docket Number 95-01012). In
the complaint, Sylvia Hankin alleges that, on December 18, 1989, the board of
directors of the Bank resolved that Perch Hankin's then current salary of
$150,000 per year would be continued for life and for the life of his wife,
Sylvia Hankin. The complaint then alleges that, on May 24, 1990, shortly after
the death of Perch Hankin, the board of directors of the Bank resolved that the
salary to be paid to Sylvia Hankin was subject to a "spendthrift" program and
was declared to be "not assignable nor anticipated by the widow or subject to
execution or attachment by creditors of the widow". According to the complaint,
the Bank then demanded that Sylvia Hankin turn over to the Bank as collateral
for the loan to Sylvia Hankin the proceeds of a life insurance policy on Perch
Hankin in the amount of $150,000. According to the complaint, the Bank then
withdrew from these proceeds certain principal and interest owed to the Bank on
a loan to Sylvia Hankin's son, Robert Krakovitz, which had been guaranteed by
Sylvia Hankin. The complaint then alleges that, on May 1, 1992 and July 2, 1993,
the Bank and Sylvia Hankin entered into two loan modification agreements.
According to the complaint, the Bank insisted that the second modification
agreement be signed by Sylvia Hankin and that the second modification agreement
contained language which made the salary being paid to Sylvia Hankin "subject to
annual review and termination or adjustment". According to the complaint, the
Bank intended to and did deceive Sylvia Hankin into signing technical and
complicated loan modification documents which the Bank did not explain to her
and which she did not fully understand, for the sole purpose of reducing Bank's
obligation to pay an annual salary to Sylvia Hankin. The complaint further
alleges that the Bank failed to advise Sylvia Hankin that she obtain independent
advice or legal counsel before signing the documents and misrepresented to
Sylvia Hankin that she was "required" to sign the documents and that the
documents, if signed, would benefit Sylvia Hankin's interests. The complaint
further alleges that these modification documents signed by Sylvia Hankin are
invalid in that they lacked consideration, were signed without Sylvia Hankin's
full and complete understanding of their implications, were signed under duress,
and were signed as a result of oral representations made by the Bank that
signing such documents were in the best interests of Sylvia Hankin. The
complaint then alleges that the Bank unilaterally reduced Sylvia Hankin's salary
from $150,000 per year to $80,000 per year and initiated an action in Colorado
state court to collect the balance due on the loan to Krakovitz guaranteed by
Sylvia Hankin. According to the complaint, the Bank breached its obligations to
Sylvia Hankin in that the Bank reduced the annual payments to Sylvia Hankin to
offset the amount received by her as Social Security payments, reduced the
payments to Sylvia Hankin to make payments on the loan guaranteed by her,
reduced the amount paid to Sylvia Hankin from $150,000 to $80,000 per annum,
wrongfully retained the insurance policy proceeds on the life of Perch Hankin,
and ultimately refused to pay any additional compensation to Sylvia Hankin.
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The complaint then purports to state causes of action against Bank for breach of
contract, release of obligation, fraud, rescission, and punitive damages in the
amount of $2,000,000.00. The complaint requests the following in relief against
defendant Bank:
a. order Bank to repay with interest all sums deducted from Sylvia Hankin's
compensation package, which include but are not limited to deductions for the
Social Security payments received by Sylvia Hankin, all arbitrary deductions,
loan payments, and all sums due but not yet paid;
b. order Bank to repay the proceeds of the $150,000 insurance policy with
interest;
c. equitably enforce the provisions of the second modification to the loan
documents and prohibit Bank from proceeding against the assets of Sylvia Hankin
to collect on amounts alleged to be due on the loan to Krakovitz;
d. order Bank to pay Sylvia Hankin the proceeds of all amounts received as a
result of their actions that sell, transfer or modify any assets owned by Sylvia
Hankin, with interest thereon;
e. pay all sums originally due to Sylvia Hankin under the terms of the
compensation package granted to Perch Hankin and Sylvia Hankin on December 19,
1989 as well as the life insurance policy, plus interest thereon;
f. rescind all modifications, amendments, alterations or changes to the original
resolutions of the Board of Directors dated December 18, 1989 and May 24, 1990;
g. declare a constructive trust of all funds, plus interest obtained from Sylvia
Hankin;
h. order Bank to pay Sylvia Hankin, going forward on a monthly basis in
accordance with the terms of the resolutions of the Board of Directors dated
December 18, 1989 and May 24, 1990 relating to the compensation package;
i. order Bank to pay punitive damages in the amount of $2,000,000.00;
j. order Bank to pay all costs and expenses involved in the prosecution of this
claim, including reasonable counsel fees;
k. order such other relief as the Court deems proper.
Counsel representing Bank in this action have advised that they believe that
Bank has strong legal and factual defenses to this action. While the damages
demanded by Sylvia Hankin in this action could amount to more than
$1,000,000.00, if reduced to present value, both outside counsel and house
counsel believe that the probability of Sylvia Hankin's prevailing in this
litigation is remote.
B. Dr. Robert Krakovitz. In the above described Counterclaim to Bank's
foreclosure Complaint filed in Colorado, Dr. Krakovitz demands compensatory and
punitive damages in an unstated amount based upon alleged lender liability. The
lender liability claim is based upon Bank's alleged management and control of
borrower through Perch P. Hankin. The Colorado foreclosure action is ongoing.
Dr. Krakovitz and the Bank have had some settlement discussions wherein Dr.
Krakovitz has demanded $150,000.00 to settle the foreclosure and give Bank a
release on his Counterclaims. The Bank believes Dr. Krakovitz's Counterclaim
lacks merit.
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First Fidelity Bank (formerly known as Merchants Bank) participated with the
Bank in a $1,700,000.00 Loan to Willow Grove Plaza I Associates. The Bank also
made a $2.85 Million loan to Bay Properties Company. Both the Willow Grove Plaza
and the Bay Properties Loans were secured by guarantees made by the same
guarantors. Prior to the Willow Grove Plaza loan going into default, Meridian
Bank confessed judgment against the Bay Properties guarantors for a default on
the loan it had made to that partnership. Meridian Bank and the Bank later
entered into an agreement with respect to the proceeds received from a proposed
settlement with guarantors.
On January 19, 1995, First Fidelity Bank filed an action against the Bank and
individuals Mark Hankin, Lowen Hankin, Sabina Hankin Kurtzman, Louis Schiffman,
and Jane Hankin. According to the complaint, the Bank violated the terms of a
participation agreement between the Bank and First Fidelity Bank and applicable
law in that the Bank failed to ensure that adequate collateral was obtained and
maintained for the loan to which the participation agreement relates, failed to
inform First Fidelity Bank of changes in the loan structure and to obtain First
Fidelity Bank's consent to such changes, advanced its own interests in
connection with another loan made to the same or related parties as the loan
which is the subject of the participation agreement by, among other things,
releasing those parties from surety obligations and depleting assets of those
parties in payment of obligations other than the loan which is the subject of
the participation agreement. The complaint further alleges that the Bank
compounded these failures by failing to properly administer the loan which is
the subject of the participation agreement, including failing to pursue all
available remedies after a default in the loan. According to the complaint, Bank
committed these acts because all of the loans at issue were made to entities
whose principals are affiliated with and dominate the Bank. According to the
complaint, Bank's actions constitute a breach of contract, breach of duty of
care as well as gross neglect, and have caused damage to First Fidelity Bank in
excess of $1,000,000.00. The complaint further alleges that the individual
defendants are liable to First Fidelity Bank for tortious interference with the
participation agreement.
The complaint then describes the following transaction between the Bank and
Merchants Bank, the predecessor of First Fidelity Bank: Bank and Merchants Bank
allegedly entered a loan participation agreement for a loan in the amount of
$1,700,000 from the Bank to an entity called LKH Development Company, a
partnership allegedly comprised of Lowen Hankin and his wife, Jane Hankin.
According to the complaint, Merchants Bank agreed to purchase a participating
interest in the amount of $1,200,000 of the loan balance. The loan was allegedly
secured by, among other things, a mortgage on the land owned by the borrower, an
assignment of an installment sale agreement for the property, an assignment of
leases and rents for the property, and personal guarantees of Lowen Hankin, Jane
Hankin and Moe Hankin. The complaint then alleges that, without the knowledge or
consent of First Fidelity Bank, Bank allowed LKH Development Company to assign
its interest in the mortgaged property to an entity called Willow Grove Plaza I
Associates ("WGP Associates"). According to the complaint, the assignment was
conditioned upon each of the general partners of WGP Associates--Lowen Hankin,
Jane Hankin, Sabina Hankin Kurtzman and Louis Schiffman--signing a personal
guarantee of the loan. According to the complaint, all of the partners signed
guarantees except for Louis Schiffman, whose guarantee is an allegedly illusory
obligation.
The complaint then alleges that the Bank made a loan in the amount of $2,800,000
to a partnership called Bay Properties, the general partners of which are
alleged to be Lowen Hankin, Sylvia Hankin, Sabina Hankin Kurtzman and Louis
Schiffman. According to the complaint, Meridian Bank loaned this partnership an
additional $3,000,000 at or around the same time as the Bank's loan. According
to the complaint, the Bank received unconditional guarantees from each of the
partners of Bay Properties, who are also the guarantors of the LKH Development
Company loan.
89
<PAGE>
The complaint then alleges that Bank engaged in a scheme to preserve its own
self-interest without regard to its obligations to First Fidelity Bank under the
Participation Agreement. According to the complaint, Bank concealed the true
condition of the loan to Bay Properties from regulators through a loan from Mark
Hankin to Lowen Hankin in the amount of $2,850,000.00, of which $2,300,000.00
was repaid to Mark Hankin within several months. Then, according to the
complaint, Meridian Bank and Bank confessed judgment against Bay Properties and
its partners Lowen Hankin, Sabina Hankin Kurtzman and Louis Schiffman in October
and November 1991, when the loan from Bank to LKH Development Company was also
in default. The complaint further alleges that Bank and Meridian Bank formed a
partnership known as MerBoyr Corp. in order to restructure the Bay Properties'
loans and obtain additional collateral as security for these loans. During the
course of negotiations with Bay Properties and its partners, MerBoyr Corp.,
acting on behalf of Bank, agreed to release Mark Hankin, Lowen Hankin, Jane
Hankin, Sabina Hankin Kurtzman, and Louis Schiffman from personal guarantees for
the LKH Development Company loan. MerBoyr Corp. further agreed to accept a
pledge of certain real estate from Sabina Hankin Kurtzman and of approximately
$3,000,000 worth of Bank stock that was owned by some or all of the guarantors.
The complaint then alleges that, when Bank attempted collection of the amounts
due under the LKH Development Company loan, the fair market value of the
property was substantially less than the amount owed on the loan. According to
the complaint, this deficiency amount would have been repaid from the assets of
Lowen Hankin, Jane Hankin, Sabina Hankin Kurtzman and Louis Schiffman, as well
as LKH Development Company and WGP Associates, had they not been improperly
released by Bank. Further, the complaint alleges that Bank improperly failed to
make a claim against the estate of Moe Hankin, who died during Bank's
administration of the loan to LKH Development Company and who was a guarantor of
the loan.
The complaint purports to state the following causes of action against Bank and
the individual defendants: breach of contract, gross negligence, breach of duty
of care, breach of covenant of good faith and fair dealing and (against the
individual defendants) tortious interference with contractual relations. The
complaint requests the following relief from the defendants (including Bank):
a. compensatory damages in the amount of $1,028,987.10 plus interest and costs;
b. punitive damages in an amount not specified in the complaint;
c. costs and interest for bringing this action, together with reasonable
attorneys' fees;
d. such other and further relief as the Court deems just and appropriate.
Because of the uncertainty of this litigation and the proof of plaintiff's
allegations, Bank's counsel is unable to form a definitive opinion as to the
ultimate outcome of such a suit or estimate the range of damages that may be
recovered.
In the opinion of the management of Old York, there are no other proceedings
pending to which Bancorp and the Bank are a party or to which their property is
subject, which, if determined adversely to Bancorp and the Bank, would be
material in relation to Bancorp's consolidated capital or financial condition.
There are no proceedings pending other than ordinary routine litigation incident
to the business of Bancorp and the Bank. In addition, no material proceedings
are pending or are known to be threatened or contemplated against Bancorp and
the Bank by government authorities.
90
<PAGE>
Market Price of and Dividends on Bancorp Common Stock
Bancorp's Common Stock was listed on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") Small-Cap Market on or about November 29,
1993. The following table sets forth the quarterly high and low prices for a
share of Bancorp's Common Stock during the periods indicated as reported by the
management of Bancorp, except for the closing bid and ask prices on December 31,
1994, as reported on the Nasdaq Small-Cap Market.
Stock Prices
-------------------
High Low
----- ---
1993:
First quarter ..................... $6.00 $3.00
Second quarter .................... $6.50 $4.00
Third quarter ..................... $4.50 $3.75
Fourth quarter .................... $4.50 $3.75
1994:
First quarter ..................... $5.00 $4.50
Second quarter .................... $5.50 $4.25
Third quarter ..................... $7.50 $5.50
Fourth quarter .................... $9.13 $6.00
Ask Bid
--- ---
NASDAQ Small-Cap Market Closing Price
on December 31, 1994 ................. $9.13 $8.63
Bancorp's Common Stock is listed on the Nasdaq Small-Cap Market and
quotations of the bid and ask prices per share are presented under the
designation "Old York" or "BOYR."
Bancorp declared no dividends in 1994 and 1993. Under the Regulatory
Agreements and MOU, Bancorp and the Bank are prohibited from paying dividends
without the prior written approval of their respective regulatory agencies. The
Bank must achieve and maintain a Tier I Leverage Capital Ratio of 6.5% by
February, 1994. It is likely that the Bank must maintain this 6.5% ratio for a
considerable period of time before the respective regulatory agencies will
consider any approval for the payment of dividends.
It is the present intention of Bancorp to resume dividend payments as soon
as such payments would be approved by the respective regulatory agencies.
However, dividends must necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the time the Board
of Directors considers dividend policy. Cash available for dividend
distributions to the shareholders of Bancorp must initially come from dividends
paid by the Bank to Bancorp. Therefore, the legal restrictions on the Bank's
dividend payments are directly applicable to Bancorp.
Under the Pennsylvania Business Corporation Law of 1988, Bancorp may pay
dividends only if it is solvent and would not be rendered insolvent by the
dividend payment, and only to the extent of unrestricted and unreserved earned
(and, under some circumstances, capital) surplus.
As of February 28, 1995, Bancorp had approximately 720 shareholders of
record.
91
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF OLD YORK
The following table sets forth information, as of January 31, 1995, by each
director and executive officer of Old York and by all directors and executive
officers as a group. Old York knows of no person or group which beneficially
owns 5% or more of Old York Common stock, except as set forth in the table.
Shares Beneficially Owned
------------------------------------
Amount and
Nature of
Name of Beneficial Percent of
Beneficial Owner Ownership (1) Class (2)
---------------- ------------- ----------
Guy M. Cooper ........................... 6,362 --
John J. Fiorillo ........................ 500 --
Robert M. Flood, Jr. .................... 100 --
Carl F. Haeussler, Jr. .................. 200 --
Mark Hankin(3) .......................... 271,356 9.60%
Harry Hilger, Jr.(4) .................... 3,200 --
Henry B. Holtzman ....................... 15,300 --
Stanford S. Hunn ........................ 7,000 --
Allan Nappen ............................ 9,517 --
Arthur Poley ............................ 25,440 --
George S. Rapp(5) ....................... 667 --
Leon Riebman ............................ 20,445 --
James L. Weese .......................... 100 --
Arlene G. Goldbach(6) ................... 379 --
Erwin K. Wenner(5) ...................... -- --
All Directors and Executive
Officers of Old York as a group........ 360,566 12.76%
(12 directors, 3 officers,
15 persons in total)
Shareholder:
Nappen and Associates ................. 145,909 5.2%
Limited Partnership
119 Keystone Drive
Montgomeryville, PA 18936
- -----------------
(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 January 31, 1995.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Less than one percent unless otherwise indicated.
(3) Includes 1,311 shares owned by Mr. Hankin's wife, 6,896 shares held in
trust by Mr. Hankin for his son and 5,544 shares held in trust by Mr.
Hankin for his daughter, with respect to which Mr. Hankin disclaims
beneficial ownership. The total shares presented as beneficially owned by
Mr. Hankin presents an adjustment from previously filed reports.
(4) Includes 1,000 shares owned jointly with Mr. Hilger's wife and 600 shares
owned by Mr. Hilger's wife's IRA.
(5) Messrs. Rapp and Wenner are no longer executive officers of Old York.
(6) Ms. Goldbach is not a director of Old York.
92
<PAGE>
SHAREHOLDER PROPOSALS
If the Merger is not approved at the Meeting, an annual meeting of
shareholders of Old York will thereafter be scheduled and announced. Old York
will notify Old York shareholders of the date by which any proposal which an Old
York shareholder wishes to have included in the proxy solicitation materials to
be used in connection with the annual meeting must be received by Old York,
which date will be a reasonable time before the solicitation is made.
LEGAL OPINION
Certain legal matters relating to the issuance of the shares of Midlantic
Common Stock offered hereby and certain tax consequences of the Merger will be
passed upon by Pitney, Hardin, Kipp & Szuch, counsel to Midlantic. Members in
the law firm of Pitney, Hardin, Kipp & Szuch beneficially own 7,250 shares of
Midlantic Common Stock as of April 21, 1995.
EXPERTS
The financial statements of Midlantic as of December 31, 1994 and 1993 and
for each of the years in the three-year period ended December 31, 1994 included
in this Proxy Statement (including those incorporated by reference) have been so
included in reliance upon the report of Coopers & Lybrand L.L.P., independent
certified public accountants, and have been included in this Proxy Statement
upon the authority of said firm as experts in accounting and auditing. The
reports of Coopers & Lybrand L.L.P. refer to a change in the methods of
accounting for postemployment benefits and investment securities for the year
ended 1994, and a change in the methods of accounting for postretirement
benefits other than pensions and income taxes for the year ended 1993.
The consolidated financial statements of Old York, as of December 31, 1994
and 1993 and for each of the years in the three-year period ended December 31,
1994, included in this Prospectus, have been so included in reliance upon the
report of Rudolph, Palitz LLP, independent certified public accountants, given
on the authority of said firm as experts in accounting and auditing. The report
of Rudolph, Palitz LLP covering the financial statements referred to above
refers to: uncertainty with respect to the effect of the proposed merger with
Midlantic; uncertainties with respect to the effects of potential regulatory
actions; uncertainties regarding various lawsuits to which the Bank is subject;
uncertainty with respect to the estimates of fair value of financial
instruments; and changes in the methods of accounting for investments and income
taxes.
93
<PAGE>
OLD YORK ROAD BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Page Number
-----------
Report of Independent Certified Accountants ................... F-1
Consolidated Balance Sheets at
December 31, 1994 and 1993 ................................... F-3
Consolidated Statements of Loss for the
years ended December 31, 1994, 1993 and 1992 ................. F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1994, 1993 and 1992 ......... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992 ................. F-6
Notes to Consolidated Financial Statements for the
years ended December 31, 1994, 1993 and 1992 ................. F-8-F-42
SCHEDULES
Schedule I, Loans to Officers, Directors,
Principal Security Holders and any
Associates of the Foregoing Persons,
Years Ended December 31, 1994, 1993 and 1992 ............... F-43-F-45
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
Consolidated Balance Sheets at March 31, 1995
and December 31, 1994 (unaudited) ............................ FF-1
Consolidated Statements of Operation for the
three month periods ended March 31, 1995
and 1994 (unaudited) ......................................... FF-2
Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1995
and 1994 (unaudited) ......................................... FF-3
Notes to Condensed Consolidated Financial Statements
for the three month periods ended March 31, 1995 and 1994..... FF-4 to FF-22
94
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Old York Road Bancorp, Inc.
Willow Grove, Pennsylvania
We have audited the accompanying consolidated balance sheets of Old York
Road Bancorp, Inc. and Subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of loss, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1994. These
financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 Old York
Road Bancorp, Inc. and Subsidiary as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company entered
into an Agreement and Plan of Merger on December 29, 1994 with Midlantic
Corporation. The accompanying financial statements do not include any
adjustments that might result from the outcome of the uncertainty of the effect
on the Company's operations as a result of the proposed merger.
As discussed in Note 1 to the financial statements, the Company was
examined during 1994 by Regulatory Authorities who cited the Company for certain
apparent violations of Federal and state banking laws and regulations. In
addition, the Company is not in compliance with its existing Cease and Desist
Orders and Memorandum of Understanding. The accompanying financial statements do
not include any adjustments that might result from the outcome of the
uncertainties related to potential regulatory sanctions and/or supervisory
actions.
F-1
<PAGE>
As discussed in Note 12 to the financial statements, the Company is a
defendant in various lawsuits, the ultimate outcome of which cannot presently be
determined. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As explained in Note 19, the financial statements include fair value
information about financial instruments, which values have been estimated by
management in the absence of readily ascertainable market values. We have
reviewed the procedures used by management in arriving at their estimate of
value and have inspected underlying documentation, and in the circumstances, we
believe the procedures are reasonable and the documentation appropriate.
However, because of the uncertainty inherent in estimating fair values, those
estimated values may differ significantly from the values that would have been
used had a ready market for the financial instruments existed, and the
difference could be material.
As discussed in Notes 3 and 10 to the financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities effective January 1, 1994 and changed it method of accounting for
income taxes effective January 1, 1993.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
accompanying index for 1994, 1993 and 1992, are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. The schedules have been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
RUDOLPH, PALITZ LLP
-------------------
Rudolph, Palitz LLP
Plymouth Meeting, Pennsylvania
February 10, 1995 except as to
paragraphs 1 and 2 on pages F-31,
which are as of February 27, 1995
and paragraph 2 on page F-29, which
is as of March 2, 1995.
F-2
<PAGE>
<TABLE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1994 AND 1993
ASSETS
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Cash and due from banks ................................. $ 14,868,000 $ 14,141,000
Investment securities
(market value of $40,917,000) .......................... -- 40,902,000
Investments held for sale (market
value of $8,189,000) ................................... -- 8,171,000
Investments available for sale .......................... 6,960,000 --
Investments held to maturity
(market value of $47,841,000) .......................... 50,988,000 --
Federal funds sold ...................................... 4,400,000 13,200,000
Loans (including related party loans
of $8,940,000 and $10,532,000
respectively), net ..................................... 143,248,000 134,610,000
Bank premises and equipment ............................. 2,592,000 2,741,000
Other real estate held for sale, net .................... 5,300,000 8,380,000
Accrued interest receivable and
other assets ........................................... 2,829,000 1,458,000
------------ ------------
Total assets ....................................... $231,185,000 $223,603,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand ......................... $ 43,785,000 $ 43,130,000
NOW accounts ........................................ 46,079,000 40,120,000
Savings ............................................. 39,201,000 39,608,000
Money market ........................................ 25,202,000 29,980,000
Other time deposits ................................. 62,406,000 53,238,000
------------ ------------
216,673,000 206,076,000
Accrued expenses and other liabilities ................ 1,975,000 1,222,000
------------ ------------
Total liabilities ................................. 218,648,000 207,298,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 11, 12 and 13)
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value; authorized
14,000,000 shares; issued and outstanding,
2,825,312 shares ..................................... 2,825,000 2,825,000
Capital in excess of par .............................. 20,508,000 20,508,000
Accumulated deficit ................................... ( 10,527,000) ( 7,028,000)
Unrealized loss on investment securities
available for sale ................................... ( 269,000) --
------------ ------------
Total shareholders' equity .............................. 12,537,000 16,305,000
------------ ------------
Total liabilities and
shareholders' equity ............................. $231,185,000 $223,603,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .......... $ 12,230,000 $ 12,681,000 $ 15,767,000
Interest on investment securities:
U.S. Government obligations ....... 2,920,000 2,006,000 1,927,000
Obligations of states and
political subdivisions .......... 6,000 6,000 6,000
Other securities .................. 47,000 41,000 271,000
Interest on Federal funds sold ....... 280,000 351,000 308,000
Interest on certificates of deposit .. 2,000 4,000 6,000
------------ ------------ ------------
15,485,000 15,089,000 18,285,000
Interest on deposits .................. 5,562,000 5,245,000 8,026,000
------------ ------------ ------------
Net interest income ................... 9,923,000 9,844,000 10,259,000
Provision for possible loan losses .... 2,474,000 1,953,000 4,222,000
------------ ------------ ------------
Net interest income after provision
for possible loan losses ............. 7,449,000 7,891,000 6,037,000
Other income:
Gain on sale of investment securities -- 491,000 45,000
Trust Department income ............. 7,000 22,000 14,000
Service fees ........................ 1,676,000 1,804,000 1,915,000
Other ............................... 83,000 39,000 49,000
------------ ------------ ------------
Income before other expenses .......... 9,215,000 10,247,000 8,060,000
------------ ------------ ------------
Other expenses:
Salaries and wages .................. 4,053,000 3,580,000 3,572,000
Employee benefits ................... 953,000 950,000 935,000
Occupancy expense ................... 1,192,000 1,288,000 1,242,000
Equipment expense ................... 848,000 729,000 761,000
Net loss on holding foreclosed assets 2,130,000 1,165,000 1,306,000
Other operating expenses ............ 3,538,000 2,911,000 3,793,000
------------ ------------ ------------
12,714,000 10,623,000 11,609,000
------------ ------------ ------------
Loss before income tax expense ........ ( 3,499,000) ( 376,000) ( 3,549,000)
Income tax expense .................... -- 28,000 724,000
------------ ------------ ------------
Net loss .............................. ($ 3,499,000) ($ 404,000) ($ 4,273,000)
============ ============ ============
Loss per common share ................. ($ 1.24) ($ .28) ($ 3.28)
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
COMMON STOCK
------------------------
Number Retained
of shares Capital earnings Unrealized
issued and in excess (accumulated) loss on
outstanding Amount of par (deficit) investments Total
--------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 ..... 1,301,545 $1,302,000 $15,863,000 ($ 2,351,000) ($ 92,000) $14,722,000
Unrealized gain on investment
securities ................... -- -- -- -- 92,000 92,000
Net loss for the year .......... -- -- -- ( 4,273,000) -- ( 4,273,000)
--------- ---------- ----------- ------------ ---------- -----------
Balance, December 31, 1992 ..... 1,301,545 1,302,000 15,863,000 ( 6,624,000) -- 10,541,000
Issuance of common stock ....... 1,523,767 1,523,000 4,645,000 -- -- 6,168,000
Net loss for the year .......... -- -- -- ( 404,000) -- ( 404,000)
--------- ---------- ----------- ------------ ---------- -----------
Balance, December 31, 1993 ..... 2,825,312 2,825,000 20,508,000 ( 7,028,000) -- 16,305,000
Net loss for the year .......... -- -- -- ( 3,499,000) -- ( 3,499,000)
Unrealized loss on investment
securities available for sale -- -- -- -- ( 269,000) ( 269,000)
--------- ---------- ----------- ------------ ---------- -----------
Balance, December 31, 1994 ..... 2,825,312 $2,825,000 $20,508,000 ($10,527,000) ($ 269,000) $12,537,000
========= ========== =========== ============ ========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ................................................................... ($ 3,499,000) ($ 404,000) ($ 4,273,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for possible loan losses ..................................... 2,474,000 1,953,000 4,222,000
Provision for possible losses on other real estate held for sale ....... 1,508,000 719,000 1,192,000
Depreciation and amortization .......................................... 797,000 794,000 761,000
Write-off of deferred taxes ............................................ -- -- 703,000
(Gain) loss on sale of other real estate ................................ 145,000 ( 12,000) ( 189,000)
Gain on sale of investment securities ................................... -- ( 491,000) ( 45,000)
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets ...... ( 1,371,000) 1,354,000 812,000
Increase (decrease) in accrued expenses and other liabilities ............ 753,000 ( 537,000) ( 1,317,000)
------------ ------------ ------------
Net cash provided by
operating activities ............................................. 807,000 3,376,000 1,866,000
------------ ------------ ------------
INVESTING ACTIVITIES
Loans originated or acquired, net of payments made .......................... (11,423,000) 12,186,000 38,444,000
Purchases of bank premises and equipment .................................... ( 417,000) ( 306,000) ( 168,000)
Purchases of investment securities .......................................... (16,620,000) (44,131,000) (30,890,000)
Proceeds from sales of other real estate held for sale ...................... 1,738,000 1,424,000 1,676,000
Proceeds from sale of Bank equipment ........................................ 3,000 59,000 --
Proceeds from investment maturities ......................................... 7,242,000 7,895,000 2,657,000
Proceeds from sales of investments .......................................... -- 20,898,000 22,076,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities ............................................. (19,477,000) ( 1,975,000) 33,795,000
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in non-interest bearing demand
deposits, NOW accounts, savings accounts and money market accounts ......... 1,429,000 6,761,000 2,518,000
Net increase (decrease) in time deposits .................................... 9,168,000 (11,082,000) (35,136,000)
Proceeds from issuance of common stock ...................................... -- 6,168,000 --
------------ ------------ ------------
Net cash provided by (used in)
financing activities ............................................. 10,597,000 1,847,000 (32,618,000)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. ( 8,073,000) 3,248,000 3,043,000
CASH AND CASH EQUIVALENTS, JANUARY 1, ........................................ 27,341,000 24,093,000 21,050,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, DECEMBER 31, ...................................... $ 19,268,000 $ 27,341,000 $ 24,093,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Income taxes ............................................................. $ 28,000 $ 22,000 $ --
============ ============ ============
Interest ................................................................. $ 5,304,000 $ 5,614,000 $ 9,275,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SUPPLEMENTAL DISCLOSURES OF INVESTING ACTIVITIES:
1) The valuation allowance for investment securities decreased $92,000 in
1992 due to the sale of "other investment securities";
2) During 1994, 1993 and 1992, the Bank reclassified $941,000, $411,000
and $160,000, respectively, of loans as other real estate held for
sale as a result of foreclosures on uncollectible loans;
3) During 1994, 1993 and 1992, the Bank reclassified $128,000, $696,000
and $2,273,000, respectively, of loans as other real estate held for
sale as a result of "in-substance" foreclosures on uncollectible
loans;
4) During 1992, the Bank reclassified $1,055,000 of deferred taxes as
income taxes receivable due to the utilization of net operating loss
carrybacks;
5) During 1994, the Bank took back $758,000 of financing (i.e., loans)
related to the sale of "other real estate held for sale";
6) During 1994, the Bank recorded $269,000 in unrealized losses on
investment securities classified as "Available-for-Sale" as a charge
to shareholders' equity.
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 1. OPERATIONS AND PLAN OF MERGER
Agreement and Plan of Merger
On December 29, 1994, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Midlantic Corporation. The Merger Agreement
provides for the payment to Bank shareholders at the closing of the merger $10
in cash or .3721 shares of Midlantic for each Bank share outstanding. A maximum
of 49% of the Bank's common stock can be exchanged for cash, subject to
adjustment under certain conditions. The Plan of Merger is subject to
shareholder approval, regulatory approvals and various other conditions of
closing.
The Merger Agreement may be terminated by either Midlantic or the Bank if
the Closing has not occurred by December 31, 1995. The Agreement may be
terminated by the Bank if the price of Midlantic Common Stock over a specified
period of time is less than $26.87 multiplied by 0.85 (which is approximately
$22.84) and also less than an index ratio based upon a selected peer group of
other Bank-holding companies; provided, however, that in such event Midlantic,
in its sole discretion, may elect to increase the Exchange Ratio to avoid such
termination. In addition, if the Bank's capital (as adjusted in accordance with
the terms of the Agreement) falls below a specific level, Midlantic is not
obligated to effect the Merger. The Agreement also provides that if the Bank
does not meet certain minimum capital requirements, the price which Bank
shareholders are entitled to receive in exchange for their shares of common
stock will be adjusted downward.
In addition, the Bank and Midlantic have entered into a Stock Option
Agreement dated December 29, 1994 in connection with the Merger Agreement.
Pursuant to the terms of the Stock Option Agreement, the Bank has granted
Midlantic an option (the "Option") to purchase up to 19.9% of the shares of the
Bank's Common Stock which would be outstanding immediately following the
exercise of the Option, at a price of $7.25 per share (based upon the number of
outstanding shares of the Bank on December 29, 1994, the Option represents the
right to purchase up to 701,919 shares). Midlantic does not have any voting
rights with respect to shares of the Bank's Common Stock subject to the Option
prior to exercise of the Option. The Option is exercisable only upon the
occurrence of a triggering event, as defined in the Agreement.
F-8
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 1. OPERATIONS AND PLAN OF MERGER (Continued)
Agreement and Plan of Merger (Continued)
The Stock Option Agreement terminates upon either the termination of the
Agreement or the consummation of the transactions contemplated thereby; provided
that if the Agreement terminates after the occurrence of a triggering event, the
Stock Option Agreement will not terminate until the later of 18 months following
the date of termination of the Agreement or the consummation of any proposed
transactions which constitute the triggering event.
Regulatory Matters
On September 30, 1992, the Pennsylvania Department of Banking (the
"Department") and the Federal Deposit Insurance Corporation ("FDIC") issued a
joint report of examination of the Bank (the "Report") as of February 24, 1992.
The report cited numerous deficiencies including an unacceptably high volume of
adversely classified and special mention assets, inadequate capital levels,
continued deterioration of the loan portfolio, a deficient allowance for loan
losses, weak liquidity and funds management and overall lack of earnings.
During 1992, the Company also received from the Federal Reserve Bank (the
"FRB") its report of Inspection as of December 31, 1991. The findings of the FRB
were consistent with those of the FDIC and the Department as described above.
As a result of the regulatory examinations described above, on February 2,
1993 and February 16, 1993, the Bank entered into a Stipulation and Consent to
the Issuance of an Order to Cease and Desist (the "C & D") with the Department
and the F.D.I.C., respectively. The Bank neither admitted nor denied the
allegation of charges of unsafe or unsound banking practices and violations of
laws and/or regulations. On December 8, 1992, the Company also entered into a
Memorandum of Understanding ("MOU") with the FRB.
F-9
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 1. OPERATIONS AND PLAN OF MERGER (Continued)
The C & D and MOU require the Bank and the Company, respectively, to take
certain actions as defined, subject to Regulatory approval, to provide for safe
and sound banking practices and improve the overall financial condition of the
Bank and the Company. The key provisions of these agreements include
requirements to:
1) Improve earnings and capital and, within certain time frames, to maintain
a leverage ratio equal to 6.5% or more and reduce all doubtful and
substandard assets and contingent liabilities to not more than 50% of Tier
One capital;
2) Adopt and implement a program for each "problem asset" and contingent
liability and, within certain time frames, reduce loans past due 30 days
or more and non-accrual loans to no greater than 5.0% and 1.0%,
respectively, of total loans;
3) Adopt a plan to increase asset portfolio diversification and ultimately
concentration of loans to less than 100% of Tier One capital;
4) Eliminate all violations of laws and regulations and substantially revise
lending and collection policies within 60 days;
5) Restrict extensions of credit to certain borrowers adversely classified;
6) Appoint a Committee to monitor compliance with the C & D and report to
regulatory authorities quarterly;
7) Prohibit the payment of dividends by the Bank or the Company, with certain
exceptions;
8) Prohibit the assumption of debt or redemption of stock by the Company.
F-10
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 1. OPERATIONS AND PLAN OF MERGER (Continued)
During 1994, a joint examination was conducted by the Department and the
FDIC and the findings were consistent with previous examinations. The
aforementioned C & D's issued in 1993 are still in effect at December 31, 1994.
The 1994 examination cited the Company for certain apparent violations of
Federal and state banking laws and regulations. In addition, as of December 31,
1994, the Company was not in compliance with the existing F.D.I.C. and
Department Cease and Desist Orders and the Federal Reserve Bank Memorandum of
Understanding, principally with respect to its capital level, level of
delinquent loans, classified assets and nonaccrual loans. As a result of the
alleged violations, the Company and/or the Bank could be subject to supervisory
action, regulatory sanctions and/or potential civil money penalties.
NOTE 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Business
Old York Road Bancorp, Inc. and its subsidiary's operations relate
primarily to commercial banking activities which represent one industry segment.
Principles of Consolidation
The consolidated financial statements include the accounts of Old York Road
Bancorp, Inc. and its wholly-owned subsidiary, Bank and Trust Company of Old
York Road. All material intercompany accounts have been eliminated in
consolidation.
Investment Securities
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) ("Statement") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Statement requires certain
investments to be classified under one of the following categories: "held to
maturity" and accounted for at historical cost, adjusted for accretion of
discounts and amortization of premiums; "available for sale" and accounted for
at fair market value, with unrealized gains and losses reported as a separate
component of shareholders' equity; or "trading" and accounted for at fair market
value, with unrealized gains and losses reported as a component of net income.
The Bank does not hold trading securities.
F-11
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
At December 31, 1994, the Company has identified investment securities that
will be held for indefinite periods of time, including securities that will be
used as part of the Company's asset/liability management strategy and that may
be sold in response to changes in interest rates, prepayments and similar
factors. These securities are classified as "available for sale". At December
31, 1993, these securities were classified as "held-for-sale" and accounted for
at the lower of cost or market value.
Also, at December 31, 1994, the Company reported investments in securities
which were carried at cost, adjusted for amortization of premium and accretion
of discount. The Company has the intent and ability to hold these investment
securities to maturity considering all reasonably foreseeable events or
conditions. These securities are classified as "held to maturity." At December
31, 1993, these securities were classified as "Investment Securities."
Gains and losses on the sale of investment securities are computed using
the specific identification method and are included in other income.
Loans
Loans are stated at the principal amount outstanding, net of deferred loan
fees and costs. Income is accrued on the principal amount outstanding. Accrual
of interest is discontinued when, in management's judgement, collection of
interest or principal is questionable, or where such payments are 90 or more
days past due unless the loan is well secured and in the process of collection.
Previously accrued interest on loans which become non-accrual, is reversed and
charged against income.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through a provision
for possible loan losses charged to operations. Loan losses are charged against
the allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged-off are credited
to the allowance.
F-12
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
The allowance is an amount that management believes will be adequate to
absorb possible loan losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration 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 and trends that may
affect the borrowers' ability to pay.
Loan Fees
The Company treats loan fees in accordance with Statement of Financial
Accounting Standards (SFAS) No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". The method of accounting for loan fees as prescribed by SFAS No. 91
requires the capitalization of loan fees and the direct costs associated with
originating such fees and amortizing the net fees over the estimated lives of
the loans on the effective interest method, resulting in a constant yield over
the lives of the related loans. Amortization of net loan fees is included in
interest income. Estimated loan lives are based upon prepayment experience
reflected in the Bank's uniform peer group.
Bank Premises and Equipment and Depreciation
and Amortization
Bank premises and equipment are stated at cost. Depreciation and
amortization are being provided by use of the straight-line method over the
estimated useful lives of the various classes of property, or, the shorter of
the estimated useful lives or the term of the lease in the case of leasehold
improvements.
Other Real Estate Held for Sale
Other real estate held for sale includes real estate obtained through
foreclosure or deed in lieu of foreclosure and is initially recorded at the
lower of the related loan balance or fair value of the property less estimated
costs to sell at the date acquired.
F-13
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Other Real Estate Held for Sale (Continued)
The Company classifies foreclosed assets in its balance sheet as assets
held for sale and reported at the lower of cost as acquired or net realizable
value. The Company accounts for the results of operations of foreclosed assets
by requiring that the net amount of revenues and expenses related to operating
or holding foreclosed assets be charged or credited to income as a gain or loss
on holding foreclosed assets.
Other real estate held for sale also consists of loans "in-substance"
foreclosed. Loans are accounted for as foreclosed property even though actual
foreclosure has not occurred. These assets are initially recorded at the lower
of the related loan balance or the fair value of the property at the time the
loan is deemed foreclosed "in-substance." Although the collateral underlying the
loans has not been repossessed, the borrower has little or no equity in the
collateral at its current estimated fair value, and proceeds for repayment are
expected to come only from the operations or sale of collateral. At December 31,
1994, 1993 and 1992, the Company had $2,239,000, $3,118,000, $3,440,000,
respectively, of loans "in-substance" foreclosed.
Income Taxes
Effective January 1, 1993, the Company accounts for income taxes in
compliance with the Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
Deferred income taxes arise principally from differences in the recognition
of the provision for possible loan losses, the accounting for other real estate
held for sale, and the recognition of loan origination fees for income tax and
financial reporting purposes and from recognition of the tax benefits of net
operating loss carryforwards.
Deferred income tax assets are reduced by a valuation allowance when, based
on the weight of evidence available, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Pension Plan
It is the Company's policy to fund pension costs accrued.
F-14
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Earnings Per Share
Loss per share of common stock is based upon the weighted average number of
shares outstanding during the years. The average shares outstanding were
2,825,312 for 1994, 1,428,525 for 1993 and 1,301,545 for 1992.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit with banks,
certificates of deposit with original maturities of three months or less, and
Federal funds sold. Cash on deposit with banks is insured by the Federal Deposit
Insurance Corporation up to $100,000 and, therefore, a significant amount of the
Company's cash balances are uninsured.
At December 31, 1994 and 1993, cash and due from banks includes
interest-bearing deposits of approximately $197,000 and $967,000, respectively.
Reclassifications
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to conform to the 1994 presentation.
Accounting Pronouncements
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors
for Impairment of a Loan." The standard requires that an impaired loan be
measured based upon the present value of expected future cash flows discounted
at the loan's effective interest rate, observable market price or fair value of
the collateral if the loan is collateral dependent. In October 1994, the FASB
issued Statement No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosure." FASB Statement No. 118 amends No. 114
to allow creditors to use existing methods for recognizing interest income on
impaired loans. These standards are effective for fiscal years beginning after
December 15, 1994. The Company intends to adopt these standards in its fiscal
year beginning January 1, 1995. Implementation of these standards is not
expected to have a material effect on the financial statements of the Company.
F-15
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 3. INVESTMENT SECURITIES
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) ("Statement") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Statement requires certain
investments to be classified under one of the following categories: "held to
maturity" and accounted for at historical cost, adjusted for accretion of
discounts and amortization of premiums; "available for sale" and accounted for
at fair market value, with unrealized gains and losses reported as a separate
component of share- holders' equity; or "trading" and accounted for at fair
market value, with unrealized gains and losses reported as a component of net
income. The Bank does not hold trading securities.
If the Statement had been adopted on December 31, 1993, the impact on
shareholders' equity would have been immaterial.
At December 31, 1994, the amortized cost and estimated market values of
investments in debt securities classified by maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------ ------------ ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
United States Government
and/or Agency Obligations:
Maturing within one year .. -- -- -- --
Maturing after one year,
but within five years:
Mortgage-backed
securities ........... $ 12,209,000 $1,000 ($ 610,000) $ 11,600,000
Collateralized mort-
gage obligations ..... 2,011,000 -- ( 86,000) 1,925,000
Maturing after five years,
but within ten years:
Mortgage-backed
securities ........... 6,741,000 -- ( 588,000) 6,153,000
Collateralized mort-
gage obligations ..... 3,009,000 -- ( 178,000) 2,831,000
Maturing after ten years:
Mortgage-backed
securities ........... 21,921,000 -- ( 1,360,000) 20,561,000
Collateralized mort-
gage obligations ..... 5,097,000 -- ( 326,000) 4,771,000
------------ ------ ------------ ------------
Total securities
held to maturity ..... $ 50,988,000 $1,000 ($ 3,148,000) $ 47,841,000
============ ====== ============ ============
</TABLE>
F-16
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
United States Government
and/or Agency Obligations:
Maturing within one year .. $2,000,000 -- ($ 20,000) $1,980,000
Maturing after one year,
but within five years .... 1,834,000 -- ( 99,000) 1,735,000
Maturing after five years,
but within ten years ..... 606,000 -- ( 44,000) 562,000
Maturing after ten years .. 2,434,000 -- ( 100,000) 2,334,000
---------- --------- --------- ----------
Total available for sale 6,874,000 -- ( 263,000) 6,611,000
---------- --------- --------- ----------
Obligations of States and
Political Subdivisions:
Maturing after ten years . 100,000 -- ( 6,000) 94,000
---------- --------- --------- ----------
Other:
Maturing within one year .. 255,000 -- -- 255,000
---------- --------- --------- ----------
$7,229,000 $ -- ($269,000) $6,960,000
========== ========= ========= ==========
</TABLE>
At December 31, 1993, investment securities are classified as "investment
securities" and "investments held for sale."
<TABLE>
<CAPTION>
December 31, 1993
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------- -------- -----------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
United States Government
Obligations:
Maturing within one year ....................... -- -- -- --
Maturing after one year, but within five years:
Mortgage-backed securities ................. $ 5,244,000 -- ($26,000) $ 5,218,000
Collateralized mortgage obligations ........ 4,029,000 -- -- 4,029,000
Maturing after five years, but within ten years:
Mortgage-backed securities ................. 9,685,000 -- (46,000) 9,639,000
Collateralized mortgage obligations ........ 1,988,000 -- -- 1,988,000
Maturing after ten years:
Mortgage-backed securities ................. 19,493,000 87,000 -- 19,580,000
------------ ------- -------- -----------
40,439,000 87,000 (72,000) 40,454,000
------------ ------- -------- -----------
Obligations of states and political subdivisions:
Maturing after ten years ....................... 100,000 -- -- 100,000
------------ ------- -------- -----------
Other:
Maturing within one year ........................ 363,000 -- -- 363,000
------------ ------- -------- -----------
$40,902,000 $87,000 ($72,000) $40,917,000
=========== ======= ======== ===========
</TABLE>
F-17
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 3. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1993
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Marketed
Cost Gains Losses Value
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
INVESTMENTS HELD FOR SALE
United States Government obligations:
Maturing within one year ................................. $2,014,000 $ 2,000 -- $2,016,000
Maturing after one year, but within five years ........... 6,157,000 16,000 -- 6,173,000
Maturing after five years, but within ten years .......... -- -- -- --
Maturing after ten years ................................. -- -- -- --
---------- ------- --------- ----------
$8,171,000 $18,000 $ -- $8,189,000
========== ======= ========= ==========
</TABLE>
Proceeds from sales of investments in securities during 1993 were
$20,898,000. Gross gains of $491,000 were realized on those sales in 1993. There
were no sales of investment securities in 1994.
Investment securities with a book value of $20,424,000 and $8,593,000 at
December 31, 1994 and 1993, respectively, and market values of $19,147,000 and
$8,615,000 at December 31, 1994 and 1993, respectively, were pledged to secure
available lines of credit and public deposits.
NOTE 4. LOANS
1994 1993
------------ ------------
Commercial, financial and agricultural $ 11,140,000 $ 14,959,000
Real estate--mortgage ................ 103,573,000 109,555,000
Real estate--construction ............ 4,540,000 3,352,000
Consumer and other ................... 31,010,000 13,661,000
------------ ------------
150,263,000 141,527,000
------------ ------------
Less:
Net deferred loan fees (costs) ..... (78,000) (36,000)
Unearned income .................... 2,067,000 1,451,000
Allowance for possible loan
losses ........................... 5,026,000 5,502,000
------------ ------------
7,015,000 6,917,000
------------ ------------
$143,248,000 $134,610,000
============ ============
F-18
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 4. LOANS (Continued)
A summary of loans, net of deferred loan fees and unearned income, by
maturity and interest rate classification, is shown below:
1994
---------------------------------------------------
(in thousands) One Year Five Years Over
Within But but Ten
One Year Within Five Within Ten Years Total
------- ------- ------- ------- --------
Real Estate
Fixed Rate ............. $ 3,217 $ 8,973 $11,279 $20,960 $ 44,429
Floating Rate .......... 16,125 9,478 10,971 26,898 63,472
Commercial Loans
Fixed Rate ............. 705 2,011 265 -- 2,981
Floating Rate .......... 5,479 1,147 60 1,458 8,144
All Other Loans
Fixed Rate ............. 273 21,705 1,798 1,641 25,417
Floating Rate .......... 281 3,550 -- -- 3,831
------- ------- ------- ------- --------
Total ............... $26,080 $46,864 $24,373 $50,957 $148,274
======= ======= ======= ======= ========
1993
---------------------------------------------------
(in thousands) One Year Five Years Over
Within But but Ten
One Year Within Five Within Ten Years Total
------- ------- ------- ------- --------
Real Estate
Fixed Rate ............. $ 672 $10,519 $10,262 $15,989 $ 37,442
Floating Rate .......... 17,482 9,352 10,624 37,526 74,984
Commercial Loans
Fixed Rate ............. 1,400 780 516 -- 2,696
Floating Rate .......... 7,697 2,567 402 1,537 12,203
All Other Loans
Fixed Rate ............. 714 7,742 149 -- 8,605
Floating Rate .......... 704 3,404 74 -- 4,182
------- ------- ------- ------- --------
Total ............... $28,669 $34,364 $22,027 $55,052 $140,112
======= ======= ======= ======= ========
Significant Group Concentrations of Credit Risk:
The Company grants business, commercial and residential loans to customers
throughout the state. Approximately 85% of the Company's real estate loans are
located in Pennsylvania with most of the remainder in New Jersey. Although the
Company has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the viability of the real
estate economic sector.
F-19
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 4. LOANS (Continued)
Loans on which the accrual of interest have been discontinued or reduced
amounted to approximately $6,900,000 (which does not include $2,675,000 of gross
loans considered "in-substance" foreclosures) and $4,585,000 at December 31,
1994 and 1993, respectively. If interest on these loans (including
"in-substance" foreclosures) had been accrued, such income would have
approximated $827,000, ($262,000 of which resulted from loans foreclosed upon in
1994 or considered in-substance foreclosures at December 31, 1994) $767,000 and
$1,206,000 for 1994, 1993 and 1992, respectively.
Included in loans are loans to officers and directors of the Company, and
their associates, of approximately $8,940,000 ($8,407,000 with collateral
pledged, $533,000 unsecured) and $10,532,000 ($10,514,000 with collateral
pledged; $18,000 unsecured) at December 31, 1994 and 1993, respectively. An
analysis of activity with respect to such aggregate loans to related parties
during 1994 and 1993 is as follows:
Balance At Balance At
January 1, 1994 Additions Repayments December 31, 1994
--------------- --------- ------------- -----------------
$10,532,000 $8,550,000 ($10,142,000) $ 8,940,000
=========== ========== ============ ===========
Balance At Balance At
January 1, 1993 Additions Repayments December 31, 1993
--------------- --------- ------------- -----------------
$11,956,000 $3,467,000 ($ 4,891,000) $10,532,000
=========== ========== ============ ===========
A related party loan (Bay Properties Company--a general partnership in
which one of the three general partners was a former director of the Company and
the Bank) on which the accrual of interest was discontinued as of December 31,
1991, had a balance of $2,850,000 as of that date. BPI defaulted on its payment
obligations under the loan in 1991. During 1992 a portion of the loan was
charged off, resulting in a balance of $1,075,000 at December 31, 1993 and 1992,
which amount has been reclassified as other real estate held for sale. Net
proceeds from the sale of certain collateral have reduced the outstanding
balance to $551,000 at December 31, 1994. If interest on this loan had been
accrued, such income would have been approximately $191,000 in 1992.
F-20
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 4. LOANS (Continued)
During 1993, LKH Associates (a partnership whose partners were Company
shareholders) defaulted in its payment obligation under a participation loan
and, at December 31, 1993 and 1994, the net realizable value of this loan was
classified as an "in-substance foreclosure." In connection with the default,
First Fidelity Bank filed suit against the Company (See Note 12).
During 1994, the Company charged off the remaining portion of a loan
guaranteed by the wife of the former Chairman of the Company. The balance of
this loan was $296,000 at December 31, 1993.
At December 31, 1994 and 1993 loans past due 30-89 days were approximately
$5,796,000 and $4,319,000, respectively. Loans past due 90 days or more were
approximately $6,900,000 and $4,585,000, respectively. Restructured loans were
$2,538,000 and $3,010,000 at December 31, 1994 and 1993, respectively.
Loan origination costs of $574,000, $475,000 and $259,000, incurred during
1994, 1993, and 1992, respectively, in connection with the origination of loans
have reduced salaries and employee benefits by that amount. "Interest and fees
on loans" include $26,000, $100,000, and $95,000, respectively, for the years
ended December 31, 1994, 1993 and 1992, resulting from the amortization of loan
origination fees received and net of loan origination costs.
NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES AND ALLOWANCE FOR
OTHER REAL ESTATE HELD FOR SALE
LOANS:
1994 1993 1992
---------- ---------- ----------
Balance, beginning ................ $5,502,000 $4,044,000 $5,271,000
Add:
Provision charged to
operating expenses ............. 2,474,000 1,953,000 4,222,000
Recoveries ....................... 254,000 207,000 65,000
---------- ---------- ----------
8,230,000 6,204,000 9,558,000
Less:
Loans charged-off ................ 2,996,000 702,000 5,485,000
"In-substance" foreclosures ...... 208,000 -- 29,000
---------- ---------- ----------
Balance, ending ................... $5,026,000 $5,502,000 $4,044,000
========== ========== ==========
F-21
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES AND ALLOWANCE FOR
OTHER REAL ESTATE HELD FOR SALE (Continued)
OTHER REAL ESTATE HELD FOR SALE:
1994 1993 1992
---------- ---------- ----------
Balance, beginning ................ $3,593,000 $3,106,000 $3,498,000
Add:
Provision charged to
operating expenses ............. 1,508,000 719,000 1,192,000
---------- ---------- ----------
5,101,000 3,825,000 4,690,000
Less:
Amounts charged-off/sales ........ 1,198,000 232,000 1,584,000
---------- ---------- ----------
Balance, ending ................... $3,903,000 $3,593,000 $3,106,000
========== ========== ==========
For Federal income tax reporting purposes, the Company maintained
allowances of $2,292,000 in 1994, $1,609,000 in 1993 and $1,744,000 in 1992, the
maximum permitted under current Federal income tax regulations.
NOTE 6. BANK PREMISES AND EQUIPMENT
Accumulated
Depreciation Estimated
and Net Useful
Cost Amortization Book Value Lives, Years
---------- ---------- ---------- ------------
1994
---------------------------------------------------
Land ................. $ 267,000 -- $ 267,000
Buildings ............ 1,435,000 $ 550,000 885,000 20-50
Equipment ............ 4,682,000 3,885,000 797,000 3-20
Leasehold improvements 1,465,000 822,000 643,000 Term of lease
---------- ---------- ----------
$7,849,000 $5,257,000 $2,592,000
========== ========== ==========
Accumulated
Depreciation Estimated
and Net Useful
Cost Amortization Book Value Lives, Years
---------- ---------- ---------- ------------
1993
---------------------------------------------------
Land ................. $ 267,000 -- $ 267,000
Buildings ............ 1,427,000 $ 490,000 937,000 20-50
Equipment ............ 4,562,000 3,556,000 1,006,000 3-20
Leasehold improvements 1,260,000 729,000 531,000 Term of lease
---------- ---------- ----------
$7,516,000 $4,775,000 $2,741,000
========== ========== ==========
Depreciation and amortization expense amounted to $563,000 in 1994 and
$588,000 in 1993.
F-22
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 7. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
1994 1993
---------- ----------
Accrued interest receivable .............. $2,273,000 $1,022,000
Prepaid expenses ......................... 153,000 148,000
Income taxes receivable .................. 22,000 --
Deposits ................................. 231,000 226,000
Other .................................... 150,000 62,000
---------- ----------
$2,829,000 $1,458,000
========== ==========
NOTE 8. TIME DEPOSITS
At December 31, 1994 and 1993, certificates of deposit with a face value
greater than or equal to $100,000 totalled approximately $5,428,000 and
$3,165,000, respectively. Interest expense for the years then ended relating to
these certificates was approximately $178,000 and $156,000, respectively.
Maturities of certificates of deposit of $100,000 or more as of December
31, 1994 and 1993, are as follows:
Three
Three Months Six Months Over
Months Through Through Twelve
Or Less Six Months Twelve Months Months Total
---------- ---------- ---------- -------- ----------
1994: $3,070,000 $1,200,000 $ 555,000 $603,000 $5,428,000
========== ========== ========== ======== ==========
1993: $ 620,000 $ 665,000 $1,694,000 $186,000 $3,165,000
========== ========== ========== ======== ==========
NOTE 9. ACCRUED EXPENSES AND OTHER LIABILITIES
1994 1993
---------- ----------
Accrued interest ................ $1,039,000 $ 781,000
Other ........................... 753,000 441,000
---------- ----------
$1,792,000 $1,222,000
========== ==========
F-23
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 10. INCOME TAX EXPENSE
Effective January 1, 1993, the Company changed its method of accounting for
income for income taxes to comply with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." A requirement of SFAS
No. 109 is that deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of assets and
liabilities using the currently enacted tax rate expected to be in effect when
the taxes are actually paid or recovered. In accordance with SFAS No. 109, the
Company elected to adopt such statement prospectively in 1993 by recording an
adjustment for the cumulative effect on prior years of the change in method of
accounting for income taxes. At January 1, 1993, the cumulative effect on prior
years of adopting SFAS No. 109 was $-0-.
The net deferred tax asset at January 1, 1993 includes the following:
Deferred tax asset .............. $2,700,000
Deferred tax liability .......... (100,000)
Valuation allowance for
deferred tax asset ............ (2,600,000)
----------
$ --
==========
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax asset at January 1, 1993, are as follows:
Net operating loss and alternative
minimum tax credit carryforwards .... $1,744,000
Allowance for possible loan losses .... 782,000
Loan fees, net ........................ 132,000
Other ................................. 42,000
Depreciation .......................... (100,000)
----------
$2,600,000
==========
F-24
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 10. INCOME TAX EXPENSE (Continued)
Deferred income tax assets (liabilities) result from differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes.
The net deferred tax asset at December 31, 1994 and 1993 includes the
following:
1994 1993
---------- ----------
Deferred tax asset .................. $5,601,000 $4,489,000
Deferred tax liability .............. (44,000) (26,000)
Valuation allowance for net
deferred tax asset ................. (5,557,000) (4,463,000)
---------- ----------
Net deferred tax asset ............. $ -- $ --
========== ==========
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax asset at December 31, 1994 and 1993 are as follows:
1994 1993
---------- ----------
Net operating loss and alternative
minimum tax credit carryforwards .... $3,323,000 $1,662,000
Allowance for possible loan losses ... 930,000 1,324,000
Differences in financial and income
tax reporting of other real estate
held for sale, including
in-substance foreclosures ........... 1,143,000 1,152,000
Other, net ........................... 161,000 325,000
---------- ----------
$5,557,000 $4,463,000
========== ==========
Income tax expense (benefit) is as follows for the years ended December 31:
1994 1993 1992
------- ------- --------
Current ........ -- -- --
Deferred ....... -- $28,000 $724,000
------- ------- --------
$ -- $28,000 $724,000
======= ======= ========
F-25
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 10. INCOME TAX EXPENSE (Continued)
Total income tax expense amounted to $-0- in 1994, $28,000 in 1993 and
$724,000 in 1992, (effective tax rates of (0%), (7.4%), and (20.4%)
respectively), compared to income tax (benefit) of ($1,190,000), ($128,000), and
($1,207,000) computed by applying the statutory rate of 34.0% to loss before
income taxes. These differences are accounted for as follows:
1994
-------------------------
Percent of
Pretax
Amount Loss
----------- ----
Computed "expected" tax (benefit) ...... ($1,190,000) 34.0%
Increase in benefit resulting from
non-taxable interest income .......... (183,000) 5.2
Increase in taxes due to valuation
allowance provided for deferred
tax assets ........................... 1,373,000 (39.2)
----------- ----
$ -- 0.0%
=========== ====
1993
-------------------------
Percent of
Pretax
Amount Loss
----------- ----
Computed "expected" tax (benefit) ...... $ (128,000) 34.0%
Increase in benefit resulting from
non-taxable interest income .......... (264,000) 70.2
Increase in taxes due to
valuation allowance provided
for deferred tax assets .............. 659,000 (175.2)
Decrease in taxes due to utilization
of net operating loss carryforward ... (239,000) 63.6
----------- ----
$ 28,000 (7.4%)
=========== ====
F-26
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 10. INCOME TAX EXPENSE (BENEFIT) (Continued)
1992
-------------------------
Percent of
Pretax
Amount Loss
---------- ------
Computed "expected" tax (benefit) ..... ($1,207,000) 34.0%
Increase in benefit resulting from
non-taxable interest income ......... (284,000) 8.0
Decrease in benefit resulting from
limitation on net operating
loss carryback ...................... 1,491,000 (42.0)
Decrease in benefit resulting from
write-off of deferred tax assets .... 724,000 (20.4)
---------- -----
$ 724,000 (20.4%)
========== =====
Income tax expense for the year ended December 31, 1992 was computed in
accordance with the provisions of Accounting Principles Board Opinion No. 11,
"Accounting for Income Taxes."
As of December 31, 1994, the Company has available net operating loss
carryforwards of approximately $9,100,000 and $5,500,000 that may be applied
against taxable income and alternative minimum taxable income, respectively.
These carryforwards expire through December 31, 2009.
As of December 31, 1994, the Company has available alternative minimum tax
credit carryforwards of $236,000 that may be applied against regular income
taxes. These credits may be carried forward indefinitely.
NOTE 11. LEASES
The Company leases buildings and equipment under non-cancelable operating
leases.
F-27
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 11. LEASES (Continued)
Minimum rentals under operating leases are as follows:
Years Ending
December 31, Amount
------------ ----------
1995 .............. $ 424,000
1996 .............. 381,000
1997 .............. 365,000
1998 .............. 352,000
1999 .............. 309,000
2000 and thereafter .. 336,000
----------
Total minimum
lease payments ..... $2,167,000
==========
Rent expense for the years ended December 31, 1994, 1993 and 1992 was
approximately $616,000, $610,000 and $683,000, respectively, including operating
expenses of approximately $149,000, $137,000, $161,000, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
During 1994 and 1993, the Company had lines of credit available from
correspondent banks of $9,000,000 and $-0-, respectively.
On August 17, 1992, the Company entered in an employment contract for a
period of three years with the President and Chief Executive Officer providing
for a minimum annual base salary of $135,000 per year plus incentive
compensation based on a percentage of net profits as defined. There was no
incentive compensation expense for the years ended December 31, 1993 and 1992.
During 1994, the parties mutually agreed to terminate this contract.
F-28
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
In July 1994, the Company entered into an employment contract for a period
of two years with the President and Chief Executive Officer providing for a
minimum annual base salary of $125,000 per year. In addition, the Company
granted him certain stock options to purchase the Company's shares. Such options
vested on December 29, 1994 upon the public announcement of a Plan of Merger.
Accordingly, the Company recorded compensation expense for $183,000. At the
effective date of the Merger (See Note 1), all the options granted in connection
with the Merger shall automatically be cancelled and the individual shall
receive as consideration for such cancellation an amount in cash equal to the
excess of $10 over the applicable exercise price of the option.
The parties agreed to terminate the employment of the President on March 2,
1995. The termination agreement also cancels such stock options and obligates
the Bank to pay approximately $94,000, subject to adjustment under certain
circumstances, in lieu of the aforementioned options. Upon such termination of
the President, the Bank hired another President. Upon the effective date of the
Merger, the new President's employment will be terminated and he will be paid a
bonus of $100,000, subject to adjustment under certain circumstances.
In connection with the proposed Merger (See Note 1), the Company is
obligated for broker's fees amounting to 1% of the purchase price or $282,000,
subject to closing. Because of entering a Plan of Merger, minimum broker fees of
$150,000 are due and have been accrued at December 31, 1994. In addition, the
Company has offered severance packages to various employees. Since the amount of
severance to be paid is dependent upon the number of employees accepting the
terms of such severance packages as well as employee retention by Midlantic, the
amount of severance to be paid cannot be estimated. However, such amount may be
material.
The Company was a defendant in two lawsuits, originally filed in June 1992,
in the United States District Court for the Eastern District of Pennsylvania.
These two cases were consolidated since the claims were identical. All of the
defendants in the cases moved to dismiss the Complaints and/or for summary
Judgement in July 1992. These motions were denied without prejudice in November
1992. After Court-ordered discovery process, the Plaintiffs filed amended
Complaints in January 1993. The Defendants filed Motions to Dismiss the amended
Complaints and/or for summary Judgment in February 1993.
F-29
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
On September 30, 1993, the District Court entered an Order dismissing
plaintiff's Federal claims with prejudice and dismissing plaintiff's state
claims without prejudice. On October 22, 1993, plaintiff's appealed this Order
to the United States Court of Appeals for the Third Circuit. On May 24, 1994,
the Third Circuit Court affirmed the District Courts September 30, 1993 Order to
Dismiss.
On July 22, 1994, the plaintiff in one of the above-stated lawsuits, filed
a class action suit in the Court of Common Pleas of Montgomery County,
Pennsylvania. Preliminary objections to the Complaint have been filed and are in
the process of Briefing and Argument.
The Complaint asserts claims against various directors and officers of the
Company and the Company, as a nominal defendant. The Complaint alleges:
Fraud against all defendants with respect to disclosure; a derivative claim
on behalf of the Company for breach of fiduciary duty and waste of
corporate assets against the individual defendants; and direct and
derivative claims for negligent misrepresentations against all defendants.
The Plaintiffs purport to sue on behalf of a class of all persons who
purchased publicly-traded securities of the Company during the period of
approximately February 6, 1990 through June 7, 1992 and who sustained damages as
a result of such purchases and/or were holders of shares of the Company with
respect to voting in the 1990, 1991 and 1992 proxy solicitations.
The Complaint does not demand a specified amount of damages. The Complaint
seeks:
"compensatory damages including establishing a constructive trust for any
monies generated by the disposal of the Bay Properties asset; Judgments
removing the Board of Directors from the Company and appointing a
conservator for the Bank; Judgments awarding the Company compensatory
damages; a Judgment declaring the election of directors and other business
consummated at the 1990, 1991 and 1992 annual shareholder meetings null and
void and ordering a new election; and an award of counsel fees, interest
and costs of suits to Plaintiffs and their counsel."
F-30
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
On about February 27, 1995, a Complaint was filed in the Court of Common
Pleas of Montgomery County, Pennsylvania against the Company and various
Directors and Officers. The Complaint alleges a claim against all defendants for
breach of fiduciary duties of care, loyalty and full disclosure, relating to the
transaction whereby Midlantic Corp. intends to acquire the shares of the
Company. The Plaintiff purports to sue on behalf of a class of all stockholders
of the Company who owned shares of the Company on December 31, 1994 (excluding
defendants and persons and entities related to defendants).
The Complaint does not demand a specified amount of damages. The Complaint
seeks the following relief: a declaration that the case is a proper class
action; an Order that defendants carry out their fiduciary duties to plaintiff
and the class; a preliminary and permanent injunction against the Midlantic
transaction; in the event the Midlantic transaction is consummated, an Order
rescinding the transaction and/or awarding rescissory damages; compensatory
damages; an accounting and constructive Trust on all profits realized by
defendants as a result of the Midlantic transaction; an Order requiring
defendants to permit a Stockholders' Committee to "ensure a fair procedure,
adequate procedural safeguards, and independent input by plaintiff and the class
in connection with any buy-out proposals"; and costs and disbursements of the
action.
While the Company is a nominal defendant in certain of the above lawsuits,
there may be liability to the Company for indemnification of expenses, liability
and loss (including without limitation attorneys's fees; judgments, fines,
taxes, penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered in connection with these cases, under Pennsylvania law and
provisions of the bylaws of the Company and the Bank. Such amounts may be
material.
F-31
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
The Company is also a defendant in two lawsuits filed in January 1995 in
the Court of Common Pleas of Montgomery County, Pennsylvania. The first
Complaint asserts claims against the Company for breach of contract, release of
obligation, fraud and recession with respect to a death benefit compensation
agreement with the wife of the former Chairman of the Bank. The Complaint seeks
payments which could be material depending on the Plaintiff's life expectancy,
as well as punitive and other damages in excess of $2,000,000. The second
Complaint asserts claims against the Company and certain shareholders for breach
of contract, gross negligence, breach of duty of care, breach of covenant of
good faith and fair dealing, and tortious interferences with respect to a
participation loan that is now in default and in the process of foreclosure. The
second Complaint seeks damages of approximately $1,000,000 plus interest and
costs.
Management of the Company, including directors and officers named as
defendants in these cases, intends to contest these cases vigorously and
believes that the Defendants have strong factual and legal defenses to the
claims asserted. The outcome of the litigation or an estimate of the range of
damages claimed cannot be predicted.
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The contract
amount of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
F-32
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
The Company'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 notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Contract Amount
December 31,
------------------------------
1994 1993
----------- -----------
Financial instruments
whose contract amounts
represent credit risk:
Commitments to extend credit .......... $24,211,000 $22,357,000
Standby letters of credit ............. 747,000 1,295,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include residential properties, income and non-income producing commercial
properties, accounts receivable, inventory and property, plant and equipment.
F-33
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including trade, real estate developments and similar
transactions. For the most part, these letters of credit are short-term in
nature with maturities of eighteen months or less.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Company
holds collateral supporting those letters of credit commitments, i.e.,
certificates of deposit, marketable securities, real estate, UCC's, etc for
which collateral is deemed necessary. Approximately 70% and 81% of the total
letters of credit at December 31, 1994 and 1993, respectively, were fully
collateralized with the balance unsecured.
The Bank does not issue or hold derivative instruments with the exception
of loan commitments and letters of credit. These instruments are issued in the
normal ordinary course of business to meet customer needs. Commitments to fund
fixed-rate loans were immaterial at December 31, 1994. Variable rate commitments
are generally issued for less than one year and carry market rates of interest.
Such instruments are not likely to be affected by annual rate caps triggered by
rising interest rates. Bank management expects that off-balance sheet risk will
not be material to the Bank's results of operations or financial condition.
NOTE 14. RELATED PARTIES
Legal fees amounting to $58,000 in 1993 and $288,000 in 1992, were paid to
law firms whose principals were also directors and/or shareholders of the
Company and/or its subsidiary.
The Company leases space for two of its branches and its administrative
offices under operating leases from certain directors and/or shareholders and/or
their affiliates. These leases expire at varying times through 2000 and provide
for current minimum annual rentals of $133,000 in the aggregate. Rent expense
and operating costs incurred to those related parties in 1994, 1993 and 1992 was
$202,000, $190,000 and $215,000, respectively.
F-34
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 14. RELATED PARTIES (Continued)
A management company owned by a director/shareholder of the Company has
provided management services at no expense to the Company, for certain other
real estate held for sale and owned by the Company.
NOTE 15. PENSION AND THRIFT PLANS
The Company has a non-contributory, defined benefit plan for substantially
all employees who meet the age and service requirements of the Plan. Pension
benefits are based on length of service and compensation levels.
Effective January 1, 1989, the Company implemented the provisions of
Statement of Financial Accounting Standards No. 87, "Employers Accounting for
Pensions", which included modifications of certain actuarial assumptions and
methods.
Net periodic pension cost for 1994, 1993 and 1992 includes the following
components:
1994 1993 1992
------- ------- -------
Service cost ................................. $54,288 $50,428 $44,739
Interest cost ................................ 35,930 56,263 54,951
Actual return (loss) on plan assets .......... 2,858 (65,855) (56,747)
Net amortization and deferral ................ (32,405) 22,142 14,405
------- ------- -------
Net periodic pension cost .................. $60,671 $62,978 $57,348
======= ======= =======
The following is a reconciliation of the funded status of the Plan with the
balance sheet as of December 31, 1994, 1993 and 1992:
Actuarial present value of benefit obligations:
1994 1993 1992
--------- --------- ---------
Accumulated benefit obligation,
including vested benefits of
$201,000, 1994, $365,000, 1993,
and $539,000, 1992 ................. ($210,000) ($390,174) ($563,376)
Effect of future compensation levels . (252,000) (165,816) (139,911)
--------- --------- ---------
Projected benefit obligation ......... (462,000) (555,990) (703,287)
Fair value of plan assets ............ 400,000 523,145 716,432
--------- --------- ---------
Projected benefit obligation less than
(in excess of) plan assets ......... (62,000) (32,845) 13,145
Unrecognized net obligation
on transition, being amortized
over 15 years ...................... 73,000 81,628 89,790
Unrecognized net (gain) loss
subsequent to transition ........... (19,000) (59,018) (50,192)
--------- --------- ---------
Prepaid (accrued) pension cost ....... ($ 8,000) ($ 10,235) $ 52,743
========= ========= =========
F-35
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 15. PENSION AND THRIFT PLANS
For each of the years ended December 31, 1994, 1993 and 1992, the weighted
average discount rate used in determining the actuarial present value of the
projected benefit obligation was 8%, the expected long-term rate of return on
assets was 8%, and the assumed rate of increase in future compensation levels
was 6%. The Company's vested accumulated benefit obligation was determined using
the frozen initial liability method. The Company's funding policy is to make at
least the minimum annual contributions required by applicable regulations.
The Company also has a 401(k) Thrift Plan for all full-time employees. The
Plan provides for employee tax-free contributions through salary withholdings
and employer contributions to the Plan at the discretion of the Company's Board
of Directors. There were no employer contributions for the years ended December
31, 1994, 1993 and 1992.
NOTE 16. SHAREHOLDERS' EQUITY
Common Stock Offering
- ---------------------
The Company completed a Common Stock Rights and Community Offering (the
"Offering") on November 29, 1993. There were 1,523,767 shares of common stock
sold at a price of $4.50 per share, of which approximately $2.1 million was sold
to existing shareholders and approximately $4.8 million was sold to investors.
Net proceeds of the Offering were approximately $6,168,000 after broker
commissions and other expenses. The Company invested substantially all of the
proceeds in its subsidiary, the Bank.
Capital Resources
- -----------------
As a state-chartered bank, the Bank is subject to an informal state
requirement of a 6.0% total capital to total asset ratio. The new risk-based
capital standards provide that as of December 31, 1992, banks must have total
capital equal to at least 8.0% of their total risk-weighted assets and Tier 1
capital equal to at least 4% of total risk-weighted assets. In addition, banks
must maintain a minimum Tier 1 capital to total average assets (leverage) ratio
of at least 4% subject to regulatory requirements. As a result of the C & D
issued to the Bank (Note 1) the Bank was required to maintain a leverage ratio
of 6% within six months of the C & D and 6.5% within one year of the C & D.
F-36
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 16. SHAREHOLDERS' EQUITY (Continued)
Capital Resources (Continued)
- -----------------
At December 31, 1994, the Bank's total and Tier One risk-weighted capital
ratios were 9.17% and 7.90%, respectively. At December 31, 1993, the Bank's
total and Tier One risk-weighted capital ratios were 11.60% and 10.32%,
respectively. In addition, the Bank's leverage ratio was 5.50% at December 31,
1994 and 7.51% at December 31, 1993.
As of December 31, 1993, the Bank's capital ratios met the requirements of
FDICIA and the restrictions imposed by the C & D (Note 1). However, the Company
was deficient in meeting the December 31, 1994 Leverage Ratio.
FDICIA
- ------
On December 19, 1991, FDICIA became law. Some of the most significant
provisions of the Act concern regulatory supervision with respect to capital
levels of financial institutions. These provisions, referred to as "prompt
corrective action" regulations, establish five "capital" categories. The
categories range from well capitalized to critically undercapitalized. Financial
institutions falling within each of these categories are subject to various
restrictions and requirements. There are numerous other provisions of the Act
which require banking agencies to establish standards relating to a variety of
areas.
NOTE 17. SUPPLEMENTARY INCOME STATEMENT INFORMATION
1994 1993 1992
-------- -------- --------
Maintenance and repairs ..................... $411,000 $374,000 $314,000
Taxes other than payroll
and income taxes:
Pennsylvania Shares Tax ................. 192,000 195,000 199,000
Other ................................... 77,000 113,000 230,000
Pursuant to an examination of the Company by Federal and State banking
agencies, the Company recorded, retroactive to its fourth quarter of 1993,
adjustments of $1,072,000 and $626,000 to increase its allowance for possible
loan losses and allowance for losses on other real estate, respectively.
F-37
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 18. FINANCIAL STATEMENTS OF OLD YORK ROAD BANCORP, INC.
(PARENT ONLY)
BALANCE SHEET
DECEMBER 31, 1994 AND 1993
ASSETS
1994 1993
----------- -----------
Investment in subsidiary, at equity ........... $12,591,000 $16,347,000
Other assets, organization costs .............. 14,000 26,000
----------- -----------
$12,605,000 $16,373,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities ............................. $ 68,000 $ 68,000
Shareholders' equity:
Common stock ................................ 2,825,000 2,825,000
Capital in excess of par .................... 20,508,000 20,508,000
Accumulated deficit ......................... (10,527,000) (7,028,000)
Unrealized loss on AFS Portfolio ............ (269,000) --
----------- -----------
Total shareholders' equity ................ 12,537,000 16,305,000
----------- -----------
$12,605,000 $16,373,000
=========== ===========
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992
---------- -------- ----------
Operating expenses, amortization of
organization costs ............... ($ 12,000) ($ 14,000) ($ 14,000)
---------- -------- ----------
Loss before equity in undistributed
net loss of subsidiary ........... (12,000) (14,000) (14,000)
Equity in undistributed net loss
of subsidiary .................... (3,487,000) (390,000) (4,259,000)
---------- -------- ----------
Net loss ........................... ($3,499,000) ($404,000) ($4,273,000)
========== ======== ==========
F-38
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 18. FINANCIAL STATEMENTS OF OLD YORK ROAD BANCORP, INC.
(PARENT ONLY) (Continued)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Net loss ................................. ($3,499,000) ($ 404,000) ($4,273,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of organization costs .... 12,000 14,000 14,000
Equity in undistributed net loss
of subsidiary ....................... (3,487,000) (390,000) (4,259,000)
----------- ----------- -----------
Net cash provided by
operating activities .............. -- -- --
----------- ----------- -----------
Investing activity, purchase of subsidiary
common stock ........................... -- (6,168,000) --
----------- ----------- -----------
Financing activity, proceeds from issuance
of common stock ........................ -- 6,168,000 --
----------- ----------- -----------
Increase in cash ......................... -- -- --
Cash, beginning of period ................ -- -- --
----------- ----------- -----------
Cash, end of period ...................... -- -- --
=========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
The valuation allowance for investment securities decreased $92,000 in 1992
due to the sale of "other investment securities" of the Company during 1992
which resulted in a loss of approximately $145,000. This amount has been
properly reflected in the "Equity in undistributed net loss of subsidiary" in
Old York Road Bancorp, Inc.'s Statement of Operations.
F-39
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107),
"Disclosures About Fair Value of Financial Instruments" requires all entities to
disclose the estimated fair value of its financial instrument assets and
liabilities. For the Company, as for most financial institutions, approximately
98% of its assets and liabilities are considered financial instruments as
defined in SFAS No. 107. Many of the Company's financial instruments, however,
lack an available trading market as characterized by a willing buyer and willing
seller engaging in an exchange transaction. It is also the Company's general
practice and intent to hold its financial instruments to maturity and to not
engage in trading or sales activities. Therefore, significant estimates and
present value calculations were used by the Company for the purposes of this
disclosure.
Estimated fair values have been determined by the Company using the best
available data, and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and carrying values at December 31, 1994 were as follows:
* Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
1994
--------------------------
Estimated
Fair Carrying
Value Amount
----------- -----------
Cash due from banks
and Federal funds sold ................. $19,268,000 $19,268,000
=========== ===========
Investment securities .................... $54,801,000 $57,948,000
=========== ===========
1993
--------------------------
Estimated
Fair Carrying
Value Amount
----------- -----------
Cash due from banks
and Federal funds sold ................. $27,341,000 $27,341,000
=========== ===========
Investment securities .................... $49,106,000 $49,073,000
=========== ===========
F-40
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
* The net loan portfolio has been valued on an aggregate basis using a
present value discounted cash flow method. The discount rate used in
these calculations is based on the treasury yield curve rates adjusted
for servicing costs and estimated credit quality.
Estimated Carrying
Fair Value Amount
------------ ------------
Net loans ........................ 1994 $139,577,000 $143,248,000
---- ============ ============
Net loans ........................ 1993 $136,455,000 $134,610,000
---- ============ ============
* Financial instruments with stated maturities have been valued using a
present value discounted cash flow method. The discount rate used in
these calculations is based on treasury yield curve rates.
Estimated Carrying
Fair Value Amount
------------ ------------
Deposits with stated
maturities ..................... 1994 $60,854,000 $62,406,000
---- =========== ===========
Deposits with stated
maturities ..................... 1993 $53,358,000 $53,238,000
---- =========== ===========
F-41
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
* Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the
recorded book balance.
Estimated Carrying
Fair Value Amount
------------ ------------
Deposits with no stated
maturities .................... 1994 $154,267,000 $154,267,000
---- ============ ============
Deposits with no stated
maturities .................... 1993 $152,838,000 $152,838,000
---- ============ ============
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
There is no material difference between the notional amount and the
estimated fair value of off-balance sheet items which total $24,958,000 at
December 31, 1994, primarily comprised of unfunded loan commitments which are
generally priced at market at the time of funding.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values.
F-42
<PAGE>
<TABLE>
SCHEDULE I--LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY HOLDERS AND ANY ASSOCIATES OF THE FOREGOING PERSONS
(000'S)
<CAPTION>
Balance at
Beginning of Balance at
Period Repayments/ End of Period
Name of Borrower January 1,1994 Additions Other December 31, 1994
- ---------------- -------------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Mark Hankin/Associates ..................... $7,419 $6,444 $ 6,412 $7,451
Harry Hilger III ........................... 86 -- 1 85
Estate of Perch Hankin/Associates .......... 1,358 -- 851 507
Laren Pitcairn ............................. 979 -- 979 --
Stanford Hunn .............................. 381 -- 35 346
Albert Hoffman ............................. 9 -- 9 --
John Fiorillo .............................. 300 1,680 1,830 150
Dr. Reibman ................................ -- 10 10 --
Henry Holtzman ............................. -- 182 10 172
Art Poley .................................. -- 24 1 23
Arlene Goldbach ............................ -- 12 4 8
Carl Haeussler, Jr. ........................ -- 198 -- 198
------- ------ ------- ------
$10,532 $8,550 $10,142 $8,940
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Name of Borrower Interest Rate Due Date Collateral
- ---------------- ------------- -------- ----------
<S> <C> <C> <C>
Mark Hankin/Associates ............... 7%-12.0% Demand/ Real Estate/
1995-2016 $ 31,000 Unsecured and
$500,000 Unsecured
Harry Hilger III ..................... 10.0% 2014 Real Estate
Estate of Perch Hankin/Associates .... 7%-10% 2000 Real Estate
Laren Pitcairn ....................... 7% 2012 Real Estate
Stanford Hunn ........................ 7.5% 1994-2014 Real Estate/
Business equipment
Albert Hoffman ....................... 10% 1996 Auto
John Fiorillo ........................ 8.5% Demand Corporate assets
Dr. Reibman .......................... 8.75% Demand Marketable securities
Henry Holtzman ....................... 8.5% 2002 Real estate
Art Poley ............................ 8.5%-12% 1996-1998 Auto/$2,000 unsecured
Arlene Goldbach ...................... 9.75% 2004 Real estate
Carl Haeussler, Jr. .................. 10% Demand Real estate
</TABLE>
F-43
<PAGE>
<TABLE>
SCHEDULE I--LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY HOLDERS AND ANY ASSOCIATES OF THE FOREGOING PERSONS
(000'S)
<CAPTION>
Balance at
Beginning of Balance at
Period Repayments/ End of Period
Name of Borrower January 1,1993 Additions Other December 31, 1993
- ---------------- -------------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Mark Hankin/Associates ..................... $ 9,369 $ 753 $2,703 $ 7,419
Harry Hilger III ........................... 87 -- 1 86
Estate of Perch Hankin/Associates .......... 1,504 -- 146 1,358
Laren Pitcairn ............................. 996 -- 17 979
Stanford Hunn .............................. -- 414 33 381
Albert Hoffman ............................. -- 10 1 9
John Fiorillo .............................. -- 2,290 1,990 300
</TABLE>
<TABLE>
<CAPTION>
Name of Borrower Interest Rate Due Date Collateral
- ---------------- ------------- -------- ----------
<S> <C> <C> <C>
Mark Hankin/Associates ................. 7%-12% Demand/ Real Estate/
1995-2016 $12,000 Unsecured
Harry Hilger III ....................... 10% 2014 Real Estate
Estate of Perch Hankin/Associates ...... 7%-10% 2000 Real Estate
Laren Pitcairn ......................... 7% 2012 Real Estate
Stanford Hunn .......................... 7.5% 1994-2014 Real Estate/
Business equipment/
$6,000--unsecured
Albert Hoffman ......................... 10% 1996 Auto
John Fiorillo .......................... 8.5% Demand Corporate assets
</TABLE>
F-44
<PAGE>
<TABLE>
SCHEDULE I--LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY HOLDERS AND ANY ASSOCIATES OF THE FOREGOING PERSONS
(000'S)
<CAPTION>
Balance at
Beginning of Balance at
Period Repayments/ End of Period
Name of Borrower January 1,1992 Additions Other December 31, 1992
- ---------------- -------------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Mark Hankin/Associates .................. $6,229 $8,034 $ 4,894 $9,369
Harry Hilger III ........................ 88 -- 1 87
Estate of Perch Hankin/Associates ....... 1,634 -- 130 1,504
Laren Pitcairn .......................... -- 1,000 4 996
Joseph Murphy ........................... 374 -- 374 --
Bernie Gottlieb ......................... 1,553 -- 1,553 --
Lowen Hankin ............................ 3,312 -- 3,312 --
James Schwartzmann ...................... 781 -- 781 --
</TABLE>
<TABLE>
<CAPTION>
Name of Borrower Interest Rate Due Date Collateral
- ---------------- ------------- -------- ----------
<S> <C> <C> <C>
Mark Hankin/Associates .................... 6.5%-10% Demand/ Real Estate/
1995-2016 $1,630,000 Unsecured
Harry Hilger III .......................... 10% 2014 Real Estate
Estate of Perch Hankin/Associates ......... 6.5%-10% 2000 Real Estate
Laren Pitcairn ............................ 10% 2012 Real Estate
Joseph Murphy ............................. 6.5% 2005 Real Estate/
Repayments include a $346,000 reclassification
as a loan to an unrelated party since the
Director resigned in 1992.
Bernie Gottlieb ........................... 6%-6.5% 1992/1994 Partial/Real Estate/
$1,485,000 Unsecured
Repayments include a $39,000 reclassification
as a loan to an unrelated party since the
Director resigned in 1992.
Lowen Hankin .............................. 7%-11.5% Demand Real Estate
1992-2009 During 1992 a portion of this loan was
charged off, resulting in a balance of
$1,075,000 at December 31, 1992, which has
been reclassified as an "in-substance
foreclosure." The Director resigned
during 1992.
James Schwartzman ......................... 9.75% 2004 Real Estate.
Resigned as Director in 1992
</TABLE>
F-45
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
(Dollar amounts in thousands)
<S> <C> <C>
Assets:
Cash and Due From Banks ........................................ $ 17,225 $ 14,868
Investment Securities:
Investments Held to Maturity (Market Values
of $49,221 and $47,841 respectively) ....................... 50,323 50,988
Investment Securities Available-for-Sale ..................... 7,062 6,960
Federal Funds Sold ............................................. 4,500 4,400
Loans .......................................................... 146,511 152,769
Less: Unearned Income and deferred fees ...................... (1,712) (1,989)
Less: Allowance for Possible Loan Losses ..................... (6,132) (5,293)
------- -------
Net Loans ...................................................... 138,667 145,487
- --------- ------- -------
Bank Premises and Equipment .................................... 2,467 2,592
Other Real Estate Held for Sale, Net ........................... 2,708 3,061
Accrued Interest Receivable
and Other Assets ............................................. 3,323 2,829
-------- -------
Total Assets ................................................... $226,275 $231,185
- ------------ ======== ========
Liabilities:
Deposits:
Demand ....................................................... $ 38,647 $ 43,785
Savings ...................................................... 35,797 39,201
Interest Bearing Checking .................................... 66,964 71,281
Other Time Deposits .......................................... 70,076 62,406
-------- --------
211,484 216,673
Accrued Expenses and
Other Liabilities ............................................ 2,001 1,975
-------- --------
Total Liabilities .............................................. 213,485 218,648
- ----------------- -------- --------
Shareholders' Equity:
Capital Stock $1.00 par, authorized
14,000,000 shares; issued and outstanding
2,825,312 shares ............................................ 2,825 2,825
Capital in Excess of Par ....................................... 20,508 20,508
Accumulated Deficit ............................................ (10,445) (10,527)
Unrealized Loss on Investment Securities Available for Sale .... (98) (269)
-------- --------
Total Shareholders' Equity ..................................... 12,790 12,537
- -------------------------- -------- --------
Total Liabilities and
Shareholders' Equity ......................................... $226,275 $231,185
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
FF-1
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
March 31,1995 March 31, 1994
------------- --------------
(Dollar amounts in thousands except earnings per share)
<S> <C> <C>
Interest Income:
Interest and Fees on Loans .................................... $3,329 $2,876
Interest on Investment Securities:
U.S. Government Obligations ................................. 800 640
State and Political Subdivision Obligations ................. 2 2
Other Securities ............................................ 13 3
Interest on Federal Funds Sold .................................. 19 116
------ ------
Total Interest Income ........................................... 4,163 3,637
------ ------
Interest Expense:
Interest on Deposits .......................................... 1,453 1,282
Interest on Federal Funds Purchased
and Other Borrowed Money ..................................... 25 9
------ ------
Total Interest Expense .......................................... 1,478 1,291
------ ------
Net Interest Income ............................................. 2,685 2,346
Provision for Possible Loan Losses .............................. 97 300
------ ------
Net Interest Income After Provision for Possible
Loan Losses ................................................... 2,588 2,046
------ ------
Other Income:
Trust Department Income ....................................... 0 3
Service Fees .................................................. 421 437
Other Operating Income ........................................ 8 13
------ ------
Total Other Income .............................................. 429 453
------ ------
Income Before Other Expenses .................................... 3,017 2,499
------ ------
Other Expenses:
Salaries and Benefits ......................................... 1,217 1,173
Occupancy and Equipment ....................................... 457 538
Net Loss on Holding Foreclosed Assets ......................... 192 44
Other Operating Expenses ...................................... 1,067 622
------ ------
Total Other Expenses ............................................ 2,933 2,377
------ ------
Income Before Income Tax Expense ................................ 84 122
Income Tax Expense .............................................. 3 2
------ ------
Net Income ...................................................... $ 81 $ 120
====== ======
Earnings per Common Share ....................................... $0.03 $0.04
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
FF-2
<PAGE>
OLD YORK ROAD BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
March 31, 1995 March 31, 1994
-------------- --------------
(Dollar amounts in thousands)
<S> <C> <C>
Operating Activities:
Net income for the period ...................................... $ 81 $ 120
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for possible Loan and OREO Losses .................. 152 300
Depreciation and amortization ................................ 150 239
Changes in operating assets and Liabilities:
Accrued interest receivable and other assets ............... (494) (1,414)
Accrued expenses and other Liabilities ..................... 26 1,063
------- -------
Net cash provided by (used in) operating activities ............ (85) 308
------- -------
Investing Activities:
Loans originated or acquired, net of principal
collected .................................................... 6,878 634
Purchases of investment securities ............................. 0 (7,967)
Purchases of bank premises and equipment ....................... (4) (45)
Proceeds from sales of other real estate held
for sale ..................................................... 145 171
Proceeds from investment maturities ............................ 697 1,570
Proceeds from sales of equipment ............................... 15 0
------- -------
Net cash provided by (used in) investing activities ............ 7,731 (5,637)
------- -------
Financing Activities:
Net increase(decrease) in non-interest bearing demand deposits,
N.O.W. accounts, savings accounts and money market
accounts .................................................... (12,859) 3,384
Net increase in time deposits .................................. 7,670 2,021
------- -------
Net cash provided by (used in) by financing activities ......... (5,189) 5,405
------- -------
Net increase in cash and cash equivalents ...................... 2,457 76
CASH AND CASH EQUIVALENTS, JANUARY 1 ........................... 19,268 27,341
------- -------
CASH AND CASH EQUIVALENTS, MARCH 31, ........................... $21,725 $27,417
======= =======
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest ....................................... $ 1,392 $ 1,311
</TABLE>
See Notes to Consolidated Financial Statements
FF-3
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
BASIS OF PRESENTATION
NOTE 1.
In the opinion of Old York Road Bancorp, Inc. (the "Company" or "Bancorp") the
accompanying unaudited financial statements contain all adjustments necessary to
present fairly the financial position as of March 31, 1995 and the results of
operations for the three month periods ended March 31, 1995 and 1994, and the
cash flows for the three month periods ended March 31, 1995 and 1994.
NOTE 2.
Results of operations for the three month period ended March 31, 1995 are not
necessarily indicative of the results to be expected for the full year.
Certain captions in the financial statements presented for prior periods have
been reclassified to conform with the 1995 presentation. This includes the
reclassification for all periods presented of in-substance foreclosures ("ISFs")
from other real estate owned ("OREO") to loans (See "Accounting for loan
impairment", Note 15).
NOTE 3.
Net income per share of common stock is based upon the weighted average number
of shares outstanding (2,825,312 shares) during the three month periods ended
March 31, 1995 and March 31, 1994.
NOTE 4.
The financial information has been prepared in accordance with the requirements
of Form 10-QSB and therefore does not include all the disclosures normally
required by generally accepted accounting principles, or those normally made in
the Company's annual Form 10-KSB filing. The reader of this Form 10-QSB may wish
to refer to the Company's annual report on Form 10-KSB for the year ended
December 31, 1994, filed with the Securities and Exchange Commission.
NOTE 5. OPERATIONS, PLAN OF MERGER AND MANAGEMENT'S PLANS
Agreement and Plan of Merger
On December 29, 1994, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with Midlantic Corporation ("Midlantic"). The Merger
Agreement provides for the payment to shareholders of the Company at the closing
of the merger $10 in cash or .3721 shares of Midlantic common stock for each
share of Company common stock outstanding. A maximum of 49% of the Company's
common stock can be exchanged for cash, subject to adjustment under certain
conditions. The Merger Agreement is subject to shareholder approval, regulatory
approvals and various other conditions of closing.
The Merger Agreement may be terminated by either Midlantic or the Company if the
Closing has not occurred by December 31, 1995. The Merger Agreement may be
terminated by the Company if the price of Midlantic common stock over a
specified period of time is less than $26.87 multiplied by 0.85 (which is
approximately $22.84) and also less than an index ratio based upon a selected
peer group of other bank-holding companies; provided, however, that in such
event Midlantic, in its sole discretion, may elect to increase the Exchange
Ratio to avoid such termination. In addition, if the Company's capital (as
adjusted in accordance with the terms of the Merger Agreement) falls below a
specific level, Midlantic is not
FF-4
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
obligated to effectuate the Merger. The Merger Agreement also provides that if
the Company does not meet certain minimum capital requirements, the amount of
cash and the number of shares of Midlantic common stock which Company
shareholders are entitled to receive in exchange for their shares of Company
common stock will be adjusted downward.
In addition, the Company and Midlantic have entered into a Stock Option
Agreement dated December 29, 1994 in connection with the Merger Agreement.
Pursuant to the terms of the Stock Option Agreement, the Company has granted
Midlantic an option (the "Option") to purchase up to 19.9% of the shares of the
Company's Common Stock which would be outstanding immediately following the
exercise of the option, at a price of $7.25 per share (based upon the number of
outstanding shares of Company Common Stock on December 29, 1994, the Option
represents the right to purchase up to 701,919 shares). Midlantic does not have
any voting rights with respect to shares of the Company's Common Stock subject
to the Option prior to exercise of the Option. The Option is exercisable only
upon the occurrence of a triggering event, as defined in the Stock Option
Agreement.
The Stock Option Agreement terminates upon either the termination of the Merger
Agreement or the consummation of the transactions contemplated thereby; provided
that if the Merger Agreement terminates after the occurrence of a triggering
event, the Stock Option Agreement will not terminate until the later of 18
months following the date of termination of the Merger Agreement or the
consummation of any proposed transactions which constitute the triggering event.
Regulatory Matters
On September 30, 1992, the Pennsylvania Department of Banking (the "Department")
and the Federal Deposit Insurance Corporation ("FDIC") issued a joint report of
examination of the Bank (the "Report") as of February 24, 1992. The report cited
numerous deficiencies including an unacceptably high volume of adversely
classified and special mention assets, inadequate capital levels, continued
deterioration of the loan portfolio, a deficient allowance for loan losses, weak
liquidity and funds management and overall lack of earnings.
During 1992, the Company also received from the Federal Reserve Bank (the "FRB")
its report of inspection as of December 31, 1991. The findings of the FRB were
consistent with those of the FDIC and the Department as described above.
As a result of the regulatory examinations described above, on February 2, 1993
and February 16, 1993, the Bank entered into a Stipulation and Consent to the
Issuance of an Order to Cease and Desist (the "C & D") with the Department and
the FDIC, respectively. The Company neither admitted nor denied the allegation
of charges of unsafe or unsound banking practices and violations of laws and/or
regulations. On December 8, 1992, the Company also entered into a Memorandum of
Understanding ("MOU") with the FRB.
The C & D and MOU require the Bank and the Company, respectively, to take
certain actions as defined, subject to regulatory approval, to provide for safe
and sound banking practices and improve the overall financial condition of the
Bank and the Company. The key provisions of these agreements include
requirements to:
1) Improve earnings and capital and, within certain time frames, to
maintain a leverage ratio equal to 6.5% or more and reduce all doubtful and
substandard assets and contingent liabilities to not more than 50% of Tier One
capital (Note 13);
FF-5
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
2) Adopt and implement a program for each "problem asset" and contingent
liability and, within certain time frames, reduce loans past due 30 days or more
and non-accrual loans to no greater than 5.0% and 1.0%, respectively, of total
loans;
3) Adopt a plan to increase asset portfolio diversification and ultimately
concentration of loans to less than 100% of Tier One capital;
4) Eliminate all violations of laws and regulations and substantially
revise lending and collection policies within 60 days;
5) Restrict extensions of credit to certain borrowers adversely classified;
6) Appoint a Committee to monitor compliance with the C & D and report to
regulatory authorities quarterly;
7) Prohibit the payment of dividends by the Bank or the Company, with
certain exceptions;
8) Prohibit the assumption of debt or redemption of stock by the Company;
During 1994, a joint examination was conducted by the Department and the FDIC
and the findings were consistent with previous examinations. The aforementioned
C & D issued in 1993 is still in effect at December 31, 1994 and March 31, 1995.
The 1994 examination cited the Company for certain apparent violations of
Federal and state banking laws and regulations. In addition, as of December 31,
1994 and March 31, 1995, the Company was not in compliance with the existing
FDIC and Department Cease and Desist Orders and the Federal Reserve Bank MOU,
principally with respect to its capital level, level of delinquent loans,
classified assets and non-accrual loans. As a result of the alleged violations,
the Company and/or the Bank could be subject to supervisory action, regulatory
sanctions and/or potential civil money penalties.
FF-6
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 6. INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) ("Statement") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Statement requires certain investments to be
classified under one of the following categories: "held to maturity" and
accounted for at historical cost, adjusted for accretion of discounts and
amortization of premiums; "available for sale" and accounted for at fair market
value, with unrealized gains and losses reported as a separate component of
shareholders' equity; or "trading" and accounted for at fair market value, with
unrealized gains and losses reported as a component of net income. The Bank does
not hold trading securities.
At March 31, 1995, the Company has also identified investment securities that
will be held for indefinite periods of time, including securities that will be
used as part of the Company's asset/liability management strategy and that may
be sold in response to changes in interest rates, prepayments and similar
factors. The securities are classified as "available-for-sale". These securities
consist primarily of U.S. Government Treasury, and U.S. Government Agency
Securities with book and market values of $7,160,000 and $7,062,000
respectively, as of March 31, 1995 which has resulted in an unrealized loss on
securities available-for-sale of $98,000.
The following table represents the carrying and estimated fair values of
investment securities at March 31, 1995.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
HELD-TO-MATURITY Cost Gains Losses Fair Value
---------------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury ................... $ 4,079 $ 0 $ 93 $ 3,986
U.S. Government
Agencies ....................... 46,244 171 1,180 45,235
------- ---- ------ -------
Total Held-To-
Maturity ....................... $50,323 $171 $1,273 $49,221
======= ==== ====== =======
<CAPTION>
Gross Gross
Unrealized Unrealized
AVAILABLE-FOR-SALE Cost Gains Losses Fair Value
------------------ ------- ---------- ---------- ----------
U.S. Treasury ................... $2,991 $0 $25 $2,966
U.S. Government
Agencies ....................... 3,802 0 71 3,731
State and Municipal ............. 100 0 2 98
Other .......................... 267 0 0 267
------ -- --- ------
Total Available-for-
Sale ........................... $7,160 $0 $98 $7,062
====== == === ======
</TABLE>
FF-7
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 7. LOANS March 31, 1995
--------------
Commercial, financial and agricultural ................... $ 9,341,000
Real estate - mortgage ................................... 103,941,000
Real estate - construction ............................... 3,304,000
Consumer and other ....................................... 29,925,000
------------
$146,511,000
============
Less:
Net deferred loan costs .................................. (37,000)
Unearned income .......................................... 1,749,000
Allowance for possible loan losses (Note 8) .............. 6,132,000
------------
7,844,000
------------
$138,667,000
============
Significant Group Concentrations of Credit Risk:
The Company grants business, commercial and residential loans to customers
throughout the state. Approximately 85% of the Company's real estate loans are
located in Pennsylvania with most of the remainder in New Jersey. Although the
Company has a diversified loan portfolio, a substantial portion of its debtors
ability to honor their contracts is dependent upon the viability of the real
estate economic sector.
Included in loans are loans to executive officers and directors of the Company,
and their associates, of $8,237,000 ($7,884,000 with collateral pledged,
$353,000 unsecured) at March 31, 1995.
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JANUARY 1, 1995 ADDITIONS REPAYMENTS MARCH 31, 1995
- --------------- --------- ---------- --------------
<C> <C> <C> <C>
$8,940,000 $493,000 $1,196,000 $8,237,000
- ---------- -------- ---------- ----------
</TABLE>
Loans on which the accrual of interest have been discontinued or reduced
amounted to approximately $8,764,000 at March 31, 1995. If interest on these
loans had been accrued, such income would have approximated $248,000.
At March 31, 1995 loans past due 30-89 days were approximately $2,736,000. Loans
past due 90 days or more were $8,764,000.
At March 31, 1995, non-accrual loans and other real estate owned are as follows:
<TABLE>
<CAPTION>
Net
Loan Related Carrying
Loans: Amount Allowance Value
---------- ---------- ----------
<S> <C> <C> <C>
Business/Commercial ................ $3,372,000 $ 541,000 $2,831,000
Real Estate ........................ 5,362,000 719,000 4,643,000
Installment ........................ 30,000 3,000 27,000
---------- ---------- ---------
$8,764,000 $1,263,000 $7,501,000
========== ========== ==========
Other Real Estate .................. $6,626,000 $3,918,000 $2,708,000
========== ========== ==========
</TABLE>
FF-8
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
<TABLE>
<CAPTION>
NOTE 8. ALLOWANCE FOR POSSIBLE LOAN LOSSES AND ALLOWANCE FOR OTHER REAL ESTATE HELD FOR SALE
ALLOWANCE FOR POSSIBLE LOAN LOSSES: March 31, 1995
--------------
<S> <C>
Balance, beginning December 31, 1994* ........................................................ $5,293,000
Add:
Provision charged to
operating expenses ......................................................................... 97,000
Recoveries ................................................................................. 888,000
----------
6,278,000
Less:
Loans charged-off ............................................................................ 146,000
----------
Balance, ending March 31, 1995 ............................................................... $6,132,000
==========
<CAPTION>
ALLOWANCE FOR POSSIBLE LOSSES ON
OTHER REAL ESTATE HELD FOR SALE:
March 31, 1995
--------------
<S> <C>
Balance, beginning December 31, 1994* ........................................................ $3,636,000
Add:
Recoveries ................................................................................. 227,000
Provision charged to operating expenses .................................................... 55,000
----------
Balance, ending March 31, 1995 ............................................................... $3,918,000
==========
</TABLE>
*After reclassification for effect of SFAS No. 114 as discussed in NOTE 15 to
financial statements.
FF-9
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 9. COMMITMENTS AND CONTINGENCIES
At March 31, 1995 and December 31, 1994, the Company had lines of credit
available from correspondent banks of $9,000,000 and $ - 0 -, respectively.
On June 19, 1992, an action (the "Goldberg Action") was filed in the United
States District Court for the Eastern District of Pennsylvania (Civil Action No.
92-3582), by Richard Goldberg, on behalf of himself as a "purchaser" of the
shares of Bancorp common stock and derivatively on behalf of Bancorp, against
each of the then incumbent directors of Bancorp (with the exception of one of
the directors who is the brother-in-law of Richard Goldberg) and other parties
(collectively, the "Goldberg Defendants"). The Goldberg Action, among other
things, alleged that it was a class action on behalf of purchasers of the shares
of the common stock between February 6, 1990 and June 7, 1992, arising under the
federal securities laws for untrue statements of material facts and the omission
to state material facts necessary in order to make the statements made, in the
light of the circumstances under which they were made not misleading, by Bancorp
in public reports, financial statements, releases and proxy statements.
Additionally, the Goldberg Action alleged state law claims which were a
derivative action on behalf of Bancorp against the Goldberg Defendants for the
alleged breach of fiduciary duty, waste of corporate assets and alleged
negligent misrepresentation of the Goldberg Defendants. The Goldberg Action
sought, among other things, damages, removal of the members of the Board of
Directors and appointment of a conservator for a Bank, a declaration that the
election of directors at Bancorp's 1992 Annual Meeting of Shareholders was null
and void, and counsel fees and costs.
On June 26, 1992, an action (the "Blum Action") was filed in the United States
District Court for the Eastern District of Pennsylvania (Civil Action No.
92-3735), by Byron Blum, on behalf of himself as an owner of shares of the
Common Stock and derivatively on behalf of Bancorp, against each of the then
incumbent directors of Bancorp and other parties (collectively, the "Blum
Defendants"). The Blum Action, among other things, alleged that is was a class
action on behalf of owners of the shares of the Common Stock who were eligible
to vote at the 1990, 1991 and 1992 Annual Meetings of Shareholders of Bancorp
and its predecessor, the Bank, arising under the federal securities laws for
untrue statements of material facts and the omission to state material facts
necessary in order to make the statements made, in the light of the
circumstances under which they were made not misleading, by Bancorp in public
reports, financial statements, releases and proxy statements. Additionally, the
Blum Action alleged state law claims which were a derivative action on behalf of
Bancorp against the Blum Defendants for the alleged breach of fiduciary duty and
waste of corporate assets by the Blum Defendants. The Blum Action sought, among
other things, damages, the institution of procedural safeguards to prevent
alleged wrongdoing by the Blum Defendants, the institution of disciplinary
action against certain Blum Defendants, and counsel fees and costs.
The Goldberg and Blum Actions were consolidated for adjudication. The Goldberg
and Blum plaintiffs filed amended complaints in January, 1993. In February,
1993, the Goldberg and Blum Defendants filed motions to dismiss and/or for
summary judgment with respect to the amended complaints. An oral argument was
held in August, 1993, on the motions filed by the Goldberg and Blum Defendants.
On September 30, 1993, the District Court entered an Order dismissing
plaintiff's Federal claims with prejudice and dismissing plaintiff's state
claims without prejudice. On October 22, 1993, plaintiffs appealed this Order to
the United States Court of Appeals for the Third Circuit. On May 24, 1994 the
Third Court affirmed the District Court's September 30, 1993 order to dismiss.
On July 22, 1994 Richard Goldberg filed a class action lawsuit against various
directors and officers of Bancorp in the Court of Common Pleas of Montgomery
County, Pennsylvania (No. 94-14297). The
FF-10
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
complaint asserts claims against various directors and officers of Bancorp and
the Bank, as a nominal defendant. The complaint alleges:
Fraud against all defendants with respect to disclosure; a derivative claim
on behalf of Bancorp for breach of fiduciary duty and waste of corporate assets
against the individual defendants; and direct and derivative claims for
negligent misrepresentations against all defendants.
The plaintiffs purport to sue on behalf of a class of persons who purchased
publicly traded securities of Bancorp during the period of approximately
February 6, 1990 through June 7, 1992 and who sustained damages as a result of
such purchases and/or were holders of shares of Bancorp common stock with
respect to voting in the 1990, 1991 and 1992 proxy solicitations.
The complaint does not demand a specified amount of damages. The complaint
seeks:
compensatory damages including establishing a constructive trust for any
monies generated by the disposal of the Bay Properties asset; judgments removing
the Board of Directors from Bancorp and appointing a conservator for the Bank;
judgments awarding Bancorp compensatory damages; a judgment declaring the
election of directors and other business consummated at the 1990, 1991 and 1992
annual shareholder meetings null and void and ordering a new election; and an
award of counsel fees, interest and costs of suits to Plaintiffs and their
counsel.
While Bancorp is a nominal defendant in the lawsuits, there may be a liability
to Bancorp for indemnification of expenses, liability and loss (including
without limitation attorneys' fees, judgments, fines, taxes, penalties and
amounts paid or to be paid in settlement) reasonably incurred or suffered in
connection with these cases, under Pennsylvania law and provisions of the bylaws
of Bancorp and the Bank. Such amounts may be material. The Goldberg and Blum
Defendants previously agreed to reimburse Bancorp all such monies advanced by
Bancorp, if the presiding Court found that they breached or failed to perform
their duties as a director or officer, as the case may be, of Bancorp and the
Bank and that the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. Bancorp does not have any directors' and officers'
liability insurance for these legal actions.
Management of Bancorp, including directors and officers named as defendants in
these cases, has stated their intention to contest these cases vigorously and
believe that the Defendants have strong factual and legal defenses to the claims
asserted. The outcome of the litigation or an estimate of the range of damages
claimed cannot be predicted.
In early 1995, Richard Goldberg, the plaintiff in the action described above,
filed another class action against Bancorp and various directors and officers of
Bancorp in the Court of Common Pleas for Montgomery County, Pennsylvania.
Goldberg brings this alleged class action on behalf of himself and on behalf of
all other persons similarly situated who owned shares of Bancorp on December 31,
1994. According to the complaint filed in this action, the plaintiff and other
class members are being bought out of Bancorp at an "unconscionably low price"
by defendants and "purchasers" and "owners" of Bancorp common stock will be
damaged if the proposed merger between Bancorp and Midlantic is consummated.
FF-11
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
The Complaint alleges that the officers and directors of Bancorp have breached
their fiduciary duty of care, loyalty, disclosure and fairness to the
shareholders of Bancorp by entering into the Merger Agreement with Midlantic and
seeks to enjoin such merger.
Among other allegations, the complaint averred that, since January 1990, the
Bank suffered from poor financial performance due to, among other things, gross
mismanagement, imprudent lending practices, and resulting waste of corporate
assets with a resulting dilution of the shareholders' interest in Bancorp.
The complaint requested that the Court order the following relief against the
defendants (including Bancorp):
a. declaring the class described in the complaint to be a proper class and
naming Goldberg to be the representative of this class.
b. ordering defendants to carry out their fiduciary duties to plaintiff and the
class members, including the duty of care, loyalty, disclosure and entire
fairness;
c. granting preliminary and permanent injunctive relief against the consummation
of the transaction between Bancorp and Midlantic, as described in the complaint;
d. if the transaction described above is consummated, rescinding the tender
offer, merger or other similar transaction effectuated by defendants and/or
awarding rescissionary damages;
e. ordering defendants (including Bancorp), jointly and severally, to pay the
plaintiff and the other class members all damages suffered and to be suffered by
them as the result of the acts and transactions alleged in the complaint;
f. ordering defendants (including Bancorp), jointly and severally, to account to
plaintiff and the other class members for all profits realized and to be
realized by them as a result of the transaction complained of and, pending such
accounting, to hold such profits in a constructive trust for the benefit of
plaintiff and other class members;
g. ordering defendants to permit a stockholders' committee, comprised of class
members and their representatives only, to ensure a fair procedure, adequate
procedural safeguards and independent input by plaintiff and the class members
in connection with any buy-out proposals;
h. awarding plaintiff the cost and disbursement of the action including
allowances for plaintiff's reasonable attorneys and expert fees; and
i. granting such other and further relief as may be just and proper.
On April 25, 1995, the Common Pleas Court dismissed this action without
prejudice to the right of the plaintiff to appeal the dismissal or to
reinstitute the matter at a future date.
On June 22, 1988, Bank made a loan to Sylvia Hankin and her son, Dr. Robert
Krakovitz. The loan was secured by Dr. Krakovitz's interest in a certain
long-term lease of federal real estate in Colorado which he was operating as a
health/dude ranch. Dr. Krakovitz leased and gave an option to purchase the ranch
to another individual. Bank received a Collateral Assignment and Security
Agreement of the Lease and Option to Purchase and has exercised its interest so
as to receive lease payments directly because the loan is in default. An action,
in the nature of a foreclosure proceeding, has been instituted by Bank's local
FF-12
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
counsel in Colorado to take title to Krakovitz's interest in the ranch. An
action to establish receivership for the leased property has also been initiated
by Bank in Colorado and is presently pending with the court there. Dr. Krakovitz
has filed a Counterclaim against Bank in the Colorado action.
A. Sylvia Hankin. Sylvia Hankin is the widow of former Bank Chairman, Perch
P. Hankin. When Perch P. Hankin died, the Bank Board of Directors resolved to
provide Sylvia Hankin with pension benefits in the amount of the Chairman's last
salary. Similar type payments had been provided to other Bank Officer/Director
widows. These payments, in the net amount of approximately $130,000.00 a year,
continued until 1993. In July 1993, Bank, Sylvia Hankin and Dr. Krakovitz
entered into a Loan Modification Agreement releasing Mrs. Hankin as a co-signer
on the above described loan while immediately reducing her pension benefits to
$80,000.00 a year and making them subject to further review, reduction and/or
termination. As described above, Dr. Krakovitz and his lessee have defaulted on
the Loan Agreement and the Collateral Assignment providing lease payments
directly to Bank from lessee.
On January 20, 1995, Sylvia Hankin filed an action against the Bank in the Court
of Common Pleas for Montgomery County, Pennsylvania (Docket Number 95-01012). In
the complaint, Sylvia Hankin alleges that, on December 18, 1989, the board of
directors of Bank resolved that Perch Hankin's then current salary of $150,000
per year would be continued for life and for the life of his wife, Sylvia
Hankin. The complaint then alleges that, on May 24, 1990, shortly after the
death of Perch Hankin, the board of directors of Bank resolved that the salary
to be paid to Sylvia Hankin was subject to a "spendthrift" program and was
declared to be "not assignable nor anticipated by the widow or subject to
execution or attachment by creditors of the widow". According to the complaint,
Bank then demanded that Sylvia Hankin turn over to Bank as collateral for the
loan to Sylvia Hankin the proceeds of a life insurance policy on Perch Hankin in
the amount of $150,000. According to the complaint, Bank then withdrew from
these proceeds certain principal and interest owed to Bank on a loan to Sylvia
Hankin's son, Robert Krakovitz, which had been guaranteed by Sylvia Hankin. The
complaint then alleges that, on May 1, 1992 and July 2, 1993, Bank and Sylvia
Hankin entered into two loan modification agreements. According to the
complaint, Bank insisted that the second modification agreement be signed by
Sylvia Hankin and that the second modification agreement contained language
which made the salary being paid to Sylvia Hankin "subject to annual review and
termination or adjustment". According to the complaint, Bank intended to and did
deceive Sylvia Hankin into signing technical and complicated loan modification
documents which Bank did not explain to her and which she did not fully
understand, for the sole purpose of reducing Bank's obligation to pay an annual
salary to Sylvia Hankin. The complaint further alleges that Bank failed to
advise Sylvia Hankin that she obtain independent advice or legal counsel before
signing the documents and misrepresented to Sylvia Hankin that she was
"required" to sign the documents and that the documents, if signed, would
benefit Sylvia Hankin's interests. The complaint further alleges that these
modification documents signed by Sylvia Hankin are invalid in that they lacked
consideration, were signed without Sylvia Hankin's full and complete
understanding of their implications, were signed under duress, and were signed
as a result of oral representations made by Bank that signing such documents
were in the best interests of Sylvia Hankin. The complaint then alleges that
Bank unilaterally reduced Sylvia Hankin's salary from $150,000 per year to
$80,000 per year and initiated an action in Colorado state court to collect the
balance due on the loan to Krakovitz guaranteed by Sylvia Hankin. According to
the complaint, Bank breached its obligations to Sylvia Hankin in that Bank
reduced the annual payments to Sylvia Hankin to offset the amount received by
her as Social Security payments, reduced the payments to Sylvia Hankin to make
payments on the loan guaranteed by her, reduced the amount paid to Sylvia Hankin
from $150,000 to $80,000 per annum, wrongfully retained the insurance policy
proceeds on the life of Perch Hankin, and ultimately refused to pay any
additional compensation to Sylvia Hankin.
FF-13
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
The complaint then purports to state causes of action against Bank for breach of
contract, release of obligation, fraud, rescission, and punitive damages in the
amount of $2,000,000.00. The complaint requests the following in relief against
defendant Bank:
a. order Bank to repay with interest all sums deducted from Sylvia Hankin's
compensation package, which include but are not limited to deductions for the
Social Security payments received by Sylvia Hankin, all arbitrary deductions,
loan payments, and all sums due but not yet paid;
b. order Bank to repay the proceeds of the $150,000 insurance policy with
interest;
c. equitably enforce the provisions of the second modification to the loan
documents and prohibit Bank from proceeding against the assets of Sylvia Hankin
to collect on amounts alleged to be due on the loan to Krakovitz;
d. order Bank to pay Sylvia Hankin the proceeds of all amounts received as a
result of their actions that sell, transfer or modify any assets owned by Sylvia
Hankin, with interest thereon;
e. pay all sums originally due to Sylvia Hankin under the terms of the
compensation package granted to Perch Hankin and Sylvia Hankin on December 19,
1989 as well as the life insurance policy, plus interest thereon;
f. rescind all modifications, amendments, alterations or changes to the original
resolutions of the Board of Directors dated December 18, 1989 and May 24, 1990;
g. declare a constructive trust of all funds, plus interest obtained from Sylvia
Hankin;
h. order Bank to pay Sylvia Hankin, going forward on a monthly basis in
accordance with the terms of the resolutions of the Board of Directors dated
December 18, 1989 and May 24, 1990 relating to the compensation package;
i. order Bank to pay punitive damages in the amount of $2,000,000.00;
j. order Bank to pay all costs and expenses involved in the prosecution of this
claim, including reasonable counsel fees;
k. order such other relief as the Court deems proper.
Counsel representing Bank in this action have advised that they believe that
Bank has strong legal and factual defenses to this action. While the damages
demanded by Sylvia Hankin in this action could amount to more than
$1,000,000.00, if reduced to present value, both outside counsel and house
counsel believe that the probability of Sylvia Hankin's prevailing in this
litigation is remote.
B. Dr. Robert Krakovitz. In the above described Counterclaim to Bank's
foreclosure complaint filed in Colorado, Dr. Krakovitz demands compensatory and
punitive damages in an unstated amount based upon alleged lender liability. The
lender liability claim is based upon Bank's alleged management and control of
borrower through Perch P. Hankin. The Colorado foreclosure action is ongoing.
Dr. Krakovitz and the Bank have had some settlement discussions wherein Dr.
Krakovitz has demanded $150,000.00 to settle the foreclosure and give Bank a
release on his Counterclaims. The Bank believes Dr. Krakovitz's Counterclaim
lacks merit.
FF-14
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
First Fidelity Bank (formerly known as Merchants Bank) participated with Bank in
a $1,700,000.00 Loan to Willow Grove Plaza I Associates. Bank also made a $2.85
Million loan to Bay Properties Company. Both the Willow Grove Plaza and the Bay
Properties Loans were secured by guarantees made by the same guarantors. Prior
to the Willow Grove Plaza loan going into default, Meridian Bank confessed
judgment against the Bay Properties guarantors for a default on the loan it had
made to that partnership. Meridian Bank and Bank later entered into an agreement
with respect to the proceeds received from a proposed settlement with
guarantors.
On January 19, 1995, First Fidelity Bank filed an action against Bank and
individuals Mark Hankin, Lowen Hankin, Sabina Hankin Kurtzman, Louis Schiffman,
and Jane Hankin. According to the complaint, Bank violated the terms of a
participation agreement between Bank and First Fidelity Bank and applicable law
in that Bank failed to ensure that adequate collateral was obtained and
maintained for the loan to which the participation agreement relates, failed to
inform First Fidelity Bank of changes in the loan structure and to obtain First
Fidelity Bank's consent to such changes, advanced its own interests in
connection with another loan made to the same or related parties as the loan
which is the subject of the participation agreement by, among other things,
releasing those parties from surety obligations and depleting assets of those
parties in payment of obligations other than the loan which is the subject of
the participation agreement. The complaint further alleges that Bank compounded
these failures by failing to properly administer the loan which is the subject
of the participation agreement, including failing to pursue all available
remedies after a default in the loan. According to the complaint, Bank committed
these acts because all of the loans at issue were made to entities whose
principals are affiliated with and dominate Bank. According to the complaint,
Bank's actions constitute a breach of contract, breach of duty of care as well
as gross neglect, and have caused damage to First Fidelity Bank in excess of
$1,000,000.00. The complaint further alleges that the individual defendants are
liable to First Fidelity Bank for tortious interference with the participation
agreement.
The complaint then describes the following transaction between Bank and
Merchants Bank, the predecessor of First Fidelity Bank: Bank and Merchants Bank
allegedly entered a loan participation agreement for a loan in the amount of
$1,700,000 from Bank to an entity called LKH Development Company, a partnership
allegedly comprised of Lowen Hankin and his wife, Jane Hankin. According to the
complaint, Merchants Bank agreed to purchase a participating interest in the
amount of $1,200,000 of the loan balance. The loan was allegedly secured by,
among other things, a mortgage on the land owned by the borrower, an assignment
of an installment sale agreement for the property, an assignment of leases and
rents for the property, and personal guarantees of Lowen Hankin, Jane Hankin and
Moe Hankin. The complaint then alleges that, without the knowledge or consent of
First Fidelity Bank, Bank allowed LKH Development Company to assign its interest
in the mortgaged property to an entity called Willow Grove Plaza I Associates
("WGP Associates"). According to the complaint, the assignment was conditioned
upon each of the general partners of WGP Associates--Lowen Hankin, Jane Hankin,
Sabina Hankin Kurtzman and Louis Schiffman--signing a personal guarantee of the
loan. According to the complaint, all of the partners signed guarantees except
for Louis Schiffman, whose guarantee is an allegedly illusory obligation.
The complaint then alleges that Bank made a loan in the amount of $2,800,000 to
a partnership called Bay Properties, the general partners of which are alleged
to be Lowen Hankin, Sylvia Hankin, Sabina Hankin Kurtzman and Louis Schiffman.
According to the complaint, Meridian Bank loaned this partnership an additional
$3,000,000 at or around the same time as Bank's loan. According to the
complaint, Bank received unconditional guarantees from each of the partners of
Bay Properties, who are also the guarantors of the LKH Development Company loan.
FF-15
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
The complaint then alleges that Bank engaged in a scheme to preserve its own
self-interest without regard to its obligations to First Fidelity Bank under the
Participation Agreement. According to the complaint, Bank concealed the true
condition of the loan to Bay Properties from regulators through a loan from Mark
Hankin to Lowen Hank in the amount of $2,850,000.00, of which $2,300,000.00 was
repaid to Mark Hankin within several months. Then, according to the complaint,
Meridian Bank and Bank confessed judgment against Bay Properties and its
partners Lowen Hankin, Sabina Hankin Kurtzman and Louis Schiffman in October and
November 1991, when the loan from Bank to LKH Development Company was also in
default. The complaint further alleges that Bank and Meridian Bank formed a
partnership known as MerBoyr Corp. in order to restructure the Bay Properties'
loans and obtain additional collateral as security for these loans. During the
course of negotiations with Bay Properties and its partners, MerBoyr Corp.,
acting on behalf of Bank, agreed to release Mark Hankin, Lowen Hankin, Jane
Hankin, Sabina Hankin Kurtzman, and Louis Schiffman from personal guarantees for
the LKH Development Company loan. MerBoyr Corp. further agreed to accept a
pledge of certain real estate from Sabina Hankin Kurtzman and of approximately
$3,000,000 worth of Bank stock that was owned by some or all of the guarantors.
The complaint then alleges that, when Bank attempted collection of the amounts
due under the LKH Development Company loan, the fair market value of the
property was substantially less than the amount owed on the loan. According to
the complaint, this deficiency amount would have been repaid from the assets of
Lowen Hankin, Jane Hankin, Sabina Hankin Kurtzman and Louis Schiffman, as well
as LKH Development Company and WGP Associates, had they not been improperly
released by Bank. Further, the complaint alleges that Bank improperly failed to
make a claim against the estate of Moe Hankin, who died during Bank's
administration of the loan to LKH Development Company and who was a guarantor of
the loan.
The complaint purports to state the following causes of action against Bank and
the individual defendants: breach of contract, gross negligence, breach of duty
of care, breach of covenant of good faith and fair dealing and (against the
individual defendants) tortious interference with contractual relations. The
complaint requests the following relief from the defendants (including Bank):
a. compensatory damages in the amount of $1,028,987.10 plus interest and costs;
b. punitive damages in an amount not specified in the complaint;
c. costs and interest for bringing this action, together with reasonable
attorneys' fees;
d. such other and further relief as the Court deems just and appropriate.
Because of the uncertainty of this litigation and the proof of plaintiff's
allegations, Bank's counsel is unable to form a definitive opinion as to the
ultimate outcome of such a suit or estimate the range of damages that may be
recovered.
In the opinion of the management of Bancorp, there are no other proceedings
pending to which Bancorp and the Bank are a party or to which their property is
subject, which, if determined adversely to Bancorp and the Bank, would be
material in relation to Bancorp's consolidated capital or financial condition.
There are no proceedings pending other than ordinary routine litigation incident
to the business of Bancorp and the Bank. In addition, no material proceedings
are pending or are known to be threatened or contemplated against Bancorp and
the Bank by government authorities.
FF-16
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
In July, 1994, the Company entered into an employment contract for a period of
two years with the President and Chief Executive Officer providing for a minimum
annual base salary of $125,000 per year. In addition, the Company granted him
certain stock options to purchase shares of the Company. Such options vested on
December 29, 1994 upon the public announcement of the Merger. Accordingly, the
Company recorded compensation expense for $183,000. At the effective date of the
Merger (See Note 5), all the options granted in connection with the Merger shall
automatically be cancelled and the individual shall receive as consideration for
such cancellation an amount in cash equal to the excess of $10 over the
applicable exercise price of the option.
The parties agreed to terminate the employment of the President on March 2,
1995. The termination agreement also cancels such stock options and obligates
the Bank to pay approximately $94,000, subject to adjustment under certain
circumstances, in lieu of the aforementioned options. Upon such termination of
the President, the Bank hired another President. Upon the effective date of the
Merger, the new President's employment will be terminated and he will be paid a
bonus of $100,000, subject to adjustment under certain circumstances.
In connection with the proposed Merger (See Note 5), the Company is obligated
for broker's fees amounting to 1% of the purchase price or $282,000, subject to
closing. Because of entering into the Merger Agreement, minimum broker fees of
$150,000 are due and have been accrued at December 31, 1994 and March 31, 1995.
In addition, the Company has offered severance packages to various employees.
Since the amount of severance to be paid is dependent upon the number of
employees accepting the terms of such severance packages as well as employee
retention by Midlantic, the amount of severance to be paid cannot be estimated.
However, such amount may be material.
FF-17
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet. The contract amount of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
CONTRACT AMOUNT
MARCH 31, 1995
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit ............................ $24,959,000
Standby letters of credit ............................... $759,000
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Company holds
collateral supporting those letters of credit commitments, i.e.. certificates of
deposit, marketable securities, real estate, UCC's etc. for which collateral is
deemed necessary. Approximately 77% of the total letters of credit at March 31,
1995 were fully collateralized with the balance unsecured.
NOTE 11. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to comply with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." A requirement of SFAS No. 109 is that
deferred tax assets and liabilities are recorded for temporary differences
between the financial statement and tax bases of assets and liabilities using
the currently enacted tax rate expected to be in effect when the taxes are
actually paid or recovered. In accordance with SFAS No. 109, the Company elected
to adopt such statement prospectively in 1993 by recording an adjustment for the
cumulative effect on prior years of the change in method of accounting for
income taxes. At January 1, 1993 the cumulative effect on prior years of
adopting SFAS No. 109 was $-0-.
The net deferred tax asset at December 31, 1994 includes the following:
Deferred tax asset .................................... $5,601,000
Deferred tax liability ................................ (44,000)
Valuation allowance for
deferred tax asset .................................. (5,557,000)
----------
Net deferred tax asset ................................ $ -0-
==========
The tax effect of major temporary differences that gave rise to the Company's
net deferred tax asset are as follows:
Net operating loss and alternative minimum
tax credit carryforwards .................................... $3,323,000
Allowance for possible loan losses ........................... 930,000
Differences in Financial and Income Tax Reporting
of Other Real Estate Held for Sale Including
Insubstance Foreclosures .................................... 1,143,000
Other Net .................................................... 161,000
----------
$5,557,000
==========
FF-18
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
For the three months ended March 31, 1995 and 1994 income tax expense is
comprised of the following:
1995 1994
------ ------
Current .................................................. $ -0- $ -0-
Deferred ................................................. 3,000 2,000
------ ------
$3,000 $2,000
====== ======
Total income tax expense for the three months ended March 31, 1995 and 1994
amounted to $3,000 and $2,000 respectively, effective tax rates of 4% and 2%
respectively. The differences between the Company's effective tax rate and the
Federal statutory tax rate are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal Statutory rate ................... 34.0% 34.0%
Decrease in taxes resulting
from utilization of net operating
loss carryforward ........................ (34.0%) (34.0%)
Increase in taxes due to effect of
alternative minimum tax,
net of utilization of alternative
minimum tax carryforwards ................ 4.0% 2.0%
----- ----
4.0% 2.0%
===== ====
</TABLE>
At March 31, 1995, the Company had available net operating loss carryforwards of
approximately $9,100,000 and $5,500,000 that may be applied against taxable
income and alternative minimum taxable income, respectively. These carryforwards
expire December 31, 2009.
NOTE 12. SHAREHOLDERS' EQUITY
Capital Resources
At March 31, 1995, the Bank's Total and Tier One risk-weighted capital ratios
were 9.53% and 8.25% respectively. In addition, the Bank's leverage ratio was
5.80%. As a result of the C & D issued to the Bank, the Bank is required to
maintain a leverage ratio of 6% within three months of the C & D and 6.5% within
one year of the C & D.
The Bank is currently in compliance with the Federal and State mandated
regulatory risk based capital ratio. However, the Bank's leverage ratio is not
in compliance with the mandated ratios.
FF-19
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 13. CAPITAL ADEQUACY
The following table presents the Bank's regulatory capital based on these
guidelines at March 31, 1995 and 1994, respectively (in thousands):
At At
March 31,1995 March 31, 1994
------------- --------------
Tier I Capital .......................... $12,875 $16,308
Tier II Capital ......................... 2,002 2,038
-------- --------
Total Capital ........................... 14,877 18,346
======== ========
Total Average Quarterly Assets .......... $222,112 $224,534
Total Risk-Weighted Assets (1) .......... $156,045 $159,168
Tier I Risk-Based Capital
Ratio (2) ............................... 8.25% 10.25%
Required Tier I Risk-Based Capital
Ratio ................................... 4.00% 4.00%
-------- --------
Excess Tier I Risk-Based
Capital ................................. 4.25% 6.25%
======== ========
Total Risk-Based Capital
Ratio (3) ............................... 9.53% 11.53%
Total Required Risk-Based
Capital Ratio ........................... 8.00% 8.00%
-------- --------
Excess (Deficient) Total Risk-Based
Capital Ratio ........................... 1.53% 3.53%
======== ========
Tier I Leverage Ratio (4) ............... 5.80% 7.26%
Required Tier I Leverage
Ratio (5) ............................... 6.50% 6.50%
-------- --------
Excess (Deficient) Tier I Leverage
Ratio ................................... (0.70%) 0.76%
======== ========
(1) Includes off-balance sheet items at credit equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital to
Total Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I plus Tier
II Capital to Total Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Total
Average Quarterly Assets.
(5) The Bank was required to meet the 6.5% Tier I Leverage Ratio by February,
1994, in accordance with the Regulatory Agreements.
FF-20
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 14. SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands)
March 31, 1995 March 31, 1994
-------------- --------------
Balance at beginning of Fiscal Year ......... $ 5,293 $ 5,502
Charge Offs:
Commercial Loans ............................ 106 0
Real Estate Loans ........................... 0 0
Consumer Loans .............................. 40 0
------- -------
Total Charge offs ........................... 146 0
------- -------
Recoveries
Real Estate Loans ........................... 863 56
Commercial Loans ............................ 23 19
Consumer Loans .............................. 2 1
------- -------
Total Recoveries ............................ 888 76
------- -------
Net (Charge Offs) Recoveries ................ 742 76
------- -------
Addition to Allowance
Charged to Operations ..................... 97 300
------- -------
Balance at End of Period .................... $ 6,132 $ 5,878
======= =======
Nonperforming Assets:
Nonaccruing Loans:
Real Estate Loans ......................... $ 5,362 $ 5,336
Commercial Loans .......................... 3,372 3,026
Consumer Loans ............................ 30 12
------- -------
Total Nonaccruing Loans ..................... 8,764 $ 8,374
------- -------
Restructured Loans .......................... 2,526 2,673
------- -------
OREO ........................................ 6,626 11,630
Reserve for OREO Losses ..................... (3,918) (3,593)
------- -------
Net OREO .................................... 2,708 8,037
------- -------
Total Non-Performing Assets ................. $13,998 $19,084
======= =======
FF-21
<PAGE>
OLD YORK ROAD BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
NOTE 15. RECENT ACCOUNTING DEVELOPMENTS
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 114 "Accounting by Creditors for Impairment of a Loan" and
FAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure." Under FAS No. 114, an impaired loan is defined as a
loan for which it is probable, based on current information, that the lender
will not collect all amounts due according to the contractual terms of the loan
agreement. This includes all nonaccrual loans and other loans for which there
exists doubt as to ultimate collectibility of principal and interest (except
those loans which are excluded from the scope of FAS No. 114, principally
consumer installment loans and residential mortgages and lease financing
receivables). FAS No. 114 requires that impaired loans be measured based upon
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. If the calculated
measurement of an impaired loan is less than the recorded investment in the
loan, the deficiency is recognized through a provision to the allowance for loan
losses. FAS No. 118 amended the provisions of FAS No. 114 regarding the
recognition of interest income on impaired loans, allowing banks to
substantially use the methods of income recognition previously in effect. While
a loan is classified as impaired and the future collectibility of the recorded
loan balance is doubtful, collections of interest and principal are generally
applied as a reduction to principal outstanding. When the future collectibility
of the recorded loan balance is expected, interest income may be recognized on a
cash basis.
FAS No. 114 also provides for the reclassification of all ISFs outstanding from
OREO to the loan portfolio as nonaccrual loans at their current carrying value.
The reclassification of ISFs to loans has been made for all periods presented.
The Company will no longer be required to identify and isolate future loans that
may meet the former criteria for ISF classification. Accounting policies
relating to the allowance for loan losses, charge-offs and income recognition
for impaired loans are consistent with the accounting for nonaccrual loans.
Carrying Value of Impaired Loans March 31, 1995
--------------
Commercial and Financial ......................... $2,152,956
Real estate
Construction and development .................. 1,642,921
Long-term mortgage ............................ 4,947,113
Loans to individuals (not on an installment basis) 655,789
-----------------------------------------------------------------
Total impaired loans ............................. 9,398,779
-----------------------------------------------------------------
As required FAS No. 114 reserve .................. $ 570,044
-----------------------------------------------------------------
At March 31, 1995, impaired loans carried at $9.4 million were valued using the
fair value of collateral. Based on this method, $570,044 of the $6.1 million
allowance for loan losses was allocated against $3.9 million of impaired loans.
The remaining allowance for loan losses, totalling $5.6 million at March 31,
1995, is available to absorb losses in the Company's entire credit portfolio.
During the first quarter of 1995, there were no significant changes of impaired
loans. Interest income recorded on total impaired loans and received in cash
during the first quarter of 1995 was immaterial.
See NOTE 8 on page FF-9, in the Notes to Consolidated Financial Statements.
FF-22
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER*
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 29, 1994
("Agreement"), is among MIDLANTIC CORPORATION ("the Acquiror"), a New Jersey
corporation and registered bank holding company, MIDLANTIC BANK, NATIONAL
ASSOCIATION, (the "Acquiring Bank"), a national banking association and a
wholly-owned subsidiary of the Acquiror, OLD YORK ROAD BANCORP, INC. (the
"Company"), a Pennsylvania corporation and registered bank holding company, and
BANK AND TRUST COMPANY OF OLD YORK ROAD, a Pennsylvania chartered commercial
bank and a wholly-owned subsidiary of the Company (the "Acquired Bank").
WHEREAS, the respective Boards of Directors of the Acquiror and the Company
have each determined that it is in the best interests of the Acquiror and the
Company, respectively, and their respective stockholders to proceed with the
acquisition contemplated by this Agreement upon the terms and conditions
hereinafter set forth;
WHEREAS, the acquisition will be accomplished by first merging the Company
with and into the Acquiror with the Acquiror surviving and the Company
shareholders receiving the consideration hereinafter set forth, and immediately
thereafter merging the Acquired Bank with and into the Acquiring Bank with the
Acquiring Bank surviving;
WHEREAS, for Federal income tax purposes, it is intended that the
acquisition shall qualify as a reorganization under the provisions of Section
368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, to induce the Acquiror to enter into this Agreement,
simultaneously with the execution of this Agreement, the Company has entered
into a stock option agreement with the Acquiror (the "Stock Option Agreement"),
pursuant to which the Company has granted to the Acquiror options to purchase
shares of the authorized and unissued Company Common Stock (as hereinafter
defined), at an option price and subject to the terms and conditions, set forth
in the Stock Option Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, and intending to be
legally bound, the parties hereto hereby agree as follows:
*This Agreement and Plan of Merger was amended pursuant to an Amendment to
Agreement and Plan of Merger dated as of May 11, 1995, the terms of which
amendment are incorporated herein.
A-1
<PAGE>
ARTICLE I--THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as hereafter defined), the Company shall be merged with and
into the Acquiror (the "Merger") in accordance with the Pennsylvania Business
Corporation Law and the New Jersey Business Corporation Act (the "NJBCA").
1.2. Effective Time. As soon as practicable following fulfillment or waiver
of the conditions specified in Article VI and consummation of the closing
described herein, and provided that this Agreement has not been terminated or
abandoned pursuant to Article VII, the Acquiror and the Company (the
"Constituent Corporations") shall take or shall have taken all steps necessary
to cause the filing and the effectiveness of (a) articles of merger (the
"Pennsylvania Articles of Merger"), in a form reasonably acceptable to the
Acquiror, with the Secretary of the Commonwealth of Pennsylvania, and (b) a
certificate of merger (the "New Jersey Certificate of Merger"), in the form
attached hereto as Exhibit 1.2, with the Secretary of State of the State of New
Jersey. The term "Effective Time" shall mean the close of business on the first
day when both the New Jersey Certificate of Merger and the Pennsylvania Articles
of Merger have been so filed and are effective.
1.3. Effect of the Merger. Pursuant to the Merger, the Acquiror shall be
the surviving corporation in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation") and shall continue to be a New Jersey corporation.
Upon consummation of the Merger, the Surviving Corporation shall thereupon and
thereafter possess all of the rights, privileges, powers, immunities, purposes
and franchises, both public and private, of each of the Constituent
Corporations; and all property, real, personal and mixed, tangible and
intangible, and all debts due on whatever account, and all other choses in
action, and all and every other interest, of or belonging to or due to each of
the Constituent Corporations so merged, shall be deemed to be vested in the
Surviving Corporation without further act or deed; and the title to any real
estate or any interest therein, vested in any of such Constituent Corporations,
shall not revert or be in any way impaired by reason of the Merger. Any
reference to either of the Constituent Corporations in any contract or document,
whether executed or taking effect before or after the Effective Time, shall be
considered a reference to the Surviving Corporation if not inconsistent with the
other provisions of the contract or document; and any pending action or other
judicial proceeding to which either of the Constituent Corporations is a party,
shall not be deemed to have abated or to have discontinued by reason of the
Merger, but may be prosecuted to final judgment, order or decree in the same
manner as if the Merger had not been made; or the Surviving Corporation may be
substituted as a party to such action or
A-2
<PAGE>
proceeding, and any judgment, order or decree may be rendered for or against it
that might have been rendered for or against either of the Constituent
Corporations if the Merger had not occurred.
1.4. Consummation of Merger. The closing of the Merger (the "Closing")
shall take place (a) at the offices of the Acquiror as promptly as practicable
after the later of (i) the day of (and immediately following) the receipt of
approval of the Merger by the Company's shareholders, and also the approval of
the Acquiror's shareholders if required, and (ii) the third business day after
the day on which the last of the conditions set forth in Article VI (other than
the condition set forth in Section 6.1.1) is satisfied or duly waived or (b) at
such other time and place and on such other date as the Acquiror and the Company
may agree. The date on which the Closing is conducted pursuant to this Section
1.4 is sometimes referred to herein as the "Closing Date." At the Closing, all
documents required by the terms of this Agreement to be delivered at or prior to
the consummation of the Merger will be exchanged by the parties.
1.5. Certificate of Incorporation and By-Laws. The certificate of
incorporation and by-laws of the Acquiror in effect at the Effective Time shall
be the certificate of incorporation and by-laws of the Surviving Corporation,
until duly amended in accordance with their terms and the NJBCA.
1.6. Directors and Officers. The directors and officers of the Acquiror
immediately prior to the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation, from and after the Effective Time,
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the terms
of the Surviving Corporation's Certificate of Incorporation and by-laws and the
NJBCA.
1.7. The Bank Merger. Subject to the terms and conditions of this
Agreement, immediately following the Effective Time, the Acquired Bank shall be
merged with and into the Acquiring Bank (the "Bank Merger") pursuant to a merger
agreement in the form attached hereto as Exhibit 1.7, to be executed by the
Acquired Bank and the Acquiring Bank, and the separate corporate existence of
the Acquired Bank shall thereupon cease in accordance with the applicable
provisions of The Pennsylvania Banking Code of 1965 (the "Pennsylvania Banking
Code") and The National Bank Act (the "National Bank Act").
1.8. Effect of the Bank Merger. Pursuant to the Bank Merger, the Acquired
Bank and the Acquiring Bank (the "Constituent Banks") shall be merged, and the
Acquiring Bank shall be the surviving bank in the Bank Merger (sometimes
hereinafter referred to as the "Surviving Bank") and shall continue to be a
national banking association. Upon consummation of the Bank Merger, the
A-3
<PAGE>
Surviving Bank shall thereupon and thereafter possess all of the rights,
privileges, immunities and franchises, both public and private powers, including
appointments, designations and nominations of a trust or fiduciary nature, of
each of the Constituent Banks; and all property, real, personal and mixed,
tangible and intangible, and all debts due on whatever account, and all other
choses in action, and all and every other interest, of or belonging to or due to
each of the Constituent Banks so merged, shall be deemed to be vested in the
Surviving Bank without further act or deed; and the title to any real estate or
any interest therein, vested in any of such Constituent Banks, shall not revert
or be in any way impaired by reason of the Bank Merger. Upon consummation of the
Bank Merger, the Surviving Bank shall thenceforth be responsible and liable for
all the liabilities, obligations and penalties of each of the Constituent Banks.
Any reference to either of the Constituent Banks in any contract or document,
whether executed or taking effect before or after the Bank Merger, shall be
considered a reference to the Surviving Bank if not inconsistent with the other
provisions of the contract or document; and any pending action or other judicial
proceeding to which either of the Constituent Banks is a party, shall not be
deemed to have abated or to have discontinued by reason of the Bank Merger, but
may be prosecuted to final judgment, order or decree in the same manner as if
the Bank Merger had not been made; or the Surviving Bank may be substituted as a
party to such action or proceeding, and any judgment, order or decree may be
rendered for or against it that might have been rendered for or against either
of the Constituent Banks if the Bank Merger had not occurred.
1.9. Articles of Incorporation and By-Laws. The articles of association and
by-laws of the Acquiring Bank in effect at the Effective Time shall be the
articles of association and by-laws of the Surviving Bank, until duly amended in
accordance with their terms and the National Bank Act.
1.10. Bank Directors and Officers. The directors and officers of the
Acquiring Bank immediately prior to the Effective Time shall be the directors
and officers, respectively, of the Surviving Bank, from and after the Effective
Time, until their successors have been duly elected or appointed and qualified
or until their earlier death, resignation or removal in accordance with the
terms of the Surviving Bank's Articles of Association and by-laws and the
National Bank Act.
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ARTICLE II--CONVERSION OF SHARES
2.1. Exchange. As of the Effective Time, by virtue of the Merger and
without action on the part of any holder thereof:
2.1.1. Acquiror Stock. Each share of capital stock of the Acquiror that is
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and continue as one share of the Surviving Corporation and each
certificate evidencing ownership of any such shares shall continue to evidence
ownership of the same number of shares of the Surviving Corporation.
2.1.2. Certain Company Shares Cancelled. Each share of common stock of the
Company, par value $1.00 per share (the "Common Stock"), that is either (a)
owned by the Acquiror or any direct or indirect wholly-owned subsidiary of the
Acquiror (except for any shares of Common Stock held in trust accounts, managed
accounts or in any similar manner as trustee or in a fiduciary capacity ("Trust
Account Shares") and shares held as collateral or in lieu of a debt previously
contracted ("Collateral Shares"), (b) held in the treasury of the Company or (c)
owned by any direct or indirect wholly-owned subsidiary of the Company (except
Trust Account Shares and Collateral Shares) shall be cancelled and retired and
no capital stock of the Acquiror, cash or other consideration shall be paid or
delivered in exchange therefor.
2.1.3. Acquired Shares. Subject to Sections 2.6 and 2.8 hereof, each share
of Common Stock that is issued and outstanding immediately prior to the
Effective Time, including without limitation all Trust Account Shares and
Collateral Shares, and that is not retired pursuant to Section 2.1.2, shall be
converted as follows:
2.1.3.1. Each such share of Common Stock which under the terms of Section
2.3 is to be converted into the right to receive cash, shall be converted into
the right to receive $10.00 in cash.
2.1.3.2. Subject to Sections 2.9 and 7.2.3.5, each such share of Common
Stock which under the terms of Section 2.3 is to be converted into the common
stock of the Acquiror, par value $3.00 per share ("Acquiror Common Stock"),
shall be converted into 0.3721 shares (as the same may be adjusted as herein
provided, the "Exchange Ratio") of Acquiror Common Stock. The certificates for
Acquiror Common Stock issued in the Merger will also evidence and entitle the
holder thereof to certain Rights pursuant to the Rights Declaration of the Board
of Directors of the Acquiror, dated as of February 23, 1990.
2.1.3.3. No Dissenting Shares (as hereinafter defined) shall be converted
into or represent a right to receive cash or Acquiror Common Stock under this
Section 2.1.3, but such Dissenting Shares shall be subject to the provisions of
Section 2.8.
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2.1.3.4. Each authorized but unissued share of Common Stock shall cease to
exist.
2.2. Election Procedures. The Acquiror shall authorize the Acquiring Bank
or, in the Acquiror's sole discretion, any other commercial bank having assets
of more than $200,000,000, to act as exchange agent hereunder (the "Exchange
Agent") pursuant to an agreement (the "Exchange Agent Agreement") in form
reasonably acceptable to the Company. The Exchange Agent Agreement shall set
forth procedures for the exchange of Common Stock for consideration in the
Merger, including procedures for holders of Common Stock to request that they
receive all cash or all stock consideration, as set forth below:
2.2.1. Each holder of Common Stock (other than holders of Dissenting Shares
or shares of Common Stock to be cancelled as set forth in Section 2.1.2) shall
have the right to submit an election form to the Exchange Agent (an "Election
Form") specifying whether such holder desires to have such holder's Common Stock
converted into Acquiror Common Stock or the right to receive cash in the Merger
(in either case, an "Election") in accordance with and subject to the following
procedures:
2.2.2. Each holder of Common Stock may specify in the Election Form:
2.2.2.1. that such holder desires to have all of the shares of Common Stock
owned by such holder converted into the right to receive cash in the Merger
("Cash Election"); or
2.2.2.2. that such holder desires to have all of the shares of Common Stock
owned by such holder converted into Acquiror Common Stock in the Merger (a
"Stock Election"). Any shareholder who validly submits an Election Form and does
not make a Cash Election in such Election Form, or who does make a Cash Election
and thereafter validly revokes such Cash Election, or who does not validly
submit an Election Form, shall be deemed to have made a Stock Election.
2.2.3. The Company will use its best efforts to cause the Exchange Agent to
make the Form of Election (accompanied by the Company Proxy Statement described
in Section 5.10) available to all persons who are or who become Company
shareholders of record during the period between the record date for the Company
Meeting (as defined in Section 5.10) and the business day immediately prior to
the Election Date (as defined in this Section 2.2.3). As used herein, the term
"Election Date" means a date announced by the Acquiror, in a news release
delivered to the Dow Jones News Service, as the last day on which Forms of
Election will be accepted; provided, however, that such day (i) shall be a
business day no more than five business days prior to the anticipated Effective
Time and no less than two business days prior to the
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anticipated Effective Time and (ii) shall be at least twenty business days
following the date of such news release; provided further, that the Acquiror
shall have the right to set a later date as the Election Date (and such later
date shall be deemed the "Election Date" for all purposes hereunder) by means of
a similar new release, so long as such later date is no later than the date on
which the Effective Time occurs.
2.2.4. Any Election shall have been properly made only if the Exchange
Agent shall have received, at its office designated in the Form of Election, by
5:00 p.m., local time in the city in which the principal place of business of
such Exchange Agent is located, on or before the Election Date, a Form of
Election properly completed and signed and accompanied by certificates for the
shares of Common Stock to which such Form of Election relates (or by an
appropriate guarantee of delivery of such certificates as set forth in such Form
of Election from a member of any registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States, provided
such certificates are in fact delivered by the time set forth in such guarantee
of delivery). Any Election relating to shares of Common Stock with respect to
which the holder thereof has filed and not withdrawn as of the Effective Time a
written demand for payment of the fair value of Common Stock in accordance with
the provisions of Section 2.8 hereof shall be deemed to have been automatically
revoked as of the Election Date.
2.2.5. Notwithstanding anything herein to the contrary, a combined Form of
Election containing a single Election (a "Combined Form of Election") may be
submitted by two or more holders of shares of Common Sock either of whom may be
deemed constructively to own the holders' shares of Common Stock by reason of
the ownership attribution rules of Section 318 of the Code. Any Combined Form of
Election and any change or revocation in such Combined Form of Election must be
signed by or on behalf of all holders of the Common Stock covered thereby. For
purposes of this Article II, all shares of Common Stock covered by a single
Combined Form of Election held by holders of Common Stock submitting such
Combined Form of Election will be treated as being held by a single holder.
2.2.6. Any holder of Common Stock may at any time prior to the Election
Date change such holder's Election by written notice received by the Exchange
Agent at or prior to the Election Date accompanied by a properly completed,
revised Form of Election.
2.2.7. Any holder of Common Stock may at any time prior to the Election
Date revoke such holder's Election by written notice received by the Exchange
Agent at or prior to the Election Date or by withdrawal prior to the Election
Date of such holder's
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certificates for Common Stock or of the guarantee of delivery of such
certificates, previously deposited with the Exchange Agent.
2.2.8. The Acquiror shall have the right to make rules not inconsistent
with the terms of this Agreement governing the validity of the Forms of
Election, the manner and extent to which Elections are to be taken into account
in making the determinations prescribed by Section 2.3, the issuance and
delivery of certificates for Acquiror Common Stock into which Common Stock is
converted in the Merger and the payment for shares of Common Stock converted
into the right to receive cash in the Merger. All such rules and determinations
thereunder shall be final and binding on all holders of shares of Common Stock.
2.3. Selection of Common Stock. The manner in which each share of Common
Stock (other than shares of Common Stock to be retired as set forth in Section
2.1.2) shall be converted at the Effective Time into either cash or Acquiror
Common Stock shall be as set forth below in this Section 2.3.
2.3.1. As is more fully set forth below, the number of shares of Common
Stock to be converted into the right to receive cash in the Merger pursuant to
this Agreement (the "Maximum Cash Conversion Number") shall not exceed (i) 49%
of the number of shares of Common Stock outstanding immediately prior to the
Effective Time minus (ii) the sum of (A) the number of shares of Common Stock
purchased by the Acquiror or any subsidiary of the Acquiror on or after the date
hereof, (B) the number of shares of Common Stock redeemed by the Company, if
any, from the date hereof to the Effective Time, (C) the number of shares of
Common Stock as to which a cash amount is to be paid to the Executive, as
defined in and in, accordance with, Section 2.12.1 hereof, and (D) the number of
shares of Common Stock if any, as to which the holders of such shares have filed
and not withdrawn a written demand for payment of the fair value of their Common
Stock pursuant to the provisions of Section 2.8 at or before the Meeting. There
shall be no limitation on the number of shares of Common Stock to be converted
into Acquiror Common Stock in the Merger.
2.3.2. Each share of Common Stock for which Stock Elections have been made
or deemed made ("Stock Election Shares") and each Non-Electing Common Share (as
defined in Section 2.3.5) shall be converted into Acquiror Common Stock in the
Merger.
2.3.3. If Cash Elections are received for a number of shares of Common
Stock which is more than the Maximum Cash Conversion Number, and the shares of
Common Stock for which Cash Elections have been received ("Cash Election
Shares") shall be converted into the right to receive cash and Acquiror Common
Stock in the following manner:
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2.3.3.1. each Cash Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the product of (x)
$10.00 and (y) a fraction (the "Cash Fraction"), the numerator of which shall be
the Maximum Cash Conversion Number and the denominator of which shall be the
total number of Cash Election Shares, and (ii) a number of shares of Acquiror
Common Stock equal to the product of (x) the Exchange Ratio and (y) a fraction
equal to one minus the Cash Fraction.
2.3.4. If Cash Elections are received for a number of shares of Common
Stock which is equal to or less than the Maximum Cash Conversion Number, then
each share of Common Stock covered by a Cash Election shall be converted into
the right to receive cash in the Merger.
2.3.5. For the purposes of this Section 2.3, outstanding shares of Common
Stock (other than shares of Common Stock owned by the Acquiror, the Acquiring
Bank or any other subsidiary of the Acquiror) as to which an Election is not in
effect on the Election Date shall be referred to as "Non-Electing Common
Shares." If the Exchange Agent shall reasonably determine for any reason that
any Election was not properly made with respect to shares of Common Stock such
Election shall be deemed to be not in effect and shares of Common Stock covered
by such Election shall, for purposes hereof, be deemed to be Non-Electing Common
Shares.
2.4. Beneficial Owners. Any record holder of Common Stock may submit two or
more Forms of Election, each containing a different specification of preference
(or non-preference) covering all or any portion of the shares of Common Stock
owned by such record holder, provided that, upon request of the Acquiror, such
record holder shall certify to the satisfaction of the Acquiror that such record
holder holds the shares of Common Stock registered in the name of the record
holder as nominee for two or more persons and that the various Forms of Election
submitted by such record holder represent the individual specifications of
preference (or non-preference) of the respective beneficial owners as to all of
the shares of Common Stock beneficially owned by them, and for purposes of this
Article II each beneficial owner for which such a Form of Election is submitted
will be treated as a separate holder of Common Stock.
2.5. Delay. It is understood by the parties hereto that the election
procedure described in this Article II and the allocation procedure described in
this Article II will involve substantial administrative work to complete the
computation, verification and exchange tasks involved and that the rules of the
Depository Trust Company may require a delay after the Effective Time before the
final allocations may be made. No interest shall be payable by the Acquiror or
the Exchange Agent with respect to any cash to be paid pursuant to this Article
II, even if the
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payment of cash pursuant to the Merger is delayed by reason of the
administrative steps required to effect the steps described herein.
2.6. No Fractional Shares. Acquiror will not issue fractional shares of
Acquiror Common Stock. In lieu of fractional shares of Acquiror Common Stock,
the shareholders of the Company entitled to receive such fractional shares will
receive an amount of cash equal to the value of such fractional share interest
based on the Last Price (as defined in Section 2.7) of the Acquiror Common Stock
on the date on which the Effective Time occurs. Such fractional share interest
shall not include the right to vote or to receive dividends or any interest
thereon.
2.7. Last Price. For purposes of this Agreement, "Last Price" shall mean
the closing price per share of Acquiror Common Stock as quoted on the NASDAQ
National Market System ("NASDAQ") (as published in The Wall Street Journal) for
each trading day as to which such closing price is relevant hereunder or, in the
absence of such quotations for any such trading day, as determined by such other
source upon which the Acquiror and the Company shall mutually agree.
2.8. Dissenting Shares. The shares of Acquiror Common Stock held by those
shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with all applicable laws and regulations
relating to the merger of a Pennsylvania corporation into a New Jersey
corporation (the "Appraisal Laws") are herein referred to as "Dissenting
Shares." Each Dissenting Share, the holder of which, as of the Effective Time of
the Merger, has not effectively withdrawn or lost the dissenter's rights in
respect thereto under the Appraisal Laws, shall not be converted into or
represent a right to receive cash or Acquiror Common Stock but the holder
thereof shall be entitled only to such rights as are granted by the Appraisal
Laws. Each holder of Dissenting Shares who becomes entitled to payment for
Common Stock pursuant to the provisions of the Appraisal Laws shall receive
payment therefor from the Acquiror (but only after the amount thereof shall have
been agreed upon or finally determined pursuant to such provisions). If a holder
of shares of Common Stock who dissents under the Appraisal Laws shall
effectively withdraw or lose (through failure to perfect or otherwise) the right
to dissent, then, as of the Effective Time or the occurrence of such event,
whichever last occurs, those shares shall be deemed, upon the surrender of the
Certificate representing those shares, to be Non-Electing Common Shares for
purposes of this Agreement and shall be converted into Acquiror Common Stock in
accordance with the provisions hereof. The Company shall give the Acquiror
notice of dissent of any shares of Common Stock, attempted withdrawals of any
such notices of dissent and any other instruments served pursuant to the
Appraisal Laws received by the Company relating to shareholders' rights, if any,
to dissent. The Company shall not, except with the prior written consent of the
Acquiror, voluntarily
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make any payment with respect to any dissenting shares of the Company, offer to
settle or settle any demands for payment with respect thereto or approve any
withdrawal of any such demands.
2.9. Adjustments. Notwithstanding the foregoing, the Exchange Ratio set
forth in Section 2.1.3.2 shall be subject to appropriate adjustment in the event
that, subsequent to the date of this Agreement but prior to the Effective Time,
the outstanding Acquiror Common Stock shall be increased, decreased, changed
into or exchanged for a different number or kind of securities through a stock
dividend, recapitalization, stock split, reorganization, reclassification or
reverse stock split (or any similar change in capitalization) pursuant to which
the Acquiror shall issue securities to its existing shareholders without
receiving consideration therefor.
2.10. Exchange of Certificates.
2.10.1. Exchange Agent. Except as set forth herein, from and after the
Effective Time, each holder of a certificate (each such certificate, a
"Certificate") representing outstanding shares of Common Stock that have been
converted into the right to receive cash, without interest (the "Cash
Consideration"), or into Acquiror Common Stock and cash, without interest, in
lieu of fractional shares, as applicable (the "Common Stock Consideration")
shall be entitled to receive in exchange therefor, upon surrender of the
Certificate to the Exchange Agent, the applicable Cash Consideration or Common
Stock Consideration for each share of Common Stock so represented by the
Certificate surrendered by such holder thereof. All certificates representing
shares of Acquiror Common Stock issued as part of the Common Stock Consideration
shall be properly issued and countersigned and executed and authenticated, as
appropriate.
2.10.2. Notice of Exchange. Promptly after the Effective Time, the Acquiror
shall cause the Exchange Agent to mail and/or make available to each record
holder of a Certificate who did not submit such Certificate and a Form of
Election prior to the Effective Time a notice and letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) advising such holder of the effectiveness of the Merger and the
procedures to be used in effecting the surrender of the Certificates for
exchange therefor. Upon surrender to the Exchange Agent by any such holder of a
Certificate, together with such letter of transmittal duly executed and
completed in accordance with the instructions thereon, and such other documents
as may reasonably be requested, the Acquiror shall cause the Exchange Agent to
promptly deliver to such holder the Common Stock Consideration to which such
holder would have been entitled had such holder submitted a valid Stock Election
(with
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respect to the shares represented by such Certificate) prior to the Election
Date, and such Certificate shall forthwith be cancelled.
2.10.3. Transfer. If delivery of all or part of the Common Stock
Consideration is to be made to a person other than the person in whose name a
surrendered Certificate is registered, it shall be a condition to such delivery
or the exchange of such Certificate that such surrendered Certificate be
properly endorsed or shall be otherwise in proper form for transfer and that the
person requesting such delivery or exchange shall have paid any transfer and
other taxes required by reason of such delivery or exchange in a name other than
that of the registered holder of the Certificate surrendered or shall have
established to the reasonable satisfaction of the Acquiror that such tax either
has been paid or is not payable.
2.10.4. Right to Consideration. Until surrendered and exchanged in
accordance with this Section 2.10, each Certificate shall, after the Effective
Time, represent solely the right to receive the appropriate Common Stock
Consideration or Cash Consideration, as the case may be, multiplied by the
number of shares of Common Stock evidenced by such Certificate, together, in the
case of Common Stock Consideration consisting of shares of Acquiror Common Stock
with any dividends or other distributions as provided in Section 2.10.5, and
shall have no other rights. From and after the Effective Time, the Acquiror
shall be entitled to treat any Certificates that have not yet been surrendered
for exchange as evidencing only the ownership of the aggregate Common Stock
Consideration or Cash Consideration, as the case may be, into which the shares
represented by such Certificates have been converted, notwithstanding any
failure to surrender such Certificates. Any portion of the Common Stock
Consideration (or dividends, distributions or interest with respect thereto) or
Cash Consideration which remains unclaimed for two years after the Effective
Time shall be returned by the Exchange Agent to the Acquiror, and any holders of
Common Stock who have not theretofore complied with this Article II shall
thereafter (but only until such time as such property shall escheat to any
applicable governmental authority) look only to the Acquiror for the applicable
Common Stock Consideration or Cash Consideration. Neither the Company, the
Acquired Bank, the Acquiror or the Acquiring Bank shall be liable to any holder
of shares of Common Stock for any Common Stock Consideration (or dividends,
distributions or interest with respect thereto) or Cash Consideration delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
2.10.5. Distribution with Respect to Unexchanged Certificates. No dividends
or other distributions with respect to Acquiror Common Stock declared or paid by
the Acquiror after the Effective Time and with a record date after the Effective
Time shall be paid to the holder of any unsurrendered Certificate until
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the holder of such Certificate surrenders such Certificate (and then only if
such holder is entitled to receive Acquiror Common Stock pursuant to the
Merger). Subject to applicable law, following surrender of any such Certificate
to be converted into Acquiror Common Stock there shall be paid to each holder of
certificates representing shares of Acquiror Common Stock issued in exchange
therefor, without interest, (i) the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such shares of Acquiror Common Stock and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such shares of Acquiror Common Stock.
2.10.6. No Interest. All payments of dividends, cash or cash for fractional
shares shall be made without any payment of interest.
2.10.7. Transfer Books. At the Effective Time, the stock transfer books of
the Company shall be closed, and no transfer of Common Stock shall thereafter be
made. If, after the Effective Time, any Certificates are presented to the
Exchange Agent or the Acquiror, they shall be cancelled, retired and exchanged
as provided in this Article II.
2.11. Withholding Rights. The Acquiror shall be entitled to require each
holder of Common Stock to deliver to the Exchange Agent a properly completed
Form W-9 or its equivalent, as a precondition to delivery of the holder's Cash
consideration or Common Stock consideration, as the case may be. The Acquiror
shall be entitled to deduct and withhold, or cause the Exchange Agent to deduct
and withhold, from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Common Stock the minimum amounts (if any)
that the Acquiror is required to deduct and withhold with respect to the making
of such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Acquiror, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the shares of Common Stock in respect of which such deduction
and withholding was made by the Acquiror.
2.12. Options. At the Effective Time, all options to purchase Common Stock
which the Company is obligated to grant to Erwin K. Wenner (the "Executive") in
connection with the Merger (the "Executive Options") shall automatically be
cancelled either in accordance with paragraph 2.12.1 below or in accordance with
paragraph 2.12.2 below.
2.12.1. At the Effective Time, each of (a) the Executive Option to purchase
8,333 shares of Common Stock in the event that
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a public announcement is made of a merger or affiliation as the result of the
efforts of the Executive or of the Executive in conjunction with a certain
special committee of the Company's Board of Directors (the "8,333 Executive
Option") and (b) the Executive Option to purchase 25,000 shares of Common Stock
in the event that a public announcement is made of a sale of 80% or more of the
stock of the Company or the Acquired Bank, the merger or consolidation of the
Company or the Acquired Bank or the sale of substantially all of the assets of
the Company or the Acquired Bank, shall be cancelled, and the Executive shall
receive as consideration for such cancellation, for each share of Common Stock
covered by each such option an amount in cash equal to the excess, if any, of
$10.00 over the applicable exercise price of the option.
2.12.2. At the Effective Time, the Executive Option to purchase (i) 8,333
shares of Common Stock, exercisable commencing July 25, 1996, (ii) 8,333 shares
of Common Stock, exercisable commencing July 25, 1997, and (iii) 8,334 shares of
Common Stock, exercisable commencing July 25, 1998, respectively, shall be
cancelled.
2.12.3. The Company has delivered to the Acquiror a consent (in the form of
Exhibit 2.12.3) executed by the Executive agreeing that the covenants of the
Acquiror pursuant to this Section 2.12 are in full satisfaction of all
obligations of the Company and the Acquiror to the Executive with respect to the
Executive Options and with respect to any other options or other right of the
Executive to acquire or receive, at any time, any securities of the Company.
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ARTICLE III--REPRESENTATIONS AND WARRANTIES OF THE COMPANY
References herein to "Company Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article III, dated as of the date hereof
and referenced to the specific sections and subsections of Article III of this
Agreement as provided herein, which have been delivered on the date hereof by
the Company to the Acquiror. The Company hereby represents and warrants to the
Acquiror and the Acquiring Bank as follows:
3.1. Corporate Organization.
3.1.1. Company. The Company is a corporation that is duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania. The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company has full power
and authority, corporate and otherwise, to own or lease all of its properties
and assets and to carry on its business as it is now being conducted, and is
duly licensed or qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned or leased
by it makes such licensing or qualification necessary, except where the failure
to be so licensed, qualified or in good standing would not have a material
adverse effect on the business, results of operations, assets or financial
condition of the Company, the Acquired Bank, and the other "Company
Subsidiaries" (as hereinafter defined), taken as a whole (a "Company Material
Adverse Effect"). A true and complete copy of the Articles of Incorporation and
By-laws, as in effect on the date hereof, of the Company are contained in
Section 3.1.1 of the Company Disclosure Schedules.
3.1.2. Subsidiaries. The Acquired Bank and the corporations and other
entities listed in Section 3.1.2 of the Company Disclosure Schedules are the
only Company Subsidiaries. When used with reference to the Company, the term
"Company Subsidiary" means any corporation, partnership, limited liability
company, joint venture or other legal entity in which the Company, directly or
indirectly, owns at least a 50% stock or other equity interest or for which the
Company, directly or indirectly, acts as a general partner. The Acquired Bank is
a commercial bank duly organized, validly existing and in good standing under
the laws of the Commonwealth of Pennsylvania. Each other Company Subsidiary is a
corporation or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization as
set forth in Section 3.1.2. of the Company Disclosure Schedules. Each Company
Subsidiary has full power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being conducted, and is
duly licensed or qualified to do business as a foreign
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corporation or entity and is in good standing in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not constitute a Company Material Adverse Effect.
Section 3.1 of the Company Disclosure Schedules sets forth true and complete
copies of the Articles of Incorporation (or Certificate of Incorporation, as the
case may be) and By-laws or other governing instrument, as in effect on the date
hereof, of each Company Subsidiary. Except for the Acquired Bank and the other
Company Subsidiaries identified in Section 3.1.2 of the Company Disclosure
Schedules, the Company does not own or control, directly or indirectly, any
equity interest in any corporation, limited liability company, association,
partnership, joint venture or other entity.
3.2. Capitalization. The authorized capital stock of the Company consists
solely of 14,000,000 shares of Common Stock. As of the date hereof, there are
2,825,312 shares of Common Stock issued and outstanding. As of the date hereof,
there are 33,333 shares of Common Stock issuable upon exercise of the Executive
Options. Section 3.2 of the Company Disclosure Schedules sets forth a true and
complete copy of all agreements relating to the Executive Options. The
authorized capital stock of the Acquired Bank consists solely of 3,000,000
shares of common stock. As of the date hereof, there are 1,307,517 shares of
common stock of the Acquired Bank issued and outstanding. The capitalization and
equity interest ownership in each other Company Subsidiary is as set forth in
Section 3.2 of the Company Disclosure Schedules. Neither the Company nor any
Company Subsidiary has adopted any plan or agreement pursuant to which capital
stock may be issued or stock options may be granted other than the agreements
(all of which are set forth in Section 3.2 of the Company Disclosure Schedules)
which relate to the Executive Options. All issued and outstanding shares of
Common Stock and all issued and outstanding shares of capital stock or other
equity interest of each Company Subsidiary have been duly authorized and validly
issued, have been issued without violating the pre-emptive or other rights of
third parties, are fully paid, and are nonassessable. All of the outstanding
shares of capital stock or other equity interest of each Company Subsidiary are
owned by the Company and are free and clear of all liens, encumbrances, charges,
restrictions or rights of third parties. Except for the Executive Options,
neither the Company nor any Company Subsidiary has granted or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the transfer, purchase, subscription or issuance of
any shares of capital stock or equity interest of the Company or any Company
Subsidiary or has issued any securities representing the right to purchase,
subscribe or otherwise receive any shares of such capital stock or other equity
interest or any securities convertible into any such shares, and there are no
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agreements or understandings to which the Company or any Company Subsidiary is a
party with respect to the voting of any such shares or other equity interest.
There are no outstanding contractual obligations requiring the Company or any
Company Subsidiary to repurchase, redeem or otherwise acquire any outstanding
securities or other equity interest in the Company or any Company Subsidiary.
Except as set forth in Section 3.2 of the Company Disclosure Schedules, since
December 31, 1993, neither the Company nor any Company Subsidiary has
repurchased, redeemed or otherwise acquired any such securities or interests.
3.3. Authority; No Violation.
3.3.1. Authority. Subject to the approval of this Agreement and the
transactions contemplated hereby (other than the Stock Option Agreement, as to
which no shareholder approval is required) by the shareholders of the Company,
each of the Company and the Acquired Bank has full power and authority,
corporate and otherwise, to execute and deliver this Agreement, to perform its
obligations hereunder, and to consummate the transactions contemplated hereby in
accordance with the terms hereof. The Company has full power and authority to
execute and deliver the Stock Option Agreement, to perform its obligations
thereunder, and to consummate the transactions contemplated thereby in
accordance with the terms thereof. The execution and delivery of this Agreement
and the Stock Option Agreement, and the performance of the Company and the
Acquired Bank's obligations hereunder and thereunder, and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of each of the Company and the Acquired Bank
in accordance with its respective Articles of Incorporation and By-laws and all
applicable laws and regulations. Except for approval by the Company's
shareholders of this Agreement, no other corporate proceedings on the part of
the Company or the Acquired Bank are necessary to consummate the transactions so
contemplated. This Agreement and the Stock Option Agreement have been duly and
validly executed by the Company and this Agreement has been duly and validly
executed by the Acquired Bank and constitute valid and binding obligations of
the Company and the Acquired Bank, enforceable against each of them in
accordance with their respective terms.
3.3.2. No Violation. Neither the execution and delivery of this Agreement
by the Company or the Acquired Bank, nor the execution and delivery of the Stock
Option Agreement by the Company, nor the consummation by the Company or the
Acquired Bank of the transactions contemplated hereby or thereby in accordance
with the terms hereof or thereof, or compliance by the Company or the Acquired
Bank with, or performance of, any of the terms or provisions hereof or thereof,
will (i) violate any provision of the Company's or the Acquired Bank's Articles
of Incorporation or By-
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Laws, (ii) assuming that the consents and approvals set forth below are duly
obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to the Company or any Company
Subsidiary or any of their respective properties or assets, or (iii) except as
set forth in Section 3.3 of the Company Disclosure Schedules, violate, conflict
with, result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, security interest, charge or other encumbrance upon
any of the respective properties or assets of the Company or any Company
Subsidiary under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, commitment, pledge, permit, deed of trust, license, lease,
contract, agreement or other instrument or obligation or any judgment, order,
decree, law, rule or other restriction of any governmental authority, in each
case to which the Company or the Company Subsidiary is a party, or by which the
Company or the Company Subsidiary may be bound or to which any of the assets or
properties of the Company or the Company Subsidiary are subject, except, with
respect to the matters described in clauses (ii) and (iii) above, such as
individually or in the aggregate will not constitute a Company Material Adverse
Effect, and which will not prevent or delay the consummation of the transactions
contemplated hereby. Except for consents and approvals of or filings or
registrations with or notices to the Federal Deposit Insurance Corporation (the
"FDIC"), the Board of Governors of the Federal Reserve System (the "FRB") and
the Pennsylvania Department of Banking (the "Department") (collectively, the
"Applicable Bank Regulatory Agencies"), applicable environmental protection
agencies (such as, but not limited to the New Jersey Department of Environmental
Protection and Energy ("DEPE")), the Securities and Exchange Commission (the
"SEC") and the shareholders of the Company, no consents or approvals of or
filings or registrations with or notices to any third party or any public body
or authority are necessary on behalf of the Company or the Acquired Bank in
connection with (x) the execution and delivery by the Company or the Acquired
Bank of this Agreement, (y) the execution and delivery by the Company of the
Stock Option Agreement or (z) the performance by the Company or the Acquired
Bank of their respective obligations hereunder (including, without limitation,
consummation of the Merger and the Bank Merger), the performance by the Company
of its obligations under the Stock Option Agreement, or the consummation of the
transactions contemplated hereby and thereby.
3.4. Financial Statements.
3.4.1. Section 3.4 of the Company Disclosure Schedules sets forth copies of
the consolidated statements of condition of the Company as of December 31, 1992
and 1993, and the related consolidated statements of income, changes in
shareholders' equity
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and cash flows for the periods ended December 31, in each of the three years
1991 through 1993, in each case accompanied by the audit report of Rudolph,
Palitz, independent public accountants with respect to the Company, and the
unaudited consolidated statement of condition of the Company as of September 30,
1994 and the related unaudited consolidated statements of income and cash flows
for the nine months ended September 30, 1993 and September 30, 1994
(collectively, the "Company Financial Statements"). Except as set forth in
Section 3.4 of the Company Disclosure Schedules with respect to such unaudited
consolidated financial statements, the Company Financial Statements (including
the related notes) have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied during the periods covered
thereby (except as may be indicated therein or in the notes thereto), fairly
present the consolidated financial condition of the Company as of the respective
dates set forth therein and fairly present the consolidated results of
operations, changes in shareholders' equity and cash flows of the Company for
the respective periods set forth therein.
3.4.2. The books and records of the Company and each Company Subsidiary
have been maintained in compliance in all material respects with all applicable
legal, regulatory and accounting requirements.
3.4.3. Except as and to the extent reflected, disclosed or reserved against
in the Company Financial Statements (including the notes thereto), as of
September 30, 1994 (the "Company Statement of Condition Date"), neither the
Company nor any Company Subsidiary had any liabilities, whether absolute,
accrued, contingent or otherwise, material to the business, operations, assets
or financial condition of the Company and the Company Subsidiaries, taken as a
whole, which were required by GAAP (consistently applied) to be disclosed in the
Company's consolidated statement of condition (as of the Company Statement of
Condition Date) or the notes thereto. Since the Company Statement of Condition
Date, neither the Company nor any Company Subsidiary have incurred any
liabilities except in the ordinary course of business and consistent with
prudent banking practice or except as related to the transactions contemplated
by this Agreement.
3.5. Broker's and Other Fees. Except for the retention of Sandler O'Neill &
Partners, L.P., neither the Company nor any Company Subsidiary nor any of their
directors or officers has employed any broker or finder or incurred any
liability for any broker's or finder's fees or commissions in connection with
any of the transactions contemplated by this Agreement. All agreements with
Sandler O'Neill & Partners, L.P. providing for the payment of fees in connection
with the Merger are set forth in Section 3.5 of the Company Disclosure
Schedules. There are no other fees, other than time charges billed at usual and
customary rates, payable by the Company or any Company Subsidiary to any
advisors, including
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lawyers and accountants, in connection with the Merger or the Bank Merger or
which would be triggered by consummation of the Merger or the Bank Merger or the
termination of the services of such advisors by the Company or any Company
Subsidiary.
3.6. Absence of Certain Changes or Events.
3.6.1. Except for the net operating losses incurred by the Company since
September 30, 1994 which have been disclosed to the Acquiror, there has not been
any material adverse change in the business, results of operations, assets or
financial condition of the Company and the Company Subsidiaries, taken as a
whole, since the Company Statement of Condition Date, and to the best of the
Company's knowledge, no facts or conditions exist which are likely to cause such
a material adverse change in the future, except for net operating losses not
arising from any other event which, in and of itself, would be a breach of
another representation or warranty.
3.6.2. Except as set forth in Section 3.6 of the Company Disclosure
Schedules, neither the Company nor any Company Subsidiary has taken or permitted
any of the actions described in Section 5.2 (other than Sections 5.2.6, 5.2.7,
and 5.2.8) hereof (but without reference to the dates specified in Section 5.2)
between December 31, 1993 and the date hereof.
3.6.3. Except as set forth in Section 3.6 of the Company Disclosure
Schedules, since December 31, 1993, neither the Company nor any Company
Subsidiary has taken or permitted any actions, or omitted to take any actions,
that would, or that, with the passage of time or the occurrence of events, would
reasonably be expected to, result in (A) any of the representations and
warranties set forth in this Article III hereafter becoming untrue, (B) a breach
of any of the Company's covenants set forth herein or (C) any of the conditions
to closing set forth in Sections 6.1, 6.2 or 6.3 not being satisfied.
3.7. Legal Proceedings. Except as disclosed in Section 3.7 of the Company
Disclosure Schedules, and except for ordinary routine litigation incidental to
the business of the Company and the Company Subsidiaries, neither the Company
nor any Company Subsidiary is a party to any, and there are no pending or, to
the best of the Company's knowledge, threatened, legal, administrative,
arbitrable or other proceedings, claims, actions or governmental investigations
of any nature against the Company or any Company Subsidiary which, if decided
adversely to the Company or the Company Subsidiary, would constitute a Company
Material Adverse Effect. Except as disclosed in Section 3.7 of the Company
Disclosure Schedules, neither the Company nor any Company Subsidiary is a party
to any order, judgment or decree entered in any lawsuit or proceeding which
order, judgment or proceeding continues to bind, or could in the future bind,
the Company or any Company Subsidiary.
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3.8. Taxes and Tax Returns.
3.8.1. The Company and each Company Subsidiary has duly filed (and until
the Effective Time will so file) all returns, declarations, reports, information
returns and statements ("Returns") required to be filed by them in respect of
any federal, state and local taxes (including without limitation all income
taxes, payroll and employee withholding taxes, backup withholding taxes,
unemployment insurance taxes, social security taxes, sales and use taxes, excise
taxes, franchise taxes, gross receipts taxes, occupation taxes, real and
personal property taxes, stamp taxes, transfer taxes, workers' compensation
taxes, capital stock taxes, taxes on services, and other obligations of the same
or of a similar nature, whether arising before, on or after the Closing Date and
any interest, penalties or additions to taxes that may become payable in respect
thereof ("Taxes"). Each of the Company and the Acquired Bank has duly paid (and
until the Effective Time will so pay) all such Taxes due and payable, other than
taxes or other charges which are being contested in good faith and are disclosed
in Section 3.8 of the Company Disclosure Schedules. The Company and each Company
Subsidiary have established (and until the Effective Time will establish) on
their books and records reserves that are adequate for the payment of all Taxes
not yet due and payable. Section 3.8 of the Company Disclosure Schedules
identifies the federal income tax returns of the Company and the Company
Subsidiaries which have been examined by the Internal Revenue Service (the
"IRS") within the past six years. No deficiencies were asserted as a result of
such examinations which have not been resolved and paid in full. The federal
Returns of the Company and the Company Subsidiaries have been audited and closed
through December 1992, the state Returns of the Company and the Company
Subsidiaries have been settled through 1989, and there have been no audits or
reviews of any local Returns of the Company and the Company Subsidiaries. Except
as set forth in Section 3.8 of the Company Disclosure Schedules, there is no
action, suit, proceeding, investigation, audit, dispute, protest or claim now
threatened or pending with respect to any Taxes due from the Company or any
Company Subsidiary with respect to any Return, and neither the Company nor any
Company Subsidiary nor their employees (based on personal contact with any
authority) know of any such action, suit, proceeding, investigation, audit,
dispute or claim that has been threatened. Except as set forth in Section 3.8 of
the Company Disclosure Schedules, no claim has ever been made by an authority in
a jurisdiction where the Company or any Company Subsidiary does not file Returns
that the Company or any Company Subsidiary is or may be subject to taxation by
that jurisdiction nor, to the best of the Company's or the Acquired Bank's
knowledge does such a valid claim exist. The Company or the Acquired Bank shall
immediately notify the Acquiror of any governmental audits, actions,
proceedings, investigations or claims with respect to Taxes that occur in the
future and shall provide such information in connection therewith as may be
reasonably requested by the
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<PAGE>
Acquiror. Neither the Company nor any Company Subsidiary have given any
currently outstanding waivers or comparable consents regarding the application
of the statute of limitations with respect to any Taxes or Returns. With respect
to information reporting (Forms 1098 and 1099), policies and procedures have
been established by the Company and each Company Subsidiary sufficient to
demonstrate that reasonable care has been exercised under Section 6724 of the
Code and the regulations thereunder to obtain taxpayer identification ("TIN")
numbers including initial and annual solicitation of such TIN's and collection
and submission of back-up withholding where applicable.
3.8.2. Except as set forth in Section 3.8 of the Company Disclosure
Schedules, neither the Company nor any Company Subsidiary (i) has requested any
extension of time within which to file any Return which Return has not since
been filed, (ii) is a party to any agreement providing for the allocation or
sharing of taxes, (iii) is required to include in income any adjustment pursuant
to Section 481(a) of the Code by reason of a voluntary change in accounting
method initiated by the Company or any Company Subsidiary (nor does the Company
have any knowledge that the IRS has proposed any such adjustment or change of
accounting method), or (iv) has filed a consent pursuant to Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply. The Company's
outstanding securities are not "United States real property interests" within
the meaning of Section 897(c) of the Code.
3.8.3. To the date of this Agreement, neither the Company nor any Company
Subsidiary has experienced an equity shift that would limit the use of any tax
attribute carryforward (e.g., net operating losses, credits, etc.) or built in
deductions under Section 382 of the Code and the regulations thereunder.
3.9. Reports.
3.9.1. Section 3.9 of the Company Disclosure Schedules lists, and the
Company has previously delivered to the Acquiror a complete copy of, each (i)
final registration statement, prospectus, annual, quarterly or special report
and definitive proxy statement filed by the Company since September 30, 1990
pursuant to the Securities Act of 1933, as amended ("1933 Act"), or the
Securities and Exchange Act of 1934, as amended ("1934 Act") and (ii)
communication (other than general advertising materials and press releases)
mailed by the Company to its stockholders as a class since September 30, 1990,
and each such final registration statement, prospectus, annual, quarterly or
special report, definitive proxy statement or communication, as of its date,
complied in all material respects with all applicable statutes, rules and
regulations enforced or promulgated by the SEC and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary
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<PAGE>
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading; provided that information as of a
later date shall be deemed to modify information as of an earlier date.
3.9.2. The Company and the Acquired Bank have, since January 1, 1991, duly
filed with the FDIC, the FRB, and the Department in form which was correct in
all material respects all financial reports required to be filed under
applicable laws and regulations, and, subject to any required permission from
such regulatory authorities, the Company promptly will deliver or make available
to the Acquiror accurate and complete copies of such reports. Each such report,
as of its date, complied in all material respects with all applicable statutes,
rules and regulations and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading; provided that
information as of a later date shall be deemed to modify information as of an
earlier date. Section 3.9 of the Company Disclosure Schedule lists all
examinations of the Company or the Acquired Bank conducted by either the FRB,
the FDIC or the Department since January 1, 1991 and the dates of any responses
thereto submitted by the Company or the Acquired Bank.
3.10. Company Information. The information relating to the Company and the
Company Subsidiaries to be contained in the Proxy Statement (as defined in
Section 5.10 hereof) to be delivered to shareholders of the Company in
connection with the solicitation of their approval of the Merger, as of the date
the Proxy Statement is mailed to shareholders of the Company, and up to and
including the date of the meeting of shareholders to which such Proxy Statement
relates, will not contain any untrue statement of a material fact or 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.
3.11. Certain Contracts.
3.11.1. Except for plans referenced in Section 3.17 or as disclosed in
Section 3.11 of the Company Disclosure Schedules, (i) neither the Company nor
any Company Subsidiary is a party to or bound by any written contract or
understanding (whether written or oral) with respect to the employment of any
officers, employees, directors or consultants, and (ii) the consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events with respect to either participation
in such plans or to any employment related matter) result in any payment (either
of severance pay or otherwise) becoming due from the Company or any Company
Subsidiary or any successor of any of the foregoing to any officer, employee,
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director or consultant thereof. Section 3.11 of the Company Disclosure Schedules
sets forth true and correct copies of all severance and employment agreements
with officers, directors, employees, agents or consultants to which the Company
or any Company Subsidiary is a party. Except as disclosed in Section 3.11 of the
Company Disclosure Schedules, neither the Company nor any Company Subsidiary is
a party to or bound by any written contract or understanding (whether written or
oral) that (i) was entered into outside of the ordinary course of business, (ii)
relates to the borrowing of long-term debt by the Company or any Company
Subsidiary or the guarantee by the Company or any Company Subsidiary of any
obligation, (iii) constitutes a collective bargaining agreement or otherwise
involves organized labor, (iv) involves the payment after the date hereof by the
Company or any Company Subsidiary of more than $25,000 in the aggregate; (v)
constitutes an agreement or arrangement to indemnify; or (vi) cannot be
terminated by the Company or the Company Subsidiary at its option within thirty
days or less; copies or descriptions of all such contracts and understandings
referred to in Section 3.11 of the Company Disclosure Schedules have previously
been provided to the Acquiror.
3.11.2. Except as disclosed in Section 3.11 of the Company Disclosure
Schedules and except for loan commitments issued in the ordinary course of
business, (i) as of the date of this Agreement, neither the Company nor any
Company Subsidiary is a party to or bound by any commitment, agreement or other
instrument which is material to the business, operations, assets or financial
condition of the Company and the Company Subsidiaries taken as a whole, but in
no event shall a contract involving the payment or receipt by the Company or any
Company Subsidiary of less than $25,000 in the aggregate be deemed material
under this Section 3.11.2, and (ii) no commitment, agreement or other instrument
to which the Company or any Company Subsidiary is a party or by which any of
them is bound limits the freedom of the Company or any Company Subsidiary to
compete in any line of business or with any person.
3.11.3. Except as disclosed in Section 3.11 of the Company Disclosure
Schedules, neither the Company nor any Company Subsidiary or, to the best
knowledge of each of the Company and the Acquired Bank, any other party thereto,
is in default under any material lease, contract, mortgage, promissory note,
deed of trust, loan or other commitment (except those under which the Acquired
Bank is or will be the creditor) or arrangement, except for defaults which
individually or in the aggregate would not constitute a Company Material Adverse
Effect, and no event has occurred which, with the giving of notice or the lapse
of time or both, would constitute such a default under any such lease, contract,
mortgage, promissory note, deed of trust, loan or other commitment or under any
contract described in Section 3.11 of the Company Disclosure Schedules.
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3.12. Properties and Insurance.
3.12.1. The Company and the Company Subsidiaries have good title, and, as
to owned real property, marketable title, to all assets and properties, whether
real or personal, tangible or intangible, reflected in the Company's
consolidated statement of condition (as set forth in Section 3.4 of the Company
Disclosure Schedules) as of the Company Statement of Condition Date, or owned
and acquired subsequent thereto (except to the extent that such assets and
properties have been disposed of for fair value in the ordinary course of
business since the Company Statement of Condition Date or as otherwise set forth
in Section 3.12 of the Company Disclosure Schedules), subject to no
encumbrances, liens, mortgages, security interests, pledges or rights of others,
except (i) those items that secure liabilities that are reflected in such
consolidated statement of condition or the notes thereto, (ii) statutory liens
for amounts not yet delinquent or which are being contested in good faith, (iii)
such encumbrances, liens, mortgages, security interests, pledges and title
imperfections that are not in the aggregate material to the business,
operations, assets and financial condition of the Company and the Company
Subsidiaries taken as a whole and (iv) with respect to owned real property,
title imperfections noted in title reports delivered to the Acquiror prior to
the date hereof. Since December 31, 1993, neither the Company nor any of the
Company Subsidiaries have experienced any uninsured damage or destruction with
respect to any material properties or assets owned or leased by any of them. All
properties and assets used by the Company and/or any of the Company Subsidiaries
are, in all material respects, in good operating condition and repair, suitable
for the purposes for which they are currently utilized, and comply in all
material respects with all laws and other governmental requirements relating
thereto currently in effect. The Company and the Company Subsidiaries, as
lessees, have the right under valid and subsisting leases to occupy, use,
possess and control all real property leased by the Company or the Company
Subsidiaries in all material respects as presently occupied, used, possessed and
controlled by the Company or the Company Subsidiaries. The Company and the
Company Subsidiaries enjoy peaceful and undisturbed possession under all such
leases, all of which are valid and binding obligations of the Company or the
Company Subsidiary, as the case may be. Except as set forth in Section 3.12 of
the Company Disclosure Schedules, neither the Company nor any Company Subsidiary
is in default, nor to the best knowledge of each of them is any other party in
default, in any material respect under any of such leases and there has occurred
no material default or event which, with the lapse of time or the giving of
notice or both, would constitute a material default by the Company, the Company
Subsidiary or any other party under any such lease.
3.12.2. The business operations and all insurable properties and assets of
the Company and the Company Subsidiaries
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are insured for their benefit against all risks which, in the reasonable
judgment of the management of Company, should be insured against, in each case
under policies or bonds issued by insurers of recognized responsibility, in such
amounts with such deductibles and against such risks and losses reasonably
adequate for the business engaged in by the Company and the Company
Subsidiaries. The Company has not received any notice of cancellation or notice
of a material amendment of any such insurance policy or bond, the Company and
the Company Subsidiaries are not in default under any such insurance policy or
bond, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion.
3.13. Minute Books. The minute books of the Company and the Company
Subsidiaries contain accurate records of all meetings and other actions held of
their respective shareholders and Boards of Directors or governing bodies
(including committees of their respective Boards of Directors or governing
bodies), except where the failure to so maintain such records would not result
in an omission to disclose a matter which would be material to any party
acquiring a substantial interest in the Company or any Company Subsidiary.
3.14. Reserves. As of the Company Statement of Condition Date, each of the
allowance for loan losses and the allowance for OREO properties in the Company
Financial Statements was adequate. The methodology used to compute such
allowances complies in all material respects with all applicable FDIC and
Department policies.
3.15. No Termination Agreements or Parachute Payments.
3.15.1. Except as disclosed in Section 3.15 of the Company Disclosure
Schedules, no current or former officer, director, employee or agent of the
Company or any Company Subsidiary (each, a "Company Employee") is entitled now,
or will or may be entitled as a consequence of or in connection with (a) this
Agreement or the Merger or the Bank Merger, or (b) termination of such person's
employment with the Company or any Company Subsidiary (by resignation,
involuntary termination or otherwise), in either case ((a) or (b)), alone or in
combination with other facts or events, to any payment or benefit from the
Company, any Company Subsidiary, the Acquiror or any of the Acquiror's
Subsidiaries.
3.15.2. No Company Employee is entitled now, or will or may be entitled as
a consequence of (a) this Agreement or the Merger or the Bank Merger, or (b)
termination of such person's employment with the Company or any Company
Subsidiary (by resignation, involuntary termination or diminution of duties or
otherwise), in either case ((a) or (b)), alone or upon the occurrence of
subsequent events, to any payment or benefit from the Company, any Company
Subsidiary, the Acquiror or any of the
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Acquiror's Subsidiaries which, if paid or provided, would constitute an "excess
parachute payment", as defined in Section 280G of the Code or the regulations
promulgated thereunder.
3.16. Indemnification. Except as set forth in the Articles of Incorporation
and By-laws of the Company or in Section 3.16 of the Company Disclosure
Schedules, (i) neither the Company nor any Company Subsidiary is a party to any
indemnification agreement with any former, current or future Company Employee or
any other person, (ii) no person has served, serves or will serve in any
capacity with any enterprise other than the Company or any Company Subsidiary at
the request of the Company or any Company Subsidiary (a "Covered Person"), and
(iii) to the best knowledge of the Company, there are no claims or potential
claims for which any former or current Company Employee or any other person
would be entitled to indemnification under Section 5.7 hereof if such provisions
were deemed to be in effect.
3.17. Employee Plans. Except as set forth in Section 3.17 of the Company
Disclosure Schedules, all employee benefit, welfare, bonus, deferred
compensation, pension, profit sharing, stock bonus, stock option, employee stock
ownership, consulting, health insurance, life insurance, accident insurance,
disability insurance, disability, severance, cafeteria or fringe benefit plans,
formal or informal, written or oral, and all trust agreements related thereto,
relating to any present or former directors, officers or employees of the
Company or any Company Subsidiary or their relatives or affiliates ("Company
Employee Plans") have been maintained, operated and administered in compliance
with their terms and currently comply, and have at all relevant times complied,
with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
to the extent applicable, the Code, to the extent applicable, and any other
applicable laws. Copies of all Company Employee Plans (or description of the
applicable terms where such plans are oral or otherwise informal) currently in
effect, and all financial statements relating thereto, have previously been
delivered to the Acquiror. With respect to each Company Employee Plan which is a
pension plan (as defined in Section 3(2) of ERISA), except as set forth in
Section 3.17 of the Company Disclosure Statements, (a) each pension plan, as
amended (and any trust relating thereto), intended to be a qualified plan under
Section 401(a) of the Code, either has been determined by the IRS to be so
qualified in its current form or is the subject of a pending application for
such determination that was timely filed, (b) there is no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, and no waiver of the minimum funding standards of such
sections has been requested from the IRS, (c) no reportable event described in
Section 4043 of ERISA has occurred, (d) no defined benefit plan has been
terminated, nor has the Pension Benefit Guaranty Corporation (the "PBGC")
instituted proceedings to terminate a defined benefit plan or to
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appoint a trustee or administrator of a defined benefit plan, and no
circumstances exist that constitute grounds under Section 4042 of ERISA
entitling the PBGC to institute any such proceedings, (e) no pension plan is a
"multi-employer plan" within the meaning of Section 3(37) of ERISA and (f) as of
the last day of the most recent plan year which ended prior to the date hereof
and for which an actuarial valuation has been issued by the plan's actuary, with
respect to each defined benefit plan which is a "single-employer plan" (within
the meaning of Section 4001 (a)(15) of ERISA), the actuarially determined
present value of all "benefit liabilities" (within the meaning of Section
4001(a)(16) of ERISA), as determined on the basis of the actuarial assumptions
contained in the plan's most recent actuarial valuation, did not exceed the then
current value of the assets of the plan and there has been no material change in
the financial condition of the plan since the last day of the most recent plan
year. No liability under subtitle C or D of Title IV of ERISA has been incurred
by the Company or any Company Subsidiary with respect to any "single-employer
plan" formerly maintained by them or by any entity which is considered one
employer with the Company under Section 4001 of ERISA or Section 414 of the
Code. Except as disclosed in Section 3.17 of the Company Disclosure Schedules,
no plan, contract or other arrangement to which the Company or any Company
Subsidiary is a party provides health, medical, disability, death, accident,
survivor or pension benefits to any retiree, former employee or relative,
affiliate or beneficiary thereof. The Company and each Company Subsidiary will
continue to make all required contributions, premium payments or other required
transfers and meet all required funding obligations to keep all Company Employee
Plans current. Except as may be set forth in Section 3.11.1 of the Company
Disclosure Schedules, neither the Company nor any Company Subsidiary provides
continued health care benefits under the Acquired Bank Medical Benefits Plan to
retirees or employees on leave of absence or on long or short term disability
except coverage required by the terms of the Consolidated Omnibus Budget
Reconciliation Act or the federal Family and Medical Leave Act of 1993, nor does
the Company or any Company Subsidiary provide continuing insurance benefits
under the Acquired Bank Life and Accidental Death and Dismemberment Insurance
Plan except for those employees who qualify for continued coverage due to total
disability under the terms of such plan.
3.18. Compliance with Laws and Orders. Except as set forth in Section 3.18
of the Company Disclosure Schedules, all eligible accounts of depositors of the
Acquired Bank are insured by the Bank Insurance Fund of the FDIC to the fullest
extent permitted by law. Except as set forth in Section 3.18 of the Company
Disclosure Schedules, the businesses of the Company and each Company Subsidiary
have not been, and are not being, conducted in violation of any law, ordinance,
regulation, judgment, order, decree, license or permit of any governmental
entity (including, without limitation, in the case of the Company and the
Acquired
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Bank, all statutes, rules and regulations pertaining to the conduct of the
banking business and the exercise of trust powers), except for violations or
possible violations which individually or in the aggregate do not, and, insofar
as reasonably can be foreseen, in the future will not, constitute a Company
Material Adverse Effect. Section 3.18 of the Company Disclosure Schedules
describes with particularity the only areas and matters with respect to which
the condition and operations of the Acquired Bank are not in compliance
therewith. Except as set forth in Section 3.18 of the Company Disclosure
Schedules, no investigation or review by any governmental entity with respect to
the Company or any Company Subsidiary is pending or, to the knowledge of the
Company, threatened, nor has any governmental entity indicated an intention to
conduct any such investigation or review.
3.19. Agreements with Bank Regulators. Except as described in Section 3.19
of the Company Disclosure Schedules, neither the Company nor any Company
Subsidiary is a party to any agreement or memorandum of understanding with, or a
party to any commitment letter, Board resolution submitted to a regulatory
authority or similar undertaking to, or is subject to any order or directive by,
or is a recipient of any extraordinary supervisory letter from, any governmental
entity which restricts in any manner the conduct of its business, or in any
manner relates to its capital adequacy, its credit or reserve policies or its
management, nor has the Company or any Company Subsidiary been advised by any
governmental entity that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, resolution, extraordinary
supervisory letter, commitment letter or similar submission. Except as described
in Section 3.19 of the Company Disclosure Schedules, the Company and each
Company Subsidiary are in compliance in all material respects with each order,
decree, agreement, memorandum of understanding, resolution, letter or submission
referenced in Section 3.19 of the Company Disclosure Schedules. Except as
described in Section 3.19 of the Company Disclosure Schedules, the Company is
not required by Section 32 of the Federal Deposit Insurance Act or otherwise to
give prior notice to any Federal banking agency or to the Department of the
proposed addition of an individual to its board of directors or the employment
of an individual as a senior executive officer. Except as set forth in Section
3.19 of the Company Disclosure Schedules, neither the Company nor the Bank is
subject to any order, limitation, covenant or directive with respect to any
assets purchased from any regulatory agency.
3.20. Company Action. The Board of Directors of the Company (at a meeting
duly called and held) has by the requisite vote of all directors present (a)
determined that the Merger is advisable and in the best interests of the Company
and its shareholders, (b) approved this Agreement and the transactions
contemplated hereby, including the Merger and the Bank Merger,
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(c) directed that the Agreement be submitted for consideration by the Company's
shareholders and (d) resolved to recommend that the Company's shareholders
approve the Merger and this Agreement.
3.21. Vote Required. The affirmative vote of a majority of the outstanding
shares of Common Stock entitled to vote thereon is the only vote of the holders
of any class or series of Company capital stock necessary to approve this
Agreement and the transactions contemplated hereby.
3.22. No Triggering Events. Except as set forth in Section 3.22 of the
Company Disclosure Schedules, neither the execution and delivery by the Company
or the Acquired Bank of this Agreement or the execution and delivery of the
Stock Option Agreement by the Company, nor the consummation of the transactions
or any other event contemplated hereby and thereby, will constitute an event
under any Company Employee Plans that will, or upon the occurrence of subsequent
events would, accelerate the time of payment or vesting or increase the amount
of compensation or benefits due any director, officer, employee or former
employee (or any beneficiary of a former employee) of the Company or any Company
Subsidiary.
3.23. Environmental Matters.
3.23.1. For purposes of this Section 3.23, the following terms shall have
the following meanings:
"Branch Properties" means all real property presently or formerly owned or
operated by the Company or any Company Subsidiary on which branches, operations
centers or headquarters facilities are or were located.
"Environmental Law" means any applicable federal, state or local statute,
law, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction, directive, requirement
or agreement with any governmental entity relating to: (a) the protection,
preservation or restoration of the environment (including, without limitation,
air, water vapor, surface water, ground water, drinking water supply, 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 Substances (as
hereinafter defined). The term Environmental Law includes, without limitation,
(x) the following statutes, each as amended:
(i) the federal Clean Air Act;
(ii) the federal Clean Water Act;
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(iii) the federal Water Pollution Control Act of 1972;
(iv) the federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto)
("RCRA");
(v) the federal Comprehensive Environmental Response Compensation
Liability Act of 1980 (including the Superfund Amendments and
Reauthorization Act of 1986) ("CERCLA");
(vi) the federal Toxic Substances Control Act;
(vii) the federal Occupational Safety and Health Act of 1970; (viii)
the federal Emergency Planning and Community Right to Know Act
of 1986;
(ix) the federal Safe Drinking Water Act;
(x) the federal Solid Waste Disposal Act;
(xi) the federal Insecticide, Fungicide and Rodenticide Act;
(xii) the New Jersey Industrial Site Recovery Act ("ISRA"); and
(y) 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 Substance.
"Hazardous Substance" means any substance, whether liquid, solid or gas,
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous under any applicable Environmental Law, whether by type or by
quantity. Hazardous Substance includes, without limitation, (i) any "hazardous
substance" as defined in CERCLA, (ii) any "hazardous waste" as defined in RCRA,
and (iii) any toxic waste, pollutant, contaminant, hazardous substance, toxic
substance, hazardous waste, special waste or petroleum or any derivative or
by-product thereof, radon, radioactive material, asbestos, asbestos containing
material, urea formaldehyde foam insulation, lead and polychlorinated biphenyls.
"Real Property" means the Branch Properties, all real property classified
by the Company or any Company Subsidiary as OREO and all real property
(including property held as trustee or in any other fiduciary capacity) over
which the Company or any Company Subsidiary currently or formerly has exercised
dominion, management or control.
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3.23.2. Except as set forth in Section 3.23 of the Company Disclosure
Schedules or as would not, singly or in the aggregate, constitute a Company
Material Adverse Effect,
3.23.2.1. the Company and each Company Subsidiary and each predecessor of
any of them is and has been at all times during its existence in compliance in
all material respects with all applicable Environmental Laws;
3.23.2.2. the Real Property does not contain any Hazardous Substance in
violation of any applicable Environmental Law;
3.23.2.3. neither the Company nor any Company Subsidiary has received any
written notices, demand letters or written requests for information from any
governmental entity or any third-party indicating that the Company or any
Company Subsidiary may be in violation of, or liable under, any Environmental
Law;
3.23.2.4. there are no civil, criminal or administrative actions, suits,
demands, claims, hearings, investigations or proceedings pending or, to the best
knowledge of the Company, threatened against the Company or any Company
Subsidiary with respect to the Company or any Company Subsidiary or the Real
Property relating to any violation, or alleged violation, of any Environmental
Law;
3.23.2.5. no reports have been filed, or are required to be filed, by the
Company or any Company Subsidiary concerning the release of any Hazardous
Substance or the threatened or actual violation of any Environmental Law on or
at the Real Property;
3.23.2.6. to the knowledge of the Company, there are no underground storage
tanks on, in or under any of the Branch Properties and no underground storage
tanks have been closed or removed from any Branch Properties while any such
Branch Properties were owned or operated by the Company or any Company
Subsidiary; and
3.23.2.7. to the knowledge of the Company, neither the Company nor any
Company Subsidiary has incurred, and none of the Real Property is currently
subject to, any liabilities (fixed or, to the knowledge of the Company,
contingent) relating to any suit, settlement, court order, administrative order,
judgment or claim asserted or arising under any Environmental Law.
3.23.3. There are no permits or licenses required under any Environmental
Law with respect to the Branch Properties presently operated by the Company or
any Company Subsidiary.
3.23.4. Neither the Company nor any Company Subsidiary has received written
notice that any part of the Real Property has
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been or is listed as a site containing Hazardous Substances pursuant to any
Environmental Law.
3.24. Labor Relations. Except as set forth in Section 3.24 of the Company
Disclosure Schedules, neither the Company nor any Company Subsidiary is a party
to or bound by any collective bargaining agreement respecting its employees, nor
is there pending, or to the best knowledge of the Company threatened, any
strike, walk-out or other work stoppage or labor organizational effort.
3.25. Loans. As of the date hereof:
3.25.1. Except as set forth in Section 3.25 of the Company Disclosure
Schedules, all loans owned by the Company or any Company Subsidiary, or in which
the Company or any Company Subsidiary has an interest ("Company Loans"), comply
in all material respects with all laws, including, but not limited to,
applicable usury statutes, underwriting and record-keeping requirements and the
Truth in Lending Act, the Equal Credit Opportunity Act and the Real Estate
Settlement Procedures Act, and all other applicable consumer protection statutes
and all applicable regulations under such laws.
3.25.2 Except as set forth in Section 3.25 of the Company Disclosure
Schedules, all Company Loans were made or acquired by the Company or the
Acquired Bank in accordance with board of director approved loan policies.
3.25.3. Except as set forth in Section 3.25 of the Company Disclosure
Schedules, all loans originated or purchased by the Company or any Company
Subsidiary and subsequently sold by the Company or a Company Subsidiary have
been sold without recourse to either the Company or to any Company Subsidiary
and without any liability under any yield maintenance or similar obligation.
3.26. Examinations. Section 3.26 of the Company Disclosure Schedules sets
forth the dates on which each of the following occurred: the last examination of
the Acquired Bank by the FDIC prior to the date of this Agreement, the last
examination of the Acquired Bank by the Department prior to the date of this
Agreement, the last examination of the Company by the FRB prior to the date of
this Agreement, and the last examination of the Acquired Bank with respect to
community reinvestment prior to the date of this Agreement. Except as set forth
in Section 3.26 of the Company Disclosure Schedules, all deficiencies noted in
such examinations have been resolved to the satisfaction of the applicable
regulatory agency. Section 3.26 of the Company Disclosure Schedules contains a
copy of the latest public Community Reinvestment Act filing of the Acquired
Bank.
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3.27. Transactions with Certain Persons. Except as set forth in Section
3.27 of the Company Disclosure Schedules, no executive officer, director or
principal shareholder of the Company or any Company Subsidiary, nor any
affiliate of any of the foregoing persons (as such terms are used in
Regulation O of the FRB), has engaged in any transaction with the Company or any
Company Subsidiary at any time and there has been no "extension of credit", as
defined in 12 C.F.R. Section 215.3, to any such person, which transaction was
not concluded, or which extension of credit was not paid in full, prior to
January 1,1988 and was not the subject of any inquiry, investigation, or written
comment by any regulatory agency since such date.
3.28. Disclosure. No representation or warranty contained in Article III of
this Agreement or in the Company Disclosure Schedules contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
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ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR
References herein to "Acquiror Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article IV, dated as of the date hereof
and referenced to the specific sections and subsections of Article IV of this
Agreement as provided herein, which have been delivered on the date hereof by
the Acquiror to the Company. The Acquiror hereby represents and warrants to the
Company as follows:
4.1. Corporate Organization.
4.1.1. Acquiror. The Acquiror is a corporation duly organized, validly
existing and in good standing under the laws of the State of New Jersey. The
Acquiror has full power and authority, corporate and otherwise, to own or lease
all of its properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a material adverse effect on the business, results of operations,
assets or financial condition of the Acquiror and each Acquiror Subsidiary (as
defined in Section 4.1.2), taken as a whole (an "Acquiror Material Adverse
Effect"). The Acquiror is registered as a bank holding company under the BHCA.
4.1.2. Subsidiaries. The Acquiring Bank is the only "Significant
Subsidiary" (as such term is defined in Rule 405 promulgated by the SEC under
the 1933 Act) of the Acquiror. When used with reference to the Acquiror, the
term "Acquiror Subsidiary" means any corporation, partnership, limited liability
company, joint venture or other legal entity in which the Acquiror, directly or
indirectly, owns at least a 50% stock or other equity interest or for which the
Acquiror, directly or indirectly, acts as a general partner. The Acquiring Bank
is a national banking association that is duly organized, validly existing and
in good standing. Each Acquiror Subsidiary has full power and authority to own
or lease all of its properties and assets and to carry on its business as it is
now being conducted, and is duly licensed or qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not constitute an Acquiror Material Adverse Effect.
For purposes of this Agreement, the term "Acquiror Corporations" shall mean the
Acquiror and the Acquiror Subsidiaries collectively.
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4.2. Capitalization. The authorized capital stock of the Acquiror consists
of 150,000,000 shares of Acquiror Common Stock and 40,000,000 shares of
preferred stock, no par value ("Acquiror Preferred Stock"). As of September 30,
1994, there were 52,491,042 shares of Acquiror Common Stock issued and
outstanding and 500,000 shares of Acquiror Preferred Stock issued and
outstanding. As of September 30, 1994, there were 10,951,927 shares of Acquiror
Common Stock reserved for issuance upon the conversion of debentures and for
employee and dividend reinvestment plans. All issued and outstanding shares of
the capital stock of the Acquiror have been, and all shares of Acquiror Common
Stock to be issued in the Merger will be when issued, duly authorized and
validly issued, issued without violating the pre-emptive or other rights of
third-parties, fully paid, and nonassessable.
4.3. Authority; No Violation.
4.3.1. Authority. The Acquiror and the Acquiring Bank have full power and
authority, corporate and otherwise, to execute and deliver this Agreement and to
consummate the transactions contemplated hereby in accordance with the terms
hereof. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Acquiror in accordance with the Certificate of
Incorporation of the Acquiror, the By-laws of the Acquiror and all applicable
laws and regulations. Prior to the Closing, the Acquiror will cause the Board of
Directors of the Acquiring Bank to duly and validly approve such execution,
delivery and consummation in accordance with the Articles of Association and
By-laws of the Acquiring Bank and all applicable laws and regulations. Except to
the extent that shareholder approval may be required in the event that the
Acquiror enters into other agreements to issue its capital stock prior to the
Closing, no other corporate proceedings on the part of the Acquiror or the
Acquiring Bank (other than such approval of the Acquiring Bank's Board of
Directors) are necessary to consummate the transactions so contemplated. Subject
to receipt of such approval of the Acquiring Bank's Board of Directors and the
receipt of such shareholder approval (if necessary), this Agreement constitutes
a valid and binding obligation of the Acquiror and the Acquiring Bank,
enforceable against the Acquiror and the Acquiring Bank in accordance with its
terms.
4.3.2. No Violation. Neither the execution and delivery of this Agreement
by the Acquiror and the Acquiring Bank, nor the consummation by the Acquiror and
the Acquiring Bank of the transactions contemplated hereby in accordance with
the terms hereof, or compliance by the Acquiror and the Acquiring Bank with any
of the terms or provisions hereof, will (i) violate any provision of the
Acquiror's Certificate of Incorporation, the Acquiring Bank's Articles of
Association or the By-laws of the Acquiror or the Acquiring Bank (ii) assuming
that the consents and
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approvals set forth below are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to the Acquiror Corporations, or any of their respective properties
or assets, or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of the Acquiror Corporations under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, commitment, pledge, permit,
deed of trust, license, lease, contract, agreement or other instrument or
obligation or any judgment, order, decree, law, rule or other restriction of any
governmental authority, in each case to which the Acquiror Corporations is a
party, or by which the Acquiror or any of the Acquiror Corporations may be bound
or to which any of the assets or properties of any of the Acquiror Corporations
are subject, except, with respect to the items described in clauses (ii) and
(iii) above, such as individually or in the aggregate will not constitute an
Acquiror Material Adverse Effect, and which will not prevent or delay the
consummation of the transactions contemplated hereby. Except for consents and
approvals of or filings or registrations with or notices to the Applicable Bank
Regulatory Agencies, applicable environmental agencies, the SEC, the state
securities commissions of the states in which the Company's shareholders reside,
NASDAQ, the Acquiring Bank's Board of Directors and the Acquiror's shareholders
(to the extent contemplated by Section 4.3.1), no consents or approvals of or
filings or registrations with or notices to any third party or any public body
or authority are necessary on behalf of the Acquiror or the Acquiring Bank in
connection with (x) the execution and delivery by the Acquiror and the Acquiring
Bank of this Agreement and the Stock Option Agreement and (y) the consummation
by the Acquiror and the Acquiring Bank of the Merger and the other transactions
contemplated hereby and thereby.
4.4. Reports. Section 4.4 of the Acquiror Disclosure Schedules lists, and
the Acquiror has previously delivered to the Company a complete copy of, each
final prospectus, annual, quarterly or current report and definitive proxy
statement, in each case without exhibits, filed by the Acquiror since January 1,
1992 pursuant to the 1933 Act or the 1934 Act.
4.5. Acquiror Information. The information relating to the Acquiror
Corporations to be contained in the Proxy Statement, as of the date the Proxy
Statement is mailed to shareholders of the Company, and up to and including the
date of the meeting of shareholders to which such Proxy Statement relates, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make
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the statements therein, in light of the circumstances under which they were
made, not misleading.
4.6. Agreements with Bank Regulators. None of the Acquiror Corporations is
a party to any agreement or memorandum of understanding with, or a party to any
commitment letter, Board resolution submitted to a regulatory authority or
similar undertaking to, or is subject to any order or directive by, or is
subject to, any extraordinary supervisory letter from, any governmental entity
which restricts materially the conduct of its business, or in any manner relates
to its capital adequacy, its credit or reserve policies or its management, nor
has the Acquiror or the Acquiring Bank been advised by any governmental entity
that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, agreement,
memorandum of understanding, resolution, extraordinary supervisory letter,
commitment letter or similar submission.
4.7. Broker's and Other Fees. Neither the Acquiror nor the Acquiring Bank
nor any of their directors or officers has employed any broker or finder or
incurred any liability for any broker's or finder's fees or commissions in
connection with any of the transactions contemplated by this Agreement.
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ARTICLE V--COVENANTS
5.1. Acquisition Proposals.
5.1.1. Neither the Company nor any Company Subsidiary shall, and each of
the Company and the Acquired Bank shall instruct and otherwise use its best
efforts to cause the officers, directors, employees, agents, advisors and other
representatives and consultants of the Company and each Company Subsidiary not
to, directly or indirectly, (i) encourage, solicit or initiate any proposals or
offers from any person relating to any acquisition or purchase of all or a
material amount of the assets of, or any securities of, or any merger,
consolidation or business combination with, the Company or the Acquired Bank
(any such transaction is referred to herein as an "Acquisition Transaction") or
(ii) except as the Board of Directors of the Company deems necessary, on the
advice of outside counsel, in the exercise of its fiduciary obligations under
applicable law, participate in any discussions or negotiations regarding, or
furnish to any other person any information with respect to, an Acquisition
Transaction; provided, however, that so long as the Acquiror is given prior
notice and an opportunity to object, nothing contained in this Section 5.1.1
shall restrict or prohibit any disclosure by the Company that is required on the
advice of outside counsel in any document to be filed with the SEC after the
date of this Agreement or any disclosure that, in the opinion of the Board of
Directors of the Company on advice of outside counsel, is otherwise required
under applicable law.
5.1.2. The Company shall promptly notify the Acquiror orally and in writing
of any proposal or offer regarding an Acquisition Transaction or any inquiries
with respect thereto. Such written notification shall include the identity of
the entity making such inquiry or Acquisition Transaction proposal or offer and
such other information with respect thereto as is reasonably necessary to
apprise the Acquiror of the material terms of such Acquisition Transaction
proposal or offer and all other material information relating thereto. The
Company shall give the Acquiror contemporaneous written notice upon engaging in
discussions or negotiations with, or providing any information regarding the
Company to, any such person regarding a possible Acquisition Transaction. The
Company shall promptly provide oral and written notice of all changes in the
information provided to the Acquiror pursuant to this Section 5.1.2 and of the
status of each inquiry, proposal, offer, discussion or negotiation relating to
an Acquisition Transaction.
5.1.3. Neither the Company nor the Acquired Bank shall enter into any
Acquisition Transaction unless, prior thereto, all of the following conditions
(the "Acquisition Transaction Conditions") have been met: (x) the Company's
Board of Directors shall have approved the Acquisition Transaction after
determining,
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upon advice of outside counsel, that such approval was necessary in the exercise
of its fiduciary obligations under applicable law; (y) the Company, prior to
accepting such approved Acquisition Transaction, shall have advised the Acquiror
of the terms of such Acquisition Transaction and shall have offered to the
Acquiror the opportunity to increase the consideration paid by the Acquiror
hereunder to the extent necessary such that the Company shall have a reasonable
basis for determining, upon the advice of outside counsel, that approval of the
Acquisition Transaction is not necessary (in light of such increased
consideration) in the exercise of the fiduciary duties of the Company's Board of
Directors under applicable law and (z) the Acquiror shall fail to increase the
consideration to be paid by the Acquiror to such an extent within seven days
after its receipt of such offer by the Company in writing.
5.2. Interim Operations of the Company. During the period from the date of
this Agreement to the Effective Time, except as expressly provided in this
Agreement, as required by law, or as otherwise approved in writing in advance by
the Acquiror:
5.2.1. Conduct of Business. The Company and the Acquired Bank shall, and
shall cause each Company Subsidiary to, conduct their respective businesses only
in, and not take any action except in, the ordinary course of business. The
Company and the Acquired Bank shall use reasonable efforts to preserve intact
the business organizations of the Company and each Company Subsidiary, to keep
available the services of their respective present key officers and key
employees whom the Company and the Acquired Bank have reasonably determined to
be necessary or appropriate to preserve the goodwill of those having business
relationships with the Company or the Acquired Bank and, except as set forth in
a letter of the Company delivered by the Company to the Acquiror with the
delivery of this Agreement, all other employees.
5.2.2. Governing Instruments. Neither the Company nor the Acquired Bank
shall, nor shall they permit any Company Subsidiary to, make any change or
amendment to their respective articles of incorporation, certificate of
incorporation, by-laws or other governing instruments.
5.2.3. Capital Stock. The Company and the Acquired Bank shall not, and
shall not permit any Company Subsidiary to, issue or sell any shares of capital
stock or any other securities of any of them (other than pursuant to the
exercise of the Executive Options described in Section 2.12 hereof which are
outstanding on the date hereof); or issue any subscriptions, options, warrants,
rights or convertible securities; or enter into any agreements or commitments of
any character relating to the issued or unissued capital stock or other
securities of the Company or any Company Subsidiary obligating the Company or
any Company Subsidiary to issue, deliver
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or sell, or cause to be issued, delivered or sold, additional shares of capital
stock of the Company or any Company Subsidiary or obligating the Company or any
Company Subsidiary to grant, extend or enter into any subscription, option,
warrant, right, convertible security or other similar agreement or commitment;
or purchase any of their own securities; or enter into any arrangement or
contract with respect to the purchase or voting of shares of their capital
stock; or adjust, split, combine or reclassify their capital stock or other
securities; or make any other changes in their capital structures.
5.2.4. Dividends. The Company shall not declare, set aside, pay or make any
dividend or other distribution or payment (whether in cash, stock or property)
with respect to, or purchase or redeem, any shares of the capital stock of the
Company and shall not permit any Company Subsidiary to declare, set aside, pay
or make any dividend or other distribution or payment (whether in cash, stock or
property) with respect to, or purchase or redeem, any shares of its capital
stock other than pursuant to transactions in which funds are paid solely to the
Company (or its pro-rata portion thereof, based on the percentage ownership
thereof, is paid solely to the Company if the Subsidiary is not wholly-owned).
5.2.5. Employees. The Company shall not, and shall not permit any Company
Subsidiary to, enter into, adopt or amend any bonus, profit-sharing,
compensation, severance, termination, consulting, fringe benefit, stock
purchase, stock ownership, stock option, pension, retirement, deferred
compensation, health insurance, medical insurance, life insurance, accident
insurance, retiree, employment or other employee or retiree benefit agreement,
trust, plan or fund, whether formal or informal, written or oral, or other
arrangement for the benefit or welfare of any director, officer, employee or
retiree except as required by Section 5.19. Except for increases pursuant to
commitments of the Company existing as of the date hereof as disclosed in
Section 5.2 of the Company Disclosure Schedules, the Company shall not, and
shall not permit any Company Subsidiary to, increase the compensation or fringe
benefits of any director, officer, employee or retiree or pay any benefit not
required by any existing plan or arrangement (including, without limitation, the
granting of stock options or stock appreciation rights) or take any action or
grant any benefit not required under the terms of any existing agreements,
trusts, plans, funds or other arrangements or enter into any contract,
agreement, commitment or arrangement to do the foregoing.
5.2.6. Conforming Accounting and Reserve Policies; Restructuring Expenses.
5.2.6.1. Notwithstanding that the Company believes that it has established
all reserves and taken all provisions for possible loan losses required by
generally accepted accounting principles and applicable laws, rules and
regulations, the Company
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recognizes that the Acquiror has adopted different loan, accrual and reserve
policies (including loan classifications and levels of reserves for possible
loan losses). From and after the date of this Agreement to the Effective Time,
the Company and the Acquiror shall consult and cooperate with each other with
respect to conforming, as specified in a written notice from the Acquiror to the
Company, based upon such consultation, the Company's loan, accrual and reserve
policies to those policies of the Acquiror to the extent appropriate.
5.2.6.2. In addition, from and after the date of this Agreement to the
Effective Time, the Company and the Acquiror shall consult and cooperate with
each other with respect to determining, as specified in a written notice from
the Acquiror to the Company, based upon such consultation, appropriate accruals,
reserves and charges to establish and take in respect of excess facilities and
equipment capacity, severance costs, litigation matters, write-offs or
write-downs of various assets and other appropriate accounting adjustments,
taking into account the Surviving Bank's business plans following the Merger.
5.2.6.3. The Company and the Acquiror shall consult and cooperate with each
other with respect to determining, as specified in a written notice from the
Acquiror to the Company, based upon such consultation, the amount and the timing
of recognition (for recognizing for financial accounting purposes) of the
expenses of the Merger and any restructuring charges related to or to be
incurred in connection with the Merger.
5.2.6.4. At the request of the Acquiror, the Company shall, prior to the
Closing, use its reasonable efforts to establish and take such accruals and
reserves as the Acquiror shall request in order to conform the Company's loan,
accrual and reserve policies to the Acquiror's policies, to establish and take
such accruals, reserves and charges to implement such policies in respect of
excess facilities and equipment capacity, severance costs, litigation matters,
write-offs or write-downs of various assets and other appropriate accounting
adjustments, and to recognize for financial accounting purposes such expenses of
the Merger and restructuring charges related to or to be incurred in connection
with the Merger; provided, however, that (i) the Company shall not be obligated
to take any such action pursuant to this Section 5.2.6.4 unless and until the
Acquiror specifies its request in a writing delivered by the Acquiror to the
Company, and acknowledges that all conditions to its obligation to consummate
the Merger set forth in Sections 6.1 and 6.3 (other than the Company's
performance under this Section 5.2.6.4) have been waived or satisfied, and (ii)
the Company shall not be required to take any such action to the extent that
such action (A) is inconsistent with GAAP, (B) materially impairs it regulatory
capital, (C) is inconsistent with any formal or informal undertaking by the
Company to any Applicable Bank Regulatory Agency which has been disclosed
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in writing to the Acquiror prior to the date hereof or (D) is inconsistent with
any requirement hereinafter imposed on the Company by any Applicable Bank
Regulatory Agency.
5.2.7. Shareholder Meetings. The Company shall not convene any meeting of
the Company's shareholders (other than the meeting convened to vote upon the
Merger) or determine to submit any matter for shareholder action (other than the
Merger) unless the Acquiror has been given at least 45 days prior written notice
of such meeting or determination.
5.2.8. Representations and Covenants. The Company shall not, and shall not
permit any Company Subsidiary to, take any action, or knowingly omit to take any
action, that would, or that would reasonably be expected to, result in (A) any
of the representations and warranties set forth in Article III becoming untrue,
(B) a breach of any of the Company's covenants set forth herein or (C) any of
the conditions to closing set forth in Sections 6.1, 6.2 or 6.3 not being
satisfied. The Acquired Bank may create subsidiaries after the date hereof,
provided that each such subsidiary is created solely to hold one or more
properties which were, are, or would be property acquired by the Acquired Bank
as a result of the acquisition of property which had been or is pledged,
assigned or mortgaged to the Acquired Bank in a loan transaction and which
Subsidiary is wholly owned by the Acquired Bank and the officers and directors
of which are employees of the Acquired Bank and are removable from their
respective offices and directorships without cause by the Acquired Bank.
5.2.9. Other Actions. The Company shall not, and shall not permit any
Company Subsidiary to, take any action that would (A) materially delay or
adversely affect the ability of the Company or the Acquired Bank to obtain any
approvals of governmental entities required to permit consummation of the Merger
or the Bank Merger or (B) materially adversely affect the Company's or the
Acquired Bank's ability to perform their respective obligations under this
Agreement.
5.2.10. Dominion and Control. Schedule 5.2.10 of the Company Disclosure
Schedules contains a copy of the Company's and each Company Subsidiary's written
policies and procedures and a description of any unwritten policies and
procedures with respect to taking any action that results or would be likely to
result in it being deemed to exercise dominion, management or control over
collateral securing any extension of credit. The actual practices of the Company
and each Company Subsidiary have been consistent with such policies and
procedures. The Company shall not, nor shall it permit any Company Subsidiary
to, change any such policies, procedures or practices. The Company shall not,
and shall not permit any Company Subsidiary to, exercise any dominion,
management or control over collateral securing any outstanding extension of
credit with a contractual amount due of $100,000 or
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more or in connection with which there is reasonably anticipated to be any
environmental exposure, without prior consultation with the Acquiror.
5.3. Acquiror Representations and Covenants; Other Actions. Acquiror shall
not, and shall not permit any of the Acquiror Subsidiaries to, take any action,
or knowingly omit to take any action, that would, or that would reasonably be
expected to, result in (A) any of the representations and warranties of Acquiror
set forth in Article IV becoming untrue, (B) a breach of any covenants of the
Acquiror or the Acquiring Bank set forth herein or (C) any of the conditions to
closing set forth in Sections 6.1, 6.2 or 6.3 not being satisfied. The Acquiror
shall not, and shall not permit any of the Acquiror Subsidiaries to, take any
action that would (A) materially adversely affect the ability of the Acquiror or
the Acquiring Bank to obtain any approvals of governmental entities required to
permit consummation of the Merger or (B) materially adversely affect the
Acquiror's or the Acquiring Bank's ability to perform their respective
obligations under this Agreement.
5.4. Employee Matters. Effective upon consummation of the Bank Merger, the
Acquiror shall assume sponsorship of the (i) "Acquired Bank Employee Retirement
Plan," (ii) "Acquired Bank 401(k) Thrift Plan," (iii) "Acquired Bank Life and
Accidental Death and Dismemberment Insurance Plan," and (iv) "Acquired Bank
Medical Benefits Plan."
5.5. Access and Information.
5.5.1. Upon reasonable notice, each of the Company and the Acquired Bank
shall (and shall cause each Company Subsidiary to) afford to the Acquiror and
its representatives (including, without limitation, directors, officers and
employees of the Acquiror and its affiliates and counsel, accountants and other
professionals retained by the Acquiror) such access as the Acquiror shall
specify during normal business hours throughout the period from the date hereof
through the Effective Time to the books, records (including, without limitation,
tax returns and work papers of the Company's independent auditors), properties,
personnel and such other information as the Acquiror shall reasonably request.
The Acquiror shall provide to the Company, upon its reasonable request, copies
of any publicly disclosed document published by the Acquiror within the past
five years. The Acquiror shall cause one or more of its senior officers to be
available from time to time prior to the Effective Time to respond to reasonable
inquiries made by the Company and its representatives (including, without
limitation, directors, officers and employees of the Company and its affiliates
and counsel, accountants and other professionals retained by the Company).
Notwithstanding the foregoing, neither the Company nor the Acquiror nor their
respective Subsidiaries shall be required to provide access to any such
information if the
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providing of such access (i) would violate a binding contractual obligation,
(ii) would, as advised by outside counsel, be reasonably likely to result in the
loss or impairment of any privilege with respect to such information or (iii)
would be precluded by any law, ordinance, regulation, judgment, order, decree,
license or permit of any governmental entity. Any access granted to the Company
or the Acquiror pursuant to this Section 5.5 shall not in any way limit any
representation or warranty set forth in this Agreement.
5.5.2. The Company and the Acquired Bank shall, and shall cause each other
Company Subsidiary and the officers, directors, employees, affiliates, agents
and representatives of the Company, the Acquired Bank and/or any other Company
Subsidiary (with the Company and the Acquired Bank, collectively, the "Company
Parties") to, keep confidential all confidential information of the Acquiror or
the Acquiring Bank obtained by any of them in connection with the transactions
contemplated hereby. The foregoing restriction shall not apply to any
confidential information which (i) is or becomes generally available to the
public other than as a result of a disclosure by any of the Company Parties, or
(ii) is or becomes available to any of the Company Parties from a source not
known to such party to be bound by a confidentiality obligation with respect
thereto. If any Company Party shall become legally compelled to disclose any
such confidential information, such party to the extent feasible shall inform
the Acquiror of the compelled disclosure and shall exercise reasonable efforts
to obtain assurance that confidential information shall remain confidential. The
Acquiror and the Acquiring Bank shall, and shall cause its officers, directors,
employees, affiliates, agents and representatives (with the Acquiror and the
Acquiring Bank, collectively, the "Acquiror Parties") to, keep confidential all
confidential information of the Company or any Company Subsidiary obtained by
any of them in connection with the transactions contemplated hereby. The
foregoing restriction shall not apply to any confidential information which (i)
is or becomes generally available to the public other than as a result of a
disclosure by any of the Acquiror Parties, or (ii) is or becomes available to
any of the Acquiror Parties from a source not known to such party to be bound by
a confidentiality obligation with respect thereto. If any Acquiror Party shall
become legally compelled to disclose any such confidential information, such
party to the extent feasible shall inform the Company of the compelled
disclosure and shall exercise reasonable efforts to obtain assurance that
confidential information shall remain confidential. The parties hereto
acknowledge that remedies at law may be inadequate to protect against breach of
this Section 5.5.2 and, without prejudice to the rights and remedies otherwise
available, the parties agree each of them shall be entitled to injunctive relief
in their favor in the event of such breach.
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5.6. Certain Filings, Consents and Arrangements. Subject to Section 5.10,
the Acquiror, the Acquiring Bank and the Company shall (a) promptly file all
applications, proxy statements, registration statements and reports required to
be filed with all applicable governmental entities between the date of this
Agreement and the Effective Time with respect to the Merger and the other
transactions contemplated by this Agreement, (b) cooperate with one another (i)
in promptly determining which filings are required to be made and which
consents, approvals, permits or authorizations are required to be obtained under
any applicable federal, state or foreign law or regulation and (ii) in promptly
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such consents, approvals, permits or
authorizations and (c) subject to the qualifications set forth in Section 5.5,
deliver to the other parties to this Agreement copies of all such reports and
filings promptly after they are filed.
5.7. Indemnification.
5.7.1. The Acquiror shall indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date hereof or who becomes
prior to the Effective Time, a director or officer (whether elected or
appointed) of the Company or the Acquired Bank (collectively, the "Indemnitees")
against any and all claims, damages, liabilities, losses, costs, charges,
expenses (including, without limitation, reasonable costs of investigation, and
the reasonable fees and disbursements of legal counsel and other advisors and
experts, as incurred), judgments, fines, penalties and amounts paid in
settlement, asserted against, incurred by or imposed upon any Indemnitee, in
connection with, arising out of or relating to any claim, action, suit or
proceeding (whether civil, criminal, administrative or investigative) pending at
any time within a period of six years after the Effective Time, including,
without limitation, any and all claims, actions, suits, proceedings or
investigations by or on behalf of or in the right of or against the Company or
any Company Subsidiary, or by any present or former shareholder of the Company
in such person's capacity as a shareholder (collectively, "Claims"), including,
without limitation, any Claim which is based upon, arises out of or in any way
relates to the Merger, the Proxy Statement, any of the transactions contemplated
by this Agreement, the Indemnitee's service as a member of the Company's or the
Company Subsidiary's Board of Directors or any committee of the Company's or the
Company Subsidiary's Board of Directors, the events leading up to the execution
of this Agreement, any statement, recommendation or solicitation made in
connection therewith or related thereto and any breach of any duty in connection
with any of the foregoing, and in connection with, arising out of or relating to
the enforcement of the obligations of the Acquiror set forth in this Section
5.7, in each such case above to the full extent permitted under applicable law,
but in no event beyond the extent to which such
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indemnification would have been available from the Company had the Claim been
advanced on the date hereof.
5.7.2. This Section 5.7 shall be construed as an agreement, as to which the
Indemnitees are intended to be third-party beneficiaries, between the Acquiror
and the Indemnitees, as unaffiliated third parties.
5.7.3. Any Indemnitee wishing to claim indemnification under this Section
5.7, upon learning of any such claim, action, suit or proceeding, shall promptly
notify the Acquiror thereof, but the failure to so notify shall not relieve the
Acquiror of any liability it may have to such Indemnitee if such failure does
not prejudice the Acquiror. In the event of any such claim, action, suit or
proceeding (whether arising before or after the Effective Time) as to which the
Acquiror agrees that indemnification under this Section 5.7 is applicable, (a)
the Acquiror shall have the right to assume the defense thereof and neither the
Acquiror nor the Surviving Bank shall be liable to such Indemnitees for any
legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnitees in connection with the defense thereof, except that if the
Acquiror elects not to assume such defense or counsel for the Indemnitees
advises that there are issues which raise conflicts of interest between the
Acquiror or the Surviving Bank and the Indemnitees, the Indemnitees may retain
counsel satisfactory to them, and the Acquiror or the Surviving Bank shall pay
the reasonable fees and expenses of counsel for the Indemnitees as statements
therefor are received; provided, however, that the Acquiror and the Surviving
Bank shall be obligated pursuant to this Section 5.7.3 (a) to pay for only one
firm of counsel for all Indemnitees in any jurisdiction with respect to a matter
unless the use of one counsel for such Indemnitees would present such counsel
with a conflict of interest and (b) the Indemnitees will cooperate in the
defense of any such matter. Neither the Acquiror nor the Surviving Bank shall be
liable for settlement of any claim, action or proceeding hereunder unless such
settlement is effected with its prior written consent; and provided further,
however, that neither the Acquiror nor the Surviving Bank shall have any
obligation hereunder to any Indemnitee when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that the indemnification of such Indemnitee in
the manner contemplated hereby is prohibited by applicable law.
5.7.4. If the Acquiror, in its sole discretion, considers obtaining
insurance to cover any or all of its indemnification obligations under this
Section 5.7, then each Indemnitee shall provide the Acquiror with such complete
and correct information as the Acquiror requests to enable it to obtain such
insurance or to determine the cost of such insurance.
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5.8. Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable efforts to
take promptly, or cause to be taken, all actions and to do promptly, or cause to
be done, all things necessary, proper or advisable under all applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including using its reasonable efforts to obtain all necessary
actions or non-actions, extensions, waivers, consents and approvals from all
applicable governmental entities, effecting all necessary registrations and
filings (including, without limitation, making all filings under all applicable
banking and securities laws) and obtaining any required contractual consents.
If, at any time after the Effective Time, the Surviving Corporation considers or
is advised that any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or confirm of
record or otherwise in the Surviving Corporation its right, title or interest
in, to or under any of the rights, properties or assets of either of the
Constituent Corporations acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger or otherwise to carry out the
purposes of this Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of each of the Constituent Corporations or otherwise, all such deeds,
bills of sale, assignments and assurances and to take and do, in the name and on
behalf of each of the Constituent Corporations or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out the purposes of
this Agreement.
5.9. Publicity. The initial press release announcing this Agreement shall
be a joint press release, and thereafter the Company and the Acquiror shall
consult and reasonably cooperate with each other before (i) issuing any press
releases or otherwise making public statements with respect to the transactions
contemplated hereby, or (ii) making any publicly available filings with any
governmental entity with respect thereto.
5.10. Company Proxy Statement; Registration Statement. The Acquiror and the
Company shall cooperate in preparing a proxy statement (the "Proxy Statement")
which shall be utilized to solicit proxies in connection with the meeting (the
"Company Meeting") at which the Company's shareholders will vote upon the
Merger. Such proxy statement shall also constitute a prospectus for the sale of
the Acquiror's capital stock pursuant to the Merger. Promptly after both the
Acquiror and the Company confirm that the Proxy Statement is satisfactory for
filing in preliminary form, the Acquiror shall file with the SEC a registration
statement on Form S-4 (the "Registration Statement") utilizing such Proxy
Statement as the prospectus. The Company and the Acquiror shall
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each have a reasonable opportunity to respond to any comments received from the
SEC with respect to the Registration Statement and the Proxy Statement. The
Acquiror and the Company shall use reasonable efforts to finalize the Proxy
Statement and Registration Statement and cause the SEC to declare the
Registration Statement effective. The Company will promptly advise the Acquiror
in writing if at any time prior to the Company Meeting it shall obtain knowledge
of any facts that might make it necessary or appropriate to amend or supplement
the Proxy Statement in order to make the statements contained therein not
misleading or to comply with applicable law. The Acquiror shall also take any
reasonable action required to be taken under state blue sky or securities laws
in connection with the issuance of the Acquiror Common Stock pursuant to the
Merger, and the Company shall furnish the Acquiror with all information
concerning the Company and the holders of its capital stock and shall take such
action as the Acquiror may reasonably request in connection with such blue sky
or securities filings.
5.11. Compliance with the 1933 Act.
5.11.1. Prior to the execution and delivery of this Agreement, the Company
has, or within 8 days thereafter, will have, obtained and delivered to the
Acquiror a written agreement (in the form attached hereto as Exhibit 5.11.1),
from each officer and director of the Company and the Acquired Bank, providing
that such person shall not offer, sell, pledge, transfer or otherwise dispose of
any shares of Common Stock held by such person and any shares of Acquiror Common
Stock to be received by such person pursuant to the Merger, except in compliance
with the applicable provisions of the 1933 Act and the rules and regulations
(including Rule 145) thereunder.
5.11.2. Promptly, but in any event within two weeks, after the execution
and delivery of this Agreement, the Company shall identify to the Acquiror all
persons other than officers and directors of the Company or the Acquired Bank
who may reasonably be deemed to be, on the date hereof, "affiliates" of the
Company as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act, and shall obtain and provide to the Acquiror a written agreement
(in form and substance satisfactory to the Acquiror), from each such person
providing that such person shall not offer, sell, pledge, transfer or otherwise
dispose of any shares of Common Stock held by such person and any shares of
Acquiror Common Stock to be received by such person pursuant to the Merger,
except in compliance with the applicable provisions of the 1933 Act and the
rules and regulations (including Rule 145) thereunder. If the Company
subsequently determines that additional persons may be deemed "affiliates" as of
the date of the Company Meeting, the Company promptly shall identify such
persons to the Acquiror and obtain and provide to the Acquiror a written
agreement of the type described in Section 5.11.1 above.
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5.12. Shareholders' Meeting. The Company shall take all action necessary,
in accordance with applicable law and its Articles of Incorporation and By-laws,
to convene the Company Meeting as promptly as practicable for the purpose of
considering and taking action upon this Agreement. The Board of Directors of the
Company shall recommend that the holders of shares of Common Stock vote in favor
of and approve the Merger and adopt this Agreement at the Company Meeting;
provided, however, that such recommendation may be withdrawn, modified or
amended to the extent the Board of Directors of the Company deems it necessary,
upon advice of outside counsel, in the exercise of its fiduciary obligations
under applicable law.
5.13. Reorganization Treatment. Neither the Acquiror nor the Company shall
intentionally take, fail to take or cause to be taken or not taken any action
within its control, which would disqualify the Merger from being treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
5.14. ISRA Approval. The Company, at its sole cost and expense, shall
obtain prior to the Effective Time (i) a determination from the DEPE that the
transactions contemplated by this Agreement are not subject to the requirements
of ISRA, or (ii) an order issued by the DEPE pursuant to ISRA authorizing the
consummation of the transaction contemplated by this Agreement prior to the
issuance of any "Negative Declaration" or approval of any "Clean-Up Plan," as
such terms are defined under ISRA or (iii) a "Negative Declaration" or approval
of a "Clean-up Plan" with respect to each property in New Jersey which the
Company or any Company Subsidiary owns or operates, in each case to the extent
that such property renders the provisions of ISRA applicable to the transactions
contemplated by this Agreement. The Company will post or have posted with the
DEPE a surety bond or other financial security approved by the DEPE in an amount
requested by the DEPE as required in furtherance of the Company's obligations
under this Section 5.14.
5.15. Other Transactions. The parties hereto acknowledge that the Acquiror
may pursue one or more business combinations and may issue securities during the
period between the date hereof and the Effective Time. No provision herein shall
be construed to limit the Acquiror's right to pursue such combinations or issue
such securities.
5.16. Updating. In the event that a party hereto discovers, prior to the
Effective Time, that a representation or warranty made by such party herein
either was inaccurate in any material respect when made or has become inaccurate
in any material respect as a result of acts or omissions occurring subsequent to
the date hereof, such party shall immediately notify the other parties hereto in
writing of such inaccuracy and the facts relating thereto. Such notification
shall not, however, have any effect on
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the rights of the parties under Article VII and shall not be taken into
consideration in determining whether the conditions set forth in Sections 6.2.2
and 6.3.2 have been satisfied.
5.17. Right to Increase Exchange Ratio. If the Company elects to exercise
its termination right pursuant to Section 7.2.3.5, it shall give prompt written
notice to the Acquiror and provide the Acquiror the right, in Acquiror's
discretion, to increase the Exchange Ratio as set forth in Section 7.2.3.5 and,
if the Exchange Ratio is so increased, no termination shall have occurred
pursuant to Section 7.2.3.5. and this Agreement shall remain in effect in
accordance with its terms (except as the Exchange Ratio shall have been so
modified).
5.18. Representations by Company Affiliates. The Company shall cause the
Company Affiliates to furnish the representations to be furnished by them in
accordance with Section 6.3.5.
5.19. Benefit Plan Requirements. The Company and the Acquired Bank shall
take, and shall cause each other Company Subsidiary to take, all action which
shall be necessary or appropriate, including the making of filings and
amendments, to comply with the representations and warranties of the Company as
set forth in Section 3.17 without regard to any exception therefrom, by the
elimination of all the exceptions, if any, as are set forth in Section 3.17 of
the Company Disclosure Schedules.
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ARTICLE VI--CONDITIONS
6.1. Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
6.1.1. The Merger shall have been approved and adopted by the requisite
vote of the holders of the Common Stock and, if determined by the Acquiror to be
necessary, by the requisite vote of the Acquiror's shareholders.
6.1.2. All authorizations, consents, orders or approvals of, and all
expirations of waiting periods imposed by, any governmental entity
(collectively, "Governmental Consents") which are necessary for the consummation
of the Merger shall have been obtained or shall have occurred and shall be in
full force and effect at the Effective Time; provided, however, that the entry
by a court, in any suit brought by a private party or governmental entity
challenging the Merger as violative of the antitrust laws, of an order or decree
permitting the Merger, but requiring that any of the businesses, product lines
or assets of the Acquiror or the Company be disposed of or held separate
thereafter, shall not be deemed to satisfy the conditions specified in this
Section 6.1.2 unless waived in writing by the Acquiror.
6.1.3. The Registration Statement shall have become effective in accordance
with the provisions of the 1933 Act. No stop order suspending the effectiveness
of the Registration Statement shall have been issued by the SEC and remain in
effect.
6.1.4. No temporary restraining order, preliminary or permanent injunction
or other order by any federal or state court in the United States which prevents
the consummation of the Merger shall have been issued and remain in effect.
6.1.5. The Company and the Acquiror shall have obtained an opinion of
Pitney, Hardin, Kipp & Szuch, dated the Closing Date, and reasonably
satisfactory in form and substance to the Company and the Acquiror, to the
effect that (i) the Merger qualifies as a "reorganization" qualifying within the
meaning of Section 368(a)(1)(A) of the Code; (ii) no gain or loss shall be
recognized by Company shareholders whose Common Stock is exchanged solely into
Acquiror Common Stock in connection with the Merger; (iii) in the case of
Company shareholders who receive cash in whole or in part in exchange for their
Common Stock gain, if any, realized by the recipient on the exchange shall be
recognized, but in an amount not in excess of the amount of such cash; (iv) in
the case of Company shareholders who recognize gain on the exchange of their
Common Stock and in whose hands such stock was a capital asset on the date of
the exchange, such gain shall be treated as capital gain (long-term or
short-term, depending on the
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shareholders' respective holding periods for their Common Stock), except in the
case of any such shareholder as to which the exchange has the effect of the
distribution of a dividend within the meaning of Section 356(a)(2) of the Code,
determined with the application of the stock attribution rules of Section 318 of
the Code, it being understood that such determination depends on such
shareholder's particular factual circumstances; (v) the basis of any Acquiror
Common Stock received in exchange for Common Stock shall equal the adjusted
basis of the recipient's Common Stock surrendered on the exchange, reduced by
the amount of cash received, if any, on the exchange, and increased by the
amount of the gain recognized, if any, on the exchange (whether characterized as
dividend or capital gain income); (vi) the holding period for any Acquiror
Common Stock received in exchange for Common Stock in connection with the Merger
will include the period during which the Common Stock exchanged in the Merger
was held, provided such stock was held as a capital asset on the date of the
Merger; and (vii) no gain or loss shall be recognized by the Acquiring Bank or
the Acquiror in connection with the Merger or the issuance of securities and
payment of cash in pursuance thereof. In rendering their opinion, Pitney,
Hardin, Kipp & Szuch may require and rely upon representations contained in the
agreements of the Company Affiliates and in certificates of officers of the
Company, the Acquiring Bank, the Acquiror and others.
6.2. Conditions to Obligations of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the additional
following conditions:
6.2.1. The Acquiror and the Acquiring Bank shall have performed in all
material respects their covenants contained in this Agreement required to be
performed at or prior to the Effective Time.
6.2.2. The representations and warranties of the Acquiror contained in this
Agreement shall be true in all material respects when made, and as of the
Effective Time as if made at and as of such time, except as expressly
contemplated or permitted by this Agreement and except for representations and
warranties relating to a time or times other than the Effective Time which were
or shall be true in all material respects at such time or times.
6.2.3. The Acquiror shall have delivered to the Company a Certificate,
dated the date of the Closing, signed by the President or a Vice President of
the Acquiror and the Chief Financial Officer of Acquiror, that, to the best of
their knowledge and belief after due inquiry, the conditions set forth in
Sections 6.2.1 and 6.2.2 have been satisfied.
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6.3. Conditions to Obligation of Acquiror to Effect the Merger. The
obligations of the Acquiror to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the additional
following conditions:
6.3.1. The Company and the Acquired Bank shall have performed in all
material respects its covenants contained in this Agreement and the Stock Option
Agreement required to be performed at or prior to the Effective Time.
6.3.2. The representations and warranties of the Company and the Acquired
Bank contained in this Agreement and the Stock Option Agreement shall not be
untrue in any material adverse respect when made, and as of the Effective Time
as if made at and as of such time, except as expressly contemplated or permitted
by this Agreement or the Stock Option Agreement, as the case may be, and except
for representations and warranties relating to a time or times other than the
Effective Time which were or shall be true in all material respects at such time
or time, provided, however, that the representations and warranties of the
Company and the Acquired Bank contained in this Agreement and the Stock Option
Agreement which shall fail to be true in any material respect when made, shall,
nevertheless, be deemed to be true when made if cured within 10 days after
notice thereof to the Company by the Acquiror and, further provided, the
representation and warranties set forth in Section 3.6.1 shall not fail to be
deemed true in all material respects as of the Effective Time if, at the
Effective Time, (i) the Adjusted Capital as determined in accordance with
Section 6.3.7 is determined to be not less than $12,000,000 and (ii) there shall
have been no other representation and warranty (including those set forth in
Section 3.6.1) of the Company or the Acquired Bank which shall be untrue in any
material adverse respect when made and as of the Effective Time.
6.3.3. The Company shall have delivered to the Acquiror a Certificate,
dated the date of the Closing, signed by the Chief Executive Officer and the
Chief Financial Officer of the Company, certifying the calculation of the
Company's shareholders equity as of the Closing Date and certifying that, to the
best of their knowledge and belief after due inquiry, the conditions set forth
in Sections 6.3.1 and 6.3.2 have been satisfied.
6.3.4. The Acquiror and its directors and officers who sign the
Registration Statement shall have received from Rudolph, Palitz, the Company's
independent certified public accountants, an "agreed upon procedures" letter,
dated the date of the mailing of the Registration Statement to the Company's
shareholders, with respect to certain financial information regarding the
Company in the form customarily issued by independent certified public
accountants at such time in transactions of this type.
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6.3.5. The Acquiror shall have received such factual representations from
the Company Affiliates relating to the Common Stock held or previously held by
them, in form and substance reasonably satisfactory to the Acquiror, that will
support the conclusions set forth in Section 6.1.5.
6.3.6. The Acquiror and the Acquiring Bank shall have received from counsel
to the Company and the Acquired Bank an opinion letter dated the Closing Date
and in form acceptable to the Acquiror, to the following effect:
6.3.6.1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and has all
requisite corporate power and authority to own or lease all of its properties
and assets and to carry on its business in the manner conducted on the Closing;
6.3.6.2. The Acquired Bank is a commercial bank duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has all requisite corporate power and authority to own or lease all of its
properties and assets and to carry on its business in the manner described in
the Proxy Statement and each Company Subsidiary (other than the Acquired Bank)
is duly organized and in good standing under the laws of their respective
organizations and have all requisite power and authority to own or lease all of
its properties and assets and to carry on the business carried on by it on the
Closing;
6.3.6.3. The Company has all requisite corporate power and authority under
the Pennsylvania Business Corporation Law to execute and deliver this Agreement
and the Stock Option Agreement and to perform its obligations hereunder and
thereunder, and the execution, delivery and performance of this Agreement and
the Stock Option Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby, have been duly authorized by
all requisite corporate actions of the Company;
6.3.6.4. The Acquired Bank has all requisite corporate power and authority
under the Pennsylvania Code to execute and deliver this Agreement and to perform
its obligations thereunder, and the execution, delivery and performance of this
Agreement by the Acquired Bank and the consummation by the Acquired Bank of the
transactions contemplated hereby, have been duly authorized by all requisite
corporate actions of the Acquired Bank;
6.3.6.5. All of the outstanding shares of Company Common Stock and all of
the outstanding shares or equity interests of all the Company Subsidiaries' have
been duly authorized and are validly issued, fully paid and non-assessable;
6.3.6.6. Each of this Agreement and the Stock Option Agreement has been
duly executed and delivered by the Company and
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the Acquired Bank and, assuming due authorization, execution and delivery by the
Acquiror and the Acquiring Bank, constitutes the legal, valid and binding
obligation of each of the Company and the Acquired Bank, enforceable in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other similar
laws relating to or affecting the right of creditors generally and the effect of
general principles of equity;
6.3.6.7. The execution, delivery and performance of this Agreement and the
Stock Option Agreement by the Company and the Acquired Bank, and the
consummation by the Company and the Acquired Bank of the transactions
contemplated hereby and thereby, will not conflict with, or result in a breach
of, any of the terms, conditions or provisions of either the Company's or the
Acquired Bank's articles of incorporation or by-laws, or any law, rule, order
(of a bank regulatory agency) or regulation to which the Company or any Company
Subsidiary is subject or, to the best of such firm's knowledge, in any material
respect conflict with, result in a breach or violation of, give rise to a
default under or result in the acceleration of performance or right to
accelerate performance under (whether or not after the giving of notice or lapse
of time or both) any order (other than of a bank regulatory agency) or any
material contract, obligation or commitment relating to the Company or any
Company Subsidiary known to such firm;
6.3.6.8. Such firm is not aware of any facts which would indicate that any
consents or approvals by governmental authorities or other parties which are
required in connection with the consummation by the Company and the Acquired
Bank of the transactions contemplated by this Agreement have not been obtained;
and
6.3.6.9. Such firm is not aware of any facts which would indicate that
either the Company or any Company Subsidiary is involved as plaintiff or
defendant in any legal proceedings other than those described in such letter.
6.3.6.10. All the outstanding stock of the Acquired Bank is owned by the
Company and all the outstanding stock and other equity interests owned by the
Company or the Acquired Bank of each Company Subsidiary (other than the Acquired
Bank) is owned by the Company or the Acquired Bank, in each case, free and clear
of all liens, encumbrances, charges, restrictions and rights of third parties.
6.3.7. The Acquiror shall have reasonably determined that the Adjusted
Capital of the Company is not less than $17,600,000. "Adjusted Capital" shall
mean the sum of shareholders equity and loan loss reserves calculated by the
method utilized in computing shareholders equity and loan loss reserves for the
Company Financial Statements at September 30, 1994 (provided that
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such shareholders equity as so calculated shall not be less than $7,300,000),
increased by amounts up to $300,000 paid to or accrued after the date hereof for
services rendered to the Company by Sandler O'Neill & Partners, L.P., in
connection with this Agreement, up to $150,000 paid to or accrued after the date
hereof for legal services incurred by the Company in connection with the
negotiation and consummation of this Agreement, up to $185,000 for the accrual
of expenses incurred in connection with the cancellation of the Executive
Options to be cancelled pursuant to this Agreement, and up to $150,000
additional adjustment to the investment portfolio of the Acquired Bank incurred
by reason of the application of certain accounting rules (FASB 115) relating to
certain securities held for sale in addition to such amount as shown in the
Company Financial Statements at September 30, 1994, and by disregarding the
effect of adjustments, if any, made pursuant to Section 5.2.6 of this Agreement.
In the event Adjusted Capital as so determined shall be less than $17,600,000,
the amount of cash and the number of shares of Acquiror Common Stock into which
Common Stock shall be converted into the right to receive, shall be adjusted as
follows:
(i) after determining the amount of cash and the number of shares to
which the holders of Common Stock shall be entitled to receive pursuant to the
provisions of this Agreement without regard to this Section,
(ii) the amount of cash to be received by the holders of Common Stock
entitled to receive solely cash shall be reduced below the amount of such cash
by the amount of $0.01 per share for each full $100,000 by which such Adjusted
Capital shall be less than $17,600,000, provided, however, in the event Adjusted
Capital shall be less than $15,500,000, the amount of such cash shall be reduced
by $0.22 plus $0.02 for each full $100,000 by which such Adjusted Capital shall
be less than $15,500,000, provided further, in the event Adjusted Capital shall
be less than $12,000,000, the Acquiror may elect, in its sole discretion, to
either determine that the condition required by this Section 6.3.7. shall not
have been met or to decrease such cash amount by $0.92 plus $0.02 for each full
$100,000 by which Adjusted Capital shall be less than $12,000,000, and
(iii) after so determining the amount of cash to be so paid to the
holders of Common Stock entitled to receive solely cash, the shares of Acquiror
Common Stock to be received by the holders of Common Stock entitled to receive
solely Acquiror Common Stock shall be reduced by reducing the Exchange Ratio by
multiplying the Exchange Ratio by a fraction (the "Reduction Fraction"), the
numerator of which shall be the cash amount as so determined in accordance with
this Section 6.3.7. and the denominator of which shall be the amount of cash to
which the holders of Common Stock entitled to receive solely cash shall be
entitled without regard to this Section 6.3.7 and
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(iv) after so determining the amount of cash to be so paid to the
holders of Common Stock entitled to receive solely cash, and the amount of
Acquiror Common Stock to be received by the holders of Common Stock entitled to
receive solely Acquiror Common Stock, the amount of cash and the amount of
Acquiror Common Stock to be received by the holders of Common Stock entitled to
receive both cash and Acquiror Common Stock shall be reduced by multiplying the
amount of such cash determined without regard to Section 6.3.7. by the Reduction
Fraction and the Exchange Ratio determined without regard to Section 6.3.7. by
the Reduction Fraction.
6.3.8. The Acquiror shall have determined, in its sole discretion, that (a)
the sums paid or accrued by the Company and each Company Subsidiary through the
Effective Time, and (b) the potential obligations of the Surviving Corporation
and the Surviving Bank, in each case ((a) and (b)) with respect to any bulk sale
transaction entered into or consummated by the Company or any Company
Subsidiary, shall not, in the aggregate, be material to the financial condition
or business of the Company or to the earnings that the business of the Company
would be expected to contribute to the Acquiror following the Effective Time.
6.3.9. No loan or other advancement of credit or commitment to make a loan
or to advance credit by the Acquired Bank to any principal shareholder of the
Company or any director or executive officer of the Acquired Bank or the
Company, or to any of their affiliates, within the meaning of Regulation O of
the FRB, since September 30, 1994, has been modified to extend or postpone any
maturity date or the prepayment of any portion thereof (except in compliance
with the underwriting standards of the Acquired Bank, not in violation of any
law or regulation, and with notice to the Acquiring Bank) increase any
principal, delay any enforcement, release any collateral, or otherwise adversely
change its collectibility or the security thereof and no guarantee with respect
to any such loan, credit, or commitment, whether currently effective or to
become effective at any time or upon any condition, has been released or
modified in any way to adversely change the guarantee or the availability of any
collateral therefor.
6.3.10. All qualified pension and profit sharing plans of the Company shall
have been restated or amended in a manner satisfactory to the Acquiror on or
prior to December 31, 1994, unless subject to the extended remedial amendment
period pursuant to I.R.S. Announcement 94-136, and all requests for IRS
determination letters relative to such restatements or amendments shall have
been fully and timely filed.
6.3.11. All authorizations, consents or approvals of, and all expirations
of waiting periods imposed by, any non-governmental third party, which are
necessary for the consummation of the Merger and the transaction by the
Surviving Corporation and the Surviving Bank of all business previously
conducted by the
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Company and each Company Subsidiary, respectively, shall have been obtained or
shall have occurred and shall be in full force and effect at the Effective Time.
6.3.12. The Executive Options to be cancelled in accordance with Sections
2.12.1. and 2.12.2 shall have been so cancelled in accordance therewith and the
Company shall have delivered to the Acquiror the Consent of the Executive
required by Section 2.12.3.
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ARTICLE VII--TERMINATION
This Agreement may be terminated (which termination shall also constitute a
termination of the Bank Merger Agreement) at any time prior to the Effective
Time, whether before or after approval by the Company's shareholders, as
follows:
7.1. Mutual Consent. The Acquiror and the Company may terminate this
Agreement at any time by mutual written agreement.
7.2.1 Other Termination. Either the Acquiror or the Company may terminate
this Agreement by giving written notice (a "Termination Notice") to the other at
any time up to and including the date of Closing, if any one or more of the
following shall have occurred and be continuing:
7.2.1.1. at any time after December 31, 1995, if the Closing shall not have
occurred for any reason other than a Default (as defined in Section 7.4) by the
party giving such notice;
7.2.1.2. this Agreement is not approved by the requisite vote of the
shareholders of the Company at the Company Meeting (including any adjournments
thereof);
7.2.1.3. any application for regulatory approval is denied or withdrawn and
is not modified or supplemented and resubmitted in a manner that the party
giving the notice reasonably believes is responsive to the comments of the
applicable government authority within 120 days after it is so denied or
withdrawn; or
7.2.1.4. a court or other government authority of competent jurisdiction
shall have issued an order, writ, injunction or decree or shall have taken any
other action permanently restraining or otherwise prohibiting the Merger or the
Bank Merger and such order, writ, injunction, decree or other action shall have
become final and nonappealable.
7.2.2. Termination By the Acquiror. In addition to its termination rights
pursuant to Section 7.2.1 hereof, the Acquiror may terminate this Agreement
under any one or more of the following circumstances:
7.2.2.1. at any time if there shall have occurred a Default (as defined in
Section 7.4) by the Company or the Acquired Bank or if Section 5.1 has been
violated or would have been violated but for a fiduciary duty exception set
forth in Section 5.1;
7.2.2.2. on the Closing Date, if any condition set forth in Sections 6.1 or
6.3 shall not have been satisfied;
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7.2.2.3. at any time, if the Board of Directors of the Company withdraws
its recommendation that the shareholders of the Company approve the Merger;
7.2.2.4. at any time if an event constituting a Company Material Adverse
Effect (other than events constituting a Company Material Adverse Effect
relating solely to net operating losses) shall have occurred since September 30,
1994 (excluding any adjustments made by the Company solely to comply with
Section 5.2.6.); or
7.2.2.5. at any time, if the Acquiror determines that the approval of its
shareholders is required in connection with this Agreement, alone or in
combination with other matters, and at the meeting of the Acquiror's
shareholders called to solicit such approval (including any adjournments
thereof), the requisite approving vote of the Acquiror's shareholders is not
obtained.
7.2.3. Termination By the Company. In addition to its termination rights
pursuant to Section 7.2.1 hereof, the Company may also terminate this Agreement
under any one or more of the following circumstances:
7.2.3.1. at any time if there shall have occurred a Default (as defined in
Section 7.4) by the Acquiror or the Acquiring Bank;
7.2.3.2. on the Closing Date, if any condition set forth in Sections 6.1 or
Section 6.2 shall not have been satisfied;
7.2.3.3. at any time if an event constituting an Acquiror Material Adverse
Effect shall have occurred since September 30, 1994;
7.2.3.4. at any time if the Company or the Acquired Bank shall enter into
any Acquisition Transaction after meeting all of the Acquisition Transaction
Conditions specified in Section 5.1.3; or
7.2.3.5. if (either before or after approval of the Merger by the
shareholders of the Company) the Company's Board of Directors so determines by a
vote of a majority of the members of its entire Board, at any time during the
ten day period commencing with the Determination Date (as hereinafter defined),
if both of the following conditions are satisfied:
(1) the Acquiror Final Price (as hereinafter defined) shall be less than
$26.87 (the "Acquiror Starting Price") multiplied by 0.85; and
(2) (i) the number obtained by {subtracting from 1.0 a fraction, the
numerator of which is the Acquiror Final Price and
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the denominator of which is the Acquiror Starting Price} shall be greater than
(ii) the number obtained by (a) {subtracting from 1.0 a fraction (the "Index
Ratio"), in which the numerator is the Index Final Price (as hereinafter
defined) and the denominator is 100 (the "Index Starting Price")}, and (b)
multiplying the result by 1.15; subject, however, to the following:
If the Company elects to exercise its termination right pursuant to
this Section 7.2.3.5, it shall give prompt written notice to the
Acquiror (provided that such notice of election to terminate may be
withdrawn at any time within the aforementioned ten-day period).
During the seven-day period commencing with its receipt of such
notice, the Acquiror shall have the option of increasing the Exchange
Ratio to equal the lesser of:
i) a number equal to a quotient, the numerator of which is 0.85
multiplied by the Acquiror Starting Price multiplied by the
Exchange Ratio (as then in effect) and the denominator of which
is the Acquiror Final Price, and
(ii) a number equal to a quotient, the numerator of which is the
Exchange Ratio (as then in effect) multiplied by the Acquiror
Starting Price and by the number which results from {0.15
multiplied by (the Index Ratio subtracted from 1.0) subtracted
from the Index Ratio} and the denominator of which is the
Acquiror Final Price.
If the Acquiror makes an election contemplated by the preceding
sentence within such seven-day period, it shall give prompt written
notice to the Company of such election and its calculation of the
revised Exchange Ratio, whereupon no termination shall have occurred
pursuant to this Section 7.2.3.5. and this Agreement shall remain in
effect in accordance with its terms (except as the Exchange Ratio
shall have been so modified), and any references in this Agreement to
"Exchange Ratio" shall thereafter be deemed to refer to the Exchange
Ratio as adjusted pursuant to this Section 7.2.3.5.
For purposes of this subsection 7.2.3.5, the following terms shall have the
following meanings:
7.2.3.5.1. "Acquiror Final Price" means the average of the Last Prices (as
defined in Section 2.7) for the 20 consecutive full trading days ending at the
close of trading on the Determination Date.
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7.2.3.5.2. "Determination Date" means the last to occur of (i) the 19th
business day after the commencement of the mailing to the Company's shareholders
of the Proxy Statement, in accordance with Section 5.10, (ii) the date of the
approval of the OCC required for consummation of the Bank Merger, or (iii) the
date of the approval of the FRB required for consummation of the Merger.
7.2.3.5.3. "Index Group" means the ten bank holding companies identified in
a letter from the Acquiror to the Company dated the date hereof, the common
stock of all of which shall be publicly traded and as to which there shall not
have been a publicly announced proposal since the Starting Date and before the
Determination Date for any such company to be acquired. In the event that the
common stock of any such company ceases to be publicly traded or a proposal to
acquire any such company is announced after the Starting Date and before the
Determination Date, such company will be retroactively removed from the Index
Group, and the weights (which are based on the number of shares of common stock
outstanding as of September 30, 1994 as reflected in the Quarterly Report on
Form 10-Q filed with the SEC by each of the bank holding companies in the Index
Group and their respective market prices) will be redistributed proportionately
for purposes of determining the Index Price.
7.2.3.5.4. "Index Price" on a given date means the weighted average
(weighted in accordance with the basis therefor set forth in Section 7.2.3.5.3.)
of the closing prices of the companies in the Index Group.
7.2.3.5.5. "Index Final Price" means the average of the Index Prices for
the 20 consecutive full trading days ending at the close of trading on the
Determination Date.
7.2.3.5.6. "Starting Date" means the first NASDAQ trading day immediately
following the date of the first public announcement of the parties' entry into
this Agreement.
7.2.3.5.7. If any company belonging to the Index Group or the Acquiror
declares or effects a stock dividend, reclassification, recapitalization,
split-up, combination, exchange of shares or similar transaction between the
Starting Date and the Determination Date, the prices for and outstanding amount
of common stock of such company or the Acquiror shall be appropriately adjusted
for the purposes of applying this Section 7.2.3.5.
7.3. Effect of Termination. Termination of this Agreement pursuant to this
Article VII shall not relieve any party of any liability for a Default or other
breach, default or nonperformance under this Agreement.
7.4. Definition of Default. For purposes of this Article VII, a party shall
be in "Default" hereunder if:
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7.4.1. any representation or warranty of such party contained in this
Agreement shall have been incorrect, incomplete or otherwise misleading in any
material respect when made; and/or
7.4.2. such party shall have failed to perform or otherwise breached in any
material respect any of its covenants or obligations contained in this Agreement
and such failure or breach shall have remained uncured for ten days after notice
thereof to such party by any other party hereto.
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ARTICLE VIII--THE CLOSING
8.1. Closing. The Closing shall be conducted at the time and place
described in Section 1.4.
8.2. Delivery of Common Stock Consideration and Cash Consideration.
Contemporaneous with the Closing, the Acquiror shall deliver to the Exchange
Agent one or more stock certificates representing the aggregate number of shares
of Acquiror Common Stock included within the Common Stock Consideration and the
aggregate Cash Consideration for delivery after the Effective Time pursuant to
Article II hereof.
8.3. Deliveries by the Company. At the Closing, the Company shall deliver
or cause to be delivered to the Acquiror the following:
8.3.1. the officers' certificate described in Section 6.3.3;
8.3.2. evidence, in form and substance satisfactory to the Acquiror, of the
Company's compliance with Section 5.14 (ISRA approval);
8.3.3. a certificate of the Secretary of the Company and the Cashier or
Secretary of the Acquired Bank, in form and substance reasonably satisfactory to
the Acquiror, which (i) sets forth copies of all resolutions pursuant to which
the Company's Board of Directors and shareholders approved the Merger and the
Acquired Bank's Board of Directors and shareholders approved the Bank Merger,
(ii) sets forth the Company's and the Acquired Bank's By-laws, (iii) confirms
that there have been no amendments to either the Company's or the Acquired
Bank's Articles of Incorporation other than as previously disclosed in the
Company Disclosure Schedules, (iv) confirms that no stop order or comparable
directive has been received by the Company with respect to the Proxy Statement
or the Registration Statement, (v) certifies the incumbency of officers that
have executed documents relating to the Merger and the Bank Merger and (vi)
covers such other matters as shall be reasonably requested by the Acquiror's
counsel to assure the Company's and the Acquired Bank's compliance with this
Agreement and the Company's and the Acquired Bank's representations hereunder;
and
8.3.4. evidence of the Company's and the Acquired Bank's receipt of all
approvals and consents necessary for the Company to consummate the Merger and
the Acquired Bank to consummate the Bank Merger.
8.4. Deliveries by the Acquiror. At the Closing, the Acquiror shall deliver
or cause to be delivered to the Company the following:
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8.4.1. the officers' certificate described in Section 6.2.3;
8.4.2. a certificate of the Secretary of the Acquiror and the Cashier of
the Acquiring Bank, in form and substance reasonably satisfactory to the
Company, which (i) sets forth copies of all resolutions pursuant to which the
Acquiror's Boards of Director and the Acquiring Bank's Board of Directors
approved the Merger, (ii) sets forth the Acquiror's and the Acquiring Bank's
By-laws, (iii) confirms the last date on which the Acquiror's Certificate of
Incorporation and the Acquiring Bank's Articles of Association were amended,
(iv) confirms that no stop order or comparable directive has been received by
the Acquiror with respect to the Proxy Statement or the Registration Statement,
(v) certifies the incumbency of officers that have executed documents relating
to the Merger and the Bank Merger and (vi) covers such other matters as shall be
reasonably requested by the Company's counsel to assure the Acquiror's and the
Acquiring Bank's compliance with this Agreement and the Acquiror's
representations hereunder; and
8.4.3. evidence of the Acquiror's and the Acquiring Bank's receipt of all
approvals and consents necessary for the Acquiror to consummate the Merger and
the Acquiring Bank to consummate the Bank Merger.
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ARTICLE IX--MISCELLANEOUS
9.1. Non-Survival of Representations, Warranties, and Agreements. The
representations, warranties and covenants in this Agreement shall terminate at
the Effective Time or the earlier termination of this Agreement pursuant to
Article VII, as the case may be; provided, however, that if the Merger is
consummated, Article II and Sections 5.5.2, 5.7, 5.8 and Article IX hereof shall
survive the Effective Time to the extent contemplated by such Sections;
provided, further, however that Section 5.5.2 and all of Article IX hereof shall
in all events survive any termination of this Agreement.
9.2. Interpretation. Unless the context of this Agreement expressly
indicates otherwise, (i) any singular term in this Agreement shall include the
plural and any plural term shall include the singular and (ii) the term Section
or Schedule shall mean a section or schedule of or to this Agreement, the
Company Disclosure Schedules or the Acquiror Disclosure Schedules, as the
context indicates. It is intended by the parties that this Agreement is not to
be construed against the Acquiror or the Acquiring Bank by virtue of the fact
that this Agreement was initially drafted by representatives of the Acquiror and
the Acquiring Bank.
9.3. Parties in Interest. Except for Section 5.7 (which is intended to be
for the benefit of directors and officers and may be enforced by such persons),
this Agreement is not intended to nor shall it confer upon any other person
(other than the parties hereto) any rights or remedies.
9.4. Expenses.
9.4.1. If the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by either the Acquiror or the Surviving Bank.
9.4.2. Notwithstanding any provision herein to the contrary, if this
Agreement is terminated by the Company or the Acquiror pursuant to Sections
7.2.2 or 7.2.3, respectively, because of the willful breach by the other party
of any representation, warranty, covenant, undertaking or restriction contained
in this Agreement and if the terminating party is not in material breach of any
representation, warranty, covenant, undertaking or restriction contained in this
Agreement, then the breaching party shall pay all costs and expenses of the
terminating party; provided, however, that if this Agreement is terminated under
circumstances other than those described in the preceding clauses of this
Section 9.4.2, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and
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expenses. Nothing contained in this Section 9.4.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a party of the
terms of this Agreement or otherwise limit the rights of the non-breaching
party.
9.5. Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
9.6. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
maximum extent possible.
9.7. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be delivered personally, by facsimile,
or by overnight courier, or sent by certified, registered or express air mail,
postage prepaid, and shall be deemed given when so delivered personally, or by
facsimile, or by overnight courier, or if mailed, five days after the date of
mailing, as follows:
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If to the Acquiror or the Acquiring Bank:
if delivered: General Counsel, Midlantic Corporation
499 Thornall Street
Edison, New Jersey 08837
Telephone: (908) 321-8200
Facsimile: (908) 321-8518
if mailed: General Counsel, Midlantic Corporation
P.O. Box 600
Edison, New Jersey 08818-0600
Telephone: (908) 321-8200
Facsimile: (908) 321-8518
With a copy to:
if delivered: Pitney, Hardin, Kipp & Szuch
200 Campus Drive
Florham Park, New Jersey 07932-0950
Telephone: (201) 966-6300
Facsimile: (201) 966-1500
Attention: Joseph Lunin, Esq.
if mailed: Pitney, Hardin, Kipp & Szuch
P.O. Box 1945
Morristown, New Jersey 07962-1945
Telephone: (201) 966-6300
Facsimile: (201) 966-1500
Attention: Joseph Lunin, Esq.
If to the Company or the Acquired Bank:
Bank and Trust Company of Old York Road
York and Easton Roads
Willow Grove, Pennsylvania 19090-3282
Telephone: (215) 784-1980
Facsimile: (215) 659-3420
Attention: Erwin K. Wenner,
Chief Executive Officer
With a copy to: Fellheimer Eichen Braverman & Kaskey
One Liberty Place
1650 Market Street
Philadelphia, Pennsylvania 19103
Telephone: (215) 575-3800
Facsimile: (215) 575-3801
Attention: Alan Fellheimer, Esq.
9.8. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New Jersey without reference
to choice of law principles thereof, except to the extent that the Merger is
governed by the
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Pennsylvania Business Corporation Law and the Bank Merger is governed by the
National Bank Act and the Pennsylvania Code.
9.9. Assignment; Successors and Assigns. This Agreement may not be
assigned, and any attempted assignment shall be null and void, except that this
Agreement may be assigned by the Acquiring Bank to another Acquiror Subsidiary.
This Agreement shall be binding unto and inure to the benefit of the parties
hereto and their respective successors, permitted assigns and legal
representatives.
9.10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original agreement, but all of
which together shall constitute one and the same instrument.
9.11. Titles and Headings. The titles, headings and table of contents in
this Agreement are for reference purposes only, and shall not in any way affect
the meaning or interpretation of this Agreement.
9.12. Amendment and Modification. This Agreement may only be amended or
modified in a writing signed by the party against whom enforcement of such
amendment or modification is sought.
9.13. Waiver. Except as otherwise required by law, any of the terms and
conditions of this Agreement may be waived at any time by the party or parties
entitled to the benefit thereof, but only by a writing signed by the party or
parties waiving such terms or conditions.
9.14. Entire Agreement. This Agreement, including the Company Disclosure
Schedules, the Acquiror Disclosure Schedules, and the Stock Option Agreement,
shall constitute the entire agreement among the parties with respect to the
matters covered hereby and shall supersede all previous written, oral and
implied understandings among them with respect to such matters.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective duly authorized officers as of
the day and year first above written.
MIDLANTIC CORPORATION
By: /S/ DONALD W. EBBERT, Jr.
------------------------
Name: Donald W. Ebbert, Jr.
Title: Senior Vice President
and Treasurer
MIDLANTIC BANK, NATIONAL ASSOCIATION
By: /S/ DONALD W. EBBERT, Jr.
-------------------------
Name: Donald W. Ebbert, Jr.
Title: Senior Vice President
and Treasurer
OLD YORK ROAD BANCORP, INC.
By: /S/ MARK HANKIN
-------------------------
Name: Mark Hankin
Title: Chairman
BANK AND TRUST COMPANY OF OLD YORK ROAD
By: /S/ MARK HANKIN
-------------------------
Name: Mark Hankin
Title: Chairman
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APPENDIX B
THE TRANSFER OF THE OPTION GRANTED BY THIS AGREEMENT IS SUBJECT TO RESALE
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") dated December 29, 1994, is by
and between MIDLANTIC CORPORATION, a New Jersey corporation (the "Acquiror") and
registered bank holding company for MIDLANTIC BANK, NATIONAL ASSOCIATION, (the
"Acquiring Bank"), and OLD YORK ROAD BANCORP, INC., a Pennsylvania corporation
(the "Company") and registered bank holding company for BANK AND TRUST COMPANY
OF OLD YORK ROAD, a commercial bank organized under the laws of the Commonwealth
of Pennsylvania (the "Acquired Bank").
BACKGROUND
1. Acquiror, the Company, the Acquired Bank and the Acquiring Bank, as of
the date hereof, have executed a definitive Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which Acquiror will acquire the Company through
a merger of the Company with and into Acquiror (the "Merger") and the Acquired
Bank will be merged with and into the Acquiring Bank.
2. Acquiror has made it a condition of its willingness to enter into the
Merger Agreement that the Company grant to Acquiror an option to purchase
authorized but unissued shares of common stock of the Company in an amount and
on the terms and conditions hereinafter set forth.
3. As an inducement to Acquiror to enter into the Merger Agreement and in
consideration for such entry, the Company desires to grant to Acquiror an option
to purchase authorized but unissued shares of common stock of the Company in an
amount and on the terms and conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements
set forth herein and in the Merger Agreement, Acquiror and the Company,
intending to be legally bound hereby, agree:
1. Grant of Option. The Company hereby grants to Acquiror the option to
purchase such number of the shares Common Stock of the Company, which, after
issuance thereof would constitute 19.9% of the then issued and outstanding
shares (based on the outstanding shares of the company on the date hereof is an
option to purchase 701,919 shares) of common stock, par value $1.00 per share
(the "Common Stock") of the Company at a price of $7.25 per share (the "Option
Price"), subject to the terms and conditions set forth herein (the "Option").
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2. Exercise of Option. This Option shall not be exercisable until the
occurrence of a Triggering Event (as such term is hereinafter defined). Upon or
after the occurrence of a Triggering Event (as such term is hereinafter
defined), the Acquiror may exercise the Option, in whole or in part, at any time
or from time to time subject to the termination provisions of Section 19 of this
Agreement.
The term "Triggering Event" means the occurrence of any of the following
events:
A person or group (as such terms are defined in the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder) other than the Acquiror or an affiliate of the Acquiror:
a. acquires beneficial ownership (as such term is defined in Rule 13d-3 as
promulgated under the Exchange Act) of at least 20% of the then outstanding
shares of Common Stock; or
b. enters into a letter of intent or an agreement, whether oral or written,
with the Company pursuant to which such person or any affiliate of such person
would (i) merge or consolidate, or enter into any similar transaction with the
Company, (ii) acquire all or a significant portion of the assets or liabilities
of the Company, or (iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership or to vote securities
representing 20% or more of the then outstanding shares of Common Stock; or
c. makes a filing with the Securities Exchange Commission or bank
regulatory authorities (which filing has been accepted for processing by such
authorities) or publicly announces a bona fide proposal (such filing or
proposal, a "Proposal") with respect to (i) any merger, consolidation or
acquisition of all or a significant portion of all the assets or liabilities of
the Company or any other business combination involving the Company, or (ii) a
transaction involving the transfer of beneficial ownership of securities
representing, or the right to acquire beneficial ownership or to vote securities
representing, 20% or more of the outstanding shares of Common Stock, and
thereafter, such Proposal is not Publicly Withdrawn (as such term is hereinafter
defined) at least 15 days prior to the meeting of stockholders of the Company
called to vote on the Merger and the Company' stockholders fail to approve the
Merger by the vote required by applicable law at the meeting of stockholders
called for such purpose; or
d. makes a bona fide Proposal and thereafter, but before such Proposal has
been Publicly Withdrawn, the Company willfully takes any action in any manner
which would materially interfere
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with its ability to consummate the Merger or materially reduce the value of the
transaction to the Acquiror.
The term "Triggering Event" also means the taking of any material direct or
indirect action by the Company or any of its directors, officers or agents with
the intention of inviting, encouraging or soliciting, or which is likely to
result in, any proposal which has as its purpose a tender offer for the shares
of the Company's Common Stock, a merger, consolidation, plan of exchange, plan
of acquisition or reorganization of the Company, or a sale of a significant
number of shares of the Company's Common Stock or any significant portion of its
assets or liabilities.
The term "significant number" means 10% of the outstanding shares of Common
Stock. The term "significant portion" means 25% of the assets or liabilities of
the Company.
"Publicly Withdrawn", for purposes of clauses (c) and (d) above, shall mean
an unconditional bona fide withdrawal of a Proposal coupled with a public
announcement of no further interest in pursuing such Proposal or in acquiring
any controlling influence over the Company or in soliciting or inducing any
other person (other than the Acquiror or any affiliate) to do so.
Notwithstanding the foregoing, the Option may not be exercised at any time
(i) in the absence of any required governmental or regulatory approval or
consent necessary for the Company to issue the shares of Common Stock covered by
the Option (the "Option Shares") or the Acquiror to exercise the Option or prior
to the expiration or termination of any waiting period required by law, or (ii)
so long as any injunction or other order, decree or ruling issued by any federal
or state court of competent jurisdiction is in effect which prohibits the sale
or delivery of the Option Shares.
The Company shall notify the Acquiror promptly in writing of the occurrence
of any Triggering Event known to it, it being understood that the giving of such
notice by the Company shall not be a condition to the right of the Acquiror to
exercise the Option. The Company will not take any action which would have the
effect of preventing or disabling the Company from delivering the Option Shares
to the Acquiror upon exercise of the Option or otherwise performing its
obligations under this Agreement. In the event the Acquiror wishes to exercise
the Option, the Acquiror shall send a written notice to the Company (the date of
which is hereinafter referred to as the "Notice Date") specifying the total
number of Option Shares it wishes to purchase and a place and date for the
closing of such a purchase (a "Closing"); provided, however, that a Closing
shall not occur prior to five business days after the later of receipt of any
necessary regulatory approvals and the
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expiration of any legally required notice or waiting period, if any.
3. Payment and Delivery of Certificates. At any Closing hereunder (a) the
Acquiror will make payment to the Company of the aggregate price for the Option
Shares so purchased by wire transfer of immediately available funds to an
account designated by the Company, (b) the Company will deliver to the Acquiror
a stock certificate or certificates representing the number of Option Shares so
purchased, free and clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever created by or through the Company (other than
restrictions imposed by applicable securities laws), registered in the name of
the Acquiror or its designee, in such denominations as were specified by the
Acquiror in its notice of exercise and bearing a legend as set forth below and
(c) the Acquiror shall pay any transfer or other taxes required by reason of the
issuance of the Option Shares so purchased.
Unless a registration statement is filed and declared effective under
Section 4 hereof, a legend will be placed on each stock certificate evidencing
Option Shares issued pursuant to this Agreement, which legend will read
substantially as follows:
The shares of stock evidenced by this certificate have not been
registered for sale under the Securities Act of 1933 (the "1933 Act").
These shares may not be sold, transferred or otherwise disposed of unless a
registration statement with respect to the sale of such shares has been
filed under the 1933 Act and declared effective or, in the opinion of
counsel to the Company, said transfer would be exempt from registration
under the provisions of the 1933 Act and the regulations promulgated
thereunder.
4. Registration Rights. Upon or after the occurrence of a Triggering Event
that occurs prior to the termination of this Agreement and upon receipt of a
written request from the Acquiror, the Company shall prepare and file a
registration statement with the Securities and Exchange Commission, covering the
Option and such number of Option Shares as the Acquiror shall specify in its
request, and the Company shall use its best efforts to cause such registration
statement to be declared effective in order to permit the sale or other
disposition of the Option and the Option Shares, provided that the Acquiror
shall in no event have the right to have more than one such registration
statement become effective (or only one demand registration if a Registration
Statement which has been filed does not become effective because of the failure
of the Acquiror to furnish information concerning the Acquiror) and provided
further that the Company may postpone such preparation and filing for a period
of time (not to exceed 90 days) if in its reasonable judgment such filing would
require the disclosure of
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material information that the Company has a bona fide business purpose for
preserving as confidential.
In connection with such filing, the Company shall use its best efforts to
cause to be delivered to the Acquiror such certificates, opinions, accountant's
letters and other documents as the Acquiror shall reasonably request and as are
customarily provided in connection with registrations of securities under the
Securities Act of 1933, as amended, and the Acquiror shall provide to the
Company such information regarding the Acquiror as the Company shall reasonably
request for purposes of preparing such registration statement. In the event the
Acquiror shall have exercised the option to acquire in the aggregate 50% or more
of the shares which the Acquiror is entitled to purchase hereunder, all expenses
incurred by the Company in complying with the provisions of this Section 4,
including without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company and blue sky fees
and expenses shall be paid by the Company. Underwriting discounts and
commissions to brokers and dealers relating to the Option Shares, fees and
disbursements of counsel to the Acquiror and any other expenses incurred by the
Acquiror in connection with such registration shall be borne by the Acquiror. In
connection with such filing, the Company shall indemnify and hold harmless the
Acquiror against any losses, claims, damages or liabilities, joint or several,
to which the Acquiror may become subject, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any preliminary or final prospectus or any amendment or supplement
thereto, or arise out of a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Company will
reimburse the Acquiror for any legal or other expense reasonably incurred by the
Acquiror in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such preliminary or final prospectus or
such amendment or supplement thereto in reliance upon and in conformity with
written information furnished by or on behalf of the Acquiror specifically for
use in the preparation thereof. The Acquiror will indemnify and hold harmless
the Company to the same extent as set forth in the immediately preceding
sentence but only with reference to written information specifically furnished
by or on behalf of the Acquiror for use in the preparation of such preliminary
or final prospectus or such amendment or supplement thereto; and the Acquiror
will reimburse the Company for any legal or other expense reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action.
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5. Adjustment Upon Changes in Capitalization. In the event of any change in
the Common Stock by reason of stock dividends, stock splits, mergers,
recapitalizations, combinations, conversions, exchanges of shares or the like,
then the number and kind of Option Shares and the Option Price shall be
appropriately adjusted.
In the event any capital reorganization or reclassification of the Common
Stock, or any consolidation, merger or similar transaction of the Company with
another entity, or any sale of all or substantially all of the assets of the
Company shall be effected in such a way that the holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
(in form reasonably satisfactory to the holder hereof) shall be made whereby the
holder hereof shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified herein and in lieu of the
Common Stock immediately theretofore purchasable and receivable upon exercise of
the rights represented by this Option, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for the number
of shares of Common Stock immediately theretofore purchasable and receivable
upon exercise of the rights represented by this Option had such reorganization,
reclassification, consolidation, merger or sale not taken place; provided,
however, that if such transaction results in the holders of Common Stock
receiving only cash, the holder hereof shall, upon exercise of the Option, be
paid the excess, if any, of such cash consideration over the Option Price
without the need to exercise the Option.
6. Filings and Consents. Each of the Acquiror and the Company will use its
best efforts to make all filings with, and to obtain consents of, all third
parties and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement.
Exercise of the Option herein provided shall be subject to compliance with
all applicable laws including, in the event the Acquiror is the holder hereof,
approval of the Board of Governors of the Federal Reserve System, and the
Company agrees to cooperate with and furnish to the holder hereof such
information and documents as may be reasonably required to secure such
approvals.
7. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Acquiror as follows:
a. Due Authorization. The Company has full corporate power and authority to
execute, deliver and perform this Agreement
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and all corporate action necessary for execution, delivery and performance of
this Agreement has been duly taken by the Company.
b. Authorized Shares. The Company has taken and, as long as the Option is
outstanding, will take all necessary corporate action to authorize and reserve
for issuance all shares of Common Stock that may be issued pursuant to any
exercise of the Option.
c. No Conflicts. Neither the execution and delivery of this Agreement nor
consummation of the transactions contemplated hereby (assuming all appropriate
regulatory approvals) will violate or result in any violation or default of or
be in conflict with or constitute a default under any term of the articles of
association or by-laws of the Company or any agreement, instrument, judgment,
decree, statute, rule or order applicable to the Company.
8. 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. Notwithstanding the
foregoing, the Acquiror shall have the right to seek money damages against the
Company for a breach of this Agreement.
9. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof.
10. Assignment or Transfer. The Acquiror may not sell, assign or otherwise
transfer its rights and obligations hereunder, in whole or in part, to any
person or group of persons other than to an affiliate of the Acquiror, except
upon or after the occurrence of a Triggering Event. The Acquiror represents that
it is acquiring the Option for the Acquiror's own account and not with a view to
or for sale in connection with any distribution of the Option or the Option
Shares. The Acquiror is aware that presently neither the Option nor the Option
Shares are being offered by a registration statement filed with, and declared
effective by, the Securities and Exchange Commission, but instead are being
offered in reliance upon the exemption from the registration requirements
pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Acquiror
shall have the right to assign this Agreement to any party it selects after the
occurrence of a Triggering Event, subject to the application of all applicable
securities laws.
11. Amendment of Agreement. In the event that the parties hereto mutually
consent, this Agreement may be amended in writing at any time, for the purpose
of facilitating performance hereunder or to comply with any applicable
regulation of any
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governmental authority or any applicable order of any court or for any other
purpose.
12. 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.
13. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally, by express service, cable, telegram
or telex, or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties as follows:
If to the Acquiror:
if delivered:
General Counsel, Midlantic Corporation
499 Thornall Street
Edison, New Jersey 08837
Telephone: (908) 321-8200
Facsimile: (908) 321-8518
if mailed:
General Counsel, Midlantic Corporation
P.O. Box 600
Edison, New Jersey 08818-0600
Telephone: (908) 321-8200
Facsimile: (908) 321-8518
With a copy to:
if delivered:
Pitney, Hardin, Kipp & Szuch
200 Campus Drive
Florham Park, New Jersey 07932-0950
Telephone: (201) 966-6300
Facsimile: (201) 966-1500
Attention: Joseph Lunin, Esq.
if mailed:
Pitney, Hardin, Kipp & Szuch
P.O. Box 1945
Morristown, New Jersey 07962-1945
Telephone: (201) 966-6300
Facsimile: (201) 966-1500
Attention: Joseph Lunin, Esq.
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If to the Company:
Bank and Trust Company of Old York Road
York and Easton Roads
Willow Grove, Pennsylvania 19090-3282
Telephone: (215) 784-1980
Facsimile: (215) 659-3420
Attention: Erwin K. Wenner,
Chief Executive Officer
With a copy to:
Fellheimer Eichen Braverman & Kaskey
One Liberty Place
1650 Market Street
Philadelphia, Pennsylvania 19103
Telephone: (215) 575-3800
Facsimile: (215) 575-3801
Attention: Alan Fellheimer, Esq.
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
15. Captions. The captions in the Agreement are inserted for convenience
and reference purposes, and shall not limit or otherwise affect any of the terms
or provisions hereof.
16. Waivers and Extensions. The parties hereto may, by mutual consent,
extend the time for performance of any of the obligations or acts of either
party hereto. Each party may waive (i) compliance with any of the covenants of
the other party contained in this Agreement and/or (ii) the other party's
performance of any of its obligations set forth in this Agreement.
17. 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, except
as provided in Section 10 permitting the Acquiror to assign its rights and
obligations hereunder.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an
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original, but all of which shall constitute one and the same agreement.
19. Termination. This Agreement shall terminate upon either (i) the
termination of the Merger Agreement as provided therein, or (ii) the
consummation of the transactions contemplated by the Merger Agreement; provided,
however, that if termination of the Merger Agreement occurs after the occurrence
of a Triggering Event, this Agreement shall not terminate until the later of 18
months following the date of the termination of the Merger Agreement or the
consummation of any proposed transactions which constitute the Triggering Event,
provided however, that in the event a Triggering Event has occurred but has not
been consummated, and the Company proposes to file a Registration Statement with
the Securities and Exchange Commission in connection with the registration and
issuance of securities solely to raise capital for the Company, and the Company
notifies the Acquiror not less than 30 days prior to the filing of such
Registration Statement, promptly furnishes to the Acquiror copies of all
documents filed by the Company with the Securities and Exchange Commission,
including the Registration Statement and all amendments thereto, and notifies
the Company of the effective term of the Registration Statement not less than 3
days in advance of the effective date of such Registration Statement, then this
Agreement shall terminate at the close of business on the date of the
effectiveness of such Registration Statement.
IN WITNESS WHEREOF, each of the parties hereto, pursuant to resolutions
adopted by its Board of Directors, has caused this Agreement to be executed by
its duly authorized officer, all as of the day and year first above written.
OLD YORK ROAD BANCORP, INC.
By: /s/ MARK HANKIN
---------------------------
Name: Mark Hankin
Title: Chairman
MIDLANTIC CORPORATION
By: /s/ DONALD W. EBBERT, JR.
----------------------------
Name: Donald W. Ebbert, Jr.
Title: Senior Vice President
and Treasurer
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APPENDIX C
- -------------------------------------------------------------------------------
May 23, 1995
Board of Directors
Old York Road Bancorp, Inc.
York and Easton Roads
Willow Grove, PA 19090
Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of common stock, par value
$1.00 per share (the "Shares"), of Old York Bancorp, Inc. ("Company") of the
consideration to be paid to them for the Shares (the "Consideration") pursuant
to the Agreement and Plan of Merger, dated as December 29, 1994, by and between
Midlantic Corporation ("Midlantic"), Midlantic Bank, N.A., Bank and Trust
Company of Old York Road and the Company (the "Agreement").
Under the terms of the Agreement, the Company will be merged with and into
Midlantic (the "Merger") and each Share issued and outstanding immediately prior
to the Merger will be converted into the right to receive, at the holder's
election, either (a) 0.3721 shares of Midlantic's common stock, par value $3.00
per share ("Midlantic Common Stock"), or (b) $10.00 in cash, subject to certain
limitations and adjustments set forth in the Agreement.
Sandler O'Neill Corporate Strategies, a division of Sandler O'Neill &
Partners, L.P., as part of its investment banking business, is regularly engaged
in the valuation of financial institutions and their securities in connection
with mergers and acquisitions and other corporate transactions.
In connection with this opinion, we have reviewed, among other things: (i)
the Agreement; (ii) the Stock Option Agreement dated as of December 29, 1994 by
and between the Company and Midlantic; (iii) the audited consolidated financial
statements and management's discussion and analysis of the financial condition
and results of operations of each of the Company and Midlantic for the three
years ended December 31, 1994; (iv) the unaudited consolidated financial
statements and management's discussion and analysis of the financial condition
and results of operations for the interim period ending March 31,1995 of each of
the Company and Midlantic; (v) financial analyses and forecasts for the Company
prepared by and/or reviewed with the management of the Company; (vi) the views
of senior management of each of the Company and Midlantic of their respective
past and current business operations, results thereof, financial condition and
future prospects; (vii) the reported price and trading activity for the
Company's common stock and Midlantic's Common Stock, including a comparison of
certain financial and stock market information for the Company and Midlantic
with similar information for certain other companies the securities
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Board of Directors
Old York Road Bancorp, Inc.
May 23, 1995
Page 2
of which are publicly traded; (viii) the financial terms of recent business
combinations in the banking industry; (ix) the pro forma impact of the
transaction on Midlantic; (x) the current market environment generally and the
banking environment in particular; and (xi) such other information, financial
studies, analyses and investigations and financial, economic and market criteria
as we considered relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
information, analyses and other information reviewed by and discussed with us,
and we did not make any independent evaluation or appraisal of specific assets,
the collateral securing assets or the liabilities of the Company or Midlantic or
any of their subsidiaries, or the collectibility of any such assets (relying,
where relevant, on the analyses and estimates of the Company and Midlantic).
With respect to the financial projections reviewed with management, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of the
respective future financial performances of each of the Company and Midlantic,
and that such performances will be achieved. We have also assumed that there has
been no material change in the Company's or Midlantic's assets, financial
condition, results of operations, business or prospects since the date of the
last financial statements made available to us. We have further assumed that the
Company will remain as a going concern for all periods relevant to our analysis,
and that the conditions precedent in the Agreement are not waived.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have not undertaken to reaffirm or revise
this opinion or otherwise comment upon any events occurring after the date
hereof.
We have acted as the Company's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. We have also received a fee
for rendering this opinion. We have also provided general financial advisory
services for the Company and have received fees for such services.
In the ordinary course of our business, we may actively trade the equity
securities of both the Company and Midlantic for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this opinion is not to be quoted or referred to, in
whole or in part, in a registration statement, prospectus or proxy statement, or
in any other document used in connection with the offering or sale of
securities, nor shall this letter be used for any other purposes, without
Sandler O'Neill's prior written consent.
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Board of Directors
Old York Road Bancorp, Inc.
May 23, 1995
Page 3
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be paid by Midlantic to the holders of Shares
pursuant to the Agreement is fair, from a financial point of view, to such
holders.
Very truly yours,
SANDLER O'NEILL & PARTNERS, L.P.
Sandler O'Neill & Partners, L.P.
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APPENDIX D
SUBCHAPTER 15D OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
DISSENTERS RIGHTS
Section
1571. Application and effect of subchapter.
1572. Definitions.
1573. Record and beneficial holders and owners.
1574. Notice of intention to dissent.
1575. Notice to demand payment.
1576. Failure to comply with notice to demand payment, etc.
1577. Release of restrictions or payment for shares.
1578. Estimate by dissenter of fair value of shares.
1579. Valuation proceedings generally.
1580. Costs and expenses of valuation proceedings.
ss. 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).
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Section 7104(b)(3) (relating to procedure).
(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:
(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.
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(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).
ss. 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.
"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.
ss. 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.
ss. 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
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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.
ss. 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.
(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.
ss. 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.
ss. 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 to 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.
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(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 so 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.
ss. 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 of 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.
ss. 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.
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(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).
(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.
ss. 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 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 by 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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