As filed with the Securities and Exchange Commission on
December 23, 1996
Registration No. 33-____
_________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
SOVEREIGN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 6720 23-2453088
(State or other jurisdic- (Primary Standard (I.R.S. Employer
tion of incorporation or Industrial Class- Identification
organization) ification Code No.)
Number)
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
(610) 320-8400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Jay S. Sidhu
President and Chief Executive Officer
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
(610) 320-8400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
________________________________________
Copies to:
David W. Swartz, Esquire John J. Gorman, Esquire
Stevens & Lee Luse Lehman Gorman Pomerenk
111 North Sixth Street & Schick
P.O. Box 679 5335 Wisconsin Avenue, N.W.,
Reading, Pennsylvania 19603 Suite 400
Washington, D.C. 20015
________________________________________
<PAGE>
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there
is compliance with General Instruction G, check the following
box: [ ]
CALCULATION OF REGISTRATION FEE
_________________________________________________________________
Title of Amount to be Proposed Proposed Amount of
each class registered (1) maximum maximum registra-
of secur- offering aggregate tion fee (2)
ities to be price per offering
registered unit price
_________________________________________________________________
Common Stock, 7,912,102 Not Not
no par value shares applicable applicable $19,709
(and (with rights)
associated
stock purchase
rights) (3)
_________________________________________________________________
(1) Based on the maximum number of shares of the Registrant's
common stock that may be issued in connection with the
proposed merger (the "Merger") of First State Financial
Services, Inc. ("First State") with and into the Registrant.
In accordance with Rule 416, this Registration Statement
shall also register any additional shares of the
Registrant's common stock which may become issuable to
prevent dilution resulting from stock splits, stock
dividends or similar transactions as provided by the
agreement relating to the Merger.
(2) Estimated solely for purposes of calculating the
registration fee. Computed, in accordance with
Rule 457(f)(1), on the basis of the closing sale price of
the common stock of First State on December 19, 1996 of
$15.125 and based on 3,929,455 shares of First State common
stock outstanding and unexercised options to purchase
370,600 shares of First State common stock.
(3) Prior to the occurrence of certain events, the stock
purchase rights will not be evidenced separately from the
common stock.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
_________________________________________________________________
<PAGE>
[LETTERHEAD OF FIRST STATE FINANCIAL SERVICES, INC.]
January __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the
stockholders of First State Financial Services, Inc. ("First
State") to be held on ________, February __, 1997, at 10:00 a.m.,
local time, at Mayfair Farms, 481 Eagle Rock Road, West Orange,
New Jersey.
The purpose of the Special Meeting is to consider and vote
upon the Agreement and Plan of Merger dated June 24, 1996, as
amended by an Amendment to Agreement and Plan of Merger dated
November 26, 1996 (collectively, the "Merger Agreement"), between
First State and Sovereign Bancorp, Inc. ("Sovereign"), providing
for the merger of First State with and into Sovereign (the
"Merger") and the conversion of each outstanding share of common
stock of First State into shares of common stock of Sovereign and
related stock purchase rights based on an exchange ratio to be
determined in accordance with the Merger Agreement, all as more
fully described in the accompanying Proxy Statement/Prospectus.
Completion of the Merger is subject to certain conditions,
including the approval of the Merger Agreement by the
stockholders of First State at this Special Meeting.
The attached Proxy Statement/Prospectus contains important
information concerning the Merger. We urge you to give it your
careful attention.
The Board of Directors of First State has carefully
considered and approved the Merger Agreement and believes that
the Merger is in the best interests of First State and its
stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. You are urged to sign, date and
mail the enclosed proxy card promptly in the postage-prepaid
envelope provided. If you attend the Special Meeting, you may
vote in person even if you have already mailed your proxy card.
On behalf of the Board of Directors and our employees, I
wish to thank you for your continued support. We appreciate your
interest.
Sincerely yours,
Michael J. Quigley, III
Chairman, President and Chief
Executive Officer
<PAGE>
FIRST STATE FINANCIAL SERVICES, INC.
1120 Bloomfield Avenue
West Caldwell, New Jersey 07007-2449
____________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on February __, 1997
____________________
NOTICE IS HEREBY GIVEN that a Special Meeting of
Stockholders of First State Financial Services, Inc. ("First
State"), a Delaware corporation, will be held on _____________,
February __, 1997, at 10:00 a.m., local time, at Mayfair Farms,
481 Eagle Road Avenue, West Orange, New Jersey (the "Special
Meeting"), to consider the following matters:
1. The approval and adoption of the Agreement
and Plan of Merger dated June 24, 1996, as amended by an
Amendment to Agreement and Plan of Merger dated November 26,
1996 (collectively, the "Merger Agreement"), between First
State and Sovereign Bancorp, Inc. ("Sovereign"), which is
attached as Annex A to the accompanying Proxy
Statement/Prospectus, providing for the merger of First
State with and into Sovereign (the "Merger"). Pursuant to
the Merger Agreement, each share of the common stock,
$.01 par value per share, of First State (the "First State
Common Stock") outstanding at the closing of the Merger will
be converted into such number of shares of common stock, no
par value, of Sovereign ("Sovereign Common Stock"), and
related stock purchase rights, as shall equal $14.75 divided
by the average market value of a share of Sovereign Common
Stock (as determined in accordance with the Merger
Agreement); provided, however, that (i) if such average
market value of Sovereign Common Stock is less than $8.00
per share, each share of First State Common Stock will be
converted into 1.840 shares of Sovereign Common Stock, and
related stock purchase rights, or (ii) if the average market
value of a share of Sovereign Common Stock is greater than
$12.04 per share, each share of First State Common Stock
will be converted into 1.225 shares of Sovereign Common
Stock, and related stock purchase rights. Sovereign will
pay cash to First State stockholders in lieu of issuing
fractional shares of Sovereign Common Stock.
2. To vote on adjournment of the Special
Meeting, if necessary, to permit further solicitation of
proxies in the event there are not sufficient votes at the
time of the Special Meeting to constitute a quorum or to
approve the Merger Agreement.
3. Such other matters as may properly be brought
before the Special Meeting or any adjournments thereof.
The Board of Directors of First State has fixed the
close of business on ______________, 1996 as the record date for
determining stockholders entitled to notice of, and to vote at,
the Special Meeting and any adjournments thereof.
A Proxy Statement/Prospectus is set forth on the
following pages and a form of proxy is enclosed herewith. To
ensure that your vote is counted, please complete, sign, date and
return the proxy in the enclosed return envelope, whether or not
you plan to attend the Special Meeting in person. If you attend
the Special Meeting, you may revoke your proxy and vote your
shares in person.
A list of stockholders entitled to vote at the Special
Meeting will be available at 1120 Bloomfield Avenue, West
Caldwell, New Jersey for a period of ten days prior to the
Special Meeting and will also be available for inspection at the
Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Marie G. Martino, Secretary
West Caldwell, New Jersey
January __, 1997
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN
PROMPTLY THE ENCLOSED PROXY CARD, WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING. PLEASE DO NOT SEND IN ANY
CERTIFICATES FOR YOUR SHARES AT THIS TIME.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
FIRST STATE AT (201) 244-9831.
Attention: Marie G. Martino
<PAGE>
________________________________________________________________
FIRST STATE FINANCIAL SERVICES, INC.
PROXY STATEMENT
____________________
SOVEREIGN BANCORP, INC.
PROSPECTUS
________________________________________________________________
This Proxy Statement/Prospectus ("Proxy
Statement/Prospectus") is being furnished to stockholders of
First State Financial Services, Inc. ("First State") in
connection with the solicitation of proxies by the Board of
Directors of First State for use at a Special Meeting of
Stockholders (including any adjournments or postponements
thereof) to be held on February __, 1997 (the "Special Meeting").
This Proxy Statement/Prospectus relates to up to
7,912,102 shares of common stock, no par value ("Sovereign Common
Stock"), of Sovereign Bancorp, Inc., a Pennsylvania corporation
("Sovereign"), which may be issued upon the merger (the "Merger")
of First State with and into Sovereign, pursuant to an Agreement
and Plan of Merger dated June 24, 1996, as amended by an
Amendment to Agreement and Plan of Merger dated November 26, 1996
(collectively, the "Merger Agreement"). In the Merger, each
outstanding share of common stock, par value $0.01 per share, of
First State ("First State Common Stock"), will be converted into
such number of shares of Sovereign Common Stock, and related
stock purchase rights, as shall equal $14.75 divided by the
average of the mean between the high bid and low asked prices of
a share of Sovereign Common Stock (as reported on the Nasdaq
National Market) for the ten consecutive trading days immediately
preceding the effective date of the Merger (the "Sovereign Market
Value"). This exchange ratio is subject to possible adjustment
in the event that the Sovereign Market Value as of the effective
date of the Merger is less than $8.00 or greater than $12.04 per
share (such exchange ratio, as adjusted, is hereinafter referred
to as the "Exchange Ratio"). If the Sovereign Market Value as of
the effective date of the Merger is less than $8.00 per share,
then the Exchange Ratio will be 1.840 shares of Sovereign Common
Stock, and related stock purchase rights, for each outstanding
share of First State Common Stock. If the Sovereign Market Value
as of the effective date of the Merger is greater than $12.04 per
share, then the Exchange Ratio will be 1.225 shares of Sovereign
Common Stock, and related stock purchase rights, for each
outstanding share of First State Common Stock.
This Proxy Statement/Prospectus constitutes both the
proxy statement of First State relating to the solicitation of
proxies by the First State Board of Directors for use at the
Special Meeting to be held for the purpose of considering and
voting upon a proposal to approve the Merger Agreement, and the
prospectus of Sovereign with respect to the Sovereign Common
Stock to be issued in the Merger. Completion of the Merger is
subject to various conditions including the approval of First
State stockholders.
This Proxy Statement/Prospectus and the accompanying
form of proxy are first being mailed to shareholders of First
State on or about January __, 1996.
THE SHARES OF SOVEREIGN COMMON STOCK OFFERED HEREBY
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF SOVEREIGN COMMON STOCK OFFERED HEREBY ARE
NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
________________
The date of this Proxy Statement/Prospectus is
January __, 1997.
<PAGE>
Table of Contents
Page
AVAILABLE INFORMATION.................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......... 2
SUMMARY.................................................. 6
The Companies....................................... 6
The Meeting......................................... 8
The Merger.......................................... 9
Certain Related Transactions........................ 16
Recent Developments................................. 17
Comparative Per Common Share Data................... 18
INTRODUCTION............................................. 24
SOVEREIGN SELECTED FINANCIAL DATA........................ 26
FIRST STATE SELECTED FINANCIAL DATA...................... 29
PRO FORMA COMBINED FINANCIAL INFORMATION................. 32
Pro Forma Unaudited Combined Condensed Balance
Sheet as of September 30, 1996................. 32
Pro Forma Unaudited Combined Condensed Statements
of Income for the Nine Months Ended
September 30, 1996 and 1995 and the Years
Ended December 31, 1995, 1994 and 1993......... 35
THE MEETING.............................................. 41
Matters to be Considered at the Meeting............. 41
Vote Required....................................... 41
Voting of Proxies................................... 42
Revocability of Proxies............................. 43
Record Date; Stock Entitled to Vote; Quorum......... 44
Solicitation of Proxies............................. 44
THE MERGER............................................... 46
Background of and Reasons for the Merger;
Recommendation of the First State Board
of Directors................................... 46
Terms of the Merger................................. 54
Opinion of Financial Advisor........................ 56
Effective Date of the Merger....................... 70
Exchange of First State Stock Certificates.......... 70
Conditions to the Merger............................ 72
Subsidiary Bank Merger.............................. 74
Regulatory Approvals................................ 75
Representations and Warranties...................... 76
Business Pending the Merger......................... 77
Dividends........................................... 80
No Solicitation of Transactions..................... 81
Amendment; Waivers.................................. 82
Termination; Effect of Termination.................. 82
Management and Operations after the Merger.......... 83
Employee Benefits................................... 85
Accounting Treatment................................ 86
Certain Federal Income Tax Consequences............. 87
Expenses............................................ 88
Resale of Sovereign Common Stock.................... 89
No Dissenters' Rights of Appraisal.................. 89
Dividend Reinvestment Plan.......................... 89
INTERESTS OF CERTAIN PERSONS IN THE MERGER............... 90
Stock Options....................................... 90
Indemnification..................................... 90
CERTAIN RELATED TRANSACTIONS............................. 91
Stock Option Agreement.............................. 91
INFORMATION WITH RESPECT TO SOVEREIGN.................... 94
General............................................. 94
Market Price of and Dividends on Sovereign Common
Stock and Related Shareholder Matters............... 94
INFORMATION WITH RESPECT TO FIRST STATE.................. 96
General............................................. 96
Market Price of and Dividends on First State
Common Stock and Related Shareholder
Matters........................................ 96
DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES.............. 99
Common Stock........................................ 99
Preferred Stock..................................... 103
Shareholder Rights Plan............................. 108
Special Charter and Pennsylvania Corporate
Law Provisions................................. 109
COMPARISON OF SHAREHOLDER RIGHTS......................... 113
Directors........................................... 113
Shareholders' Meetings.............................. 115
Shareholder Rights Plan............................. 116
Required Shareholder Vote........................... 116
Amendment of Bylaws................................. 120
Mandatory Tender Offer Provision.................... 120
Special Pennsylvania Corporate Law Provisions....... 121
ADJOURNMENT OF SPECIAL MEETING........................... 121
EXPERTS.................................................. 123
LEGAL MATTERS............................................ 123
OTHER MATTERS............................................ 124
SHAREHOLDER PROPOSALS.................................... 124
ANNEXES
A. Agreement and Plan of Merger between
Sovereign Bancorp, Inc. and First State
Financial Services, Inc. dated June 24,
1996, and Amendment to Agreement and
Plan of Merger between Sovereign Bancorp,
Inc. and First State Financial Services,
Inc. dated as of November 26, 1996.................. A-1
B. Stock Option Agreement.............................. B-1
C. Opinion of McConnell, Budd & Downes, Inc............ C-1
<PAGE>
No persons have been authorized to give any information
or to make any representations other than those contained in this
Proxy Statement/Prospectus in connection with the solicitation of
proxies or the offering of securities made hereby and, if given
or made, such information or representation must not be relied
upon as having been authorized by Sovereign or First State. This
Proxy Statement/Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any
person to whom it is not lawful to make any such offer or
solicitation in such jurisdiction. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities
made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of
Sovereign or First State since the date hereof or that the
information herein is correct as of any time subsequent to its
date.
All information concerning Sovereign and its
subsidiaries contained herein, incorporated herein by reference
or supplied herewith has been furnished by Sovereign, and all
information concerning First State and its subsidiaries contained
herein, incorporated herein by reference or supplied herewith has
been furnished by First State.
AVAILABLE INFORMATION
Sovereign and First State are subject to the
informational 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").
The reports, proxy statements and other information filed by
Sovereign and First State with the Commission can be inspected
and copied at the offices of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade
Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Avenue, Suite 1400, Chicago, Illinois 60661-2511. Copies
of such material also can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates, and from the web site that the
Commission maintains at http://www.sec.gov.
Sovereign has filed with the Commission a Registration
Statement on Form S-4 (together with any amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Sovereign
Common Stock to be issued pursuant to the Merger Agreement. This
Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto.
Such additional information may be obtained from the Commission's
principal office in Washington, D.C. Statements contained in
this Proxy Statement/Prospectus or in any document incorporated
in this Proxy Statement/Prospectus by reference or supplied
herewith as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and,
in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by
Sovereign (File No. 34-16533) pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement/Prospectus:
1. Sovereign's Annual Report on Form 10-K for the
year ended December 31, 1995 (including certain
information contained in Sovereign's Proxy
Statement dated March 15, 1996, used in connection
with Sovereign's 1996 Annual Meeting of
Shareholders and incorporated by reference in the
Form 10-K).
2. Sovereign's Quarterly Reports on Form 10-Q for
each of the quarters ended March 31, 1996,
June 30, 1996 and September 30, 1996.
3. Sovereign's Current Reports on Form 8-K dated
February 15, 1996, June 3, 1996, October 31, 1996
and November 26, 1996.
4. Sovereign's Registration Statement on Form 8-A,
filed August 14, 1989, pursuant to which Sovereign
registered certain stock purchase rights under the
Exchange Act and any amendments or reports filed
for the purpose of updating such Registration
Statement.
The following documents are incorporated by reference
in this Proxy Statement/Prospectus:
1. First State's Annual Report on Form 10-K for the
year ended September 30, 1996 as filed with the
Commission by First State (File No. 0-16329)
pursuant to the Exchange Act.
2. The following portions of First State's Annual
Report to Stockholders for the year ended
September 30, 1996, which accompanies this Proxy
Statement/Prospectus: audited financial
statements and notes thereto (pages 16 through
44); selected consolidated financial and other
data (page 4); management's discussion and
analysis of financial condition and results of
operations (pages 5 through 17); and (page 48).
In addition, all documents filed by Sovereign and First
State pursuant to Section 13(a), 13(c), 14 and 15(d) of the
Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the dates of
filing of such documents or reports. Any statement contained
herein or in a document all or a portion of which is incorporated
or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document 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 modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
Accompanying this Proxy Statement/Prospectus is First
State's Annual Report to Stockholders for the year ended
September 30, 1996.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST. DOCUMENTS RELATING TO
SOVEREIGN MAY BE REQUESTED FROM SOVEREIGN BANCORP, INC.,
1130 BERKSHIRE BOULEVARD, WYOMISSING, PENNSYLVANIA 19610
(TELEPHONE NUMBER (610) 320-8400), ATTENTION: LAWRENCE M.
THOMPSON, JR., SECRETARY. DOCUMENTS RELATING TO FIRST STATE MAY
BE REQUESTED FROM FIRST STATE FINANCIAL SERVICES, INC.,
1120 BLOOMFIELD AVENUE, WEST CALDWELL, NEW JERSEY 07007-2449
(TELEPHONE NUMBER (201) 244-9831), ATTENTION: MARIE G. MARTINO,
SECRETARY. IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO
THE SPECIAL MEETING OF STOCKHOLDERS, REQUESTS SHOULD BE RECEIVED
BY JANUARY __, 1997.
<PAGE>
SUMMARY
The following is a summary of certain information
contained elsewhere in this Proxy Statement/Prospectus.
Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained or
incorporated by reference in this Proxy Statement/Prospectus and
the Annexes hereto. A copy of the Merger Agreement, as amended
(excluding schedules thereto), is set forth in Annex A to this
Proxy Statement/Prospectus and reference is made thereto for a
complete description of the terms of the Merger. Stockholders
are urged to read carefully this entire Proxy Statement/
Prospectus, including the Annexes hereto.
The Companies
Sovereign
Sovereign Bancorp, Inc. ("Sovereign"), a Pennsylvania
business corporation, is the holding company for Sovereign Bank,
a Federal Savings Bank ("Sovereign Bank") and Sovereign Community
Bank, a federal savings bank ("Sovereign Community"). At
September 30, 1996, Sovereign and its subsidiaries have total
consolidated assets, deposits and shareholders' equity of
approximately $9.4 billion, $5.0 billion and $460 million,
respectively. The primary operating entity of Sovereign is
Sovereign Bank. Sovereign Bank's primary business consists of
attracting deposits from its network of 122 community banking
offices, and originating residential mortgage loans and home
equity lines of credit in the communities served by those
offices. Those offices are located largely in the Pennsylvania
counties of Berks, Lancaster, Bucks, Montgomery, Philadelphia,
Lehigh and Northampton and in the New Jersey counties of Mercer,
Ocean, Monmouth and Union.
The principal executive offices of Sovereign are
located at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania
19610, and its telephone number is (610) 320-8400. For further
information concerning Sovereign, its subsidiaries and certain
pending transactions, see "AVAILABLE INFORMATION,"
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "INFORMATION
WITH RESPECT TO SOVEREIGN," "DESCRIPTION OF SOVEREIGN CAPITAL
SECURITIES" and "RECENT DEVELOPMENTS."
First State
First State Financial Services, Inc. ("First State"), a
Delaware corporation, is the holding company for First DeWitt
Bank, a federal savings bank ("First DeWitt"). At September 30,
1996, First State had total consolidated assets, deposits and
shareholders' equity of approximately $610 million, $554 million
and $35 million, respectively. The primary operating entity of
First State is First DeWitt, a federally-chartered savings bank
having 14 branches located in Essex, Ocean, Morris, Monmouth and
Sussex Counties, New Jersey. First DeWitt is principally engaged
in the business of attracting deposits, primarily from the
general public, through a variety of deposit products and
investing those deposits, together with funds from ongoing
operations, in the origination and purchase of one-to-four family
residential mortgage loans and securities backed by these
mortgage loans and, to a lesser extent, consumer and other
mortgage loans. First DeWitt considers its primary market area
to be Essex, Ocean and Monmouth Counties, New Jersey.
The principal executive offices of First State are
located at 1120 Bloomfield Avenue, West Caldwell, New Jersey
07007-2449, and its telephone number is (201) 575-5800. For
additional information concerning First State and its
subsidiaries, see "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION WITH RESPECT TO
FIRST STATE."
The Meeting
General
A Special Meeting of the shareholders of First State
will be held at Mayfair Farms, 481 Eagle Rock Avenue, West
Orange, New Jersey, on _______________, February __, 1997 at
10:00 a.m., local time (the "Special Meeting").
Record Date
The record date for the Special Meeting is December __,
1996 (the "Record Date"). Only stockholders of record at the
close of business on the Record Date will be entitled to receive
notice of, and to vote at, the Special Meeting.
Matters to be Considered at the Meeting
At the Special Meeting, holders of First State's common
stock, par value $0.01 per share (the "First State Common
Stock"), will consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger, dated June 24, 1996, as
amended by an Amendment to Agreement and Plan of Merger dated as
of November 26, 1996 (collectively, the "Merger Agreement"),
between Sovereign and First State, which is attached as Annex A
to this Proxy Statement/Prospectus, providing for the merger of
First State with and into Sovereign (the "Merger"). In addition
to the Merger Agreement, stockholders of First State are being
asked to approve a proposal to adjourn the Special Meeting, if
necessary, to permit further solicitation of proxies in the event
there are not sufficient votes at the Special Meeting to approve
the Merger Agreement. Stockholders will also consider and vote
upon any other matter that may properly come before the Special
Meeting. See "THE MEETING -- Matters to be Considered at the
Meeting."
Vote Required
The Merger will require the approval of the Merger
Agreement by the affirmative vote of a majority of the
outstanding shares of First State Common Stock entitled to be
voted thereon. The directors and executive officers of First
State have agreed to vote all shares of First State Common Stock
that they own on the Record Date in favor of the approval and
adoption of the Merger Agreement. At September 30, 1996,
directors and executive officers of First State owned
approximately 460,206 shares of First State Common Stock or
approximately 11.7% of the then outstanding shares of First State
Common Stock that are entitled to be voted at the Special
Meeting. See "THE MEETING -- Votes Required."
The Merger
Terms of the Merger
At the effective date of the Merger (the "Effective
Date"), each outstanding share of First State Common Stock will
be automatically converted into, and become a right to receive,
such number of shares of Sovereign Common Stock, and related
stock purchase rights, as shall equal $14.75 divided by the
average of the mean between the high bid and low asked prices of
a share of Sovereign Common Stock (as reported on the Nasdaq
National Market) for the ten consecutive trading days immediately
preceding the Effective Date (the "Sovereign Market Value").
This exchange ratio is subject to possible adjustment in the
event that the Sovereign Market Value as of the Effective Date is
less than $8.00 per share or greater than $12.04 per share (such
exchange ratio, as adjusted, is hereinafter referred to as the
"Exchange Ratio").
If on the Effective Date, the Sovereign Market Value is
less than $8.00 per share, each outstanding share of First State
Common Stock will be converted into and become a right to receive
1.840 shares of Sovereign Common Stock and related stock purchase
rights.
If on the Effective Date, the Sovereign Market Value is
greater than $12.04 per share, each outstanding share of First
State Common Stock will be converted into and become a right to
receive 1.225 shares of Sovereign Common Stock and related stock
purchase rights.
Sovereign will in all events pay cash to First State
stockholders in lieu of issuing fractional shares of Sovereign
Common Stock.
First State may terminate the Merger Agreement if,
among other things, the Sovereign Market Value on the Effective
Date is less than $8.00 per share, subject to the right of
Sovereign to increase the Exchange Ratio to an amount which when
multiplied by the Sovereign Market Value as of the Closing Date
equals $14.75. Sovereign or First State may terminate the Merger
Agreement if the Merger has not been completed prior to March 31,
1997.
In connection with the Merger, all outstanding options
to purchase shares of First State Common Stock under First
State's preexisting employee and director stock option plans will
be converted on the Effective Date into an option to acquire that
number of shares of Sovereign Common Stock equal to the number of
shares of First State Common Stock covered by the option
multiplied by the applicable Exchange Ratio, and the exercise
price for a whole share of Sovereign Common Stock shall be the
stated exercise price for such option divided by the applicable
Exchange Ratio, such shares to be issuable upon exercise in
accordance with the terms of the respective plans and grant
agreements under which they were issued. See "THE MERGER --
Terms of the Merger" and "-- Accounting Treatment."
The Effective Date will be designated by Sovereign and
will occur within the 30-day period following the first day on
which all conditions precedent are fulfilled or waived. See "THE
MERGER -- Effective Date."
The Merger Agreement permits First State to pay its
regular quarterly cash dividend in an amount not to exceed
$.055 per share in each quarter in which the Effective Date is
not on or before the record date for the payment by Sovereign of
its regular cash dividend. See "THE MERGER -- Dividends."
Merger Agreement Amendment
The Merger Agreement as originally executed by the
parties provided that First State stockholders would receive in
the Merger such number of shares of Sovereign Common Stock as
equalled $14.75 divided by the Sovereign Market Value (which is
determined by reference to the average price of Sovereign Common
Stock for the ten trading days preceding the Effective Date) if
the Sovereign Market Value was between $9.00 and $11.45 per
share; provided that, if the Sovereign Market Value was greater
than $11.45 per share, First State stockholders would receive
1.29 shares of Sovereign Common Stock in the Merger and, if the
Sovereign Market Value was less than $9.00 per share, First State
stockholders would receive 1.64 shares of Sovereign Common Stock
in the Merger. The Merger Agreement as originally executed by
the parties also included certain termination provisions that
allowed Sovereign to terminate the Merger Agreement at any time
prior to the Effective Date if certain asset quality measures
were triggered, including if the aggregate deficiencies in the
current appraised values of commercial real estate assets
securing commercial real estate loans necessary to maintain an
80% loan to value ratio for each loan exceeded $1,000,000 (the
"Commercial Real Estate Termination Right"). In late November
1996, Sovereign and First State amended the Merger Agreement as a
result of Sovereign's notification to First State that the
Commercial Loan Termination Right had been triggered.
Under the Amendment to Agreement and Plan of Merger,
dated November 26, 1996 (the "Merger Agreement Amendment"), the
parties agreed to revise the exchange ratio in exchange for
Sovereign's agreement to eliminate the termination rights
included in the Merger Agreement relating to the asset quality of
First State. Under the Merger Agreement Amendment, if the
Sovereign Market Value is between $8.00 and $12.04, First State
stockholders will receive such number of shares of Sovereign
Common Stock as will equal $14.75 divided by the Sovereign Market
Value. If the Sovereign Market Value is greater than $12.04,
First State stockholders will receive 1.225 shares of Sovereign
Common Stock in the Merger and, if the Sovereign Market Value is
less than $8.00, First State stockholders will receive 1.84
shares of Sovereign Common Stock in the Merger. In the Merger
Agreement Amendment, First State retained the right to terminate
the transaction if the Sovereign Market Value as of the Effective
Date is less than $8.00 per share unless Sovereign agrees to
increase the exchange ratio to an amount which, when multiplied
by the Sovereign Market Value as of the Effective Date, equals
$14.75. References in this Proxy Statement/Prospectus to the
"Merger Agreement" are references to such Merger Agreement as
amended by the Merger Agreement Amendment. See "THE MERGER --
Background of and Reasons for the Merger; Recommendation of the
First State Board of Directors" and "--Terms of the Merger."
No Dissenters' Rights of Appraisal
Record holders of First State Common Stock will not be
entitled to appraisal rights enabling such holders to obtain a
cash payment for the "fair value" of their shares in connection
with the matters to be acted on at the Special Meeting. See "THE
MERGER -- No Dissenters' Rights of Appraisal."
Accounting Treatment and Certain Federal Income Tax
Consequences
The Merger is intended to qualify as a pooling of
interests for financial accounting purposes and is expected to
constitute a tax-free reorganization for federal income tax
purposes. See "THE MERGER -- Certain Federal Income Tax
Consequences" and "-- Accounting Treatment."
Recommendations of First State's Board of Directors and
Reasons for the Merger
The Board of Directors of First State unanimously
recommends that its shareholders approve and adopt the Merger
Agreement. See "THE MERGER -- Background of and Reasons for the
Merger; Recommendation of the First State Board of Directors."
Opinion of Financial Advisor
McConnell, Budd & Downes ("MB&D") has delivered its
written opinion to the Board of Directors of First State that, as
of the date of this Proxy Statement/Prospectus, the Exchange
Ratio is fair, from a financial point of view, to the
stockholders of First State. For information on the assumptions
made, matters considered, and limitations on the review
undertaken by MB&D, see "THE MERGER -- Opinion of Financial
Advisor." Stockholders are urged to read in its entirety the
opinion of MB&D, attached as Annex C to this Proxy
Statement/Prospectus.
Conditions to the Merger; Regulatory Approvals
The obligations of Sovereign and First State to
complete the Merger are subject to various conditions usual and
customary in transactions similar to the Merger, including
obtaining requisite regulatory approvals and stockholder approval
of First State's stockholders. Application has been made to
obtain required regulatory approvals. No assurance can be given
that all required approvals will be received or as to the timing
or conditions of such approvals. See "THE MERGER --Regulatory
Approvals." The obligation of Sovereign to complete the Merger
is also subject to certain other conditions, including, among
other things, receipt of an opinion from Sovereign's independent
auditors to the effect that the Merger will be treated as a
"pooling of interests" for financial accounting purposes. No
assurances can be given that all such conditions will be met.
See "THE MERGER -- Conditions to the Merger."
Termination; Effect of Termination
The Merger Agreement may be terminated at any time
prior to the Effective Date by mutual consent of Sovereign and
First State or by either party if (i) the other party breaches
any representation, warranty, covenant or other obligation
contained in the Merger Agreement which results in a Material
Adverse Effect, and such breach has not or cannot be cured within
thirty days from the date written notice of such breach was given
to such party committing the breach, (ii) the Merger is not
completed by March 31, 1997, or (iii) either party is notified
that a necessary regulatory approval is unlikely to be granted.
In addition, First State may terminate the Merger Agreement if,
on the Effective Date, the Sovereign Market Value is less than
$8.00, subject to the right of Sovereign to increase the Exchange
Ratio to an amount which when multiplied by the Sovereign Market
Value as of the Closing Date equals $14.75. See "THE MERGER --
Termination; Effect of Termination."
Differences in Shareholder Rights
Sovereign is a Pennsylvania corporation subject to the
provisions of the Pennsylvania Business Corporation Law of 1988,
as amended (the "Pennsylvania BCL"). First State is a Delaware
corporation subject to the provisions of the Delaware GCL. Upon
completion of the Merger, stockholders of First State will become
shareholders of Sovereign and their rights as such will be
governed by Sovereign's Articles of Incorporation and Bylaws and
by the Pennsylvania BCL. The rights of shareholders of Sovereign
are different in certain respects from the rights of stockholders
of First State. See "COMPARISON OF SHAREHOLDER RIGHTS."
Management and Operations after the Merger
The Board of Directors and executive officers of
Sovereign in office immediately prior to completion of the Merger
will remain as Sovereign's Board of Directors and executive
officers upon completion of the Merger. The Board of Directors
and executive officers of Sovereign Bank in office immediately
prior to completion of the merger of First DeWitt with and into
Sovereign Bank (the "Bank Merger") will remain as Sovereign
Bank's Board of Directors and executive officers, except that
upon completion of the Bank Merger Michael J. Quigley, III,
Chairman of the Board of Directors, President and Chief Executive
Officer of First DeWitt, will become a director of Sovereign Bank
until the 1998 annual reorganization meeting of the Board of
Directors of Sovereign Bank. See "THE MERGER -- Subsidiary Bank
Merger," "-- Management and Operations after the Merger" and "--
Employee Benefits and Severance."
Exchange of Certificates
After the Effective Date, Sovereign will send to First
State stockholders transmittal materials for use in effecting the
exchange of their certificates representing shares of First State
Common Stock for certificates representing shares of Sovereign
Common Stock. See "THE MERGER -- Exchange of First State Stock
Certificates."
Certain Related Transactions
Stock Option Agreement
As a condition to entering into the Merger Agreement,
First State granted Sovereign an option under certain
circumstances to purchase up to 783,500 shares of the issued and
outstanding First State Common Stock pursuant to a Stock Option
Agreement, dated as of June 24, 1996 (the "Stock Option
Agreement"). The option may be exercised by Sovereign only upon
the occurrence of specified events that have the potential for a
third party to effect an acquisition of control of First State
prior to the termination of the Merger Agreement. The exercise
price per share to purchase First State Common Stock under the
option is equal to the lower of $10.00 or the lowest price per
share that a person or group, other than Sovereign or an
affiliate of Sovereign, paid or offers to pay for First State
Common Stock upon the occurrence of one of the specified events
that triggers the ability of Sovereign to exercise the option.
None of such triggering events has occurred as of the date
hereof. Acquisitions of shares of First State Common Stock
pursuant to an exercise of the option would be subject to prior
regulatory approval under certain circumstances. See "CERTAIN
RELATED TRANSACTIONS -- Stock Option Agreement."
Other
First State has agreed in the Merger Agreement that
during the term of the Merger Agreement, it will not solicit or
engage in any discussions with any person other than Sovereign
concerning any acquisition of First State or any of its
subsidiaries, except that First State may respond to unsolicited
inquiries from analysts, regulatory authorities, and stockholders
in the ordinary course of business. See "THE MERGER -- No
Solicitation of Transactions." In addition, the directors and
executive officers of First State have agreed to vote their
shares of First State Common Stock in favor of the Merger
Agreement. See "THE MERGER -- Matters to be Considered at the
Meeting."
The Stock Option Agreement and the agreements of First
State's directors and executive officers to vote in favor of the
Merger may have the effect of precluding or discouraging persons
who might now or prior to the Effective Date be interested in
acquiring all of or a significant interest in First State from
considering or proposing such an acquisition, even if such
persons were to pay a higher price per share for First State
Common Stock than the price per share being paid by Sovereign
under the Merger Agreement, or might result in a potential
acquiror proposing to pay a lower price per share to acquire
First State than it might otherwise have proposed to pay. See
"CERTAIN RELATED TRANSACTIONS -- Stock Option Agreement."
Recent Developments
On September 30, 1996, federal legislation was adopted
to recapitalize the Savings Association Insurance Fund (the
"SAIF") of the Federal Deposit Insurance Corporation. The
legislation, which, among other things, will result in an
immediate reduction in SAIF insurance premiums and the eventual
elimination of the disparity for deposit insurance premiums under
the SAIF and the Bank Insurance Fund (the "BIF") of the Federal
Deposit Insurance Corporation, required a one-time assessment for
the third quarter of 1996 of all institutions with SAIF-insured
deposits. Sovereign's one-time after-tax charge was $17.2
million for the quarter ended September 30, 1996. First State's
one-time after-tax charge was $2.0 million for the quarter ended
September 30, 1996. Certain information of Sovereign and First
State for the period ended September 30, 1996 is presented in
this Proxy Statement/Prospectus both including and excluding the
effects of this one-time assessment. See "Comparative Per Common
Share Data" and "SOVEREIGN SELECTED FINANCIAL DATA."
Interests of Certain Persons in the Merger
Certain directors and executive officers of First State
are the holders of stock options to acquire First State Common
Stock which will be converted into options to acquire Sovereign
Common Stock. Certain executive officers of First State may be
entitled to receive severance payments as a result of the Merger
under agreements with First State to which they are parties.
Also, Sovereign has agreed to indemnify, for a period of six
years after the Effective Date, persons who served as directors
and officers of First State. See "THE MERGER -- Management and
Operations After the Merger" and "INTERESTS OF CERTAIN PERSONS IN
THE MERGER."
Comparative Per Common Share Data
The following table sets forth certain unaudited
comparative per share data relating to book value per common
share, cash dividends declared per common share and income from
continuing operations per common share (i) on an historical basis
for Sovereign and First State, (ii) on a pro forma basis per
share of Sovereign Common Stock to reflect completion of the
Merger, and (iii) on an equivalent pro forma basis per share of
First State Common Stock to reflect completion of the Merger.
The information at and for the nine months ended September 30,
1996 is presented both including and excluding the SAIF special
assessment applicable to deposits incurred by the Savings
Association Insurance Fund of the Federal Deposit Insurance
Corporation. See "RECENT DEVELOPMENTS." The pro forma
information has been prepared giving effect to the Merger using
the pooling of interests accounting method. For a description of
the effect of pooling of interests accounting, see "THE MERGER --
Accounting Treatment." The pro forma information for the
nine-month period ended September 30, 1996 and for the years
ended December 31, 1995, 1994 and 1993 utilizes First State
historical financial information for the nine-month period ended
June 30, 1996 (unaudited), and the years ended September 30,
1995, 1994 and 1993, respectively. The following equivalent per
share data assume an Exchange Ratio of 1.225 shares of Sovereign
Common Stock for each share of First State Common Stock (based on
a closing sale price of $_________________ per share for
Sovereign Common Stock as of the date of this Proxy Statement/
Prospectus); the Exchange Ratio is subject to adjustment based on
the Sovereign Market Value as of the Effective Date. See "THE
MERGER -- Terms of the Merger." This information should be read
in conjunction with the consolidated financial statements of
Sovereign and First State, including the notes thereto,
incorporated by reference in this Proxy Statement/Prospectus, and
the other financial data appearing elsewhere in this Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "AVAILABLE INFORMATION."
The following information is not necessarily indicative
of the results of operations of future periods or future combined
financial position.
<TABLE>
<CAPTION>
At Sept. 30, 1996(1) At December 31, 1995(1)
Excluding SAIF Including SAIF
Assessment Assessment
Book Value Per Common Share:
<S> <C> <C> <C>
Historical:
Sovereign . . . . . . . . . . . . . . . $8.05 $7.76 $7.40
First State . . . . . . . . . . . . . . 10.14 10.14 10.71
Pro Forma:
Pro forma per share of Sovereign Common
Stock . . . . . . . . . . . . . . . . 8.07 7.80 7.49
Equivalent pro forma per share of First State
Common Stock . . . . . . . . . . . . 9.88 9.55 9.18
<CAPTION>
For the nine months ended For the year ended December 31,
Sept. 30, 1996(1) 1995(1) 1994(1) 1993(1)
Excluding SAIF Including SAIF
Assessment Assessment
Cash Dividends Paid Per Common Share:
<S> <C> <C> <C> <C> <C>
Historical:
Sovereign . . . . . . . . . . . . . . . 0.063 0.063 0.084 0.106 0.099
First State . . . . . . . . . . . . . . 0.17 0.17 0.20 0.12 --
Pro Forma(2):
Pro forma per share of Sovereign
Common Stock. . . . . . . . . . . . . 0.063 0.063 0.084 0.106 0.099
Equivalent pro forma per share
of First State Common Stock . . . . . 0.077 0.077 0.103 0.130 0.121
Income from Continuing Operations Per Common Share:
Historical:
Sovereign. . . . . . . . . . . . . . . . $0.84 $0.55 $1.00 $0.90 $0.70
First State. . . . . . . . . . . . . . . (0.25) (0.25) 1.01 0.91 0.65
Pro Forma(3):
Pro forma per share of Sovereign
Common Stock . . . . . . . . . . . . . 0.76 0.49 0.98 0.89 0.69
Equivalent pro forma per share of First State
Common Stock . . . . . . . . . . . . . 0.93 0.60 1.21 1.08 .84
</TABLE>
__________________
(1) Data reflect First State historical financial data at and
for the nine months ended June 30, 1996, and at and for the
years ended September 30, 1995, 1994 and 1993. First State
historical financial data for the nine months ended June 30,
1996 do not include the one-time after-tax charge of
$2.0 million relating to the SAIF recapitalization. See
"Recent Developments."
(2) Sovereign pro forma dividends per share represent historical
dividends paid by Sovereign. First State pro forma
equivalent dividends per share represent such amounts
multiplied by an Exchange Ratio of 1.225 shares of Sovereign
Common Stock for each share of First State Common Stock.
The Exchange Ratio is subject to adjustment based on the
Sovereign Market Value as of the Effective Date. See "THE
MERGER -- Terms of the Merger."
(3) Sovereign pro forma income from continuing operations per
common share represents historical net income from
continuing operations for Sovereign and First State combined
on the assumption that Sovereign and First State had been
combined for the periods presented on a pooling of interests
basis, divided by the number of shares of Sovereign Common
Stock which will be issued and outstanding following
completion of the Merger. First State equivalent pro forma
income from continuing operations per common share
represents such amounts multiplied by an Exchange Ratio of
1.225 shares of Sovereign Common Stock for each share of
First State Common Stock. The Exchange Ratio is subject to
adjustment based on the Sovereign Market Value as of the
Effective Date. See "THE MERGER -- Terms of the Merger."
<PAGE>
Market Value of Securities
The following table sets forth the market value per
share of Sovereign Common Stock, the market value per share of
First State Common Stock and the equivalent market value per
share of First State Common Stock on each of June 24, 1996, the
last business day preceding public announcement of the Merger,
and November 25, 1996, the last business day preceding public
announcement of the Merger Agreement Amendment. The equivalent
market value per share of First State Common Stock indicated in
the table is based upon an Exchange Ratio of 1.45 shares of
Sovereign Common Stock for each outstanding share of First State
Common Stock based on a market value of a share of Sovereign
Common Stock on June 24, 1996 of $10-3/16. The equivalent market
value per share of First State Common Stock indicated in the
table as of November 25, 1996 is based upon an Exchange Ratio of
1.225 shares of Sovereign Common Stock for each share of First
State Common Stock based on a market value of a share of
Sovereign Common Stock on November 25, 1996 of $13.625. The
Exchange Ratio is subject to adjustment based on the Sovereign
Market Value as of the Effective Date. See "THE MERGER -- Terms
of the Merger."
The historical market values per share of Sovereign
Common Stock and First State Common Stock and the historical
market value of Sovereign Common Stock used to determine the
equivalent market value per share of First State Common Stock are
the per share last sale prices on June 24, 1996, as reported on
the Nasdaq National Market System with respect to both Sovereign
Common Stock and First State Common Stock.
First State
Equivalent
Sovereign Market Value
Historical Historical Per Share
June 24, 1996 $10.1875 $10.000 $14.750
November 25, 1996 $13.7250 $14.750 $16.690
Market Price and Dividend Information
At January __, 1997, the last reported sale price of
Sovereign Common Stock, as reported on the Nasdaq/NMS, was $_____
per share. For information concerning cash dividends paid by
Sovereign, see "INFORMATION WITH RESPECT TO SOVEREIGN -- Market
Price of and Dividends on Sovereign Common Stock and Related
Shareholder Matters."
END OF SUMMARY
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to
stockholders of First State in connection with the solicitation
of proxies by First State's Board of Directors for use at the
Special Meeting of Stockholders of First State (the "Special
Meeting") to be held at Mayfair Farms, 481 Eagle Rock Avenue,
West Orange, New Jersey, on February __, 1997, at 10:00 a.m.,
local time, and at any adjournments thereof.
At the Special Meeting, the stockholders of First State
will be asked to approve the Merger Agreement, dated June 24,
1996, as amended by an Amendment to Agreement and Plan of Merger
dated as of November 26, 1996 (collectively, the "Merger
Agreement"), between First State and Sovereign, which is attached
as Annex A and incorporated by reference and more fully described
herein. Stockholders of First State will also be asked to
approve a proposal to adjourn the Special Meeting, if necessary,
to permit further solicitation of proxies in the event there are
not sufficient votes at the time of the Special Meeting to
constitute a quorum or to approve the Merger Agreement. The
description of the Merger Agreement set forth herein is qualified
in its entirety by reference to the Merger Agreement, which is
attached hereto as Annex A.
This Proxy Statement/Prospectus does not cover resales
of Sovereign Common Stock received in the Merger by any person
who may be deemed to be an "affiliate" of First State as such
term is used in Rule 145 under the Securities Act of 1933, as
amended (the "Securities Act"). Under Rule 145, affiliates of
First State will be subject to certain restrictions on their
ability to transfer Sovereign Common Stock received by them in
the Merger. See "THE MERGER -- Resale of Sovereign Common
Stock."
The approximate date on which this Proxy
Statement/Prospectus is first being sent to stockholders of First
State is on or about January __, 1997.
<PAGE>
SOVEREIGN SELECTED FINANCIAL DATA
The following table sets forth certain historical
consolidated summary financial data for Sovereign. This data is
derived from, and should be read in conjunction with, among other
things, the consolidated financial statements of Sovereign,
including the notes thereto, incorporated by reference in this
Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION." Interim
unaudited data for the nine months ended September 30, 1996 and
1995 reflects, in the opinion of management of Sovereign, all
adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of such data. Results for the
nine months ended September 30, 1996, are not necessarily
indicative of results which may be expected for any other interim
period or for the year as a whole.
<PAGE>
SOVEREIGN SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
Balance Sheet
Data
At or for the Nine Months
Ended September 30,
Excluding Including
SAIF SAIF
Assessment Assessment At December 31,
1996 1996 1995 1995 1994 1993 1992(2) 1991
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets. . . . . . . . . . . . $9,381,883 $9,364,636 $7,854,057 $8,078,287 $6,564,082 $4,877,166 $3,699,084 $2,274,702
Loans . . . . . . . . . . . . . . . 5,990,552 5,990,552 4,621,351 4,674,364 4,350,898 2,898,014 2,337,382 1,437,247
Allowance for possible loan losses. (34,018) (34,018) (34,018) (34,856) (36,289) (33,099) (26,562) (13,198)
Investment and mortgage-backed
securities available-for-sale . . 526,700 526,700 118,218 889,509 87,128 -- -- --
Investment and mortgage-backed
securities held-to-maturity . . . 2,478,239 2,478,239 2,726,861 2,077,212 1,816,840 1,689,304 1,001,356 644,061
Deposits. . . . . . . . . . . . . . 5,007,118 5,007,118 4,987,862 5,039,143 4,027,119 3,183,107 2,691,058 1,815,679
Borrowings. . . . . . . . . . . . . 3,814,828 3,814,828 2,383,400 2,530,656 2,162,587 1,367,100 427,591 285,059
Stockholders' equity. . . . . . . . 477,328 460,081 415,006 427,025 303,900 259,121 220,419 137,259
<CAPTION>
Summary Statement
of Operations
At or for the Nine Months
Ended September 30,
Excluding Including
SAIF SAIF
Assessment Assessment Year Ended December 31,
1996 1996 1995 1995 1994 1993 1992(2) 1991
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income . . . . . . . $ 451,794 $ 451,794 $ 356,456 $ 493,031 $ 354,141 $ 282,790 $ 199,431 $ 182,015
Total interest expense. . . . . . . 290,785 290,785 228,668 318,805 198,741 153,318 118,585 125,326
Net interest income . . . . . . . . 161,009 161,009 127,788 174,226 155,400 129,472 80,846 56,689
Provision for possible loan
losses. . . . . . . . . . . . . . 1,516 1,516 750 1,000 4,100 8,650 10,080 6,796
Net interest income after
provision for possible
loan losses . . . . . . . . . . . 159,493 159,493 127,038 173,226 151,300 120,822 70,766 49,893
Other income. . . . . . . . . . . . 17,032 17,032 19,055 25,829 14,554 15,167 10,965 5,083
Other expenses. . . . . . . . . . . 96,292 124,110 84,168 113,108 90,989 77,377 47,036 33,460
Income before income taxes and
cumulative effect of change in
accounting principle. . . . . . . 80,223 52,415 61,925 85,947 74,865 58,612 34,695 21,516
Income tax provision. . . . . . . . 30,489 19,911 21,214 29,539 28,467 22,998 15,057 9,534
Income before cumulative effect
of change in accounting
principle . . . . . . . . . . . . 49,744 32,504 40,711 56,408 46,398 35,614 19,638 11,982
Cumulative effect of change
in accounting principle . . . . . 0 0 0 -- -- 4,800 -- --
Net income. . . . . . . . . . . . . $ 45,057 $ 32,504 $ 40,711 $ 56,408 $ 46,398 $ 40,414 $ 19,638 $ 11,982
Net income applicable to common
stock . . . . . . . . . . . . . . $ 49,716 $ 27,817 $ 37,585 $ 51,719 $ 46,398 $ 40,414 $ 19,638 $ 11,982
Share Data (3)
Common shares outstanding at end
of period (in thousands). . . . . 48,334 49,334 48,365 45,465 45,567 41,357 40,682 23,898
Preferred shares outstanding at
end of period (in thousands). . . 2,000 2,000 2,000 2,000 -- -- -- --
Earnings per common and common
equivalent share:
Before cumulative effect
of change in accounting
principle . . . . . . . . . . . . $0.84 $0.55 $0.73 $1.00 $.90 $.70 $.51 $.37
After cumulative effect
of change in accounting
principle . . . . . . . . . . . . 0.84 0.55 0.73 1.00 .90 .80 .51 .37
Book value per common and common
equivalent share at end of
period(4) . . . . . . . . . . . . 8.05 7.76 7.14 7.40 6.05 5.24 4.53 3.73
Common share price at end of
period. . . . . . . . . . . . . . 11 11 10-16/93 9-5/8 7 10-11/16 6-1/16 3-3/16
Dividends paid per common share . . 0.063 0.063 0.063 0.84 .106 .099 .082 .058
Dividend payout ratio . . . . . . . 7.50% 11.45% 8.63% 8.40% 11.78% 14.14% 16.08% 15.68%
________________
</TABLE>
(1) The acquisitions of Valley Federal Savings and Charter
Bancorp, Inc. were accounted for as pooling-of-interests and
accordingly, the consolidated financial statements have been
restated to include the accounts of Valley Federal and
Charter for all periods presented.
(2) The acquisition of Harmonia Bancorp, Inc. was accounted for
as a purchase at the close of business on December 31, 1992.
Sovereign's consolidated balance sheet at December 31, 1992
includes Harmonia. Sovereign's 1992 consolidated results of
operations do not include Harmonia's results.
(3) All per share data have been adjusted to reflect all stock
dividends and stock splits.
(4) Book Value is calculated using equity divided by common
shares and assuming conversion of all outstanding preferred
shares.
<PAGE>
FIRST STATE SELECTED FINANCIAL DATA
The following table sets forth certain selected
historical consolidated financial data for First State. These
data are derived in part from, and should be read in conjunction
with, among other things, the consolidated financial statements
of First State, including the related notes thereto, incorporated
by reference in this Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION."
<PAGE>
<TABLE>
<CAPTION>
FIRST STATE SELECTED FINANCIAL DATA
At or for the Year Ended September 30
1996 1995 1994 1993 1992
(Dollars in thousands, except per share data)
Balance Sheet Data
<S> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . . . . $610,417 $637,020 $553,483 $476,370 $470,520
Loans(1) . . . . . . . . . . . . . . . . 490,037 528,867 446,414 376,620 357,148
Investment securities and mortgage-
backed securities. . . . . . . . . . . 68,537 55,364 59,164 54,168 64,028
Deposits . . . . . . . . . . . . . . . . 554,320 567,710 479,364 432,012 428,402
Borrowings . . . . . . . . . . . . . . . 5,928 23,105 31,738 5,680 5,846
Stockholders' equity . . . . . . . . . . 35,236 41,592 37,973 34,179 31,490
Operating Data
Interest income. . . . . . . . . . . . . 49,239 44,349 34,935 34,624 36,479
Interest expense . . . . . . . . . . . . 24,054 21,765 13,448 15,401 20,474
Net interest income before provision
for loan losses. . . . . . . . . . . . 25,185 22,584 21,487 19,223 16,005
Provision for loan losses. . . . . . . . 8,900 1,650 1,892 2,440 2,667
Net interest income after provision for
loan losses. . . . . . . . . . . . . . 16,285 20,934 19,595 16,783 13,328
Other income . . . . . . . . . . . . . . 17,480 6,368 4,150 4,205 3,881
Operating expenses . . . . . . . . . . . 41,022 22,172 18,881 18,448 16,997
Income (loss) before income tax expense
(benefit). . . . . . . . . . . . . . . (7,257) 5,130 4,864 2,540 212
Income tax expense (benefit) . . . . . . (1,608) 1,132 1,363 15 (504)
Extraordinary item . . . . . . . . . . . -- -- -- -- --
Net income (loss). . . . . . . . . . . . $(5,649) $ 3,998 $ 3,501 $ 2,525 $ 716
======== ======== ======= ======= =======
Net income (loss) per share. . . . . . . $ (1.40) $ 1.01 $ 0.91 $ 0.65 $ 0.19
Selected Other Data
Return on average assets . . . . . . . . (0.90)% 0.67% 0.70% 0.53% 0.15%
Return on average equity . . . . . . . . (13.51) 10.27 9.62 7.56 2.28
Average equity to average assets . . . . 6.69 6.56 7.27 6.99 6.7
Interest rate spread(2). . . . . . . . . 4.41 4.25 4.72 4.5 3.94
Net yield on average interest-earning
assets(3). . . . . . . . . . . . . . . 4.38 4.18 4.73 4.46 3.82
Average interest-earning assets to
average interest-bearing liabilities . 0.99x 0.98x 1.01x 0.99x 0.98x
Book value per share of common stock
outstanding. . . . . . . . . . . . . . $ 8.97 $ 10.71 $ 9.89 $ 8.86 $ 8.17
Dividends Paid per share of common stock
outstanding. . . . . . . . . . . . . . $ 0.22 $ 0.21 $ 0.12 $ -- $ --
Dividend payout ratio. . . . . . . . . . NM 20.79% 13.19% 0.00% 0.00%
Number of full service offices . . . . . 14 12 12 12 11
____________________
<FN>
(1) Includes construction and land development loans of $17.6 million, $23.0
million, $19.7 million, $11.3 million, and $19.1 million, at September 30,
1996, 1995, 1994, 1993, and 1992, respectively. Also includes mortgage loans
held for resale of $9.1 million, $67.2 million, $3.1 million, $10.9 million,
and $10.2 million at September 30, 1996, 1995, 1994, 1993, and 1992,
respectively.
(2) Represents the average yield earned on interest-earning assets less the
average cost of interest-bearing liabilities.
(3) Represents net interest income as a percentage of average interest-earning
assets.
</TABLE>
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected unaudited pro
forma financial data reflecting the merger.
The pro forma information has been prepared assuming
that First State's stockholders will receive in the Merger
1.225 shares of Sovereign Common Stock for each share of First
State Common Stock they own (based on a closing sale price of
$____________ per share of Sovereign Common Stock as of the date
of this Proxy Statement/Prospectus). This exchange ratio is
subject to adjustment based on the Sovereign Market Value as of
the Effective Date. See "THE MERGER -- Terms of the Merger."
The pro forma financial information included in this Proxy
Statement/Prospectus is presented for illustrative purposes only.
Such pro forma financial information does not necessarily reflect
what the actual results of Sovereign would be following
completion of the Merger.
The following pro forma information does not give
effect to any potential cost savings or any merger-related
expenses which may be realized or incurred as a result of the
Merger. See "THE MERGER -- Management and Operations After the
Merger."
Pro Forma Unaudited Combined Condensed Balance Sheet as of
September 30, 1996
The following unaudited pro forma combined condensed
balance sheet information reflects (i) the historical
consolidated balance sheets of Sovereign and First State as of
September 30, 1996 and (ii) the pro forma combined condensed
balance sheet of Sovereign as of such date, after giving effect
to the Merger. The Merger has been reflected as a pooling-of-
interests effective as of September 30, 1996. The pro forma
combined condensed balance sheet as of September 30, 1996
utilizes First State historical information as of June 30, 1996.
The unaudited information should be read in conjunction with the
historical consolidated financial statements of Sovereign and
First State, including the notes thereto, incorporated by
reference in this Proxy Statement/Prospectus. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996(1)
(In thousands)
Sovereign
and
First First State
Sovereign State Combined
Cash and amounts due from
depository institutions ... $ 122,973 $ 13,874 $ 136,847
Investment and mortgage-
backed securities ......... 3,004,939 75,244 3,080,183
Loans ....................... 5,990,552 545,976 6,536,528
Allowance for possible loan
losses .................... (34,018) (9,125) (43,143)
Goodwill and other intangible
assets .................... 114,524 2,199 116,723
Other assets ................ 165,666 37,769 203,435
TOTAL ASSETS .............. $9,364,636 $665,937 $10,030,573
Deposits .................... 5,007,118 589,509 5,596,627
Borrowings .................. 3,814,828 32,629 3,847,457
Other Liabilities ........... 82,609 3,844 86,453
TOTAL LIABILITIES ......... 8,904,555 625,982 9,530,537
Other Equity ................ 68,157 20,863 89,020
Common Stock ................ 276,498 39 276,537
Retained Earnings ........... 115,426 19,053 134,479
TOTAL STOCKHOLDERS' EQUITY .. 460,081 39,955 500,036
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...... $9,364,636 $665,937 $10,030,573
____________________________
(1) Reflects First State historical financial information as of
June 30, 1996. For historical financial information for
First State's fiscal year ended September 30, 1996,
reference should be made to First State's 1996 Annual Report
to Stockholders, which accompanies this Proxy Statement/
Prospectus.
<PAGE>
Pro Forma Unaudited Combined Condensed Statements of Income for
the Nine Months Ended September 30, 1996 and 1995 and the Years
Ended December 31, 1995, 1994 and 1993
The following unaudited pro forma combined condensed
statements of income reflect the historical consolidated
statements of income of Sovereign and First State, as indicated
below, for each period presented and the pro forma combined
condensed statements of income of Sovereign, after giving effect
to the Merger. The Merger has been reflected as a pooling-of-
interests. See "THE MERGER -- Accounting Treatment." The pro
forma combined condensed statements of income for the nine-month
periods ended September 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993 were prepared on the assumption
that the Merger had been effected as of the beginning of the
applicable nine-month or annual period for Sovereign or First
State, as the case may be. The pro forma combined condensed
statements of income for the years ended December 31, 1995, 1994
and 1993 and for the nine-month periods ended September 30, 1996
and 1995 utilize First State historical financial information for
the years ended September 30, 1995, 1994 and 1993 and the nine-
month periods ended June 30, 1996 and 1995, respectively. The
unaudited information should be read in conjunction with the
historical consolidated financial statements of Sovereign and
First State, including the notes thereto, incorporated by
reference in this Proxy Statement/Prospectus. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996(1)
(In thousands, except per share data)
Sovereign
and
First First State
Sovereign State Combined
Interest income ............ $451,794 $36,494 $488,288
Interest expense ........... 290,785 17,780 308,565
Net interest income ........ 161,009 18,714 179,723
Provision for possible
loan losses .............. 1,516 5,600 7,116
Net interest income after
provision for possible
loan losses .............. 159,493 13,114 172,607
Other non-interest income... 17,032 12,466 29,498
Non-interest expense ....... 124,110 26,381 150,491
Income (loss) before taxes . 52,415 (801) 51,614
Income taxes ............... 19,911 195 20,106
Net income (loss) .......... $ 32,504 $ (996) $ 31,508
Earnings (loss) per share .. $0.55 $(0.25) $0.49
__________________________
(1) Reflects First State historical financial information for
the nine months ended June 30, 1996. First State historical
financial data for the nine months ended June 30, 1996 do
not include the ont-time after-tax charge of $2.0 million
relating to the SAIF recapitalization (see "SUMMARY --
Recent Developments"). For historical information for First
State's fiscal year ended September 30, 1996, reference
should be made to First State's 1996 Annual Report to
Stockholders, which accompanies this Proxy Statement/
Prospectus.
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995(1)
(In thousands, except per share data)
Sovereign
and
First First State
Sovereign State Combined
Interest income ............ $356,456 $32,507 $388,963
Interest expense ........... 228,668 15,545 244,213
Net interest income ........ 127,788 16,962 144,750
Provision for possible
loan losses .............. 750 1,100 1,850
Net interest income after
provision for possible
loan losses .............. 127,038 15,862 142,900
Other non-interest income .. 19,055 4,543 23,598
Non-interest expense ....... 84,168 16,109 100,277
Income before taxes ........ 61,925 4,296 66,221
Income taxes ............... 21,214 1,389 22,603
Net income ................. 40,711 2,907 43,618
Earnings per share ......... $0.73 $0.75 $0.72
______________________
(1) Reflects First State historical financial information for
the nine months ended June 30, 1995.
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995(1)
(In thousands, except per share data)
Sovereign
and
First First State
Sovereign State Combined
Interest income ............ $493,031 $44,349 $537,380
Interest expense ........... 318,805 21,765 340,570
Net interest income ........ 174,226 22,584 196,810
Provision for possible
loan losses .............. 1,000 1,650 2,650
Net interest income after
provision for possible
loan losses .............. 173,226 20,934 194,160
Other non-interest income .. 25,829 6,368 32,197
Non-interest expense ....... 113,108 22,172 135,280
Income before taxes ........ 85,947 5,130 91,077
Income taxes ............... 29,539 1,132 30,671
Net income ................. $ 56,408 $ 3,998 $ 60,406
Earnings per share ......... $1.00 $1.01 $0.98
______________________
(1) Reflects First State historical financial information for
the fiscal year ended September 30, 1995.
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994(1)
(In thousands, except per share data)
Sovereign
and
First First State
Sovereign State Combined
Interest income ............ $354,141 $34,935 $389,076
Interest expense ........... 198,741 13,448 212,189
Net interest income ........ 155,400 21,487 176,887
Provision for possible
loan losses .............. 4,100 1,892 5,992
Net interest income after
provision for possible
loan losses .............. 151,300 19,595 170,895
Other non-interest income .. 14,554 4,150 18,704
Non-interest expense ....... 90,989 18,881 109,870
Income before taxes ........ 74,865 4,864 79,729
Income taxes ............... 28,467 1,363 29,830
Net income ................. $ 46,398 $ 3,501 $ 49,899
Earnings per share ......... $0.90 $0.91 $0.89
_____________________
(1) Reflects First State historical financial information for
the fiscal year ended September 30, 1994.
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993(1)
(In thousands, except per share data)
Sovereign
and
First First State
Sovereign State Combined
Interest income ............ $282,790 $34,624 $317,414
Interest expense ........... 153,318 15,401 168,719
Net interest income ........ 129,472 19,223 148,695
Provision for possible
loan losses .............. 8,650 2,440 11,090
Net interest income after
provision for possible
loan losses .............. 120,822 16,783 137,605
Other non-interest income .. 15,167 4,205 19,372
Non-interest expense ....... 77,377 18,448 95,825
Income before taxes ........ 58,612 2,540 61,152
Income taxes ............... 22,998 15 23,013
Net income ................. $ 35,614 $ 2,525 $ 38,139
Earnings per share ......... $0.70 $0.65 $0.69
__________________________
(1) Reflects First State historical financial information for
the fiscal year ended September 30, 1993.
<PAGE>
THE MEETING
Matters to be Considered at the Meeting
At the Special Meeting, the stockholders of First State
will consider and vote upon the approval and adoption of the
Merger Agreement. In addition to the Merger Agreement,
stockholders of First State are being asked to approve a proposal
to adjourn the Special Meeting, if necessary, to permit further
solicitation of proxies in the event there are not sufficient
votes at the time of the Special Meeting to constitute a quorum
or approve the Merger Agreement (the "Adjournment Proposal").
Stockholders will also consider and vote upon such other matters,
if any, as may be properly brought before the Special Meeting.
The Board of Directors of First State has unanimously
approved the Merger Agreement and the Adjournment Proposal, and
unanimously recommends a vote FOR approval and adoption of the
Merger Agreement and FOR approval of the Adjournment Proposal.
Vote Required
The presence in person or by proxy of the holders of a
majority of the outstanding First State Common Stock entitled to
vote at the Special Meeting is required to constitute a quorum at
the Special Meeting. The affirmative vote of a majority of the
outstanding shares of First State Common Stock entitled to be
voted is required to approve the Merger Agreement. The
affirmative vote of a majority of the votes cast at the Special
Meeting, assuming a quorum is present, is required to approve the
Adjournment Proposal. Except as provided in the following
paragraph, each share of First State Common Stock entitles its
holder to one vote with respect to all matters properly submitted
for action at the Special Meeting.
As provided in the First State's Certificate of
Incorporation, record holders of First State Common Stock who
beneficially own in excess of 10% of the outstanding shares of
First State Common Stock (the "Limit") are not entitled to any
vote with respect to the shares held in excess of the Limit. A
person or entity is deemed to beneficially own shares owned by an
affiliate of, as well as persons acting in concert with, such
person or entity. First State's Certificate of Incorporation
authorizes the Board of Directors (i) to make all determinations
necessary to implement and apply the Limit, including determining
whether persons or entities are acting in concert, and (ii) to
demand that any person who is reasonably believed to beneficially
own stock in excess of the Limit supply information to the
Company to enable the Board to implement and apply to Limit. The
Board of Directors of First State is not aware of any person who
beneficially owns shares of First State Common Stock in excess of
the Limit with respect to the matters to be considered at the
Special Meeting.
The directors and executive officers of First State
have agreed to vote all shares of First State Common Stock that
they own on the Record Date in favor of the Merger Agreement. At
June 30, 1996, directors and executive officers of First State
owned approximately 406,206 shares of First State Common Stock,
or approximately 11.7% of the then outstanding shares of First
State Common Stock that are entitled to be voted at the Special
Meeting.
Under applicable law and Sovereign's Articles of
Incorporation, Sovereign's shareholders are not required to
approve the Merger Agreement or the issuance of Sovereign Common
Stock in connection with the Merger.
Voting of Proxies
Shares represented by all properly executed proxies
received prior to the Special Meeting and not revoked prior to
exercise will be voted in the manner specified by the holders
thereof. Proxies which do not contain voting instructions will
be voted in favor of approval and adoption of the Merger
Agreement and the Adjournment Proposal. Abstentions may be
specified on the proxy card. Abstentions and broker nonvotes
will be considered present for purposes of determining the
presence of a quorum, but as unvoted on the matters as to which
abstention has been specified. For the vote on the Merger
Agreement, abstentions and broker nonvotes will have the same
effect as a negative vote because the affirmative vote of not
less than a majority of the outstanding shares of First State
Common Stock is required to approve the Merger Agreement. For
any vote on adjournment, abstentions will have the same effect as
a negative vote and broker nonvotes will have no effect.
It is not expected that any matter, other than those
referred to herein, will be brought before the Special Meeting.
If, however, other matters are properly presented, the persons
named as proxies will vote in accordance with their judgment with
respect to such matters.
Revocability of Proxies
The grant of a proxy on the enclosed form does not
preclude a stockholder from voting in person. A stockholder may
revoke a proxy at any time prior to its exercise by filing with
the Secretary of First State a duly executed revocation or a
proxy bearing a later date, or by voting in person at the Special
Meeting. Attendance, without voting in person at the Special
Meeting, will not of itself constitute revocation of a proxy. If
a stockholder's shares are not held in the stockholder's name,
such stockholder will need additional documentation from the
record holder in order to vote personally at the Special Meeting.
Record Date; Stock Entitled to Vote; Quorum
The record date for the Special Meeting is
________________, 1996 (the "Record Date"). Only stockholders of
record of First State at the close of business on the Record Date
will be entitled to receive notice of the Special Meeting or any
adjournment thereof, and only stockholders of record of First
State Common Stock at that time will be entitled to vote at the
Special Meeting. On the Record Date, First State had issued and
outstanding 3,929,455 shares of First State Common Stock, which
were owned by approximately 1,100 stockholders of record.
Solicitation of Proxies
First State will bear the cost of the solicitation of
proxies from its stockholders, except that (i) Sovereign and
First State will share equally the cost of printing and mailing
this Proxy Statement/Prospectus and (ii) if Sovereign requests
First State to retain a proxy solicitor in connection with the
solicitation of First State stockholder approval of the Merger
Agreement, Sovereign will bear the expense of such proxy
solicitor. In addition to solicitations by mail, the directors,
officers and employees of First State and its subsidiaries may
solicit proxies from First State stockholders by telephone,
telefacsimile, telegram or in person. Arrangements will also be
made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and
First State will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses incurred
in connection therewith.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS. AS DESCRIBED BELOW UNDER THE CAPTION "THE
MERGER -- EXCHANGE OF First State STOCK CERTIFICATES," EACH FIRST
STATE STOCKHOLDER WILL BE PROVIDED WITH MATERIALS FOR EXCHANGING
SHARES OF FIRST STATE COMMON STOCK AS PROMPTLY AS PRACTICABLE
AFTER THE EFFECTIVE DATE.
<PAGE>
THE MERGER
Background of and Reasons for the Merger; Recommendation of the
First State Board of Directors
Background of the Merger
From time to time, the Board of Directors of First
State has reviewed its strategic alternatives for enhancing
profitability and maximizing stockholder value. The changing
competitive situation in banking and financial services on a
nation-wide basis and in particular with respect to New Jersey,
has been evidenced by considerable consolidation activity in
recent years. During the past few years, the increasing size of
competitors and the benefits that an increased scale of operation
contribute to supporting product innovations and technological
improvements has led First State to recognize that a combination
or consolidation with a larger financial services entity could be
beneficial to both First State stockholders and First DeWitt
customers.
In September 1995, Jay S. Sidhu, Sovereign's President
and Chief Executive Officer, contacted Michael J. Quigley, III,
First State's Chairman, President and Chief Executive Officer,
regarding First State's interest in a possible merger with and
into Sovereign. As a result of this telephone call, a luncheon
meeting between Messrs. Sidhu and Quigley was arranged and held
in late September 1995. Following this meeting, Sovereign
entered into a confidentiality agreement with First State for the
purpose of allowing Sovereign to commence a due diligence
investigation of First State. At approximately that time, First
State authorized MB&D to contact a limited number of
institutions, to be identified by MB&D and including one
institution that had from time to time expressed to Mr. Quigley
an interest in acquiring First State, as to their possible
interest in a merger transaction with First State. A total of
four companies were contacted, and two companies, in addition to
Sovereign, conducted a due diligence review of First State. At a
regular board meeting held in October 1995, the Board of
Directors of First State was apprised of developments regarding
possible merger transactions. MB&D was in attendance at this
meeting, as was counsel to First State. The directors were
advised of their fiduciary duties in general and in particular
with respect to mergers, and a determination was made to proceed
with discussions regarding a possible merger transaction.
Continued discussions were held thereafter with the various
parties, but by the end of November, negotiations were continuing
with only Sovereign, based on pricing considerations. Special
meetings of the Board of Directors of First State were held on
the 5th and 13th of December 1995 to review and discuss a
proposed merger agreement between Sovereign and First State.
However, at a regular Board of Directors meeting on December 22,
a determination was made to terminate discussions with Sovereign
due to a disagreement over pricing terms.
In 1996, the Board actively reviewed with management,
and in consultation with MB&D, its options for maximizing
stockholder value. As a result of this review, at a meeting held
on April 25, 1996, the Board of Directors adopted a strategic
restructuring plan, pursuant to which First State would offer for
sale seven branch offices that were located outside of its
primary market areas of Essex and Morris Counties, New Jersey,
implement a comprehensive expense reduction program, and
liquidate substantially all nonperforming assets by March 31,
1997. First State publicly announced the Board's action in this
regard, and also disclosed that as a result of the strategic
restructuring plan, First State would make a significant
additional provisions for loan losses for the quarter ending
June 30, 1996. Following the issuance of the press release,
Mr. Sidhu again contacted Mr. Quigley, to again express
Sovereign's interest in acquiring First State in its entirety,
and not just the branches outside of Morris and Essex Counties,
New Jersey. Other parties contacted the Company at this time
regarding the branch sales. Sovereign requested to and again
commenced a due diligence investigation of First State. One
other company that had conducted a due diligence investigation in
1995 again requested and received due diligence information
regarding an acquisition of the entire company. However, this
company again declined to pursue an interest in a merger
transaction.
At a regular meeting held on June 19, 1996, the Board
of Directors of First State was apprised of the expressions of
renewed interest in acquiring First State and the Board
authorized management and First State's advisors to continue
discussions with Sovereign. At a special meeting held on
June 24, 1996, the Board of Directors of First State reviewed
with First State's senior management officials, financial
advisors and legal counsel, the terms of the Merger, the Merger
Agreement and the Stock Option Agreement and the transactions
contemplated thereby, as well as the background of the
transactions, the potential financial and strategic benefits of
the transactions, the results of due diligence reviews, financial
and valuation analyses of the transactions and the terms of the
proposed agreements, including the Exchange Ratio. The Board of
Directors again discussed with counsel its fiduciary duties in
connection with merger transactions. At the meeting, MB&D
rendered its opinion that, as of June 24, 1996, the consideration
to be paid by Sovereign in the Merger was fair to First State
stockholders from a financial point of view. At such meeting,
the First State Board of Directors unanimously adopted and
approved the Merger, the Merger Agreement, the Stock Option
Agreement and the transactions contemplated thereby.
The Merger Agreement initially provided for First State
stockholders to receive that number of shares of Sovereign Common
Stock as equalled $14.75 divided by the Sovereign Market Value
(which is determined by reference to the average price of
Sovereign Common Stock for the ten trading days preceding the
Effective Date), if the Sovereign Market Value was between $9.00
and $11.45. If the Sovereign Market Value was greater than
$11.45, First State stockholders would receive 1.29 shares of
Sovereign Common Stock and, if the Sovereign Market Value was
less than $9.00, First State stockholders will receive 1.64
shares of Sovereign Common Stock. If the Sovereign Market Value
was less than $8.00, then First State had the right to terminate
the Merger Agreement, unless Sovereign agreed to increase the
exchange ratio to an amount which, when multiplied by the
Sovereign Market Value, equaled $13.12. The Merger Agreement
also included a provision that allowed Sovereign to terminate the
Merger Agreement if certain asset quality measures were
triggered, including if the aggregate deficiencies in the current
appraised values of commercial real estate assets securing
commercial real estate loans necessary to maintain an 80% loan to
value ratio for each loan exceeded $1,000,000 (the "Commercial
Real Estate Termination Right").
In late November 1996, Sovereign informed First State
of its view, based on its continued review of First State's
commercial real estate assets, that the Commercial Real Estate
Termination Right was applicable, and requested to revise the
Merger Agreement. Based on negotiations between First State and
Sovereign, an amendment to the Merger Agreement was proposed (the
"Merger Agreement Amendment"), which revised the exchange ratio
to provide that First State stockholders are to receive that
number of shares of Sovereign Common Stock as will equal $14.75
divided by the Sovereign Market Value, if the Sovereign Market
Value is equal to or greater than $8.00 and less than or equal to
$12.04. If the Sovereign Market Value is greater than $12.04,
First State stockholders will receive 1.225 shares of Sovereign
Common Stock and, if the Sovereign Market Value is less than
$8.00, First State stockholders will receive 1.84 shares of
Sovereign Common Stock. First State retained the right to
terminate the Merger Agreement if the Sovereign Market Value is
less than $8.00, unless Sovereign agrees to increase the exchange
ratio to an amount which, when multiplied by the Sovereign Market
Value, equals $14.75. The Merger Agreement Amendment also
eliminates certain termination rights previously held by
Sovereign under the Merger Agreement, which termination rights
were specific to the asset quality of First State. A special
meeting of the Board of Directors of First State was held on
November 25, and in consultation with its financial and legal
advisors, the Board agreed to the Amendment. A joint press
release was issued on November 26 announcing the Merger Agreement
Amendment.
Reasons for the Merger
Sovereign's Reasons for the Merger.
Sovereign's acquisition strategy consists of
identifying financial institutions with business philosophies
that are similar to Sovereign, which operate in strong markets
that are geographically compatible with Sovereign, are
financially sound and can be acquired at reasonable cost.
Acquisitions are also evaluated in terms of asset quality,
interest rate risk, potential operating efficiencies and
management capabilities.
In determining the terms of its offer for First State
and whether to enter into the Merger Agreement, Sovereign's Board
of Directors considered a number of factors, including the
following: (i) the financial condition, operating results and
future prospects of Sovereign and First State, (ii) historical
pro forma financial information on the Merger, including, among
other things, pro forma book value and earnings per share
information, dilution analysis and capital ratio impact
information, (iii) a comparison of the price being paid in this
Merger to other comparable financial institution mergers, based,
among other things, on multiples of book value and earnings, and
(iv) the historical trading prices for First State Common Stock
and Sovereign Common Stock.
In the view of Sovereign's Board of Directors, the
Merger is a strategic acquisition for Sovereign that provides a
natural extension of its existing New Jersey community bank
franchise by establishing a strong presence in Essex County, New
Jersey. In addition, First State branches located outside of
Essex County will complement Sovereign's existing New Jersey
franchise.
In approving the transaction, the Sovereign Board did
not specifically identify anyone factor or group of factors as
being more significant than any other factor in the decision
making process, although individual directors may have given one
or more factors more weight than other factors.
The emphasis of the Sovereign Board's discussion in
considering the transaction, however, was on the financial
aspects of the transaction, particularly (i) the strategic fit
and enhanced franchise value discussed above, including pro forma
market share information relating to deposits, (ii) perceived
opportunities to reduce operating expenses relating to First
State's operations, (iii) provisions of the Merger Agreement
relating to credit quality, including provisions granting
Sovereign the right to terminate the Merger Agreement under
certain circumstances relating to weakened credit quality (see
"THE MERGER -- Termination; Effect of Termination"), and
(iv) pricing provisions of the Merger Agreement, which provide
for a fixed price of $14.75 in value of Sovereign Common Stock
for each share of First State Common Stock in the event Sovereign
Common Stock is trading between $8.00 and $12.04 per share and a
fixed exchange ratio in the event Sovereign Common Stock is
trading outside such range.
First State's Reasons for the Merger.
The First State Board has determined that the Merger
and the Merger Agreement, as amended, are fair to, and in the
best interests of, First State and its stockholders. In reaching
this determination, the First State Board consulted with its
financial advisor, MB&D, with respect to the financial aspects
and fairness of the transaction. In arriving at its
determination, the First State Board also considered a number of
factors which indicated that the Merger should produce an
institution that is well capitalized, and one which will enjoy an
enhanced operational and strategic value and that should foster
the potential for future earnings growth. The factors considered
by the First State Board included, but were not limited to, the
following:
(i) Information concerning the businesses,
earnings, operations, financial condition, prospects, capital
levels and asset quality of First State and Sovereign, both
individually and as combined.
(ii) The financial advice rendered by MB&D, as
financial advisor to First State, that the Exchange Ratio is
fair, from a financial point of view, to First State and its
stockholders. See "--Opinion of Financial Advisor."
(iii) The terms of the Merger Agreement, as
amended, the Stock Option Agreement and the other documents
executed in connection with the Merger.
(iv) The tax-free nature of the transaction to
First State's stockholders, for federal income tax purposes. See
"--Federal Income Tax Consequences of the Merger."
(v) The historical trading prices for First State
Common Stock and for Sovereign Common Stock.
(vi) The anticipated cost savings and
efficiencies available to the combined company as a result of the
Merger.
(vii) The current and prospective economic,
competitive and regulatory environment facing each institution
and other financial institutions.
(viii) First State's alternatives to the Merger,
including the interest expressed by other institutions and the
strategic restructuring plan adopted by the Board after
negotiations were terminated in December 1995.
(ix) The provisions of the Merger Agreement
allowing First State to terminate the Merger Agreement if the
Sovereign Market Value is less than $8.00, unless Sovereign
provides First State stockholders with $14.75 of Sovereign Market
Value.
The Board of Directors also took into account that
First State stockholders would have the opportunity to
participate in the future growth of Sovereign by obtaining
Sovereign Common Stock in the Merger. The Board noted that First
DeWitt, as part of an interstate savings institution holding
company of greater size and resources, should be able to provide
its customers with a greater range of services and should become
a stronger competitor in its existing markets. The Board of
Directors of First State believes that the Merger will result in
a stronger and more effective competitor in First State's market,
better able to compete effectively in the rapidly changing
marketplace for banking and financial services and to take
advantage of opportunities that might not be available to First
State on its own. The First State Board of Directors believes
that the Merger will provide First DeWitt's customers with a
broader range of products and services, as well as greater
convenience. In reaching their determinations to approve and
recommend the Merger, the First State Board did not assign any
specific or relative weights to any of the foregoing factors, and
individual directors may have given differing weights to
different factors.
Recommendation of the First State Board of Directors.
The Board of Directors of First State believes that the
terms of the Merger are fair and in the best interests of First
State's stockholders and has unanimously approved the Merger
Agreement. The Board of Directors of First State unanimously
recommends that the stockholders of First State approve the
Merger Agreement.
Terms of the Merger
Upon completion of the Merger, the separate legal
existence of First State will cease. All property, rights,
powers, duties, obligations and liabilities of First State will
automatically be transferred to Sovereign, in accordance with
Pennsylvania and Delaware law. Sovereign, as the surviving
corporation, will be governed by the Articles of Incorporation
and Bylaws of Sovereign in effect immediately prior to completion
of the Merger. The directors and executive officers of Sovereign
prior to the Merger will continue, in their respective
capacities, as the directors and executive officers of Sovereign
after the Merger.
Upon completion of the Merger, each outstanding share
of Sovereign Common Stock and related stock purchase rights will
continue to be outstanding as an identical share of Sovereign
Common Stock and related stock purchase rights. Under the Merger
Agreement, each outstanding share of First State Common Stock on
the Effective Date will be converted into such number of shares
of Sovereign Common Stock, and related stock purchase rights, as
shall equal $14.75 divided by the average of the mean between the
high bid and low asked prices of a share of Sovereign Common
Stock (as reported on the Nasdaq National Market) for the ten
consecutive trading days immediately preceding the Effective Date
of the Merger (the "Sovereign Market Value"). This exchange
ratio is subject to possible adjustment in the event that the
Sovereign Market Value as of the Effective Date of the Merger is
less than $8.00 or greater than $12.04 per share (such exchange
ratio, as adjusted, is hereinafter referred to as the "Exchange
Ratio").
If the Sovereign Market Value is less than $8.00, then
the Exchange Ratio will be 1.840 shares of Sovereign Common
Stock, and related stock purchase rights, for each outstanding
share of First State Common Stock (the "Maximum Fixed Share
Alternative").
If the Sovereign Market Value is greater than
$12.04, then the Exchange Ratio will be 1.225 shares of Sovereign
Common Stock, and related stock purchase rights, for each
outstanding share of First State Common Stock (the "Minimum Fixed
Share Alternative").
If, on the Effective Date, the Sovereign Market Value
is less than $8.00, the Merger Agreement may be terminated by
First State, subject to the right of Sovereign to increase the
Exchange Ratio to an amount which when multiplied by the
Sovereign Market Value as of the Closing Date equals $14.75. See
"Termination; Effect of Termination" herein.
First State's stockholders will receive cash in lieu of
fractional shares of Sovereign Common Stock. See "Exchange of
First State Stock Certificates" herein.
If Sovereign, at any time before completion of the
Merger, pays or effects a stock dividend, stock split, reverse
stock split or reclassification of Sovereign Common Stock and at
the Minimum Fixed Share Alternative or the Maximum Fixed Share
Alternative is applicable, then the Exchange Ratio will be
adjusted so that each First State stockholder would be entitled
to receive such number of shares of Sovereign Common Stock as
such stockholder would have been entitled to receive if the
Effective Date occurred prior to the happening of such event.
As of the Record Date, directors and executive officers
of First State and/or First Dewitt have been granted options to
purchase 370,600 shares of First State Common Stock (the
"Management Options"). On the Effective Date, each Management
Option, whether or not such Management Option is exercisable on
the Effective Date, shall cease to be outstanding and shall be
converted on the Effective Date into and become an option to
acquire that number of shares of Sovereign Common Stock equal to
the number of shares of First State Common Stock covered by the
Management Option multiplied by the Exchange Ratio, at an
exercise price equal to the present stated exercise price of such
option divided by the Exchange Ratio. Shares issuable upon the
exercise of such options to acquire Sovereign Common Stock shall
be issuable in accordance with the terms of the respective plans
and grant agreements under which they were issued.
The Sovereign Common Stock and cash to be received by
the holders of First State Common Stock (including the holders of
options to acquire First State Common Stock) in exchange for each
share of First State Common Stock (including shares subject to
options) shall be referred to herein as the "Merger
Consideration."
Opinion of Financial Advisor
McConnell, Budd & Downes, Inc. ("MB&D") has acted as
financial advisor to First State on a contractual basis since
1994. MB&D has advised First State on numerous facets of its
strategic planning process. MB&D advised First State in
connection with the proposed merger with Sovereign. Throughout
this process representatives of MB&D meet with both management
and the Board of Directors of First State on a regular basis.
MB&D was retained based on its qualifications and
experience in the financial analysis of banking and thrift
institutions, knowledge of the New Jersey banking markets in
particular and the banking markets in the North Eastern part of
the United States in general, and its experience with merger and
acquisition transactions involving banking institutions. MB&D is
also an NASDAQ broker-dealer specializing in the securities of
banking and thrift entities and produces equity research for
institutional and high net-worth investors in the securities of
financial institutions. In the ordinary course of business, MB&D
may trade the equity securities of First State and Sovereign for
its own account and for the accounts of its customers and,
accordingly, at any time may hold a long or short position in
such securities. In addition, various employees of MB&D may from
time to time hold positions in the securities of a wide variety
of financial institutions, including First State and Sovereign.
MB&D has also served as a market maker in First State Common
Stock since 1994.
MB&D has delivered its written opinion as of the date
of this Proxy Statement/Prospectus, that, subject to the
limitations set forth in the opinion, the Exchange Ratio
(including the maximum and minimum Exchange Ratios permitted)
provided for in the Merger Agreement Amendment is fair to the
holders of First State Common Stock from a financial point of
view. MB&D delivered its initial oral opinion on June 24, 1996.
Due to the execution of the Merger Agreement Amendment, MB&D
delivered a supplementary oral opinion after consideration of the
effects of the Merger Agreement Amendment to First State's Board
on November 25, 1996.
The full text of the opinion of MB&D dated the date of
this Proxy Statement/Prospectus that sets forth assumptions made,
matters considered and limits on the review undertaken is
attached hereto as Annex C. First State's stockholders are urged
to read both this section and the opinion in their entirety.
MB&D's opinion is directed to the possible range of exchange
ratios that may be obtained in the Merger and does not constitute
a recommendation to any holder of First State Common Stock as to
how such holder should vote at the Special Meeting. The summary
of the opinion of MB&D set forth in this Proxy Statement
Prospectus is qualified in its entirety by reference to the full
text of the opinion itself. The conclusion of the oral opinion
of November 25, 1996 is the same as the conclusion of the opinion
that appears in Annex C.
In arriving at its opinion, MB&D (i) reviewed the
executed Merger Agreement, the executed Merger Agreement
Amendment, the executed Stock Option Agreement, and a final draft
of this Prospectus/Proxy Statement in substantially the form to
be mailed to stockholders; (ii) reviewed publicly available
business and financial information concerning Sovereign and First
State and certain internal financial information and financial
projections shared with MB&D by the management's of First State
and Sovereign respectively; (iii) held discussions with members
of the senior management of First State concerning the past and
current results of operations, its current financial condition
and management's opinion of the bank's future prospects;
(iv) held discussions with members of the senior management of
Sovereign concerning the past and current results of operations,
its current financial condition and management's opinion of the
banks' future prospects; (v) reviewed the specific acquisition
analysis models employed by MB&D to evaluate potential business
combinations of banking companies; (vi) considered certain
financial and stock market data of Sovereign (including
historical reported price and trading volume) and compared that
information with similar information for other publicly held bank
and thrift holding companies; (vii) reviewed a number of other
recently announced transactions involving the acquisition of
banking institution; and (viii) performed such other studies and
analyses as MB&D considered appropriate under the circumstances
associated with this particular transaction.
MB&D's opinion takes into account its assessment of
general economic, market and financial conditions, its experience
in other transactions, as well as its experience in securities
valuation and its knowledge of the banking and thrift industry
generally. For purposes of reaching its opinion, MB&D has
assumed and relied upon the accuracy and completeness of the
information provided to it by First State and Sovereign, and does
not assume any responsibility for the independent verification of
such information or any independent valuation or appraisal of any
of the assets or liabilities of either First State or Sovereign.
With respect to the financial projections reviewed by MB&D in the
course of rendering its opinion, MB&D has assumed that such
projections have been reasonably prepared on a basis reflecting
the best currently available estimates and judgments of the
management's of each of First State and Sovereign as to the most
likely future performance of their respective companies.
Finally, MB&D has not been furnished with any independent
appraisals of the assets or liabilities of Sovereign.
The following is a summary of the analyses employed by
MB&D in connection with rendering its written opinion as to the
fairness of the Exchange Ratio to the holders of First State
Common Stock from a financial point of view. Given that it is a
summary, it is by definition not a complete and comprehensive
description of all the analyses performed, or an enumeration of
all matters considered by MB&D in arriving at its opinion. The
preparation of a fairness opinion is a complicated process,
involving a determination as to the most appropriate and relevant
methods of financial analysis and the application of those
methods to the particular circumstances. Therefore, such an
opinion is not readily susceptible to a summary description. In
arriving at its fairness opinion, MB&D did not attribute any
particular weight to any one specific analysis or factor
considered by it and made qualitative as well as quantitative
judgments as to the significance of each analysis and factor.
Therefore, MB&D believes that its analysis must be considered as
a whole and believes that attributing undue weight to any single
analysis or factor considered could create a misleading or
incomplete view of the process leading to the formation of its
opinion. In its analyses, MB&D has made certain assumptions with
respect to banking industry performance, general business and
economic conditions and other factors, many of which are beyond
the control of management of either First State or Sovereign.
Estimates that comprise a part of MB&D's analysis are
not necessarily indicative of actual value or predictive of
future results or values. Estimates of values referenced in any
such analysis are not intended to be appraisals and may not
reflect the price at which the companies or their securities may
actually be sold.
The following is a summary of the analyses completed by
MB&D in connection with rendering and reaffirming its opinion.
Analysis of the Exchange Ratio as Amended:
The consideration to be received per share of First
State Common Stock would be the number of shares of Sovereign
Common Stock with a market value (based on the average of the
mean between the high bid and low asked prices of a share of
Sovereign Common Stock for the ten consecutive trading days
immediately preceding the Effective Date of the merger,
"Sovereign Market Value") of $14.75 constrained by a minimum
exchange of 1.225 shares of Sovereign Common Stock and a maximum
exchange of 1.84 shares of Sovereign Common Stock ("Exchange
Ratio Collar"). The Merger Agreement Amendment executed on
November 25, 1996 changed the minimum and maximum number of
Sovereign shares to be received per share of First State Common
Stock. Prior to being amended, the minimum number of Sovereign
shares to be exchanged per share of First State was 1.29 shares
and the maximum number of Sovereign shares to be exchange per
share of First State was 1.66 shares.
MB&D considered the effect of the Exchange Ratio Collar
as amended. The effect of said collar is that stockholders of
First State could receive Sovereign Common Stock valued at
greater than $14.75 per share of First State if the Sovereign
Market Value is greater than $12.04. The Exchange Ratio at this
price level is 1.225 shares of Sovereign for every share of First
State. This is the minimum number of Sovereign shares that will
be exchanged for each share of First State Common Stock. If the
Sovereign Market Value is $12.04 or greater the Exchange Ratio
becomes fixed at 1.225 shares of Sovereign for each share of
First State. If the Sovereign Market Value is greater than
$12.04, then the value of the 1.225 shares of Sovereign Common
Stock to be exchanged for each First State share will be greater
than $14.75.
The amended Exchange Ratio provides for a maximum
Exchange Ratio of 1.84 shares of Sovereign Common Stock per share
of First State Common Stock. Prior to being amended, the Merger
Agreement had constrained the maximum at 1.66 shares of Sovereign
Common Stock. If the Sovereign Market Value is $8.00 or greater,
each share of First State Common Stock will be exchanged for the
number of shares of Sovereign Common Stock equal in value to
$14.75. If the Sovereign Market Value is less than $8.00, the
maximum number of Sovereign Common Stock (1.84 shares) will be
exchanged. If the Sovereign Market Value is less than $8.00,
then the value of the 1.84 shares of Sovereign to be exchanged
for each First State share will be less than $14.75. First State
has the right to terminate the transaction if the Sovereign
Market Value is less than $8.00.
The closing price of Sovereign Common Stock on
December __, 1996 ("Current Market Price") was $12.75. Assuming
$12.75 represented the Sovereign Market Value, each share of
First State Common Stock would currently have value equal to
$15.62 in Sovereign Common Stock.
First State shareholders are exposed to the risk of
receiving less than $14.75 in value only if the Sovereign Market
Value calculates to be less than $8.00 and First State does not
elect to terminate the Merger Agreement. This value is 37.10%
lower than Sovereign's Current Market Price of $12.75.
Transaction Value:
$14.75 of value in Sovereign Common Stock per share of
First State Common Stock assuming the Sovereign Market Value
falls within the Exchange Ratio collar. An aggregate transaction
value of $63,479,058.75 would result from such assumptions.
$15.62 of value in Sovereign Common stock per share of
First State Common Stock assuming the Sovereign Market Value
equaled the Current Market Price of $12.75. An aggregate
transaction value of $67,217,867.72 would result from such
assumptions.
Transaction Multiples:
- Multiple of Earnings:
Based upon an assumed value of $14.75 per share of
First State
16.44 times reported earnings for the trailing 12
months ended March 31, 1996.
The earnings multiple as compared to earnings for the
fiscal year ended September 30, 1996 is not measurable. Due to
the SAIF assessment and asset quality concerns, First State
reported a loss for the period.
11.47 times First State's projected earnings for the
fiscal year ending September 30, 1997.
Based upon an assumed value of $15.62 per share of
First State
17.40 times reported earnings for the trailing 12
months ended March 31, 1996.
The earnings multiple as compared to earnings for the
fiscal year ended September 30, 1996 is not measurable. Due to
the SAIF assessment and asset quality concerns, First State
reported a loss for the period.
12.14 times First State's projected earnings for the
fiscal year ending September 30, 1997.
- Multiple of Book Value:
Based upon the assumed value of $14.75 per share of
First State
1.92 times tangible book value as of September 30,
1996.
Based upon the assumed value of $15.62 per share of
First State
2.03 times tangible book value as of September 30,
1996.
- Multiple of Market Value:
The consideration of Sovereign Common Stock with a
value of $14.75 per share of First State Common Stock represented
a 47.5% premium to the market price reported by NASDAQ as of
close of business on June 24, 1996 (the day prior to the
announcement of the execution of the Merger Agreement).
- Specific Acquisition Analysis:
MB&D employs a number of proprietary analysis models to
examine hypothetical transactions involving banking and/or thrift
companies. The models use forecast earnings data, selected
current period balance sheet and income statement data, current
market and trading information and a number of assumptions as to
interest rates for borrowed funds, opportunity costs of funds,
discount rates, dividend streams, effective tax rates and
transaction structures (the alternative or combinative uses of
common equity, cash, debt or other securities to fund a
transaction). The models distinguish between purchase and
pooling accounting treatments and inquire into the likely
economic feasibility of a given hypothetical transaction, at a
given price level or specified exchange rate and employing a
specified transaction structure. The models also permit an
examination of the capital adequacy of the pro forma institution.
In connection with the agreement, MB&D evaluated the
range of possible exchange ratios in a pooling transaction where
the consideration to be received by First State shareholders is
Sovereign Common Stock. On the basis of the financial
projections of the respective managements, MB&D projects the
transaction to be slightly accretive to earnings per share during
the 1997 fiscal year. It is anticipated that this can be
realized through efficiencies of the combined institution and the
ability of a larger institution to accelerate resolution of First
State's troubled assets.
Other hypothetical Merger Partners:
As part of its financial advisory services, MB&D
analyzed hypothetical merger partners for First State. MB&D used
only publicly available information and did not contact any other
banking institution for its analysis. From time to time, First
State's Board of Directors would ask MB&D to present its analysis
to the Board.
In the latter part of 1995, First State received an
unsolicited expression of interest from Sovereign. After
consulting with the Board and MB&D, First State's management
extended due diligence materials to Sovereign. In response to
the expression of interest, First State instructed MB&D to
solicit other financial institutions to ascertain if there was
additional interest in First State. Two other institutions were
also extended due diligence materials. Discussions were
terminated in December 1995 with all three parties.
Shortly after First State announced its strategic
restructuring plan (to divest its southern branches and
aggressively address its troubled asset portfolio) in May 1996,
First State was contacted by Sovereign and one of the other
institutions that had conducted due diligence during 1995. Both
Sovereign and the other institution expressed interest in renewed
negotiations. Each institution was allowed to perform a complete
due diligence review of First State. Through this process and
after consideration and consultation with MB&D, the Board of
First State determined that the shareholders were best served by
continuing to negotiate with Sovereign.
Discounted Cash Flow Analysis:
In late April 1996, the Board of First State resolved
to dramatically alter its strategic plan. First State planned to
divest its six southern branches, approximately $125 million in
deposits would be auctioned to other financial institutions. The
two primary benefits that were projected to be the result of such
a plan were:
1. The resulting franchise would be much more
concentrated both in terms of branch size and
geography. This greater concentration would allow
First State to reduce expenses and operate more
efficiently. The plan incorporated a reduction of 18%
in non-interest expense.
2. The proceeds from the branch sale would be used to
aggressively reduce to troubled asset portfolio at
First State. The goal of the plan was to reduce
problem assets to less than 1% of total assets. The
proposed changes to First Sate's strategic plan had
been analyzed by both management and MB&D.
As part of its evaluation of Sovereign's offer, MB&D
performed a discounted cash flow analysis incorporating First
State's revised strategic restructuring plan. Discounted cash
flow analyses permit the conceptual examination of the present
discounted values of potential future results employing selected
assumptions and discount rates.
The following assumptions and projections are a summary
of the analyzed business plan provided to MB&D by the management
of First State and the discounted cash flow model utilized.
1. On a per share basis, a control sale was deemed to
be possible at a P/E ratio (using estimated 1997 fiscal
year earnings) of 11.47 times or $14.75 in Sovereign
Common Stock.
2. First State's assets would be substantially
reduced initially due to the branch sale and resolution
of problem assets. Assets would then steadily grow at
an average of 6.88% per annum throughout the remaining
4 years of the planning period.
3. First State's average return on assets over the
five year period will be 0.90%. Average return on
assets for the final fiscal year of the planning period
is projected to be 1.00%.
4. First State's dividend payout ratio is projected
to average 29.57% throughout the period.
5. A discount rate of 12.0% was applied to all cash
flows.
The last variable needed to project a present value per
share is a terminal P/E multiple. MB&D employed hypothetical
terminal control transaction P/E multiples ranging from 10 times
to 15 times. It is MB&D's opinion that the P/E multiple for a
transaction involving a thrift in the last year of the planning
period would likely fall within this range. The resulting
present values fell within a range of $9.62 (P/E multiple of 10)
to $13.87 (P/E multiple of 15).
It is important to note that the discount factors
employed embody both the concept of a riskless time value of
money and risk factors that reflect the uncertainty of the
forecast cash flows and terminal P/E multiples. Use of higher
discount rates would result in lower discounted present values.
Conversely, use of lower discount rates would result in higher
discounted present values.
The assumptions employed were thoroughly discussed with
both First State's management and Board. Within this context
both external and internal factors were discussed. Consideration
was given to the present health and future prospects of the
banking environment within the State of New Jersey. MB&D advised
the First State Board that although discounted cash flow analysis
is a widely used valuation methodology, it relies on numerous
assumptions, including discount rates, terminal values, earnings
and asset growth, as well as dividend payout ratios.
Analysis of Other Comparable Transactions:
MB&D is reluctant to place undue emphasis on
"comparables analysis" as a valuation methodology due to what it
considers to be inherent limitations of the application of the
results to specific cases. MB&D has observed that such analysis
often fails to adequately take into consideration such factors
as: material differences in the underlying capitalization of the
institutions which are being acquired; differences in the
historic earnings (or loss) patterns recorded by the compared
institutions which can depict a very different trend than might
be implied by examining only recent financial results;
differences in the asset quality of the compared institutions;
failure to exclude non-recurring profit or loss items from the
last twelve month earnings streams of target companies, which can
distort apparent earnings multiples; differences in the form or
forms of consideration used to complete the transaction;
differences between the planned method of accounting for the
completed transaction and such factors as the relative population
demographics of the acquired entities markets as compared or
contrasted to such factors for the markets in which comparable
are doing business. Comparable analysis also rarely seems to
take into consideration the degree of facilities overlap between
the acquirers' market and that of the target or the absence of
such overlap and the resulting cost savings differentials between
two otherwise apparently comparable transactions. MB&D
consequently believes that comparable analysis is the least
reliable form of financial analysis available for the analysis of
a prospective transaction.
Nevertheless, in June 1996 MB&D reviewed 13 publicly
announced transactions involving a thrift as the acquisition
target in the State of New Jersey and the New York metropolitan
area. These transactions were announce between June 1994 and May
1996. One of the transactions was terminated by mutual consent
prior to closing. Within this universe the average (mean)
multiple of tangible book value paid by the acquirer was 1.55
times and the maximum multiple paid was 2.50 times, while the
minimum multiple was 1.22 times. These statistics can be
compared to a multiple of 1.56 (using fully diluted tangible book
value as of March 31, 1996) which was derived for the Merger.
With respect to trailing 12 months earnings multiples for this
same data sample, the average P/E multiple paid was 16.09 times
and the maximum multiple was 23.10 times, while the minimum
multiple was 7.70 times. These statistics can be compared to a
multiple of 16.44 (Using trailing 12 months earnings ended
March 31, 1996) which was derived for the Merger.
Tangible Book Multiple Earnings Multiple
The Merger 1.56 16.44
Sample Average 1.55 16.09
Sample Maximum 2.50 23.10
Sample Minimum 1.22 7.70
Compensation of MB&D:
Pursuant to a letter dated December 5, 1995, First
State paid MB&D a fee of $200,000 upon execution of the
definitive Merger Agreement, and First State is required to pay
MB&D a fee of $150,000 promptly after the mailing of this Proxy
Statement/Prospectus, which contains MB&D's written opinion. In
addition, First State has agreed to pay MB&D a cash fee
equivalent to 1.00% of the fair market value of the consideration
received by First State stockholders (including in-the-money
options) upon closing of the Merger, less $350,000 of the fees
which will have been previously paid to MB&D as described above.
First State has agreed to reimburse MB&D for its
reasonable out-of-pocket expenses incurred. First State has
agreed to indemnify MB&D and its directors, officers and
employees against certain losses, claims, damages and liabilities
relating to or arising out of MB&D's engagement, including
liabilities under the federal securities laws.
MB&D has filed a written consent with the Commission
relating to the inclusion of its fairness opinion and the
references to such opinion and to MB&D in the Registration
Statement in which this Proxy Statement/Prospectus is included.
In giving such consent, MB&D did not admit that it comes within
the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and
regulations thereunder.
Effective Date of the Merger
Under the Merger Agreement, the Effective Date is the
date determined by Sovereign, in its sole discretion, upon five
days prior written notice to First State, but in no event may the
Effective Date be later than thirty days after the last condition
precedent to the completion of the Merger set forth in the Merger
Agreement has been fulfilled or waived. See "Conditions to the
Merger" herein.
On or prior to the Effective Date (i) Articles of
Merger between Sovereign and First State will be filed with the
Pennsylvania Department of State and (ii) a Certificate of Merger
will be filed in the Delaware Office of the Secretary of State,
and each such document will set forth the Effective Date. The
Merger Agreement may be terminated by either party if, among
other reasons, the Merger is not completed before March 31, 1997
and the terminating party is not in breach of the Merger
Agreement. See "THE MERGER--Termination; Effect of Termination."
Exchange of First State Stock Certificates
The conversion of First State Common Stock into
Sovereign Common Stock will occur automatically at the Effective
Date. As soon as practicable after the Effective Date,
Sovereign, or a bank or trust company designated by Sovereign, in
the capacity of exchange agent (the "Exchange Agent"), will send
a transmittal form to each First State stockholder. The
transmittal form will contain instructions with respect to the
surrender of certificates representing First State Common Stock
to be exchanged for Sovereign Common Stock.
FIRST STATE STOCKHOLDERS SHOULD NOT FORWARD FIRST STATE
STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS. FIRST STATE STOCKHOLDERS SHOULD NOT RETURN
STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Until the certificates representing First State Common
Stock are surrendered for exchange after completion of the
Merger, holders of such certificates will not receive, and will
not be paid dividends on, the Sovereign Common Stock into which
such shares have been converted. When such certificates are
surrendered, any unpaid dividends will be paid without interest.
For all other purposes, however, each certificate which
represents shares of First State Common Stock outstanding at the
Effective Date will be deemed to evidence ownership of the shares
of Sovereign Common Stock into which those shares have been
converted by virtue of the Merger.
All shares of Sovereign Common Stock issued upon
conversion of shares of First State Common Stock shall be deemed
to have been issued in full satisfaction of all rights pertaining
to such shares of First State Common Stock, subject, however, to
Sovereign's obligation to pay any dividends or make any other
distributions with a record date on or prior to the Effective
Date, which may have been declared or made by First State on such
shares of First State Common Stock in accordance with the Merger
Agreement and which remain unpaid at the Effective Date.
No fractional shares of Sovereign Common Stock will be
issued to any First State stockholder upon completion of the
Merger. For each fractional share that would otherwise be
issued, Sovereign will pay by check an amount equal to the
product obtained by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Sovereign
Market Value.
Neither Sovereign nor First State will be liable to any
holder of shares of First State Common Stock which are converted
into shares of Sovereign Common Stock in the Merger for any such
shares of Sovereign Common Stock (or dividends, distributions or
net sale proceeds with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat
or similar law.
Conditions to the Merger
The obligations of Sovereign and First State to effect
the Merger are subject to various conditions which include the
following:
(a) the Merger Agreement shall have been duly
approved by the holders of First State Common Stock;
(b) all necessary governmental approvals for the
Merger shall have been obtained, and all waiting periods required
by law or imposed by any governmental authority with respect to
the Merger shall have expired (see "Regulatory Approvals"
herein);
(c) there shall not be any order, decree, or
injunction in effect preventing the completion of the
transactions contemplated by the Merger Agreement;
(d) there shall have been delivered to each of
Sovereign and First State an opinion of counsel that, among other
things, the Merger will be treated for Federal income tax
purposes as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended
(see "Certain Federal Income Tax Consequences" herein); and
(e) there shall not have been any material
adverse change in the consolidated assets, business, financial
condition or results of operations of the other since March 31,
1996.
With respect to the condition relating to material
adverse change, Sovereign has agreed that neither (i) an increase
in the provision for loan losses by FSFS for the period ended
June 30, 1996 in an amount not to exceed $5,000,000, (ii) the
existence of nonperforming assets of FSFS in an amount up to
$26,100,000, (iii) the incurrence by FSFS of aggregate losses on
the sale, exchange or other disposition of nonperforming assets
up to $1,000,000 (for purposes of this subsection, loss will be
identified net of any portion of the allowance for loan losses
allocable to the nonperforming asset which is sold, exchanged or
otherwise disposed of by FSFS) or (iv) provisions for loan losses
taken or recognized by FSFS after the date of this Agreement in
aggregate amounts up to $7,250,000 shall be considered a Material
Adverse Effect for purposes of this subsection. For purposes of
this provision, the term "nonperforming assets" means (i) loans
that are "troubled debt restructurings" as defined in Statement
of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings," excluding
restructured loans the terms and conditions of which were
approved in writing in advance by Sovereign, (ii) loans on
nonaccrual, including loans placed on nonaccrual that may have
been previously restructured with Sovereign's approval,
(iii) real estate owned, and (iv) all loans 90 days or more past
due, except that the term "nonperforming assets" shall not
include loans originated to finance the purchase of any one-to-
four-family residential property. Sovereign has agreed that the
provisions for loan losses taken for the period ended
September 30, 1996 would not constitute a material adverse change
for purposes of the Merger Agreement.
In addition, Sovereign's obligation to effect the
Merger is subject to, among others, the following additional
conditions:
(a) Sovereign shall have received an opinion from
its independent certified public accountant to the effect that
the Merger will be treated as a "pooling of interests" for
financial accounting purposes (see "Accounting Treatment"
herein);
(b) the results of any "phase I environmental
audit" that Sovereign shall have had performed at its expense at
any office or branch of First State or First DeWitt shall be
reasonably satisfactory to Sovereign;
(c) neither the Merger nor the Bank Merger shall
require Sovereign, First State or any subsidiary to distribute to
depositors the liquidation account established by First DeWitt in
connection with the conversion of First DeWitt from mutual to
stock form; and
(d) First DeWitt shall have received all amounts
due to it from a check processing company which is in liquidation
(all of which have been received as of the date of the Proxy
Statement/Prospectus).
Except for the requirements of stockholder approval,
regulatory approvals and the absence of any order, decree, or
injunction preventing the transactions contemplated by the Merger
Agreement, each of the conditions described above may be waived
in the manner and to the extent described in "Amendment; Waivers"
herein.
Subsidiary Bank Merger
In connection with the Merger, Sovereign Bank and First
DeWitt entered into a Bank Plan of Merger (the "Bank Plan of
Merger") dated June 24, 1996. Pursuant to the Bank Plan of
Merger, concurrently with or as soon as practicable after
consummation of the Merger, First DeWitt will merge with and into
Sovereign Bank, with Sovereign Bank surviving (the "Bank
Merger"). Sovereign and First State anticipate that the Bank
Merger will be completed concurrently with the completion of the
Merger.
Regulatory Approvals
The Merger is subject to the prior approval of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan
Act (the "HOLA") and the regulations adopted under the HOLA, and
the Pennsylvania Department of Banking (the "Department") under
the Pennsylvania Savings Association Code of 1967, as amended
(the "Association Code"). An application for approval of the
Merger was filed with the OTS on September 25, 1996 and amended
on November 23, 1996. The OTS deemed the application complete by
letter dated December 4, 1996. Under applicable OTS regulations,
the OTS will review the financial, managerial, competitive,
legal, disclosure, accounting and tax aspects of the transaction.
In addition, the OTS has the responsibility by statute
and regulation to review the performance of all involved
institutions in meeting their responsibilities under the
Community Reinvestment Act ("CRA"). No protest of the Merger has
been filed with the OTS under the CRA as of the date of this
Proxy Statement/Prospectus.
An application was filed with the Department on
September 25, 1996. In connection with its review of the
application, the Department may conduct such investigation as it
deems necessary. Such investigation must specifically include
consideration of the effects of the Merger on the reasonable
availability of banking services to all segments of the public
and the economy of the Commonwealth of Pennsylvania, with special
emphasis on the financing of enterprises and economic development
with a view to increasing or retaining employment opportunities.
The Department will also review the credit practices and policies
of Sovereign Bank to determine the overall performance of such
institution in providing financial services to individuals and
business enterprises in light of its role as a thrift
institution, its resources, its capital and its income, the
particular needs of the communities it serves, competition and
alternative sources of credit. The Department will also review
the extent to which Sovereign Bank provides basic transaction
account services to the public and, in particular, low or
moderate income individuals. The Department may approve the
application if it determines that Sovereign Bank's performance
with respect to the reasonable availability of banking services
is not materially deficient. The Department may approve the
transaction subject to such conditions regarding banking services
and basic transaction account services as it deems appropriate.
There can be no assurance that the regulatory
authorities described above will approve the Merger or the Bank
Merger, and if approved, there can be no assurance as to the date
of such approvals.
Representations and Warranties
The Merger Agreement contains customary representations
and warranties relating to, among other things, (a) the corporate
organization of Sovereign, Sovereign Bank, First State and First
DeWitt; (b) the capital structures of Sovereign and First State;
(c) the due authorization, execution, delivery, performance and
enforceability of the Merger Agreement and the Bank Plan of
Merger; (d) consents or approvals of regulatory authorities or
third parties necessary to complete the Merger and the Bank
Merger; (e) the consistency of financial statements with
generally accepted accounting principles and, where appropriate,
applicable regulatory accounting principles; (f) the absence of
material adverse changes, since March 31, 1996, in the
consolidated assets, business, financial condition or results of
operations of Sovereign or First State; (g) the filing of tax
returns and payment of taxes; (h) the absence of undisclosed
material pending or threatened litigation; (i) compliance with
applicable laws and regulations; (j) retirement and other
employee plans and matters relating to the Employee Retirement
Income Security Act of 1974; (k) the quality of title to assets
and properties; (l) the maintenance of adequate insurance;
(m) the absence of undisclosed brokers' or finders' fees; (n) the
accuracy of information supplied by Sovereign and First State in
connection with the Registration Statement on Form S-4 filed with
the Securities and Exchange Commission (the "SEC") in connection
with the issuance of Sovereign Common Stock in the Merger, this
Proxy Statement/Prospectus and all applications filed with
regulatory authorities for approval of the Merger and the Bank
Merger; and (o) documents filed with the SEC and the accuracy of
information contained therein.
The Merger Agreement also contains other
representations and warranties by First State relating to, among
other things, (a) certain contracts relating to employment,
consulting and benefits matters; (b) the absence of material
environmental violations, actions or liabilities of or against
First State and its subsidiaries; (c) the consistency of First
State's allowance for loan losses with generally accepted
accounting principles and all applicable regulatory criteria; and
(d) transactions with affiliates.
Business Pending the Merger
Pursuant to the Merger Agreement, Sovereign and First
State have each agreed to use their best efforts to preserve
their business organizations intact, to maintain good
relationships with employees and to preserve the goodwill of
customers and others with whom business relationships exist. In
addition, First State has agreed to conduct its business and to
engage in transactions only in the ordinary course of business,
consistent with past practice, except as otherwise required by
the Merger Agreement or with the written consent of Sovereign.
In addition, First State has agreed in the Merger
Agreement that neither it nor First DeWitt Bank may, without the
written consent of Sovereign, among other things, (i) change its
Certificate of Incorporation, Charter or Bylaws; (ii) change the
number of authorized or issued shares of its capital stock,
except for the possible issuance of up to 370,600 shares of First
State Common Stock upon the exercise of then outstanding stock
options; (iii) grant options or similar rights with respect to
its capital stock or any securities convertible into its capital
stock; (iv) split, combine or reclassify any shares of its
capital stock; (v) declare, set aside or pay any dividend or
other distribution in respect of its capital stock, except as
otherwise specifically set forth in the Merger Agreement (see
"Dividends" herein); (vi) grant any severance pay, except in
accordance with First State's severance policy in effect on the
date of the Merger Agreement (see "Employee Benefits and
Severance" herein), or enter into or amend any employment
agreement; (vii) grant any pay increase except for routine
periodic increases in accordance with past practice;
(viii) engage in any merger, acquisition or similar transaction;
(ix) dispose of any assets other than in the ordinary course of
business; (x) change any accounting practices; (xi) implement any
new employee benefit or welfare plan, or amend any such plan,
unless such amendment does not result in an increase in cost;
(xii) purchase any security for its investment portfolio not
rated "A" or higher by either Standard & Poor's Corporation or
Moody's Investor Services, Inc.; (xiii) make, enter into, renew,
extend, modify or compromise any transaction (including loans and
commitments to lend) with any affiliate of First State;
(xiv) enter into any swap or similar arrangement; (xv) take any
action which would give rise to a right of payment to any
individual under any employment agreement; (xvi) intentionally
and knowingly take any action that would preclude the treatment
of the Merger as a pooling of interests for financial accounting
purposes; (xvii) make any loan or other credit facility
commitment to any borrower in excess of $600,000, or compromise,
extend, renew or modify any such loan or commitment outstanding
in excess of $600,000; (xviii) waive, release, grant or transfer
any rights of value, or modify or change in any material respect
any existing agreement to which First State or any First State
subsidiary is a party, other than in the ordinary course of
business, consistent with past practice; (xix) take any action
which would cause any of the representations and warranties of
First State set forth in the Merger Agreement to be untrue or the
conditions set forth in the Merger Agreement to be unsatisfied;
or (xx) agree to do any of the foregoing.
First State has also agreed in the Merger Agreement,
among other things, (i) to permit Sovereign, if Sovereign elects
to do so at its own expense, to cause a "phase I environmental
audit" to be performed at any physical site owned or occupied by
First State or First DeWitt; office or branch; (ii) to permit a
representative of Sovereign to attend committee meetings of First
State and First DeWitt's management, and to reasonably consider
Sovereign's requests that its representatives be permitted to
attend meetings of First State's Board of Directors or Executive
Committee; (iii) if Sovereign requests and agrees to bear the
expense, to retain a proxy solicitor in connection with the
solicitation of First State stockholder approval of the Merger
Agreement; (iv) if Sovereign requests, to cause its independent
certified public accountants to perform a review of its unaudited
consolidated financial statements as of the end of any calendar
quarter, in accordance with Statement of Auditing Standards
No. 36, and to issue their report on such financial statements;
(v) if Sovereign requests, to use its best efforts to obtain an
extension of any contract with an outside service bureau or other
vendor of services to First State or any First State subsidiary,
on terms and conditions mutually acceptable to First State and
Sovereign; (vi) to submit the Merger Agreement to its
stockholders for approval at a meeting to be held as soon as
practicable, and use its best efforts to cause its Board of
Directors to unanimously recommend approval of the Merger
Agreement to First State's stockholders; (vii) to provide to
Sovereign copies of the minutes of all meetings of the Board of
Directors of First State and its subsidiaries, and of any of
their respective committees or of any senior management
committee; and (viii) to approve the Bank Merger as sole
stockholder of First DeWitt.
Sovereign and First State have jointly agreed, among
other things, (i) to prepare all applications for, and use their
best efforts to obtain, all required regulatory consents; (ii) to
take all actions necessary to complete the transactions
contemplated by the Merger Agreement; (iii) to maintain adequate
insurance; (iv) to maintain accurate books and records; (v) to
file all tax returns and pay all taxes when due; (vi) to
cooperate with each other and use their best efforts to identify
those persons who may be deemed to be affiliates of First State;
(vii) to agree upon the form and substance of any press release
or public disclosure related to the Merger Agreement, the Merger
and the Bank Merger; and (viii) to deliver to the other copies of
all securities documents when filed.
Dividends
The Merger Agreement permits First State to pay a
regular quarterly cash dividend, not to exceed $0.055 per share
of First State Common Stock outstanding in any quarter in which
the Effective Date is not on or before the record date for the
payment by Sovereign of its regular cash dividend. The Board of
Directors of First State agreed in the Merger Agreement to cause
the regular quarterly dividend record dates and payment dates
with respect to First State Common Stock to be the same as
Sovereign's regular quarterly dividend record dates and payment
dates for Sovereign Common Stock. First DeWitt may pay cash
dividends sufficient to permit payment of the dividends permitted
to be paid by First State. No other dividends may be paid by
First State or First DeWitt without the prior written consent of
Sovereign.
No Solicitation of Transactions
The Merger Agreement provides that during the term of
the Merger Agreement, First State shall not, nor shall it permit
any First State subsidiary or any other affiliate of First State
or any officer, director or employee of any of them, or any
investment banker, attorney, accountant or other representative
retained by First State, any First State subsidiary or any other
First State affiliate to, directly or indirectly, solicit,
encourage, initiate or engage in discussions or negotiations
with, or respond to requests for information, inquiries, or other
communications from, any person other than Sovereign concerning
the fact of, or the terms and conditions of, the Merger
Agreement, or concerning any acquisition of First State, any
First State subsidiary, or any assets or business thereof, except
First State's officers may respond to inquiries from analysts,
regulatory authorities and holders of First State Common Stock in
the ordinary course of business. The Merger Agreement provides
that First State shall notify Sovereign immediately if any such
discussions or negotiations are sought to be initiated with First
State by any person other than Sovereign or if any such requests
for information, inquiries, proposals or communications are
received from any person other than Sovereign.
The directors and executive officers of First State
have executed a letter agreement containing provisions similar to
those described above relating to First State, and such directors
and executive officers have also agreed to vote all shares of
First State Common Stock owned by them in favor of the Merger
Agreement. A copy of the letter agreement executed by the
directors and executive officers of First State is included as
Exhibit 1 to the Merger Agreement attached hereto as Annex A.
Amendment; Waivers
Subject to applicable law, at any time prior to the
consummation of the transactions contemplated by the Merger
Agreement, Sovereign and First State may (a) amend the Merger
Agreement, (b) extend the time for the performance of any of the
obligations or other acts of Sovereign and First State required
in the Merger Agreement, (c) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement,
or (d) waive compliance with any of the agreements or conditions
contained in the Merger Agreement
Termination; Effect of Termination
The Merger Agreement may be terminated on or at any
time prior to the Effective Date (a) by the mutual written
consent of Sovereign and First State; (b) by Sovereign or First
State (i) if there shall have been any breach of any
representation, warranty, covenant or other obligation of
Sovereign which results in a material adverse effect with respect
to Sovereign, on the one hand, or of First State which results in
a material adverse effect with respect to First State, on the
other hand, and such breach cannot be, or shall not have been,
remedied within 30 days after receipt by such other party of
notice in writing specifying the nature of such breach and
requesting that it be remedied; (ii) if the Effective Date shall
not have occurred on or before March 31, 1997, unless the failure
of such occurrence shall be due to the failure of the party
seeking to terminate the Merger Agreement to perform or observe
its agreements set forth in the Merger Agreement required to be
performed or observed by such party on or before the Effective
Date; or (iii) if either party has been informed in writing by a
regulatory authority whose approval or consent has been requested
that such approval or consent is unlikely to be granted, unless
the failure of such occurrence shall be due to the failure of the
party seeking to terminate the Merger Agreement to perform or
observe its agreements set forth in the Merger Agreement and
required to be performed or observed by such party on or before
the Effective Date; or (c) by First State if, on the Effective
Date, the Sovereign Market Value is less than $8.00 (as adjusted
for any stock splits or stock dividends); provided, however, that
if Sovereign delivers to First State on the Effective Date a
written notice increasing the Exchange Ratio to an amount which,
when multiplied by the Sovereign Market Value determined as of
the Closing Date, equals $14.75, then no termination of the
Merger Agreement shall occur and the Merger shall be completed
pursuant of the Merger Agreement.
Management and Operations after the Merger
Directors and Executive Officers
The Board of Directors and executive officers of
Sovereign in office immediately prior to the completion of the
Merger will constitute Sovereign's Board of Directors and
executive officers after completion of the Merger.
The Board of Directors and executive officers of
Sovereign Bank in office immediately prior to completion of the
Bank Merger will constitute Sovereign Bank's Board of Directors
and executive officers after completion of the Bank Merger,
except that Michael J. Quigley, III, Chairman, President and
Chief Executive Officer of First State, will become a director of
Sovereign Bank to hold office until the 1998 annual
reorganization meeting of the Board of Directors of Sovereign
Bank and until his successor is elected and qualified or
otherwise in accordance with the Charter and Bylaws of Sovereign
Bank and the policies of Sovereign and Sovereign Bank.
On the effective date of the Bank Merger, Sovereign
will create an advisory board of directors of Sovereign Bank for
the market area served by First DeWitt which shall consist of all
directors of First DeWitt in office immediately prior to the
completion of the Bank Merger. Sovereign shall cause such
persons to be elected as advisory directors of Sovereign Bank
effective as of the effective date of the Bank Merger, and each
shall hold office for at least one year from such effective date.
Such advisory board shall meet quarterly and each member shall
receive $250 per meeting attended.
Mr. Quigley and six other executive officers of First
State are parties to employment agreements with First State
which, among other things, provide rights to such officers upon
the occurrence, after a change in control, of certain
circumstances. These circumstances include a demotion,
reassignment to a new location, and a reduction in salary (a
"Triggering Event"). Sovereign has agreed to honor the terms of
such contracts. One or more Triggering Events under such
agreements will in all likelihood occur as a result of the
Merger. If a Triggering Event occurs after the Effective Date
and all of such officers exercise their rights under such
agreements, Sovereign would be required to pay such officers the
aggregate amount of approximately $6.4 million.
Consolidation of Operations
Sovereign expects to achieve certain cost savings and
operating synergies as a result of the Merger. These costs
savings and operating synergies are anticipated to aggregate
approximately 40% of First State's recurring operating expenses,
substantially realized within the twelve months following the
Effective Date. Sovereign expects that such cost savings and
operating synergies will be realized primarily as the result of
the elimination of duplicative functions in the areas of human
resources, loan servicing, and corporate overhead in the combined
New Jersey operations. Because of the uncertainties inherent in
merging two financial institutions, changes in the regulatory
environment, and changes in economic conditions, no assurances
can be given that any particular level of cost savings will be
realized, that any such cost savings will be realized over the
time period currently anticipated, or that such cost savings will
not be offset to some degree by increases in other expenses,
including expenses relating to integrating the two companies.
Any such expected cost savings or synergies do not give
effect to an expected one-time after-tax charge of approximately
$10 to $20 million, relating to Merger expenses, which will be
incurred upon completion of the Merger. Such expenses will be
incurred principally as a result of an addition to the allowance
for possible loan losses which Sovereign has determined will be
necessary in connection with a change in strategy related to
problem assets and to conform First State's charge-off policies
to those of Sovereign, payments to executive officers of First
State under existing employment contracts containing change in
control related obligations, other severance payments and asset
writedowns, and transaction costs directly related to the Merger.
Employee Benefits
Sovereign intends to maintain employee benefits for
First State and First DeWitt employees at levels which, in the
aggregate, are at least as favorable as such benefits which
existed as of March 31, 1996. On and after the Effective Date,
so long as such benefits are so maintained, the employee pension
and welfare benefit plans of Sovereign and First State may, at
Sovereign's election, continue to be maintained separately or
consolidated. In the event of a consolidation of any or all of
such plans, First State and First DeWitt employees shall receive
credit for service with First State or First DeWitt under any
Sovereign benefit plan or new Sovereign benefit plan in which
such employees would be eligible to enroll, for purposes of
eligibility and vesting determination.
Accounting Treatment
The Merger is expected to qualify as a "pooling-of-
interests" for accounting and financial reporting purposes.
Under this method of accounting, the recorded assets and
liabilities of Sovereign and First State will be carried forward
to the combined corporation at their recorded amounts; income of
the combined corporation will include income of both Sovereign
and First State for the entire fiscal year of Sovereign in which
the Merger occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as
income of the combined corporation. Expenses incurred in
connection with the Merger will constitute expenses for the
accounting periods to which such expenses relate. The receipt of
a letter from Sovereign's independent auditors confirming that
the Merger will qualify for pooling of interests accounting is a
condition to Sovereign's obligation to complete the Merger.
Certain Federal Income Tax Consequences
Completion of the Merger is conditioned upon there
being delivered to Sovereign and to First State an opinion of
Stevens & Lee, P.C., counsel to Sovereign, that for Federal
income tax purposes, under current law, assuming that the Merger
and related transactions will take place as described in the
Merger Agreement, among other things, the Merger will constitute
a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and
Sovereign and First State will each be a party to the
reorganization within the meaning of Code Section 368(b).
In that case, in the opinion of Stevens & Lee, P.C.,
the following would be the material Federal income tax
consequences of the Merger:
(i) no gain or loss will be recognized by
Sovereign or First State in the Merger;
(ii) no gain or loss will be recognized by
holders of shares of First State Common Stock upon their receipt
of Sovereign Common Stock in exchange for their First State
Common Stock, except that stockholders who receive cash proceeds
for fractional interests in Sovereign Common Stock will recognize
gain or loss equal to the difference between such proceeds and
the tax basis allocated to their fractional share interests, and
such gain or loss will constitute capital gain or loss if their
First State Common Stock is held as a capital asset at the
Effective Date;
(iii) the tax basis of the shares of Sovereign
Common Stock (including fractional share interests) received by
the stockholders of First State will be the same as the tax basis
of their First State Common Stock exchanged therefor; and
(iv) the holding period of the Sovereign Common
Stock in the hands of the First State stockholders will include
the holding period of their First State Common Stock exchanged
therefor, provided such First State Common Stock is held as a
capital asset at the Effective Date.
Under the Merger Agreement, the condition that
Stevens & Lee deliver the opinion described above can be waived
by Sovereign and First State. However, in the event that the
delivery of such opinion of counsel is waived, or such opinion
would otherwise set forth tax consequences materially different
to a stockholder than those described above, Sovereign and First
State intend to resolicit proxies as required in accordance with
the rules and regulations of the Securities and Exchange
Commission.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED ON CURRENTLY EXISTING PROVISIONS OF
THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER,
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF
THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD
AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION
IS NOT A COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND, IN PARTICULAR, DOES NOT ADDRESS
TAX CONSIDERATIONS THAT MAY AFFECT THE TREATMENT OF STOCKHOLDERS
WHO ACQUIRED THEIR FIRST STATE COMMON STOCK PURSUANT TO THE
EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION,
OR STOCKHOLDERS WHICH ARE EXEMPT ORGANIZATIONS OR WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. EACH STOCKHOLDER'S
INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX CONSEQUENCES OF THE
MERGER TO SUCH STOCKHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE
MERGER UNDER APPLICABLE STATE, LOCAL, OR FOREIGN LAWS.
ACCORDINGLY, EACH FIRST STATE STOCKHOLDER IS ADVISED TO CONSULT A
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
SUCH STOCKHOLDER.
Expenses
Sovereign and First State will each pay all costs and
expenses incurred by it in connection with the transactions
contemplated by the Merger Agreement, including fees and expenses
of financial consultants, accountants and legal counsel, except
that (i) the cost of printing and mailing this Proxy
Statement/Prospectus will be shared equally by Sovereign and
First State and (ii) if Sovereign requests First State to retain
a proxy solicitor in connection with the solicitation of First
State stockholder approval of the Merger Agreement, Sovereign
will bear the expense of such proxy solicitor.
Resale of Sovereign Common Stock
The Sovereign Common Stock issued pursuant to the
Merger will be freely transferable under the Securities Act
except for shares issued to any First State shareholder who may
be deemed to be an "affiliate" of First State or Sovereign for
purposes of Rule 145 under the Securities Act of 1933 (the
"Securities Act"). Each director and executive officer of First
State has entered into an agreement with Sovereign providing
that, as an affiliate, he or she will not transfer any Sovereign
Common Stock received in the Merger except in compliance with the
Securities Act and will make no dispositions of any Sovereign
Common Stock or First State Common Stock (or any interest
therein) during the period commencing 30 days prior to the
Effective Date through the date on which financial results
covering at least 30 days of combined operations of Sovereign and
First State after the Merger have been made public. A copy of
such agreement is included as Exhibit 1 to the Merger Agreement
attached hereto as Annex A. This Proxy Statement/Prospectus does
not cover resales of Sovereign Common Stock received by any
person who may be deemed an affiliate of First State or
Sovereign.
No Dissenters' Rights of Appraisal
Holders of shares of First State Common Stock will not
be entitled to appraisal rights under the Delaware General
Corporation law in connection with the matters to be acted on at
the Special Meeting.
Dividend Reinvestment Plan
Sovereign currently maintains a Dividend Reinvestment
and Stock Purchase Plan. This plan provides shareholders of
Sovereign with a simple and convenient method of investing cash
dividends, as well as voluntary cash payments, in additional
shares of Sovereign Common Stock, without payment of any
brokerage commission or service charge. It is anticipated that,
after the Effective Date, Sovereign will continue to offer this
plan and shareholders of First State who become shareholders of
Sovereign will be eligible to participate therein.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Stock Options
As of the Record Date, the directors and executive
officers of First State beneficially own approximately
830,806 shares of First State Common Stock, including options to
purchase 370,600 shares of First State Common Stock. On the
Effective Date, each Management Option, whether or not such
Management Option is exercisable on the Effective Date, shall
cease to be outstanding and shall be converted on the Effective
Date into and become an option to acquire that number of shares
of Sovereign Common Stock equal to the number of shares of First
State Common Stock covered by the Management Option multiplied by
the Exchange Ratio, at an exercise price equal to the present
stated exercise price of such option divided by the Exchange
Ratio. Shares issuable upon the exercise of such options to
acquire Sovereign Common Stock shall be issuable, at the election
of Sovereign, either under Sovereign's stock option plans or
First State's stock option plans.
Indemnification
Sovereign has agreed in the Merger Agreement that, on
or after the Effective Date, Sovereign shall indemnify, defend
and hold harmless all prior and then-existing directors and
officers of First State and First DeWitt, against (i) all losses,
claims, damages, costs, expenses, liabilities or judgments or
amounts that are paid in settlement (with the approval of
Sovereign which approval shall not be unreasonably withheld) of
or in connection with any claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or
in part out of the fact that such person is or was a director,
officer or employee of First State or any First State subsidiary,
whether pertaining to any matter existing or occurring at or
prior to the Effective Date and whether asserted or claimed prior
to, or at or after, the Effective Date ("Indemnified
Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or
pertaining to the Merger Agreement or the transactions
contemplated by the Merger Agreement, to the same extent as such
officer, director or employee would be indemnified by First State
or First DeWitt as of June 24, 1996 including the right to
advancement of expenses, provided, however, that any such
officer, director or employee of First State or First DeWitt may
not be indemnified by Sovereign and/or Sovereign Bank if such
indemnification is prohibited by applicable law.
CERTAIN RELATED TRANSACTIONS
Stock Option Agreement
As a condition to entering into the Merger Agreement,
First State executed and delivered to Sovereign the Stock Option
Agreement, dated as of June 24, 1996 (the "Stock Option
Agreement"). A copy of the Stock Option Agreement is included as
Exhibit 2 to the Merger Agreement attached hereto as Annex A.
Pursuant to the Stock Option Agreement, Sovereign was granted an
option to purchase up to 783,500 shares of First State Common
Stock. The exercise price per share to purchase First State
Common Stock under the option is equal to the lower of $10.00 or
the lowest price per share that a person or group, other than
Sovereign or an affiliate of Sovereign, paid or offers to pay for
First State Common Stock upon the occurrence of one of the
specified events that trigger exercise of the option. The option
may only be exercised, in whole or in part, upon the occurrence
of certain events (collectively, "Triggering Events"), including,
among other things, the acquisition by a person or group of a
significant number of shares of First State Common Stock, First
State entering into an agreement to merge, consolidate or sell
assets, or a public announcement by a third party of an intent to
acquire control of First State under certain circumstances.
The Stock Option Agreement, together with (i) First
State's agreement to not solicit other transactions relating to
the acquisition of First State by a third party and (ii) the
agreement of First State's directors and executive officers to
vote their shares in favor of the Merger Agreement (see "THE
MERGER--No Solicitation of Transactions"), may have the effect of
discouraging persons who might now or prior to the Effective Date
be interested in acquiring all of or a significant interest in
First State from considering or proposing such an acquisition,
even if such persons were prepared to pay a higher price per
share for First State Common Stock than the price per share
implicit in the Merger Consideration. Certain attempts to
acquire First State or an interest in First State would cause the
option to become exercisable as described above. Sovereign's
exercise of such option would significantly increase a potential
acquiror's cost of acquiring First State compared to the cost
that would be incurred without the Stock Option Agreement. Such
increased cost might discourage a potential acquiror from
considering or proposing an acquisition or might result in a
potential acquiror proposing to pay a lower per share price to
acquire First State than it might otherwise have proposed to pay.
In addition, the management of Sovereign and First State believe
that the existence of the Stock Option Agreement is likely to
prohibit any acquiror of First State from accounting for any
acquisition of First State using the "pooling of interests"
accounting method. In addition, exercise of the option would
increase the ability of Sovereign to obtain the approval of First
State's shareholders necessary to complete the Merger and
adversely affect the ability of a third party to obtain any
necessary approval of such shareholders to complete an
alternative transaction.
<PAGE>
INFORMATION WITH RESPECT TO SOVEREIGN
General
Financial and other information relating to Sovereign,
including information relating to Sovereign's directors and
executive officers, is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION."
Market Price of and Dividends on Sovereign Common Stock and
Related Shareholder Matters
The Sovereign Common Stock is listed on the Nasdaq
National Market System under the symbol SVRN. As of
September 30, 1996, Sovereign had approximately
______ shareholders of record. The table below sets forth for
the periods indicated the amount of dividends paid per share and
the quarterly ranges of high and low sales prices for Sovereign
Common Stock as reported by the Nasdaq National Market System and
does not necessarily reflect mark-ups, mark-downs or commissions.
All per share information has been adjusted to show the effect of
all stock dividends and stock splits payable or effected through
February 15, 1996. The Sovereign Common Stock commenced trading
in August 1986 upon the conversion of Sovereign Bank's
predecessor from mutual to stock form.
Quarterly
Quarter Ended Dividend High Low
December 31, 1996(1) $0.0210 $12.8750 $12.7500
September 30, 1996 0.0210 11.1250 9.5000
June 30, 1996 0.0210 11.1250 10.0000
March 31, 1996 0.0210 11.1250 9.1875
December 31, 1995 0.0210 10.3750 9.1875
September 30, 1995 0.0209 10.2500 8.9375
June 30, 1995 0.0209 9.1875 7.6250
March 31, 1995 0.0209 8.8125 7.0000
December 31, 1994 0.0259 9.0625 7.0000
September 30, 1994 0.0258 10.1875 8.7500
__________________
(1) Through December 20, 1996
On June 24, 1996, the last business day preceding
public announcement of the Merger, the last sale price for
Sovereign Common Stock was $10.1875 per share. On December 20,
1996, the last sale price for the Sovereign Common Stock was
$12.7500 per share. The average weekly trading volume for the
Sovereign Common Stock during the quarter ended September 30,
1996 was 795,386 shares.
For certain limitations on the ability of Sovereign
Bank to pay dividends to Sovereign, see Sovereign's Annual Report
on Form 10-K for the year ended December 31, 1995 which is
incorporated herein by reference. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
<PAGE>
INFORMATION WITH RESPECT TO FIRST STATE
General
Financial and other information concerning First State,
including information relating to First State's directors and
executive officers, is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." A copy of
First State's 1996 Annual Report to Stockholders is being sent to
First State's stockholders together with this Proxy
Statement/Prospectus.
Market Price of and Dividends on First State Common Stock and
Related Shareholder Matters
The First State Common Stock is listed on the Nasdaq
National Market System under the symbol FSF1. As of
September 30, 1996, there were approximately 1,100 shareholders
of record. The table below sets forth for the periods indicated
the amount of dividends declared per share and the quarterly
ranges of high and low closing sales prices as reported by Nasdaq
for the periods indicated. Such prices do not necessarily
reflect mark-ups, mark-downs or commissions.
Quarterly
Quarter Ended Dividend High Low
December 31, 1996(1) $.055 $15-3/16 $15-1/8
September 30, 1996 .055 13-3/8 12-1/2
June 30, 1996 .055 13-5/8 10
March 31, 1996 .055 13-3/8 11-3/4
December 31, 1995 .055 14-3/8 12-7/8
September 30, 1995 .055 13-1/4 12-1/8
June 30, 1995 .055 12-1/4 9-1/4
March 31, 1995 .050 9-1/2 6-3/4
December 31, 1994 .050 8-3/4 6-5/8
September 30, 1994 .050 8-3/4 7-3/4
__________________
(1) Through December 20, 1996
On June 24, 1996, the last business day preceding
public announcement of the Merger, the last sale price for First
State Common Stock was $10 per share. On December 20, 1996, the
last sale price for First State Common Stock was $15-3/16 per
share. The average weekly trading volume for the First State
Common Stock during the quarter ended September 30, 1996 was
__________ shares.
The Merger Agreement permits First State to pay a
regular quarterly cash dividend, not to exceed $0.055 per share
of First State Common Stock outstanding in any quarter in which
the Effective Date is not on or before the record date for the
payment by Sovereign of its regular cash dividend. The Board of
Directors of First State agreed in the Merger Agreement to cause
the regular quarterly dividend record dates and payment dates
with respect to First State Common Stock to be the same as
Sovereign's regular quarterly dividend record dates and payment
dates for Sovereign Common Stock. First DeWitt may pay cash
dividends sufficient to permit payment of the dividends permitted
to be paid by First State. No other dividends may be paid by
First State or First DeWitt without the prior written consent of
Sovereign. See "THE MERGER -- Dividends." First State's ability
to continue to pay dividends may be dependent upon its receipt of
dividends from First DeWitt. See "REGULATION AND SUPERVISION,"
set forth in First State's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996, which is incorporated
herein by reference. See also Note 16 to First State's audited
consolidated financial statements set forth in First State's 1996
Annual Report to Stockholders, which is incorporated herein by
reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
<PAGE>
DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES
The authorized capital stock of Sovereign consists of
100,000,000 shares of common stock, no par value ("Sovereign
Common Stock"), and 7,500,000 shares of authorized preferred
stock ("Sovereign Preferred Stock"). As of September 30, 1996,
there were 49,333,762 shares of Sovereign Common Stock issued and
outstanding and no shares held by Sovereign as treasury stock,
and 2,000,000 shares of 6-1/4% Cumulative Convertible Preferred
Stock, Series B ($50 liquidation preference) issued and
outstanding. There are no other shares of capital stock of
Sovereign authorized, issued or outstanding. Sovereign has no
options, warrants, or other rights authorized, issued or
outstanding, other than as described herein under "Shareholder
Rights Plan" and options granted under the Sovereign Bancorp,
Inc. Stock Option Plan and the 1993 Sovereign Bancorp, Inc. Stock
Option Plan.
Common Stock
The holders of Sovereign Common Stock are entitled to
share ratably in dividends when and if declared by the Sovereign
Board of Directors from funds legally available therefor.
Declaration and payment of cash dividends by Sovereign depends
upon dividend payments by Sovereign Bank, which are Sovereign's
primary source of revenue and cash flow. Sovereign is a legal
entity separate and distinct from its subsidiaries. Accordingly,
the right of Sovereign, and consequently the right of creditors
and shareholders of Sovereign, to participate in any distribution
of the assets or earnings of any subsidiary is necessarily
subject to the prior claims of creditors of the subsidiary,
except to the extent that claims of Sovereign in its capacity as
a creditor may be recognized.
Sovereign Bank will not be permitted to pay dividends
on its capital stock or repurchase shares of its stock if its
shareholders' equity would be reduced below the amount required
for the liquidation accounts established in the respective
conversions from mutual to stock form of the predecessors of
Sovereign Bank or applicable regulatory capital requirements.
Current OTS regulations require a holding company's insured
institutions to give the OTS 30 days advance notice of any
proposed declaration of dividends to the holding company, and the
OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the holding company.
The OTS capital distribution rule, which became
effective on August 1, 1990, provides for three tiers of savings
associations: (i) Tier 1 associations, associations that have
capital ("total capital" as calculated under the OTS capital
regulations) equal to or greater than their fully phased-in
capital requirements (the requirements applicable at December 31,
1994) prior to, and on a pro forma basis after giving effect to,
a proposed capital distribution; (ii) Tier 2 associations,
associations that have capital equal to or greater than their
minimum capital requirements, but less than their fully phased-in
capital requirements prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution; and
(iii) Tier 3 associations, associations that do not meet their
minimum capital requirements, either before or after giving
effect to a proposed capital distribution. At September 30,
1995, Sovereign Bank is a "Tier 1 association" both historically
and on a pro forma basis after giving effect to the Merger.
Under the OTS capital distribution rule, a Tier 1 association may
make capital distributions of up to the greater of (a) 100% of
its net income during a calendar year plus the amount that would
reduce by one-half its surplus capital ratio (the percentage by
which the association's capital-to-assets ratio exceeds the ratio
of its fully phased-in capital requirements to its assets) at the
beginning of the calendar year, or (b) 75% of its net income over
the most recent four-quarter period. A Tier 1 association may
make capital distributions in excess of the foregoing limits if
the OTS does not object after receiving notice thereof. A Tier 2
association is authorized to make distributions of up to 75% of
net income over the most recent four-quarter period if it
satisfies its fully phased-in risk-based capital requirement, or
up to 50% of such net income if it satisfies its interim (90% of
fully phased-in amount) risk-based capital requirement. A Tier 2
association may, through a written approval process, obtain OTS
approval to make distributions in excess of these amounts.
Tier 3 associations are not authorized to make any capital
distributions without prior written OTS approval unless, in the
case of an association operating in compliance with an approved
capital plan, the capital distribution is consistent with the
association's capital plan. The OTS has supervisory authority to
prohibit the payment of capital distributions for Tier 1 and
Tier 2 associations.
For certain limitations on the ability of Sovereign
Bank to pay dividends to Sovereign, see Sovereign's Annual Report
on Form 10-K for the year ended December 31, 1995 which is
incorporated herein by reference. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
Prior to the issuance of any Sovereign Preferred Stock
which possesses voting rights (see "Preferred Stock" below), the
holders of shares of Sovereign Common Stock will possess
exclusive voting rights in Sovereign. Each holder of shares of
Sovereign Common Stock will be entitled to one vote for each
share held on matters upon which shareholders have the right to
vote. Sovereign shareholders are not entitled to cumulate votes
in the election of directors.
The Sovereign Board of Directors is divided into three
classes, each serving three-year terms, so that approximately
one-third of the directors of Sovereign are elected at each
annual meeting of shareholders of Sovereign. Classification of
the Sovereign Board of Directors has the effect of decreasing the
number of directors that could be elected in a single year by any
person who seeks to elect its designees to a majority of the
seats on the Sovereign Board of Directors and thereby could
impede a change in control of Sovereign.
The holders of Sovereign Common Stock have no
preemptive rights to acquire any additional shares of Sovereign.
In addition, the Sovereign Common Stock is not subject to
redemption.
Sovereign's Articles of Incorporation authorize the
Sovereign Board of Directors to issue authorized shares of
Sovereign Common Stock without shareholder approval. Sovereign
Common Stock is included for quotation on the Nasdaq National
Market System. As a result, in order to maintain such inclusion,
approval of Sovereign's shareholders is required for the issuance
of additional shares of Sovereign Common Stock or securities
convertible into Sovereign Common Stock if the issuance of such
securities (1) is in connection with the acquisition of a
company, is not in connection with a public offering for cash,
and the securities issued have or will have voting power equal to
or in excess of 20% of the voting power outstanding before such
issuance; (2) is in connection with the acquisition of a company
in which a director, officer or substantial shareholder of
Sovereign has a 5% or greater interest and the issuance of the
securities could result in an increase in outstanding common
stock or voting power of 5% or more; (3) is in connection with a
transaction, other than a public offering, at a price less than
the greater of book or market value in which the shares issued
will equal 20% or more of the shares of Sovereign Common Stock or
20% or more of the voting power outstanding before issuance; or
(4) would result in a change in control of Sovereign. Under
Nasdaq National Market System rules, shareholder approval is also
required for the establishment of a stock option or purchase plan
in which stock may be acquired by officers and directors other
than a broadly-based plan in which other security holders of
Sovereign or employees of Sovereign participate. For a
discussion of whether the approval of Sovereign shareholders is
required for the issuance of the shares of Sovereign Common Stock
issuable to First State stockholders in the Merger, see "THE
MEETING -- Votes Required; Quorum."
In the event of liquidation, dissolution or winding-up
of Sovereign, whether voluntary or involuntary, holders of
Sovereign Common Stock will be entitled to share ratably in any
of its assets or funds that are available for distribution to its
shareholders after the satisfaction of its liabilities (or after
adequate provision is made therefor) and after payment of any
liquidation preferences of any outstanding Sovereign Preferred
Stock.
Preferred Stock
General
Sovereign's Board of Directors is authorized to approve
the issuance of Sovereign Preferred Stock, without any required
approval of shareholders. The rights, qualifications,
limitations and restrictions on each series of Sovereign
Preferred Stock issued will be determined by the Board of
Directors at the time of issuance and may include, among other
things, rights to participating dividends, voting and
convertibility into shares of Common Stock. Shares of Sovereign
Preferred Stock may be issued with dividend, redemption, voting,
and liquidation rights taking priority over Common Stock, and may
be convertible into common stock, as determined by the Board of
Directors at the time of issuance.
On May 17, 1995, Sovereign issued 2,000,000 shares of
6-1/4% Cumulative, Convertible Preferred Stock, Series B (the
"Series B Preferred Stock").
Description of Series B Preferred Stock
Ranking. The Series B Preferred Stock will rank prior
to Sovereign Common Stock and Series A Junior Participating
Preferred Stock, and on a parity with all other preferred stock
of Sovereign (unless such other preferred stock is expressly made
junior to the Series B Preferred Stock), with respect to the
payment of dividends and amounts payable upon any voluntary or
involuntary liquidation, dissolution or winding up of Sovereign.
Dividends. Holders of shares of Series B Preferred
Stock are entitled to receive, when and as declared by the Board
of Directors, cash dividends payable quarterly at the rate of
6-1/4% per annum. Dividends on the Series B Preferred Stock,
calculated as a percentage of the liquidation preference, are
payable quarterly on February 15, May 15, August 15 and
November 15 of each year. Dividends will be cumulative from the
date of issue of the Series B Preferred Stock. So long as any
Series B Preferred Stock is outstanding, Sovereign may not
declare any dividends on the Sovereign Common Stock or any other
stock ranking as to dividends or distribution of assets junior to
the Series B Preferred Stock (the Common stock and any such other
stock being herein referred to as "Junior Stock"), or make any
payment on account of, or set apart money for, a sinking or other
analogous fund for the purchase, redemption or other retirement
of any shares of Junior Stock, or make any distribution in
respect thereof, whether in cash or property or in obligations or
stock of Sovereign, other than Junior Stock, unless (i) full
cumulative dividends shall have been paid or declared and set
apart for payment upon all outstanding shares of Sovereign
Preferred Stock other than Junior Stock, and (ii) Sovereign is
not in default or in arrears with respect to any sinking or other
analogous fund or any call for tenders, obligation or other
agreement for the purchase, redemption or other retirement of any
shares of Sovereign Preferred Stock other than Junior Stock. If
dividends on shares of the Series B Preferred Stock are in
arrears, and there shall be outstanding shares of any other
series of Sovereign Preferred Stock ranking on a parity as to
dividends with the shares of the Series B Preferred Stock,
Sovereign in making any dividend payment on account of such
arrears, is required to make payments ratably upon all
outstanding shares of the Series B Preferred Stock and shares of
such other series of Sovereign Preferred Stock in proportion to
the respective amounts of dividends in arrears on such shares of
Series B Preferred Stock and shares of other series of Sovereign
Preferred Stock.
Conversion Rights. Holders of shares of Series B
Preferred Stock have the right, at their option, to convert
shares of Series B Preferred Stock into shares of Sovereign
Common Stock at any time at an initial conversion rate of 4.989
(adjusted to reflect the Sovereign Stock Dividend) shares of
Common Stock for each share of Series B Preferred Stock provided
that if any of the Preferred Stock is called for redemption, the
conversion rights pertaining thereto will terminate at the close
of business on the date fixed for redemption. The conversion
rate is subject to adjustment in certain events, including:
(i) the issuance of capital stock as a dividend or distribution
on the Sovereign Common Stock; (ii) subdivisions and combinations
of the Sovereign Common Stock; (iii) the issuance to all holders
of Sovereign Common Stock of certain rights or warrants entitling
them to subscribe for or purchase Sovereign Common Stock (or
securities convertible into Sovereign Common Stock) within
45 days after the date fixed for the determination of the
shareholders entitled to receive such rights or warrants, at less
than the current market price; and (iv) the distribution to all
holders of Sovereign Common Stock of evidences of indebtedness or
assets of Sovereign (excluding those referred to above).
In the case of (i) any reclassification or change of
the Common Stock, or (ii) a consolidation or merger involving
Sovereign, or (iii) a sale or conveyance to another corporation
of the property and assets of Sovereign as an entirety or
substantially as an entirety, in each case as a result of which
holders of Sovereign Common Stock will be entitled to receive
stock, securities, other property or assets (including cash) with
respect to or in exchange for such Sovereign Common Stock, the
holders of the Series B Preferred Stock then outstanding will be
entitled thereafter to convert such Series B Preferred Stock into
the kind and amount of shares of stock and other securities or
property which they would have received upon such
reclassification, change, consolidation, merger, combination,
sale or conveyance had such Series B Preferred Stock been
converted into Sovereign Common Stock immediately prior to such
reclassification, change, consolidation, merger, combination,
sale or conveyance.
Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of Sovereign,
the holders of shares of Series B Preferred Stock are entitled to
receive out of assets of Sovereign available for distribution to
shareholders, before any distribution of assets is made to
holders of Sovereign Common Stock or of any other stock of
Sovereign ranking as to such distribution junior to the Series B
Preferred Stock, liquidating distributions in the amount of $50
per share plus accrued and unpaid dividends. If upon any
voluntary or involuntary liquidation, dissolution or winding up
of Sovereign, the amounts payable with respect to the Series B
Preferred Stock and any other shares of stock of Sovereign
ranking as to any such distribution on a parity with the Series B
Preferred Stock are not paid in full, the holders of the Series B
Preferred Stock and of each other share will share ratably in any
such distribution of assets of Sovereign in proportion to the
full respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of shares of Series B
Preferred Stock will not be entitled to any further participation
in any distribution of assets by Sovereign. A consolidation or
merger of Sovereign with or into any other corporation or
corporations or a sale of all or substantially all of the assets
of Sovereign will not be deemed to be a liquidation, dissolution
or winding up of Sovereign.
Redemption. The shares of Series B Preferred Stock are
not redeemable prior to May 15, 1998. On or after May 15, 1998,
at any time or from time to time, each share of Series B
Preferred Stock will be redeemable in whole or in part at the
option of Sovereign, upon not less than 30 nor more than 60 days'
notice, at a redemption price as set forth below plus, in each
case, accrued and unpaid dividends to the redemption date.
If Redeemed During the
Twelve Months Beginning May 15, Redemption Price
1998........................... $52.188
1999........................... 51.875
2000........................... 51.563
2001........................... 51.250
2002........................... 50.938
2003........................... 50.625
2004........................... 50.313
and at $50 per share thereafter
The Series B Preferred Stock may not be redeemed and
Sovereign may not otherwise purchase or acquire any shares of the
Series B Preferred Stock unless full cumulative dividends on the
Series B Preferred Stock or on any series of Sovereign Preferred
Stock ranking on a parity with or senior to the Series B
Preferred Stock have been paid or declared and set apart for
payment and unless all matured obligations of Sovereign with
respect to all sinking funds or purchase funds applicable to any
other series of Sovereign Preferred Stock then outstanding have
been met.
Voting Rights. Except as indicated below, or except as
expressly required by applicable law, the holders of the Series B
Preferred Stock are not entitled to vote.
If the equivalent of six quarterly dividends payable on
any series of Sovereign Preferred Stock of Sovereign are in
default (whether or not declared consecutive), the holders of all
outstanding series of Sovereign Preferred Stock, voting as a
single class without regard to series, will be entitled to elect
two directors until all dividends in default have been paid or
declared and set apart for payment. The affirmative vote or
consent of the holders of at least two-thirds of the outstanding
shares of Series B Preferred Stock and any other series of
Sovereign Preferred Stock, voting as a single class without
regard to series, will be required (i) for any amendment to
Sovereign's Articles of Incorporation (or any certificate
supplemental thereto providing for the capital stock of
Sovereign) or Bylaws which will materially and adversely change
the preferences, privileges, rights or powers of the Sovereign
Preferred Stock, but, in any case in which one or more, but not
all, series of preferred stock would be affected as to their
preferences, privileges, rights or powers, only the consent of
holders of at least two-thirds of the shares of all such series
that would be so affected, voting separately as a class, will be
required; or (ii) to issue any class of stock which shall have
preference as to dividends or distribution of assets over any
outstanding series of Sovereign Preferred stock.
Shareholder Rights Plan
Sovereign maintains a Shareholder Rights Plan (the
"Rights Plan") designed to protect shareholders from attempts to
acquire control of Sovereign at an inadequate price. Under the
Rights Plan, each outstanding share of Sovereign Common Stock has
attached to it one right to purchase one one-hundredth of a share
of a series of junior participating preferred stock at an initial
exercise price of $40. The rights are not currently exercisable
or transferable, and no separate certificates evidencing such
rights will be distributed, unless certain events occur.
The rights become exercisable to purchase shares of the
junior participating preferred stock if a person, group or other
entity acquires or commences a tender offer or an exchange offer
for 19.9% or more of total voting power. They can also be
exercised if a person or group who has become a beneficial owner
of at least 4.9% of Sovereign Common Stock or total voting power
is declared by Sovereign's Board of Directors to be an "adverse
person," as defined in the Rights Plan.
After the rights become exercisable, under certain
circumstances, the rights (other than rights held by a 19.9%
beneficial owner or an "adverse person") will entitle the holders
to purchase either Sovereign Common Stock or the common stock of
the potential acquiror, in lieu of the junior participating
preferred stock, at a substantially reduced price.
Sovereign is generally entitled to redeem the rights at
$.001 per right at any time until the tenth business day
following public announcement that a 19.9% position has been
acquired. At any time prior to the date the rights have become
nonredeemable, the Sovereign Board of Directors can extend the
redemption period. Rights are not redeemable following an
"adverse person" determination.
Special Charter and Pennsylvania Corporate Law Provisions
Sovereign's Articles of Incorporation and Bylaws
contain certain provisions which may have the effect of deterring
or discouraging, among other things, a nonnegotiated tender or
exchange offer for Sovereign stock, a proxy contest for control
of Sovereign, the assumption of control of Sovereign by a holder
of a large block of Sovereign's stock and the removal of
Sovereign's management. These provisions: (1) empower the
Sovereign Board of Directors, without shareholder approval, to
issue Sovereign Preferred Stock the terms of which, including
voting power, are set by the Sovereign Board of Directors;
(2) divide the Sovereign Board of Directors into three classes
serving staggered three-year terms; (3) restrict the ability of
shareholders to remove directors; (4) require that shares with at
least 80% of total voting power approve mergers and other similar
transactions with a person or entity holding stock with more than
5% of Sovereign's voting power, if the transaction is not
approved, in advance, by the Sovereign Board of Directors;
(5) prohibit shareholders' actions without a meeting; (6) require
that shares with at least 80%, or in certain instances a
majority, of total voting power approve the repeal or amendment
of Sovereign's articles of incorporation; (7) require any person
who acquires stock of Sovereign with voting power of 25% or more
to offer to purchase for cash all remaining shares of Sovereign's
voting stock at the highest price paid by such person for shares
of Sovereign's voting stock during the preceding year;
(8) eliminate cumulative voting in elections of directors;
(9) require an affirmative vote of at least two-thirds of
Sovereign's total voting power in order for shareholders to
repeal or amend Sovereign's bylaws; (10) require advance notice
of nominations for the election of directors and the presentation
of shareholder proposals at meetings of shareholders; and
(11) provide that officers, directors, employees, agents and
persons who own 5% or more of the voting securities of any other
corporation or other entity that owns 66-2/3% or more of
Sovereign's outstanding voting stock cannot constitute a majority
of the members of Sovereign's Board of Directors.
The Pennsylvania Business Corporation Law of 1988 (the
"PaBCL") also contains certain provisions applicable to Sovereign
which may have the effect of impeding a change in control of
Sovereign. These provisions, among other things: (1) require
that, following any acquisition by any person or group of 20% of
a public corporation's voting power, the remaining shareholders
have the right to receive payment for their shares, in cash, from
such person or group in an amount equal to the "fair value" of
the shares, including an increment representing a proportion of
any value payable for control of the corporation; and
(2) prohibit for five years, subject to certain exceptions, a
"business combination" (which includes a merger or consolidation
of the corporation or a sale, lease or exchange of assets) with a
shareholder or group of shareholders beneficially owning 20% or
more of a public corporation's voting power.
In 1990, Pennsylvania adopted legislation further
amending the PaBCL. To the extent applicable to Sovereign at the
present time, this legislation generally (1) expands the factors
and groups (including shareholders) which the Sovereign Board of
Directors can consider in determining whether a certain action is
in the best interests of the corporation; (2) provides that the
Sovereign Board of Directors need not consider the interests of
any particular group as dominant or controlling; (3) provides
that Sovereign's directors, in order to satisfy the presumption
that they have acted in the best interests of the corporation,
need not satisfy any greater obligation or higher burden of proof
with respect to actions relating to an acquisition or potential
acquisition of control; (4) provides that actions relating to
acquisitions of control that are approved by a majority of
"disinterested directors" are presumed to satisfy the directors'
standard, unless it is proven by clear and convincing evidence
that the directors did not assent to such action in good faith
after reasonable investigation; and (5) provides that the
fiduciary duty of Sovereign's directors is solely to the
corporation and may be enforced by the corporation or by a
shareholder in a derivative action, but not by a shareholder
directly.
The 1990 amendments to the PaBCL explicitly provide
that the fiduciary duty of directors shall not be deemed to
require directors (1) to redeem any rights under, or to modify or
render inapplicable, any shareholder rights plan; (2) to render
inapplicable, or make determinations under, provisions of the
PaBCL relating to control transactions, business combinations,
control-share acquisitions or disgorgement by certain controlling
shareholders following attempts to acquire control; or (3) to act
as the board of directors, a committee of the board or an
individual director solely because of the effect such action
might have on an acquisition or potential or proposed acquisition
of control of the corporation or the consideration that might be
offered or paid to shareholders in such an acquisition. One of
the effects of the 1990 fiduciary duty statutory provisions may
be to make it more difficult for a shareholder to successfully
challenge the actions of the Sovereign Board of Directors in a
potential change in control context. Pennsylvania case law
appears to provide that the fiduciary duty standard under the
1990 amendments to the PaBCL grants directors the statutory
authority to reject or refuse to consider any potential or
proposed acquisition of the corporation.
Sovereign opted out of coverage by the "disgorgement"
and "control-share acquisition" statutes included in the 1990
legislation, pursuant to a Bylaw amendment as permitted by the
legislation; Sovereign can reverse this action under certain
circumstances.
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS
At the Effective Date, shareholders of First State
automatically will become shareholders of Sovereign, and their
rights as shareholders will be determined by the Pennsylvania BCL
and by Sovereign's Articles of Incorporation and Bylaws. The
following is a summary of material differences between the rights
of holders of Sovereign Common Stock and the rights of holders of
First State Common Stock. These differences arise from various
provisions of the Pennsylvania BCL and the Delaware GCL, the
Articles of Incorporation, Bylaws and Rights Plan of Sovereign
and the Certificate of Incorporation and Bylaws of First State.
Directors
Removal
Pursuant to Sovereign's Articles of Incorporation,
Sovereign directors may be removed from office without cause by
the affirmative vote of a majority of outstanding voting shares.
First State directors, pursuant to First State's Certificate of
Incorporation, may only be removed for cause and only by the
affirmative vote of the holders of at least 80% of the
outstanding voting capital stock.
Nomination
Shareholders of both First State and Sovereign are
required to submit to their respective companies, in writing and
in advance, any nomination of a candidate for election as a
director. Sovereign's bylaws provide that such nominations
generally must be submitted not more than 120 days, and not less
than 90 days, prior to a scheduled meeting for the election of
directors (unless less than 21 days' notice of the meeting is
given to shareholders in which case such nominations must be
submitted within 7 days following the mailing of the notice to
shareholders). First State's Bylaws provide that its
shareholders must submit written nominations not less than
90 days prior to the date of the meeting for the election of
directors (unless less than 100 days' notice of the meeting is
given to stockholders in which case such nominations must be
submitted not less than 10 days following the day on which notice
of the meeting was mailed or public disclosure was made).
Limited Liability
A director of Sovereign is not personally liable to
Sovereign, its shareholders or others for any action taken or any
failure to take any action unless the director breached or failed
to perform the duties of his or her office as set forth under
Pennsylvania law and such breach or failure constitutes
self-dealing, willful misconduct or recklessness; provided,
however, that there is no such elimination of liability arising
under any criminal statute or with respect to the payment of
taxes pursuant to local, state or federal law.
A director of First State is not personally liable to
First State or its shareholders for monetary damages for breach
of fiduciary duty as a director except for liability (i) for any
breach of the director's duty of loyalty, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for certain
illegal dividends, or (iv) for any transaction from which the
director derived an improper personal benefit.
Indemnification
The Certificate of Incorporation of First State and the
Bylaws of Sovereign each provide for indemnification of
directors, officers and agents for certain litigation-related
liabilities and expenses. Generally, directors, officers and
employees of First State are entitled to indemnification (i) in
third party actions, if the person acted in good faith and in a
manner he reasonably believed to be in the best interests of
First State and, as to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (ii) in
derivative actions, if the person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of First State, provided the person has not been
adjudged to be liable to First State. Indemnification in both
third party actions and derivative actions can be made only in a
specific case upon a finding by (i) a majority vote of
disinterested directors, even though less than a quorum,
(ii) independent legal counsel in a written opinion, or (iii) by
shareholders, that the appropriate standard for indemnification
has been met.
In comparison, directors, officers, employees and
agents of Sovereign are entitled to indemnification in both third
party actions and derivative actions unless there is a court
finding that the act or failure to act giving rise to the claim
for indemnification constitutes willful misconduct or
recklessness. There is no requirement of a case-by-case
determination that the applicable standard of conduct has been
met for a person to be entitled to indemnification.
Shareholders' Meetings
Special meetings of Sovereign shareholders may be
called at any time by any of the following: (1) the Board of
Directors at a duly called and held meeting of the Board of
Directors or upon the unanimous written consent of the members of
the Board of Directors; or (2) the Chairman of the Board or the
Chief Executive Officer, but only upon receiving written
direction of at least a majority of directors then in office.
Holders of First State Common Stock are not entitled to call a
special meeting of First State shareholders. Special meetings of
First State shareholders may be called only by a majority of the
total number of Directors of First State.
Shareholders of Sovereign are required to submit to
Sovereign, in writing and in advance, any matter desired to be
placed on the agenda of an annual meeting of shareholders. Such
proposal generally must be submitted not more than 150 days and
not less than 90 days prior to the meeting (or 7 days if less
than 21 days' notice of the annual meeting is given to
shareholders). First State's Bylaws require that its
shareholders submit to First State written notice of any matter
desired to be placed on the agenda of an annual meeting of
shareholders not less than 90 days prior to the date of the
meeting (or 10 days if less than 100 days' notice or prior public
disclosure of the date of the meeting is given or made to
shareholders).
Shareholder Rights Plan
Sovereign has adopted a shareholder rights plan
pursuant to which holders of Sovereign Common Stock are entitled,
under certain circumstances generally involving an accumulation
of Sovereign Common Stock, to purchase Sovereign Common Stock or
common stock of the potential acquiror at a substantially reduced
price. See "DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES --
Shareholder Rights Plan."
First State does not have a shareholder rights plan.
Required Shareholder Vote
General
Subject to the voting rights of any series of Sovereign
Preferred Stock then outstanding, the holders of Sovereign Common
Stock possess exclusive voting rights of Sovereign. Each holder
of Sovereign Common Stock is entitled to one vote for each share
owned of record. There are no cumulative voting rights in the
election of directors. For general corporate action of the
shareholders of Sovereign, the affirmative vote of a majority of
the votes represented, in person or by proxy, at a stockholders'
meeting is required for approval.
The holders of First State Common Stock possess
exclusive voting rights of First State. Except as provided in
the following paragraph, each holder of First State Common Stock
is entitled to one vote for each share owned of record. There
are no cumulative voting rights in the election of directors.
For general corporate action of the stockholders of First State,
the affirmative vote of a majority of the votes cast at a
stockholders' meeting is required for approval.
As provided in the First State's Certificate of
Incorporation, record holders of First State Common Stock who
beneficially own in excess of 10% of the outstanding shares of
First State Common Stock (the "Limit") are not entitled to any
vote with respect to the shares held in excess of the Limit. A
person or entity is deemed to beneficially own shares owned by an
affiliate of, as well as persons acting in concert with, such
person or entity. First State's Certificate of Incorporation
authorizes the Board of Directors (i) to make all determinations
necessary to implement and apply the Limit, including determining
whether persons or entities are acting in concert, and (ii) to
demand that any person who is reasonably believed to beneficially
own stock in excess of the Limit supply information to the
Company to enable the Board to implement and apply to Limit. The
Board of Directors of First State is not aware of any person who
beneficially owns shares of First State Common Stock in excess of
the Limit with respect to the matters to be considered at the
Special Meeting.
Fundamental Changes
Sovereign's Articles of Incorporation require that 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 Sovereign other than in the usual and regular course of
business) must be approved by the affirmative vote of
shareholders entitled to cast at least a majority of the votes
which all shareholders are entitled to cast, except that
shareholder approval of any such transaction which is approved in
advance by at least 66-2/3% of the members of Sovereign's Board
of Directors requires only the affirmative vote of a majority of
the votes cast. In the absence of prior approval by Sovereign's
Board of Directors, Sovereign's Articles of Incorporation require
a vote of shareholders with at least 80% of Sovereign's total
voting power to approve any merger, consolidation, share
exchange, asset transfer (in respect of a sale, lease, exchange
or other disposition of all, or substantially all, the assets of
Sovereign) or similar transactions involving a shareholder
holding 5% or more of Sovereign's voting power.
Under the Delaware GCL, a plan of merger,
consolidation, or asset transfer (in respect of a sale, lease,
exchange or other disposition of all, or substantially all, the
assets of First State) must be approved by the affirmative vote
of a majority of the outstanding stock of First State entitled to
vote thereon; provided, however, that no vote of shareholders of
a constituent corporation surviving a merger shall be necessary
to authorize a merger if (1) the agreement of merger does not
amend in any respect the certificate of incorporation of such
constituent corporation, (2) each share of stock of such
constituent corporation outstanding immediately prior to the
effective date of the merger is to be an identical outstanding or
treasury share of the surviving corporation after the effective
date of the merger, and (3) either no shares of common stock of
the surviving corporation and no shares, securities or
obligations convertible into such stock are to be issued or
delivered under the plan of merger, or the authorized unissued
shares or the treasury shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other
shares, securities or obligations to be issue or delivered under
such plan do not exceed 20% of the shares of common stock of such
constituent corporation outstanding immediately prior to the
effective date of the merger. In addition, First State's
Certificate of Incorporation requires a vote of shareholders with
at least 80% of First State's total voting power to approve any
merger, consolidation, share exchange, asset transfer (in respect
of a sale, lease, exchange or other disposition of all, or
substantially all, the assets of First State) or similar
transactions involving a shareholder holding 10% or more of First
State's voting power.
Amendment of Articles or Certificate of Incorporation
Sovereign's Articles of Incorporation contain various
provisions that require a supermajority vote of shareholders to
amend or repeal particular sections of such Articles. Amendment
or repeal of the provisions of Sovereign's Articles of
Incorporation relating to noncumulative voting, the
classification of directors, the requirement of holding meetings
for shareholder action, the amendment of Bylaws generally, and
the consideration of non-economic factors by Sovereign's Board of
Directors if evaluating a tender offer, all require (i) the
affirmative vote of 80% of the shares entitled to vote or
(ii) the affirmative vote of 80% of the members of Sovereign's
Board of Directors and the affirmative vote of shareholders
entitled to cast at least a majority of votes which all
shareholders are entitled to cast.
A supermajority vote of 80% of First State's
shareholders, is required to amend or repeal the provisions of
First State's Certificate of Incorporation relating to the
requirements of holding meetings for shareholder action, the
right to call special meetings of shareholders being vested
solely in the Board of Directors, the classification and filling
of vacancies on, and removal of members of, the First State Board
of Directors, the amendment of Bylaws generally, indemnification
of First State's officers, directors, employees, and agents, and
the supermajority vote requirement on a merger or similar
transaction with a 10% or greater First State shareholder.
Amendment of Bylaws
The authority to amend or repeal Sovereign's Bylaws is
vested in Sovereign's Board of Directors, subject always to the
power of the shareholders of Sovereign to change such action by
the affirmative vote of shareholders holding at least two-thirds
of the voting power (except that any amendment to the
indemnification provisions set forth in the Bylaws shall require
the affirmative vote of two-thirds of the Board of Directors or
shareholders holding 80% of the votes that all shareholders are
entitled to cast). Similarly, the authority to amend or repeal
First State's Bylaws is vested in First State's Board of
Directors. By contrast, however, although First State's
shareholders may amend or repeal the Bylaws, a shareholder
amendment to or repeal of any Bylaw provision requires the
affirmative vote of First State shareholders holding at least 80%
of the voting power.
Mandatory Tender Offer Provision
Sovereign's Articles of Incorporation provide that any
person or entity acquiring Sovereign capital stock with 25% or
more of Sovereign's total voting power is required to offer to
purchase, for cash, all shares of Sovereign's voting stock, at a
price per share equal to the highest price paid by such person
for each respective class of Sovereign's voting stock within the
preceding twelve months. The Pennsylvania BCL also provides that
following any acquisition by a person or group of more than 20%
of a publicly-held corporation's voting stock, the remaining
shareholders have the right to receive payment, in cash, for
their shares from such person or group of an amount equal to the
"fair value" of their shares, including a proportionate amount
for any control premium.
Neither First State's Certificate of Incorporation,
Bylaws nor the Delaware GCL provide First State shareholders with
similar rights.
Special Pennsylvania Corporate Law Provisions
For certain differing provisions of Pennsylvania and
Delaware corporate law relating to the fiduciary duty of
directors, see "DESCRIPTION OF SOVEREIGN CAPITAL SECURITIES --
Special First State and Corporate Law Provisions."
ADJOURNMENT OF SPECIAL MEETING
In the event that there are not sufficient votes to
constitute a quorum or approve the adoption of the Merger
Agreement at the time of the Special Meeting, such proposal could
not be approved unless the Special Meeting were adjourned in
order to permit further solicitation of proxies. In order to
allow proxies which have been received by First State at the time
of the Special Meeting to be voted for such adjournment, if
necessary, First State has submitted the question of adjournment
under such circumstances to its stockholders as a separate matter
for their consideration. A majority of the shares represented
and voting at the Special Meeting is required in order to approve
the Adjournment Proposal.
The Board of Directors of First State recommends that
stockholders vote their proxies in favor of the Adjournment
Proposal so that their proxies may be used for such purposes in
the event it becomes necessary. Properly executed proxies will
be voted in favor of the Adjournment Proposal unless otherwise
indicated thereon. If it is necessary to adjourn the Special
Meeting, no notice of the time and place of the adjourned meeting
is required to be given to stockholders other than an
announcement of such time and place at the Special Meeting.
<PAGE>
EXPERTS
The consolidated financial statements of Sovereign, at
December 31, 1995 and for each of the three years in the period
ended December 31, 1995, appearing in Sovereign's Annual Report
on Form 10-K for the year ended December 31, 1995, have been
audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein
by reference which, as to the year 1993, is based in part on the
report of BDO Seidman LLP, independent auditors. The financial
statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in
accounting and auditing.
The consolidated financial statements of First State
Financial Services, Inc. and subsidiary as of September 30, 1996
and 1995 and for each of the years in the three-year period ended
September 30, 1996, included in First State's Annual Report on
Form 10-K, incorporated by reference herein and in the
Registration Statement, have been incorporated by reference
herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Sovereign Common Stock to be issued
in the Merger, certain federal income tax consequences of the
Merger, and certain other legal matters relating to the Merger
are being passed upon for Sovereign by the law firm of Stevens &
Lee, counsel to Sovereign. Joseph E. Lewis, a director of
Sovereign Bank, is a principal of the firm of Stevens & Lee.
Stevens & Lee and its attorneys own an aggregate of approximately
215,000 shares of Sovereign Common Stock, including shares
issuable upon the exercise of options owned by Mr. Lewis.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the
Board of Directors of First State knows of no matters which will
be presented for consideration at the Special Meeting other than
as set forth in the Notice of Special Meeting accompanying this
Proxy Statement/Prospectus. However, if any other matters shall
come before the meeting or any adjournments thereof and be voted
upon, the enclosed Proxy shall be deemed to confer discretionary
authority to the individuals named as proxies therein to vote the
shares represented by such Proxy as to any such matters.
SHAREHOLDER PROPOSALS
Any Sovereign shareholder who desired to submit a
proposal for presentation to the 1997 Annual Meeting of
Shareholders was required to submit the proposal to Sovereign
Bancorp, not later than November 14, 1996, for inclusion, if
appropriate, in Sovereign's proxy statement and the form of proxy
relating to the 1997 Annual Meeting.
Any First State stockholder who wishes to submit a
proposal for presentation to the 1997 Annual Meeting of
Stockholders, if the Merger has not been completed prior to the
date the meeting is to be held, must submit the proposal to First
State, 1120 Bloomfield Avenue, CN 2449, West Caldwell, New Jersey
07007-2449, Attention: Office of the Secretary, not later than
forty-five days prior to First State's solicitation of proxies
for such annual meeting, for inclusion, if appropriate, in First
State's proxy statement and the form of proxy relating to the
1997 Annual Meeting.
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER BETWEEN SOVEREIGN BANCORP, INC.,
AS AMENDED
<PAGE>
AGREEMENT AND PLAN
OF MERGER
between
SOVEREIGN BANCORP, INC.
and
FIRST STATE FINANCIAL SERVICES, INC.
June 24, 1996
<PAGE>
AGREEMENT
TABLE OF CONTENTS
Page
BACKGROUND................................................... 1
AGREEMENT.................................................... 1
ARTICLE I
THE MERGERS
Section 1.01 Definitions.................................... 1
Section 1.02 The Merger..................................... 6
Section 1.03 The Bank Merger................................ 12
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FSFS
Section 2.01 Organization.................................... 12
Section 2.02 Capitalization.................................. 13
Section 2.03 Authority; No Violation......................... 14
Section 2.04 Consents........................................ 16
Section 2.05 Financial Statements............................ 16
Section 2.06 Taxes........................................... 17
Section 2.07 No Material Adverse Effect...................... 17
Section 2.08 Contracts....................................... 17
Section 2.09 Ownership of Property; Insurance Coverage....... 19
Section 2.10 Legal Proceedings............................... 20
Section 2.11 Compliance With Applicable Law.................. 20
Section 2.12 ERISA........................................... 21
Section 2.13 Brokers, Finders and Financial Advisors......... 22
Section 2.14 Environmental Matters........................... 22
Section 2.15 Loan Portfolio.................................. 23
Section 2.16 Information to be Supplied...................... 23
Section 2.17 Securities Documents............................ 23
Section 2.18 Related Party Transactions...................... 23
Section 2.19 Schedule of Termination Benefits................ 24
Section 2.20 Loans........................................... 24
Section 2.21 Quality of Representations...................... 24
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN
Section 3.01 Organization.................................... 25
Section 3.02 Capital Structure............................... 25
Section 3.03 Authority; No Violation......................... 26
Section 3.04 Consents........................................ 27
Section 3.05 Financial Statements............................ 28
Section 3.06 Taxes........................................... 28
Section 3.07 No Material Adverse Effect...................... 28
Section 3.08 Legal Proceedings............................... 28
Section 3.09 Ownership of Property; Insurance Coverage....... 29
Section 3.10 Compliance With Applicable Law.................. 29
Section 3.11 Information to be Supplied...................... 30
Section 3.12 ERISA........................................... 30
Section 3.13 Securities Documents............................ 32
Section 3.14 Environmental Matters........................... 32
Section 3.15 Loan Portfolio.................................. 32
Section 3.16 Brokers and Finders............................. 32
Section 3.17 Quality of Representations...................... 32
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of FSFS's Business..................... 32
Section 4.02 Access; Confidentiality........................ 36
Section 4.03 Regulatory Matters and Consents................ 37
Section 4.04 Taking of Necessary Action..................... 38
Section 4.05 Certain Agreements............................. 39
Section 4.06 No Other Bids and Related Matters.............. 39
Section 4.07 Duty to Advise; Duty to Update FSFS's
Disclosure Schedule..................................... 40
Section 4.08 Conduct of Sovereign's Business................ 40
Section 4.09 Board and Committee Minutes.................... 40
Section 4.10 Undertakings by Sovereign and FSFS............. 40
Section 4.11 Employee Benefits and Termination Benefits..... 43
ARTICLE V
CONDITIONS
Section 5.01 Conditions to FSFS's Obligations under this
Agreement............................................... 45
Section 5.02 Conditions to Sovereign's Obligations under this
Agreement............................................... 46
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination.................................... 49
Section 6.02 Effect of Termination.......................... 50
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses....................................... 51
Section 7.02 Non-Survival of Representations and Warranties. 51
Section 7.03 Amendment, Extension and Waiver................ 51
Section 7.04 Entire Agreement............................... 51
Section 7.05 No Assignment.................................. 52
Section 7.06 Notices........................................ 52
Section 7.07 Captions....................................... 53
Section 7.08 Counterparts................................... 53
Section 7.09 Severability................................... 53
Section 7.10 Consent to Service of Process.................. 53
Section 7.11 Governing Law.................................. 54
Exhibit 1 FSFS Affiliate Agreement
Exhibit 2 Stock Option Agreement
Exhibit 3 Bank Plan of Merger
Exhibit 4 Form of Agreement Re: Benefits
Exhibit 5 Form of Opinion of Sovereign's Counsel
Exhibit 6 Form of Tax Opinion of Sovereign's
Counsel
Exhibit 7 Form of Opinion of FSFS's Counsel
<PAGE>
AGREEMENT
THIS AGREEMENT AND PLAN OF MERGER, dated as of June 24,
1996, is made by and between SOVEREIGN BANCORP, INC.
("Sovereign"), a Pennsylvania corporation, having its principal
place of business at 1130 Berkshire Boulevard, Wyomissing,
Pennsylvania 19610, and FIRST STATE FINANCIAL SERVICES, INC.
("FSFS"), a Delaware corporation, having its principal place of
business at 1120 Bloomfield Avenue, CN 2449, West Caldwell, New
Jersey 07007-2449.
BACKGROUND
1. Sovereign and FSFS desire for FSFS to merge with
and into Sovereign, with Sovereign surviving such merger, in
accordance with the applicable laws of the Commonwealth of
Pennsylvania and the State of Delaware, and in accordance with
the plan of merger set forth herein.
2. At or prior to the execution and delivery of this
Agreement, and as a condition and inducement to Sovereign's
execution of this Agreement (a) certain directors and officers of
FSFS and affiliates of FSFS, each have executed in favor of
Sovereign, a Letter Agreement dated June 24, 1996, in the form
attached hereto as Exhibit 1, and (b) FSFS granted to Sovereign
an option to acquire, under certain circumstances, FSFS's common
stock (the "Sovereign Option") pursuant to a Stock Option
Agreement between Sovereign and FSFS dated June 24, 1996,
attached hereto as Exhibit 2.
3. Sovereign desires to merge First DeWitt Bank, a
federal savings bank and a wholly-owned subsidiary of FSFS
("First DeWitt") into and with Sovereign Bank, FSB, a federal
savings bank and a wholly-owned subsidiary of Sovereign
("Sovereign Bank"), with Sovereign Bank surviving such merger in
accordance with the Bank Plan of Merger in the form attached
hereto as Exhibit 3.
4. Sovereign and FSFS desire to provide the terms and
conditions governing the transactions contemplated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of
the mutual covenants, agreements, representations and warranties
herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:
ARTICLE I
THE MERGERS
Section 1.01 Definitions. As used in this Agreement,
the following terms shall have the indicated meanings (such
meanings to be equally applicable to both the singular and plural
forms of the terms defined):
Affiliate means, with respect to any Person, any
Person who directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under
common control with, such Person and, without limiting the
generality of the foregoing, includes any executive officer
or director of such Person and any Affiliate of such
executive officer or director.
Agreement means this agreement, and any amendment
or supplement hereto, which constitutes a "plan of merger"
between Sovereign and FSFS.
Applicable Exchange Ratio shall have the meaning
given to such term in Section 1.02(e)(ii)(A).
Applications means the applications for regulatory
approval which are required by the transactions contemplated
hereby.
Articles of Merger means the articles of merger to
be executed by Sovereign and FSFS and to be filed in the
PDS, in accordance with the applicable laws of the
Commonwealth of Pennsylvania.
Bank Merger means the merger of First DeWitt with
and into Sovereign Bank, with Sovereign Bank surviving such
merger, contemplated by Section 1.03 of this Agreement.
Bank Plan of Merger has the meaning given to that
term in Section 1.03 of this Agreement.
BCL means the Pennsylvania Business Corporation
Law of 1988, as amended.
Certificate of Merger means the certificate of
merger to be executed by Sovereign and FSFS and to be filed
in the DOSS, in accordance with the applicable laws of the
State of Delaware.
Closing Date means the date determined by
Sovereign, in its sole discretion, upon five (5) days prior
written notice to FSFS, but in no event later than thirty
(30) days after the last condition precedent pursuant to
this Agreement has been fulfilled or waived (including the
expiration of any applicable waiting period), or such other
date as Sovereign and FSFS shall agree.
DGCL means the Delaware General Corporation Law,
as amended.
DOSS means the Delaware Office of the Secretary of
State.
Effective Date means the date upon which the
Articles of Merger shall be filed in the PDS and the
Certificate of Merger shall be filed in the DOSS, and shall
be the same as the Closing Date.
Environmental Law means any federal, state, local
or foreign law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface
soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material
containing any such substance as a component.
ERISA means the Employee Retirement Income
Security Act of 1974, as amended.
Exchange Act means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated
from time to time thereunder.
FDIC means the Federal Deposit Insurance
Corporation.
FFIEC means the Federal Financial Institutions
Examination Council.
FSFS Common Stock means the common stock of FSFS
described in Section 2.02(a).
FSFS Disclosure Schedule means a disclosure
schedule delivered by FSFS to Sovereign pursuant to
Article II of this Agreement.
FSFS Financials means (i) the audited consolidated
financial statements of FSFS as of September 30, 1995 and
for the three years ended September 30, 1995, including the
notes thereto, and (ii) the unaudited interim consolidated
financial statements of FSFS as of each calendar quarter
thereafter included in Securities Documents filed by FSFS.
FSFS Regulatory Reports means the Annual Reports
of FSFS on Form H(b)-11, any Current Report of FSFS on Form
H(b)-11 filed with the OTS from September 30, 1994 through
the Closing Date and the Thrift Financial Reports of First
DeWitt and accompanying schedules for each calendar quarter,
beginning with the quarter ended September 30, 1994, through
the Closing Date.
FSFS Subsidiaries means any corporation, 50% or
more of the capital stock of which is owned, either directly
or indirectly, by FSFS, except any corporation the stock of
which is held in the ordinary course of the lending
activities of First DeWitt.
GAAP means generally accepted accounting
principles as in effect.
HOLA means the Home Owners' Loan Act, as amended.
IRC means the Internal Revenue Code of 1986, as
amended.
IRS means the Internal Revenue Service.
Material Adverse Effect shall mean, with respect
to Sovereign or FSFS, any adverse effect on its assets,
financial condition or results of operations which is
material to its assets, financial condition or results of
operations on a consolidated basis, except for any material
adverse effect caused by any change occurring after the date
hereof in any federal or state law, rule or regulation or in
GAAP, which change affects banking institutions generally,
including any changes affecting the Bank Insurance Fund or
the Savings Association Insurance Fund.
Merger means the merger of FSFS with and into
Sovereign, with Sovereign surviving such merger,
contemplated by this Agreement.
OTS means the Office of Thrift Supervision.
PDB means the Department of Banking of the
Commonwealth of Pennsylvania.
PDS means the Department of State of the
Commonwealth of Pennsylvania.
Person means any individual, corporation,
partnership, joint venture, association, trust or "group"
(as that term is defined under the Exchange Act).
Prospectus/Proxy Statement means the
prospectus/proxy statement, together with any supplements
thereto, to be transmitted to holders of FSFS Common Stock
in connection with the transactions contemplated by this
Agreement.
Registration Statement means the registration
statement on Form S-4, including any pre-effective or
post-effective amendments or supplements thereto, as filed
with the SEC under the Securities Act with respect to the
Sovereign Common Stock and Sovereign Stock Purchase Rights
to be issued in connection with the transactions
contemplated by this Agreement.
Regulatory Agreement has the meaning given to that
term in Section 2.11 of this Agreement.
Regulatory Authority means any banking agency or
department of any federal or state government, including
without limitation the OTS, the FDIC, the PDB or the
respective staffs thereof.
Rights means warrants, options, rights,
convertible securities and other capital stock equivalents
which obligate an entity to issue its securities.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933,
as amended, and the rules and regulations promulgated from
time to time thereunder.
Securities Documents means all registration
statements, schedules, statements, forms, reports, proxy
material, and other documents required to be filed under the
Securities Laws.
Securities Laws means the Securities Act and the
Exchange Act and the rules and regulations promulgated from
time to time thereunder.
Sovereign Common Stock has the meaning given to
that term in Section 3.02(a) of this Agreement.
Sovereign Disclosure Schedule means a disclosure
schedule delivered by Sovereign to FSFS pursuant to
Article III of this Agreement.
Sovereign Financials means (i) the audited
consolidated financial statements of Sovereign as of
December 31, 1995 and for the three years ended December 31,
1995, including the notes thereto, and (ii) the unaudited
interim consolidated financial statements of Sovereign as of
each calendar quarter thereafter included in Securities
Documents filed by Sovereign.
Sovereign Market Value means, as of any date, the
average of the mean between the closing high bid and low
asked prices of a share of Sovereign Common Stock, as
reported on the National Association of Securities Dealers
Automated Quotation System (Nasdaq) National Market System,
for the ten consecutive trading days commencing eleven (11)
trading days prior to the date of determination.
Sovereign Option means the option granted to
Sovereign to acquire shares of FSFS Common Stock referenced
in the recitals to this Agreement.
Sovereign Regulatory Reports means the Annual
Reports of Sovereign on Form H(b)-11, any Current Report of
Sovereign on Form H(b)-11 filed with the OTS from
September 30, 1994 through the Closing Date and the Thrift
Financial Reports of Sovereign and accompanying schedules
for each calendar quarter, beginning with the quarter ended
September 30, 1994, through the Closing Date.
Sovereign Rights Agreement means the Rights
Agreement dated as of September 19, 1989, as amended
September 27, 1995, between Sovereign and Chemical Bank, as
rights agent, relating to Sovereign's Series A Junior
Participating Preferred Stock.
Sovereign Stock Purchase Rights means Rights to
purchase a unit of Sovereign's Series A Junior Participating
Preferred Stock in accordance with the terms of the
Sovereign Rights Agreement.
Sovereign Subsidiaries means any corporation, 50%
or more of the capital stock of which is owned, either
directly or indirectly, by Sovereign, except any corporation
the stock of which is held in the ordinary course of the
lending activities of a bank.
Subsidiary means any corporation, 50% or more of
the capital stock of which is owned, either directly or
indirectly, by another entity, except any corporation the
stock of which is held in the ordinary course of the lending
activities of a bank.
Section 1.02 The Merger.
(a) Closing. The closing will take place at
10:00 a.m. on the Closing Date at the offices of Stevens & Lee,
111 North Sixth Street, Reading, Pennsylvania, unless another
time and place are agreed to by the parties hereto; provided, in
any case, that all conditions to closing set forth in Article V
have been satisfied or waived at or prior to the Closing Date.
On the Closing Date, FSFS and Sovereign shall cause the Articles
of Merger to be duly executed and to be filed in the PDS and the
Certificate of Merger to be duly executed and filed in the DOSS.
(b) The Merger. Subject to the terms and
conditions of this Agreement, on the Effective Date: FSFS shall
merge with and into Sovereign; the separate existence of FSFS
shall cease; Sovereign shall be the surviving corporation in the
Merger; and all of the property (real, personal and mixed),
rights, powers and duties and obligations of FSFS shall be taken
and deemed to be transferred to and vested in Sovereign, as the
surviving corporation in the Merger, without further act or deed;
all debts, liabilities and duties of each of FSFS and Sovereign
shall thereafter be the responsibility of Sovereign as the
surviving corporation; all in accordance with the applicable laws
of the Commonwealth of Pennsylvania and the State of Delaware.
(c) Sovereign's Articles of Incorporation and
Bylaws. On and after the Effective Date, the articles of
incorporation and the bylaws of Sovereign, as in effect
immediately prior to the Effective Date, shall automatically be
and remain the articles of incorporation and bylaws of Sovereign,
as the surviving corporation in the Merger, until thereafter
altered, amended or repealed.
(d) Board of Directors and Officers of Sovereign
and Sovereign Bank.
(i) On the Effective Date, the Board of
Directors of Sovereign, as the surviving corporation in the
Merger, shall consist of those persons holding such office
immediately prior to the Effective Date.
(ii) On the Effective Date, the officers of
Sovereign duly elected and holding office immediately prior to
the Effective Date shall be the officers of Sovereign, as the
surviving corporation in the Merger, existing on such Effective
Date.
(iii) On the effective date of the Bank
Merger, the directors of Sovereign Bank as the surviving
institution in the Bank Merger shall consist of (i) those persons
holding such office immediately prior to the Effective Date, and
(ii) Michael J. Quigley, III. Sovereign shall cause Mr. Quigley
to be appointed as a director of Sovereign Bank effective as of
the effective date of the Bank Merger. Mr. Quigley shall be
appointed to hold office until the 1997 annual reorganization
meeting of the Board of Directors of Sovereign Bank and until his
successor is elected and qualified or otherwise in accordance
with Sovereign Bank's charter and bylaws.
(iv) On the effective date of the Bank
Merger, the officers of Sovereign Bank duly elected and holding
office immediately prior to such effective date shall be the
officers of Sovereign Bank, as the surviving corporation in the
Bank Merger.
(v) On the effective date of the Bank
Merger, Sovereign will create an advisory board of directors of
Sovereign Bank for the market area served by First DeWitt which
shall consist of all existing directors of First DeWitt.
Sovereign shall cause such persons to be elected as advisory
directors of Sovereign Bank effective as of the effective date of
the Bank Merger, and each shall hold office for at least one year
from such effective date. Such advisory board shall meet
quarterly and each member shall receive $250 per meeting
attended.
(e) Conversion of Shares.
(i) Sovereign Common Stock.
(A) Each share of Sovereign Common
Stock issued and outstanding immediately prior to the
Effective Date shall, on and after the Effective Date,
continue to be issued and outstanding as an identical share
of Sovereign Common Stock. Shares of Sovereign Common Stock
owned by FSFS (other than shares held in trust, managed,
custodial or nominee accounts and the like or held by mutual
funds for which a subsidiary of FSFS acts as investment
advisor, that in any such case are beneficially owned by
third parties (any such shares, "trust account shares") and
shares acquired in respect of debts previously contracted
(any such shares, "DPC shares")) shall become treasury stock
of Sovereign.
(B) Each share of Sovereign Common
Stock issued and held in the treasury of Sovereign as of the
Effective Date, if any, shall, on and after the Effective
Date, continue to be issued and held in the treasury of
Sovereign.
(ii) FSFS Common Stock.
(A) Subject to the provisions of
subparagraphs (B), (C) and (D) of this Section 1.02(e)(ii),
each share of FSFS Common Stock issued and outstanding
immediately prior to the Effective Date (other than shares
of FSFS Common Stock, if any, then owned by Sovereign or
FSFS or any FSFS Subsidiary) shall, on the Effective Date,
by reason of the Merger and without any action on the part
of the holder thereof, be converted into and become a right
to receive:
(i) if the Sovereign Market Value
determined as of the Effective Date is greater than or
equal to $9.00 (88% of the Sovereign Market Value
determined as of the date of this Agreement) and less
than or equal to $11.45 (112% of the Sovereign Market
Value determined as of the date of this Agreement),
then that number of shares of fully paid and
nonassessable shares of Sovereign Common Stock, and the
corresponding percentage of Sovereign Stock Purchase
Rights pursuant to the Sovereign Rights Agreement,
equal to $14.75 divided by the Sovereign Market Value
determined as of the Effective Date;
(ii) if the Sovereign Market Value
determined as of the Effective Date is less than $9.00,
then 1.64 shares of fully paid and nonassessable shares
of Sovereign Common Stock, and the corresponding
percentage of Sovereign Stock Purchase Rights pursuant
to the Sovereign Rights Agreement; or
(iii) if the Sovereign Market
Value determined as of the Effective Date is greater
than $11.45, then 1.29 shares of fully paid and
nonassessable shares of Sovereign Common Stock, and the
corresponding percentage of Sovereign Stock Purchase
Rights pursuant to the Sovereign Rights Agreement (as
determined pursuant to either Sections
1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or
1.02(a)(ii)(A)(iii), the "Applicable Exchange Ratio").
(B) Each share of FSFS Common Stock
(other than trust account shares or DPC shares) owned by
Sovereign or a Sovereign Subsidiary on the Effective Date,
if any, shall be cancelled.
(C) Each share of FSFS Common Stock
issued and held in the treasury of FSFS or owned by FSFS or
any FSFS Subsidiary (other than trust account shares or DPC
shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be
delivered in exchange therefor.
sgt No fraction of a whole share of
Sovereign Common Stock and no scrip or certificates therefor
shall be issued in connection with the Merger. Any former
holder of FSFS Common Stock who would otherwise be entitled
to receive a fraction of a share of Sovereign Common Stock
shall receive, in lieu thereof, cash in an amount equal to
such fraction of a share multiplied by the market value of
Sovereign Common Stock (determined in accordance with the
provisions of Section 1.02(e)(iii) hereof).
(f) Stock Options. Each option to acquire FSFS
Common Stock shall be converted into and become an option to
acquire that number of shares of Sovereign Common Stock equal to
the number of shares of FSFS Common Stock covered by the option
multiplied by the Applicable Exchange Ratio and the exercise
price for a whole share of Sovereign Common Stock shall be the
present stated exercise price of such option divided by the
Applicable Exchange Ratio, such shares to be issuable upon
exercise of such options in accordance with the terms of the
respective plans and grant agreements under which they were
issued.
(g) Surrender and Exchange of FSFS Stock
Certificates.
(i) Exchange of Certificates. Each holder
of shares of FSFS Common Stock who surrenders to Sovereign
the certificate or certificates representing such shares
will be entitled to receive, as soon as practicable after
the Effective Date, in exchange therefor a certificate or
certificates for the number of whole shares of Sovereign
Common Stock into which such holder's shares of FSFS Common
Stock have been converted pursuant to the Merger, together
with a check for cash in lieu of any fractional share in
accordance with Section 1.02(e)(ii)(D) hereof.
(ii) Rights Evidenced by Certificates. Each
certificate for shares of Sovereign Common Stock issued in
exchange for certificates for FSFS Common Stock pursuant to
Section 1.02(g)(i) hereof will be dated the Effective Date
and be entitled to dividends and all other rights and
privileges pertaining to such shares of stock from the
Effective Date. Until surrendered, each certificate
theretofore evidencing shares of FSFS Common Stock will,
from and after the Effective Date, evidence solely the right
to receive certificates for shares of Sovereign Common Stock
pursuant to Section 1.02(g)(i) hereof and a check for cash
in lieu of any fractional share in accordance with
Section 1.02(e)(ii)(D) hereof. If certificates for shares
of FSFS Common Stock are exchanged for Sovereign Common
Stock at a date following one or more record dates for the
payment of dividends or of any other distribution on the
shares of Sovereign Common Stock, Sovereign will pay cash in
an amount equal to dividends theretofore payable on such
Sovereign Common Stock and pay or deliver any other
distribution to which holders of shares of Sovereign Common
Stock have theretofore become entitled. No interest will
accrue or be payable in respect of dividends or cash
otherwise payable under this Section 1.02(g) upon surrender
of certificates for shares of FSFS Common Stock.
Notwithstanding the foregoing, no party hereto will be
liable to any holder of FSFS Common Stock for any amount
paid in good faith to a public official or agency pursuant
to any applicable abandoned property, escheat or similar
law. Until such time as certificates for shares of FSFS
Common Stock are surrendered by a FSFS shareholder to
Sovereign for exchange, Sovereign shall have the right to
withhold dividends or any other distributions on the shares
of Sovereign Common Stock issuable to such shareholder.
(iii) Exchange Procedures. Each certificate
for shares of FSFS Common Stock delivered for exchange under
this Section 1.02(g) must be endorsed in blank by the
registered holder thereof or be accompanied by a power of
attorney to transfer such shares endorsed in blank by such
holder. If more than one certificate is surrendered at one
time and in one transmittal package for the same shareholder
account, the number of whole shares of Sovereign Common
Stock for which certificates will be issued pursuant to this
Section 1.02(g) will be computed on the basis of the
aggregate number of shares represented by the certificates
so surrendered. If shares of Sovereign Common Stock or
payments of cash are to be issued or made to a person other
than the one in whose name the surrendered certificate is
registered, the certificate so surrendered must be properly
endorsed in blank, with signature(s) guaranteed, or
otherwise in proper form for transfer, and the person to
whom certificates for shares of Sovereign Common Stock is to
be issued or to whom cash is to be paid shall pay any
transfer or other taxes required by reason of such issuance
or payment to a person other than the registered holder of
the certificate for shares of FSFS Common Stock which are
surrendered. As promptly as practicable after the Effective
Date, Sovereign shall send or cause to be sent to each
shareholder of record of FSFS Common Stock transmittal
materials for use in exchanging certificates representing
FSFS Common Stock for certificates representing Sovereign
Common Stock into which the former have been converted in
the Merger.
(iv) Closing of Stock Transfer Books;
Cancellation of FSFS Certificates. Upon the Effective Date,
the stock transfer books for FSFS Common Stock will be
closed and no further transfers of shares of FSFS Common
Stock will thereafter be made or recognized. All
certificates for shares of FSFS Common Stock surrendered
pursuant to this Section 1.02(g) will be cancelled by
Sovereign.
(h) Payment Procedures. As soon as practicable
after the Effective Date, Sovereign shall make payment of the
cash consideration provided for in Section 1.02(e)(ii)(D) to each
person entitled thereto.
(i) Anti-Dilution Provisions. If, on the
Effective Date, the Applicable Exchange Ratio is determined
pursuant to either Section 1.02(e)(ii)(A)(ii) or
1.02(e)(ii)(A)(iii) and Sovereign has, at any time after the date
hereof and before the Effective Date, (A) issued a dividend in
shares of Sovereign Common Stock, (B) combined the outstanding
shares of Sovereign Common Stock into a smaller number of shares,
(C) subdivided the outstanding shares of Sovereign Common Stock,
or (D) reclassified the shares of Sovereign Common Stock, then,
in any such event, the number of shares of Sovereign Common Stock
to be delivered pursuant to Sections 1.02(e)(ii)(A)(ii) or
1.02(e)(ii)(A)(iii) to FSFS shareholders who are entitled to
receive shares of Sovereign Common Stock in exchange for shares
of FSFS Common Stock shall be adjusted so that each FSFS
shareholder shall be entitled to receive such number of shares of
Sovereign Common Stock as such shareholder would have been
entitled to receive if the Effective Date had occurred prior to
the happening of such event. (By way of illustration, if
Sovereign shall declare a stock dividend of 7% payable with
respect to a record date on or prior to the Effective Date, the
Applicable Exchange Ratio determined pursuant to
Sections 1.02(e)(ii)(A)(ii) and 1.02(e)(ii)(A)(iii) shall be
adjusted upward by 7%).
Section 1.03 The Bank Merger. Sovereign and FSFS
shall use their best efforts to cause First DeWitt to merge with
and into Sovereign Bank, with Sovereign Bank surviving such
merger, as soon as practicable after the Effective Date.
Concurrently with, or as soon as practicable after, the execution
and delivery of this Agreement, Sovereign shall cause Sovereign
Bank, and FSFS shall cause First DeWitt, to execute and deliver
the Bank Plan of Merger attached hereto as Exhibit 3.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FSFS
FSFS hereby represents and warrants to Sovereign that,
except as specifically set forth in the FSFS Disclosure Schedule
delivered to Sovereign by FSFS on the date hereof:
Section 2.01 Organization.
(a) FSFS is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware and is duly qualified and licensed to do business under
the laws of the State of New Jersey. FSFS is a savings and loan
holding company duly registered under the HOLA. FSFS has the
corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the
properties and assets now owned and being operated by it. Except
for the State of New Jersey, FSFS is not qualified or licensed to
do business as a foreign corporation in any other jurisdiction
and is not required to be so qualified or licensed as the result
of the ownership or leasing of property or the conduct of its
business except where the failure to be so qualified or licensed
would not have a Material Adverse Effect.
(b) First DeWitt is a federal savings bank duly
organized and validly existing under the laws of the United
States of America. First DeWitt has the corporate power and
authority to carry on its business and operations as now being
conducted and to own and operate the properties and assets now
owned and being operated by it. Except for the State of
New Jersey, neither First DeWitt nor any FSFS subsidiary is
qualified or licensed to do business as a foreign corporation in
any other jurisdiction and are not required to be so qualified or
licensed as the result of the ownership or leasing of property or
the conduct of its business except where the failure to be so
qualified or licensed would not have a Material Adverse Effect.
(c) There are no FSFS Subsidiaries other than
First DeWitt and those identified in the FSFS Disclosure
Schedule. There are no First DeWitt Subsidiaries other than
those identified in the FSFS Disclosure Schedule.
(d) The deposits of First DeWitt are insured by
the FDIC to the extent provided in the Federal Deposit Insurance
Act.
(e) The respective minute books of FSFS and First
DeWitt and each other FSFS Subsidiary accurately record, in all
material respects, all material corporate actions of their
respective shareholders and boards of directors (including
committees) through the date of this Agreement.
(f) Prior to the date of this Agreement, FSFS has
delivered to Sovereign true and correct copies of the certificate
of incorporation and bylaws of FSFS and the charter and bylaws of
First DeWitt as in effect on the date hereof.
Section 2.02 Capitalization.
(a) The authorized capital stock of FSFS consists
of (a) 8,000,000 shares of common stock, $0.01 par value ("FSFS
Common Stock"), of which 3,938,815 shares are outstanding,
validly issued, fully paid and nonassessable and free of
preemptive rights, and (b) 2,000,000 shares of preferred stock,
$0.01 par value, none of which are issued or outstanding.
Neither FSFS nor First DeWitt nor any other FSFS Subsidiary has
or is bound by any subscription, option, warrant, call,
commitment, agreement, plan or other Right of any character
relating to the purchase, sale or issuance or voting of, or right
to receive dividends or other distributions on any shares of FSFS
Common Stock, FSFS preferred stock or any other security of FSFS
or any securities representing the right to vote, purchase or
otherwise receive any shares of FSFS Common Stock, FSFS preferred
stock or any other security of FSFS, other than for (i) shares
issuable under the Sovereign Option and (ii) 385,600 shares which
FSFS is obligated to issue, under FSFS's 1987 Stock Option Plan,
FSFS's 1993 Long-term Incentive Stock Benefit Plan and FSFS's
1993 Stock Option Plan for Outside Directors (the "FSFS Stock
Option Plans"), at a weighted average exercise price of $7.66, to
its directors, officers and employees and officers and employees
of FSFS Subsidiaries, including First DeWitt. As of March 31,
1996, FSFS had approximately 1,150 shareholders of record.
(b) The authorized capital stock of First DeWitt
consists of (i) 750,000 shares of common stock, par value
$1.00 per share ("First DeWitt Common Stock"), of which
1,000 shares are outstanding, validly issued, fully paid,
nonassessable, free of preemptive rights and owned by FSFS and
(ii) 250,000 shares of preferred stock, par value $1.00 per
share, none of which are issued or outstanding. Neither FSFS nor
any other FSFS Subsidiary has or is bound by any subscription,
option, warrant, call, commitment, agreement or other Right of
any character relating to the purchase, sale or issuance or
voting of, or right to receive dividends or other distributions
on any shares of the capital stock of any FSFS Subsidiary or any
other security of any FSFS Subsidiary or any securities
representing the right to vote, purchase or otherwise receive any
shares of the capital stock or any other security of any FSFS
Subsidiary. Either FSFS or First DeWitt owns all of the
outstanding shares of capital stock of each FSFS Subsidiary free
and clear of all liens, security interests, pledges, charges,
encumbrances, agreements and restrictions of any kind or nature.
(c) Except as set forth in the FSFS Disclosure
Schedule, neither (i) FSFS, (ii) First DeWitt or (iii) any other
FSFS Subsidiary, owns any equity interest, directly or
indirectly, in any other company or controls any other company,
except for equity interests held in the investment portfolios of
FSFS Subsidiaries, equity interests held by FSFS Subsidiaries in
a fiduciary capacity, and equity interests held in connection
with the commercial loan activities of FSFS Subsidiaries. There
are no subscriptions, options, warrants, calls, commitments,
agreements or other Rights outstanding and held by FSFS or First
DeWitt with respect to any other company's capital stock or the
equity of any other person.
(d) No person or "group" (as that term is used in
Section 13(d)(3) of the Exchange Act), to the best of FSFS's
knowledge, is the beneficial owner (as defined in Section 13(d)
of the Exchange Act) of 5% or more of the outstanding shares of
FSFS Common Stock, except as disclosed in FSFS's proxy statement
for use in connection with its January 17, 1996 annual meeting of
shareholders, previously delivered to Sovereign or in the FSFS
Disclosure Schedule.
(e) Neither Austin Bernet, Inc. ("ABI"), Basswood
Partners, L.P. ("Basswood"), nor FMR Corp. ("FMR") is an
Affiliate or is or will be deemed to be an affiliate of FSFS
within the meaning of SEC Staff Accounting Bulletin No. 65, SEC
Accounting Series Release No. 130 or SEC Accounting Series
Release No. 135.
Section 2.03 Authority; No Violation.
(a) FSFS has full corporate power and authority
to execute and deliver this Agreement and to complete the
transactions contemplated hereby. First DeWitt has full
corporate power and authority to execute and deliver the Bank
Plan of Merger and to consummate the Bank Merger. The execution
and delivery of this Agreement by FSFS and the completion by FSFS
of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors of FSFS and, except
for approval by the shareholders of FSFS as required under the
DGCL, FSFS's certificate of incorporation and bylaws and Nasdaq
requirements applicable to it, no other corporate proceedings on
the part of FSFS are necessary to complete the transactions
contemplated hereby. This Agreement has been duly and validly
executed and delivered by FSFS, subject to approval of the
shareholders of FSFS as required under the DGCL, FSFS's
certificate of incorporation and bylaws and Nasdaq requirements
applicable to it, and constitutes the valid and binding
obligation of FSFS, enforceable against FSFS in accordance with
its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject,
as to enforceability, to general principles of equity. The Bank
Plan of Merger, upon its execution and delivery by First DeWitt,
will constitute the valid and binding obligation of First DeWitt,
enforceable against First DeWitt in accordance with its terms,
subject to applicable conservatorship, receivership, insolvency
and similar laws affecting creditors' rights generally and
institutions the deposits of which are insured by the FDIC, and
subject, as to enforceability, to general principles of equity.
(b) (A) The execution and delivery of this
Agreement by FSFS, (B) the execution and delivery of the Bank
Plan of Merger by First DeWitt, (C) subject to receipt of
approvals from the Regulatory Authorities referred to in
Section 3.04 hereof and FSFS's and Sovereign's compliance with
any conditions contained therein, the completion of the
transactions contemplated hereby, and (D) compliance by FSFS or
First DeWitt with any of the terms or provisions hereof or of the
Bank Plan of Merger, will not (i) conflict with or result in a
breach of any provision of the certificate of incorporation or
bylaws of FSFS or any FSFS Subsidiary or the charter and bylaws
of First DeWitt; (ii) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction
applicable to FSFS or any FSFS Subsidiary or any of their
respective properties or assets; or (iii) except as set forth in
the FSFS Disclosure Schedule, 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 a right of termination or
acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets
of FSFS or any FSFS Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement, commitment or other
instrument or obligation to which FSFS or any FSFS Subsidiary is
a party, or by which they or any of their respective properties
or assets may be bound or affected, except for such violations,
conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a
material adverse effect on the assets, business, financial
condition, results of operations or business prospects of FSFS
and the FSFS Subsidiaries taken as a whole or the ability of FSFS
to perform any of its obligations under this Agreement.
Section 2.04 Consents. Except for the consents,
approvals, filings and registrations from or with the Regulatory
Authorities referred to in Section 3.04 hereof and compliance
with any conditions contained therein, and the approval of this
Agreement by the shareholders of FSFS under the DGCL, and of the
Bank Plan of Merger by FSFS as sole shareholder of First DeWitt
under the HOLA, and by the First DeWitt Board of Directors, no
consents or approvals of, or filings or registrations with, any
public body or authority are necessary, and no consents or
approvals of any third parties are necessary, or will be, in
connection with (a) the execution and delivery of this Agreement
by FSFS or the Bank Plan of Merger by First DeWitt, and (b) the
completion by FSFS of the transactions contemplated hereby or by
First DeWitt of the Bank Merger. FSFS has no reason to believe
that (i) any required consents or approvals will not be received
or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact FSFS's ability
to consummate the transactions contemplated by this Agreement or
that (ii) any public body or authority, the consent or approval
of which is not required or any filing with which is not
required, will object to the consummation of the transactions
contemplated by this Agreement.
Section 2.05 Financial Statements.
(a) FSFS has previously delivered, or will
deliver, to Sovereign the FSFS Regulatory Reports. The FSFS
Regulatory Reports have been, or will be, prepared in all
material respects in accordance with applicable regulatory
accounting principles and practices applied on a consistent basis
throughout the periods covered by such statements, and fairly
present, or will fairly present in all material respects, the
financial position, results of operations and changes in
shareholders' equity of FSFS as of and for the periods ended on
the dates thereof, in accordance with applicable regulatory
accounting principles applied on a consistent basis.
(b) FSFS has previously delivered to Sovereign
the FSFS Financials. The FSFS Financials have been, or will be,
prepared in accordance with generally accepted accounting
principles and practices applied on a consistent basis throughout
the periods covered by such statements, and fairly present, or
will fairly present, the consolidated financial position, results
of operations and cash flows of FSFS as of and for the periods
ending on the dates thereof, in accordance with generally
accepted accounting principles applied on a consistent basis.
(c) At the date of each balance sheet included in
the FSFS Financials or the FSFS Regulatory Reports, neither FSFS
nor First DeWitt (as the case may be) had, or will have any
liabilities, obligations or loss contingencies of any nature
(whether absolute, accrued, contingent or otherwise) of a type
required to be reflected in such FSFS Financials or FSFS
Regulatory Reports or in the footnotes thereto which are not
fully reflected or reserved against therein or fully disclosed in
a footnote thereto, except for liabilities, obligations and loss
contingencies which are not material in the aggregate and which
are incurred in the ordinary course of business, consistent with
past practice and except for liabilities, obligations and loss
contingencies which are within the subject matter of a specific
representation and warranty herein and subject, in the case of
any unaudited statements, to normal, recurring audit adjustments
and the absence of footnotes.
Section 2.06 Taxes.
(a) FSFS and the FSFS Subsidiaries are members of
the same affiliated group within the meaning of IRC
Section 1504(a). FSFS has duly filed, and will file, all
federal, state and local tax returns required to be filed by or
with respect to FSFS and all FSFS Subsidiaries on or prior to the
Closing Date (all such returns being accurate and correct in all
material respects) and has duly paid or will pay, or made or will
make, provisions for the payment of all federal, state and local
taxes which have been incurred by or are due or claimed to be due
from FSFS and any FSFS Subsidiary by any taxing authority or
pursuant to any tax sharing agreement or arrangement (written or
oral) on or prior to the Closing Date other than taxes which
(i) are not delinquent or (ii) are being contested in good faith.
(b) No consent pursuant to IRC Section 341(f) has
been filed (or will be filed prior to the Closing Date) by or
with respect to FSFS or any FSFS Subsidiary.
Section 2.07 No Material Adverse Effect. FSFS has not
suffered any Material Adverse Effect since March 31, 1996.
Section 2.08 Contracts.
(a) Except as described in FSFS's proxy statement
for its January 17, 1996 annual meeting of shareholders and
Annual Reports on Form 10-K for the fiscal years ended
September 30, 1993, 1994 and 1995, previously delivered to
Sovereign, in the footnotes to the audited consolidated financial
statements of FSFS as of September 30, 1995 and for the three
years ended September 30, 1995 or in the FSFS Disclosure
Schedule, neither FSFS nor any FSFS Subsidiary is a party to or
subject to: (i) any employment, consulting or severance contract
or arrangement with any past or present officer, director or
employee of FSFS or any FSFS Subsidiary, except for "at will"
arrangements; (ii) any plan, arrangement or contract providing
for bonuses, pensions, options, deferred compensation, retirement
payments, profit sharing or similar arrangements for or with any
past or present officers, directors or employees of FSFS or any
FSFS Subsidiary; (iii) any collective bargaining agreement with
any labor union relating to employees of FSFS or any FSFS
Subsidiary; (iv) any agreement which by its terms limits the
payment of dividends by any FSFS Subsidiary; (v) any instrument
evidencing or related to indebtedness for borrowed money whether
directly or indirectly, by way of purchase money obligation,
conditional sale, lease purchase, guaranty or otherwise, in
respect of which FSFS or any FSFS Subsidiary is an obligor to any
person, which instrument evidences or relates to indebtedness
other than deposits, repurchase agreements, bankers acceptances
and "treasury tax and loan" accounts established in the ordinary
course of business and transactions in "federal funds" or which
contains financial covenants or other restrictions (other than
those relating to the payment of principal and interest when due)
which would be applicable on or after the Closing Date to
Sovereign or any Sovereign Subsidiary; or (vi) any contract
(other than this Agreement) limiting the freedom of any FSFS
Subsidiary to engage in any type of banking or bank-related
business permissible under law.
(b) True and correct copies of agreements, plans,
arrangements and instruments referred to in Section 2.08(a) or
described in the FSFS proxy statement for its January 17, 1996
annual meeting of shareholders or in a footnote to such audited
consolidated financial statements, have been provided to
Sovereign on or before the date hereof, are listed on the FSFS
Disclosure Schedule and are in full force and effect on the date
hereof and neither FSFS nor any FSFS Subsidiary (nor, to the
knowledge of FSFS, any other party to any such contract, plan,
arrangement or instrument) has breached any provision of, or is
in default in any respect under any term of, any such contract,
plan, arrangement or instrument which breach has resulted in or
will result in a Material Adverse Effect with respect to FSFS.
Except as set forth in the FSFS Disclosure Schedule, no party to
any material contract, plan, arrangement or instrument will have
the right to terminate any or all of the provisions of any such
contract, plan, arrangement or instrument as a result of the
transactions contemplated by this Agreement. None of the
employees (including officers) of FSFS or any FSFS Subsidiary,
except for Michael J. Quigley, III, possess the right to
terminate their employment as a result of the execution of this
Agreement. Except as set forth in the FSFS Disclosure Schedule,
no plan, employment agreement, termination agreement, or similar
agreement or arrangement to which FSFS or any FSFS Subsidiary is
a party or under which FSFS or any FSFS Subsidiary may be liable
contains provisions which permit an employee or independent
contractor to terminate it without cause and continue to accrue
future benefits thereunder. Except as set forth in the FSFS
Disclosure Schedule, no such agreement, plan or arrangement
(x) provides for acceleration in the vesting of benefits or
payments due thereunder upon the occurrence of a change in
ownership or control of FSFS or any FSFS Subsidiary absent the
occurrence of a subsequent event; (y) provides for benefits which
may cause the disallowance of a federal income tax deduction
under IRC Section 280G; or (z) requires FSFS or any FSFS
Subsidiary to provide a benefit in the form of FSFS Common Stock
or determined by reference to the value of FSFS Common Stock.
Section 2.09 Ownership of Property; Insurance
Coverage.
(a) Except as disclosed in the FSFS Disclosure
Schedule, FSFS and the FSFS Subsidiaries have, or will have as to
property acquired after the date hereof, good and, as to real
property, marketable title to all assets and properties owned by
FSFS or any FSFS Subsidiary in the conduct of their businesses,
whether such assets and properties are real or personal, tangible
or intangible, including assets and property reflected in the
balance sheets contained in the FSFS Regulatory Reports and in
the FSFS Financials or 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 date of
such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items
which secure liabilities for borrowed money from a Federal Home
Loan Bank, (ii) statutory liens for amounts not yet delinquent or
which are being contested in good faith and (iii) items permitted
under Article IV. FSFS and the FSFS Subsidiaries, as lessee,
have the right under valid and subsisting leases of real and
personal properties used by FSFS and its Subsidiaries in the
conduct of their businesses to occupy or use all such properties
as presently occupied and used by each of them. Except as
disclosed in the FSFS Disclosure Schedule, such existing leases
and commitments to lease constitute or will constitute operating
leases for both tax and financial accounting purposes and the
lease expense and minimum rental commitments with respect to such
leases and lease commitments are as disclosed in the Notes to the
FSFS Financials.
(b) With respect to all agreements pursuant to
which FSFS or any FSFS Subsidiary has purchased securities
subject to an agreement to resell, if any, FSFS or such FSFS
Subsidiary, as the case may be, has a valid, perfected first lien
or security interest in the securities or other collateral
securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured
thereby.
(c) FSFS and the FSFS Subsidiaries currently
maintain insurance considered by FSFS to be reasonable for their
respective operations and similar in scope and coverage to that
maintained by other businesses similarly engaged. Neither FSFS
nor any FSFS Subsidiary has received notice from any insurance
carrier that (i) such insurance will be cancelled or that
coverage thereunder will be reduced or eliminated, or
(ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no material
claims pending under such policies of insurance and no notices
have been given by FSFS or First DeWitt under such policies. All
such insurance is valid and enforceable and in full force and
effect, and within the last three years FSFS has received each
type of insurance coverage for which it has applied and during
such periods has not been denied indemnification for any material
claims submitted under any of its insurance policies.
Section 2.10 Legal Proceedings. Except as disclosed
in the FSFS Disclosure Schedule, neither FSFS nor any FSFS
Subsidiary is a party to any, and there are no pending or, to the
best of FSFS's knowledge, threatened legal, administrative,
arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries
of any nature (i) against FSFS or any FSFS Subsidiary, (ii) to
which FSFS or any FSFS Subsidiary's assets are or may be subject,
(iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of FSFS to perform under this
Agreement, except for any proceedings, claims, actions,
investigations or inquiries referred to in clauses (i) or (ii)
which, if adversely determined, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse
Effect.
Section 2.11 Compliance With Applicable Law.
(a) FSFS and FSFS Subsidiaries hold all licenses,
franchises, permits and authorizations necessary for the lawful
conduct of their businesses under, and have complied in all
material respects with, applicable laws, statutes, orders, rules
or regulations of any federal, state or local governmental
authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any
material respect on the conduct of their businesses nor otherwise
have a Material Adverse Effect on the assets, business, financial
condition, the results of operations or business prospects of
FSFS and its Subsidiaries taken as a whole.
(b) Except as disclosed in the FSFS Disclosure
Schedule, neither FSFS nor any FSFS Subsidiary has received any
notification or communication from any Regulatory Authority
(i) asserting that FSFS or any FSFS Subsidiary is not in
compliance with any of the statutes, regulations or ordinances
which such Regulatory Authority enforces; (ii) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to FSFS or any FSFS Subsidiary;
(iii) requiring or threatening to require FSFS or any FSFS
Subsidiary, or indicating that FSFS or any FSFS Subsidiary may be
required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of FSFS or any FSFS Subsidiary, including without
limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct,
restrict or limit, in any manner the operations of FSFS or any
FSFS Subsidiary, including without limitation any restriction on
the payment of dividends (any such notice, communication,
memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither
FSFS nor any FSFS Subsidiary has consented to or entered into any
Regulatory Agreement, except as heretofore disclosed to
Sovereign.
Section 2.12 ERISA. FSFS has previously delivered to
Sovereign true and complete copies of all employee pension
benefit plans within the meaning of ERISA Section 3(2), profit
sharing plans, stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement
plans, employment agreements, annual or long term incentive
plans, settlement plans, policies and agreements, group insurance
plans, and all other employee welfare benefit plans within the
meaning of ERISA Section 3(1) (including vacation pay, sick
leave, short-term disability, long-term disability, and medical
plans) and all other employee benefit plans, policies, agreements
and arrangements, all of which are set forth in the FSFS
Disclosure Schedule, maintained or contributed to for the benefit
of the employees or former employees (including retired
employees) and any beneficiaries thereof or directors or former
directors of FSFS or any FSFS Subsidiary, together with (i) the
most recent actuarial (if any) and financial reports relating to
those plans which constitute "qualified plans" under IRC
Section 401(a), (ii) the most recent annual reports relating to
such plans filed by them, respectively, with any government
agency, and (iii) all rulings and determination letters which
pertain to any such plans. The pension plan has not incurred,
directly or indirectly, within the past six (6) years any
liability under Title IV of ERISA (including to the Pension
Benefit Guaranty Corporation) or to the IRS except liabilities to
the Pension Benefit Guaranty Corporation pursuant to ERISA
Section 4007, all of which have been fully paid, nor has any
reportable event under ERISA Section 4043(b) occurred with
respect to any such pension plan. Neither FSFS, any FSFS
Subsidiary nor any other pension plan maintained by FSFS or any
FSFS Subsidiary, has incurred, directly or indirectly, within the
past six (6) years any liability under Title IV of ERISA
(including to the Pension Benefit Guaranty Corporation) or to the
IRS with respect to any pension plan qualified under IRC
Section 401(a) which liability has resulted in or will result in
a Material Adverse Effect with respect to FSFS, except
liabilities to the Pension Benefit Guaranty Corporation pursuant
to ERISA Section 4007, all of which have been fully paid, nor has
any reportable event under ERISA Section 4043(b) occurred with
respect to any such pension plan. With respect to each of such
plans that is subject to Title IV of ERISA, the present value of
the accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the plan's most recent
actuarial report dated _________ __, ____, did not, as of its
latest valuation date, exceed the then current value of the
assets of such plan allocable to such accrued benefits by more
than $200,000, and FSFS estimates that by the Closing Date such
liabilities will not exceed such assets. Neither FSFS nor any
FSFS Subsidiary has incurred or is subject to any liability under
ERISA Section 4201 for a complete or partial withdrawal from a
multi-employer plan. All "employee benefit plans," as defined in
ERISA Section 3(3), comply and within the past six (6) years have
complied in all material respects with (i) relevant provisions of
ERISA and (ii) in the case of plans intended to qualify for
favorable income tax treatment, provisions of the IRC relevant to
such treatment. Neither FSFS nor any FSFS Subsidiary has a
material liability under any such plan which pursuant to GAAP is
required to be reflected on or disclosed in (pursuant to a
footnote or otherwise) the FSFS Financials and which is not so
reflected or disclosed thereon. No prohibited transaction,
breach of fiduciary duty or other transaction has occurred within
the past six (6) years with respect to (i) any pension plan,
employment agreement, supplemental executive retirement plan or
special termination agreement maintained by FSFS or any FSFS
Subsidiary which would result in the imposition, directly or
indirectly, of an excise tax or other penalty under ERISA or the
IRC or (ii) any other employee benefit plan maintained by FSFS or
any FSFS Subsidiary which would result in the imposition,
directly or indirectly, of an excise tax or other penalty under
ERISA or the IRC, which, individually or in the aggregate, has
resulted in or will result in a Material Adverse Effect with
respect to FSFS. FSFS and the FSFS Subsidiaries provide
continuation coverage under group health plans for separating
employees and "qualified beneficiaries" in accordance with the
provisions of IRC Section 4980B(f). Such group health plans are
in compliance with Section 1862(b)(1) of the Social Security Act.
Section 2.13 Brokers, Finders and Financial Advisors.
Except for FSFS's engagement of McConnell, Budd & Downes, Inc. in
connection with transactions contemplated by this Agreement,
neither FSFS nor any FSFS Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the
transactions contemplated by this Agreement or in connection with
any transaction other than the Merger, or, except for a
commitment to pay McConnell, Budd & Downes, Inc. in connection
with the transactions contemplated by this Agreement, incurred
any liability or commitment for any fees or commissions to any
such person in connection with the transactions contemplated by
this Agreement or in connection with any transaction other than
the Merger, which has not been reflected in the FSFS Financials.
The FSFS Disclosure Schedule shall contain as an exhibit the
engagement letter between FSFS and McConnell, Budd & Downes, Inc.
Section 2.14 Environmental Matters. To the knowledge
of FSFS, neither FSFS nor any FSFS Subsidiary, nor any properties
owned or operated by FSFS or any FSFS Subsidiary has been or is
in violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate,
resulted in, or will result, in a Material Adverse Effect with
respect to FSFS. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including without
limitation notices, demand letters or requests for information
from any environmental agency) instituted or pending, or to the
knowledge of FSFS, threatened, relating to the liability of any
property owned or operated by FSFS or any FSFS Subsidiary under
any Environmental Law.
Section 2.15 Loan Portfolio. The allowance for loan
losses reflected, and to be reflected, in the FSFS Regulatory
Reports, and shown, and to be shown, on the balance sheets
contained in the FSFS Financials have been, and will be,
established in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory
criteria.
Section 2.16 Information to be Supplied. The
information to be supplied by FSFS and First DeWitt for inclusion
in the Registration Statement will not, at the time the
Registration Statement is declared effective pursuant to the
Securities Act, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein not misleading. The information supplied, or
to be supplied, by FSFS for inclusion in the Applications will,
at the time such documents are filed with any Regulatory
Authority, be accurate in all material aspects.
Section 2.17 Securities Documents. FSFS has delivered
to Sovereign copies of its (i) annual reports on SEC Form 10-K
for the years ended September 30, 1995, 1994 and 1993,
(ii) quarterly reports on SEC Form 10-Q for the quarters ended
December 31, 1995, and March 31, 1996, and (iii) proxy materials
used or for use in connection with its meetings of shareholders
held in 1996, 1995 and 1994. Such reports and such proxy
materials complied, at the time filed with the SEC, in all
material respects, with the Exchange Act and all applicable rules
and regulations of the SEC.
Section 2.18 Related Party Transactions. Except as
disclosed (i) in the FSFS Disclosure Schedule, (ii) in the proxy
statement for use in connection with FSFS's 1996 annual meeting
of shareholders or (iii) in the footnotes to the FSFS Financials,
FSFS is not a party to any transaction (including any loan or
other credit accommodation) with any Affiliate of FSFS (except a
FSFS Subsidiary). Except as disclosed in the FSFS Disclosure
Schedule or in the proxy statement for use in connection with
FSFS's 1995 annual meeting of shareholders, all such transactions
(a) were made in the ordinary course of business, (b) were made
on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other Persons, and (c) did not involve more
than the normal risk of collectability or present other
unfavorable features. Except as set forth on the FSFS Disclosure
Schedule, no loan or credit accommodation to any Affiliate of
FSFS is presently in default or, during the three year period
prior to the date of this Agreement, has been in default or has
been restructured, modified or extended. Neither FSFS nor First
DeWitt has been notified that principal and interest with respect
to any such loan or other credit accommodation will not be paid
when due or that the loan grade classification accorded such loan
or credit accommodation by First DeWitt is inappropriate.
Section 2.19 Schedule of Termination Benefits. The
FSFS Disclosure Schedule includes a schedule of termination
benefits and related payments payable to the individuals
identified thereon, excluding any options to acquire FSFS Common
Stock granted to such individuals, under any and all employment
agreements, special termination agreements, supplemental
executive retirement plans, deferred bonus plans, deferred
compensation plans, salary continuation plans, or any other
pension benefit or welfare benefit plan maintained by FSFS solely
for the benefit of officers of FSFS or FSFS Subsidiaries (the
"Benefits Schedule"), in the event their employment had been
terminated as of March 31, 1996. No other individuals are
entitled to benefits under any such plans. The present value of
the termination benefits and related payments specified,
including required gross-up payments under Section 280G of the
IRC, on the Benefit Schedule with respect to each named
individual (based on a 6% per annum discount factor) is true and
correct in all material respects and the aggregate amount of the
present value of such termination benefits and related payments
(based on a 6% per annum discount factor) does not exceed the
amount set forth on the Benefits Schedule included in the FSFS
Disclosure Schedule, excluding any amounts accrued through
March 31, 1996, assuming all individuals entitled to receive
termination benefits under any and all agreements providing for
such termination benefits terminated their employment on
March 31, 1996.
Section 2.20 Loans. Each loan reflected as an asset
in the FSFS Financial Statements (i) is evidenced by notes,
agreements or other evidences of indebtedness which are true,
genuine and correct (ii) to the extent secured, has been secured
by valid liens and security interests which have been perfected,
and (ii) is the legal, valid and binding obligation of the
obligator named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent conveyance
and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FSFS.
Section 2.21 Quality of Representations. The
representations made by FSFS in this Agreement are true, correct
and complete in all material respects.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOVEREIGN
Sovereign hereby represents and warrants to FSFS that,
except as set forth in the Sovereign Disclosure Schedule
delivered by Sovereign to FSFS on or prior to the date hereof:
Section 3.01 Organization.
(a) Sovereign is a corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Each Sovereign Subsidiary is duly
organized, validly existing, and in good standing under the laws
of the jurisdiction of its incorporation and each possesses full
corporate power and authority to carry on its respective business
and to own, lease and operate its properties as presently
conducted. Neither Sovereign nor any Sovereign Subsidiary is
required by the conduct of its business or the ownership or
leasing of its assets to qualify to do business as a foreign
corporation in any jurisdiction other than the Commonwealth of
Pennsylvania and the states of Delaware and New Jersey, except
where the failure to be so qualified would not have a Material
Adverse Effect. Sovereign is a savings and loan holding company
duly registered under the HOLA.
(b) Sovereign Bank is a federal savings bank,
duly organized and validly existing under the laws of the United
States of America. Sovereign Bank has the corporate power and
authority to carry on its business and operations as now being
conducted and to own and operate the properties and assets now
owned and being operated by it.
(c) The deposits of Sovereign Bank are insured by
the FDIC to the extent provided in the Federal Deposit Insurance
Act.
(d) The respective minute books of Sovereign and
Sovereign Bank accurately record in all material respects all
material corporate action of their respective shareholders and
boards of directors (including committees) through the date of
this Agreement.
(e) Prior to the execution of this Agreement,
Sovereign has delivered to FSFS true and correct copies of the
articles of incorporation and the bylaws of Sovereign and
Sovereign Bank, respectively, as in effect on the date hereof.
Section 3.02 Capital Structure.
(a) Sovereign is authorized, by its articles of
incorporation, to issue (a) 100,000,000 shares of common stock,
no par value ("Sovereign Common Stock"), of which, at the date of
this Agreement, no shares were issued and held by Sovereign as
treasury stock and 52,769,815 shares are issued and outstanding,
and (b) 7,500,000 shares of preferred stock, no par value, of
which, at the date of this Agreement, 2,000,000 shares of 6-1/4%
Cumulative, Convertible Preferred Stock, Series B, are issued and
outstanding. All shares of Sovereign Common Stock issued and
outstanding are fully paid and nonassessable and none were issued
in violation of any preemptive rights. Sovereign has no Rights
authorized, issued or outstanding, other than (i) the Sovereign
Stock Purchase Rights, and (ii) options to acquire
1,578,902 shares of Sovereign Common Stock as authorized under
Sovereign's employee benefit plans, stock option plans, non-
employee directors compensation plan, employee stock ownership
plan, employee stock purchase plan, and dividend reinvestment and
stock purchase plan. As of March 31, 1996, Sovereign had
approximately 8,500 shareholders of record.
(b) To the best of Sovereign's knowledge, except
as disclosed in Sovereign's proxy statement dated March 15, 1996,
no person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) is the beneficial owner of 5% or more of the
outstanding shares of Sovereign Common Stock.
(c) Sovereign owns all of the capital stock of
Sovereign Bank, free and clear of any lien or encumbrance.
Except for the Sovereign Subsidiaries, Sovereign does not
possess, directly or indirectly, any material equity interest in
any corporation, except for equity interests held in the
investment portfolios of Sovereign Subsidiaries, equity interests
held by Sovereign Subsidiaries in a fiduciary capacity, and
equity interests held in connection with the commercial loan
activities of Sovereign Subsidiaries.
Section 3.03 Authority; No Violation.
(a) Sovereign has full corporate power and
authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. Sovereign Bank has full
corporate power and authority to execute and deliver the Bank
Plan of Merger and to consummate the Bank Merger. The execution
and delivery of this Agreement by Sovereign and the consummation
by Sovereign of the transactions contemplated hereby have been
duly and validly approved by the Board of Directors of Sovereign
and no other corporate proceedings on the part of Sovereign are
necessary to consummate the transactions contemplated hereby.
The execution and delivery of the Bank Plan of Merger by
Sovereign Bank and the consummation by Sovereign Bank of the Bank
Merger have been duly and validly approved by the Board of
Directors of Sovereign Bank and by Sovereign as sole shareholder
of Sovereign Bank, and no other corporate proceedings on the part
of Sovereign Bank are necessary to consummate the transactions
contemplated by the Bank Plan of Merger. This Agreement has been
duly and validly executed and delivered by Sovereign and, subject
to receipt of the required approvals of Regulatory Authorities
described in Section 3.04 hereof, constitutes the valid and
binding obligation of Sovereign, enforceable against Sovereign in
accordance with its terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally
and subject, as to enforceability, to general principles of
equity. The Bank Plan of Merger, upon its execution and delivery
by Sovereign Bank concurrently with the execution and delivery of
this Agreement, will constitute the valid and binding obligation
of Sovereign Bank, enforceable against Sovereign Bank in
accordance with its terms, subject to applicable conservatorship
and receivership provisions of the Federal Deposit Insurance Act,
or insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general
principles of equity.
(b) (A) The execution and delivery of this
Agreement by Sovereign, (B) the execution and delivery of the
Bank Plan of Merger by Sovereign Bank, (C) subject to receipt of
approvals from the Regulatory Authorities referred to in
Section 3.04 hereof and FSFS's and Sovereign's compliance with
any conditions contained therein, the consummation of the
transactions contemplated hereby, and (D) compliance by Sovereign
or Sovereign Bank with any of the terms or provisions hereof or
of the Bank Plan of Merger will not (i) conflict with or result
in a breach of any provision of the articles of incorporation or
bylaws of Sovereign or the charter and bylaws of Sovereign Bank;
(ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to
Sovereign or Sovereign Bank 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 a right of termination or acceleration
or the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of Sovereign or
Sovereign Bank under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other investment or obligation to which
Sovereign or Sovereign Bank is a party, or by which they or any
of their respective properties or assets may be bound or
affected, except for such violations, conflicts, breaches or
defaults under clause (ii) or (iii) hereof which, either
individually or in the aggregate, will not have a Material
Adverse Effect on Sovereign.
Section 3.04 Consents. Except for consents and
approvals of or filings with the OTS, the PDB, the SEC, and state
"blue sky" authorities, no consents or approvals of, or filings
or registrations with, any public body or authority are necessary
in connection with the execution and delivery of this Agreement
by Sovereign or the Bank Plan of Merger by Sovereign Bank, or the
consummation by Sovereign of the transactions contemplated hereby
or by Sovereign Bank of the Bank Merger. Sovereign has no reason
to believe that (i) any required consents or approvals will not
be received or will be received with conditions, limitations or
restrictions unacceptable to it or which would adversely impact
Sovereign's ability to consummate the transactions contemplated
by this Agreement or that (ii) any public body or authority, the
consent or approval of which is not required or any filing with
which is not required, will object to the consummation of the
transactions contemplated by this Agreement.
Section 3.05 Financial Statements.
(a) Sovereign has previously delivered, or will
deliver, to FSFS the Sovereign Financials. The Sovereign
Financials have been, or will be, prepared in accordance with
generally accepted accounting principles, and fairly present, or
will fairly present, the consolidated financial position, results
of operations and cash flows of Sovereign as of and for the
periods ending on the dates thereof, in accordance with generally
accepted accounting principles. Sovereign will make the
Sovereign Regulatory Reports available to FSFS for inspection.
(b) At the date of any balance sheet included in
the Sovereign Financials, Sovereign did not have any liabilities
or obligations of any nature (whether absolute, accrued,
contingent or otherwise) of a type required to be reflected in
such Sovereign Financials or in the footnotes thereto which are
not fully reflected or reserved against therein or disclosed in a
footnote thereto, except for liabilities and obligations which
are not material in the aggregate and which are incurred in the
ordinary course of business, consistent with past practice, and
except for liabilities and obligations which are within the
subject matter of a specific representation and warranty herein.
Section 3.06 Taxes. Sovereign and the Sovereign
Subsidiaries are members of the same affiliated group within the
meaning of IRC Section 1504(a). Sovereign has duly filed in
correct form all federal, state and local tax returns required to
be filed by or with respect to Sovereign and all Sovereign
Subsidiaries on or prior to the date hereof (all such returns
being accurate and correct in all material respects) and has duly
paid or made provisions for the payment of all federal, state and
local taxes which have been incurred by or are due or claimed to
be due from Sovereign and any Sovereign Subsidiary by any taxing
authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the date hereof other than taxes
which (i) are not delinquent or (ii) are being contested in good
faith.
Section 3.07 No Material Adverse Effect. Sovereign
has not suffered any Material Adverse Effect since March 31,
1996.
Section 3.08 Legal Proceedings. Neither Sovereign nor
any Sovereign Subsidiary is a party to any, and there are no
pending or, to the best of Sovereign's knowledge, threatened
legal, administrative, arbitration or other proceedings, claims,
actions or governmental investigations or inquiries of any nature
(i) against Sovereign or any Sovereign Subsidiary, (ii) to which
Sovereign's or any Sovereign Subsidiary's assets are subject,
(iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of Sovereign to perform under this
Agreement, except for any proceedings, claims, actions,
investigations or inquiries referred to in clauses (i) or (ii)
which, individually or in the aggregate, could not be reasonably
expected to materially and adversely affect the assets, business,
financial condition or results of operations of Sovereign and its
Subsidiaries taken as a whole.
Section 3.09 Ownership of Property; Insurance
Coverage.
(a) Sovereign and the Sovereign Subsidiaries have
good and, as to real property, marketable title to all assets and
properties owned by Sovereign or any of its Subsidiaries, whether
real or personal, tangible or intangible, including assets and
property reflected in the balance sheets contained in the
Sovereign Financials or 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
date of such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items
that secure liabilities for borrowed money and that are described
in the Sovereign Disclosure Schedule or permitted under
Article IV hereof, and (ii) statutory liens for amounts not yet
delinquent or which are being contested in good faith. Sovereign
and the Sovereign Subsidiaries, as lessee, have the right under
valid and subsisting leases of properties used by Sovereign and
its Subsidiaries in the conduct of their businesses to occupy and
use all such properties as presently occupied and used by each of
them.
(b) Sovereign and the Sovereign Subsidiaries
currently maintain insurance in amounts considered by Sovereign
to be reasonable for their respective operations, and such
insurance is similar in scope and coverage to that maintained by
other businesses similarly engaged. Neither Sovereign nor any
Sovereign Subsidiary has received notice from any insurance
carrier that (i) such insurance will be cancelled or that
coverage thereunder will be reduced or eliminated or (ii) premium
costs with respect to such insurance will be substantially
increased.
Section 3.10 Compliance With Applicable Law.
(a) Sovereign and the Sovereign Subsidiaries hold
all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their businesses under, and have
complied in all material respects with, applicable laws,
statutes, orders, rules or regulations of any federal, state or
local governmental authority relating to them, other than where
such failure to hold or such noncompliance will neither result in
a limitation in any material respect on the conduct of their
businesses nor otherwise have a Material Adverse Effect on the
assets, business, financial condition, business prospects or
results of operations of Sovereign and its Subsidiaries taken as
a whole.
(b) Neither Sovereign nor any Sovereign
Subsidiary has received any notification or communication from
any Regulatory Authority (i) asserting that Sovereign or any
Sovereign Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Regulatory
Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material
to Sovereign or any Sovereign Subsidiary; (iii) requiring or
threatening to require Sovereign or any Sovereign Subsidiary, or
indicating that Sovereign or any Sovereign Subsidiary may be
required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of Sovereign or any Sovereign Subsidiary, including
without limitation any restriction on the payment of dividends;
or (iv) directing, restricting or limiting, or purporting to
direct, restrict or limit, in any manner the operations of
Sovereign or any Sovereign Subsidiary, including without
limitation any restriction on the payment of dividends (any such
notice, communication, memorandum, agreement or order described
in this sentence is hereinafter referred to as a "Regulatory
Agreement"). Neither Sovereign nor any Sovereign Subsidiary has
consented to or entered into any Regulatory Agreement, except as
heretofore disclosed to FSFS.
Section 3.11 Information to be Supplied. The
information to be supplied by Sovereign for inclusion in the
Registration Statement will not, at the time the Registration
Statement is declared effective pursuant to the Securities Act,
contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements
therein not misleading. The information supplied, or to be
supplied, by Sovereign for inclusion in the Applications will, at
the time such documents are filed with any Regulatory Authority,
be accurate in all material aspects.
Section 3.12 ERISA. Sovereign has previously made
available to FSFS true and complete copies of the employee
pension benefit plans within the meaning of ERISA Section 3(2),
profit sharing plans, stock purchase plans, deferred compensation
and supplemental income plans, supplemental executive retirement
plans, annual incentive plans, group insurance plans, and all
other employee welfare benefit plans within the meaning of ERISA
Section 3(1) (including vacation pay, sick leave, short-term
disability, long-term disability, and medical plans), and all
other employee benefit plans, policies, agreements and
arrangements, all of which are set forth on the Sovereign
Disclosure Schedule, maintained or contributed to for the benefit
of the employees or former employees (including retired
employees) and any beneficiaries thereof or directors or former
directors of Sovereign or any Sovereign Subsidiary, together with
(i) the most recent actuarial (if any) and financial reports
relating to those plans which constitute "qualified plans" under
IRC Section 401(a), (ii) the most recent annual reports relating
to such plans filed by them, respectively, with any government
agency, and (iii) all rulings and determination letters which
pertain to any such plans. Neither Sovereign nor any Sovereign
Subsidiary, and no pension plan maintained by Sovereign or any
Sovereign Subsidiary, has incurred, directly or indirectly,
within the past six (6) years any liability under Title IV of
ERISA (including to the Pension Benefit Guaranty Corporation) or
to the IRS with respect to any pension plan qualified under IRC
Section 401(a) which liability has resulted in or will result in
a Material Adverse Effect with respect to Sovereign, except
liabilities to the Pension Benefit Guaranty Corporation pursuant
to ERISA Section 4007, all of which have been fully paid, nor has
any reportable event under ERISA Section 4043(b) occurred with
respect to any such pension plan. With respect to each of such
plans that is subject to Title IV of ERISA, the present value of
the accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the plan's most recent
actuarial report did not, as of its latest valuation date, exceed
the then current value of the assets of such plan allocable to
such accrued benefits. Neither Sovereign nor any Sovereign
Subsidiary has incurred any liability under ERISA Section 4201
for a complete or partial withdrawal from a multi-employer plan.
All "employee benefit plans," as defined in ERISA Section 3(3),
comply and in the past six (6) years have complied in all
material respects with (i) relevant provisions of ERISA, and
(ii) in the case of plans intended to qualify for favorable
income tax treatment, provisions of the IRC relevant to such
treatment. Except as disclosed in the Sovereign Disclosure
Schedule, neither Sovereign nor any Sovereign Subsidiary has a
material liability under any such plan which is not reflected on
the Sovereign Financials. No prohibited transaction (which shall
mean any transaction prohibited by ERISA Section 406 and not
exempt under ERISA Section 408 or any transaction prohibited
under IRC Section 4975) has occurred within the past six (6)
years with respect to any employee benefit plan maintained by
Sovereign or any Sovereign Subsidiary that would result in the
imposition, directly or indirectly, of an excise tax under IRC
Section 4975 or other penalty under ERISA or the IRC, which
individually or in the aggregate, has resulted in or will result
in a Material Adverse Effect with respect to Sovereign.
Sovereign and the Sovereign Subsidiaries provide continuation
coverage under group health plans for separating employees in
accordance with the provisions of IRC Section 4980B(f). Such
group health plans are in compliance with Section 1862(b)(1) of
the Social Security Act.
Section 3.13 Securities Documents. Sovereign has
delivered, or will deliver, to FSFS copies of its (i) annual
reports on SEC Form 10-K for the years ended December 31, 1995,
1994, and 1993, (ii) quarterly reports on SEC Form 10-Q for the
quarter ended March 31, 1996, and (iii) proxy statement dated
March 15, 1996 used in connection with its annual meeting of
shareholders held in April 1996. Such reports and such proxy
materials complied, at the time filed with the SEC, in all
material respects, with the Exchange Act and the applicable rules
and regulations of the SEC.
Section 3.14 Environmental Matters. To the knowledge
of Sovereign, neither Sovereign nor any Sovereign Subsidiary, nor
any properties owned or operated by Sovereign or any Sovereign
Subsidiary has been or is in violation of or liable under any
Environmental Law which violation or liability, individually or
in the aggregate, resulted in or will result in a Material
Adverse Effect with respect to Sovereign. There are no actions,
suits or proceedings, or demands, claims, notices or
investigations (including without limitation notices, demand
letters or requests for information from any environmental
agency) instituted or pending, or to the knowledge of Sovereign,
threatened, relating to the liability of any property owned or
operated by Sovereign or any Sovereign Subsidiary under any
Environmental Law.
Section 3.15 Loan Portfolio. The allowance for loan
losses reflected, and to be reflected, in the Sovereign
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the Sovereign Financials have been, and will
be, established in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory
criteria.
Section 3.16 Brokers and Finders. Neither Sovereign
nor any Sovereign Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any
broker, finder or financial advisor, or incurred any liability
for any fees or commissions to any such person, in connection
with the transactions contemplated by this Agreement.
Section 3.17 Quality of Representations. The
representations made by Sovereign in this Agreement are true,
correct and complete in all material respects.
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of FSFS's Business.
(a) From the date of this Agreement to the
Closing Date, FSFS and each FSFS Subsidiary will conduct its
business and engage in transactions, including extensions of
credit, only in the ordinary course and consistent with past
practice and policies, except as otherwise required by this
Agreement or with the written consent of Sovereign. FSFS will
use its best efforts, and will cause First DeWitt to use its best
efforts, to (i) preserve its business organizations intact,
(ii) maintain good relationships with employees, and
(iii) preserve for itself the good will of customers of FSFS and
FSFS Subsidiaries and others with whom business relationships
exist. From the date hereof to the Closing Date, except as
otherwise consented to or approved by Sovereign in writing or as
permitted or required by this Agreement, FSFS will not, and FSFS
will not permit any FSFS Subsidiary to:
(i) amend or change any provision of its
certificate or articles of incorporation, charter, or
bylaws;
(ii) change the number of authorized or
issued shares of its capital stock or issue or grant any
option, warrant, call, commitment, subscription, Right or
agreement of any character relating to its authorized or
issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any
shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock,
or redeem or otherwise acquire any shares of capital stock,
except that (A) FSFS may issue shares of FSFS Common Stock
upon the valid exercise, subject to the terms of the letter
agreement attached hereto as Exhibit 1, of presently
outstanding options to acquire FSFS Common Stock under the
FSFS Stock Option Plans and (B) FSFS may pay a regular
quarterly cash dividend, not to exceed $0.055 per share of
FSFS Common Stock outstanding. As promptly as practicable
following the date of this Agreement, the Board of Directors
of FSFS shall cause its regular quarterly dividend record
dates and payment dates to be the same as Sovereign's
regular quarterly dividend record dates and payment dates
for Sovereign Common Stock, and FSFS shall not change its
regular dividend payment dates and record dates without
prior written consent of Sovereign. Nothing contained in
this Section 4.01(ii) or in any other Section of this
Agreement shall be construed to permit FSFS shareholders to
receive two dividends in any quarter. Subject to applicable
regulatory restrictions, if any, First DeWitt may pay a cash
dividend, in the aggregate, sufficient to fund any dividend
by FSFS permitted hereunder;
(iii) grant any severance or termination pay
(other than pursuant to written policies or written
agreements of FSFS or FSFS Subsidiaries in effect on the
date hereof and provided to Sovereign prior to the date
hereof) to, or enter into any new or amend any existing
employment agreement with, or increase the compensation of,
any employee, officer or director of FSFS or any FSFS
Subsidiary, except for routine periodic increases,
individually and in the aggregate, in accordance with past
practice;
(iv) merge or consolidate FSFS or any FSFS
Subsidiary with any other corporation; sell or lease all or
any substantial portion of the assets or business of FSFS or
any FSFS Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other
person, firm, association, corporation or business
organization other than in connection with the collection of
any loan or credit arrangement between any FSFS Subsidiary
and any other person; enter into a purchase and assumption
transaction with respect to deposits and liabilities; permit
the revocation or surrender by any FSFS Subsidiary of its
certificate of authority to maintain, or file an application
for the relocation of, any existing branch office, or file
an application for a certificate of authority to establish a
new branch office;
(v) sell or otherwise dispose of the capital
stock of First DeWitt or sell or otherwise dispose of any
asset of FSFS or of any FSFS Subsidiary other than in the
ordinary course of business consistent with past practice;
subject any asset of FSFS or of any FSFS Subsidiary to a
lien, pledge, security interest or other encumbrance (other
than in connection with deposits, repurchase agreements,
bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business and
transactions in "federal funds" and the satisfaction of
legal requirements in the exercise of trust powers) other
than in the ordinary course of business consistent with past
practice; incur any indebtedness for borrowed money (or
guarantee any indebtedness for borrowed money), except in
the ordinary course of business consistent with past
practice;
(vi) take any action which would result in
any of the representations and warranties of FSFS set forth
in this Agreement becoming untrue as of any date after the
date hereof or in any of the conditions set forth in
Article V hereof not being satisfied;
(vii) change any method, practice or
principle of accounting, except as may be required from time
to time by GAAP (without regard to any optional early
adoption date) or any Regulatory Authority responsible for
regulating FSFS or First DeWitt;
(viii) waive, release, grant or transfer any
rights of value or modify or change in any material respect
any existing material agreement to which FSFS or any FSFS
Subsidiary is a party, other than in the ordinary course of
business, consistent with past practice;
(ix) implement any pension, retirement,
profit sharing, bonus, welfare benefit or similar plan or
arrangement that was not in effect on the date of this
Agreement, or materially amend any existing plan or
arrangement except to the extent such amendments do not
result in an increase in cost; provided, however, that FSFS
may contribute to the FSFS pension plan an amount not to
exceed the minimum amount required under ERISA or the IRC
only if (A) such amount is usual and ordinary, consistent
with past practice and (B) FSFS obtains an opinion of legal
counsel that the full amount of such contribution will be
deductible by FSFS for federal tax purposes, and further
provided that in no event will FSFS contribute to the FSFS
pension plan an amount in excess of $200,000 without
Sovereign's prior written consent;
(x) purchase any security for its investment
portfolio not rated "A" or higher by either Standard &
Poor's Corporation or Moody's Investor Services, Inc.;
(xi) make any loan or other credit facility
commitment (including without limitation, lines of credit
and letters of credit) to any borrower or group of
affiliated borrowers in excess of $600,000 in the aggregate,
or compromise, extend, renew or modify any such loan or
commitment outstanding in excess of $600,000, except for any
commitment disclosed on the FSFS Disclosure Schedule;
provided that Sovereign will not unreasonably withhold its
consent with respect to any request by FSFS for permission
to compromise, extend, renew or modify any loan in excess of
$600,000;
(xii) except as set forth on the FSFS
Disclosure Schedule, enter into, renew, extend or modify any
other transaction with any Affiliate;
(xiii) enter into any interest rate swap or
similar commitment, agreement or arrangement;
(xiv) except for the execution of this
Agreement, take any action that would give rise to a right
of payment to any individual under any employment agreement;
(xv) intentionally and knowingly take any
action that would preclude satisfaction of the condition to
closing contained in Section 5.02(k) relating to financial
accounting treatment of the Merger; or
(xvi) agree to do any of the foregoing.
For purposes of this Section 4.01, it shall not be
considered in the ordinary course of business for FSFS or any
FSFS Subsidiary to do any of the following: (i) make any capital
expenditure of $50,000 or more not disclosed on FSFS Disclosure
Schedule 4.01, without the prior written consent of Sovereign;
(ii) make any sale, assignment, transfer, pledge, hypothecation
or other disposition of any assets having a book or market value,
whichever is greater, in the aggregate in excess of $1,000,000,
other than pledges of assets to secure government deposits, to
exercise trust powers, sales of assets received in satisfaction
of debts previously contracted in the normal course of business,
issuance of loans, or transactions in the investment securities
portfolio by FSFS or a FSFS Subsidiary or repurchase agreements
made, in each case, in the ordinary course of business; or
(iii) undertake or enter any lease, contract or other commitment
for its account, other than in the normal course of providing
credit to customers as part of its banking business, involving a
payment by FSFS or any FSFS Subsidiary of more than $100,000
annually, or containing a material financial commitment and
extending beyond 24 months from the date hereof. Notwithstanding
anything in this Section 4.01 to the contrary, (i) FSFS shall be
permitted to sell, exchange or otherwise dispose of nonperforming
assets (as defined in Section 5.02(q)), except that sales,
exchanges or other dispositions of nonperforming assets with a
principal balance exceeding $500,000 shall require the prior
written consent of Sovereign, which consent shall not be
unreasonably withheld, and (ii) FSFS shall be permitted to sell
and transfer an aggregate of $59,900,000 in credit card
receivables, previously identified to Sovereign, to Cross Country
Bank (or its designee) at no less than the book value (exclusive
of any reserves) thereof.
Section 4.02 Access; Confidentiality.
(a) From the date of this Agreement through the
Closing Date, FSFS or Sovereign, as the case may be, shall afford
to, and shall cause each FSFS Subsidiary or Sovereign Subsidiary
to afford to, the other party and its authorized agents and
representatives, complete access to their respective properties,
assets, books and records and personnel, at reasonable hours and
after reasonable notice; and the officers of FSFS and Sovereign
will furnish any person making such investigation on behalf of
the other party with such financial and operating data and other
information with respect to the businesses, properties, assets,
books and records and personnel as the person making such
investigation shall from time to time reasonably request.
(b) FSFS and Sovereign each agree to conduct such
investigation and discussions hereunder in a manner so as not to
interfere unreasonably with normal operations and customer and
employee relationships of the other party.
(c) In addition to the access permitted by
subparagraph (a) above, from the date of this Agreement through
the Closing Date, FSFS shall permit employees of Sovereign
reasonable access to and participation in matters relating to
problem loans, loan restructurings and loan work-outs of FSFS and
the FSFS Subsidiaries, provided that nothing contained in this
subparagraph shall be construed to grant Sovereign or any
Sovereign employee any final decision-making authority with
respect to such matters. Sovereign shall have the right,
however, at Sovereign's expense, to cause FSFS or any FSFS
Subsidiary to obtain an appraisal by an independent third party
experienced in such matters, and mutually satisfactory to
Sovereign and FSFS, of the assets or property securing any loan
made by FSFS or any FSFS Subsidiary.
(d) If the transactions contemplated by this
Agreement shall not be consummated, FSFS and Sovereign will each
destroy or return all documents and records obtained from the
other party or its representatives, during the course of its
investigation and will cause all information with respect to the
other party obtained pursuant to this Agreement or preliminarily
thereto to be kept confidential, except to the extent such
information becomes public through no fault of the party to whom
the information was provided or any of its representatives or
agents and except to the extent disclosure of any such
information is legally required. FSFS and Sovereign shall each
give prompt notice to the other party of any contemplated
disclosure where such disclosure is so legally required.
Section 4.03 Regulatory Matters and Consents.
(a) Sovereign and FSFS will prepare all
Applications and make all filings for, and use their best efforts
to obtain as promptly as practicable after the date hereof, all
necessary permits, consents, approvals, waivers and
authorizations of all Regulatory Authorities necessary or
advisable to consummate the transactions contemplated by this
Agreement.
(b) FSFS will furnish Sovereign with all
information concerning FSFS and FSFS Subsidiaries as may be
necessary or advisable in connection with any Application or
filing made by or on behalf of Sovereign to any Regulatory
Authority in connection with the transactions contemplated by
this Agreement.
(c) Sovereign will promptly furnish FSFS with
copies of all material written communications to, or received by
Sovereign or any Sovereign Subsidiary from, any Regulatory
Authority in respect of the transactions contemplated hereby,
except information which is filed by Sovereign which is
designated as confidential or contains an earnings projection.
(d) Sovereign will furnish FSFS with (i) copies
of all Applications prior to filing with any Regulatory Authority
and provide FSFS a reasonable opportunity to suggest changes to
such Applications, which suggested changes Sovereign may, in its
sole discretion accept or reject, (ii) copies of all Applications
filed by Sovereign and (iii) copies of all documents filed by
Sovereign under the Securities Exchange Act of 1934, as amended.
(e) FSFS will cooperate with Sovereign in the
foregoing matters and will furnish Sovereign with all information
concerning FSFS and FSFS Subsidiaries as may be necessary or
advisable in connection with any Application or filing (including
the Registration Statement and any report filed with the SEC)
made by or on behalf of Sovereign to any Regulatory Authority in
connection with the transactions contemplated by this Agreement,
and such information will be accurate and complete in all
material respects. In connection therewith, FSFS will provide
certificates and other documents reasonably requested by
Sovereign.
Section 4.04 Taking of Necessary Action.
(a) Sovereign and FSFS shall each use its best
efforts in good faith, and each of them shall cause its
Subsidiaries to use their best efforts in good faith, to
(i) furnish such information as may be required in connection
with the preparation of the documents referred to in Section 4.03
of this Agreement, and (ii) take or cause to be taken all action
necessary or desirable on its part using its best efforts so as
to permit completion of the Merger and the Bank Merger including,
without limitation, (A) obtaining the consent or approval of each
individual, partnership, corporation, association or other
business or professional entity whose consent or approval is
required for consummation of the transactions contemplated
hereby, provided that neither FSFS nor any FSFS Subsidiary shall
agree to make any payments or modifications to agreements in
connection therewith without the prior written consent of
Sovereign, and (B) requesting the delivery of appropriate
opinions, consents and letters from its counsel and independent
auditors. No party hereto shall take, or cause, or to the best
of its ability permit to be taken, any action that would
substantially impair the prospects of completing the Merger and
the Bank Merger pursuant to this Agreement and the Bank Plan of
Merger; provided that nothing herein contained shall preclude
Sovereign or FSFS or from exercising its rights under this
Agreement or the Option Agreement.
(b) FSFS and Sovereign shall promptly prepare a
Prospectus/Proxy Statement to be mailed to shareholders of FSFS
in connection with the meeting of FSFS shareholders and
transactions contemplated hereby, and to be filed by Sovereign
with the SEC in the Registration Statement, which
Prospectus/Proxy statement shall conform to all applicable legal
requirements. Sovereign shall, as promptly as practicable
following the preparation thereof, file the Registration
Statement with the SEC and FSFS and Sovereign shall use all
reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable
after such filing. Sovereign will advise FSFS, promptly after
Sovereign receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or
the suspension of the qualification of the shares of capital
stock issuable pursuant to the Registration Statement, or the
initiation or threat of any proceeding for any such purpose, or
of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information. Sovereign
shall use its best efforts to obtain, prior to the effective date
of the Registration Statement, all necessary state securities
laws or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement. Sovereign will
provide FSFS with as many copies of such Registration Statement
and all amendments thereto promptly upon the filing thereof as
FSFS may reasonably request.
Section 4.05 Certain Agreements.
(a) On or after the Effective Date, Sovereign
shall indemnify, defend and hold harmless all prior and then-
existing directors and officers of FSFS and First DeWitt, against
(i) all losses, claims, damages, costs, expenses, liabilities or
judgments or amounts that are paid in settlement (with the
approval of Sovereign which approval shall not be unreasonably
withheld) of or in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is
or was a director, officer or employee of FSFS or any FSFS
Subsidiary, whether pertaining to any matter existing or
occurring at or prior to the Effective Date and whether asserted
or claimed prior to, or at or after, the Effective Date
("Indemnified Liabilities") and (ii) all Indemnified Liabilities
based in whole or in part on, or arising in whole or in part out
of, or pertaining to this Agreement or the transactions
contemplated hereby, to the same extent as such officer, director
or employee may be indemnified by FSFS or First DeWitt as of the
date hereof including the right to advancement of expenses,
provided, however, that any such officer, director or employee of
FSFS or First DeWitt may not be indemnified by Sovereign and/or
Sovereign Bank if such indemnification is prohibited by
applicable law.
(b) Sovereign agrees to honor and Sovereign
agrees to cause Sovereign Bank to honor all terms and conditions
of all existing employment contracts and special termination
agreements disclosed in the FSFS Disclosure Schedule.
Section 4.06 No Other Bids and Related Matters. So
long as this Agreement remains in Effect, FSFS shall not, nor
shall it permit any FSFS Subsidiary or any other Affiliate of
FSFS or any officer, director or employee of any of them, or any
investment banker, attorney, accountant or other representative
retained by FSFS, any FSFS Subsidiary or any other FSFS Affiliate
to, directly or indirectly, solicit, encourage, initiate or
engage in discussions or negotiations with, or respond to
requests for information, inquiries, or other communications
from, any person other than Sovereign concerning the fact of, or
the terms and conditions of, this Agreement, or concerning any
acquisition of FSFS, any FSFS Subsidiary, or any assets or
business thereof (except that FSFS's officers may respond to
inquiries from analysts, Regulatory Authorities and holders of
FSFS Common Stock in the ordinary course of business). FSFS
shall notify Sovereign immediately if any such discussions or
negotiations are sought to be initiated with FSFS by any person
other than Sovereign or if any such requests for information,
inquiries, proposals or communications are received from any
person other than Sovereign.
Section 4.07 Duty to Advise; Duty to Update FSFS's
Disclosure Schedule. FSFS shall promptly advise Sovereign of any
change or event having a Material Adverse Effect on it or on any
FSFS Subsidiary or which it believes would or would be reasonably
likely to cause or constitute a material breach of any of its
representations, warranties or covenants set forth herein. FSFS
shall update FSFS's Disclosure Schedule as promptly as
practicable after the occurrence of an event or fact which, if
such event or fact had occurred prior to the date of this
Agreement, would have been disclosed in the FSFS Disclosure
Schedule. The delivery of such updated Schedule shall not
relieve FSFS from any breach or violation of this Agreement and
shall not have any effect for the purposes of determining the
satisfaction of the condition set forth in Sections 5.02(b)
hereof.
Section 4.08 Conduct of Sovereign's Business. From
the date of this Agreement to the Closing Date, Sovereign will
use its best efforts to (x) preserve its business organizations
intact, (y) maintain good relationships with employees, and
(z) preserve for itself the goodwill of customers of Sovereign
and Sovereign Subsidiaries and others with whom business
relationships exist.
Section 4.09 Board and Committee Minutes. FSFS shall
provide to Sovereign, within 30 days after any meeting of the
Board of Directors of FSFS or any FSFS Subsidiary, or any
committee thereof, or any senior management committee, a copy of
the minutes of such meeting, except that with respect to any
meeting held within 30 days of the Closing Date, such minutes
shall be provided to Sovereign prior to the Closing Date.
Section 4.10 Undertakings by Sovereign and FSFS.
(a) From and after the date of this Agreement,
FSFS shall:
(i) Voting by Directors. Use its best
efforts to cause all members of FSFS's Board of Directors to
vote all shares of FSFS's Common Stock beneficially owned by
each such director in favor of this Agreement;
(ii) Phase I Environmental Audit. Permit
Sovereign, if Sovereign elects to do so, at its own expense,
to cause a "phase I environmental audit" to be performed at
any physical location owned or occupied by FSFS or any FSFS
Subsidiary on the date hereof;
(iii) Approval of Bank Plan of Merger.
Approve the Bank Plan of Merger as sole shareholder of First
DeWitt and obtain the approval of, and cause the execution
and delivery of, the Bank Plan of Merger by First DeWitt;
(iv) Proxy Solicitor. If Sovereign requests
and agrees to bear the expense thereof, retain a proxy
solicitor in connection with the solicitation of FSFS
shareholder approval of this Agreement;
(v) Timely Review. If requested by
Sovereign at Sovereign's sole expense, cause its independent
certified public accountants to perform a review of its
unaudited consolidated financial statements as of the end of
any calendar quarter, in accordance with Statement of
Auditing Standards No. 36, and to issue their report on such
financial statements as soon as is practicable thereafter;
(vi) Outside Service Bureau Contracts. If
requested to do so by Sovereign, use its best efforts to
obtain an extension of any contract with an outside service
bureau or other vendor of services to FSFS or any FSFS
Subsidiary, on terms and conditions mutually acceptable to
FSFS and Sovereign;
(vii) Committee Meetings. Permit a
representative of Sovereign, who is reasonably acceptable to
FSFS, to attend all committee meetings of FSFS and First
DeWitt management including, without limitation, any loan
committee or asset/liability committee. FSFS shall respond
reasonably and in good faith to any request of Sovereign to
permit a representative of Sovereign, who is reasonably
acceptable to FSFS, to attend any meeting of FSFS's Board of
Directors or the Executive Committee thereof;
(viii) Shareholders' Meeting. Submit this
Agreement to its shareholders for approval at a meeting to
be held as soon as practicable, and use its best efforts to
cause its Board of Director to unanimously recommend
approval of this Agreement to its shareholders; and
(ix) Certain Shareholders. Use its best
efforts to cause ABI and Basswood to execute the Letter
Agreement dated June 24, 1996, in the form attached hereto
as Exhibit 1.
(x) List of Nonperforming Assets. Provide
Sovereign, within ten (10) days of the end of each calendar
month, a written list of nonperforming assets (as defined in
Section 5.02(q)) as of the end of such month.
(xi) Reserves and Merger-Related Costs. On
or before the Effective Date, establish such additional
accruals and reserves as may be necessary to conform the
accounting reserve practices and methods (including credit
loss practices and methods) of FSFS to those of Sovereign
(as such practices and methods are to be applied to FSFS
from and after the Closing Date) and Sovereign's plans with
respect to the conduct of the business of FSFS following the
Merger and otherwise to reflect Merger-related expenses and
costs incurred by FSFS, provided, however, that FSFS shall
not be required to take such action (A) more than thirty
days prior to the Effective Date; and (B) unless Sovereign
agrees in writing that all conditions to closing set forth
in Section 5.02 have been satisfied or waived (except for
the expiration of any applicable waiting periods); prior to
the delivery by Sovereign of the writing referred to in the
preceding clause, FSFS shall provide Sovereign a written
statement, certified without personal liability by the chief
executive officer of FSFS and dated the date of such
writing, that the representation made in Section 2.15 hereof
is true as of such date or, alternatively, setting forth in
detail the circumstances that prevent such representation
from being true as of such date; and no accrual or reserve
made by FSFS or any FSFS Subsidiary pursuant to this
subsection, or any litigation or regulatory proceeding
arising out of any such accrual or reserve, shall constitute
or be deemed to be a breach or violation of any
representation, warranty, covenant, condition or other
provision of this Agreement or to constitute a termination
event within the meaning of Section 6.01(d) hereof.
(b) From and after the date of this Agreement,
Sovereign and FSFS shall each:
(i) Filings and Approvals. Cooperate with
the other in the preparation and filing, as soon as
practicable, of (A) the Applications, (B) the Registration
Statement and related filings under state securities laws
covering the Sovereign Common Stock and related Sovereign
Stock Purchase Rights to be issued pursuant to the Merger,
(C) all other documents necessary to obtain any other
approvals and consents required to effect the completion of
the Merger and the Bank Merger, and (D) all other documents
contemplated by this Agreement;
(ii) Identification of FSFS's Affiliates.
Cooperate with the other and use its best efforts to
identify those persons who may be deemed to be Affiliates of
FSFS;
(iii) Public Announcements. Cooperate and
cause its respective officers, directors, employees and
agents to cooperate in good faith, consistent with their
respective legal obligations, in the preparation and
distribution of, and agree upon the form and substance of,
any press release related to this Agreement and the
transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation
communications to FSFS shareholders, FSFS's internal
announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any
disclosure which its counsel deems necessary;
(iv) Maintenance of Insurance. Maintain,
and cause their respective Subsidiaries to maintain,
insurance in such amounts as are reasonable to cover such
risks as are customary in relation to the character and
location of its properties and the nature of its business;
(v) Maintenance of Books and Records.
Maintain, and cause their respective Subsidiaries to
maintain, books of account and records in accordance with
generally accepted accounting principles applied on a basis
consistent with those principles used in preparing the
financial statements heretofore delivered;
(vi) Delivery of Securities Documents.
Deliver to the other, copies of all Securities Documents
simultaneously with the filing thereof;
(vii) Taxes. File all federal, state, and
local tax returns required to be filed by them or their
respective Subsidiaries on or before the date such returns
are due (including any extensions) and pay all taxes shown
to be due on such returns on or before the date such payment
is due; or
Section 4.11 Employee Benefits and Termination
Benefits.
(a) Employee Benefits. On and after the
Effective Date, the employee pension and welfare benefit plans of
Sovereign and FSFS may, at Sovereign's election and subject to
the requirements of the IRC, continue to be maintained separately
or consolidated, provided, however, that FSFS employees shall
receive benefits at least as favorable, in the aggregate, as the
benefits to which they were entitled on March 31, 1996. In the
event of a consolidation of any or all of such plans or in the
event of termination of the FSFS benefit plans, FSFS and First
DeWitt employees shall receive credit for service with FSFS or
First DeWitt under any Sovereign benefit plan, or new Sovereign
benefit plan in which such employees would be eligible to enroll
for purposes of eligibility and vesting determination. In the
event of any termination of or consolidation of any FSFS or First
DeWitt health plan with any Sovereign health plan, all employees
of FSFS or First DeWitt shall have immediate coverage under any
successor health plan without the necessity of satisfying a
waiting period for coverage of any pre-existing condition. In
the event of a termination or consolidation of any FSFS or First
DeWitt health plan, terminated FSFS or First DeWitt employees
will have the right to continue coverage under group health plans
of Sovereign and/or the Sovereign subsidiaries in accordance with
the IRC Section 4980B(f).
(b) Termination Benefits. FSFS shall cause to be
delivered to Sovereign concurrently with the execution of this
Agreement with respect to Michael J. Quigley, III and Emil J.
Butchko and within 30 days after the date of this Agreement with
respect to each other individual named on the Benefits Schedule
included in the FSFS Disclosure Schedule, the written agreement
of each such individual in the form attached hereto as Exhibit 4
pursuant to which each such individual agrees and acknowledges
that the dollar amount set forth opposite such individual's name
on such Benefits Schedule is the entire amount due to such
individual under any employment agreement, special termination
agreement, supplemental executive retirement plan, deferred bonus
plan, deferred compensation plan, salary continuation plan, or
any other benefit or welfare plan maintained by FSFS solely for
the benefit of officers of FSFS or FSFS Subsidiaries in the event
of termination of such individual's employment on March 31, 1996.
Section 4.12 Duty to Advise; Duty to Update
Sovereign's Disclosure Schedule. Sovereign shall promptly advise
FSFS of any change or event having a Material Adverse Effect on
it or on any Sovereign Subsidiary or which it believes would or
would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants set
forth herein. Sovereign shall update Sovereign's Disclosure
Schedule as promptly as practicable after the occurrence of an
event or fact which, if such event or fact had occurred prior to
the date of this Agreement, would have been disclosed in the
Sovereign Disclosure Schedule. The delivery of such updated
Schedule shall not relieve Sovereign from any breach or violation
of this Agreement and shall not have any effect for the purposes
of determining the satisfaction of the condition set forth in
Sections 5.02(b) hereof.
Section 4.13 Affiliate Letter. No later than five
days after the date of this Agreement, FSFS shall cause to be
delivered to Sovereign the Letter Agreement attached hereto as
Exhibit 1, executed by each director and officer set forth
thereon.
ARTICLE V
CONDITIONS
Section 5.01 Conditions to FSFS's Obligations under
this Agreement. The obligations of FSFS hereunder shall be
subject to satisfaction at or prior to the Closing Date of each
of the following conditions, unless waived by FSFS pursuant to
Section 7.03 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, Sovereign and Sovereign Bank
to authorize the execution, delivery and performance of this
Agreement and the Bank Plan of Merger, respectively, and the
consummation of the transactions contemplated by this Agreement
and the Bank Plan of Merger, shall have been duly and validly
taken by Sovereign and Sovereign Bank; and FSFS shall have
received certified copies of the resolutions evidencing such
authorizations;
(b) Covenants. The obligations and covenants of
Sovereign required by this Agreement to be performed by Sovereign
at or prior to the Closing Date shall have been duly performed
and complied with in all respects, except where the failure to
perform or comply with any obligation or covenant would not,
either individually or in the aggregate, result in a Material
Adverse Effect with respect to FSFS;
(c) Representations and Warranties. The
representations and warranties of Sovereign set forth in this
Agreement shall be true and correct, as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
individually or in the aggregate, constitute a Material Adverse
Effect with respect to Sovereign;
(d) Approvals of Regulatory Authorities.
Sovereign shall have received all required approvals of
Regulatory Authorities of the Merger, and delivered copies
thereof to FSFS; and all notice and waiting periods required
thereunder shall have expired or been terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) No Material Adverse Effect. Since March 31,
1996, there shall not have occurred any Material Adverse Effect
with respect to Sovereign;
(g) Officer's Certificate. Sovereign shall have
delivered to FSFS a certificate, dated the Closing Date and
signed, without personal liability, by its chairman or president,
to the effect that the conditions set forth in subsections (a)
through (e) of this Section 5.01 have been satisfied, to the best
knowledge of the officer executing the same;
(h) Opinion of Sovereign's Counsel. FSFS shall
have received an opinion of Stevens & Lee, counsel to Sovereign,
dated the Closing Date, in form and substance reasonably
satisfactory to FSFS and its counsel to the effect set forth on
Exhibit 5 attached hereto;
(i) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained;
(j) Tax Opinion. The Merger shall qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the
IRC and FSFS shall have received an opinion of Stevens & Lee,
substantially to the effect set forth on Exhibit 6 attached
hereto;
(k) Approval of FSFS's Shareholders. This
Agreement shall have been approved by the holders of at least a
majority of the outstanding shares of FSFS Common Stock entitled
to vote thereon; and
(l) Investment Banking Opinion. FSFS shall have
received an oral opinion from McConnell, Budd & Downes, Inc.,
received on or before the date of this Agreement and updated in
writing as of a date within five (5) days of mailing the
Prospectus/Proxy Statement, to the effect that the consideration
to be received by shareholders of FSFS pursuant to this Agreement
is fair, from a financial point of view, to such shareholders.
Section 5.02 Conditions to Sovereign's Obligations
under this Agreement. The obligations of Sovereign hereunder
shall be subject to satisfaction at or prior to the Closing Date
of each of the following conditions, unless waived by Sovereign
pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, FSFS and First DeWitt to
authorize the execution, delivery and performance of this
Agreement and the Bank Plan of Merger, respectively, and the
consummation of the transactions contemplated by this Agreement
and the Bank Plan of Merger, shall have been duly and validly
taken by FSFS and First DeWitt; and Sovereign shall have received
certified copies of the resolutions evidencing such
authorizations;
(b) Covenants. The obligations and covenants of
FSFS, required by this Agreement to be performed by it at or
prior to the Closing Date shall have been duly performed and
complied with in all respects, except where the failure to
perform or comply with any obligation or covenant would not,
either individually or in the aggregate, result in a Material
Adverse Effect with respect to FSFS;
(c) Representations and Warranties. The
representations and warranties of FSFS set forth in this
Agreement shall be true and correct as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
individually or in the aggregate, result in a Material Adverse
Effect with respect to FSFS;
(d) Approvals of Regulatory Authorities.
Sovereign shall have received all required approvals of
Regulatory Authorities for the Merger, without the imposition of
any term or condition that would have a Material Adverse Effect
on Sovereign upon completion of the Merger; and all notice and
waiting periods required thereunder shall have expired or been
terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) No Material Adverse Effect. Since March 31,
1996, there shall not have occurred any Material Adverse Effect
with respect to FSFS; provided, however, that neither (i) an
increase in the provision for loan losses for the period ended
June 30, 1996 in an amount not to exceed $5,000,000 nor (ii) the
incurrence by FSFS of aggregate losses on the sale, exchange or
other disposition of nonperforming assets up to the amount
permitted by Section 6.01(d) of the Agreement shall be considered
a Material Adverse Effect for purposes of this subsection;
(g) Officer's Certificate. FSFS shall have
delivered to Sovereign a certificate, dated the Closing Date and
signed, without personal liability, by its chairman of the board
or president, to the effect that the conditions set forth in
subsections (a) through (e) of this Section 5.02 have been
satisfied, to the best knowledge of the officer executing the
same;
(h) Opinions of FSFS's Counsel. Sovereign shall
have received an opinion of Luse Lehman Gorman Pomerenk & Schick,
counsel to FSFS, dated the Closing Date, in form and substance
reasonably satisfactory to Sovereign and its counsel to the
effect set forth on Exhibit 7 attached hereto;
(i) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained;
(j) Tax Opinion. Sovereign shall have received
an opinion of Stevens & Lee, its counsel, substantially to the
effect set forth on Exhibit 6 attached hereto;
(k) Pooling Letter. Sovereign shall have
received an opinion from Ernst & Young to the effect that the
Merger will be treated as a "pooling of interests" for financial
accounting purposes;
(l) Phase I Environmental Audit Results. The
results of any "phase I environmental audit" conducted pursuant
to Section 4.11(a)(ii) with respect to owned or occupied bank
premises shall be reasonably satisfactory to Sovereign; provided,
however, that (i) any such environmental audit must be initiated
within 45 days of the date of this Agreement and (ii) Sovereign
must elect to terminate this Agreement or waive its right to
terminate the Agreement under this Section 5.02(k) within 15 days
of receiving the results of such environmental audit;
(m) Liquidation Account. Neither the Merger or
consummation of the Bank Plan of Merger shall require Sovereign,
FSFS or any Subsidiary of either to distribute to depositors the
liquidation account established by First DeWitt in connection
with its conversion from mutual to stock form;
(n) Nationar Payment. First DeWitt shall have
received all amounts due from Nationar (approximately $3,000,000
at the date of this Agreement), or a conservator or receiver of
Nationar, with respect to checks cleared by that correspondent
institution;
(o) Pension Plans. With respect to each pension
plan subject to Title IV of ERISA, (i) the present value of the
accrued benefits under such plan shall not, as of the Closing
Date, exceed the then current value of the assets of such plan
allocable to such accrued benefits and (ii) the amount
contributed by FSFS or any FSFS Subsidiary to any such pension
plan in the one year period preceding the Closing Date will not
exceed $500,000;
(p) Approval of Sovereign's Shareholders. This
Agreement shall have been approved by the shareholders of
Sovereign by such vote as is required under Sovereign's articles
of incorporation and bylaws if such shareholder approval is
required under the listing requirements of the National
Association of Securities Dealers; and
(q) Nonperforming Assets. The amount of
nonperforming assets of FSFS and the FSFS Subsidiaries, on a
consolidated basis, on the Closing Date shall not exceed
$26,100,000. (The term "nonperforming assets," for purposes of
this subsection, means (i) loans that are "troubled debt
restructurings" as defined in Statement of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," excluding restructured loans the
terms and conditions of which were approved in writing in advance
by Sovereign, (ii) loans on nonaccrual, including loans placed on
nonaccrual that may have been previously restructured with
Sovereign's approval, (iii) real estate owned, and (iv) all loans
90 days or more past due), except that the term "nonperforming
assets" shall not include loans originated to finance the
purchase of any one-to-four-family residential property.) FSFS
has previously delivered to Sovereign a list of nonperforming
assets as of March 31, 1996.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. This Agreement may be
terminated on or at any time prior to the Closing Date:
(a) By the mutual written consent of the parties
hereto;
(b) By Sovereign or FSFS:
(i) if there shall have been any breach of
any representation, warranty, covenant or other
obligation of Sovereign which results in a Material
Adverse Effect with respect to Sovereign, on the one
hand, or of FSFS which results in a Material Adverse
Effect with respect to FSFS, on the other hand, and
such breach cannot be, or shall not have been, remedied
within 30 days after receipt by such other party of
notice in writing specifying the nature of such breach
and requesting that it be remedied;
(ii) if the Closing Date shall not have
occurred on or before March 31, 1997, unless the failure of
such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe
its agreements set forth in this Agreement required to be
performed or observed by such party on or before the Closing
Date; or
(iii) if either party has been informed in
writing by a Regulatory Authority whose approval or consent
has been requested that such approval or consent is unlikely
to be granted, unless the failure of such occurrence shall
be due to the failure of the party seeking to terminate this
Agreement to perform or observe its agreements set forth
herein required to be performed or observed by such party on
or before the Closing Date; or
(c) By FSFS if, on the Closing Date, the
Sovereign Market Value is less than $8.00 (as adjusted for any
stock splits or stock dividends); provided, however, that if
Sovereign delivers to FSFS on the Closing Date a written notice
increasing the Applicable Exchange Ratio to an amount which, when
multiplied by the Sovereign Market Value determined as of the
Closing Date, equals $13.12 ($8.00 multiplied by the Applicable
Exchange Ratio determined pursuant to Section
1.02(e)(ii)(A)(ii)), then no termination of this Agreement shall
occur and the Merger shall be completed pursuant to the terms
hereof.
(d) By Sovereign, at any time prior to the
Closing Date, if (i) the aggregate amount of nonperforming assets
(as defined in Section 5.02(g)) exceeds $26,100,000, (ii) the
aggregate amount of loss on the sale, exchange or other
disposition of any nonperforming assets (as defined in
Section 5.02(g)) after the date of this Agreement exceeds
$1,000,000 (for purposes of this subsection, loss will be
calculated net of any portion of the allowance for loan losses
allocable to the nonperforming asset which is sold, exchanged or
otherwise disposed of by FSFS) or (iii) the aggregate amount of
the provisions for loan losses taken or recognized by FSFS after
the date of this Agreement exceeds $5,750,000.
(e) By Sovereign, at any time prior to the
Closing Date, if the aggregate amount of deficiencies in the
current appraised values of any assets or properties securing or
serving as collateral for commercial real estate loans made by
FSFS or any FSFS Subsidiary necessary to maintain an 80% loan to
value ratio for each loan exceeds $1,000,000; such appraised
values being determined after the date of this Agreement at the
request of Sovereign from independent third party appraisers
experienced in such matters.
Section 6.02 Effect of Termination. If this Agreement
is terminated pursuant to Section 6.01 hereof, this Agreement
shall forthwith become void (other than Section 4.02(d), Section
4.10(b)(iii) and Section 7.01 hereof, which shall remain in full
force and effect), and there shall be no further liability on the
part of Sovereign or FSFS to the other, except for any liability
arising out of any uncured willful breach of any covenant or
other agreement contained in this Agreement or any fraudulent
breach of a representation or warranty.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses. Except for the cost of
printing and mailing the Proxy Statement/Prospectus which shall
be shared equally, each party hereto shall bear and pay all costs
and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.
Section 7.02 Non-Survival of Representations and
Warranties. All representations, warranties and, except to the
extent specifically provided otherwise herein, agreements and
covenants, other than those covenants set forth in
Sections 1.02(d)(iii) and (v), 4.05(a) and (b), and 4.11(a) which
will survive the Merger, shall terminate on the Closing Date.
Section 7.03 Amendment, Extension and Waiver. Subject
to applicable law, at any time prior to the consummation of the
transactions contemplated by this Agreement, the parties may
(a) amend this Agreement, (b) extend the time for the performance
of any of the obligations or other acts of either party hereto,
(c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or
(d) waive compliance with any of the agreements or conditions
contained in Articles IV and V hereof or otherwise. This
Agreement may not be amended except by an instrument in writing
authorized by the respective Boards of Directors and signed, by
duly authorized officers, on behalf of the parties hereto. Any
agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in
writing signed by a duly authorized officer on behalf of such
party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
Section 7.04 Entire Agreement. This Agreement,
including the documents and other writings referred to herein or
delivered pursuant hereto, contains the entire agreement and
understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior arrangements and
understandings between the parties, both written or oral with
respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities
other than pursuant to Sections 1.02(d)(iii) and (v), 4.05(a) and
(b), and 4.11(a) with respect to indemnification and certain
other matters.
Section 7.05 No Assignment. Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.
Section 7.06 Notices. All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:
(a) If to Sovereign, to:
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Attention: Jay S. Sidhu, President and Chief
Executive Officer
Telecopy No.: (610) 320-8448
with a copy to:
Stevens & Lee
111 North Sixth Street
Reading, Pennsylvania 19601
Attention: Joseph M. Harenza, Esquire and
David W. Swartz, Esquire
Telecopy No.: (610) 376-5610
(b) If to FSFS, to:
First State Financial Services, Inc.
1120 Bloomfield Avenue
West Caldwell, New Jersey 07007-2449
Attention: Michael J. Quigley, III,
Chairman, President and Chief
Executive Officer
Telecopy No.: (201) 244-9831
with copies to:
Luse Lehman Gorman Pomerenk & Schick
Franklin Square
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Attention: John J. Gorman, Esquire
Eric Luse, Esquire
Telecopy No.: (202) 362-2902
Section 7.07 Captions. The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.
Section 7.08 Counterparts. This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 7.09 Severability. If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.
Section 7.10 Consent to Service of Process. In
accordance with the provisions of Section 252(d) of the DGCL,
Sovereign hereby consents to service of process in the State of
Delaware in any proceeding for enforcement of any obligation of
Sovereign arising from the Merger, including any suit or
proceeding to enforce the right of any stockholder as determined
in appraisal proceedings pursuant to the provisions of
Section 262 of the DGCL. Sovereign irrevocably appoints the
Secretary of State of Delaware as its agent to accept service of
process in any such suit or other proceedings. A copy of any
process served upon the Secretary of State shall be forwarded to
the address of Sovereign specified in Section 7.06.
Section 7.11 Governing Law. This Agreement shall be
governed by and construed in accordance with the domestic
internal law (including the law of conflicts of law) of the
Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.
SOVEREIGN BANCORP, INC.
By:/s/ Jay S. Sidhu
Jay S. Sidhu
President and Chief
Executive Officer
Attest:/s/ Dana J. Albera
Dana J. Albera
Assistant Secretary
FIRST STATE FINANCIAL SERVICES,
INC.
By:/s/ Michael J. Quigley, III
Michael J. Quigley, III,
Chairman, President and
Chief Executive Officer
Attest:/s/ Marie G. Martino
Marie G. Martino,
Secretary
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated
as of November 26, 1996, is made by and between SOVEREIGN
BANCORP, INC. ("Sovereign"), a Pennsylvania corporation, having
its principal place of business at 1130 Berkshire Boulevard,
Wyomissing, Pennsylvania 19610, and FIRST STATE FINANCIAL
SERVICES, INC., a Delaware corporation, having its principal
place of business at 1120 Bloomfield Avenue, CN 2449, West
Caldwell, New Jersey 07007-2449 (FSFS").
BACKGROUND
1. Sovereign and FSFS are parties to a certain
Agreement and Plan of Merger, dated as of June 24, 1996 (the
"Merger Agreement"), providing for, among other things, the
merger (the "Merger") of FSFS with and into Sovereign, with
Sovereign surviving the merger.
2. As of the date of this Agreement, stockholders of
FSFS have not yet approved the Merger Agreement.
3. Sovereign and FSFS desire to amend the Merger
Agreement as set forth herein.
AGREEMENT
1. The date specified in the third sentence of
Section 1.02(d)(iii) of the Merger Agreement is hereby amended
from "1997" to "1998."
2. Section 1.02(e)(ii) of the Merger Agreement is
hereby amended to read in its entirety as follows:
"(ii) FSFS Common Stock.
(A) Subject to the provisions of
subparagraphs (B), (C) and (D) of this
Section 1.02(e)(ii), each share of FSFS Common Stock
issued and outstanding immediately prior to the
Effective Date (other than shares of FSFS Common Stock,
if any, then owned by Sovereign or FSFS or any FSFS
Subsidiary) shall, on the Effective Date, by reason of
the Merger and without any action on the part of the
holder thereof, be converted into and become a right to
receive:
(i) if the Sovereign Market Value
determined as of the Effective Date is greater
than or equal to $8.00 and less than or equal to
$12.04, then that number of shares of fully paid
and nonassessable shares of Sovereign Common
Stock, and the corresponding percentage of
Sovereign Stock Purchase Rights pursuant to the
Sovereign Rights Agreement, equal to $14.75
divided by the Sovereign Market Value determined
as of the Effective Date;
(ii) if the Sovereign Market Value
determined as of the Effective Date is less than
$8.00, then 1.84 shares of fully paid and
nonassessable shares of Sovereign Common Stock,
and the corresponding percentage of Sovereign
Stock Purchase Rights pursuant to the Sovereign
Rights Agreement; or
(iii) if the Sovereign Market
Value determined as of the Effective Date is
greater than $12.04, then 1.225 shares of fully
paid and nonassessable shares of Sovereign Common
Stock, and the corresponding percentage of
Sovereign Stock Purchase Rights pursuant to the
Sovereign Rights Agreement (as determined pursuant
to either Sections 1.02(e)(ii)(A)(i),
1.02(e)(ii)(A)(ii) or 1.02(e)(ii)(A)(iii), the
"Applicable Exchange Ratio")."
3. Section 5.02(f) of the Merger Agreement is hereby
amended to read in its entirety as follows:
(f) No Material Adverse Effect. Since
March 31, 1996, there shall not have occurred any Material
Adverse Effect with respect to FSFS; provided, however, that
neither (i) an increase in the provision for loan losses by
FSFS for the period ended June 30, 1996 in an amount not to
exceed $5,000,000, (ii) the existence of nonperforming
assets of FSFS in an amount up to $26,100,000, (iii) the
incurrence by FSFS of aggregate losses on the sale, exchange
or other disposition of nonperforming assets up to
$1,000,000 (for purposes of this subsection, loss will be
identified net of any portion of the allowance for loan
losses allocable to the nonperforming asset which is sold,
exchanged or otherwise disposed of by FSFS) or
(iv) provisions for loan losses taken or recognized by FSFS
after the date of this Agreement in aggregate amounts up to
$7,250,000 shall be considered a Material Adverse Effect for
purposes of this subsection (the term "nonperforming
assets," for purposes of this subsection, means (i) loans
that are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt
Restructurings," excluding restructured loans the terms and
conditions of which were approved in writing in advance by
Sovereign, (ii) loans on nonaccrual, including loans placed
on nonaccrual that may have been previously restructured
with Sovereign's approval, (iii) real estate owned, and
(iv) all loans 90 days or more past due, except that the
term "nonperforming assets" shall not include loans
originated to finance the purchase of any one-to-four-family
residential property);
4. Section 6.01(c) of the Merger agreement is hereby
amended to read in its entirety as follows:
"(c) By FSFS if, on the Closing Date, the
Sovereign Market Value is less than $8.00 (as adjusted for
any stock splits or stock dividends); provided, however,
that if Sovereign delivers to FSFS on the Closing Date a
written notice increasing the Applicable Exchange Ratio to
an amount which, when multiplied by the Sovereign Market
Value determined as of the Closing Date, equals $14.75, then
no termination of this Agreement shall occur and the Merger
shall be completed pursuant to the terms hereof."
5. Sections 5.02(q), 6.01(d), and 6.01(e) of the
Merger Agreement are hereby deleted in their entirety.
6. Except as amended hereby, the Merger Agreement is
ratified and confirmed in all respects. All references in the
Merger Agreement to the "Merger Agreement" shall be deemed to be
references to the Merger Agreement as amended hereby.
7. This Agreement and the Merger Agreement contain
the entire agreement and understanding of the parties with
respect to the transactions contemplated herein and therein and
supersede all prior agreements or understandings with respect
hereto and thereto, whether written or oral.
8. Neither party hereto may assign any of its rights
or obligations hereunder to any other person, without the prior
written consent of the other party hereto.
9. This Agreement shall be governed and construed in
accordance with the domestic, internal law of the Commonwealth of
Pennsylvania without regard to its conflicts of laws principles.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.
SOVEREIGN BANCORP, INC.
By/s/ Jay S. Sidhu
(SEAL) Attest:/s/Lawrence M. Thompson, Jr.
FIRST STATE FINANCIAL SERVICES,
INC.
By/s/ Michael J. Quigley, III
(SEAL) Attest:/s/ Marie G. Martino
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Stock Option Agreement")
dated June 24, 1996, is by and between SOVEREIGN BANCORP, INC., a
Pennsylvania corporation ("Sovereign") and FIRST STATE FINANCIAL
SERVICES, INC., a Delaware corporation ("FSFS").
BACKGROUND
1. Sovereign and FSFS desire to enter into a
Agreement and Plan of Merger, dated June 24, 1996 (the
"Agreement"), providing, among other things, for the acquisition
by Sovereign of FSFS through the merger of FSFS with and into
Sovereign, with Sovereign surviving the merger (the "Merger").
2. As a condition to Sovereign to enter into the
Plan, FSFS is granting to Sovereign an option to purchase up to
that number of shares of common stock of FSFS as shall equal
19.9% of FSFS's shares of common stock issued and outstanding
immediately prior to such purchase, on the terms and conditions
hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual
covenants and agreements set forth herein, Sovereign and FSFS,
intending to be legally bound hereby, agree:
1. Grant of Option. FSFS hereby grants to Sovereign,
on the terms and conditions set forth herein, the option to
purchase (the "Option") up to 783,500 shares (as adjusted as set
forth herein, the "Option Shares") of common stock, par value
$.01 per share (the "Common Stock"), of FSFS at a price per share
(as adjusted as set forth herein, the "Option Price") equal to
the lower of (i) $10.00 or (ii) the lowest price per share that a
person or a group, other than Sovereign or an affiliate of
Sovereign, paid or offers to pay after the date hereof for Common
Stock in a transaction constituting a Triggering Event under
Section 2 hereof.
2. Exercise of Option. Provided that (i) Sovereign
shall not be in breach of the agreements or covenants contained
in this Agreement or the Plan, and (ii) no preliminary or
permanent injunction or other order against the delivery of
shares covered by the Option issued by any court of competent
jurisdiction in the United States shall be in effect, upon or
after the occurrence of a Triggering Event (as such term is
hereinafter defined) and until termination of this Stock Option
Agreement in accordance with the provisions of Section 21,
Sovereign may exercise the Option, in whole or in part, at any
time or one or more times, from time to time. As used herein,
the term "Triggering Event" means the occurrence of any of the
following events:
(a) 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 Sovereign or an affiliate of Sovereign, acquires
beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of 10% or more of the then outstanding
shares of Common Stock (excluding any shares eligible to be
reported on Schedule 13G of the Securities and Exchange
Commission);
(b) a person or group, other than Sovereign or an
affiliate of Sovereign, enters into an agreement or letter
of intent with FSFS pursuant to which such person or group
or any affiliate of such person or group would (i) merge or
consolidate, or enter into any similar transaction, with
FSFS, (ii) acquire all or substantially all of the assets or
liabilities of FSFS or all or substantially all of the
assets or liabilities of First DeWitt Bank ("First DeWitt"),
or (iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership
or to vote securities representing, 10% or more of the then
outstanding shares of Common Stock (excluding any shares
eligible to be reported on Schedule 13G of the Securities
and Exchange Commission) or the then outstanding shares of
common stock of First DeWitt; or
(c) a person or group, other than Sovereign or an
affiliate of Sovereign, publicly announces a bona fide
proposal (including a written communication that is or
becomes the subject of public disclosure) for (i) any
merger, consolidation or acquisition of all or substantially
all the assets or liabilities of FSFS or all or
substantially all the assets or liabilities of First DeWitt,
or any other business combination involving FSFS or First
DeWitt, 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, 10% or more of the then outstanding shares of
Common Stock or the then outstanding shares of common stock
of First DeWitt (collectively, a "Proposal"), and
thereafter, if such Proposal has not been Publicly Withdrawn
(as such term is hereinafter defined) at least 30 days prior
to the meeting of shareholders of FSFS called to vote on the
Merger, FSFS's shareholders fail to approve the Merger by
the vote required by applicable law at the meeting of
shareholders called for such purpose or such meeting has
been cancelled; or
(d) a person or group, other than Sovereign or an
affiliate of Sovereign, makes a bona fide Proposal and
thereafter, but before such Proposal has been Publicly
Withdrawn, FSFS willfully takes any action in a manner which
would likely result in the failure of either party to
satisfy a material condition to the closing of the Merger or
materially reduce the value of the transaction to Sovereign;
or
(e) FSFS breaches, in any material respect, any
binding term of the Agreement with respect to the Merger, or
this Stock Option Agreement after a Proposal is made and
before it is Publicly Withdrawn or publicly announces an
intention to authorize, recommend or accept any such
Proposal;
provided, however, that any purchase of shares upon exercise of
the Option shall be subject to compliance with applicable law.
If more than one of the transactions giving rise to a
Triggering Event under this Section is undertaken or effected,
then all such transactions shall give rise only to one Triggering
Event, which Triggering Event shall be deemed continuing for all
purposes hereunder until all such transactions are abandoned.
"Publicly Withdrawn" for purposes of this Section 2
shall mean an unconditional bona fide withdrawal of the Proposal
coupled with a public announcement of no further interest in
pursuing such Proposal or in acquiring any controlling influence
over FSFS or in soliciting or inducing any other person (other
than Sovereign or an affiliate of Sovereign) to do so.
Notwithstanding the foregoing, the obligation of FSFS
to issue Option Shares upon exercise of the Option shall be
deferred (but shall not terminate) (i) until the receipt of all
required governmental or regulatory approvals or consents
necessary for FSFS to issue the Option Shares, or Sovereign to
exercise the Option, or until 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, and, in each
case, notwithstanding any provision to the contrary set forth
herein, the Option shall not expire or otherwise terminate.
FSFS shall notify Sovereign promptly in writing of the
occurrence of any Triggering Event known to it, it being
understood that the giving of such notice by FSFS shall not be a
condition to the right of Sovereign to exercise the Option. FSFS
will not take any action which would have the effect of
preventing or disabling FSFS from delivering the Option Shares to
Sovereign upon exercise of the Option or otherwise performing its
obligations under this Stock Option Agreement. In the event
Sovereign wishes to exercise the Option, Sovereign shall send a
written notice to FSFS (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 between two and
ten business days inclusive from the Notice Date for the closing
of such a purchase (a "Closing"); provided, however, that a
Closing shall not occur prior to two days after the later of
receipt of any necessary regulatory approvals or the expiration
of any legally required notice or waiting period, if any.
3. Payment and Delivery of Certificates. At any
Closing hereunder, (a) Sovereign will make payment to FSFS of the
aggregate price for the Option Shares so purchased by wire
transfer of immediately available funds to an account designated
by FSFS, (b) FSFS will deliver to Sovereign a stock certificate
or certificates representing the number of Option Shares so
purchased, registered in the name of Sovereign or its designee,
in such denominations as were specified by Sovereign in its
notice of exercise, and (c) Sovereign will pay any transfer or
other taxes required by reason of the issuance of the Option
Shares so purchased.
A legend will be placed on each stock certificate
evidencing Option Shares issued pursuant to this Stock Option
Agreement, which legend will read substantially as follows:
"The shares of stock evidenced by this
certificate have not been the subject of a registration
statement filed under the Securities Act of 1933, as
amended (the "Act"), and declared effective by the
Securities and Exchange Commission. These shares may
not be sold, transferred or otherwise disposed of prior
to such time unless First State Financial Services,
Inc. receives an opinion of counsel stating that an
exemption from the registration provisions of the Act
is available for such transfer."
4. Registration Rights. Upon or after the occurrence
of a Triggering Event and upon receipt of a written request from
Sovereign, FSFS shall prepare and file as soon as practicable a
registration statement under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission covering the
Option and such number of Option Shares as Sovereign shall
specify in its request, and FSFS 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 Sovereign shall in no event have
the right to have more than one such registration statement
become effective, and provided further that FSFS shall not be
required to prepare and file any such registration statement in
connection with any proposed sale with respect to which FSFS's
counsel delivers to FSFS and to Sovereign its opinion to the
effect that no such filing is required under applicable laws and
regulations with respect to such sale or disposition; provided,
however, that FSFS may delay any registration of Option Shares
above for a period not exceeding 90 days provided FSFS shall in
good faith determine that any such registration would adversely
affect an offering or contemplated offering of other securities
by FSFS. Sovereign shall provide all information reasonably
requested by FSFS for inclusion in any registration statement to
be filed hereunder. In connection with such filing, FSFS shall
use its best efforts to cause to be delivered to Sovereign such
certificates, opinions, accountant's letters and other documents
as Sovereign shall reasonably request and as are customarily
provided in connection with registration of securities under the
Securities Act of 1933, as amended. FSFS shall provide to
Sovereign such number of copies of the preliminary prospectus and
final prospectus and any amendments and supplements thereto as
Sovereign may reasonably request. All reasonable expenses
incurred by FSFS in complying with the provisions of this
Section 4, including, without limitation, all registration and
filing fees, reasonable printing expenses, reasonable fees and
disbursements of counsel for FSFS and blue sky fees and expenses,
shall be paid by FSFS. Underwriting discounts and commissions
to brokers and dealers relating to the Option Shares, fees and
disbursements of counsel to Sovereign and any other expenses
incurred by Sovereign in connection with such filing shall be
borne by Sovereign. In connection with such filing, FSFS shall
indemnify and hold harmless Sovereign against any losses, claims,
damages or liabilities, joint or several, to which Sovereign 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
registration statement or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and FSFS
will reimburse Sovereign for any legal or other expense
reasonably incurred by Sovereign in connection with investigating
or defending any such loss, claim, damage, liability or action;
provided, however, that FSFS 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 registration statement or such amendment or
supplement thereto in reliance upon and in conformity with
written information furnished by or on behalf of Sovereign
specifically for use in the preparation thereof. Sovereign will
indemnify and hold harmless FSFS to the same extent as set forth
in the immediately preceding sentence but only with reference to
written information furnished by or on behalf of Sovereign for
use in the preparation of such preliminary or final registration
statement or such amendment or supplement thereto; and Sovereign
will reimburse FSFS for any legal or other expense reasonably
incurred by FSFS in connection with investigating or defending
any such loss, claim, damage, liability or action.
5. Adjustment Upon Changes in Capitalization. In the
event of any change in the Common Stock by reason of stock
dividends, split-ups, recapitalizations, combinations,
conversions, divisions, exchanges of shares or the like, then the
number and kind of Option Shares and the Option Price shall be
appropriately adjusted.
6. Filings and Consents. Each of Sovereign and FSFS
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 Stock Option Agreement. Within 10 days from the date
hereof, Sovereign shall file a report of beneficial ownership on
Form 13D with the Securities and Exchange Commission under the
Exchange Act which discloses the rights of Sovereign hereunder.
7. Representations and Warranties of FSFS. FSFS
hereby represents and warrants to Sovereign as follows:
(a) Due Authorization. FSFS has full corporate
power and authority to execute, deliver and perform this
Stock Option Agreement and all corporate action necessary
for execution, delivery and performance of this Stock Option
Agreement has been duly taken by FSFS. This Stock Option
Agreement constitutes a legal, valid and binding obligation
of FSFS, enforceable against FSFS in accordance with its
terms (except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer
and similar laws of general applicability relating to or
affecting creditors' rights or by general equity
principles).
(b) Authorized Shares. FSFS has taken 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.
8. Representations and Warranties of Sovereign.
Sovereign hereby represents and warrants to FSFS that Sovereign
has full corporate power and authority to execute, deliver and
perform this Stock Option Agreement and all corporate action
necessary for execution, delivery and performance of this Stock
Option Agreement has been duly taken by Sovereign. This Stock
Option Agreement constitutes a legal, valid and binding
obligation of Sovereign, enforceable against Sovereign in
accordance with its terms (except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
9. Specific Performance. The parties hereto
acknowledge that damages would be an inadequate remedy for a
breach of this Stock Option Agreement and that the obligations of
the parties hereto shall be specifically enforceable.
10. Entire Agreement. This Stock Option Agreement and
the Agreement constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, among
the parties or any of them with respect to the subject matter
hereof.
11. Assignment or Transfer. Sovereign 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 a subsidiary of Sovereign. Sovereign represents
that it is acquiring the Option for Sovereign's own account and
not with a view to, or for sale in connection with, any
distribution of the Option or the Option Shares. Sovereign is
aware that neither the Option nor the Option Shares is the
subject of a registration statement filed with, and declared
effective by, the Securities and Exchange Commission pursuant to
Section 5 of the Securities Act of 1933, as amended, but instead
each is being offered in reliance upon the exemption from the
registration requirement provided by Section 4(2) thereof and the
representations and warranties made by Sovereign in connection
therewith.
12. Amendment of Stock Option Agreement. By mutual
consent of the parties hereto, this Stock Option 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 governmental authority or any applicable order of any
court or for any other purpose.
13. Validity. The invalidity or unenforceability of
any provision of this Stock Option Agreement shall not affect the
validity or enforceability of any other provisions of this Stock
Option Agreement, which shall remain in full force and effect.
14. 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 telegram or telecopy, or by registered
or certified mail (postage prepaid, return receipt requested) to
the respective parties as follows:
(i) If to Sovereign, to:
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Attention: Jay S. Sidhu, President
and Chief Executive Officer
Telecopy No.: (610) 320-8448
with a copy to:
Stevens & Lee
111 North Sixth Street
P.O. Box 679
Reading, Pennsylvania 19603
Attention: Joseph M. Harenza, Esquire
David W. Swartz, Esquire
Telecopy No.: (610) 376-5610
(ii) If to FSFS, to:
First State Financial Services, Inc.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Attention: Michael J. Quigley, III
Chairman of the Board, President
and Chief Executive Officer
Telecopy No.: (201) 244-9831
with copies to:
Luse Lehman Gorman Pomerenk & Schick
Franklin Square
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Attention: John J. Gorman, Esquire
Eric Luse, Esquire
Telecopy No.: (202) 362-2902
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).
15. Governing Law. This Stock Option Agreement shall
be governed by and construed in accordance with the domestic
internal law (but not the law of conflicts of law) of the
Commonwealth of Pennsylvania.
16. Captions. The captions in this Stock Option
Agreement are inserted for convenience and reference purposes,
and shall not limit or otherwise affect any of the terms or
provisions hereof.
17. 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 Stock Option Agreement and/or (ii) the other
party's performance of any of its obligations set forth in this
Stock Option Agreement.
18. Parties in Interest. This Stock Option Agreement
shall be binding upon and inure solely to the benefit of each
party hereto, and, nothing in this Stock Option 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 Stock Option Agreement.
19. Counterparts. This Stock Option Agreement may be
executed in two or more counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Expenses. Subject to the terms of the Plan and
except as otherwise provided herein, all costs and expenses
incurred by the parties hereto in connection with the
transactions contemplated by this Stock Option Agreement or the
Option shall be paid by the party incurring such cost or expense.
21. Termination. This Stock Option Agreement shall
terminate and be of no further force or effect upon the earliest
to occur of (A) the Effective Time or (B) termination of the
Agreement in accordance with the terms thereof, except that if
the Agreement is terminated by Sovereign pursuant to
Section 6.01(b)(i) of the Agreement or pursuant to
Section 6.01(b)(ii) of the Agreement (provided the failure of the
occurrence of the event specified in Section 6.01(b)(ii) of the
Agreement shall be due to the failure of FSFS to perform or
observe its agreements set forth in the Agreement required to be
performed or observed by FSFS prior to the Closing Date (as
defined in the Agreement)), this Stock Option Agreement shall not
terminate until one year after the date of termination of the
Agreement.
IN WITNESS WHEREOF, each of the parties hereto,
pursuant to resolutions adopted by its Board of Directors, has
caused this Stock Option Agreement to be executed by its duly
authorized officer and has caused its corporate seal to be
affixed hereunto and to be duly attested, all as of the day and
year first above written.
SOVEREIGN BANCORP, INC.
By/s/ Jay S. Sidhu
Jay S. Sidhu,
President and Chief
Executive Officer
(CORPORATE SEAL)
Attest:/s/ Dana J. Albera
Dana J. Albera,
Assistant Secretary
FIRST STATE FINANCIAL SERVICES, INC.
By/s/ Michael J. Quigley, III
Michael J. Quigley, III,
Chairman of the Board,
President and Chief Executive
Officer
(CORPORATE SEAL)
Attest:/s/ Marie G. Martino
Marie G. Martino, Secretary
<PAGE>
ANNEX C
OPINION OF McCONNELL, BUDD & DOWNES, INC.
<PAGE>
January __, 1997
The Board of Directors
First State Financial Services, Inc.
1120 Bloomfield Avenue
West Caldwell, New Jersey 07007
Members of the Board:
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 $0.01 per share of First State Financial
Services, Inc. ("First State"), of the consideration to be Exchanged
for each issued and outstanding share of First State Common Stock in
the merger (the "Merger") of First State with and into Sovereign
Bancorp ("Sovereign") pursuant to the Agreement and Plan of Merger
dated June 24, 1996 (the "Agreement") between Sovereign and First
State and amended as of November 25, 1996. As is more specifically
set forth in the Agreement, pursuant to the Merger, each issued and
outstanding share of First State Common Stock will be converted into
the right to receive the number of shares of Sovereign Common Stock
with a market value of $14.75, with market value determined by the
Sovereign Market Value (as that term is defined in the Agreement),
constrained by a minimum exchange ratio of 1.225 shares of Sovereign
Common Stock and a maximum exchange ratio of 1.84 shares of Sovereign
Common Stock. Shareholders are urged to carefully read the Proxy
Statement/Prospectus in its entirety including the section concerning
the opinion of the financial advisor.
McConnell, Budd & Downes, Inc. ("MB&D"), as part of its
investment banking business is regularly engaged in the valuation of
bank holding companies and banks, thrift holding companies and thrifts
and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bidding, market making as a NASD
market maker, secondary distributions of listed securities, private
placements and valuations for corporate, estate and other purposes.
MB&D has acted as financial advisor to First State on a continuous
contractual basis since 1994. Advice and assistance to First State in
connection with the process and negotiations leading up to the Merger
with Sovereign were part of the contractual relationship and involved
our attendance at numerous meetings with management and the Board of
Directors. In the course of its role as financial advisor to First
State in conjunction with the Merger MB&D has received fees for its
services and will receive additional fees contingent on certain
occurrences. While the payment of all or a significant portion of
fees related to financial advisory services provided in connection
with arm's-length mergers and other business combination transactions
upon consummation of such transactions, as is the case with the
Merger, might be viewed as giving such financial advisors a financial
interest in the successful completion of such transactions, such
compensation arrangements are standard and customary for transactions
of the size and type of this Merger. MB&D will receive a fee for
rendering this opinion. In the ordinary course of our business, MB&D
may from time to time trade the equity securities of First State or
Sovereign for its own account, for the accounts of its customers and
for the accounts of individual employees of MB&D. Accordingly MB&D
may from time to time hold a long or short position in the equity
securities of either First State or Sovereign. In addition, various
employees of MB&D may from time to time hold positions in the
securities of a wide variety of financial institutions, including
First State and Sovereign. MB&D also covers First State and Sovereign
in certain of its equity research products. MB&D has acted as a
market maker for First State since 1994.
In arriving at our opinion, MB&D has reviewed the Proxy
Statement/Prospectus in substantially the form to be mailed to
shareholders, publicly available business, financial and shareholder
information relating to First State and its subsidiaries and certain
publicly available financial information relating to Sovereign. MB&D
has also made a detailed review of the Agreement and the amendment to
the Agreement. In addition, MB&D has reviewed certain other
information, including internal reports and documents from both First
State and Sovereign and certain management-prepared financial
information provided to us by both First State and Sovereign. MB&D
has also met with and had discussions with members of the senior
management of both First State and Sovereign to discuss their past and
current business operations, current financial condition and future
prospects. In addition, MB&D has reviewed the regulatory report
Form 10-Q for both First State and Sovereign for the interim periods
ended March 31, 1996 and June 30, 1996. MB&D has reviewed the Annual
Report to Shareholders for both First State and Sovereign for the
years ending 1995 and 1994. MB&D has reviewed and studied the
historical stock prices and trading volumes of the common stock of
both First State and Sovereign as well as the terms and material
conditions of a number of recent acquisition transactions involving
publicly traded banking institutions that may be deemed to be
comparable to the proposed acquisition of First State by Sovereign.
MB&D has also conducted such other studies, analyses and
investigations as we deem appropriate under the circumstances
surrounding the proposed transaction.
In the course of our review and analysis MB&D has relied upon and
assumed, without independent verification, the accuracy and
completeness of the financial information provided to us by First
State and Sovereign or otherwise publicly obtainable. In reaching our
opinion, MB&D has not been provided with any independent appraisals of
either the assets or liabilities of Sovereign. MB&D has also relied
on the management of both First State and Sovereign as to the
reasonableness of various financial and operating forecasts and of the
assumptions on which they are based, which were provided to us for use
in our analysis.
In the course of rendering this opinion, which is being rendered
prior to the receipt of certain required regulatory approvals
necessary before consummation of the Merger, MB&D has assumed that no
conditions will be imposed by any regulatory agency in connection with
its approval of the Merger that will have a material adverse effect on
the amount or form of consideration or on the results of operations,
the financial condition or the prospects of Sovereign.
Based upon and subject to the foregoing, it is our opinion, that
as of the date of this letter, the range of possible exchange ratios
pursuant to which First State Common Stock will be converted to shares
of Sovereign Common Stock with a market value of $14.75, with market
value determined by the Sovereign Market Value (as that term is
defined in the Agreement), constrained by a minimum exchange ratio of
1.225 shares of Sovereign Common Stock and a maximum exchange ratio of
1.84 shares of Sovereign Common Stock is fair to the holders of First
State Common Stock, $0.01 par value, from a financial point of view.
Very truly yours,
McConnell, Budd & Downs, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation may
indemnify directors, officers, employees and agents of the corporation
against liabilities they may incur in such capacities for any action
taken or any failure to act, whether or not the corporation would have
the power to indemnify the person under any provision of law, unless
such action or failure to act is determined by a court to have
constituted recklessness or willful misconduct. Pennsylvania law also
permits the adoption of a bylaw amendment, approved by shareholders,
providing for the elimination of a director's liability for monetary
damages for any action taken or any failure to take any action unless
(1) the director has breached or failed to perform the duties of his
office and (2) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
The bylaws of Sovereign provide for (1) indemnification of
directors, officers, employees and agents of the registrant and its
subsidiaries and (2) the elimination of a director's liability for
monetary damages, to the fullest extent permitted by Pennsylvania law.
Directors and officers are also insured against certain
liabilities for their actions, as such, by an insurance policy
obtained by Sovereign.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.1 Agreement and Plan of Merger dated June 24, 1996, between
Sovereign Bancorp, Inc. and First State Financial
Services, Inc. as amended by an Amendment to Agreement and
Plan of merger dated as of November 26, 1996 (included as
Annex A to the Proxy Statement/Prospectus). Schedules are
omitted; Sovereign Bancorp, Inc. agrees to furnish copies
of such schedules to the Commission upon request.
2.2 Stock Option Agreement dated as of June 24, 1996, between
Sovereign Bancorp, Inc. and First State Financial
Services, Inc. (included as Annex B to the Proxy
Statement/Prospectus).
3.1 Articles of Incorporation, as amended, of Sovereign
Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 of
Sovereign's Annual Report on Form 10-K for the year ended
December 31, 1995.)
3.2 Bylaws of Sovereign Bancorp, Inc. (Incorporated by
reference to Exhibit 3.2 of Sovereign's Annual Report on
Form 10-K for the year ended December 31, 1993.)
4. Sovereign Bancorp, Inc. has outstanding long-term debt
that does not exceed 10% of the total assets of Sovereign
Bancorp, Inc. and its consolidated subsidiaries;
therefore, copies of the constituent instruments defining
the rights of the holders of such debt are not included as
exhibits to this Registration Statement. Sovereign
Bancorp, Inc. agrees to furnish copies of such instruments
to the Commission upon request.
5. Opinion of Stevens & Lee re: Validity.
8. Opinion of Stevens & Lee re: Tax Matters.*
10.1 Sovereign Bancorp, Inc. Stock Option Plan, as amended and
restated. (Incorporated by reference to Exhibit 10.1 to
Sovereign's Annual Report on Form 10-K for the fiscal year
ended December 31. 1994.)
10.2 Sovereign Bancorp, Inc. 1993 Stock Option Plan.
(Incorporated by reference to Exhibit 10.21 to Sovereign's
Annual Report on Form 10-K for the year ended December 31,
1992.)
10.3 Sovereign Bancorp, Inc. Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 4.1 to Sovereign's
Registration Statement No. 33-44108 on Form S-8.)
10.4 Agreement dated as of September 15, 1992, between
Sovereign Bancorp, Inc., Sovereign Bank, a Federal Savings
Bank, and Jay S. Sidhu. (Incorporated by reference to
Exhibit 10.3 to Sovereign's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.)
10.5 Agreement dated as of September 15, 1992, between
Sovereign Bank, a Federal Savings Bank, and Karl D.
Gerhart. (Incorporated by Reference to Exhibit 10.4 of
Sovereign's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.)
10.6 Agreement dated as of September 15, 1992, between
Sovereign Bank, a Federal Savings Bank, and Lawrence M.
Thompson, Jr. (Incorporated by reference to Exhibit 10.5
of Sovereign's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.)
10.7 Penn Savings Bank Senior Officer Incentive Plan.
(Incorporated by reference to Exhibit 10.6 to Sovereign's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.)
10.8 Rights agreement dated September 19, 1989, between
Sovereign Bancorp, Inc. and Harris Trust Company of New
York. (Incorporated by reference to Exhibit 4.3 to
Sovereign's Registration Statement No. 33-89586 on
Form S-8.)
10.9 Sovereign Bancorp, Inc. Non-Employee Director Incentive
Compensation Plan. (Incorporated by reference to
Exhibit 10.12 to Sovereign's Registration Statement
No. 33-43195 on Form S-1.)
10.10 Indemnification Agreement dated December 21, 1993, between
Sovereign Bank and Jay S. Sidhu. (Incorporated herein by
reference to Exhibit 10.25 to Sovereign's Annual Report on
Form 10-K for the year ended December 31, 1993).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of BDO Seidman LLP
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Stevens & Lee (contained in Exhibit 5).
23.5 Consent of Stevens & Lee (contained in Exhibit 8).*
23.6 Consent of McConnell, Budd & Downes, Inc.
24.1 Powers of Attorney of Directors and Officers (included on
signature page hereof).
99.1 Opinion of McConnell, Budd & Downes, Inc., dated
January __, 1997 (included as Annex C to Proxy
Statement/Prospectus).
99.2 Form of Proxy for the Special Meeting of Stockholders of
First State Financial Services, Inc.
99.3 1996 Annual Report of Stockholders of First State
Financial Services, Inc.
_______________________________
* To be filed by amendment.
(b) Financial Statement Schedules.
None required.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated
by reference in the prospectus to provide such interim financial
information.
(c) (1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration
form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The registrant undertakes that every prospectus
(i) that is filed pursuant to paragraph (1) immediately
preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the bylaws of the
registrant, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the Borough of Wyomissing, Commonwealth of Pennsylvania, on
November 21, 1996.
SOVEREIGN BANCORP, INC.
(Registrant)
By: /s/ Jay S. Sidhu
Jay S. Sidhu,
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Jay S. Sidhu, Karl D.
Gerhart and David W. Swartz, and each of them, his true and lawful
attorney-in-fact, as agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any and
all capacity, to sign any or all amendments to this Registration
Statement and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully and to
all intents and purposes as they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents,
or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Signature Title Date
/s/ Richard E. Mohn Chairman and November 21, 1996
Richard E. Mohn Director
/s/ Jay S. Sidhu Director, November 21, 1996
Jay S. Sidhu President and
Chief Executive
Officer (Principal
Executive Officer)
/s/ Howard A. Mackey Director November 21, 1996
Howard D. Mackey
/s/ Rhoda S. Oberholtzer Director November 21, 1996
Rhoda S. Oberholtzer
/s/ Patrick J. Petrone Director November 21, 1996
Patrick J. Petrone
/s/ David K. Rothermel Director November 21, 1996
Daniel K. Rothermel
/s/ G. Arther Weaver Director November 21, 1996
G. Arthur Weaver
/s/ Theodore Zialek, Jr. Director November 21, 1996
Theodore Ziaylek, Jr.
/s/ Karl D. Gerhard Chief Financial November 21, 1996
Karl D. Gerhart Officer
/s/ Mark R. McCollom Chief Accounting November 21, 1996
Mark R. McCollom Officer
<PAGE>
EXHIBIT INDEX
Number Description
5. Opinion of Stevens & Lee re:
Validity.
8. Opinion of Stevens & Lee re:
Tax Matters.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of BDO Seidman LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Stevens & Lee (contained
in Exhibit 5).
23.5 Consent of Stevens & Lee (contained
in Exhibit 8)*.
23.6 Consent of McConnell, Budd & Downes,
Inc.
99.2 Form of Proxy for the Special Meeting
of Stockholders of First State Financial
Services, Inc.
99.3 1996 Annual Report to Stockholders of First State
Financial Services, Inc.
- ----------------
* To be filed by amendment.
Exhibit 5
December 23, 1996
Board of Directors
Sovereign Bancorp, Inc.
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Re: Registration Statement on Form S-4
First State Financial Services, Inc.
Ladies and Gentlemen:
In connection with the proposed offering of up to 7,912,012
shares of common stock, no par value (the "Common Stock"), by
Sovereign Bancorp, Inc. (the "Company"), covered by the Company's
Registration Statement on Form S-4 (the "Registration Statement")
filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, with respect to such Common
Stock, we, as special counsel to the Company, have reviewed:
(1) the Articles of Incorporation of the Company;
(2) the Bylaws of the Company;
(3) resolutions adopted by the Board of Directors of the
Company relating to the Registration Statement, certified by the
Assistant Secretary of the Company;
(4) a subsistence certificate with respect to the Company
issued by the Pennsylvania Department of State on December 19,
1996;
(5) the Registration Statement; and
(6) copies of the certificates representing shares of the
Common Stock.
Based upon our review of the foregoing, it is our opinion
that:
(a) the Company has been duly incorporated under the laws
of the Commonwealth of Pennsylvania and is validly existing and
in good standing under the laws of such Commonwealth; and
(b) the Common Stock covered by the Registration Statement
has been duly authorized and, when issued pursuant to the terms
described in the Registration Statement, will be legally issued
by the Company and fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to us under the
heading "LEGAL MATTERS" in the related Prospectus. In giving
this consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ STEVENS & LEE
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the
caption "Experts" in the Registration Statement (Form S-4) and
related Proxy Statement/Prospectus of Sovereign Bancorp, Inc. for
the registration of a maximum of 7,912,102 shares of its common
stock and to the incorporation by reference therein of our report
dated January 17, 1996, with respect to the consolidated
financial statements of Sovereign Bancorp, Inc. incorporated by
reference in its Annual Report (Form 10-K) for the year ended
December 31, 1995, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Reading, Pennsylvania
December 20, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Sovereign Bancorp, Inc.
We hereby consent to the incorporation in Registration
Statement on Form S-4 and related proxy statement/prospectus of
Sovereign Bancorp, Inc. relating to the registration of a maximum
of 7,912,102 shares of its common stock to be filed on or about
December 20, 1996 of our report dated November 23, 1994, with
respect to the consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended
September 30, 1993 of Charter FSB Bancorp, Inc. and subsidiary,
which report appears in the Annual Report on Form 10-K of
Sovereign Bancorp, Inc. for the year ended December 31, 1995.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
December 20, 1996
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First State Financial Services, Inc.
We consent to the incorporation by reference in the
registration statement on Form S-4 of Sovereign Bancorp, Inc. of
our report dated November 26, 1996, relating to the consolidated
balance sheets of First State Financial Services, Inc. and
subsidiary as of September 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three-year
period ended September 30, 1996, which report appears in the
September 30, 1996 annual report on Form 10-K.
/s/ KPMG Peak Marwick LLP
Short Hills, New Jersey
December 20, 1996
WOR
Exhibit 23.6
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the inclusion of the Opinion of
McConnell, Budd & Downes, Inc. as an Annex to the Proxy
Statement/Prospectus filed as part of the Form S-4 Registration
Statement of Sovereign Bancorp, Inc. and to the references to our
firm as Financial Advisor to First State Financial Services, Inc.
in the text of said Proxy Statement/Prospectus. In giving such
consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations of the
Securities and Exchange Commission.
December 20, 1996
McConnell, Budd & Downes, Inc.
By: /s/ Michael Rasmussen
Michael Rasmussen
Vice President
Exhibit 99.2
REVOCABLE PROXY
FIRST STATE FINANCIAL SERVICES, INC.
SPECIAL MEETING OF SHAREHOLDERS
February __, 1997
The undersigned hereby appoints Michael J. Quigley, III, and
Theodore F. Cox, with full power of substitution, to act as
attorney and proxy for the undersigned, and to vote all shares of
common stock of First State Financial Services, Inc. (the
"Company") which the undersigned is entitled to vote at the
Special Meeting of Shareholders (the "Special Meeting"), to be
held on February __, 1997, at 10:00 a.m., local time, at Mayfair
Farms, 481 Eagle Rock Avenue, West Orange, New Jersey, and at any
and all adjournments thereof.
The proxies are instructed to vote as follows:
<PAGE>
The Board of Directors unanimous recommends a vote FOR the
following:
1. THE APPROVAL AND ADOPTION For Against Abstain
OF THE AGREEMENT AND PLAN [ ] [ ] [ ]
OF MERGER DATED JUNE 24,
1996, AS AMENDED (THE "MERGER
AGREEMENT") BETWEEN
THE COMPANY AND SOVEREIGN
BANCORP, INC. ("SOVEREIGN"),
PROVIDING FOR THE MERGER
OF THE COMPANY WITH AND INTO
SOVEREIGN, AS DESCRIBED IN
THE COMPANY'S PROXY
STATEMENT.
2. THE APPROVAL OF AN ADJOURNMENT For Against Abstain
OF THE SPECIAL MEETING, IF [ ] [ ] [ ]
NECESSARY, TO PERMIT FURTHER
SOLICITATION OF PROXIES IN
THE EVENT THERE ARE NOT
SUFFICIENT VOTES AT THE TIME
OF THE SPECIAL MEETING TO
CONSTITUTE A QUORUM OR TO
APPROVE THE MERGER AGREEMENT,
AS DESCRIBED IN THE COMPANY'S
PROXY STATEMENT
3. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY BE
BROUGHT BEFORE THE SPECIAL MEETING. IN THEIR
DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON
SUCH OTHER BUSINESS AS MAY PROPERLY BE BROUGHT BEFORE
THE MEETING.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE
LISTED PROPOSALS.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
This proxy is revocable and will be voted as directed, but
if no instructions are specified, this proxy will be voted FOR
the proposals listed. If any other business is presented at the
Special Meeting, this proxy will be voted by those named in this
proxy in their best judgment. At the present time, the Board of
Directors knows of no other business to be presented at the
Special Meeting.
The undersigned acknowledges receipt from First State
Financial Services, Inc., prior to the execution of this proxy,
of a Notice of Special Meeting of Shareholders and of a Proxy
Statement, each dated January __, 1997 and of the Annual Report
to Shareholders.
Please sign exactly as your name appears on this card. When
signing as attorney, executor, administrator, trustee or
guardian, please give your full title. If shares are held
jointly, each holder may sign but only one signature is required.
Please be sure to sign and date this Proxy in the box below.
Date_____________________ __________________________________
Shareholder sign above
__________________________________
Co-holder (if any) sign above
EXHIBIT 99.3
FIRST STATE FINANCIAL SERVICES, INC.
First State Financial Services, Inc. (First State) is a
Delaware corporation which acquired all of the stock of First
DeWitt Savings and Loan Association upon its conversion from a
New Jersey state chartered mutual savings and loan association to
a stock association. This conversion was completed on December
29, 1987. On March 1, 1993, First DeWitt Savings and Loan
Association converted to a federal savings bank charter and on
August 1, 1994, this institution became known as First DeWitt
Bank. The information and consolidated financial statements in
this annual report of First State relate primarily to its
wholly-owned subsidiary, First DeWitt Bank, through which First
State conducts its principal business activities.
First DeWitt Bank is regulated by the Office of Thrift
Supervision and is a member of the Federal Home Loan Bank of New
York. The Bank's primary business consists of attracting
deposits from the general public and originating first mortgage
loans secured by residential properties, consumer and home equity
loans and commercial and construction mortgage loans. First
DeWitt conducts its business through 14 full-service offices in
five counties in New Jersey. First DeWitt's deposits are insured
by the FDIC.
The common stock of First State Financial Services, Inc. is
traded on the over-the-counter market and quoted by the National
Association of Security Dealers Automatic Quotation (NASDAQ)
National Market System under the symbol "FSFI."
Contents:
Chairman's Message 2
Business Description 4
Selected Consolidated Financial and Other Data 5
Management's Discussion and Analysis 7
Consolidated Financial Statements 25
Stockholder Information 57
Officers and Directors 58
<PAGE>
To Our Shareholders:
The year 1996 proved to be both a challenging and rewarding
year for the shareholders of First State Financial Services, Inc.
In terms of earnings, the company was faced with the negative
impact of the one- time Savings Association Insurance Fund
("SAIF") special assessment as well as the need to provide for
the potential of further deterioration in the value of certain
loans and other real estate owned. On the positive side, the
company signed a merger agreement with Sovereign Bancorp of
Wyomissing, Pennsylvania (amended November 26, 1996) whereby
shareholders would exchange their shares in a tax-deferred
transaction for a minimum value (subject to certain
contingencies) equal to $14.75. Let me take a moment to expand
on both these challenges and rewards.
For the full year ended September 30, 1996, the company
reported a loss of $5.6 million, or $1.40 per share, compared to
earnings during the comparable period last year of $4.0 million,
or $1.01 per share. On a pretax basis, the loss equaled $7.3
million. The SAIF special assessment of $3.1 million accounted
for 42.7% of the total pretax loss. The other factors
contributing to the loss included a provision for loan losses of
$8.9 million, compared to $1.7 million last year, and problem
asset expenses of $3.7 million, compared to $1.6 million in 1995.
On the positive side of the income statement, net interest income
advanced 11.5% to $25.2 million. In terms of the balance sheet,
total assets declined 4.2% to $610.4 million, while loans
receivable advanced 4.2% to $480.9 million. Deposits declined
slightly by 2.4% to $554.3 million. Total shareholder equity at
September 30, 1996, equaled $35.2 million, or 5.8% of total
assets.
In terms of the rewards for shareholders, I am pleased to
report that your company executed a Definitive Agreement dated
June 24, 1996, amended on November 26, 1996, under which we would
be acquired by Sovereign Bancorp. Shareholders in our company
would receive the greater of $14.75 in Sovereign common stock or
1.225 shares of Sovereign common stock for each outstanding share
of First State. Your company retains the right to terminate the
Definitive Agreement if the average price of Sovereign is below
$8.00. As of the date of this letter, Sovereign was selling at
approximately $13 per share of common stock. Substantially more
information contained in a proxy in preparation for a
shareholders' meeting will be mailed shortly to all holders of
our company stock. Assuming regulatory and shareholder approvals
are obtained in due course, it is anticipated that the merger
will be consummated before March 31, 1997. The senior management
of your company believes that the Merger Agreement with
Sovereign, which was unanimously approved by the Board of
Directors of your company, is in the best interests of
shareholders.
With the pending merger, this letter to shareholders is
likely to be my last chance to communicate with you. On a
personal note, I would like to take this opportunity to thank all
of our shareholders for your support during the past nine years.
Also, I wish to thank our dedicated employees for their loyal
cooperation during my tenure here at First State. With best
wishes for the future, I am
Sincerely yours,
/s/ Michael J. Quigley,III
Michael J. Quigley, III
Chairman, President and
Chief Executive Officer
<PAGE>
Business Description
First State Financial Services, Inc. (First State) conducts its
principal business activity through First DeWitt Bank (First
DeWitt or the Bank). The principal business of the Bank is
attracting deposits from the general public and originating
residential mortgage loans, consumer loans, home equity loans,
and commercial and construction mortgage loans. The Bank
conducts its business through six full- service offices in Essex
County, three full-service offices in each of Ocean and Monmouth
counties, and one full service office in each of Morris and
Sussex counties, New Jersey.
The Bank has a number of different deposit programs designed
to attract both short-term and long-term deposits. These
programs include passbook, statement savings and club accounts,
commercial checking, checking accounts, NOW accounts, money
market checking and passbook accounts, IRA, SEPP and Keogh
retirement accounts, certificate accounts and jumbo certificates
in denominations of $100,000 or more. The principal methods used
to attract deposit accounts include offering a wide variety of
services and accounts, competitive interest rates, and convenient
hours and locations.
The Bank originates fixed-rate loans and ARMs on single
family and multi-family residential properties for terms
generally ranging from 5 to 30 years. These loans are generally
originated in accordance with Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association standards
which enable the Bank to sell or securitize these loans in the
secondary mortgage market. A wide variety of consumer loan
programs are offered by the Bank including automobile loans,
loans secured by passbook or certificate accounts, home
improvement loans, home equity lines of credit, personal loans,
and student loans guaranteed by the State of New Jersey. The
Bank also offers credit card programs, construction loans, and
loans for commercial purposes to businesses and individuals.
Revenues of the Bank are derived principally from interest
earned on loans, fees charged in connection with loans and
banking services, and interest and dividends from investment
securities. The Bank's primary sources of funds are deposit
inflows, interest and principal repayments on loans outstanding,
prepayment of loan balances, proceeds from the sales and
maturities of loans, mortgage-backed securities, investment
securities and short-term investments, and borrowings.
First State's other wholly-owned subsidiary, First State
Investment Services, Inc., was organized primarily to offer
professional financial services and new investment alternatives,
such as tax deferred annuities, mutual funds, etc., to the Bank's
customers.
<PAGE>
Item 6 - Selected Financial Data
<TABLE>
<CAPTION>
As of and for the Year Ended September 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total Assets $ 610,417 $ 637,020 $ 553,483 $ 476,370 $ 470,520
========== ========== ========== ========== ==========
Loans receivable:
Net mortgage loans (1) 406,982 441,455 374,412 312,578 299,597
Net consumer and commercial loans 83,055 87,412 72,002 64,042 57,551
---------- ---------- ---------- ---------- ----------
Total loans receivable 490,037 528,867 446,414 376,620 357,148
Mortgage-backed securities 31,024 18,961 18,751 25,837 30,607
---------- ---------- ---------- ---------- ----------
Total loans receivable and
mortgage-backed securities $ 521,061 $ 547,828 $ 465,165 $ 402,457 $ 387,755
========== ========== ========== ========== ==========
Total investment securities and FHLB stock $ 37,513 $ 36,403 $ 40,413 $ 28,331 $ 33,421
Excess of cost over fair value of net assets
required 2,149 2,349 2,777 3,311 3,845
Deposits 554,320 567,710 479,364 432,012 428,402
Borrowed money 5,928 23,105 31,738 5,680 5,846
Retained income, substantially restricted 14,183 20,693 17,453 14,431 11,906
Total stockholder's equity 35,236 41,592 37,973 34,179 31,490
OPERATING DATA:
Interest income $ 49,239 $ 44,349 $ 34,935 $ 34,624 $ 36,479
Interest expense 24,054 21,765 13,448 15,401 20,474
---------- ---------- ---------- ---------- ----------
Net interest income 25,185 22,584 21,487 19,223 16,005
Provision for loan losses 8,900 1,650 1,892 2,440 2,677
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 16,285 20,934 19,595 16,783 13,328
---------- ---------- ---------- ---------- ----------
Other income 17,480 6,368 4,150 4,205 3,881
---------- ---------- ---------- ---------- ----------
Operating expenses 41,022 22,172 18,881 18,448 16,997
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax
expense (benefit) (7,257) 5,130 4,864 2,540 212
Income tax expense (benefit) (1,608) 1,132 1,363 15 (504)
Extraordinary item - - - - -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (5,649) $ 3,998 $ 3,501 $ 2,525 $ 716
========== ========== ========== ========== ==========
Net income (loss) per share $ (1.40) $ 1.01 $ 0.91 $ 0.65 $ .19
SELECTED OTHER DATA:
Return on average assets (0.90)% 0.67% 0.70% 0.53% 0.15%
Return on average equity (13.51) 10.27 9.62 7.56 2.28
Average equity to average assets 6.69 6.56 7.27 6.99 6.70
Interest rate spread(2) 4.41 4.25 4.72 4.50 3.94
Net yield on average interest-earning assets(3) 4.38 4.18 4.73 4.46 3.82
Average interest-earning assets to
average interest-bearing liabilities 0.99X 0.98x 1.01x 0.99x 0.98x
Book value per share of common stock
outstanding $ 8.97 $ 10.71 $ 9.89 $ 8.86 $ 8.17
Dividends paid per share of common stock
outstanding $ 0.22 $ 0.21 $ 0.12 $ - $ -
Dividend payout ratio N/M 20.79% 13.19% 0.00% 0.00%
Number of full service offices 14 12 12 12 11
(1) Includes construction and land development loans of $17.6
million, $23.0 million, $19.7 million, $11.3 million, and
$19.1 million, at September 30, 1996, 1995, 1994, 1993, and
1992, respectively. Also includes mortgage loans held for
resale of $9.1 million, $67.2 million,$3.1 million, $10.9
million, and $10.2 million at September 30, 1996, 1995,
1994, 1993, and 1992, respectively.
(2) Represents the average yield earned on interest-earning
assets less the average cost of interest-bearing
liabilities.
(3) Represents net interest income as a percentage of average
interest-earning assets.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION and ANALYSIS
Introduction
First State Financial Services, Inc. (First State) conducts
its principal business activity through First DeWitt Bank, (the
Bank), a wholly-owned subsidiary. On June 24, 1996, the
Corporation signed a definitive merger agreement providing for
the acquisition of all of the outstanding stock of First State
Financial Services, Inc. by Sovereign Bancorp,Inc. (Sovereign).
This merger agreement was amended by an agreement (the
"amendment") signed by both parties on November 26, 1996. The
amendment calls for First State shareholders to receive between
1.225 and 1.84 shares of Sovereign's common stock under a
floating exchange ratio for each share of First State common
stock if Sovereign's average closing price as defined in the
amendment (the "Sovereign Market Value") is greater than or equal
to $8.00 but less than or equal to $12.04. Within this range,
the exchange ratio will be $14.75 divided by the Sovereign Market
Value. If the Sovereign Market Value is greater than $12.04, the
exchange ratio will be 1.225. If the Sovereign Market Value
falls below $8.00, the agreement may be terminated by First State
unless certain conditions are met. In a related agreement,
Sovereign was given an option to purchase up to 783,000 shares of
First State's issued and outstanding common stock if certain
conditions occur. The merger is subject to certain conditions,
including approval by First State's shareholders and various
regulatory authorities, and is expected to be completed by the
first calendar quarter of 1997.
On a consolidated basis, at September 30, 1996, First State
had total assets of $610.4 million. This represented a decrease
in assets of $26.6 million, or 4.2%, from September 30, 1995.
The principal asset decreases were in mortgage loans held for
resale, investments available for sale, and real estate owned.
These decreases were partially offset by increases in loans
receivable, mortgage backed securities and investment securities.
Total liabilities were $575.2 million at September 30, 1996 and
this represents a decrease of $20.2 million, or 3.4%, from
September 30, 1995. The principal decreases were in deposits and
borrowings, partially offset by an increase in other liabilities.
Total stockholders' equity amounted to $35.2 million at September
30, 1996 and this was a decrease of $6.4 million from September
30, 1995. This decrease was primarily due to a net loss of $5.6
million for the year ended September 30, 1996.
First State recorded a net loss for the year ended September
30, 1996 of $5.6 million, or $1.40 per share, compared to a net
income of $4.0 million for the year ended September 30, 1995, or
$1.01 per share. Provisions for loan losses of $8.9 million,
provisions for writedowns of real estate owned of $3.0 million
and the special one- time assessment of $3.1 million, charged by
the Federal Deposit Insurance Corporation for the Savings
Association Insurance Fund ("SAIF"), were the principal causes of
the loss in the current fiscal year.
Net income is primarily dependent upon net interest income,
which represents the difference between interest income on
interest earning assets and the cost of interest bearing
liabilities. Earnings could be affected by interest rate
fluctuations to the extent that interest bearing liabilities
mature or reprice more rapidly than interest earning assets.
Such asset/liability structure may result in lower net interest
income during periods of rising interest rates and may be
beneficial in times of declining interest rates. The net
interest rate spread for fiscal 1996 was 4.41% compared to 4.25%
for fiscal 1995. Net income, which is affected by interest rate
spread, is also affected by lack of income from nonperforming
assets, gains or losses on sales of loans and securities,
provision for loan losses, other income, operating expenses, and
income taxes.
Both First State's and the Bank's capital positions remain
strong, however, they were severely impacted by the loan loss
provisions, writedowns of real estate owned and SAIF assessment
that occurred over the year. At September 30, 1996, the Bank's
capital position exceeded all regulatory requirements and was
categorized as "adequately capitalized" under the Prompt
Corrective Actions provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991.
First State's stock price reached record highs in 1996. At
September 30, 1996, the stock closed at $13.375 per share. This
compares to a stock price of $12.75 at September 30, 1995 and a
$5.50 stock price in December, 1987 when First State became a
public corporation.
First DeWitt Bank continued to expand it franchise. During
fiscal 1996, the Bank opened a branch office in Ocean County, New
Jersey, and a branch office in Wall Township, New Jersey. The
new offices brought the Bank's total number of offices in its
"southern region" to six and the overall branch office total to
fourteen. Deposits at these offices presently exceed $22.9
million. The discussion herein reflects the financial condition
and results of operations of First State and should be reviewed
in conjunction with the consolidated financial statements and
related notes to consolidated financial statements included in
this report.
Financial Condition
Total assets of First State were $610.4 million at September
30, 1996. This was a net decrease of $26.6 million from
September 30, 1995. The principal decreases in assets were in
mortgage loans held for resale of $58.1 million, (due to sales),
in investments available for sale of $2.3 million, (due to
sales), and in real estate owned of $4.5 million, (due to sales
and writedowns (see below)). Included in mortgage loans held for
resale at September 30, 1995, was a portfolio of loans that
totaled $60.8 million. These loans were sold during the quarter
ended December 31, 1995. Cash generated from the mortgage loan
sales, investment security sales, and real estate owned disposals
was mainly used to fund new loan originations, repay borrowings
and brokered certificates of deposit, and also to purchase
other securities.
The principal increases in assets were in loans receivable
of $19.3 million, mortgage-backed-securities of $12.1 million,
in investment securities of $3.8 million and in other assets of
$3.2 million. Net loans receivable consisted of first mortgage
loans of $407.0 million, consumer loans totaling $46.7 million,
and commercial loans totaling $36.3 million. The Bank originated
$107.4 million in mortgage loans during the fiscal year. This
compares with loan originations of $129.1 million during fiscal
1995. The continued strong performance was mainly attributable
to the Bank's loan soliciting operations. The Bank offers many
loan products structured so that they are attractive to borrowers
and effectively compete with mortgage banking companies and other
lending institutions. A decrease in market interest rates in the
later months of the fiscal year significantly slowed borrowers'
requests for adjustable rate mortgage loans. The Bank
alternatively invested in adjustable rate or short term
mortgage-backed securities and investment securities. The $3.2
million increase in other assets was mainly due to an increase of
$2.0 million in the deferred tax asset (caused by the increase in
provisions for loan losses, real estate writedowns and special
SAIF assessment) and the net capitalization of $471,000 in
originated mortgage servicing rights.
Problem assets at September 30, 1996 totaled $25.3 million
and consisted of $19.9 million in nonaccrual loans, $4.0 million
in real estate owned, and $1.4 million in current restructured
loans. Comparable figures at September 30, 1995 were total
problem assets of $30.5 consisting of nonaccrual loans of $18.5
million, real estate owned of $8.6 million, and current
restructured loans of $3.5 million. Although the overall
decrease in problem assets amounted to $5.2 million for the year,
nonaccrual loans increased by $1.4 million. The increase in
nonaccrual loans was mainly due to one loan relationship where
the borrowers are experiencing financial difficulties. Although
the loan is reserved based upon the estimated fair value of the
underlying collateral, management is cooperating with the
borrowers who believe they can work out of their financial
difficulties. The borrowers are currently making payments which
are in excess of their normal required monthly payments. Two
nonaccrual loans, totaling $3.1 million, have been repaid
subsequent to September 30, 1996.
The allowance for loan losses at September 30, 1996 was
$12.3 million or 61.9% of nonaccrual loans. The allowance for
loan losses at September 30, 1995 was $6.1 million or 32.9% of
nonaccrual loans. Provisions for loan losses during fiscal 1996
totaled $8.9 million, recoveries were $141,000 and charges
against the reserve were $2.8 million. This compares with
provisions for loan losses of $1.7 million during fiscal 1995,
recoveries of $72,000 and charges against the reserve of $2.0
million. The Bank's Loan Review Committee analyzes the loan
portfolio on a quarterly basis for classification of problem and
potential problem loans. The analysis of classified loans
considers such factors as the borrower's ability to repay, value
of underlying collateral, loan delinquency experience, level of
allowance for loan losses, and other matters which warrant
consideration. The Loan Review Committee also reviews the
allocation of loss reserves to loans. On April 30, 1996, the
Board of Directors of First State authorized a strategic
restructuring of the operations of First State with the goal of
increasing profitability and substantially enhancing shareholder
value. This restructuring was partially in response to an
increase in nonaccrual loans that occurred over the quarter ended
March 31, 1996. One of the key elements of this restructuring
was to liquidate substantially all nonperforming assets by March
31, 1997. The valuations of First State's problem assets were
affected by this timetable. Estimates of the carrying values
necessary to dispose of the problem assets by March 31, 1997,
were formulated over the quarter ended June 30, 1996 and resulted
in a provision for loan losses for the quarter of $4.4 million
(as well as a provision for writedowns of real estate owned of
$1.3 million). Updated appraisals for several problem assets
were received over the quarter ended September 30, 1996. In
addition, First State's historical loss experience on loans
necessitated an increase in overall general valuation allowance
levels. The asset values contained in the updated appraisals as
well as the increased general valuation allowance levels required
a provision for loan losses of $3.3 million and a provision for
the writedowns of real estate owned of $1.3 million for the
quarter ended September 30, 1996.
Management is constantly monitoring the loan portfolio and
is concentrating on workouts of the Bank's troubled loans.
Management believes that the present allowance for loan losses is
adequate in light of management's assessment of the risk inherent
in the portfolio. However, while management uses its best
judgment in providing for possible loan losses, management
recognizes that additional problems could develop and that
future adjustments may be necessary. Real estate owned totaled
$4.0 million at September 30, 1996 compared to $8.6 million at
September 30, 1995. Dispositions of real estate owned properties
amounted to $3.7 million during 1996. Real estate owned is
carried on the Bank's books at fair value less estimated costs to
sell. Provisions for the writedown of real estate owned totaled
$3.0 million for the year ended September 30, 1996 compared to
$900,000 for the year ended September 30, 1995. These provisions
were affected by the strategic restructuring announced by the
Board of Directors on April 30, 1996. These effects are
elaborated on in the discussion of the allowance for loan losses,
above. Management recognizes that future adjustments may be
necessary if the real estate values decline.
Total liabilities of First State were $575.2 million at
September 30, 1996, reflecting a net decrease of $20.2 million
from September 30, 1995. The principal changes were a decrease
in deposits of $13.4 million, a decrease in borrowed money of
$17.2 million, and offset by an increase in other liabilities of
$11.0 million. Funds obtained from the sales of loans were
mainly used to repay borrowings and brokered certificates of
deposit. The Bank aggressively marketed certificate of deposit
accounts and also continued to concentrate its efforts on
attracting checking account depositors. As a result of these
efforts, savings and checking deposits and certificates of
deposit, other than negotiated certificates of deposit, increased
$13.0 million during the year. Fiscal 1996 was a difficult year
for obtaining new deposits because depositors and investors found
the returns on mutual funds and stocks to be more attractive than
those of deposits. The increase in other liabilities was
partially due to the liability recorded for the SAIF Special
Assessment of $3.1 million at September 30, 1996, in addition to
several suspense items. These suspense items were comprised of a
certified check for $5.0 million and $2.2 million due to the
Federal Reserve Bank for customer checks that were not charged on
September 30, 1996. Both of these suspense items cleared on
October 1, 1996.
First State's stockholders' equity decreased $6.4 million
during the year bringing total equity to $35.2 million at
September 30, 1996. The net decrease was attributable to a net
loss for the year of $5.6 million, a decrease of $861,000 due to
the payment of dividends, a decrease of $139,000 due to the
change in net unrealized loss on securities classified as
available for sale and an increase of $293,000 due to the
issuance of additional shares of common stock under existing
option plans. Future declaration of cash dividends by First
State will depend upon dividend payments by the Bank to First
State, which is its primary source of income and which is subject
to regulatory restrictions. For further information regarding
dividends, see Note 16 to the Consolidated Financial Statements.
The Bank is categorized as "adequately capitalized" under the
Federal Deposit Insurance Corporation Improvement Act of 1991
definitions.
RESULTS OF OPERATIONS
A comparison of years ended September 30, 1996 and
September 30, 1995 is discussed below.
General
First State Financial Services, Inc. recorded a net loss of
$5.6 million for the year ended September 30, 1996. This
compares to net income of $4.0 million for the year ended
September 30, 1995. The net loss in 1996 was mainly due to
provisions for loan losses of $8.9 million, provisions for
writedowns of real estate owned totaling $3.0 million and a
special one-time SAIF assessment charge of $3.1 million.
Interest Income
Interest income totaled $49.2 million reflecting an increase
of $4.9 million during 1996. The increase in the Bank's interest
income in 1996 was mainly attributable to the increase in
interest on consumer and commercial loans of $4.8 million which
was primarily due to the increase in the size of the Bank's
consumer and commercial loan portfolios. The average balance of
those portfolios was $106.0 million in 1996 compared to $78.3 in
1995. Interest on mortgage loans decreased $790,000 in 1996 and
the decrease was mainly due to the sale of mortgage loans of
$81.9 million. The average yield on all loan portfolios was
8.89% in 1996 compared to 8.40% in 1995. At September 30, 1996,
the loan portfolios consisted of mortgage loans of $407.0 million
(which includes $215.0 million in adjustable rate mortgages),
consumer loans of $46.7 million, and commercial loans of $36.3
million. The Bank utilizes the services of loan solicitors for
mortgage loan production. The Bank has aggressively marketed
adjustable rate loans because of their interest rate sensitivity
in a rising interest rate environment. If nonaccrual loans had
been current in accordance with their original terms, total
interest income would have been increased by approximately $1.7
million in 1996 and approximately $1.5 million in 1995. The Bank
invests its funds primarily in loans. It will invest in
mortgage-backed or other securities when loan demand is slow or
when security investments are a better alternative. There was a
net increase in the Bank's mortgage- backed securities portfolio
of $12.1 million during 1996 bringing the total to $31.0 million
at September 30, 1996. Interest income on such securities
increased $705,000 in 1996. The investment securities portfolio
and investment securities available for sale totaled $34.1
million at September 30, 1996, an increase of $1.4 million during
1996. The average yield on all interest-earning assets was 8.56%
in 1996 compared to 8.21% in 1995.
Interest Expense
Interest expense increased $2.3 million to $24.1 million
during 1996. The increase was mainly attributable to increased
average deposits and to higher interest rates paid on certificate
accounts, particularly jumbo and brokered certificates of
deposit. The average balance of deposits in 1996 was $561.7
million compared to $532.1 million in 1995. The average cost of
deposits in 1996 was 4.09% compared to 3.88% in 1995. The Bank
continues to concentrate its efforts to attract checking
accounts, money market demand accounts, and NOW accounts.
Accounts of this type are generally less interest rate sensitive
than certificates of deposits and other savings deposits. In
addition to providing opportunities to generate service fees,
checking accounts present opportunities to develop solid core
depositor relationships. At September 30, 1996, the Bank had
$101.5 million in commercial checking, NOW, and money market
checking accounts. This compares to $90.9 million in similar
accounts at September 30, 1995. Interest expense on borrowings
decreased $22,000 in 1996. Average borrowings were $18.1 million
during 1996 compared to $18.0 million in 1995. The average
interest rate on all interest-bearing liabilities was 4.15% for
1996 compared to 3.96% for 1995.
Net Interest Income
Net interest income, which represents the difference between
total interest earned on assets and total interest paid on
deposits and borrowings supporting those assets, increased $2.6
million to $25.2 million in 1996 from $22.6 million in 1995. The
components of net interest income are discussed above in more
detail. The average balance of interest-earning assets was
$575.1 million, yielding 8.56% in 1996, compared to $540.7,
yielding 8.21% in 1995. The average balance of interest-bearing
liabilities was $579.7 million in 1996 and cost 4.15%, compared
to $550.2 million costing 3.96% in 1995. The following table
sets forth, for the periods indicated, information regarding:
(i) First State's average balance sheet; (ii) the dollar amounts
of income from interest-earning assets and the resulting average
yields; (iii) the total dollar amounts of interest expense on
interest-bearing liabilities and the resulting average costs;
(iv) net interest income; (v) interest rate spread; (vi) net
yield earned on interest-earning assets; and (vii) the ratio of
total interest-earning assets to total interest-bearing
liabilities. Average balances were calculated on a daily basis
(except for the balance adjustments relating to the pooling of
Ocean Independent Bank in 1994, which were annualized).
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
--------------------------- ---------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- ------- --------- -------- ---- --------- -------- ----
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 504,374 $ 44,862 8.89% $ 486,641 $ 40,876 8.40% $ 391,701 $ 31,102 7.94%
Mortgage-Backed Securities 29,223 1,943 6.65 17,807 1,238 6.95 21,996 1,587 7.21
Investment securities 18,063 1,072 5.93 23,216 1,387 5.97 13,220 790 5.98
Investments available for sale 14,634 838 5.73 8,588 525 6.11 20,487 1,104 5.39
Federal Funds 5,121 282 5.51 1,010 67 6.63 3,516 79 2.25
Investments required by law 3,694 241 6.52 3,393 256 7.54 3,097 273 8.81
--------- -------- ----- --------- -------- ---- --------- -------- ----
Total interest-earning assets 575,109 49,238 8.56 540,655 44,349 8.21 454,017 34,935 7.70
Non-interest-earning assets 49,910 -------- ----- 52,448 44,294
--------- --------- -------- ---- --------- -------- ----
$ 625,019 $ 593,103 $ 498,311
========= --------- -------- ---- --------- -------- ----
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities:
NOW and money mkt deposits 95,065 1,877 1.97 86,220 1,742 2.02 75,614 1,450 1.92
Passbook accounts 140,516 3,394 2.42 150,938 3,727 2.47 173,227 4,398 2.54
Certificate accounts 326,069 17,694 5.43 294,987 15,185 5.15 195,777 7,239 3.70
Borrowed Money 18,079 1,089 6.02 18,028 1,111 6.16 7,048 361 5.12
--------- -------- ----- --------- -------- ---- --------- -------- ----
Total interest-bearing liabilities $ 579,729 24,054 4.15 $ 550,173 21,765 3.96 $ 451,666 13,448 2.98
Non-interest bearing liabilities 3,485 -------- ----- 4,013 10,259
--------- --------- ---------
583,214 554,186 461,925
Stockholders' equity 41,805 38,917 36,386
--------- --------- ---------
Total liabilities and
stockholders' equity $ 625,019 $ 593,103 $ 498,311
========= ========= =========
Net interest income,
interest rate spread $ 25,184 4.41% 22,584 4.25% $ 21,487 4.72%
======== ===== ======== ===== ======== =====
Net interest-earning assets
(liabilities),net yield on
interest-earning assets $ (4,620) 4.38% $ (9,518) 4.18% $ 2,351 4.73%
========== ========== =========
Ratio of interest-earning assets to
interest-bearing liabilities .99x .98x 1.01x
(1) Includes non-accrual loans
</TABLE>
Provision for Loan Losses
Provisions for loan losses totaled $8.9 million during 1996
and $1.7 million in 1995. The related allowance for loan losses
totaled $12.3 million at September 30, 1996. This compares to a
$6.1 million allowance for loan losses at September 30, 1995.
Substantially all of the nonaccrual loans are secured by first
mortgage liens on real property. See "Financial Condition"
section for information regarding factors which influence
management's judgment in determining the amount of additions to
the loan loss allowance and increases during the year.
Although management considers the allowance for loan losses
to be adequate, management recognizes that additional problems
could develop and lead to additional loss provisions and asset
write-downs.
Other Income
Total other income increased $11.1 million to $17.5 million
in 1996. The increased income was mainly attributable to
increases in income from loan fees and other loan charges of $9.9
million and increases in net gains on the sales of loans of
$982,000. The increase in income from loan fees and other loan
charges was directly attributable to the Bank's credit card
portfolio. First State obtained a serviced credit card portfolio
through the merger with Ocean Independent Bank in October, 1994.
The effect of the accounting for the credit card portfolio has
caused increases in the areas of consumer loan interest, loan
fees and other loan charges, and loan processing expenses.
Details regarding First State's serviced credit card portfolio
are discussed below. The sales of $80.6 million of mortgage
loans from the available for sale portfolio generated a net gain
on sales of loans of $1.1 million. The Bank maintains an
investment securities available for sale portfolio and
anticipates periodic sales of such securities. Net gains on such
sales totaled $69,000 in 1996. Management intends to continue
its efforts in acquiring checking accounts and to increase other
branch service fee income through the marketing of its broad
range of banking services. Income from service charges on
deposit accounts totaled $1.9 million in 1996 as compared to $1.8
million in 1995.
Operating Expenses
Operating expenses increased $18.9 million to $41.0 million
in 1996. The principal increases were in loan processing
expenses of $12.8 million, in the SAIF special assessment of $3.1
million, in problem asset expenses, inclusive of real estate
owned writedowns, of $2.1 million, and in compensation and
employee benefits of $1.1 million. Substantially all of the
increase in loan processing expenses was due to the accounting
for credit card expenses. Details regarding First State's
serviced credit card portfolio are discussed separately below.
The increase in problem asset expenses was mainly due to
writedowns of the carrying values of the properties. The
writedowns were in accordance with the Bank's announced intent to
liquidate substantially all of its problem assets and updated
appraisals regarding the current value of the properties. The
increase in compensation and employee benefits was mainly due to
the continually rising cost of employee benefits, a cost of
living increase, an increase in expense associated with deferred
compensation and the employment of personnel to staff the two new
branch offices opened during the period. Employee benefit plans
are discussed in footnote 11 of the consolidated financial
statements. Premises and occupancy costs increased by $317,000
to $2.3 million for 1996. This increase is due primarily to the
operations of two new branch offices and high costs incurred in
1996 for snow removal. The types of other expenses together with
a comparison of the prior two years are shown in Note 9 to the
Consolidated Financial Statements. A one-time special assessment
of $3.1 million was levied on September 30, 1996 in connection
with legislation enacted to recapitalize the Savings Association
Insurance Fund ("SAIF"). The assessment was recorded on First
State's financial statements as of September 30, 1996 and
severely impacted earnings for the quarter. Congress passed the
legislation requiring a one-time charge to SAIF insured
institutions in order to recapitalize and fully fund the SAIF
deposit insurance fund. As a result of fully funding the SAIF,
First DeWitt's premium to SAIF will decrease significantly from
the current .26 percent of insured deposits as of January 1,
1997. The Corporation acquired a serviced credit card portfolio
through the acquisition of Ocean Independent Bank in October,
1994. The arrangement with the servicer of the portfolio,
Applied Card Systems (ACS) of Wilmington, Delaware, provides the
Corporation with a guaranteed net return based on the outstanding
receivables associated with the serviced portfolio. The return
that is guaranteed to the Corporation is net of all costs,
including credit loss and cost of funds. First State records all
interest income associated with the portfolio in the "Interest on
consumer and commercial loans" caption and all fees associated
with portfolio are recorded in the "Loan fees and other loan
charges" caption. The difference between the amounts received
for the two captions above and the net return guaranteed to the
Corporation is considered "credit card expenses" that represent
the fees paid to ACS for their servicing of the portfolio. This
amount is recorded in the "Loan expenses" caption. The
Corporation's business with ACS had expanded and this growth
caused an increase in all three income statement captions. The
detailed effect of the serviced credit card portfolio on the
income statement for the years ended September 30, 1996 and 1995
are presented below.
12 Months 12 Months
Ended Ended
9/30/96 9/30/95
--------- ---------
Income Statement Caption (in thousands)
Interest on consumer and $ 6,056 $ 2,281
commercial loans
Loan fees and other loan charges 12,691 2,291
--------- ---------
Total credit card income 18,747 5,272
Loan expenses 17,260 4,600
--------- ---------
Net credit card income (pre tax) $ 1,487 $ 672
========= =========
Net credit card income (after $ 907 $ 410
tax) ========= =========
The total credit card receivables outstanding that were serviced
by ACS totaled $16.6 million at September 30, 1996. Total credit
card receivables serviced by ACS reached a high of $74.6 million
over the year. On August 15, 1996, the Corporation entered into
an agreement to sell the credit card portfolio. Between August
15 and September 30, 1996, $59.6 million in credit card
receivables were sold at par. Substantially all of the remaining
credit card portfolio was sold at par subsequent to September 30,
1996. Due to the sale of this portfolio, decreases in the
"Interest on consumer and commercial loans" caption, the "Loan
fees and other loan charges" caption and the "Loan processing
expenses" caption are expected in fiscal 1997. This sale is also
expected to negatively impact the Corporation's interest rate
spread in 1997.
Income Tax Expense
The Corporation recorded a tax benefit of $1.6 million for
the year ended September 30, 1996. This benefit was due to the
pre-tax loss on operations of $7.3 million. The Corporation
recorded income tax expense of $1.1 million for the year ended
September 30, 1995, due to pre-tax income of $5.1 million. The
acquisition of Ocean Independent Bank ("Ocean") on October 21,
1994, warranted a reduction of the valuation allowance associated
with the adoption of Statement of Financial Accounting Standards
109 "Accounting for Income Taxes". This reduction of the
valuation allowance had the effect of reducing income tax expense
for First State in 1995. See Note 10 to the Consolidated
Financial Statements for additional discussion of income taxes,
including a reconciliation of the "expected" income tax benefit
or expense to the amount recorded on the Corporation's financial
statements.
RESULTS OF OPERATIONS
A comparison of years ended September 30, 1995 and September
30, 1994 is discussed below.
General
First State Financial Services, Inc. recorded net income of
$4.0 million for the year ended September 30, 1995. This
compares to net income of $3.5 million for the year ended
September 30, 1994 and represents a 14.2% increase over 1994.
The improved performance in 1995 is primarily attributable to
increases in net interest income and loan fees and other loan
charges.
Interest Income
Interest income totaled $44.3 million reflecting an increase
of $9.4 million during 1995. The increase in the Bank's interest
income in 1995 was mainly attributable to the increase in the
size of the Bank's loan portfolios and also to the increased
average interest yield of the portfolios. The average balance of
the loan portfolios was $486.6 million in 1995 compared to $391.7
in 1994. The average yield on the loan portfolios was 8.40% in
1995 compared to 7.94% in 1994. At September 30, 1995, the loan
portfolios consisted of mortgage loans of $441.5 million (which
includes $228.5 million in adjustable rate mortgages), consumer
loans of $53.0 million, and commercial loans of $34.4 million.
The Bank utilizes the services of loan solicitors for mortgage
loan production. The Bank has aggressively marketed adjustable
rate loans because of their interest rate sensitivity in a rising
interest rate environment. The Bank intends to continue its
emphasis on attracting adjustable rate loans. Long-term,
fixed-rate mortgage loans will be originated with the intent, in
most cases, of selling them. The Bank will also continue its
efforts to attract consumer and commercial loans by structuring
products attractive to borrowers and effectively marketing the
products. If nonaccrual loans had been current in accordance
with their original terms, total interest income would have been
increased by approximately $1.5 million in 1995 and approximately
$899,000 in 1994. The Bank invests its funds primarily in loans.
It will invest in mortgage-backed or other securities when loan
demand is slow or when security investments are a better
alternative. The average yield on all interest-earning assets
was 8.21% in 1995 compared to 7.70% in 1994.
Interest Expense
Interest expense increased $8.3 million to $21.8 million
during 1995. The increase was mainly attributable to increased
deposits and to higher interest rates paid on deposits. The
average balance of deposits in 1995 was $532.1 million compared
to $444.6 million in 1994. The average cost of deposits in 1995
was 3.88% compared to 2.94% in 1994. General market interest
rates began to trend upward in 1994 and continued increasing
through June, 1995. Interest rates began to trend downward after
that date and should have a lowering effect on the interest rates
paid on deposits going forward. The Bank will continue to
concentrate its efforts to attract checking accounts, money
market demand accounts, and NOW accounts. Accounts of this type
are generally less interest rate sensitive than certificates of
deposits and other savings deposits. In addition to providing
opportunities to generate service fees, checking accounts present
opportunities to develop solid core depositor relationships. At
September 30, 1995, the Bank had $90.9 million in commercial
checking, NOW, and money market checking accounts. This compares
to $83.8 million in similar accounts at September 30, 1994.
Interest expense on borrowings increased $750,000 in 1995 and was
mainly due to increased borrowings during the year. Average
borrowings were $18.0 million during 1995 compared to $7.0
million in 1994. The average interest rate on all
interest-bearing liabilities was 3.96% for 1995 compared to 2.98%
for 1994. Rising interest rates will also increase the cost of
borrowing going forward.
Net Interest Income
Net interest income, which represents the difference between
total interest earned on assets and total interest paid on
deposits and borrowings supporting those assets, increased $1.1
million to $22.6 million in 1995 from $21.5 million in 1994. The
components of net interest income are discussed above in more
detail. The average balance of interest-earning assets was
$540.7 million, yielding 8.21% in 1995, compared to $454.0,
yielding 7.70% in 1994. The average balance of interest-bearing
liabilities was $550.2 million in 1995 and cost 3.96%, compared
to $451.7 million costing 2.98% in 1994.
The following table sets forth, for the periods indicated,
information regarding: (i) First State's average balance sheet;
(ii) the dollar amounts of income from interest-earning assets
and the resulting average yields; (iii) the total dollar amounts
of interest expense on interest-bearing liabilities and the
resulting average costs; (iv) net interest income; (v) interest
rate spread; (vi) net yield earned on interest-earning assets;
and (vii) the ratio of total interest-earning assets to total
interest-bearing liabilities. Average balances were calculated
on a daily basis (except for the balance adjustments due to Ocean
in 1994 and 1993, which were annualized).
Provision for Loan Losses
Provisions for loan losses totaled $1.7 million during 1995
and $1.9 million in 1994. The related allowance for loan losses
totaled $6.1 million at September 30, 1995. This compares to a
$6.4 million allowance for loan losses at September 30, 1994.
Substantially all of the nonaccrual loans are secured by first
mortgage liens on real property. See "Financial Condition"
section for information regarding factors which influence
management's judgment in determining the amount of additions to
the loan loss allowance.
Although management considers the allowance for loan losses
to be adequate, management recognizes that additional problems
could develop and lead to additional loss provisions and asset
write-downs.
Other Income
Total other income increased $2.2 million to $6.4 million in
1995. Increased income from loan fees and other loan charges of
$2.1 million substantially accounted for the increase. The
increase was due to the increase in mortgage activity discussed
earlier and also from the Bank's credit card programs. The Bank
expects to continue to expand it's activities in these areas.
Service charges on deposit accounts increased $198,000 in 1995.
Management continued to make a concerted effort to expand the
Bank's checking account business in 1995 and, as mentioned
earlier, increased those accounts by approximately $7.5 million
in 1995. Management intends to continue its efforts in acquiring
checking accounts and to increase other branch service fee income
through the marketing of its broad range of banking services.
The net gain on sales of loans decreased $386,000 and was due to
decreased sales activity. Loans sold in 1995 totaled $6.9
million compared to $26.4 million in 1994. The net loss on sale
of investment securities in 1995 of $125,000 was due to the sale
of securities carried on Ocean Independent Bank's books as
available-for- sale at the time of merger. The increase in other
income was mainly due to the increase in the cash surrender value
of life insurance policies covering the Bank's senior officers.
Operating Expenses
Operating expenses increased $3.3 million to $22.2 million
in 1995. The principal increase was in loan expenses of $3.2
million. The principal decrease was in compensation and employee
benefits of $286,000. The decrease, as anticipated, was mainly
due to savings attained by consolidating Ocean Independent Bank's
operations into First DeWitt's operations. Medical insurance
expense was also reduced by switching to a managed care program.
The increase in loan expenses was partially due to mortgage
lending but primarily due to credit card activities. The
expenses incurred in connection with the credit card programs
were more than offset by interest income and fee income generated
from the programs. The types of other expenses together with a
comparison of the prior two years are shown in Note 9 to the
Consolidated Financial Statements.
Problem asset expenses, inclusive of real estate writedowns
totaled $1.6 million in 1995 compared to $1.5 million in 1994.
These expenses can be expected to be reduced with a decreased
level of problem assets. Management is constantly pursuing
various avenues of problem asset disposal.
Income Tax Expense
Income tax expense of $1.1 million incurred in 1995 and
income tax expense of $1.4 million incurred in 1994 was due to
the generation of taxable income. Taxable income was reduced
because of allowable deductions for increases in specific loan
and REO reserves and charge- offs. In addition, First State
adopted the Statement of Financial Accounting Standards 109
"Accounting for Income Taxes" ("FAS 109"), effective October 1,
1992. FAS 109 had the effect of significantly reducing income
tax expense for the year ended September 30, 1993, and affected
the 1994 period to a much lesser extent. The acquisition of
Ocean on October 21, 1994, warranted a reduction of the valuation
allowance associated with FAS 109. This reduction of the
valuation allowance had the effect of reducing income tax expense
for First State in 1995. See Note 10 to the Consolidated
Financial Statements for additional discussion of income taxes.
LIQUIDITY and CAPITAL RESOURCES
First State's principal sources of funds are dividends from
its subsidiaries and funds provided from operations. The Bank's
principal sources of funds are from deposits; scheduled loan
amortization payments; sales and prepayments of loan principal;
sales and maturities of mortgage-backed securities, sales and
maturities of investment securities and short-term investments;
borrowings and funds provided from operations.
The financing activities section of the Consolidated
Statement of Cash Flows reflects a net decrease in deposits of
$13.4 million during 1995. The decrease consisted of $36.4
million in net withdrawals offset by $23.0 million in interest
credited to deposit accounts. The decrease was mainly due to the
withdrawal of brokered certificates and jumbo accounts. The Bank
utilized the cash flow from loan sales to, among other things,
reduce its position in these high cost deposits. These funds
were also used to repay borrowings, see below. In fiscal 1995,
total deposits increased by $88.3 million. Net borrowings
decreased $17.2 million in 1996 compared to a net decrease in
borrowings of $13.6 million in 1995. Deposits are mainly used to
fund loans in conjunction with the Bank's investing activities.
Management will utilize borrowings when it is opportunistic to
originate loans and internally generated funds are insufficient
to fund the loans. In 1995, new deposits and internally
generated funds were in excess of loan demand and resulted in the
Bank repaying borrowings.
In the investing activities section of the Statement of Cash
Flows, a net increase in loans receivable of $90.8 million is
reported for fiscal 1996, compared to $82.8 million in 1995.
Loans originated in 1996 totaled $233.4 million compared to
$179.8 million in 1995. Loan repayments and proceeds from sales
of loans provided a substantial portion of the funds for the
origination of loans in both periods. Such sources of funds
provided $264.1 million in 1995 and $101.4 million in the 1995
period. Deposit funds, borrowings and funds obtained through
normal operations were also utilized to fund the origination of
loans. The Bank actively solicits loans through the marketing of
several competitive loan programs and has successfully utilized
the services of loan solicitors for the origination of loans. In
the operating activities section of the Statement of Cash Flows,
origination of loans held for resale totaled $21.4 million in
1996 and $10.3 million in 1995. Proceeds from the sales of such
loans were $81.9 million in 1996 and $7.0 million in 1995. The
1996 sales were primarily due to the sale of $67.2 million in
mortgage loans classified as Mortgage loans held for resale at
September 30, 1995. The Bank also sold $59.6 million in credit
card receivables in 1996. The Bank's emphasis is on attracting
adjustable rate loans. Long- term, fixed-rate mortgage loans are
originated with the intent, in most cases, of selling them. In
1996, the Bank purchased a total of $16.4 million in
mortgage-backed securities (including $1.2 million in
mortgage-backed securities available for sale) and received $4.3
million from sales and from prepayments of those securities. In
1995, purchases of mortgage-backed securities only exceeded sales
and prepayments by $114,000. The statement of cash flows
discloses that in 1996 $3.4 million in investment securities
matured and that $14.1 million was reinvested in new investment
securities. Proceeds from the sales of investment securities
available for sale portfolio exceeded purchases of securities for
this portfolio by $9.2 million. A net non cash transfer of $6.9
million significantly effected the ending balances of these
portfolios. In 1995, the Bank purchased $8.3 million in
investment securities while $9.4 million of investment securities
matured. The Bank also saw sales of investment securities
available for sale exceeding purchases by $3.6 million in 1995.
Cash funds received from the disposition of real estate
properties owned amounted to $3.7 million in 1996 and $3.2 in
1995.
The Bank is required to maintain minimum levels of liquid
assets as defined by the Office of Thrift Supervision (OTS)
regulations, such as United States Government and federal agency
securities. This requirement, which may be varied by OTS, is
based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 5.00%. The Bank's ratio was
5.13% at September 30, 1996. The Bank anticipates maintaining
its liquidity at or above the level required by regulatory
agencies.
At September 30, 1996 the Bank had $9.9 million in
outstanding commitments to originate or purchase loans and $28.8
million in unused lines of credit primarily available under home
equity loan credit lines. The Bank also had commitments to sell
$4.8 million in mortgage loans. These commitments to sell loans
primarily consisted of "best effort" commitments with minimal
detrimental effects if they are not filled. The Bank had no
material commitments for capital expenditures at September 30,
1996. Management intends to fund the total loan commitment
through new savings deposits and internal sources. Any shortfall
in obtaining the funds internally will be acquired by additional
borrowings. As a member of the Federal Home Loan Bank (FHLB)
system, the Bank may borrow from the FHLB of New York. The Bank
maintains a $63.3 million line of credit with the FHLB. The Bank
had $600,000 in borrowings against the line of credit with the
FHLB of New York at September 30, 1996.
Asset/Liability Management
The Bank's asset/liability management strategy is directed
at shortening the repricing intervals and maturities of
interest-earning assets in order to better match the
corresponding repricing intervals and maturities of
interest-bearing liabilities while maintaining an adequate spread
and asset quality. The Bank has emphasized the origination of
adjustable rate mortgage ("ARM") loans, short-term consumer
loans, and commercial loans. This strategy has reduced the
Bank's level of interest-rate risk.
The ability of the Bank to match the maturity of
interest-earning assets and interest-bearing liabilities may be
analyzed by examining the extent to which such assets and
liabilities are "interest-rate sensitive." An asset or liability
is said to be interest-rate sensitive within a specific time
period if it will mature or reprice within that time period. The
interest rate sensitivity "gap" is defined as the difference
between interest-earning assets maturing or repricing within a
specific time period and interest-bearing liabilities maturing
or repricing within that time period.
The following table presents a static gap analysis of the
Bank's current interest rate sensitivity. Assets and liabilities
are distributed in the table to reflect expected cash flow and
repricing characteristics as of September 30, 1996. The table
shows the Bank to be in a liability sensitive gap position over a
12-month time frame with a cumulative negative, one-year gap of
$99.8 million. The cumulative one-year gap equals 16.3% of total
assets.
Static gap analysis describes interest rate sensitivity at
one point in time. However, it does not capture the inherent
dynamics of the balance sheet or the influence of prospective
interest rate changes. Because of this limitation, the Bank
employs simulation models that measure the dynamics of future
cash flows, balance sheet changes and the impact on revenue of
diverse interest rate scenarios.
<TABLE>
<CAPTION>
Gap Analysis at September 30, 1996
---------------------------------------------------------------------------
Within Within Within
Within 6 Months 1 Year to 2 years After
6 months to a Year 2 Years to 5 Years 5 years Total
---------- ---------- ---------- ---------- ---------- ----------
( Dollars in thousands )
<S> <C> <C> <C> <C> <C> <C>
Interest- earnings assets:
Mortgage loans (2) (3) $ 122,025 $ 53,920 $ 58,793 $ 124,618 $ 57,993 $ 417,349
Mortgage-backed securities 17,526 3,472 3,096 4,570 2,360 31,024
Consumer and commercial loans (3) 54,431 2,816 3,699 6,659 18,363 85,968
Investment securities 12,602(1) 1,555 - 1,393 12,497 28,047
Investment securities available for sale 1,256 - 8,210 - - 9,466
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 207,840 $ 61,763 $ 73,798 $ 137,240 $ 91,213 $ 571,854
========== ========== ========== ========== ========== ==========
Interest-bearing liabilities:
NOW accounts (4) $ 8,687 $ 7,702 $ 12,827 $ 23,293 $ - $ 52,509
Non-interest demand accounts (4) 4,861 4,403 7,334 13,320 - 29,918
Money market demand accounts (4) 3,206 2,932 5,134 7,798 - 19,070
Savings and club accounts (4) 26,437 21,759 36,710 47,106 - 132,012
Certificate accounts 181,047 107,761 14,261 10,792 6,522 320,383
Borrowed money 600 - 2,000 3,000 328 5,928
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 224,838 $ 144,557 $ 78,266 $ 105,309 $ 6,850 $ 559,820
========== ========== ========== ========== ========== ==========
Rate sensitivity gap per period (4) $ (16,998) $ (82,794) $ (4,468) $ 31,931 $ 84,363 $ 12,034
========== ========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap (4) $ (16,998) $ (99,792) $(104,260) $ (72,329) $ 12,034
========== ========== ========== ========== ==========
Interest rate sensitivity gap as a
percentage of total assets (4) (2.78)% (16.31)% (17.04)% (11.82)% 1.97%
Cumulative percentage of interest-sensitive
assets to interest-sensitive liabilities 92.44% 72.99% 76.71% 86.92% 102.15%
(1) Includes $3.4 million stock in FHLB of New York.
(2) Includes loans held for resale and net of loans in process.
(3) Includes non-accrual loans.
(4) If all NOW, non-interest demand, money market, savings and
club accounts were to reprice within 6 months or less, the
one year cumulative rate sensitivity gap would have been
$(253,314) or 51.56%.
</TABLE>
Impact of Inflation
Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects
of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude
as the prices of goods and services as measured by the consumer
price index.
<PAGE>
FIRST STATE FINANCIAL SERVICES. INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First State Financial Services, Inc.
We have audited the accompanying consolidated balance sheets
of First State Financial Services, Inc. and subsidiaries as of
September 30, 1996 and 1995, the related consolidated statements
of operations, changes in stockholders' equity, and cash flows
for each of the years in the three-year period ended September
30, 1996. These consolidated financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of First State Financial Services, Inc. and
subsidiaries at September 30, 1996 and 1995 and the results of
their operations, and their cash flows for each of the years in
the three-year period ended September 30, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
November 26, 1996
<PAGE>
<TABLE>
<CAPTION>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
September 30,
-----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 12,395 $ 11,792
Investment securities available for sale (note 3) 9,466 11,799
Investment securities, market value of $24,355 and
$20,657 at September 30, 1996 and 1995 (note 3) 24,643 20,889
Stock in FHLB of New York, at cost 3,404 3,715
Loans receivable, net (note 4) 480,931 461,648
Mortgage loans held for resale, market value of
$9,106 and $67,642 at September 30, 1996 and 1995 9,106 67,219
Mortgage-backed securities, market value of $30,560
and $19,002 at September 30, 1996 and 1995
(notes 3 and 6) 31,024 18,961
Accrued interest receivable (note 8) 3,942 4,046
Office properties and equipment, net (note 7) 10,171 10,523
Real estate owned 4,045 8,564
Cost in excess of fair value of net assets acquired 2,149 2,349
Cash surrender value of life insurance (note 11) 11,978 11,582
Other assets 7,163 3,933
---------- ----------
$ 610,417 $ 637,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 5) $ 554,320 $ 567,710
Borrowed money (note 6) 5,928 23,105
Advance payments by borrowers for taxes and
insurance 2,614 3,253
Accrued expenses and other liabilities 12,319 1,360
---------- ----------
Total liabilities 575,181 595,428
---------- ----------
Stockholders' Equity (note 14 and note 16):
Preferred stock, $.01 par value, 2 million
shares authorized; none issued - -
Common stock, $.01 par value, 8 million
shares authorized;3,938,815 issued,
3,929,455 outstanding in 1996 and 3,883,765
issued, 3,874,405 outstanding in 1995 39 39
Additional paid-in capital 21,242 20,949
Net unrealized loss on securities
available for sale (228) (89)
Retained income, substantially restricted
(notes 10 and 16) 14,183 20,693
---------- ----------
Total stockholders' equity 35,236 41,592
Commitments and Contingencies (note 12) ---------- ----------
$ 610,417 $ 637,020
========== ==========
See accompanying notes to the consolidated
financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on mortgage loans (note 4) 31,948 32,738 25,217
Interest on consumer and commercial loans 12,914 8,138 5,885
Interest on mortgage-backed securities 1,943 1,238 1,587
Interest on investments available for sale 839 525 1,104
Interest on investment securities 1,595 1,710 1,142
-------- -------- --------
Total interest income 49,239 44,349 34,935
-------- -------- --------
Interest expense:
Interest on deposits (note 5) 22,965 20,654 13,087
Interest on borrowed money 1,089 1,111 361
-------- -------- --------
Total interest expense 24,054 21,765 13,448
-------- -------- --------
Net interest income 25,185 22,584 21,487
Provision for loan losses (note 4) 8,900 1,650 1,892
-------- -------- --------
Net interest income after
provision for loan losses 16,285 20,934 19,595
-------- -------- --------
Other income:
Loan fees and other loan charges 13,591 3,725 1,589
Service charges on deposit accounts 1,874 1,784 1,586
Net gain on sales of loans 1,070 88 474
Net gain (loss) on sales of investments 69 (125) 82
Other 876 896 419
-------- -------- --------
Total other income 17,480 6,368 4,150
-------- -------- --------
Operating expenses:
Compensation and employee benefits (note 11) 8,457 7,362 7,648
Premises and occupancy expense, net 2,324 2,007 2,046
Amortization of cost of intangible assets 200 427 536
Loan expenses 17,270 4,491 1,254
Data processing 1,250 1,100 1,036
Advertising and promotion 642 812 724
Federal insurance premiums 1,261 1,234 1,097
SAIF special assessment (note 16) 3,096 - -
Problem asset expenses, inclusive of
real estate owned writedowns 3,671 1,615 1,456
Other expenses (note 9) 2,851 3,124 3,084
-------- -------- --------
Total operating expenses 41,022 22,172 18,881
-------- -------- --------
Income (loss) before income tax
expense (benefit) (7,257) 5,130 4,864
Income tax expense (benefit) (note 10) (1,608) 1,132 1,363
-------- -------- --------
Net income (loss) $(5,649) $ 3,998 $ 3,501
======== ======== ========
Net income (loss) per share $ (1.40) $ 1.01 $ 0.91
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<CAPTION> Common Stock
Net Unrealized Acquired by
Retained Loss on Employees
Additional Income Securities Stock
Common Paid-In Substantially Available Ownership
Stock Capital Restricted for Sale Plan Total
------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $ 38 $ 20,869 $ 14,431 $ - $(1,159) $ 34,179
Distributions of Employee Stock
Ownership Plan Stock - 210,798 shares 1,159 1,159
Cash dividends declared and paid (476) (476)
Change in net unrealized loss on securities
classified as available for sale (278) (278)
Net income for the year 3,501 3,501
Stock cancellation upon Ocean
merger-18,302 shares (109) (109)
Adjustment for the pooling of a company
with a different year end (3) (3)
------- --------- --------- -------- -------- ---------
Balance at September 30, 1994 $ 38 $ 20,760 $ 17,453 $ (278) $ - $ 37,973
Cash dividends declared and paid (758) (758)
Issuance of common stock under stock
option plans (note 14) -46,142 shares 1 189 190
Change in net unrealized loss on securities
classified as available for sale 189 189
Net income for the year 3,998 3,998
------- --------- --------- -------- -------- ---------
Balance at September 30, 1995 $ 39 $ 20,949 $ 20,693 $ (89) $ - $ 41,592
Cash dividends declared and paid (861) (861)
Issuance of common stock under stock
option plans (note 14) - 55,050 shares - 293 293
Change in net unrealized loss on securities
classified as available for sale (139) (139)
Net loss for the year (5,649) (5,649)
------- --------- --------- -------- -------- ---------
Balance at September 30, 1996 $ 39 $ 21,242 $ 14,183 $ (228) $ - $ 35,236
======= ========= ========= ======== ======== =========
See accompanying notes to the consolidated financial statements
</TABLE>
<TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(In thousands, except per share amounts)
<CAPTION>
Year ended September 30,
-------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (5,649) $ 3,998 $ 3,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of intangible assets 200 428 534
Depreciation 1,263 962 1,087
Net accretion of loan fees and discounts (255) (376) (382)
Net amortization and (accretion) of investment
premium and discount 67 (96) (733)
Net amortization and (accretion) of MBS
premium and discount 34 58 (102)
Decrease (increase) in interest receivable 104 (935) (598)
Proceeds from sales of loans held for resale 81,856 7,012 26,864
Proceeds from sales of credit cards receivable 59,635 - -
Origination of loans held for resale (21,414) (10,278) (7,962)
Net gain on sale of real estate owned (261) (19) -
Net gain on sale of loans (1,070) (88) (474)
Net (gain) loss on sale of investments (69) 125 (82)
Provision for losses on loans 8,900 1,650 1,892
Provision for writedowns of real estate owned 3,000 900 700
Increase in cash surrender value of life insurance (396) (572) (11,010)
(Increase) decrease in other assets (3,230) 734 (192)
Increase (decrease) in other liabilities 10,959 (260) 908
---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 133,674 3,243 13,951
---------- --------- ---------
INVESTING ACTIVITIES
Net increase in loans receivable (90,760) (82,753) (91,881)
Mortgage loans purchased - (292) -
Purchase of mortgage-backed securities (15,174) (5,809) (5,048)
Purchase of mortgage-backed securities
available for sale (1,241) - -
Proceeds from sales of mortgage-backed securities - 1,630 5,207
Proceeds from sales of mortgage-backed securities
available for sale 1,224 - -
Principal payments on mortgage-backed securities 3,094 4,065 7,029
Proceeds from dispositions of real estate owned 3,718 3,231 6,935
Office properties and equipment expenditures (911) (1,167) (669)
Purchase of investment securities (14,132) (8,297) (14,901)
Purchase of investment securities available
for sale (30,588) (12,934) (1,427)
Proceeds from sale of investment securities
available for sale 39,746 16,538 4,704
Redemption (purchase) of Federal Home Loan Bank Stock 311 (710) 414
Proceeds from maturities of investment securities 3,416 9,419 -
---------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (101,297) (77,079) (89,637)
---------- --------- ---------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (13,390) 88,346 47,352
Dividends paid on common stock (861) (758) (476)
Principal repayments of borrowings (17,177) (13,633) (1,176)
Additional borrowings - 5,000 27,234
Net (decrease) increase in advance payments by
borrowers for taxes and insurance (639) 465 160
Common stock issued 293 190 -
Adjustment for the pooling of a company with a
different year-end - - (173)
---------- --------- ---------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (31,774) 79,610 72,921
---------- --------- ---------
Increase (decrease) in cash and cash equivalents 603 5,774 (2,765)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,792 6,018 8,783
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,395 $ 11,792 $ 6,018
========== ========= =========
CASH PAID DURING THE YEAR FOR:
Interest $ 24,165 $ 21,467 $ 13,346
Income taxes $ 375 $ 2,213 $ 1,235
NON-CASH TRANSFERS:
Loans classified as Real Estate Owned $ 1,938 $ 2,672 $ 2,319
Transfer of investment securities held to maturity
to investment securities available for sale $ 8,454 $ 2,300 -
Transfer of investment securities available for
sale to investment securities held to maturity $ 1,559 - -
Transfer of mortgage-backed securities held to maturity
to mortgage-backed securities available for sale $ 627 - -
Transfer of mortgage-backed securities available for
sale to mortgage-backed securities held to
maturity $ 644 - -
Reclassification of Loans rec. to mortgage
loans held for resale - $ 60,770 -
Cancellation of common shares in conjunction
with Ocean merger - - $ 109
Release of ESOP stock - - $ 1,159
See accompanying notes to consolidated financial statements.
</TABLE>
FIRST STATE FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The following is a description of the more significant accounting
policies used in preparation of the accompanying consolidated
financial statements.
Principles of Consolidation
The consolidated financial statements are comprised of the
accounts of First State Financial Services, Inc. (First State
and/or the Corporation), its wholly owned subsidiaries, First
DeWitt Bank, (First DeWitt or the Bank), and First State
Investment Services, Inc. (FSIS); and First DeWitt's wholly owned
subsidiaries, Cedar Grove Service Corporation (CGSC), Ridge
(Caldwell) Associates (Ridge) and Southport (Wall) Associates
(Southport). All intercompany accounts and transactions have
been eliminated in consolidation.
Business
First State conducts its principal business activity through
First DeWitt Bank First DeWitt provides a full range of banking
services to individual and corporate customers through branch
offices in New Jersey. First DeWitt is subject to competition
from other financial institutions and is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles
("GAAP"). In preparing the consolidated financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
balance sheet date. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to
significant change in the next accounting cycle relate to the
determination of the allowance for loan losses and the current
valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the
determination of these allowances and the valuation of real
estate owned, management obtains independent appraisals for
significant properties.
Cash and Cash Equivalents
The caption of cash and cash equivalents used in the statements
of cash flows includes the balance sheet caption cash on hand and
in banks. Investments, Investments Available for Sale and
Mortgage-backed Securities Investment securities and
mortgage-backed securities are carried at amortized cost.
Investment securities available for sale are carried at market
value. They are adjusted for unamortized premiums and unearned
discounts which are recognized as interest income over the terms
of the securities for investments and the estimated remaining
lives based on anticipated prepayments for mortgage-backed
securities using a method which approximates the level-yield
interest method. Investment and mortgage-backed securities are
carried at cost because First State intends and has the ability
to hold them to maturity. Gains or losses on the sale of
securities are determined using the specific identification
method and are recognized upon realization.
Under Statement of Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115),
debt securities to be held for indefinite periods of time and not
intended to be held to maturity, as well as marketable equity
securities, are classified as available for sale. Investment
securities available for sale are carried at fair value and
unrealized gains and losses, net of related tax effect, on such
securities are excluded from earnings but are included in
stockholders' equity.
First DeWitt, as a member of the FHLB of N.Y., is required to
hold shares of capital stock in the FHLB of N.Y. in an amount
equal to 1% of the outstanding balance of residential mortgage
loans and similar obligations or 5% of its outstanding advances
from the FHLB of N.Y., whichever is greater. First DeWitt
complied with this requirement as of September 30, 1996.
Loans
Loans are stated at their principal amounts outstanding net of
unearned income. Interest is accrued monthly as earned, except
when a loan becomes 90 days or more past due or collection
becomes uncertain, in which case the accrual of income is
discontinued. Any accrued but unpaid interest on such loans is
reversed against current earnings. These loans are classified as
nonaccrual and interest income is only recognized subsequently in
the period collected. Loans are returned to an accrual status
when all past due amounts have been collected and factors
indicating doubtful collectability on a timely basis no longer
exists.
Discounts on loans purchased are accreted to income over the
expected lives of such loans using a method that approximates the
level-yield interest method of accounting.
Loan origination fees and certain direct loan origination costs
are deferred and amortized into income using a method which
approximates the level-yield interest method over the estimated
lives of the related loans as an adjustment to the related loan
yields.
Mortgage Loans Held for Resale
First DeWitt from time to time sells its fixed rate conforming
loan originations and retains all other types of loan
originations for its loan portfolio. Mortgage loans intended for
sale are carried at the lower of cost or market using the
aggregate method. Valuation adjustments, if applicable, are
reflected in current operations. Gains and losses on sales are
recorded using the specific identification method.
Allowance for Loan Losses
Provisions for losses on loans are charged to operations based
upon periodic review and management's assessment of the risk
inherent in the loan portfolio in relation to the level of the
allowance for loan losses, loan loss experience, changes in the
nature and volume of the loan portfolio, estimated value of the
collateral underlying the loan agreements, economic conditions
and other matters which warrant consideration.
Management believes that the allowance for losses on loans is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions in their
market area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the allowance for losses on loans. Such agencies may require the
Corporation to recognize additions to the allowance based on
their judgments about information available to them at the time
of their examination.
On October 1, 1995, First State adopted Statement of Accounting
Standards No. 114, "Accounting by Creditors for the Impairment of
a Loan", as amended by SFAS 118, "Accounting by Creditors for the
Impairment of a Loan-Income Recognition and Disclosures. As
defined by these statements, a loan is considered impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. As a result,
certain impaired loans are reported at the present value of
expected future cash flows discounted at the loan's effective
interest rate or the fair value of the collateral if the loan is
collateral dependent. The adoption of these statements did not
impact the Corporation's operating results or total allowances
for loan losses.
Office Properties and Equipment
Office properties and equipment are stated at cost less
accumulated depreciation. Depreciation of office properties and
equipment is accumulated on a straight-line basis over their
estimated useful lives of three to forty years.
Real Estate Owned
Real estate acquired through foreclosure or by deed in lieu of
foreclosure, is recorded at the lower of cost or fair value less
estimated costs to sell. An allowance for REO losses is
maintained for subsequent declines in fair value. Gains and
losses from sales are recognized as incurred. Carrying costs are
generally expensed as incurred.
Cost in Excess of Fair Value of Net Assets Acquired
Costs in excess of fair value of net assets acquired in business
combinations are being amortized on a straight-line basis over
periods of either 10 or 25 years. The remaining balance at
September 30, 1996, is being amortized over 25 years.
Income Taxes
The Corporation and the Bank file a consolidated Federal income
tax return. State income tax returns are filed on a separate
basis.
Loan Servicing
The Bank services real estate loans for investors which are not
included in the accompanying consolidated balance sheets. Fees
earned for servicing loans are reported as income when the
related mortgage loan payments are collected. Loan servicing
costs are charged to expense as incurred.
Originated Mortgage Servicing Rights
Effective October 1, 1995, First State adopted Statement of
Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS 122). SFAS 122 requires that a mortgage banking
enterprise recognize as separate assets the rights to service
mortgage loans for others that have been acquired through either
the purchase or origination of a loan. A mortgage banking
enterprise that sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans based on
their relative fair values.
The fair value of capitalized originated mortgage servicing
rights is determined based on the estimated discounted net cash
flows to be received. Originated mortgage servicing rights are
amortized in proportion to and over the period of estimated net
loan servicing income. These capitalized mortgage servicing
rights are periodically reviewed for impairment based on the fair
value of those rights. First State capitalized $535,000 of
originated mortgage servicing rights during the year ended
September 30, 1996.
Net Income Per Share
Net income per share is computed by dividing net income by the
average number of common shares outstanding during the period.
Shares exercisable under stock option plans have been included in
the calculation of primary earnings per share using the treasury
stock method for periods in which this calculation was dilutive.
Financial Statement Presentation
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to comply with the 1996
presentation.
(2) Merger Agreement and Business Combinations
On June 24, 1996, the Corporation signed a definitive merger
agreement providing for the acquisition of all of the outstanding
stock of First State Financial Services, Inc. by Sovereign
Bancorp, Inc. (Sovereign). This merger agreement was amended by
an agreement (the "amendment") signed by both parties on November
26, 1996. The amendment calls for First State shareholders to
receive between 1.225 and 1.84 shares of Sovereign's common stock
under a floating exchange ratio for each share of First State
common stock if Sovereign's average closing price as defined in
the amendment (the "Sovereign Market Value") is greater than or
equal to $8.00 but less than or equal to $12.04. Within this
range, the exchange ratio will be $14.75 divided by the Sovereign
Market Value. If the Sovereign Market Value is greater than
$12.04, the exchange ratio will be 1.225. If the Sovereign
Market Value falls below $8.00, the agreement may be terminated
by First State unless certain conditions are met. In a related
agreement, Sovereign was given an option to purchase up to
783,000 shares of First State's issued and outstanding common
stock if certain conditions occur. The merger is subject to
certain conditions, including approval by First State's
shareholders and various regulatory authorities and is expected
to be completed by the first calendar quarter of 1997.
On October 21, 1994, the Corporation issued approximately 678,000
shares of its common stock for all the outstanding stock of Ocean
Independent Bank, a New Jersey chartered bank located in Ocean,
New Jersey (Ocean). This business combination was accounted for
as a pooling-of-interests combination and, accordingly, the
Corporation's historical consolidated financial statements have
been restated to include the accounts and results of operations
of Ocean for all years presented. The results of operation of
the Corporation and Ocean for the year ended September 30, 1994
prior to restatement is as follows:
Year ended September 30, 1994
(in thousands)
The Corporation:
Net Interest Income $ 19,058
Net Income 3,189
Ocean:
Net Interest Income 2,429
Net Income 312
Combined:
Net Interest Income 21,487
Net Income 3,501
Prior to the combination, Ocean's fiscal year ended December 31.
In recording the pooling-of-interests combination, Ocean's
unaudited financial statements for the twelve months ended
September 30, 1994 were combined with the Corporation's financial
statements for the same period. In addition, Ocean's financial
statements for the years ended December 31, 1993 and 1992 were
combined with the Corporation's financial statements for the
years ended September 30, 1993 and 1992. Ocean's unaudited
results of operation for the three months ended December 31,
1993, included net interest income of $649,000 and net income of
$3,000. An adjustment has been made to stockholders' equity to
eliminate the effect of including Ocean's results of operations
for the three months ended December 31, 1994 in both the year
ended September 30, 1994 and the year ended September 30, 1993.
(3) Investment Securities Available for Sale, Investments and
Mortgage-Backed Securities
The amortized costs, gross unrealized gains and losses and
estimated market values of investment debt securities are as
follows:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity Portfolio:
Investment Securities
US Treasury Securities $ 847 $ 6 $ - $ 853
US Government & Agency Obligations 9,310 8 (146) 9,172
Municipal Obligations 14,486 86 (242) 14,330
---------- ------------ ------------ ---------
24,643 100 (388) 24,355
---------- ------------ ------------ ---------
Mortgage-Backed Securities
GNMA 6,839 31 (163) 6,707
FNMA 7,102 61 (106) 7,057
FHLMC 14,997 63 (314) 14,746
FHA 2,086 - (36) 2,050
---------- ------------ ------------ ---------
31,024 155 (619) 30,560
---------- ------------ ------------ ---------
$ 55,667 $ 255 $ (1,007) $ 54,915
========== ============ ============ =========
Available for Sale Portfolio:
Investment Securities
US Treasury Securities $ 750 $ - $ (7) $ 743
Municipal Obligations 7,720 - (248) 7,472
Other Investments 3 11 - 14
---------- ------------ ------------ ---------
8,473 11 (255) 8,229
---------- ------------ ------------ ---------
Mutual Funds
US Government Securities 250 - - 231
Adjustable Rate Mortgages 582 - - 579
Commercial Paper 427 - - 427
---------- ------------ ------------ ---------
1,259 - (22) 1,237
---------- ------------ ------------ ---------
$ 9,732 $ 11 $ (277) $ 9,466
========== ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity Portfolio:
Investment Securities
US Treasury Securities $ 1,256 $ 12 $ - $ 1,268
US Government & Agency Obligations 9,647 10 (171) 9,486
Municipal Obligations 9,986 75 (158) 9,903
---------- ------------ ------------ ---------
20,889 97 (329) 20,657
---------- ------------ ------------ ---------
Mortgage-Backed Securities
GNMA 3,873 39 (6) 3,906
FNMA 6,396 120 (79) 6,437
FHLMC 8,692 88 (121) 8,659
---------- ------------ ------------ ---------
18,961 247 (206) 19,002
---------- ------------ ------------ ---------
$ 39,850 $ 344 $ (535) $ 39,659
========== ============ ============ =========
Available for Sale Portfolio:
Investment Securities
US Treasury Securities $ 1,007 $ - $ (6) $ 1,001
Municipal Obligations 2,728 6 (17) 2,717
Other Investments 28 6 - 34
---------- ------------ ------------ ---------
3,763 12 (23) 3,752
---------- ------------ ------------ ---------
Mutual Funds
US Government Securities 236 - (15) 221
Adjustable Rate Mortgages 7,475 - (68) 7,407
Commercial Paper 419 - - 419
---------- ------------ ------------ ---------
8,130 - (83) 8,047
---------- ------------ ------------ ---------
$ 11,893 $ 12 $ (106) $ 11,799
========== ============ ============ =========
</TABLE>
The amortized cost and estimated market value of investment debt
securities at September 30,1996, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without penalties. The contractual maturities
of mortgage-backed securities generally exceeds twenty years;
however, the effective lives are expected to be less due to
anticipated prepayments.
<TABLE>
<CAPTION>
Estimated
Amortized Market Average
Cost Value Yield(a)
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Held to Maturity Portfolio:
Investment Securities
Due in one year or less $ 2,055 $ 2,057 6.11 %
Due after one year through five years 7,597 7,562 6.01
Due after five years through ten years 3,030 2,948 6.72
Due after ten years 11,961 11,788 7.81
--------- --------- ---------
24,643 24,355 6.98
Mortgage-Backed Securities 31,024 30,560 6.78
--------- --------- ---------
$ 55,667 $ 54,915 6.85 %
========= ========= =========
Available for Sale Portfolio:
Investment Securities
Due in one year or less $ - $ - - %
Due after one year through five years 750 743 5.03
Due after five years through ten years 419 408 6.76
Due after ten years 7,304 7,078 7.47
--------- --------- ---------
8,473 8,229 7.22
Mutual Funds
Due in one year or less 1,259 1,237 5.74
--------- --------- ---------
$ 9,732 $ 9,466 7.03 %
========= ========= =========
(a) Tax equivalent yields
</TABLE>
The carrying value of investment securities pledged as required
for public funds and deposits amounted to $2.6 million at
September 30,1996. In addition, certain investment and
mortgage-backed securities are pledged as collateral under
various borrowing agreements. See note 6.
Pursuant to the provisions and implementation guidance contained
within the Financial Accounting Standards Board's special report
"A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities", on November
15, 1995, the Corporation reassessed the classification of all
securities within its portfolio and transferred $9.1 million from
its held-to-maturity investment portfolio to its available-
for-sale portfolio. These securities had a market value of $9.2
million which resulted in the Corporation recording an unrealized
gain on securities available-for-sale, net of tax, within
stockholders' equity of $87,000. Gross gains (losses) realized on
sales of investment securities and mortgage-backed securities for
the years ended September 30, 1996, 1995, and 1994 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Gross gains $ 177 $ 32 $ 137
Gross losses (108) (157) (55)
-------- ------- -------
Net gain (loss) on sales of investments $ 69 $ (125) $ 82
======== ======= =======
</TABLE>
Cash proceeds from sales transactions approximated $41.0 million,
$18.2 million and $9.9 million for the years ended September 30,
1996, 1995, and 1994, respectively.
(4) Loans Receivable, Net
Loans receivable, net consists of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
First Mortgage loans:
Conventional $ 380,530 $ 351,416
Partially guaranteed by VA or insured by FHA 1,889 2,377
Participation in conventional loans 13,539 10,093
Loans for land and construction 17,624 23,031
----------- -----------
413,582 386,917
----------- -----------
Commercial loans 38,289 35,470
Property improvement loans 26,503 28,847
Credit card receivable 17,079 19,729
Guaranteed student loans 306 658
Loans secured by deposits 1,263 1,122
Other loans 2,528 3,022
----------- -----------
85,968 88,848
----------- -----------
Less:
Allowance for loan losses 12,284 6,082
Deferred loan fees 847 350
Net unearned discounts 10 22
Loans in process 5,478 7,663
----------- -----------
18,619 14,117
----------- -----------
$ 480,931 $ 461,648
=========== ===========
</TABLE>
First DeWitt has granted loans to officers, directors, and to
associates. Related party loans are made on substantially the
same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of
collectibilty. The aggregate dollar amount of these loans was
$10.6 million and $4.3 million at September 30,1996 and 1995,
respectively.
The following table presents information concerning loans
accounted for on a nonaccrual basis and loans whose terms have
been restructured to provide a reduction of interest rate charged
to the borrower:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1996 1995
----------------- -----------------
No. Amount No. Amount
(in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans 113 $ 19,859 159 $ 18,503
Current restructured loans 1 1,416 3 3,476
----- ---------- ----- ----------
Total 114 $ 21,275 162 $ 21,979
===== ========== ===== ==========
</TABLE>
There were approximately $2.4 million and $1.1 million in loans
that were 90 days or more past due in principal repayments while
maintaining current interest payments at September 30, 1996 and
1995, respectively. If the total nonaccrual loans had been
current and performing in accordance with their original terms,
total interest income would have been increased by approximately
$1.7 million, $1.5 million, and $899,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.
At September 30,1996, the impaired loan portfolio was primarily
collateral dependent as defined under SFAS 114 and totaled $14.6
million for which general and specific allocations to the
allowance for loan losses of $6.4 million were identified. The
average balance of impaired loans during 1996 was approximately
$12.1 million. The amount of cash basis interest income that was
recognized on impaired loans during 1996 was $407,000.
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------
1996 1995 1994
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of period $ 6,082 $ 6,351 $ 8,111
Adjustment for the pooling of a company
with a different year-end - - 170
Provisions charged to operations 8,900 1,650 1,722
Recoveries 141 72 409
Losses charged against the allowance (2,839) (1,991) (4,061)
---------- --------- ---------
Balance, end of period $ 12,284 $ 6,082 $ 6,351
========== ========= =========
</TABLE>
First DeWitt services real estate loans for investors which are
not included in the accompanying consolidated balance sheets.
The total of such loans serviced amounted to approximately
$166.8 million, $113.4 million, and $115.2 million at
September 30, 1996, 1995, and 1994, respectively. Servicing
income generated from these loans amounted to $562,000, $390,000,
and $351,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
As discussed in note (1), the Corporation prospectively adopted
SFAS 122 on October 1, 1995. The Corporation capitalized
originated mortgage servicing rights of $535,000 during the year
ended September 30, 1996. Amortization of originated mortgage
servicing rights for the year ended September 30, 1996 was
$63,000.
(5) Deposits
Savings deposits are comprised of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
1996 1995
----------------------------- -------------------------------
Rate Amount % Rate Amount %
---------- --------- ------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance by type of account
and interest rate:
Commercial Checking -% $ 23,651 4.27% -% $ 19,563 3.45 %
Personal Checking 2.47 58,776 10.60 2.47 50,075 8.82
Money Market Checking 2.52 19,070 3.44 2.52 21,268 3.75
Money Market Passbook 2.52-4.89 32,426 5.85 2.52-3.93 31,898 5.62
Savings 2.13 97,361 17.56 2.37 108,240 19.06
Club 2.13 2,225 0.40 2.37 2,064 0.36
--------- ------- --------- -------
233,509 42.12 233,108 41.06
--------- ------- --------- -------
Certificates:
Regular 3.40-5.84(a) 279,350 50.40 3.20-5.51 266,754 46.99
Negotiable 4.35-7.68(a) 41,033 7.40 5.50-7.68 67,464 11.88
--------- ------- --------- -------
320,383 57.80 334,218 58.87
--------- ------- --------- -------
Accrued interest payable 428 0.08 384 0.07
--------- ------- --------- -------
$ 554,320 100.00% $ 567,710 100.00%
========= ======= ========= =======
</TABLE>
(a) At September 30,1996, the weighted average interest rates
for regular and negotiable certificates were 5.32% and
5.87%, respectively.
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Amount % Amount %
---------- ------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Contractual maturity of
certificate accounts:
Within one year $ 288,982 90.20% $ 298,070 89.18%
One to two years 14,089 4.40 18,553 5.56
Two to three years 4,702 1.47 5,627 1.68
Three to Five Years 6,111 1.91 4,853 1.45
Over Five Years 6,499 2.02 7,115 2.13
---------- ------- ---------- -------
$ 320,383 100.00% $ 334,218 100.00%
========== ======= ========== =======
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Personal and money market
checking accounts $ 1,877 $ 1,742 $ 1,450
Savings, money market passbook
and certificate accounts. 21,088 18,912 11,637
--------- --------- ---------
$ 22,965 $ 20,654 $ 13,087
========= ========= =========
</TABLE>
(6) Borrowed Money
Notes payable and other borrowings are as follows:
<TABLE>
<CAPTION>
September 30,
Interest --------------------
Due Date Rate 1996 1995
-------------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
FHLB of N.Y. (a)(d) Mar. 3, 2008 6.56% $ 128 $ 130
FHLB of N.Y. (b)(d) Sept. 11, 2006 8.16 200 200
FHLB of N.Y. (b)(d) May 25, 2000 6.63 3,000 3,000
FHLB of N.Y. (b)(d) Jan . 30, 1998 7.97 2,000 2,000
FHLB of N.Y. (c)(d) Demand 6.13 600 -
FHLB of N.Y. (c)(d) Demand 6.63 - 17,775
--------- ---------
$ 5,928 $ 23,105
========= =========
</TABLE>
(a) These borrowings require periodic amortization.
(b) These borrowings do not require periodic amortization.
(c) The Corporation maintains a $63.3 million line of credit.
(d) First DeWitt maintains a blanket collateral agreement with
FHLB for the above borrowings. The amortized cost of
mortgage-backed securities, investments, and mortgage loans
pledged toward this agreement at September 30,1996 was $28.0
million, $8.1 million and $25.5 million, respectively. The
maximum borrowings outstanding cannot exceed 90% of the
amounts pledged.
(7) Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
----------------------
1996 1995
---------- ---------
(in thousands)
At cost:
Land $ 1,584 $ 1,563
Buildings and improvements 9,138 9,076
Furniture, equipment and automobiles 7,888 7,111
---------- ---------
18,610 17,750
Less accumulated depreciation 8,439 7,227
---------- ---------
$ 10,171 $ 10,523
========== =========
(8) Accrued Interest Receivable
A breakdown of accrued interest receivable on assets follows:
September 30,
--------------------
1996 1995
-------- --------
(in thousands)
Mortgage and other loans $ 5,140 $ 5,292
Mortgage-backed securities 212 122
Investments 579 495
-------- --------
5,931 5,909
Reserve for uncollectible interest (1,989) (1,863)
-------- --------
$ 3,942 $ 4,046
======== ========
(9) Other Expenses
Other expenses include the following:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Telephone, postage and supplies $ 687 $ 669 $ 559
Insurance and bond premium 328 457 425
Legal expenses 314 256 215
Branch operations expense 304 276 223
Examination and audit services expense 317 315 445
Other employee expense 217 280 246
Other 684 871 971
-------- -------- --------
$ 2,851 $ 3,124 $ 3,084
======== ======== ========
</TABLE>
(10) Income Taxes
Income tax expense (benefit) is made up of the following
components:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 336 $ 1,575 $ 1,550
State - 147 142
--------- -------- --------
336 1,722 1,692
--------- -------- --------
Deferred federal tax benefit (1,944) (590) (329)
--------- -------- --------
Total income tax expense (benefit) $ (1,608) $ 1,132 $ 1,363
========= ======== ========
</TABLE>
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1996 and 1995 are as follows:
1996 1995
-------- --------
Deferred tax assets:
Allowance for losses on loans
and real estate owned per books $ 3,633 $ 1,850
Loan origination fees deferred
for book purposes 177 126
Accrued SAIF special assessment 1,115 -
Reserve for uncollected interest 426 476
Other, net 344 89
Net operating loss carryforwards 417 564
-------- --------
Total gross deferred tax assets 6,112 3,105
-------- --------
Less valuation allowance 1,106 281
-------- --------
5,006 2,824
-------- --------
Deferred tax liabilities:
Depreciation 867 862
Tax reserve for bad-debt 174 -
-------- --------
Total gross deferred tax liability 1,041 862
-------- --------
$ 3,965 $ 1,962
======== ========
A reconciliation of income tax expense (benefit) per consolidated
financial statements and the "expected" income tax expense
(benefit) follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Expected income tax expense (benefit) $(2,467) $ 1,744
Amortization of excess cost over fair
value of net assets acquired 68 145
State tax, net of Federal benefit - 33
Increase in cash surrender value of
insurance policies (135) (227)
Interest income exclusion (241) (265)
Other, net 342 104
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets allocated
as income tax expense 825 (402)
Income tax expense (benefit) per -------- --------
consolidated financial statements $(1,608) $ 1,132
======== ========
</TABLE>
The valuation allowance for deferred assets as of October 1, 1995
was $281,000. The net change in the total valuation allowance
for the year ended September 30, 1996 was an increase of
$825,000. Included in deferred tax assets "Other, net" is an
asset related to the unrealized loss on securities available for
sale, in the amounts of $89,000 and $30,000 for 1996 and 1995,
respectively.
The Corporation will need to generate future taxable income, in
order to fully realize the deferred tax asset. Management
believes it is more likely than not that the Corporation will
realize the benefit of net deductible temporary differences and
that such net deductible temporary differences will reverse
during periods in which the Corporation generates net taxable
income. The net deferred tax asset is predicated on the
Corporation generating sufficient taxable income to utilize the
deferred tax assets. There can be no assurance, however, that
the Corporation will generate any earnings or any specific level
of continuing earnings.
The Congress in August of 1996, repealed, for tax purposes, the
percentage of taxable income bad debt reserve method. Pursuant
to SFAS 109, retained income at September 30, 1996 includes
approximately $10.0 million for which no provision for income tax
has been made. This amount represents an allocation of income to
bad-debt deductions for tax purposes only. Events that would
result in taxation of these reserves include failure to qualify
as a bank for tax purposes, distributions in complete or partial
liquidation, and excess distributions to shareholders. The
Corporation at September 30, 1996 had an unrecognized deferred
tax liability of $3.6 million with respect to this reserve.
(11) Employee Benefit Plans
The Corporation has a noncontributory defined benefit pension
plan. The plan covers all employees provided they are at least
21 years of age and have worked a minimum of 1000 hours in the
plan year. Benefits are generally based on years of service and
the employee's compensation during the last 5 years of
employment. In 1995, the Bank froze all future benefit accruals
to participants in the pension plan. Accordingly, 1996 net
periodic pension cost and the projected benefit obligation
reflect the effects of the plan curtailment.
The following table sets forth the plan's funded status:
<TABLE>
<CAPTION>
September 30,
-------------------
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Plan assets at fair value, primarily
investment rated bonds and
mortgages with call protection $3,126 $2,337
------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation for service
rendered to date, including vested benefits
of $2,791 and $2,860, respectively 3,066 3,106
Additional future benefits based on estimated
salary levels - 301
------- -------
Projected benefit obligation 3,066 3,407
------- -------
Excess of projected benefit obligation over
plan assets 60 (1,070)
Unrecognized net transition asset being
recognized over 20.5 and 21.5 years, respectively (9) (9)
Unrecognized prior service cost - 843
Unrecognized net gain (398) (37)
Additional minimum balance sheet liability - (496)
------- -------
Accrued pension cost included in other
(assets) liabilities $ (347) $ (769)
======= =======
<CAPTION>
Year ended September 30,
------------------------
1996 1995 1994
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Net periodic pension cost included the
following components:
Service cost-benefits earned during the
period $ - $ 273 $ 265
Interest cost on projected benefit 244 226 202
obligation
Actual return on plan assets (586) (112) (43)
Net amortization and deferral 361 10 (72)
Curtailments loss 542 - -
------ ------ -------
Total net periodic pension cost $ 561 $ 397 $ 352
</TABLE>
Annual pension contributions are made by the Bank in accordance
with the requirements of the Employee Retirement Income Security
Act of 1974. The weighted average discount rate of 7.5% in 1996,
1995 and 1994, and the rate of increase in future compensation
levels of 5.5% in 1995 and 1994 were used in determining the
actuarial present value of benefit obligations. The expected
long-term rate of return on assets was 9.0% for 1996, 1995 and
1994.
First DeWitt has established an Employee Stock Ownership Plan
("ESOP"). This plan covers all employees included in the pension
benefit plan except the President and Chief Executive Officer.
The ESOP, which is a tax-qualified employee benefit plan, became
effective upon conversion. At September 30, 1996, the ESOP held,
in trust, 171,302 shares of the Corporation's common stock.
First DeWitt has established a qualified defined contribution
401(k) Thrift Plan (the Plan) under Section 401(k) of the
Internal Revenue Code. Substantially all employees are eligible
for participation after one year of credited service, as defined,
provided they have attained age 21. Under the Plan, employee
contributions are partially matched by the Corporation. All
employee and employer matching contributions and income thereon
are fully vested at all times. Total 401(k) expense was
$111,000, $82,000 and $75,000 for the years ended September 30,
1996, 1995 and 1994, respectively.
As of October 1, 1994, the Bank adopted deferred compensation
plans for the benefit of certain executive officers. Under the
plans, the Bank agrees (i) in return for the participants
relinquishing the right to a portion of their current
compensation and (ii) as a supplemental retirement benefit, to
pay certain officers retirement benefits in a lump sum or in the
form of monthly payments of up to 240 months. The Bank will
accrue on the books the present value of the benefits, so the
amounts required will be provided at normal retirement dates and
thereafter. Full retirement benefits are immediately payable to
the participant's beneficiary if death of the participant occurs
prior to retirement. The Bank incurred $666,000 and $198,000 of
expense relating to these plans during the years ended September
30, 1996 and 1995, respectively.
In conjunction with the formation of these plans, the Bank
purchased life insurance on the participants. The cash surrender
value of that insurance was approximately $12.0 million and $11.6
million at September 30, 1996 and 1995, respectively.
(12) Commitments and Contingencies
Certain bank facilities are occupied under non-cancelable long
term operating leases which expire at various dates through 2007.
Certain lease agreements provide for renewal options and
increases in rental payments based upon increases in the consumer
price index. Minimum aggregate lease payments for the remainder
of the lease terms are as follows:
September 30, (in thousands)
------------- --------------
1997 $ 253
1998 246
1999 247
2000 258
2001 163
Thereafter 465
--------------
Total lease commitments $ 1,632
==============
Net premises and occupancy expenses for 1996, 1995, and 1994
includes approximately $239,800, $137,000 and $148,200,
respectively, of rental expenses for bank facilities. In the
ordinary course of business, to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in
interest rates, the Bank is a party to various financial
instruments which are not reflected in the consolidated financial
statements. These instruments consist of commitments to extend
credit and unused lines of credit available under consumer loan
credit lines and involve elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated
financial statements. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary upon extension of credit, is based upon
management's credit evaluation of the counterparty. Loan
commitments outstanding at September 30, 1996 and 1995 totaled
$9.9 million and $17.3 million, respectively. The loan
commitments outstanding at September 30, 1996 consist of variable
rate commitments approximating $6.7 million and fixed rate
commitments approximating $3.2 million. The later commitments
had rates primarily from 6.63% to 8.75%. Unused line of credit
available under credit lines aggregated $28.8 million and $34.6
million at September 30, 1996 and 1995. These off-balance sheet
commitments generally have fixed expiration dates or other
termination clauses.
In addition, the Bank had commitments to sell mortgage loans
outstanding at September 30, 1996 totaling $4.8 million with
interest rates ranging from 6.50% to 8.75%. At September 30,
1995, there were similar commitments to sell mortgage loans
outstanding totaling $34.7 million.
The Bank grants residential, consumer, construction and
commercial loans secured generally by real estate to customers
located primarily in New Jersey. Accordingly, as with most
financial institutions in the market area, the ultimate
collectability of a substantial portion of the loan portfolio and
recoverability of in-substance foreclosed loans and real estate
acquired by foreclosure are susceptible to changes in market
conditions.
In the normal course of business, First State may be party to
various outstanding legal proceedings and claims. In the opinion
of management, the disposition of such legal proceedings and
claims will not materially affect First State's consolidated
financial statements.
(13) Selected Quarterly Financial Data (unaudited)
Quarterly results from 1996 and 1995 are shown below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996
----------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income 11,844 11,601 13,050 12,744
Net interest income 5,905 5,880 6,928 6,472
Provisions for loan losses 300 900 4,400 3,300
Income (loss) before income taxes 2,263 439 (3,503) (6,456)
Net income (loss) 1,505 308 (2,809) (4,653)
Net income (loss) per share 0.36 0.08 (0.69) (1.15)
<CAPTION>
1995
----------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income 10,151 10,907 11,450 11,841
Net interest income 5,569 5,669 5,724 5,622
Provisions for loan losses 200 300 600 550
Income before income taxes 1,476 1,487 1,332 835
Net income 961 988 958 1,091
Net income per share 0.25 0.25 0.24 0.27
</TABLE>
(14) Stock Option Plans
The Corporation has various stock option plans which have been
approved by the Corporation's stockholders. The table below
details their status at September 30, 1996.
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK AWARDS
------------------------------------- ---------------
Total Wht. Total
Shares Avg. Options Shares
Plan Outstanding Issued Vested Price Exercised Issued Vested Unissued
- ----------------------- ------------- -------- ------- ------- --------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The 1987 Plan 190,700(a) 190,700 190,700 $ 5.50 44,250 N/A N/A -
The 1993 Directors Plan 50,800 50,800 12,700 $ 6.98 12,700 - - -
The 1993 Plan:
1995 Distribution 254,000 48,700 19,480 $ 7.25 - 11,700 4,680
1996 Distribution 75,600 15,120 $ 13.25 - 17,100 3,420 95,500
(a) Options that have expired under this plan total 82,550.
</TABLE>
On October 14, 1994, Ocean Independent Bank issued shares under
an existing stock option plan that converted to 15,443 shares of
First State common stock.
(15) Condensed Financial Information of Parent Company
<TABLE>
<CAPTION>
September 30,
---------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Balance Sheets
Assets
Cash $ 59 $ 220
Investments securities available for sale 1,007 964
Investment securities - 410
Loans receivable 207 217
Investments in subsidiaries 33,965 39,779
Other assets - 2
--------- ---------
Total assets $ 35,238 $ 41,592
========= =========
Liabilities and Stockholders' equity
Other liabilities 2 -
Stockholders' equity 35,236 41,592
--------- ---------
Total stockholders' equity $ 35,238 $ 41,592
========= =========
<CAPTION>
Years ended September 30,
-----------------------------
1996 1995 1994
--------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Statement of Operations:
Dividends from subsidiary $ - $ 1,000 $ 1,250
Other income 76 76 31
--------- -------- --------
Total income 76 1,076 1,281
Operating expenses 109 276 274
Income (loss) before income taxes and
equity in undistributed earnings of
subsidiaries (33) 800 1,007
Income tax benefit (58) (384) -
--------- -------- --------
Income before equity in undistributed
earnings of subsidiaries 25 1,184 1,007
Equity in undistributed earnings (losses)
of subsidiaries (5,674) 2,814 2,494
--------- -------- --------
Net income (loss) $ (5,649) $ 3,998 $ 3,501
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Statement of Cash Flows:
Operating activities:
Net income (loss) $ (5,649) $ 3,998 $ 3,501
Net accretion of investment discount - (29) -
Provision for losses on loans - 50 -
Decrease in other assets 2 218 100
Increase in other liabilities 2 - -
--------- -------- --------
Net cash (used) provided by operating activities (5,645) 4,237 3,601
--------- -------- --------
Investing activities:
Decrease (increase) in investment in subsidiaries 5,675 (2,845) (2,417)
Proceeds from loan repayments 10 8 20
Origination of loans receivable - (44) (154)
Purchase of investment securities available for sale (473) (454) (510)
Purchase of investment securities - (1,097) -
Proceeds from sale of investment securities available
for sale 430 - -
Proceeds from maturities of investment securities 410 716 -
--------- -------- --------
Net cash provided (used) by investing activities 6,052 (3,716) (3,061)
--------- -------- --------
Financing activities:
Dividends paid on common stock (861) (758) (476)
Common stock issued 293 190 -
--------- -------- --------
Net cash used by financing activities (568) (568) (476)
--------- -------- --------
(Decrease) increase in cash (161) (47) 64
Cash at beginning of year 220 267 203
--------- -------- --------
cash at end of year $ 59 $ 220 $ 267
========= ======== ========
NON-CASH TRANSFERS:
Release of Employee Stock Ownership Plan stock $ - $ - $ 1,159
Cancellation of common shares in conjunction with
merger $ - $ - $ 109
</TABLE>
(16) Stockholders' Equity and Regulatory Matters
Subject to applicable law, the Board of Directors of the Bank and
of the Corporation may each provide for the payment of dividends.
Future declaration of cash dividends by First State will depend
upon dividend payments by the Bank to the Corporation, which is
its primary source of income. Under Office of Thrift Supervision
("OTS") regulations, if the Bank satisfies all applicable capital
requirements, the Bank is permitted to pay cash dividends during
a calendar year in an amount equal to 100% of its net income to
date during that calendar year plus 50% of the amount by which
its capital exceeds its capital requirements at the beginning of
the year. The Bank is required to give 30 days' prior notice to
the OTS of the intention to pay a dividend, and the OTS may
prohibit the payment of the dividend.
Earnings allocated to bad debt reserves for losses and deducted
for federal income tax purposes are not available for dividends
or other distributions with respect to the Bank's capital stock
without the payment of tax at the then current income tax rate on
approximately 150% of the amount so used, assuming a 34%
corporate income tax rate.
At the time of conversion from mutual to stock form, a
liquidation account was established in an amount equal to the
Bank's retained income at December 31, 1986. The liquidation
account was established for the benefit of eligible account
holders who continue to maintain their accounts at First DeWitt
after conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced
their eligible deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each eligible account
holder will be entitled to receive a distribution from the
liquidation account in a proportionate amount to the current
adjusted eligible account balances then held. The balance of the
liquidation account at September 30, 1996 was $69,000 ($1.7
million at September 30,1995).
OTS regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
September 30, 1996, the Bank was required to maintain a minimum
ratio of tangible capital to total adjusted assets of 1.5%; a
minimum ratio of Tier 1 (core) capital to total adjusted assets
of 3.0%; and a minimum ratio of total (core and supplementary)
capital to risk- weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is
required to take certain supervisory actions (and may take
additional discretionary actions) with respect to an
undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The
regulations establish a framework for the classification of
savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution is considered adequately capitalized if it has a Tier
1 (core) capital ratio of at least 3.0%; a Tier 1 risk-based
capital ratio of at least 4.0%; and a total risk- based capital
ratio of at least 8.0%. Under the framework, the Bank's capital
levels do not allow the Bank to accept brokered deposits without
prior approval from regulators.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject
to qualitative judgments by the OTS about capital components,
risk weightings, and other factors.
Management believes that, as of September 30, 1996, the Bank
meets all capital adequacy requirements to which it is subject.
The following is a summary of the Bank's actual capital amounts
and ratios as of September 30, 1996 and 1995, compared to the OTS
minimum capital adequacy requirements and the OTS requirements
for classification as a well-capitalized institution.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
Minimum Corrective
Capital Action
Actual Requirements Provisions:
-------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ------ ------ -------
( in thousands )
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Tangible Capital 31,954 5.24% 9,143 1.50% 9,143 1.50%
Core Capital 31,954 5.24% 18,285 3.00% 30,474 5.00%
Tier 1 Risk-Based Capital 31,954 8.14% 15,710 4.00% 23,565 6.00%
Risk-Based Capital 36,921 9.40% 31,419 8.00% 39,274 10.00%
As of September 30, 1995:
Tangible Capital 37,404 5.87% 9,563 1.50% 9,563 1.50%
Core Capital 37,404 5.87% 19,126 3.00% 31,877 5.00%
Tier 1 Risk-Based Capital 37,404 9.27% 16,137 4.00% 24,205 6.00%
Risk-Based Capital 42,448 10.52% 32,273 8.00% 40,341 10.00%
</TABLE>
SAIF Special Assessment
The Deposit Insurance Funds Act of 1996 (the "Act") was signed
into law on September 30, 1996. Among other things, the Act
requires depository institutions to pay a one-time special
assessment of 65.7 basis points on their SAIF-assessable
deposits, in order to recapitalize the SAIF to the reserve level
required by law. The Corporation's financial statements for the
year ended September 30, 1996 reflect a separate charge of $3.1
million this special assessment.
(17) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" (Statement 107),
requires disclosure of estimated fair value for financial
instruments. Fair value estimates, methods and assumption are
set forth below for the Bank's financial instruments for which it
is practical to estimate those values.
Cash on hand and in banks
For cash on hand and in banks the carrying amount approximates
fair value.
Investments Available for Sale, Investments and Mortgage-backed
Securities
The fair value of investments available for sale, investments and
mortgage-backed securities, were based on quoted market prices or
dealer quotes, if available. If a quoted market price or dealer
quote was not available, fair value was estimated using quoted
market prices of similar securities.
Stock in Federal Home Loan Bank of New York
The fair value for FHLB stock is its carrying value, since this
is the amount for which it could be redeemed. There is no active
market for this stock and the Bank is required to maintain a
minimum balance based upon the unpaid principal of home mortgage
loans and similar obligations.
Loans, Receivable
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans were segregated by type. Each
loan category was further segmented into fixed and adjustable
rate interest terms.
The fair value of loans is estimated by discounting the future
cash flows and prepayments using the current rates at which
similar loans would be made to borrowers with similar credit
ratings and for the same remaining terms.
Cash surrender value of life insurance
The fair value of the cash surrender value of life insurance is
the approximate cash value at September 30, 1996 and 1995.
Deposit Liabilities
The fair value of deposits with no stated maturity, such as
passbook, NOW, money market and commercial deposit accounts, is
equal to the amount payable on demand as of September 30,1996 and
1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of
similar remaining maturities.
Borrowed Money
The fair value of borrowed money is the carrying value for
short-term obligations while long-term borrowing fair values are
estimated using rates available on borrowings with similar terms
and maturities.
The estimated fair values of the Bank's financial instruments as
of September 30, 1996 and 1995 are presented in the following
table. Since the fair value of off-balance-sheet commitments
approximates book value, these disclosures are not included.
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash on hand and in banks $ 12,395 $ 12,395 $ 11,792 $ 11,792
Investment securities 24,643 24,355 20,889 20,657
Investment securities,available for sale 9,466 9,466 11,799 11,799
Mortgage-backed securities 31,024 30,560 18,961 19,002
Federal Home Loan Bank of New York stock 3,404 3,404 3,715 3,715
Loans receivable, net 480,931 486,529 461,648 465,742
Mortgage loans held for resale 9,106 9,106 67,219 67,642
Cash surrender value of life insurance 11,978 11,978 11,582 11,582
--------- --------- --------- ---------
Financial liabilities:
Deposits $554,320 $553,205 $567,710 $567,126
Borrowed money 5,928 5,997 23,105 23,159
--------- --------- --------- ---------
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
the Bank's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and
liabilities that are not considered financial instruments. The
tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
(18) Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). This statement
establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS 123 encourages all
entities to adopt the "fair value base method" of accounting for
employee stock compensation plans. However, SFAS 123 also allows
an entity to continue to measure compensation cost under such
plans using the "intrinsic value based method." Under the fair
value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the
service period, usually the vesting period. Fair value is
determined using an option pricing model that takes into account
the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying
stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option. Under the
intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to
acquire the stock. Most stock plans have no intrinsic value at
date of grant, and under previous accounting guidance, no
compensation cost was to be recognized.
The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after
December 15, 1995. The Bank intends to continue accounting for
compensation costs under the intrinsic value based method and
will provide pro forma disclosures for all awards granted after
October 1, 1995. Such disclosures include net income and
earnings per share after the fair value based method of
accounting has been applied.
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125 "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). SFAS 125 amends
portions of SFAS 115, and extends to all servicing assets and
liabilities, the accounting standards for mortgage servicing
rights now governed by SFAS 65, and SFAS 122. The statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. Those standards are based upon consistent application
of a financial components approach that focuses on control. The
statement also defines accounting treatment for servicing assets
and other retained interests in the assets that are transferred.
SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. The Bank
does not expect the adoption of SFAS 125 to have material effect
on its future financial position or results of operations.
FIRST STATE FINANCIAL SERVICES, INC.
Stockholder Information
Executive Offices
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
Market Information for Common Stock
The common stock is traded over-the-counter and is quoted on
NASDAQ National Market System under the symbol "FSFI." At
October 29, 1996 there were 1,073 holders of record of First
State's common stock, as reported on the NASDAQ National Market
System, as well as information regarding dividends declared
during such periods.
Fiscal 1996 High Low
Quarter ended September 30, 1996 $ 13.375 $ 12.500
Quarter ended June 30, 1996 13.625 10.000
Quarter ended March 31, 1996 13.375 11.750
Quarter ended December 31, 1995 14.375 12.875
Fiscal 1995 High Low
Quarter ended September 30, 1995 $ 13.250 $ 12.125
Quarter ended June 30, 1995 12.250 9.250
Quarter ended March 31, 1995 9.500 6.750
Quarter ended December 31, 1994 8.750 6.625
Stockholder Relations
Stockholders are encouraged to contact the Secretary with
any questions or comments about their investments. A copy of
the Annual Report or Form 10-K for the year ended September 1996,
as filed with the Securities and Exchange Commission, will be
furnished without charge to stockholders as of the record date
upon written request to the Secretary.
Direct Inquiries to:
Marie G. Martino, Secretary
First State Financial Services, Inc.
1120 Bloomfield Avenue, CN 2449
West Caldwell, New Jersey 07007-2449
(201) 575-5800
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Independent Auditors
KPMG Pet Marwick LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Attorneys
Gaccione, Pomaco and Beck Luse Lehman Gorman Pomerenk &
523 Union Avenue Schick
Belleville, New Jersey 07109 5335 Wisconsin Avenue, N.W.
Washington, DC 20015
Officers and Directors
OFFICERS-FIRST STATE FINANCIAL SERVICES, INC
Michael J. Quigley, III John M. Fields, Jr.
Chairman, President, and Vice President
Chief Executive Officer
Emil J. Butchko John H. Isemann
Vice President and Vice President
Treasurer
Marie G. Martino John A. Rogers
Secretary Vice President
DIRECTORS-FIRST STATE FINANCIAL SERVICES, INC.
Henry F. Albinson Walter J. Davis
Attorney, Bloomfield Retired: Former
Government Relations
Manager, AT&T
Frank H. Bridge Marie G. Martino
President, F.H. Bridge & Secretary, First State
Associates Financial Services, Inc.
Vice President and
Secretary, First DeWitt
Bank
June D. Castano
Writer/Editor-International Michael J. Quigley, III
Renew Chairman, President, and
Chief Executive Officer
Patrick N. Ciccone, M.D.
Physician Ralph M. Riefolo
President, Riefolo
Theodore F. Cox Construction Co.
Retired: Former President of
Grove Garden Center, Inc.
OFFICERS-FIRST DeWITT BANK
Michael J. Quigley, III John M. Fields, Jr.
Chairman of the Board, Vice President and
President and Chief Controller
Executive Officer
John H. Isemann
Emil J. Butchko Vice President, Mortgage
Senior Vice President and Loan Officer
Treasurer
Richard O. Lindsey
John A. Rogers Vice President,
Senior Vice President Commercial Loan
Officer
Robert H. Blum Marie G. Martino
Vice President, Consumer Vice President and
Loan Officer Secretary
Joseph J. Burghardt Henrik Tvedt, Jr.
Vice President, Commercial Vice President
Commercial Mortgage Officer
Alan M. Chadrijian
Vice President, Commercial Loan
Officer
DIRECTOR-FIRST DeWITT BANK
Henry F. Albinson Walter J. Davis
Attorney, Bloomfield Retired: Former
Government
Relations Manager, AT&T
Frank H. Bridge Terence J. Gunning
President, F.H. Bridge & Chief Operating Officer,
Associates Accudart
June D. Castano Michael J. Quigley, III
Writer/Editor, International Chairman, President, and
Renew Chief Executive Officer
Executive Officer
Patrick N. Ciccone, M.D. Ralph M. Riefolo
Physician President, Riefolo
Construction Co.
Theodore F. Cox Jerold L. Zaro, Esq.
Retired: Former President Partner and President,
of Cedar Grove Garden Ansell Zaro Bennett &
Center, Inc. Grimm
Gary J. Davis
Managing Partner, McQueeny,
Davis, Kohm & Partners, Inc.
Branch Location Guide
Number for all offices:
1-800-537-0079
BANKING OFFICES:
Essex County Morris County
463 Washington Avenue 1980 Route 10 West
Belleville, NJ 07109 Morris Plains, NJ 07950
667 Bloomfield Avenue
Bloomfield, NJ 07003
60 Belleville Avenue Ocean County
Bloomfield, NJ 07003
2518 Old Hooper Avenue
1072 Broad Street Brick, NJ 08723
Bloomfield, NJ 07003
1161 Burnt Tavern Road
532 Pompton Avenue Brick, NJ 08724
Cedar Grove, NJ 07009
730 Jamaica Boulevard
1120 Bloomfield Avenue, Toms River, NJ 08757
CN 2449
West Caldwell, NJ 07007-2449
Monmouth County Sussex County
4 Main Street 110 River Styx Road
English, N.J. 07726 Hopatcong, NJ 07843
901 West Park Avenue
Ocean, NJ 07712
2500 Belmar Boulevard
Wall, NJ 07719
All of our offices are a part of
the MAC 24-hour banking network.
