Proxy Statement/Prospectus
ML BANCORP, INC.
Up to 766,000 Shares of Common Stock, $0.01 par value
Issuable in proposed merger with
PENNCORE FINANCIAL SERVICES CORPORATION
This Proxy Statement/Prospectus is being furnished to the holders of
Common Stock, par value $5.00 per share ("Penncore Common Stock"), of Penncore
Financial Services Corporation ("Penncore") in connection with the solicitation
of proxies by its Board of Directors for use at the Annual Meeting of
Shareholders of Penncore (the "Annual Meeting") to be held on July 17, 1997. The
purpose of the Annual Meeting is to vote upon the election of one Class A
Director to the Board of Directors of Penncore, to consider and vote upon a
proposed merger (the "Merger") of Penncore into ML Bancorp, Inc. ("Bancorp"), to
ratify the selection of KPMG Peat Marwick LLP, certified public accountants, as
the independent auditors for Penncore for the fiscal year ending December 31,
1997, to vote on the adjournment of the Annual Meeting (if necessary), and to
transact such other business as may properly come before the Annual Meeting or
any adjournment(s) thereof. As a result of the Merger, Bancorp, which will be
the surviving corporation, will acquire all of the assets and liabilities of
Penncore, and each share of Penncore Common Stock will be converted into: (i)
the right to receive $36.56 cash without interest; (ii) the right to receive the
Exchange Ratio of 2.50 shares of Common Stock of Bancorp, par value $0.01 per
share ("Bancorp Common Stock"); or (iii) the right to receive a combination of
cash and shares of Bancorp Common Stock as determined by the allocation
procedures described herein. On February 3, 1997, the last trading day before
the public announcement of the proposed Merger, the closing price for Bancorp
Common Stock on the NASDAQ National Market System ("NASDAQ") was $14.625 per
share. Penncore shareholders should note that the market value of Bancorp Common
Stock may change prior to consummation of the Merger and that an increase or
decrease in the price of the Bancorp Common Stock prior to the consummation of
the Merger may cause the Exchange Ratio to be adjusted as described herein. The
approximate date on which this Proxy Statement/Prospectus will first be mailed
to the shareholders of Penncore is May 20, 1997.
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THE SHARES OF BANCORP COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OF
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF BANCORP 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.
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No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, any such information or representation should not be relied upon as
having been authorized by Bancorp or Penncore. This Proxy Statement/Prospectus
does not constitute an offer or solicitation by any person in any State in which
such offer or solicitation is not authorized by the laws thereof or in which the
person making such offer or solicitation is not qualified to make the same.
Neither the delivery of this Proxy Statement/Prospectus at any time nor the
distribution of Bancorp Common Stock hereunder shall imply that the information
contained herein is correct as of any time subsequent to the date of this Proxy
Statement/Prospectus.
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The date of this Proxy Statement/Prospectus is May 13, 1997.
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AVAILABLE INFORMATION
Bancorp has filed with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933 (the "Securities Act") a Registration
Statement on Form S-4 (the "Registration Statement") covering the shares of
Bancorp Common Stock issuable in the Merger. As permitted by the rules and
regulations of the SEC, this Proxy Statement/Prospectus omits certain
information, exhibits and undertakings contained in the Registration Statement.
The statements contained in this Proxy Statement/Prospectus as to the contents
of any contract or other document filed as an exhibit to the Registration
Statement are of necessity brief descriptions and are not necessarily complete.
Each such statement is qualified in its entirety by reference to the copy of
such contract or document filed as an exhibit to the Registration Statement. The
Registration Statement and the exhibits thereto can be inspected at the public
reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C., and copies of such material can be obtained at prescribed
rates by mail addressed to the SEC, Public Reference Section, Washington, D.C.
20549.
Bancorp is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C.; Suite 1400, 500 West Madison Street, Chicago, Illinois; and
Room 1228, 75 Park Place, New York, New York. Copies of such material can also
be obtained at prescribed rates by mail addressed to the SEC, Public Reference
Section, Washington, D.C. 20549. In addition, Bancorp files such material
electronically with the SEC. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC. The address of the SEC Web site is
http://www.sec.gov. Bancorp Common Stock is quoted on the NASDAQ National Market
System under the symbol "MLBC," and such Bancorp reports and proxy statements
and other Bancorp information can also be inspected at the offices of NASDAQ
Operations, 1735 K Street, N.W., Washington, D.C.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC by Bancorp (File No.
0-24358) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Bancorp's Annual Report on Form 10-K for the year ended March 31,
1996.
2. Bancorp's Quarterly Reports on Form 10-Q for the three months ended
June 30, September 30 and December 31, 1996.
3. Bancorp's Current Reports on Form 8-K dated March 3, 1997 and March
10, 1997.
All documents and reports filed by Bancorp pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Annual Meeting of Penncore
shareholders 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 in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement/Prospectus.
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A copy of Bancorp's quarterly report for the period ending December 31,
1996 on Form 10-Q (not including exhibits thereto) is being furnished to each
person who receives this Proxy Statement/Prospectus.
All information contained in this Proxy Statement/Prospectus with
respect to Bancorp was supplied by Bancorp and all information with respect to
Penncore was supplied by Penncore.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. ML BANCORP, INC. WILL
PROVIDE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST OF ANY PERSON TO WHOM THIS
PROXY STATEMENT/PROSPECTUS IS DELIVERED, A COPY OF ANY AND ALL DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY
REFERENCE HEREIN. SUCH REQUESTS SHOULD BE DIRECTED TO SHAREHOLDER RELATIONS, ML
BANCORP, INC., TWO ALDWYN CENTER, ROUTE 32 AND LANCASTER AVENUE, VILLANOVA,
PENNSYLVANIA 19085, TELEPHONE: (610)526-6482. IN ORDER TO INSURE TIMELY DELIVERY
OF SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JULY 10, 1997.
This Proxy Statement/Prospectus does not constitute a prospectus for
the public reoffering of Bancorp Common Stock.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
AVAILABLE INFORMATION.............................................................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................2
SUMMARY...........................................................................................................7
The Parties..............................................................................................7
The Penncore Annual Meeting..............................................................................7
Election of Class A Director, Ratification of Independent Auditors
and Adjournment of Annual Meeting.....................................................................8
The Merger...............................................................................................8
Bancorp Selected Consolidated Financial Data............................................................13
Comparative Per Share Data..............................................................................15
Penncore Selected Consolidated Financial Data...........................................................15
Market Value Information................................................................................15
INTRODUCTION.....................................................................................................16
Purpose of the Annual Meeting...........................................................................16
Principal Terms of the Merger...........................................................................17
Record Date; Voting Rights..............................................................................18
Voting and Revocation of Proxies........................................................................18
Solicitation of Proxies.................................................................................18
Forms of Election Concerning Compensation to Be Received in the Merger..................................19
Rights of Dissenting Shareholders.......................................................................19
Voting Agreements.......................................................................................19
ITEM 1: ELECTION OF CLASS A DIRECTOR............................................................................20
ITEM 2: APPROVAL OF AGREEMENT AND PLAN OF MERGER................................................................20
The Merger..............................................................................................20
Background and Reasons for the Merger...................................................................21
Required Vote; Recommendations..........................................................................23
Voting Agreements.......................................................................................23
Opinion of Penncore Financial Advisor...................................................................24
Conversion of Penncore Common Stock.....................................................................26
Shareholder Election Procedures.........................................................................27
Allocation Procedures...................................................................................28
Exchange of Stock Certificates..........................................................................30
Stock Purchase Warrants and Phantom Shares..............................................................31
Certain Federal Income Tax Consequences.................................................................32
Interests of Certain Persons in the Transaction.........................................................34
Stock Option Agreement..................................................................................36
Conduct of Penncore Business Pending the Merger.........................................................37
Conditions to the Merger................................................................................38
Representations and Warranties..........................................................................38
Termination, Amendment and Waiver.......................................................................38
Rights of Dissenting Shareholders.......................................................................39
Restrictions on Resales by Penncore Affiliates..........................................................41
Expenses................................................................................................42
Effective Time of the Merger............................................................................42
Accounting Treatment....................................................................................42
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Indemnification of Directors and Officers of Penncore and
Commonwealth State Bank by Bancorp...................................................................42
Listing on NASDAQ Stock Market..........................................................................43
Advisory Board; Commonwealth State Bank.................................................................43
COMPARISON OF BANCORP COMMON STOCK AND PENNCORE COMMON STOCK.....................................................43
General.................................................................................................43
Voting Rights...........................................................................................43
Board of Directors......................................................................................44
Amendment of Articles and By-Laws.......................................................................45
Restrictions on Offers and Acquisitions of Bancorp's Equity Securities..................................46
Pennsylvania Business Corporation Law...................................................................46
Dissenters' Rights......................................................................................47
Preferred Stock.........................................................................................48
Dividend Rights.........................................................................................48
Liquidation Rights......................................................................................48
Miscellaneous...........................................................................................48
DESCRIPTION OF BANCORP...........................................................................................48
BANCORP MARKET PRICES AND DIVIDENDS..............................................................................50
DESCRIPTION OF PENNCORE..........................................................................................51
Business................................................................................................51
Competition.............................................................................................51
Supervision and Regulation..............................................................................51
Effect of Government Monetary Policies..................................................................52
Legislation and Regulatory Changes......................................................................53
Legal Proceedings.......................................................................................53
Environmental Issues....................................................................................53
Regulatory Capital Requirements.........................................................................53
PENNCORE MARKET PRICES AND DIVIDENDS.............................................................................54
Penncore Common Stock Prices and Common Stock Dividends.................................................54
Dividend Restrictions on Commonwealth State Bank........................................................55
PENNCORE SELECTED CONSOLIDATED FINANCIAL DATA....................................................................56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PENNCORE...............................................................57
Results of Operations...................................................................................57
Effects of Inflation and Changing Prices................................................................63
Financial Condition.....................................................................................63
Recently Issued Accounting Pronouncements...............................................................71
PRINCIPAL BENEFICIAL SHAREHOLDERS OF PENNCORE....................................................................72
INFORMATION CONCERNING PENNCORE DIRECTORS, OFFICERS
AND NOMINEE...................................................................................................73
Beneficial Ownership by Officers, Directors and Nominee.................................................74
Compensation of Officers................................................................................75
Profit Sharing Plan.....................................................................................75
Employment Agreements...................................................................................76
Stock Purchase Warrants.................................................................................79
Phantom Stock Plan......................................................................................79
Certain Transactions....................................................................................79
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ITEM 3: RATIFICATION OF INDEPENDENT AUDITORS....................................................................80
ITEM 4: ADJOURNMENT OF ANNUAL MEETING...........................................................................80
SHAREHOLDER PROPOSALS............................................................................................81
LEGAL OPINIONS...................................................................................................81
EXPERTS..........................................................................................................81
OTHER MATTERS....................................................................................................81
ANNEX F: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PENNCORE
FINANCIAL SERVICES CORPORATION AND SUBSIDIARY........................................... F-1
ANNEX A: AGREEMENT AND PLAN OF MERGER..................................................................... A-1
ANNEX B: STOCK OPTION AGREEMENT........................................................................... B-1
ANNEX C: OPINION OF DANIELSON ASSOCIATES, INC............................................................. C-1
ANNEX D: PENNSYLVANIA STATUTORY PROVISIONS FOR RIGHTS
OF DISSENTING SHAREHOLDERS.............................................................. D-1
</TABLE>
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SUMMARY
The following is a brief summary of certain information which may also be
contained elsewhere in this Proxy Statement/Prospectus. This summary is provided
for convenience and should not be considered complete. It is qualified in its
entirety by the more detailed information contained in this Proxy
Statement/Prospectus, in the financial information incorporated by reference
herein, and in the Annexes hereto.
The Parties
ML Bancorp, Inc. ("Bancorp"), a Pennsylvania business corporation, is a
unitary savings and loan holding company with its principal executive offices at
Two Aldwyn Center, Villanova, Pennsylvania 19085 (telephone: 610-526-6460). Its
subsidiary is Main Line Bank, a federally-chartered savings bank, which has 24
business centers located in Bucks, Chester, Delaware and Montgomery Counties,
Pennsylvania and 9 mortgage loan production offices located in Eastern
Pennsylvania, Southern New Jersey, Northern Delaware and Florida.
Through its community offices, Main Line Bank provides a wide range of
financial products and services, including traditional depository and lending
services to consumers, businesses, and governmental units. Main Line Bank's
primary market area consists of the greater Philadelphia metropolitan region.
Its mortgage banking and commercial real estate departments lend to borrowers
located outside of this area, but within approximately 100 miles of Bancorp's
headquarters. For further information on Bancorp, see the caption entitled:
"DESCRIPTION OF BANCORP."
Bancorp Common Stock is traded in the over-the-counter market under the
symbol "MLBC" and is listed on the NASDAQ National Market System. On May 15,
1997, the last reported sale price for Bancorp Common Stock was $15.875 per
share.
At December 31, 1996, Bancorp had consolidated total assets of $1.875
billion, customer accounts of $875.4 million and net loans of $721.4 million.
Bancorp reported net income of $11.6 million, or $0.91 per share, for the year
ended March 31, 1996 and net income of $10.4 million, or $0.91 per share, for
the nine months ended December 31, 1996.
Penncore Financial Services Corporation ("Penncore"), a Pennsylvania
business corporation, is a bank holding company with its principal executive
offices at 3 Friends Lane, Newtown, Pennsylvania 18940 (telephone:
215-860-4200). Its subsidiary is Commonwealth State Bank, which has two banking
offices in Lower Bucks County, Pennsylvania. Commonwealth State Bank offers
traditional depository and lending services to consumers, businesses and
governmental units which are located primarily in Bucks County, Pennsylvania and
Mercer County, New Jersey. For further information on Penncore, see the caption
entitled: "DESCRIPTION OF PENNCORE."
At December 31, 1996, Penncore had total assets of $138 million, deposits
of $95 million and net loans of $77 million. Penncore reported net income of
$675 thousand, or $1.74 per share (primary), for the year ended December 31,
1996.
The Penncore Annual Meeting
The Annual Meeting of Shareholders of Penncore (the "Annual Meeting") will
be held at 9:00 a.m. (local time), on July 17, 1997 at the principal office of
Commonwealth State Bank, 3 Friends Lane, Newtown, Pennsylvania. Only holders of
record of Common Stock, par value $5.00 per share, of Penncore ("Penncore Common
Stock") at the close of business on May 16, 1997 will be entitled to notice of
and to vote at the Annual Meeting. At that date, 398,868 shares of Penncore
Common Stock were outstanding, each share being entitled to one vote. See
"INTRODUCTION."
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Election of Class A Director, Ratification of Independent Auditors and
Adjournment of Annual Meeting
At the Annual Meeting, the first item that shareholders of Penncore will be
asked to vote upon is the election of one Class A Director to the Board of
Directors of Penncore. The Director will be elected by a majority of the votes
cast at the Annual Meeting. The nominee will be elected to serve for a
three-year term and until his successor is elected and qualified. If, however,
the Merger (as discussed below) is consummated, the nominee's service will end
at the Effective Time of the Merger. See "ITEM 1: ELECTION OF CLASS A DIRECTOR"
and "INFORMATION CONCERNING PENNCORE DIRECTORS, OFFICERS AND NOMINEE."
The third item that shareholders of Penncore will be asked to vote upon is
the ratification of KPMG Peat Marwick LLP ("KPMG") as Penncore's independent
public accountants for the fiscal year ending December 31, 1997. Such
ratification requires the affirmative vote of a majority of the votes cast at
the Annual Meeting. See "ITEM 3: RATIFICATION OF INDEPENDENT AUDITORS."
The fourth item shareholders of Penncore will be asked to vote upon is the
adjournment of the Annual Meeting, if necessary, to permit further solicitation
of Proxies in the event there are not sufficient votes at the time of the Annual
Meeting to constitute a quorum or to approve the Merger Agreement. Such vote on
adjournment requires the affirmative vote of a majority of the votes cast at the
Annual Meeting. See "ITEM 4:
ADJOURNMENT OF ANNUAL MEETING."
The Merger
At the Annual Meeting, the second item shareholders of Penncore will be
asked to vote upon, is the approval of an Agreement and Plan of Merger (the
"Merger Agreement") between Bancorp and Penncore. The Merger Agreement provides
for the merger of Penncore with and into Bancorp (the "Merger"). As a result of
the Merger, Bancorp will acquire all of the assets and liabilities of Penncore,
and Penncore will cease to exist as a separate corporation. It is contemplated
that simultaneously with or immediately following the Merger, Commonwealth State
Bank will be merged with and into Main Line Bank (the "Bank Merger"), but will
be operated under the title: "Commonwealth State Bank, a division of Main Line
Bank." See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--The Merger."
At the Effective Time of the Merger, shareholders of Penncore will receive
in exchange for their shares cash, shares of Bancorp Common Stock, or a
combination of cash and shares of Bancorp Common Stock, depending upon the
outcome of the shareholder elections, as described herein. Each share of
Penncore Common Stock will be exchanged for cash in the amount of $36.56 without
interest, 2.50 shares of Bancorp Common Stock (the "Exchange Ratio"), or a
combination of these two forms of consideration in accordance with the
allocation procedures described herein. The Exchange Ratio will be reduced if
the Average Price of Bancorp Common Stock is higher than $16.75, and may be
increased if such price is less than $12.50, prior to the Effective Time of the
Merger as described herein.
Not more than 49% nor less than 30% of the outstanding shares of Penncore
Common Stock will be exchanged for cash.
Penncore shareholders are requested to deliver with their Proxy a Cash
Election, a Stock Election or a Non-Election prior to the Annual Meeting on the
Form of Election included with this Proxy Statement/Prospectus.
Cash will be paid in lieu of any fractional share of Bancorp Common Stock.
On May 15, 1997, the closing sales price of Bancorp Common Stock was
$15.875 per share.
See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Conversion of Penncore
Common Stock," "--Shareholder Election Procedures," and "--Allocation
Procedures."
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Reasons for the Merger
Penncore. The Board of Directors of Penncore has, from time to time,
considered Penncore's position as an independent banking company serving the
Lower Bucks County market area with respect to the changing and increasingly
competitive financial services industry. Penncore's competition includes
commercial banks, credit unions and thrift institutions, many of which have
substantially greater resources than Penncore. These competitors can provide a
greater array of products and services to customers.
In reaching its conclusion to approve the Merger Agreement, Penncore's
Board of Directors considered a variety of factors, including: Penncore's and
Bancorp's financial position and market position; acquisition pricing of
comparable Pennsylvania commercial banks with Penncore; Bancorp's Common Stock
price performance; and the specific provisions of Bancorp's offer to purchase
Penncore.
The Board of Directors of Penncore believes that the Merger will result in
a stronger and more effective competitor in the Lower Bucks County, Pennsylvania
and Mercer County, New Jersey markets, better able to compete effectively in the
rapidly changing marketplace for banking and financial services and to take
advantage of opportunities that would not be available to Penncore on its own.
The Penncore Board of Directors believes that the Merger will provide Penncore's
customers with a broader range of products and services, as well as greater
convenience. The Penncore Board of Directors also believes that the Merger will
afford Penncore's shareholders who receive Bancorp Common Stock in the Merger
the opportunity to continue as equity participants with a more liquid investment
in a larger regional banking company.
Bancorp. Through the Merger, Bancorp seeks to strengthen its franchise by
expanding its presence in the suburban Philadelphia market. Main Line Bank has a
total of 23 business centers in Chester, Delaware and Montgomery Counties,
Pennsylvania, and currently has only one business center in Bucks County,
Pennsylvania. Through the Bank Merger, Main Line Bank will expand its presence
in the Bucks County banking market.
Vote Required for Approval of the Merger
Approval of the Merger Agreement requires the affirmative vote at the
Annual Meeting of 75% of the issued and outstanding shares of Penncore Common
Stock. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Required Vote;
Recommendation."
Voting Agreements
The directors of Penncore have entered into agreements to vote certain
shares of Penncore Common Stock beneficially owned by them in favor of the
Merger Agreement. In addition, National Penn Investment Company ("National
Penn") has entered into an agreement to vote all of the shares of Penncore
Common Stock owned by it in favor of the Merger Agreement. In the aggregate,
these agreements commit 109,899 shares of Penncore Common Stock (27.55% of the
outstanding shares) to be voted in favor of the Merger Agreement. See "APPROVAL
OF AGREEMENT AND PLAN OF MERGER--Voting Agreements."
The Board of Directors of Bancorp has approved the Merger Agreement, and
under the Pennsylvania Business Corporation Law ("BCL"), no approval of the
Merger Agreement by the shareholders of Bancorp is required.
Opinion of Penncore Financial Advisor
The firm of Danielson Associates Inc. has rendered an opinion to Penncore,
dated as of May 13, 1997, that the terms of the Merger are fair, from a
financial point of view, to Penncore shareholders. This opinion is attached as
Annex C to this Proxy Statement/Prospectus and should be read in its entirety
for information as to the matters considered and the assumptions made in
rendering such opinion. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Opinion
of Penncore Financial Advisor."
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Board of Directors' Recommendation
The Board of Directors of Penncore unanimously recommends that Penncore
shareholders vote "FOR" approval of the Merger Agreement. See "APPROVAL OF
AGREEMENT AND PLAN OF MERGER-- Required Vote; Recommendation."
PENNCORE SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND TO RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-
PAID ENVELOPE.
Form of Election
A Form of Election is enclosed in the mailing packet of the proxy
solicitation material for the Annual Meeting.
PENNCORE SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
FORM OF ELECTION AND TO RETURN IT TO PENNCORE FOR RECEIPT NOT LATER THAN 9:00
A.M. (LOCAL TIME), JULY 17, 1997.
Each shareholder of record of Penncore Common Stock, at the close of
business on May 16, 1997, is entitled: (i) to elect to receive cash in exchange
for all shares held (a "Cash Election"); (ii) to elect to receive Bancorp Common
Stock in exchange for all Shares held (a "Stock Election"); or (iii) to indicate
that such shareholder has no preference as to the receipt of cash or Bancorp
Common Stock in exchange for all shares held (a "Non-Election"). Failure by a
Penncore shareholder to make the election in accordance with the instructions
accompanying the Form of Election shall constitute a Non-Election. A Form of
Election, to be effective, must be received by Penncore by 9:00 a.m. (local
time), on July 17, 1997 (the "Election Deadline"). A shareholder who makes an
election shall have the right to revoke such election by giving written notice
of such revocation to the Secretary of Penncore prior to the Election Deadline.
See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Shareholder Election Procedures."
A Cash Election does not guarantee that a shareholder will receive only
cash in exchange for Penncore shares, and a Stock Election does not guarantee
that a shareholder will receive only Bancorp Common Stock in exchange for
Penncore shares. The exact amount of cash and number of shares of Bancorp Common
Stock to be exchanged will be determined based upon the total number of Cash
Elections, Stock Elections, and Non-Elections received by Penncore. See
"APPROVAL OF AGREEMENT AND PLAN OF MERGER--Allocation Procedures."
Interests of Certain Persons in the Transaction
Certain of the directors and officers of Penncore and Commonwealth State
Bank hold shares of Penncore Common Stock, stock purchase warrants and/or
phantom shares, as the case may be. See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Stock Purchase Warrants and Phantom Shares" and "INFORMATION CONCERNING
PENNCORE DIRECTORS, OFFICERS AND NOMINEE--Beneficial Ownership by Officers,
Directors and Nominee."
Owen O. Freeman, Jr., the Chairman of the Boards of Directors of Penncore
and Commonwealth State Bank, shall become, at the Effective Time of the Merger,
a member of the Boards of Directors of Bancorp and Main Line Bank and Chairman
of a newly formed Bancorp Advisory Board.
Mr. Freeman and H. Paul Lewis, the President of Penncore and Commonwealth
State Bank, have entered into employment contracts with Penncore and
Commonwealth State Bank, the terms of which expire on December 31, 1998. Under
such contracts, Mr. Freeman and Mr. Lewis have certain rights if their
employment is terminated following a change in control (such as the Merger). See
"APPROVAL OF AGREEMENT AND PLAN OF MERGER--Interests of Certain Persons in the
Transaction (Executive Employment Contracts)."
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In addition, under severance agreements entered into between Penncore
and/or Commonwealth State Bank, as the case may be, and certain officers (other
than Mr. Freeman and Mr. Lewis) of such entities, if there is a change of
control (such as the Merger) and the officer is terminated as a result thereof,
then Bancorp shall pay to the respective officer one-month's then current salary
for each full or partial year of full time employment with Penncore or
Commonwealth State Bank to a maximum of 12 months and provide certain other
employee benefits. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Interests of
Certain Persons in the Transaction (Severance Agreements)."
Tax Consequences
KPMG has provided an opinion, subject to certain assumptions, that the
Merger will constitute a tax-free reorganization pursuant to Section
368(a)(1)(A) of the Internal Revenue Code (the "Code") and that accordingly (i)
neither Bancorp nor Penncore will recognize gain or loss as a result of the
Merger, and (ii) holders of Penncore Common Stock that exchange their shares
solely for Bancorp Common Stock will not recognize gain or loss in the Merger,
and holders of Penncore Common Stock that exchange their shares for Bancorp
Common Stock and cash may recognize gain in the Merger but not in excess of the
amount of cash received. Furthermore, the holding period and tax basis of the
shares of Bancorp Common Stock received by a Penncore shareholder will be the
same as the holding period and tax basis of the Penncore Common Stock exchanged
for the Bancorp Common Stock, except that a holder of Penncore Common Stock
receiving Bancorp Common Stock and cash will be required to decrease its basis
in Bancorp Common Stock by the cash received and increase its basis by the gain
recognized. A Penncore shareholder who receives solely cash in the Merger in
exchange for shares of Penncore Common Stock, or who exercises such
shareholder's dissenters' right to seek an appraisal of such shareholder's
shares of Penncore Common Stock, generally will recognize capital gain or loss
measured by the difference between the amount of cash received and the tax basis
of the shares of Penncore Common Stock exchanged therefor. For a more complete
description of the income tax consequences of the Merger, see "APPROVAL OF
AGREEMENT AND PLAN OF MERGER--Certain Federal Income Tax Consequences."
Stock Option Agreement
In connection with the Merger Agreement, Bancorp and Penncore entered into
a Stock Option Agreement, granting Bancorp an option to purchase up to 95,900
newly issued or treasury shares of Penncore Common Stock (or 19.9% of the
Penncore Common Stock issued and outstanding after giving effect to the issuance
of Penncore Common Stock upon the exercise of the option) at a price of $24 per
share (the "Option"), upon the occurrence of certain events. In general, the
events which would permit Bancorp to exercise the Option would involve an
attempt by one or more third parties to acquire a significant interest in
Penncore. The Stock Option Agreement may discourage third parties from making
competing offers to acquire Penncore. Exercise of the Option for more than 5% of
the outstanding Penncore Common Stock would be subject to the prior approval of
regulatory authorities. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Stock
Option Agreement."
Dissenters' Rights
Record holders of Penncore Common Stock who object to the Merger and comply
with the prescribed statutory procedures are entitled to have the fair value of
their shares determined in accordance with the BCL and paid to them in cash in
lieu of the shares of Bancorp Common Stock, cash, or combination thereof that
they would otherwise be entitled to receive in the Merger. A copy of the
pertinent statutory provisions is attached to this Proxy Statement/Prospectus as
Annex D. Failure to follow such provisions precisely may result in a loss of
dissenters' rights. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Rights of
Dissenting Shareholders."
Differences in Shareholder Rights
The rights of the holders of Bancorp Common Stock differ in certain
respects from those of the holders of Penncore Common Stock. While Penncore's
Articles of Incorporation require the affirmative vote of at least 75% of the
outstanding shares of Penncore Common Stock to approve certain mergers and other
fundamental transactions, Bancorp's Articles of Incorporation do not contain
similar supermajority provisions with respect to such transactions and,
therefore, approval of such transactions involving Bancorp would require only
the affirmative vote
11
<PAGE>
of a majority of the outstanding shares of Bancorp Common Stock. Bancorp and
Penncore have classified Boards of Directors; however, there are differences in
the rights of shareholders of the two companies to nominate and remove
directors. Bancorp's Articles of Incorporation place certain restrictions on
acquisitions of Bancorp equity securities; Penncore's Articles of Incorporation
contain no equivalent restrictions. In addition, because Bancorp is a registered
corporation under Pennsylvania law, certain provisions of Chapter 25 of the BCL
apply to Bancorp but not to Penncore. Because Bancorp Common Stock is listed on
a national securities exchange, holders of Bancorp Common Stock are not entitled
to dissenters' appraisal rights in certain situations in which such rights would
be available to shareholders of Penncore. Unlike Penncore, Bancorp has an
authorized class of preferred stock which, if issued, could affect the rights of
the holders of Bancorp Common Stock. For a more detailed discussion of the
differences between the rights of holders of Penncore Common Stock and those of
the holders of Bancorp Common Stock, see "COMPARISON OF BANCORP COMMON STOCK AND
PENNCORE COMMON STOCK."
Regulatory Approvals
The Merger and Bank Merger require approvals by the Office of Thrift
Supervision ("OTS"), the Pennsylvania Department of Banking and other regulatory
authorities. Applications for these approvals are being filed and are expected
to be approved, although no assurances may be given as to whether or when such
approvals may be received.
Conditions; Amendment; Termination
In addition to Penncore shareholder approval and regulatory approvals,
consummation of the Merger is contingent upon the satisfaction of a number of
other conditions. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Conditions to
the Merger." Notwithstanding prior Penncore shareholder approval, the Merger
Agreement may be amended in any respect except that, after the Penncore Annual
Meeting, the form and amount of consideration to be received by the shareholders
of Penncore and the holders of Stock Purchase Warrants and Penncore Phantom
Shares shall not, in general, be decreased. The Merger Agreement may be
terminated, and the Merger abandoned, notwithstanding prior Penncore shareholder
approval, upon the following events: by mutual agreement of Bancorp and Penncore
or by either of them in the event of a material breach of the Merger Agreement
by the other party; failure to receive regulatory approval; issuance of a final
non-appealable order of any federal or state court restraining or prohibiting
the consummation of the Merger or any governmental action which would make the
consummation of the Merger illegal; or failure to consummate the Merger on or
prior to September 30, 1997. In addition, subject to certain conditions and
limitations, Penncore's Board of Directors may terminate the Merger Agreement if
the Average Price of Bancorp's Common Stock, as defined in the Merger Agreement,
is below $12.50 at the time of the Merger. See "APPROVAL OF AGREEMENT AND PLAN
OF MERGER--Termination, Amendment and Waiver."
Effective Time of the Merger
It is presently anticipated that if the Merger Agreement is approved by the
shareholders of Penncore, the Merger will become effective at 11:59 p.m., on
July 31, 1997 (the "Effective Time"). There can be no assurance, however, that
all conditions to the Merger will be satisfied or, if satisfied, that they will
be satisfied in time to permit the Merger to become effective within the
anticipated time frame. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Effective
Time of the Merger."
Accounting Treatment
Upon consummation of the Merger, the transaction will be accounted for as a
purchase. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Accounting Treatment."
Management and Operations after the Merger
The Boards of Directors and executive officers of Bancorp and Main Line
Bank in office immediately prior to the Effective Time of the Merger will remain
in such respective positions. Owen O. Freeman, Jr., the Chairman of Penncore and
Commonwealth State Bank, will be appointed a director of Bancorp and Main Line
Bank. After
13
<PAGE>
the Effective Time of the Merger, Bancorp intends to operate Commonwealth State
Bank as a division of Main Line Bank. Bancorp will also form an Advisory Board
for the Bucks and Montgomery Counties, Pennsylvania and Mercer County, New
Jersey market areas. Mr. Freeman will be the Chairman of this Advisory Board.
Employees of Penncore and Commonwealth State Bank will be offered positions
within the Bancorp organization to the extent deemed appropriate by Bancorp. See
"APPROVAL OF AGREEMENT AND PLAN OF MERGER--Interests of Certain Persons in the
Transaction."
Bancorp Selected Consolidated Financial Data
The following table sets forth certain selected historical consolidated
financial data for Bancorp. This data is derived from, and should be read in
conjunction with, the consolidated financial statements of Bancorp, including
the notes thereto, incorporated by reference in this Proxy Statement/Prospectus.
See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE." Interim unaudited data for the nine months ended December 31, 1996
and 1995 reflect, in the opinion of management of Bancorp, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine months ended December 31, 1996
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
13
<PAGE>
<TABLE>
<CAPTION>
At or For the
Nine Months
Ended December 31, At or For the Year Ended March 31,
1996 1995 1996 1995 1994 1993 1992
Balance Sheet Data(5): (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets.......................... $1,875,091 $1,757,048 $1,765,812 $1,563,452 $1,001,037 $989,308 $989,528
Loans receivable, net(1)........ 813,680 760,332 768,824 575,280 294,324 313,521 410,843
Mortgage-related securities..... 898,467 885,450 873,471 880,285 653,180 610,767 463,216
Investments..................... 30,334 29,728 24,942 46,163 13,658 14,816 37,507
Customer accounts............... 875,426 851,022 861,016 693,988 679,687 618,693 652,162
Borrowings...................... 837,357 739,378 748,206 705,231 256,633 304,881 280,413
Equity.......................... 141,163 144,607 140,337 141,300 53,978 57,056 47,122
Nonperforming assets............ 15,816 11,313 10,445 8,931 12,363 24,658 36,849
Allowance for loan losses....... 16,894 13,168 13,124 9,111 7,337 7,488 6,996
Book value per share(2)......... 13.07 12.13 12.24 11.15 N/A N/A N/A
Tangible book value per share(2) 12.74 11.85 11.93 11.10 N/A N/A N/A
Income Statement Data:
Interest income................. $103,458 $88,588 $120,421 $90,233 $61,889 $70,973 $83,925
Interest expense................ 63,216 56,843 76,659 53,484 39,079 45,959 61,697
---------- ---------- ---------- ---------- ---------- -------- --------
Net interest income............. 40,242 31,745 43,762 36,749 22,820 25,014 22,228
Provision for Loan Losses....... 4,310 3,000 4,000 3,400 1,113 3,169 9,627
---------- ---------- ---------- ---------- ---------- -------- --------
Net interest income after
provision for loan losses..... 35,932 28,745 39,762 33,349 21,707 21,845 12,601
Non-interest income............. 11,661 4,833 7,269 3,412 8,616 7,196 10,214
Non-interest expenses........... 37,643 (3) 19,570 29,139 23,093 21,000 20,253 19,045
Income before income taxes and
effect of cumulative change
in accounting principle....... 9,950 14,008 17,892 13,668 9,323 8,788 3,770
Income taxes.................... (424)(3) 5,153 6,272 4,974 7,461 3,267 3,225
Cumulative effect of change in
accounting for income taxes... -- -- -- -- -- 1,967 --
---------- ---------- ---------- ---------- ---------- -------- --------
Net income...................... $10,374 (3) $8,855 $11,620 $8,694 $1,862 $7,488 $545
========== ========== ========== ========== ========== ======== ========
Primary earnings per share...... $0.91 (3) $0.69 $0.91 $0.48 N/A N/A N/A
Fully diluted earnings per share $0.91 (3) $0.69 $0.91 $0.48 N/A N/A N/A
Dividends declared per share.... $0.28 $0.18 $0.26 N/A N/A N/A N/A
Average Balance Sheet Data(5):
Assets.......................... $1,876,313 $1,598,139 $1,628,137 $1,310,585 $1,001,449 $946,874 $972,568
Loans........................... 808,386 639,535 662,160 412,464 304,745 355,410 398,906
Mortgage-related securities..... 879,714 817,042 821,436 753,745 598,345 499,878 481,692
Investments..................... 80,833 80,898 77,199 89,501 44,770 43,894 12,889
Customer accounts............... 864,768 734,007 759,335 693,803 638,804 589,441 647,348
Borrowings...................... 855,559 697,115 704,267 498,307 294,016 291,329 247,492
Equity.......................... 142,032 148,222 147,372 105,809 58,768 50,553 51,908
Weighted shares outstanding-
primary....................... 11,347 12,858 12,695 13,457 N/A N/A N/A
Weighted shares outstanding-
fully diluted................. 11,409 12,919 12,787 13,457 N/A N/A N/A
Selected Financial Ratios:
Return on average equity........ 7.30%(4) 7.97% 7.88% 8.22% 3.17% 14.81% 1.05%
Return on average assets........ 0.55%(4) 0.74% 0.71% 0.66% 0.19% 0.79% 0.06%
Average equity to average assets 7.57% 9.27% 9.05% 8.07% 5.87% 5.34% 5.34%
Allowance for loan losses to:
Net loans..................... 2.34% 1.91% 1.90% 1.66% 2.73% 2.58% 1.84%
Non-performing loans.......... 119.46% 149.14% 156.20% 134.74% 137.50% 55.16% 40.68%
Total non-performing assets to
total assets.................. 0.84% 0.64% 0.59% 0.57% 1.23% 2.49% 3.72%
Capital ratios:
Tangible capital.............. 6.36% 7.86% 7.48% 9.17% 5.15% 5.40% 4.21%
Core capital.................. 6.36% 7.86% 7.48% 9.17% 5.11% 5.31% 4.11%
Risk-based capital............ 14.83% 17.02% 15.31% 21.54% 12.67% 13.11% 8.67%
Net interest margin............. 3.00% 2.74% 2.79% 2.90% 2.39% 2.74% 2.45%
<FN>
- ---------------------------------
(1) Loans include loans receivable, net, and loans available for sale.
(2) Per share data is calculated since August 11, 1994, the date of Bancorp's
initial public offering, and has been adjusted for Bancorp's two-for-one
stock split effected on September 6, 1996.
(3) Results of operation for the nine months ended December 31, 1996 were
impacted by $3.8 million of tax benefit related to legislation which
eliminated the need to recapture tax bad debt reserves, which was
substantially offset by a one-time, pre-tax charge of $4.8 million ($3.1
million net tax) incurred in connection with the recapitalization of the
SAIF pursuant to the same legislation. The net effect of these items was to
increase net income during the nine months ended December 31, 1996 by $0.06
per share.
(4) Ratios include the impact of the nonrecurring adjustments in Note 3. Had
these adjustments been excluded, return on average equity and return on
average assets would be 9.69% and 0.74%, respectively.
(5) Certain declassifications have been made in order to conform with current
year's presentation.
</FN>
</TABLE>
<PAGE>
Comparative Per 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 a
historical basis for Bancorp and Penncore, (ii) on a pro forma basis per share
of Bancorp Common Stock to reflect consummation of the Merger, and (iii) on an
equivalent pro forma basis per share of Penncore Common Stock to reflect
consummation of the Merger. The data presented as pro forma per share of Bancorp
Common Stock and as equivalent pro forma per share of Penncore Common Stock
assumes that the Exchange Ratio will be 2.50 shares of Bancorp Common Stock for
each share of Penncore Common Stock, that 70% of the issued and outstanding
shares of Penncore Common Stock will be exchanged in the Merger for the Bancorp
Common Stock, and that 30% of the issued and outstanding shares of Penncore
Common Stock will be exchanged in the Merger for cash. This information should
be read in conjunction with the selected consolidated financial data of Bancorp,
which appear in this Proxy Statement, and the Penncore Selected Consolidated
Financial Data which appear herein and the financial statements of Penncore,
including the notes thereto, which are contained in Annex F hereto.
<TABLE>
<CAPTION>
Historical Per Share
Pro Forma Per Equivalent Pro Forma
Bancorp Penncore Bancorp Share Per Penncore Shares
<S> <C> <C> <C> <C>
Book Value Per Common Share at
December 31, 1996.................................. $13.07 $24.94 $13.15 $32.88
Cash Dividends Declared Per Common
Share for the Nine Months Ended December 31, 1996
as to Bancorp and for the Year Ended December 31,1996
as to Penncore..................................... .285 .15 .285 .71
Income From Continuing Operations Per
Common Share (Primary) for the Nine Months Ended
December 31, 1996 as to Bancorp and for the Year Ended
December 31, 1996 as to Penncore................... .91 1.74 .86 2.15
</TABLE>
Penncore Selected Consolidated Financial Data
Selected historical consolidated financial data for Penncore is set forth
in this Proxy Statement/Prospectus at "PENNCORE SELECTED CONSOLIDATED FINANCIAL
DATA."
Market Value Information
The following table sets forth (i) the closing sale price for Bancorp
Common Stock on the NASDAQ National Market System on February 3, 1997, the last
trading day prior to the first public announcement of the Merger and (ii) an
equivalent per share price for Penncore Common Stock computed by multiplying the
closing sale price for Bancorp Common Stock on February 3, 1997 by 2.50. The
Exchange Ratio of 2.50 assumes that the "average price" (as defined herein) of a
share of Bancorp Common Stock is not more than $16.75 nor less than $12.50. See
"APPROVAL OF AGREEMENT AND PLAN OF MERGER--Conversion of Penncore Common Stock."
<TABLE>
<CAPTION>
Last
Pre-Announcement Equivalent Per
Price Share Price
<S> <C>
Bancorp Common Stock.......................................... $14.625 --
Penncore Common Stock......................................... -- $36.56
</TABLE>
On May 15, 1997, the closing sale price of Bancorp Common Stock was $15.875
per share. Using these prices and making the assumptions set forth above, the
Exchange Ratio would have been 2.50, and the equivalent per share price for
Penncore Common Stock would have been $39.68.
The last transaction involving Penncore Common Stock known to Penncore
management to have occurred prior to announcement of the Merger was a sale of
4,000 shares of Penncore Common Stock at $30.125 per share on January 9, 1997.
The most recent transaction involving Penncore Common Stock known to Penncore
management prior to the date of this Proxy Statement/Prospectus was a sale of
7,200 shares of Penncore Common Stock at $38.50 per share on March 25, 1997. See
"PENNCORE MARKET PRICES AND DIVIDENDS." There is no established public trading
market for Penncore Common Stock, and there has been only limited trading in
Penncore Common Stock. Therefore, these prices may not necessarily be indicative
of the true market value of Penncore Common Stock. See "PENNCORE MARKET PRICES
AND DIVIDENDS."
15
<PAGE>
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Penncore of proxies to be voted at the
Annual Meeting and at any adjournment or adjournments thereof. The Annual
Meeting will be held at 9:00 a.m. (local time), on July 17, 1997, at the
principal office of Commonwealth State Bank, 3 Friends Lane, Newtown,
Pennsylvania 18940.
The registered office of Penncore is located at Commonwealth State Bank, 3
Friends Lane, Newtown, Pennsylvania 18940. The telephone number for Penncore is
(215) 860-4200. For New Jersey residents, the telephone number for Penncore is
(609) 396-8008. All inquiries should be directed to Owen O. Freeman, Jr.,
Chairman of Penncore. Commonwealth State Bank is a wholly owned subsidiary of
Penncore. The approximate date on which this Proxy Statement/Prospectus and the
enclosed form of proxy (the "Proxy") will first be mailed to the shareholders of
Penncore is May 20, 1997.
Purpose of the Annual Meeting
The purpose of the Annual Meeting is to vote upon the election of one Class
A Director to the Board of Directors of Penncore, to consider and vote upon a
proposed merger of Penncore into Bancorp, to ratify the selection of KPMG as the
independent auditors for Penncore for the fiscal year ending December 31, 1997,
to vote on adjournment of the Annual Meeting, if necessary, to permit further
solicitation of Proxies in the event there are not sufficient votes at the time
of the Annual Meeting to constitute a quorum or to approve the Merger, and to
transact such other business as may properly come before the Annual Meeting.
The shareholders of Penncore will be asked to consider and vote upon a
proposal to approve the Merger Agreement. As more fully described below under
"APPROVAL OF AGREEMENT AND PLAN OF MERGER," the Merger Agreement provides for
the Merger. It is contemplated that simultaneously with or following the Merger,
Bancorp will take the necessary corporate action to cause the business of
Penncore's bank subsidiary, Commonwealth State Bank, to be merged with and into
Bancorp's bank subsidiary, Main Line Bank.
Holders of a majority of the outstanding shares of Penncore Common Stock
entitled to vote, represented in person or by Proxy, will constitute a quorum
for purposes of transacting business at the Annual Meeting.
The Class A Director will be elected by the affirmative vote of a majority
of the shares of Penncore Common Stock represented in person or by Proxy at the
Annual Meeting.
Approval of the Merger Agreement will require the affirmative vote at the
Annual Meeting of 75% of the issued and outstanding shares of Penncore Common
Stock.
The ratification of the selection of KPMG as the independent auditors for
Penncore for the fiscal year ending December 31, 1997, requires the affirmative
vote of a majority of the shares of Penncore Common Stock represented in person
or by Proxy at the Annual Meeting.
Any adjournment of the Annual Meeting requires the affirmative vote of a
majority of the votes cast at the Annual Meeting.
The Board of Directors of Penncore knows of no other business to be
presented for consideration at the Annual Meeting.
16
<PAGE>
Principal Terms of the Merger
At the Effective Time of the Merger, each issued and outstanding share of
Penncore Common Stock, based upon an election to be made by each Penncore
shareholder, will be exchanged for: (a) $36.56 cash; (b) 2.50 shares of Bancorp
Common Stock (the "Exchange Ratio," which is subject to adjustment based upon
the price of Bancorp Common Stock prior to the Merger); or (c) a combination of
Bancorp Common Stock and cash (subject to certain allocation procedures). Not
more than 49% nor less than 30% of the outstanding shares of Penncore Common
Stock shall be converted into cash.
In the event that holders of more than 49% of the outstanding shares of
Penncore Common Stock elect to receive cash in exchange for Penncore Common
Stock, then such Cash Election Shares shall be subject to the allocation
procedures. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Allocation
Procedures."
In the event that holders of more than 70% of the outstanding shares of
Penncore Common Stock elect to receive Bancorp Common Stock in exchange for
Penncore Common Stock, then such Stock Election Shares shall also be subject to
the allocation procedures. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--
Allocation Procedures."
In the event that a holder of Penncore Common Stock fails to submit an
election in a timely manner, then such Non-Election Shares shall also be subject
to the allocation procedures. See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Allocation Procedures."
Each Penncore shareholder is requested to make an election with respect to
the form of consideration to be received in exchange for shares of Penncore
Common Stock, which election shall be legally binding. This election shall be
made on the enclosed Form of Election. Each shareholder should complete and
return the enclosed Form of Election in accordance with the instructions
accompanying the Form of Election which should be carefully read and strictly
complied with. All Forms of Election must be received by Penncore no later than
9:00 a.m. (local time), on July 17, 1997, the date of the Penncore Annual
Meeting.
If the "average price" of Bancorp Common Stock is less than $12.50 for the
10 trading days ending on the 11th day prior to the Effective Time of the
Merger, then Bancorp shall have the option to increase the Exchange Ratio to a
number equal to $31.25 divided by the average price. If Bancorp fails to
exercise this option, then the Penncore Board of Directors may terminate the
Merger. For example, assuming that the "average price" is $12.00, then Bancorp
must exchange 2.604 shares of Bancorp Common Stock for each share of Penncore
Common Stock. The Merger Agreement provides that the "average price" of Bancorp
Common Stock will be the average of the last reported sale prices of Bancorp
Common Stock (as reported by NASDAQ) for the 10 trading days ending on the 11th
day before the Effective Time of the Merger.
If the "average price" of Bancorp Common Stock exceeds $16.75 for the 10
trading days ending on the 11th day prior to the Effective Time of the Merger,
then Bancorp shall decrease the Exchange Ratio to a number equal to $41.875
divided by the average price. For example, assuming the "average price" is
$18.00, then the number of shares of Bancorp Common Stock to be exchanged for a
share of Penncore Common Stock would be 2.326. This adjustment shall not occur
if prior to the 10-day trading period ending on the 11th day prior to the
Effective Time of the Merger, Bancorp has made a public announcement of its
proposed acquisition or of the sale of substantially all of Bancorp's assets.
Because the Effective Time of the Merger may not occur for several weeks
after the Annual Meeting, the market value of Bancorp Common Stock may vary
between the date of the Annual Meeting and the Effective Time of the Merger. In
the Merger Agreement, the Exchange Ratio of 2.50 shares of Bancorp Common Stock
for each share of Penncore Common Stock is fixed, subject to the adjustments
described above. Therefore, a shareholder
17
<PAGE>
of Penncore must bear the risk with respect to any decrease in the value of
Bancorp Common Stock subsequent to the Annual Meeting and prior to the Effective
Time of the Merger.
In lieu of the issuance of fractional shares of Bancorp Common Stock, cash
adjustments will be paid equal to an amount determined by multiplying such
fraction of a share of Bancorp Common Stock by the per share closing price on
NASDAQ of Bancorp Common Stock on the Effective Time of the Merger. Such
payments shall be rounded to the nearest cent.
Penncore has received an opinion of the investment banking firm of
Danielson Associates, Inc. that the terms of the Merger are fair to the
shareholders of Penncore from a financial point of view. See "APPROVAL OF
AGREEMENT AND PLAN OF MERGER--Opinion of Penncore Financial Advisor" and Annex C
hereto.
Record Date; Voting Rights
The Board of Directors of Penncore has fixed the close of business on May
16, 1997 as the record date for determining the shareholders of Penncore
entitled to notice of and to vote at the Annual Meeting. At that date, 398,868
shares of Penncore Common Stock were outstanding. Each such share entitles its
holder of record at the close of business on the record date to one vote on each
matter properly submitted to the shareholders for action at the Annual Meeting.
Penncore does not have any other outstanding class of capital stock. Cumulative
voting rights do not exist with respect to the election of Directors. On May 16,
1997, there were approximately 160 shareholders of record of Penncore Common
Stock.
Voting and Revocation of Proxies
All properly executed Proxies not theretofore revoked will be voted at the
Annual Meeting or any adjournment or postponement thereof in accordance with the
instructions thereon. Proxies containing no voting instructions will be voted in
favor of all items on the agenda. The Proxy of any shareholder who votes against
approval of the Merger Agreement will not be used to vote in favor of any
proposal to adjourn the Annual Meeting in the event Penncore management wishes
to adjourn or postpone the Annual Meeting in order to allow time for the
solicitation of additional votes to approve the Merger Agreement.
A shareholder who has executed and returned a Proxy may revoke it at any
time before it is voted by filing with the Secretary of Penncore written notice
of such revocation, by submitting a later-dated Proxy after giving notice to the
Secretary, or by attending the Annual Meeting and voting in person by ballot
after giving the Secretary notice of such intent to vote in person. Attendance
at the Annual Meeting will not, of itself, constitute a revocation of a Proxy.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
Penncore or Commonwealth State Bank may solicit Proxies from the shareholders of
Penncore in person or by telephone or otherwise. No additional compensation will
be paid for such solicitation. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward Proxy soliciting materials to beneficial
owners of shares held of record by them and will be reimbursed by Penncore for
their reasonable expenses. Penncore will bear its own expenses in connection
with the solicitation of Proxies for the Annual Meeting, except that Bancorp and
Penncore will each pay 50% of the printing costs related to the solicitation of
Proxies from Penncore shareholders. See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Expenses."
18
<PAGE>
Forms of Election Concerning Compensation to be Received in the Merger
Enclosed with the notice of the Annual Meeting is a form entitled "Form of
Election." Each shareholder of record of Penncore Common Stock at the close of
business on the record date is requested to make a legally binding election,
subject to shareholder approval and to consummation of the Merger, using the
Form of Election. Each such shareholder is entitled: (i) to elect to receive
cash in exchange for all shares held (a "Cash Election"); (ii) to elect to
receive Bancorp Common Stock in exchange for all shares held (a "Stock
Election"); or (iii) to indicate that such shareholder has no preference as to
the receipt of cash or Bancorp Common Stock in exchange for all shares held (a
"Non-Election"). A Penncore shareholder shall only be permitted to make such
election with respect to all shares of Penncore Common Stock held by him, her or
it. Failure by a Penncore shareholder to make the election in accordance with
the instructions accompanying the Form of Election shall constitute a
Non-Election. A Form of Election, to be effective, must be received by Penncore
no later than 9:00 a.m. (local time), on July 17, 1997, the date of the Penncore
Annual Meeting (the "Election Deadline"). See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Shareholder Election Procedures."
A shareholder who makes an election shall have the right to revoke such
election by giving written notice of such revocation to the Secretary of
Penncore prior to the Election Deadline.
A CASH ELECTION DOES NOT GUARANTEE THAT A SHAREHOLDER WILL RECEIVE ONLY
CASH IN EXCHANGE FOR PENNCORE SHARES, AND A STOCK ELECTION DOES NOT GUARANTEE
THAT A SHAREHOLDER WILL RECEIVE ONLY BANCORP COMMON STOCK IN EXCHANGE FOR
PENNCORE SHARES. THE EXACT COMBINATION OF CASH AND BANCORP COMMON STOCK TO BE
DISTRIBUTED TO EACH SHAREHOLDER WILL BE DETERMINED BASED UPON THE TOTAL NUMBER
OF CASH ELECTIONS, STOCK ELECTIONS, AND NON-ELECTIONS RECEIVED BY PENNCORE. SEE
"APPROVAL OF AGREEMENT AND PLAN OF MERGER-- ALLOCATION PROCEDURES."
Rights of Dissenting Shareholders
Under the BCL, each outstanding share of Penncore Common Stock, the holder
of which has (i) timely filed with Bancorp a written demand for appraisal
pursuant to Section 1574 of the BCL; (ii) effected no change in the beneficial
ownership of such shares from the date of such filing continuously through the
Effective Time of the Merger; (iii) refrained from voting such shares for
approval of the Merger Agreement; and (iv) otherwise complies with the
procedures required by the BCL, shall not be converted in the Merger into
Bancorp Common Stock or cash, but such holder shall have such rights to receive
in cash the "fair value" of such share of Penncore Common Stock in lieu of
Bancorp Common Stock or cash as provided by the BCL. See "APPROVAL OF AGREEMENT
AND PLAN OF MERGER--Rights of Dissenting Shareholders" and Subchapter 15D of the
BCL, a copy of which is attached hereto as Annex D and incorporated herein by
reference. Shareholders considering exercising rights under Subchapter 15D of
the BCL are advised to review Annex D in its entirety and to consult their own
legal counsel.
Voting Agreements
The Directors of Penncore and, in addition, National Penn Investment
Company have entered into voting agreements, subject to certain fiduciary
responsibilities, with Bancorp to vote all of the shares of Penncore Common
Stock that they control for approval of the Merger Agreement. The aggregate
number of shares of Penncore Common Stock for which this group can exercise
voting power is 109,899 shares, or 27.55%, of the issued and outstanding shares
of Penncore Common Stock on the record date of the Annual Meeting.
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ITEM 1: ELECTION OF CLASS A DIRECTOR
Unless otherwise instructed, the Proxyholders will vote the Proxies
received by them for the election of the one nominee for Class A Director, who
is Ashton Harvey. If Mr. Harvey should become unavailable for any reason,
Proxies will be voted in favor of a substitute nominee as the Board of Directors
of Penncore shall determine. The Board of Directors has no reason to believe
that Mr. Harvey will be unable to serve if elected. Mr. Harvey will be elected
to serve for a three-year term and until his successor is elected and qualified,
but if the Merger is consummated, Mr. Harvey's service will end on the Effective
Time of the Merger. Any vacancy occurring on the Board of Directors of Penncore
for any reason may be filled by a majority of the Directors then in office until
the expiration of the term of the vacancy.
There is no cumulative voting for the election of the Directors. Each share
of Penncore Common Stock is entitled to cast only one vote for each nominee. For
example, if a shareholder owns ten shares of Penncore Common Stock, he or she
may cast up to ten votes for each Director in the class to be elected.
For information as to directors, officers and the nominee, see "INFORMATION
CONCERNING PENNCORE DIRECTORS, OFFICERS AND NOMINEE."
ITEM 2: APPROVAL OF AGREEMENT AND PLAN OF MERGER
This section of the Proxy Statement/Prospectus describes the material terms
of the Merger Agreement. The following description does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
which is attached to this Prospectus/Proxy Statement as Annex A.
The Merger
The Merger Agreement provides for a merger of Bancorp and Penncore in which
Bancorp will be the surviving corporation. As a result of the Merger, Bancorp
will acquire all of the assets and liabilities of Penncore, and Penncore will
cease to exist as a separate corporation.
On the Effective Time of the Merger, shareholders of Penncore will receive
in exchange for their shares cash, shares of Bancorp Common Stock, or a
combination of cash and shares of Bancorp Common Stock, depending upon the
outcome of the shareholder elections described below. Each share of Penncore
Common Stock will be exchanged for cash in the amount of $36.56 without
interest, 2.50 shares of Bancorp Common Stock (the "Exchange Ratio"), or a pro
rata combination of these two forms of consideration in accordance with the
allocation procedures described below. The Exchange Ratio will be reduced if the
Average Price of Bancorp Common Stock is higher than $16.75, and may be
increased if the Average Price of Bancorp Common Stock is lower than $12.50,
prior to the Effective Time as described below. Penncore shareholders are being
requested to file a Cash Election, a Stock Election or a Non-Election prior to
the Annual Meeting on the Form of Election included with this Proxy
Statement/Prospectus. On May 15, 1997, the closing sale price of Bancorp Common
Stock was $15.875 per share. Cash will be paid in lieu of any fractional share
of any Bancorp Common Stock. See the captions below entitled "Conversion of
Penncore Common Stock," "Shareholder Election Procedures," and "Allocation
Procedures."
On and after the Effective Time, all of the shares of Bancorp Common Stock
issued and outstanding immediately prior to the Effective Time shall remain
issued and outstanding.
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Bancorp is a unitary savings and loan holding company with its principal
executive office in Villanova, Pennsylvania. The principal subsidiary of Bancorp
is Main Line Bank, Villanova, Pennsylvania, which operates a total of 24
business centers and 9 mortgage loan production offices principally in the
suburban Philadelphia area.
Penncore is a bank holding company with its principal executive office in
Newtown, Pennsylvania. Penncore's only subsidiary is Commonwealth State Bank,
which operates two branch banking offices in Bucks County, Pennsylvania.
It is contemplated that simultaneously with or shortly following the Merger
of Penncore and Bancorp, Commonwealth State Bank will be merged into Main Line
Bank (the "Bank Merger"). The Bank Merger is conditioned upon the prior or
simultaneous consummation of the Merger of Penncore and Bancorp, but the merger
of Penncore and Bancorp is not conditioned upon the consummation of the Bank
Merger. After the Bank Merger, the offices of Commonwealth State Bank shall be
operated as a division of Main Line Bank under the trade name of Commonwealth
State Bank.
Promptly following the Effective Time of the Merger, Bancorp will appoint
an Advisory Board for Bancorp. Owen O. Freeman, Jr., Chairman of Penncore and
Commonwealth State Bank, will become the Chairman of this Advisory Board, which
will interact with Bancorp officers for purposes of generating new deposit and
loan business in the Bucks and Montgomery Counties, Pennsylvania, and Mercer
County, New Jersey market areas. The members of the Advisory Board shall be paid
for each meeting that they attend as determined by Bancorp.
This Advisory Board and the divisional designation shall continue so long
as they are deemed to be in the best interests of Bancorp as determined by the
Board of Directors of Bancorp.
At the Effective Time of the Merger, Owen O. Freeman, Jr., will also become
a member of the Boards of Directors of Bancorp and Main Line Bank.
Background and Reasons for the Merger
Penncore. The Board of Directors of Penncore has from time to time,
considered Penncore's position as an independent banking company serving the
Lower Bucks County market area with respect to the changing and increasingly
competitive financial services industry and to its strategic
alternatives--continued independence, internal growth by opening new branch
offices, growth through the acquisition of branch offices from other financial
institutions or present or future sale of the Penncore franchise. Penncore's
competition includes credit unions, commercial banks and thrift institutions,
many of which have substantially greater resources than Penncore. These
competitors can provide a greater array of products and services to customers
and can offer their employees more opportunities to advance their careers.
Owen O. Freeman, Jr., the Chairman of the Boards of Directors of Penncore
and Commonwealth State Bank, reported, from time to time, to the members of the
Penncore Board of Directors that he had occasional informal discussions with
representatives of a variety of financial institutions regarding a business
combination with Penncore. Representatives of several of these financial
institutions indicated an interest in pursuing more serious discussions with Mr.
Freeman, but their initial ranges of proposed consideration for the Penncore
franchise were inadequate based upon then current publicly announced bank
acquisitions and did not require any analyses by a qualified financial advisor.
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However, in the middle of 1996, serious discussions commenced between Mr.
Freeman and Dennis S. Marlo, the President and Chief Executive Officer of
Bancorp. On September 17, 1996, Mr. Freeman advised the Penncore and
Commonwealth State Bank directors not to engage in any transactions with
Penncore Common Stock.
At a Board of Directors meeting of Commonwealth State Bank held on November
19, 1996, Mr. Freeman related that the discussions with a financial institution
were very positive. Mr. Freeman did not disclose at this meeting that such
financial institution was Bancorp.
At the December 3, 1996 Penncore Board of Directors meeting, Mr. Freeman
related that a possible transaction with Bancorp was imminent on terms which he
considered to be in the best interests of the Penncore shareholders as well as
the employees and customers of Commonwealth State Bank. At such meeting, the
Board of Directors directed Mr. Freeman to pursue the preparation of a
definitive acquisition agreement between Penncore and Bancorp. Furthermore,
Arnold Danielson, President of Danielson Associates, Inc. ("Danielson"), the
financial advisor to Penncore, prepared a background analysis of the acquisition
marketplace for commercial bank organizations of Penncore's size and
characteristics. Mr. Freeman distributed a copy of this Danielson analysis to
each director and discussed the contents of it with the directors.
On February 4, 1997, the Penncore Board of Directors met to consider the
Merger Agreement between Penncore and Bancorp. Prior to this meeting, each
Penncore director was delivered a copy of such agreement together with
information prepared by Danielson and financial statements of Bancorp. The
Danielson information included, among other things, Penncore's and Bancorp's
financial position and market position; acquisition pricing of comparable
Pennsylvania commercial banks with Penncore; Bancorp's Common Stock price
performance; and an examination of Bancorp's offer to purchase Penncore. Mr.
Danielson reviewed with the directors his analysis of the proposed transaction
from a financial point of view and concluded with his opinion that the terms
were fair to the Penncore shareholders from a financial point of view. The
directors reviewed the provisions of the Merger Agreement with respect to the
officers and employees of Penncore and Commonwealth State Bank and further
considered the structure of Commonwealth State Bank as an operating division of
Main Line Bank and the establishment of the advisory board of Bancorp after the
Merger is completed. The directors concluded that such organizational structure
would serve the interests of the employees and customers of Commonwealth State
Bank and the Lower Bucks County communities as well as communities located in
Mercer County, New Jersey, which are served by Commonwealth State Bank. None of
the above considerations was given preference over the others. However, each
consideration was part of the entire basis on which the Board of Directors
reached its decision.
The Board of Directors of Penncore believes that the Merger will result in
a stronger and more effective competitor in the Lower Bucks County, Pennsylvania
and Mercer County, New Jersey markets, better able to compete effectively in the
rapidly changing marketplace for banking and financial services and to take
advantage of opportunities that would not be available to Penncore on its own.
The Penncore Board of Directors believes that the Merger will provide Penncore's
customers with a broader range of products and services, as well as greater
convenience. The Penncore Board of Directors also believes that the Merger will
afford Penncore's shareholders who receive Bancorp Common Stock in the Merger
the opportunity to continue as equity participants with a more liquid investment
in a larger regional banking company.
Bancorp. Through the Merger, Bancorp seeks to strengthen its franchise by
expanding its presence in the suburban Philadelphia market. Main Line Bank has a
total of 23 business centers in Chester, Delaware and Montgomery Counties,
Pennsylvania, and currently has only one business center in Bucks County,
Pennsylvania. Through the Bank Merger, Main Line Bank will expand its presence
in the Bucks County banking market.
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Required Vote; Recommendations
Approval of the Merger Agreement requires the affirmative vote at the
Annual Meeting of 75% of the issued and outstanding shares of Penncore Common
Stock.
THE BOARD OF DIRECTORS OF PENNCORE HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT. THE BOARD OF DIRECTORS OF PENNCORE UNANIMOUSLY RECOMMENDS THAT THE
PENNCORE SHAREHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT.
The Board of Directors of Bancorp has approved the Merger Agreement, and
under the BCL, no approval of the Merger Agreement by the shareholders of
Bancorp is required.
Voting Agreements
In connection with the Merger Agreement, the directors of Penncore have
entered into agreements to vote certain shares of Penncore Common Stock
beneficially owned by them in favor of the Merger Agreement. The directors of
Penncore have agreed with Bancorp that they will vote in favor of the Merger
Agreement all shares of Penncore Common Stock owned by them as individuals or
(to the extent their proportionate voting interest) jointly with other persons,
and that they will use their best efforts to cause any other shares of Penncore
Common Stock over which they have or share voting power to be voted in favor of
the Merger Agreement. In addition, National Penn Investment Company ("National
Penn") has entered into an agreement to vote all of the shares of Penncore
Common Stock owned by it in favor of the Merger Agreement. In the aggregate,
these agreements commit 109,899 shares of Penncore Common Stock (27.55% of the
outstanding shares) to be voted in favor of the Merger Agreement.
The agreements further provide that with respect to the shares of Penncore
Common Stock, owned by National Penn and by the Penncore directors as
individuals or (to the extent of the director's proportionate voting interest)
jointly with other persons (collectively, "Shares"), the directors and National
Penn will not until the Merger has been consummated or the Merger Agreement has
been terminated: (1) vote Shares in favor of any other merger or transaction
which would have the effect of a person other than Bancorp or an affiliate
acquiring control of Penncore or Commonwealth State Bank or (2) sell or
otherwise transfer Shares (i) pursuant to any tender offer or similar proposal
made by a person other than Bancorp or an affiliate, (ii) to any person other
than Bancorp or an affiliate seeking to obtain control of Penncore or
Commonwealth State Bank, or (iii) for the principal purpose of avoiding their
obligations under the agreement. The agreements define "control" as the ability
to (1) direct the voting of 10% or more of the shares eligible to vote in the
election of directors of Penncore or Commonwealth State Bank or (2) direct the
management and policies of Penncore or Commonwealth State Bank.
THE AGREEMENTS ARE APPLICABLE TO THE DIRECTORS ONLY IN THEIR CAPACITY AS
SHAREHOLDERS AND DO NOT AFFECT THE EXERCISE OF THEIR FIDUCIARY RESPONSIBILITIES
AS DIRECTORS OR EXECUTIVE OFFICERS OF PENNCORE OR COMMONWEALTH STATE BANK. FOR
EXAMPLE, IF BANCORP'S FINANCIAL CONDITION DETERIORATES MATERIALLY PRIOR TO THE
ANNUAL MEETING, THEN THE DIRECTORS OF PENNCORE COULD INFORM THE PENNCORE
SHAREHOLDERS THAT THEY HAVE WITHDRAWN THEIR RECOMMENDATION TO VOTE FOR APPROVAL
OF THE MERGER AGREEMENT. THE AGREEMENTS ALSO DO NOT APPLY TO THE SHARES OF
PENNCORE COMMON STOCK HELD BY A DIRECTOR AS A TRUSTEE OR OTHER FIDUCIARY. NO
MONETARY OR OTHER COMPENSATION WAS PAID TO ANY PENNCORE DIRECTOR OR NATIONAL
PENN FOR ENTERING INTO THESE AGREEMENTS.
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The foregoing is a summary of the material terms of the voting agreements.
The forms of these agreements have been filed with the SEC as exhibits to the
Registration Statement. Such forms are incorporated herein by reference, and the
foregoing summary of the agreements is qualified in its entirety by reference to
such filing.
Opinion of Penncore Financial Advisor
General
The Board of Directors of Penncore retained Danielson Associates Inc.
("Danielson") in November 1996 to act as its financial advisor and as such,
among other things, to advise the Penncore Board of Directors as to the fairness
to its shareholders of the financial terms of the offer to acquire Penncore.
Danielson is regularly engaged in the valuation of banks, bank holding companies
and thrifts in connection with mergers, acquisitions and other securities
transactions and has knowledge of, and experience with, Pennsylvania banking
markets and banking organizations operating in those markets. Danielson was
selected by Penncore because of its knowledge of, experience with, and
reputation in the financial services industry.
In such capacity, Danielson participated in the negotiations with respect
to the pricing and other terms and conditions of the Merger, but the decision as
to accepting the offer was ultimately made by the Board of Directors of
Penncore. Danielson advised Penncore's Board of Directors that, in its opinion,
as of February 3, 1997, the financial terms of Bancorp's offer were "fair" to
Penncore and its shareholders. No limitations were imposed by the Penncore Board
of Directors upon Danielson with respect to the investigations made or
procedures followed by it in arriving at its opinion.
In arriving at its opinion, Danielson reviewed certain publicly available
business and financial information relating to Penncore and Bancorp, including
(a) 1994 and 1995 annual reports; (b) call report data from 1989 through 1996
and quarterly reports for March 31, 1996, June 30, 1996 and September 30, 1996;
(c) recently reported prices and trading activities of, and dividends paid on,
the common stock of Bancorp; and (d) certain other publicly available
information, including data relating to the current economic environment
generally and the banking market in particular. Danielson also met with the
management of Penncore to discuss Penncore's past and current business
operations and financial condition.
As more fully described below, Danielson also considered certain financial
and stock market data of Bancorp in comparison with similar data of other
publicly held banks, thrifts and their holding companies and considered
financial terms of comparable transactions, which have been recently announced
and/or completed.
Danielson did not obtain any independent appraisal of assets or liabilities
of Penncore or Bancorp or their respective subsidiaries. Further, Danielson did
not independently verify the information provided by Penncore or Bancorp and
assumed the accuracy and completeness of all such information.
In arriving at its opinion, Danielson performed a variety of financial
analyses. Danielson believes that its analyses must be considered as a whole and
that consideration of portions of such analyses and the factors considered
therein, without considering all factors and analyses, could create an
incomplete view of the analyses and the process underlying Danielson's opinion.
The preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis and summary
description.
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In its analyses, Danielson made certain assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond Bancorp's or Penncore's control. Any estimates contained in
Danielson's analyses are not necessarily indicative of future results of value,
which may be significantly more or less favorable than such estimates. Estimates
of values of companies do not purport to be appraisals or necessarily reflect
the prices at which companies or their securities may actually be sold.
Danielson analyzed the changes in the amount of earnings, book value, and
indicated dividends represented by the receipt of about 2.50 shares of Bancorp
Common Stock or $36.56 in cash for each of the outstanding shares of Penncore
Common Stock surrendered and $36.56 less the exercise price for each outstanding
stock purchase warrant and share of phantom stock. The analysis evaluated, among
other things, possible dilution in earnings and capital per share for Bancorp
Common Stock and dividends to be received by Penncore' shareholders.
Comparable Companies and Comparable Acquisitions Analyses
Danielson compared Penncore's (a) tangible capital of 6.98% of assets as of
December 31, 1996, (b) .58% of assets nonperforming as of September 30, 1996,
and (c) net operating income of .97% of average assets for the nine-month period
ending September 30, 1996, with the medians for selected Pennsylvania banks that
Danielson deemed comparable. These banks included all of the "new banks," -
i.e., opened since 1985, in the Philadelphia suburbs, specifically, Berks County
Bank, Madison Bank, Premier Bank and Founders Bank. Their medians were (a)
tangible capital of 7.09% of assets, (b) .99% of assets nonperforming, and (c)
net operating income of 1.30% of average assets.
Danielson also compared Bancorp's (a) stock price as of January 31, 1997 of
14 times adjusted earnings and 116% of book, (b) dividend yield based on
trailing four quarters as of September 30, 1996 and stock price as of January
31, 1997 of 2.61%, (c) tangible capital as of September 30, 1996 equal to 7.09%
of assets, (d) nonperforming assets as of September 30, 1996 equal to .61% total
assets and (e) return on average assets during the trailing four quarters ended
June 30, 1996, equal to .72% with the medians for selected bank, bank holding
and thrift companies that Danielson deemed to be comparable to Bancorp.
The selected institutions included publicly traded Pennsylvania and New
Jersey bank, bank holding and thrift companies with assets between $500 million
and $3 billion and no extraordinary characteristics. These comparable banks were
Commerce Bancorp, Inc.; Commonwealth Bancorp, Inc.; FMS Financial Corp.;
Harleysville National Corp.; IBS Financial Corp.; Jeff Banks, Inc.; Keystone
Heritage Group, Inc.; National Penn Bancshares, Inc.; Prime Bancorp, Inc.; TF
Financial Corporation; and Univest Corporation of Pennsylvania. The comparable
medians were (a) stock price of 15.1 times earnings and 124% of book for the
thrifts and 12.6 times earnings and 169% of book for the banks, (b) dividend
yield of 1.93% for the thrifts and 2.97% for the banks, (c) tangible capital of
8.59% and 8.44% of assets for the thrifts and banks, respectively, (d) .41% of
assets not performing for the thrifts and .89% for the banks, and (e) return on
average assets of .91% and 1.31% for the thrifts and banks, respectively.
Danielson also compared other income, expense and balance sheet information of
such companies with similar information about Bancorp.
Danielson compared the consideration to be paid in the Merger to the latest
twelve months earnings and equity capital of Penncore with the earnings and
capital multiples paid in recent acquisitions of Pennsylvania banks. For this
comparison, Danielson used the median of these multiples for banks acquired in
1995, 1996 and through January 31, 1997 with assets greater than $100 million.
Danielson also considered the prices paid for banks established since 1985 in
the Northeast and sold between 1993 and 1996. At the time Danielson made its
analysis, the consideration to be paid in the Merger equalled 157% of Penncore's
December 31, 1996 book value and 22.4 times Penncore's earnings for the trailing
four quarters as of December 31, 1996. This compares to median multiples of 201%
of book value and 18.3 times earnings for comparable Pennsylvania acquisitions.
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No company or transaction used in this composite analysis is identical to
Penncore and Bancorp. Accordingly, an analysis of the results of the foregoing
is not mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading values of the
company or companies to which they are being compared.
The summary set forth above describes all of the material terms of the
analyses and procedures performed by Danielson in the course of arriving at its
opinion; however, it does not purport to address every aspect of such analyses
and procedure. In payment for its services as the financial advisor to Penncore,
Danielson was paid a fee of $25,000 and out-of-pocket expenses.
The full text of the opinion of Danielson dated as of May 13, 1997, which
sets forth assumptions made and matters considered, is attached hereto as Annex
C to this Proxy Statement/Prospectus. Penncore shareholders are urged to read
this opinion in its entirety. Danielson's opinion is directed only to the
consideration to be received by Penncore shareholders in the Merger and does not
constitute a recommendation to any Penncore shareholder as to how such
shareholder should vote at the Annual Meeting.
Conversion of Penncore Common Stock
In the Merger, each share of Penncore Common Stock outstanding immediately
prior to the Effective Time (other than treasury shares, shares owned by Bancorp
and shares as to which dissenters' rights have been perfected ("Dissenting
Shares")) will be converted into the right to receive $36.56 cash without
interest (the "Per Share Cash Amount"), 2.50 shares of Bancorp Common Stock (the
"Exchange Ratio"), or a combination of cash and shares of Bancorp Common Stock
as described below (collectively, the "Merger Consideration").
If the Average Price of Bancorp Common Stock exceeds $16.75, the Exchange
Ratio shall be decreased from 2.50 to a number equal to $41.875 divided by the
Average Price (calculated to the nearest 1/1,000). For this purpose, the
"Average Price" means the average of the last reported sale prices of Bancorp's
Common Stock (as reported by NASDAQ) for the 10 trading days ending on the 11th
day before the Effective Time (the "Averaging Period"). However, there shall be
no such adjustment to the Exchange Ratio if prior to the Averaging Period, there
has been a public announcement of the proposed acquisition or sale of all of
Bancorp's Common Stock or substantially all of Bancorp's assets. If the Average
Price of Bancorp Common Stock is less than $12.50, the Merger Agreement may be
terminated unless Bancorp elects to increase the Exchange Ratio to a number
equal to $31.25 divided by the Average Price (calculated to the nearest 1/1000).
If the Averaging Period for the determination of the Exchange Ratio had ended on
May 15, 1997, the Average Price of Bancorp Common Stock would be $16.575 and the
Exchange Ratio would be 2.50 shares of Bancorp Common Stock. However, the
Averaging Period will not be known until the determination of the Effective Time
of the Merger, which will occur after the Annual Meeting. Therefore, the actual
Exchange Ratio may be a different number.
Under the Merger Agreement, there are certain limitations on the number of
shares of Penncore Common Stock that will be exchanged for Bancorp Common Stock
or cash. No more than 70% of the outstanding shares of Penncore Common Stock
will be exchanged for shares of Bancorp Common Stock. No more than 49% of the
outstanding shares of Penncore Common Stock will be exchanged for cash. If these
limitations are exceeded, then those affected Penncore shareholders shall be
subject to the allocation procedures discussed below.
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Shareholder Election Procedures
Each shareholder of Penncore Common Stock on the record date for the Annual
Meeting is entitled (i) to elect to receive cash for all of such shares (a "Cash
Election"), (ii) to elect to receive Bancorp Common Stock for all of such shares
(a "Stock Election"), or (iii) to indicate no preference as to the receipt of
cash or Bancorp Common Stock for all of such shares (a "Non-Election").
Elections should be made by holders of Penncore Common Stock by mailing or
delivering to Penncore the Form of Election which is included with this Proxy
Statement/Prospectus for delivery by Penncore to Chase Mellon Shareholder
Services (the "Exchange Agent"). To be effective, a Form of Election must be
properly completed, signed and submitted to Penncore. Forms of Election must be
received by Penncore no later than 9:00 a.m. (local time), on July 17, 1997, the
date of the Annual Meeting (the "Election Deadline"). The election by a Penncore
shareholder is legally binding, subject to the consummation of the Merger, and
cannot be revoked or changed after the Election Deadline. Penncore will review
all Forms of Election prior to their submission to the Exchange Agent. However,
Bancorp will have the discretion, which it may delegate in whole or in part to
the Exchange Agent, to determine whether Forms of Election have been properly
completed, signed and submitted or revoked and to disregard immaterial defects
in Forms of Election. The decision of Bancorp (or the Exchange Agent) in such
matters shall be conclusive and binding. Neither Penncore, Bancorp nor the
Exchange Agent will be under any obligation to notify any person of any defect
in a Form of Election submitted to the Exchange Agent. The Exchange Agent shall
also make all computations under the Allocation Procedures described below to
determine the Merger Consideration under the Merger Agreement and all such
computations shall be conclusive and binding on the holders of Penncore Common
Stock.
A PENNCORE SHAREHOLDER MUST COMMIT ALL OF HIS OR HER SHARES TO EITHER THE
CASH ELECTION OR THE STOCK ELECTION. FOR EXAMPLE, A PENNCORE SHAREHOLDER CANNOT
DIVIDE THE NUMBER OF SHARES INTO TWO GROUPS AND ELECT THE CASH ELECTION FOR ONE
GROUP OF SHARES AND THE STOCK ELECTION FOR THE OTHER GROUP OF SHARES. IF A
PENNCORE SHAREHOLDER FAILS TO MAKE THE REQUIRED ELECTION BY THE ELECTION
DEADLINE, THEN HIS OR HER ELECTION SHALL BE DEEMED TO BE A NON- ELECTION.
A person who is a nominee, trustee or who holds shares of Penncore Common
Stock in some other representative capacity (a "Representative"), may submit
multiple Forms of Election with respect to each beneficial owner of such shares.
A Representative must complete that portion of the Form of Election certifying
that such Form of Election covers all of the shares of Penncore Common Stock
held by such representative for the applicable beneficial owner.
A Penncore shareholder may revoke a previously submitted Form of Election
prior to the Election Deadline after giving written notice to Penncore of such
revocation and submitting a substitute Form of Election by the Election
Deadline.
A Penncore shareholder who does not submit a Form of Election by the
Election Deadline shall be deemed to have made a Non-Election. If Bancorp or the
Exchange Agent, as the case may be, shall determine that a Cash Election or
Stock Election was not properly made, such Cash Election or Stock Election shall
be deemed to be of no force and effect and the affected shareholder shall be
deemed to have made a Non-Election.
BECAUSE BOTH THE NUMBER OF SHARES OF PENNCORE COMMON STOCK TO BE CONVERTED
TO CASH AND THE NUMBER OF SHARES OF PENNCORE COMMON STOCK TO BE CONVERTED TO
BANCORP COMMON STOCK IN THE MERGER WILL NOT BE DETERMINED UNTIL AFTER THE
ELECTION DEADLINE UNDER THE ALLOCATION PROCEDURES DESCRIBED BELOW, NO ASSURANCE
CAN BE GIVEN THAT A SHAREHOLDER WILL RECEIVE ALL CASH OR ALL BANCORP COMMON
STOCK AS ELECTED. RATHER, THE ELECTION BY A PENNCORE SHAREHOLDER WILL BE SUBJECT
TO THE RESULTS OF THE ALLOCATION PROCEDURES DESCRIBED BELOW.
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ALL ELECTIONS SUBMITTED ARE IRREVOCABLE AFTER THE ELECTION DEADLINE. IF THE
MERGER AGREEMENT IS APPROVED BY THE REQUIRED VOTE OF THE SHARES OF PENNCORE
COMMON STOCK, THEN SUCH ELECTIONS ARE LEGALLY BINDING ON THE SHARES SUBJECT TO
SUCH FORM OF ELECTION. IF THE MERGER AGREEMENT IS APPROVED BY THE REQUISITE VOTE
OF SHARES OF PENNCORE COMMON STOCK, THEN, AFTER THE ANNUAL MEETING, THE STOCK
TRANSFER BOOKS OF PENNCORE WILL BE CLOSED AND THERE WILL BE NO FURTHER
REGISTRATION OF TRANSFERS OF SHARES OF PENNCORE COMMON STOCK.
Allocation Procedures
In order for a Penncore shareholder to understand the allocation
procedures, he or she must understand the following definitions:
"Outstanding Penncore Shares" means the number of shares of Penncore Common
Stock outstanding immediately prior to the date of the Annual Meeting.
"Stock Election Shares" means all shares of Penncore Common Stock covered
by Stock Elections.
"Stock Election Number" means the actual number of shares of Penncore
Common Stock that will be exchanged for Bancorp Common Stock.
"Cash Election Shares" means all shares of Penncore Common Stock covered by
Cash Elections.
"Cash Election Number" means the actual number of shares of Penncore Common
Stock that will be exchanged for cash.
"Non-Election Shares" means all shares of Penncore Common Stock covered by
a Non-Election or deemed to be covered by a Non-Election for failure to submit a
properly completed and executed Form of Election by the Election Deadline.
"Per Share Cash Amount" means $36.56.
The Stock Election Number cannot exceed 70% of the Outstanding Penncore
Shares and the Cash Election Number cannot exceed 49% of the Outstanding
Penncore Shares. If the Stock Election Shares or the Cash Election Shares exceed
the above limitations, then the following allocation procedures shall be
applied:
If the Cash Election Shares exceed the Cash Election Number, all Stock
Election Shares and all Non-Election Shares shall be exchanged for Bancorp
Common Stock, and the Cash Election Shares shall be exchanged for Bancorp Common
Stock and cash in the following manner:
each Cash Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the
product of (x) the Per Share Cash Amount and (y) a fraction (the
"Cash Fraction"), the numerator of which shall be the Cash
Election Number and the denominator of which shall be the total
number of Cash Election Shares, and (ii) a number of shares of
Bancorp Common Stock equal to the product of (x) the Exchange
Ratio and (y) a fraction equal to one minus the Cash Fraction (the
result shall be rounded to two decimal points, with a third
decimal point rounded upward if it equals .005 or more and ignored
if it equals less than .005).
If the Stock Election Shares exceed the Stock Election Number, all Cash
Election Shares and all Non-Election Shares shall be exchanged for cash, and all
Stock Election Shares shall be exchanged for Bancorp Common Stock and cash in
the following manner:
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each Stock Election Share shall be converted into the right to
receive (i) a number of shares of Bancorp Common Stock equal to
the product of (x) the Exchange Ratio and (y) a fraction (the
"Stock Fraction"), the numerator of which shall be the Stock
Election Number and the denominator of which shall be the total
number of Stock Election Shares, and (ii) an amount in cash,
without interest, equal to the product of (x) the Per Share Cash
Amount and (y) a fraction equal to one minus the Stock Fraction
(the result shall be rounded to two decimal points, with a third
decimal point rounded upward if it equals .005 or more and ignored
if it equals less than .005).
In the event that the Cash Election Number exceeds Cash Election Shares and
the Stock Election Number exceeds the Stock Election Shares, all Cash Election
Shares shall be exchanged for cash, all Stock Election Shares shall be exchanged
for Bancorp Common Stock, and the Non-Election Shares, if any, shall be
exchanged for Bancorp Common Stock and cash in the following manner:
each Non-Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the
product of (x) the Per Share Cash Amount and (y) a fraction (the
"Non-Election Fraction"), the numerator of which shall be the
excess of the Cash Election Number over the total number of Cash
Election Shares and the denominator of which shall be the excess
of (A) the Outstanding Penncore Shares over (B) the sum of the
total number of Cash Election Shares and the total number of Stock
Election Shares and (ii) a number of shares of Bancorp Common
Stock equal to the product of (x) the Exchange Ratio and (y) a
fraction equal to one minus the Non-Election Fraction.
The following are examples of the operation of these Allocation Procedures
based on certain hypothetical results of the Shareholder Election Procedures.
These examples are set forth only for the purpose of illustrating the operation
of the Allocation Procedures and do not reflect the actual Merger Consideration
to be received by Penncore shareholders in the Merger based on the actual
elections made by Penncore shareholders.
Example 1.
Assumptions: Stock Election Shares equal 60%, Cash
Election Shares equal 30% and Non-Election Shares equal 10%
of the Outstanding Shares.
Result: Stock Election Number is 60% and Cash Election
Number is 40% of the Outstanding Shares. All shareholders
who made Stock Elections receive Bancorp Common Stock and
all shareholders who made Cash Elections and Non-Elections
receive cash.
Example 2.
Assumptions: Stock Election Shares equal 20%, Cash
Election Shares equal 70%, and Non-Election Shares equal 10%
of the Outstanding Shares.
Result: Stock Election Number is 51% and Cash Election
Number is 49% of the Outstanding Shares. All shareholders
who made Stock Elections and Non-Elections receive Bancorp
Common Stock. All shareholders who made Cash Elections
receive for each of their shares $36.56 multiplied by 49/70
in cash plus the Exchange Ratio multiplied by 21/70 in
Bancorp Common Stock.
Example 3.
Assumptions: Stock Election Shares equal 80%, Cash
Election Shares equal 10% and Non-Election Shares equal 10%
of the Outstanding Shares.
Result: Stock Election Number is 70% and Cash Election
Number is 30% of the Outstanding Shares. All shareholders
who made Cash Elections and Non-Elections receive cash. All
shareholders who made Stock Elections receive for each of
their shares the Exchange Ratio multiplied by 70/80 in
Bancorp Common Stock plus $36.56 multiplied by 10/80 in
cash.
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<PAGE>
Example 4.
Assumptions: Stock Election Shares equal 25%, Cash
Election Shares equal 20% and Non-Election Shares equal 55%
of the Outstanding Shares.
Result: Stock Election Number is 51% and Cash Election
Number is 49% of the Outstanding Shares. All shareholders
who made Stock Elections receive Bancorp Common Stock and
all shareholders who made Cash Elections receive cash. All
shareholders who made Non- Elections receive for each of
their shares the Exchange Ratio multiplied by 26/55 in
Bancorp Common Stock plus $36.56 multiplied by 29/55 in
cash.
Exchange of Stock Certificates
At the Effective Time of the Merger, Bancorp shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Penncore Common
Stock, (i) certificates evidencing such number of shares of Bancorp Common Stock
equal to the Exchange Ratio multiplied by the Stock Election Number and, (ii)
cash in the amount equal to the Per Share Cash Amount multiplied by the Cash
Election Number (such certificates for shares of Bancorp Common Stock, together
with any dividends or distributions with respect thereto and cash, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions in the letters of transmittal described
below, deliver the Bancorp Common Stock and cash contemplated to be issued out
of the Exchange Fund.
As soon as reasonably practicable after the Effective Time of the
Merger, Bancorp will instruct the Exchange Agent to mail to each holder of
record of a certificate or certificates which immediately prior to the Effective
Time evidenced outstanding shares of Penncore Common Stock (other than
Dissenting Shares) (the "Certificates"), (i) a notice indicating the form of
Merger Consideration to be received by the holder as a result of the Allocation
Procedures, (ii) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent) in such
form and with such other provisions as Bancorp may reasonably specify, and (iii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates evidencing shares of Bancorp Common Stock or cash. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions, the holder of such Certificate
shall receive therefor (A) a certificate or certificates evidencing the number
of whole shares of Bancorp Common Stock exchanged for the shares of Penncore
Common Stock formerly evidenced by such Certificate, (B) cash, (C) cash in lieu
of fractional shares of Bancorp Common Stock, and (D) any dividends or other
distributions to which such holder is entitled (the shares of Bancorp Common
Stock, dividends, distributions and cash described in clauses (A), (B), (C) and
(D) being collectively, the "Total Merger Consideration") and the Certificate so
surrendered shall forthwith be canceled. Until surrendered as described above,
each Certificate shall be deemed at any time after such Effective Time to
evidence only the right to receive upon such surrender the Total Merger
Consideration.
No dividends or other distributions declared or made after the
Effective Time of the Merger with respect to Bancorp Common Stock with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Bancorp Common Stock evidenced
thereby. No other part of the Total Merger Consideration shall be paid to any
such holder, until the holder of such Certificate shall surrender such
Certificate. Following surrender of any such Certificate, there shall be paid
promptly to the holder of the certificate evidencing whole shares of Bancorp
Common Stock issued in exchange for the certificate, the amount of any cash
payable with respect to a fractional share of Bancorp Common Stock and the
amount of dividends or other distributions with a record date after the
Effective Time of the Merger. No interest shall be paid on the Total Merger
Consideration.
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No certificates or scrip evidencing fractional shares of Bancorp Common
Stock shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a shareholder of Bancorp. In lieu of any such fractional shares, each
holder of Penncore Common Stock upon surrender of a Certificate for exchange
shall be paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (a) the per share closing price on NASDAQ of Bancorp
Common Stock on the Effective Time of the Merger (or, if shares of Bancorp
Common Stock did not trade on the NASDAQ on such date, the first day of trading
of such Bancorp Common Stock on the NASDAQ after such Effective Time) by (b) the
fractional interest to which such holder would otherwise be entitled (after
taking into account all shares of Penncore Common Stock then held of record by
such holder).
IF THE MERGER IS APPROVED BY THE AFFIRMATIVE VOTE AT THE ANNUAL MEETING
OF 75% OF THE ISSUED AND OUTSTANDING SHARES OF PENNCORE COMMON STOCK, THEN THE
STOCK TRANSFER BOOKS OF PENNCORE WILL BE CLOSED AFTER THE ANNUAL MEETING AND
THERE WILL BE NO FURTHER REGISTRATION OF TRANSFERS OF PENNCORE COMMON STOCK
THEREAFTER ON THE RECORDS OF PENNCORE.
Any portion of the Exchange Fund which remains undistributed to the
holders of Penncore Common Stock for six months after the Effective Time of the
Merger shall be delivered by the Exchange Agent to Bancorp. Any holders of
Penncore Common Stock shall only look to Bancorp for payment of the Total Merger
Consideration. In the event that any Certificates are not surrendered for
exchange within 24 months of such Effective Time, the Bancorp Common Stock that
would otherwise have been delivered in exchange for the unsurrendered
Certificates shall be sold by Bancorp and the net proceeds of the sale shall be
held for the holders of the unsurrendered Certificates to be paid to them upon
surrender of their Certificates. After the date of such sale of Bancorp Common
Stock, the sole right of the holders of unsurrendered Certificates shall be the
right to collect the net sales proceeds held for their account without interest
thereon.
Bancorp shall not be liable to any holder of shares of Penncore Common
Stock for any such shares of Bancorp Common Stock, cash (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
Bancorp shall be entitled to deduct and withhold from the Total Merger
Consideration otherwise payable to any holder of Penncore Common Stock such
amounts as Bancorp is required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the
"Code"), or any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by Bancorp, such withheld amounts shall be treated for
all purposes as having been paid to the holder of the shares of Penncore Common
Stock in respect of which such deduction and withholding was made by Bancorp.
Stock Purchase Warrants and Phantom Shares
At the Effective Time of the Merger, the stock purchase warrants to
purchase 31,066 shares of Penncore Common Stock ("Warrants") which are currently
outstanding shall be canceled and be of no force or effect. Each holder of the
Warrants will be entitled to receive immediately prior to the Effective Time, in
settlement thereof, a cash payment from Penncore in the amount of $15.24 per
share of Penncore Common Stock covered by the Warrant, multiplied by the total
number of shares of Penncore Common Stock covered by the Warrant. See
"INFORMATION CONCERNING PENNCORE DIRECTORS, OFFICERS AND NOMINEE--Stock Purchase
Warrants."
On or prior to the Effective Time of the Merger, Penncore shall pay
each participant under Penncore's Phantom Stock Plan $15.24 in cash for each of
the shares credited to each participant's account. There are an aggregate of
27,850 shares credited to all accounts under the Phantom Stock Plan. See
"INFORMATION CONCERNING PENNCORE DIRECTORS, OFFICERS AND NOMINEE--Phantom Stock
Plan."
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Certain Federal Income Tax Consequences
The following summary discusses the principal federal income tax
consequences of the Merger. The summary is based upon the Internal Revenue Code
(the "Code"), applicable Treasury Regulations thereunder and administrative
rulings and judicial authority as of the date hereof. All of the foregoing are
subject to change, and any such change could affect the continuing validity of
the discussion. The discussion assumes that holders of shares of Penncore Common
Stock hold such shares as a capital asset, and does not address the tax
consequences that may be relevant to a particular shareholder subject to special
treatment under certain federal income tax laws, such as dealers in securities,
banks, insurance companies, tax-exempt organizations, non-United States persons
and shareholders who acquired shares of Penncore Common Stock pursuant to the
exercise of options or otherwise as compensation or through a tax-qualified
retirement plan, nor any consequences arising under the laws of any state,
locality or foreign jurisdiction.
Tax Opinion
KPMG has provided their opinion that the Merger will constitute a
tax-free reorganization pursuant to Sections 368(a)(1)(A) of the Code and that
accordingly (i) neither Bancorp nor Penncore will recognize gain or loss as a
result of the Merger, and (ii) holders of shares of Penncore Common Stock that
exchange their shares solely for Bancorp Common Stock will not recognize gain or
loss in the Merger, and holders of shares of Penncore Common Stock that exchange
their shares for Bancorp Common Stock and cash will recognize gain, if any, in
the Merger but not in excess of the amount of cash received.
The foregoing opinion is based upon (i) certain representations of
Bancorp and Penncore, (ii) the assumption that the Merger will be consummated in
accordance with its terms, and (iii) the assumption that the "continuity of
interest" requirement for tax-free reorganization treatment will be satisfied.
In general, under applicable U.S. Supreme Court precedent, the continuity of
interest requirement will be satisfied if the fair market value of the Bancorp
Common Stock issued in the Merger is approximately 40% or more of the total
amount of the cash paid plus the fair market value of the Bancorp Common Stock
issued in the Merger. While at least 51% of Penncore Common Stock must be
exchanged for Bancorp Common Stock in the Merger, the percentage of the value of
consideration of Bancorp Common Stock issued in the Merger may be greater or
less than 51%. See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Conversion of
Penncore Common Stock." Other factors may affect the continuity of interest test
as well. The consummation of the Merger is conditioned on the receipt by Bancorp
and Penncore of an opinion of KPMG confirming that the requirements for tax-free
reorganization treatment, including the continuity of interest requirement, have
been met and that the Merger therefore qualifies as a tax-free reorganization.
The discussion below summarizes certain federal income tax consequences
of the Merger to a Penncore shareholder, assuming that the Merger will qualify
as a tax-free reorganization.
Holders of Penncore Common Stock--General
As discussed below, the federal income tax consequences of the Merger
to a Penncore shareholder depend on whether such shareholder receives cash or
shares of Bancorp Common Stock or some combination thereof for such
shareholder's shares of Penncore Common Stock, as well as for any shares of
Penncore Common Stock that such shareholder constructively owns within the
meaning of Section 318 of the Code (which generally deems a person to own stock
that is owned by certain family members or related entities or that is the
subject of options owned or deemed owned by such person), and may further depend
on whether such shareholder actually or constructively owns any Bancorp Common
Stock.
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Only Bancorp Common Stock Received
Except as discussed below with respect to cash received in lieu of a
fractional shares of Bancorp Common Stock, a shareholder of Penncore that
receives only shares of Bancorp Common Stock in the exchange of such
shareholder's shares of Penncore Common Stock will not recognize gain or loss.
The tax basis of the Bancorp Common Stock received in the Merger will be the
same as the tax basis of the shares of Penncore Common Stock exchanged therefore
in the Merger. The holding period of the Bancorp Common Stock received will
include the holding period of shares of Penncore Common Stock exchanged
therefore.
Only Cash Received
A Penncore shareholder that receives solely cash in the Merger in
exchange for such shareholder's shares of Penncore Common Stock, or that
exercises such shareholder's dissenters' right to seek an appraisal of such
shareholder's shares of Penncore Common Stock, generally will recognize capital
gain or loss measured by difference between the amount of cash received and the
tax basis of the shares of Penncore Common Stock exchanged therefor. If,
however, any such shareholder constructively owns shares of Penncore Common
Stock that are exchanged for Bancorp Common Stock in the Merger, or owns Bancorp
Common Stock actually or constructively after the Merger, the consequences to
such shareholder may in unusual circumstances be similar to the consequences
discussed in the second paragraph of the next Section, except that the amount of
consideration, if any, treated as a dividend will not be limited to the amount
of such shareholder's gain.
Bancorp Common Stock and Cash Received
Except as discussed below with respect to cash received in lieu of a
fractional share of Bancorp Common Stock, a Penncore shareholder that, as a
result of the Allocation Procedures described above, receives both Bancorp
Common Stock and cash in exchange for shares of Penncore Common Stock will not
recognize loss in such exchange. Under Section 356(a)(1) of the Code, however,
the shareholder will recognize gain (measured by the sum of the fair market
value of the Bancorp Common Stock received plus the amount of any cash received
minus the tax basis of the shares of Penncore Common Stock exchanged), if any,
but only to the extent of the amount of any cash received. Under applicable U.S.
Supreme Court precedent, such gain will be capital gain except in the
circumstances described in the next paragraph.
In unusual circumstances, a Penncore shareholder that constructively
owns shares of Penncore Common Stock that are exchanged for Bancorp Common Stock
in the Merger or that actually or constructively owns Bancorp Common Stock after
the Merger (other than Bancorp Common Stock received in the Merger) will be
required to treat any gain recognized as dividend income (rather than capital
gain) up to the amount of cash received in the Merger if the receipt of cash by
such shareholder has the effect of a distribution of a dividend. Whether the
receipt of cash has the effect of the distribution of a dividend would depend
upon the shareholder's particular circumstances. The Internal Revenue Service
has indicated in published rulings that a distribution that results in any
actual reduction in interest of a small, minority shareholder in a publicly held
corporation will not constitute a dividend if the shareholder exercises no
control with respect to corporate affairs.
The tax basis of the shares of Bancorp Common Stock received will be
the same as the tax basis of the shares of Penncore Common Stock exchanged,
decreased by the basis of any fractional share interest for which cash is
received in the Merger, and further decreased by the amount of cash received
(other than cash received for a fractional share interest), and increased by the
amount of gain recognized on the exchange (including any portion that is treated
as a dividend). The holding period of the shares of Bancorp Common Stock
received will include the holding period of the shares of Penncore Common Stock
exchanged therefor.
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Fractional Shares
If a holder of shares of Penncore Common Stock receives cash in lieu of
a fractional share of Bancorp Common Stock in the Merger, such cash amount will
be treated as received in exchange for the fractional share. Gain or loss
recognized as a result of that exchange will be equal to the cash amount
received for the fractional share of Bancorp Common Stock reduced by the
proportion of the holder's tax basis in shares of Penncore Common Stock
exchanged and allocable to the fractional share of Bancorp Common Stock.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
THUS, PENNCORE SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
Interests of Certain Persons in the Transaction
Officers and Directors of Penncore
Certain of the directors and officers of Penncore and Commonwealth
State Bank hold shares of Penncore Common Stock, stock purchase warrants and/or
phantom stock, as the case may be. See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Stock Purchase Warrants and Phantom Shares" and "INFORMATION CONCERNING
PENNCORE DIRECTORS, OFFICERS AND NOMINEE--Beneficial Ownership by Officers,
Directors and Nominee."
Owen O. Freeman, Jr., the Chairman of the Boards of Directors of
Penncore and Commonwealth State Bank shall become, at the Effective Time of the
Merger, a member of the Boards of Directors of Bancorp and Main Line Bank.
Advisory Board for Bancorp
Mr. Freeman shall also become the Chairman of an Advisory Board of
Bancorp. This advisory board shall interact with Bancorp officers for purposes
of generating new deposit and loan business in the Bucks and Montgomery
Counties, Pennsylvania market area as well as the Mercer County, New Jersey
market area. Members of this Advisory Board may include members of the Boards of
Directors of Penncore and Commonwealth State Bank who will be requested by
Bancorp to serve on such board. The members of the Advisory Board shall be paid
for each meeting that they attend as determined by the Board of Directors of
Bancorp. This Advisory Board shall continue so long as it is deemed to be in the
best interests of Bancorp.
Penncore and Commonwealth State Bank Employees
As soon as administratively practicable after consummation of the
Merger, employees of Penncore and Commonwealth State Bank shall be generally
entitled to participate in Bancorp's employee benefit, health, welfare and
similar plans (other than Bancorp's defined benefit pension plan and Employee
Stock Ownership Plan as described below) on substantially the same terms and
conditions as employees of Bancorp, giving effect (except for the accrual of
benefits under such plans) to years of service with Penncore and Commonwealth
State Bank as if such service were with Bancorp. No employee of Penncore or
Commonwealth State Bank presently participating in Penncore's or Commonwealth
State Bank's medical plan shall be precluded from participating in medical plans
of Bancorp on account of a preexisting medical condition, and shall receive
credit toward any deductible and co-
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payments under any welfare benefit plans sponsored by Bancorp to the extent such
deductibles and co-payments have been satisfied under the respective Penncore
welfare benefit plans.
Upon consummation of the Merger or as soon thereafter as practicable,
all participants in Commonwealth State Bank's 401(k) Plan shall be automatically
and fully vested in all amounts contained in or allocable to their accounts in
accordance with the terms of such plan. Commonwealth State Bank's 401(k) Plan
shall be merged into Bancorp's 401(k) Plan and (i) Penncore and Commonwealth
State Bank employees who remain employees of Bancorp shall have the right to
participate in Bancorp's 401(k) Plan on the same terms and conditions as other
participating employees, but shall in all events be fully vested in their
accounts transferred from Commonwealth State Bank's 401(k) Plan in accordance
with the terms of such plan; and (ii) all other Penncore and Commonwealth State
Bank employees shall be entitled to roll their respective accounts into an
individual retirement account and to all other rights to which they would have
been entitled had they been fully vested and terminated their employment with
Penncore immediately preceding the Effective Time of the Merger.
Penncore and Commonwealth State Bank employees who remain employees of
Bancorp after the Effective Time of the Merger are not eligible to participate
in Bancorp's defined benefit pension plan.
Employees of Penncore and Commonwealth State Bank shall be entitled to
participate in Bancorp's Employee Stock Ownership Plan on the same basis as any
new employee of Bancorp, but will receive no credit for vesting purposes for
service with Penncore.
Executive Employment Contracts
Penncore and Commonwealth State Bank have entered into written
employment contracts with Owen O. Freeman, Jr., Chairman of the Boards of
Directors, and H. Paul Lewis, President of Penncore and Commonwealth State Bank.
Under such contracts, if Mr. Freeman or Mr. Lewis is terminated from employment
following a change of control (such as the Merger), then Bancorp (as the
successor to Penncore and Commonwealth State Bank) shall be obligated to pay Mr.
Freeman or Mr. Lewis, as the case may be, his current annual salary for the
remaining term of the contract (which expires December 31, 1998), or 24 months
with respect to Mr. Freeman and 18 months with respect to Mr. Lewis, whichever
is longer. Bancorp shall also maintain the current benefit plans and programs
(or pay, if ineligible, a dollar amount equal to the benefit forfeited as a
result of such ineligibility for as long as the annual salary is paid) to which
Mr. Freeman or Mr. Lewis, as the case may be, was entitled prior to the
termination. See "INFORMATION CONCERNING PENNCORE DIRECTORS, OFFICERS AND
NOMINEE--Employment Agreements."
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Severance Agreements
Penncore and Commonwealth State Bank have entered into severance
agreements with the following officers of Penncore or Commonwealth State Bank,
as the case may be:
<TABLE>
<CAPTION>
Title of Position With
Name of Officer Title of Position With Penncore Commonwealth State Bank
<S> <C> <C>
H. Nickerson Hall Vice President/Chief Financial Vice President/Chief Financial Officer
Officer
Sharon M. Fink Assistant Secretary/Treasurer Vice President, Assistant Secretary, Treasurer
P. Alice Bischoff ---------- Vice President - Operations
Aileen M. Connolly ---------- Vice President - Branch Administration
Ronald G. Langlois ---------- Vice President
</TABLE>
Under these severance agreements, if there is a change of control (such
as the Merger) and the officer is terminated as a result thereof, then Bancorp
(as the successor to Penncore and Commonwealth State Bank) shall pay to the
respective officer one-month's then current annual salary for each full or
partial year of full time employment with Penncore or Commonwealth State Bank to
a maximum of 12 months (the "Severance Benefit Period"). For example, if an
officer was employed by Penncore for six years and eight months prior to
termination, he or she shall be entitled to receive seven months of payments.
Bancorp shall also provide, during the respective officer's Severance Benefit
Period, life, medical, health, accident and disability insurance and a
survivor's income benefit in form, substance and amount which is in each case
substantially equivalent to that provided to him or her prior to the
commencement of the Severance Benefit Period, whichever the respective officer
shall select.
Future Employment Discussions
Bancorp is currently engaged in discussions with Messrs. Lewis, Hall
and Langlois and Mesdames Fink, Bischoff and Connolly regarding possible
positions for them within the Bancorp organization. There is no assurance that
any of these officers and Bancorp will agree on terms of employment following
the Effective Time of the Merger. If such agreements are not reached in any
case, then Bancorp shall make the required payments due under the respective
employment contracts and severance agreements.
Stock Option Agreement
The summary information below concerning the material terms of the
Stock Option Agreement, which is an integral part of the Merger Agreement, is
qualified in its entirety by reference to the full text of such agreement, which
is attached to this Proxy Statement/Prospectus as Annex B.
Under the Stock Option Agreement, Penncore has granted to Bancorp an
option to purchase up to 95,900 newly issued or treasury shares of Penncore
Common Stock (or 19.9% of the Penncore Common Stock issued and outstanding after
giving effect to the issuance of Penncore Common Stock upon exercise of the
option) at a price of $24 per share (the "Option"). In the event of any change
in Penncore Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, exchanges of shares or the like, the type and
number of shares subject to the Option and the purchase price therefor shall be
adjusted to reflect such change. In the event that any additional shares of
Penncore Common Stock are issued or otherwise become outstanding after the date
of the Stock
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Option Agreement (other than pursuant to such Stock Option Agreement), the
number of shares of Penncore Common Stock subject to the Option shall be
adjusted so that, after such issuance, it equals 19.9% of the number of shares
of Penncore Common Stock then issued and outstanding after giving effect to any
shares subject or issued pursuant to the Option. The $24 exercise price is a
negotiated price representing the approximate book value of Penncore Common
Stock immediately prior to the announcement of the execution of the Merger
Agreement by Penncore and Bancorp.
Certain aspects of the Stock Option Agreement may have the effect of
discouraging persons who might be interested in acquiring control of Penncore.
The Option is exercisable only upon the occurrence of certain "Purchase Events"
that might jeopardize consummation of the Merger pursuant to the terms of the
Merger Agreement. The term "Purchase Event" in the Stock Option Agreement
generally relates to an attempt by a third party to acquire a significant
interest in Penncore and refers to any of the following events: (i) Penncore or
any Penncore subsidiary, without having received Bancorp's prior written
consent, enters into an agreement with any person (other than Bancorp or one of
its subsidiaries) to (x) merge or consolidate, or enter into any similar
transaction, with Penncore, (y) purchase, lease or otherwise acquire all or
substantially all of the assets of Penncore, or (z) purchase or otherwise
acquire (including by way of merger, consolidation, share exchange or any
similar transaction) securities representing 10% or more of the voting power of
Penncore or any Penncore subsidiary; (ii) except with respect to a certain Stock
Purchase Agreement between Penncore and National Penn Investment Company, any
person shall have acquired beneficial ownership of 10% or more of the
outstanding shares of Penncore Common Stock (the term "beneficial ownership"
having the meaning assigned thereto in Section 13(d) of the Exchange Act and the
regulations promulgated thereunder); or (iii) the making of an acquisition
proposal or an offer to purchase 10% or more of the then outstanding shares of
Penncore Common Stock or the filing of an application or notice with any federal
or state regulatory agency for clearance or approval to engage in any
transaction described in clause (i) or (ii) above, and thereafter the holders of
Penncore Common Stock shall have not approved the Merger Agreement and the
transaction contemplated thereby at the meeting of such shareholders held for
such purpose or such meeting shall not have been held or shall have been
cancelled prior to termination of the Merger Agreement. As of the date of this
Proxy Statement/Prospectus, to the best of the knowledge of Bancorp and
Penncore, no purchase event has occurred.
The Option would terminate upon the earliest to occur of (i) the
Effective Time of the Merger; (ii) termination of the Merger Agreement in
accordance with the provisions thereof prior to the occurrence of a Purchase
Event (other than a termination resulting from a willful breach by Penncore of
any covenant contained therein); or (iii) twelve months after termination of the
Merger Agreement if such termination follows the occurrence of a Purchase Event
or is due to a willful breach by Penncore of any covenant contained in the
Merger Agreement.
Although the shares issuable upon exercise of the Option represent
approximately 19.9% of the shares of Penncore Common Stock that would be
outstanding after such exercise, Bancorp may not acquire more than 5% of the
outstanding shares of Penncore Common Stock, pursuant to the exercise of the
Option or otherwise, without prior approval of the Federal Reserve Board under
the Bank Holding Company Act. The Stock Option Agreement grants certain
registration rights to Bancorp with respect to the shares issued upon exercise
of the Option.
Conduct of Penncore Business Pending the Merger
Penncore has agreed in the Merger Agreement that, pending consummation
of the Merger, Penncore and Commonwealth State Bank will conduct their
businesses only in the ordinary course and that, except as consented to by
Bancorp, Penncore and Commonwealth State Bank will not, among other things, (i)
issue, purchase or otherwise dispose of or acquire any shares of their capital
stock or grant any options or other rights to acquire such stock or pay
dividends (except normal recurring dividends); (ii) make certain changes in the
compensation or benefits payable to employees; (iii) merge or consolidate with,
or acquire control over, any other corporation, bank or other organization or
acquire or dispose of any material assets outside the ordinary course of
business; (iv) make
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capital expenditures in excess of certain limits; (v) make material changes to
their lending or investment policies; (vi) incur indebtedness or enter into or
change any material contract other than in the ordinary course of business; or
(vii) amend their articles of incorporation or by-laws.
Conditions to the Merger
In addition to Penncore shareholder approval, the Merger is contingent
upon the satisfaction of a number of other conditions, including (i) approval of
the Merger by the Office of Thrift Supervision ("OTS") and the Pennsylvania
Department of Banking without conditions deemed unduly burdensome by Bancorp and
the absence of any suit by the United States under the antitrust laws to
prohibit the Merger filed within 15 days following OTS approval, (ii) receipt of
the tax opinion described above (see "Certain Federal Income Tax Consequences"),
(iii) receipt of customary closing legal opinions from Penncore and Bancorp
counsel, and (iv) the absence of any judicial or administrative order
prohibiting or adversely affecting the Merger or any pending or threatened
litigation or administrative proceeding challenging the Merger. Bancorp's
obligation to consummate the Merger is subject to the following additional
conditions: (i) receipt of the agreement of the Penncore affiliate described
below under "Restrictions on Resales by Penncore Affiliate" and (ii) receipt by
Bancorp of satisfactory evidence demonstrating that all Penncore Stock Purchase
Warrants and Phantom Shares shall have been canceled and payment therefor shall
have been received by the holders thereof on or prior to the Effective Time of
the Merger (see "Stock Purchase Warrants and Phantom Shares"). In addition,
unless waived, each party's obligation to consummate the Merger is subject to
the performance by the other party of its obligations under the Merger
Agreement, the accuracy of the representations and warranties of the other party
contained therein and the receipt of certain certificates and opinions from the
other party and its counsel.
Representations and Warranties
The representations and warranties contained in the Merger Agreement
relate, among other things, to the organization and good standing of Bancorp,
Penncore and their subsidiaries; the capitalization of Bancorp and Penncore and
ownership of their subsidiaries; the authorization by Bancorp and Penncore of
the Merger Agreement and the Stock Option Agreement and the absence of conflict
with other laws or other agreements; the accuracy and completeness of the
financial statements and other information furnished to the other party; the
absence of material adverse changes; compliance with environmental laws; the
adequacy of allowances for loan losses; compliance of employee benefit plans
under the requirements of the Employee Retirement Income Security Act of 1974,
as amended; the absence of undisclosed litigation; compliance with laws; and the
accuracy of statements contained in applicable bank regulatory applications and
filings and of this Proxy Statement/Prospectus and of Bancorp's Registration
Statement of which it is a part. Additional representations and warranties by
Penncore concern, among other things, payment of taxes; title to properties; and
the absence of undisclosed equity investments, employment contracts, employee
benefit plans, material contracts or collective bargaining agreements. None of
the representations and warranties contained in the Merger Agreement will
survive the consummation of the Merger.
Termination, Amendment and Waiver
Even though the requisite number of shares of Penncore Common Stock may
have been voted to approve the Merger Agreement, the Merger Agreement may be
terminated prior to the Effective Time of the Merger: (a) by the mutual consent
of the parties; (b) by either party in the event of a breach by the other party
of any representation or warranty or a material breach of any covenant which
cannot be or has not been cured within 30 days after written notice; (c) by
either party, 60 days after the date on which any request or application for
requisite regulatory approval shall have been denied or withdrawn; (d) by
Bancorp, if the Penncore directors fail to recommend a vote for the approval of
the Merger Agreement to the Penncore shareholders or if the Penncore directors
withdraw, modify or change their recommendation in a manner adverse to Bancorp
with respect to the Merger Agreement or
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the Merger; (e) by either party, if there shall be a final non-appealable order
of any federal or state court restraining or prohibiting the consummation of the
Merger or any governmental action which would make the consummation of the
Merger illegal; or (f) by either party in the event that the Merger is not
consummated on or prior to September 30, 1997.
In addition to the foregoing, Penncore's Board of Directors may
terminate the Merger Agreement in the event that the Average Price of Bancorp's
Common Stock is less than $12.50 unless Bancorp elects to exercise the Bancorp
Exchange Ratio Option. For this purpose, the Average Price means the average of
the last reported sale prices of Bancorp's Common Stock (as reported by NASDAQ)
for the 10 trading days ending on the 11th day prior to the Effective Time of
the Merger (the "Averaging Period"). If Penncore elects to terminate the Merger
Agreement in accordance with this provision, it shall give written notice to
Bancorp prior to the 5th business day before the Effective Time of the Merger,
and Bancorp shall thereupon have five business days from the receipt of such
notice in which it may exercise the Bancorp Exchange Ration Option which is the
right to increase the Exchange Ratio to a number equal to $31.25 divided by the
Average Price (calculated to the nearest 1/1000). Upon exercise of the Bancorp
Exchange Ratio Option, the Merger Agreement will remain in full force and
effect.
Even though the requisite number of shares of Penncore Common Stock may
have been voted to approve the Merger Agreement, any provision of the Merger
Agreement may be waived by the party benefited by the provision or amended or
modified at any time by a written agreement of the parties providing for such
amendment or modification approved by their respective Boards of Directors,
except that after the Penncore shareholders' meeting, the form and amount of
consideration to be received by the shareholders of Penncore and the holders of
the Stock Purchase Warrants and Penncore Phantom Shares shall not thereby be
decreased (except as provided in the Bancorp Exchange Ratio Option).
Rights of Dissenting Shareholders
The rights of dissenting shareholders of Penncore are governed by the
BCL. The BCL provides holders of shares of Penncore Common Stock with the right
to dissent from the Merger and obtain payment of the "fair value" of such shares
upon compliance with the relevant provisions of the BCL, in the event that the
Merger is consummated. The term "fair value" means the value of a share of
Penncore's Common Stock immediately before consummation of the Merger taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the Merger. Holders of unexercised Penncore
Stock Purchase Warrants are not entitled to dissenters' rights with respect to
the Penncore Warrants. A copy of the applicable statute is set forth in Annex D
hereto. The following summary of such provisions is qualified in its entirety by
reference to Annex D.
Any shareholder of Penncore who contemplates exercising the right to
dissent should carefully read the provisions of Subchapter D of Chapter 15 of
the BCL.
A shareholder desiring to exercise dissenters' rights must satisfy all
of the following conditions. The shareholder must (i) prior to the vote upon the
Merger at the Annual Meeting submit a written notice to Penncore of the
shareholder's intention to demand payment of the fair value of the shareholder's
shares if the Merger is effectuated; (ii) effect no change in the beneficial
ownership of the shares from the date of such filing continuously through the
Effective Time of the Merger; and (iii) refrain from voting the shares for
approval of the Merger Agreement. The written notice referred to in clause (i)
must be in addition to and separate from voting against, abstaining from voting,
or failing to vote on approval of the Merger Agreement. Voting against,
abstaining from voting or failing to vote on approval of the Merger Agreement
will not constitute written notice of an intent to demand payment for Penncore
Common Stock within the meaning of the BCL. Any written notice or demand which
is required in connection with the exercise of dissenters' rights must be sent
to: Owen O. Freeman, Jr., Chairman, Penncore Financial Services Corporation, 3
Friends Lane, Newtown, PA 18940.
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In the event a shareholder votes for approval of the Merger Agreement,
or delivers a Proxy in connection with the Annual Meeting (unless the Proxy
specifies a vote against, or an abstention from voting on, approval of the
Merger Agreement), the shareholder will have waived the dissenters' rights and
will have nullified any written notice of an intent to demand payment submitted
by such holder. Failure to submit a Proxy specifying a vote against or
abstention from voting on the Merger does not waive a shareholder's dissenters'
rights.
A Penncore shareholder may assert dissenters' rights as to less than
all of the shares registered in such holder's name only if such record holder
dissents with respect to all shares owned by any one beneficial owner and
discloses the name and address of each person on whose behalf such holder
dissents. The rights of a partial dissenter are determined as if the shares as
to which the record holder dissents and record holder's remaining shares were
registered in the names of different shareholders. A beneficial owner may assert
dissenters' rights as to shares held on such owner's behalf only if such owner
submits to Penncore the record holder's written consent to the dissent no later
than the time the beneficial owner asserts his dissenters' rights. A beneficial
owner may not dissent with respect to less than all shares of the same class or
series owned by the beneficial owner, whether or not the shares owned by such
beneficial owner are registered in such beneficial owner's name.
If the Merger Agreement is approved, Penncore will deliver a
dissenters' notice to all holders who have satisfied the foregoing requirements
which will: (i) state where and when a demand for payment is to be sent and
certificated shares are to be deposited; (ii) inform holders of any
uncertificated shares to what extent transfer of shares will be restricted from
the time that demand for payment is received; (iii) supply a form for demanding
payment that includes a requirement that the person certify the date on which he
or she, or the person on whose behalf he or she dissented, acquired beneficial
ownership of the shares; and (iv) be accompanied by a copy of Sections 1571
through 1580 of the BCL.
A shareholder who is sent a dissenters' notice is required to make a
payment demand to Penncore, make the certification referred to above, and, in
the case of certificated shares, deposit the certificates representing the
holder's dissenting shares in accordance with the dissenter's notice. A
shareholder who takes these actions (including the depositing of share
certificates) retains all other rights as a holder of Penncore Common Stock,
except to the extent such rights are canceled or modified by the consummation of
the Merger. A shareholder who does not make a payment demand and deposit the
holder's share certificates where required, each by the date set forth in
Penncore's dissenters' notice, will not be entitled to payment of the fair value
of the holder's shares under Sections 1571 through 1580 of the BCL.
Promptly after effectuation of the Merger, or upon timely receipt of
the shareholder's payment demand if the Merger has already been effectuated,
Penncore shall either (i) pay to dissenters who have made demand and, in the
case of certificated shares, have deposited their certificates, an amount that
Penncore estimates to be the fair value of the shares; or (ii) give written
notice that no payment is being made of the estimated fair value.
The payment (or written notice that no payment is being made) by
Penncore will be accompanied by: (i) Penncore's balance sheet and statement of
income as of the end of a fiscal year ended not more than 16 months before the
date of remittance and the latest available interim financial statements; (ii) a
statement of Penncore's estimate of the fair value of the shares; and (iii) a
notice of the right of the dissenter to demand payment or supplemental payment,
as the case may be, accompanied by a copy of Sections 1571 through 1580 of the
BCL. If Penncore does not make payment of the estimated value, it is required to
return to the shareholder any certificates deposited with Penncore and, with
respect to uncertificated shares, release transfer restrictions, with a notation
on the certificates or transfer records that a demand for payment has been made.
If Penncore gives notice of its estimate of the fair value of the
shares without remitting payment, or remits payment of its estimate of fair
value and the dissenter believes that the amount states or remitted is less than
fair value, the dissenter may send to Penncore the dissenter's own estimate of
fair value, which is deemed to be a demand for payment of that amount (less any
amounts previously paid by Penncore). If Penncore has remitted payment of its
estimate of fair value, a dissenter must file the dissenter's own estimate
within 30 days after the
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mailing by Penncore of its remittance or else be entitled to no more than the
amount remitted to the dissenter by Penncore.
Penncore or Bancorp, as the case may be, intends to negotiate in good
faith with any dissenting shareholders. Within 60 days of the later of (i) the
Effective Time of the Merger; (ii) timely receipt of any demands for payment
(other than those described in the previous paragraph); or (iii) timely receipt
of the demand for payment referred to in the previous paragraph, Penncore or
Bancorp, as the successor to Penncore, may apply in the Court of Common Pleas of
Bucks County (the "Court") to have the Court determine the fair value of any
shares as to which demands for payment are unsettled. All dissenters whose
demands have not been settled must be made parties to the proceeding. If
Penncore or Bancorp, as the case may be, fails to file such an action,
dissenters whose demands have not been settled may file an application for such
a proceeding in the Court within 30 days after the expiration of the 60-day
period referred to above. If such an application is not filed by a dissenter
within the prescribed time period, the dissenter shall be paid Penncore's
estimate of fair value of the dissenter's shares, and no more, and may bring an
action to recover any of such amount not remitted to the dissenter.
Costs and expenses of a valuation proceeding will be borne by Bancorp,
as the successor to Penncore, unless the Court assesses some portion or all of
the expenses against a dissenter who demanded supplemental payment and whose
action in so doing the Court finds to be dilatory, obdurate, arbitrary,
vexatious or in bad faith. Expenses of counsel and experts for respective
parties may be assessed wholly or in part against Bancorp if it fails to comply
substantially with Sections 1571 through 1580 of the BCL, and may be assessed
against any party the Court finds acted in bad faith or in a dilatory, obdurate,
arbitrary or vexatious manner.
The foregoing is only a summary of the rights of a dissenting
shareholder of Penncore. Any shareholder who intends to dissent from the Merger
should carefully review the applicable provisions of the BCL and should also
consult with his or her attorney. The failure of a shareholder to follow
precisely the procedures summarized above may result in loss of dissenters'
rights. No further notice of the events giving rise to dissenters' rights or any
steps associated therewith will be furnished to Penncore shareholders, except as
indicated above or otherwise required by law.
In general, any dissenting shareholder who perfects the dissenters'
right to be paid the fair value of the dissenter's shares in cash will recognize
taxable gain or loss for federal income tax purposes upon receipt of such cash.
See "APPROVAL OF AGREEMENT AND PLAN OF MERGER--Certain Federal Income Tax
Consequences."
Restrictions on Resales by Penncore Affiliates
The shares of Bancorp Common Stock issuable in the Merger have been
registered under the Securities Act, and such shares will generally be freely
tradeable by the Penncore shareholders who receive Bancorp Common Stock as a
result of the Merger. However, this registration does not cover resales by any
Penncore shareholders who may be deemed to be an "affiliate" of Penncore or
Bancorp at the Effective Time of the Merger as that term is defined in Rule 145
under the Securities Act. An affiliate may not sell his or her shares of Bancorp
Common Stock acquired in the Merger except pursuant to: (i) an effective
Registration Statement under the Securities Act covering the shares to be sold;
(ii) the conditions contemplated by Rules 144 and 145 under the Securities Act;
or (iii) another applicable exemption from the registration requirements of the
Securities Act. For purposes of Rule 145, Owen O. Freeman, Jr. is deemed to be
the only "affiliate" who must comply with these requirements.
The Merger Agreement requires as a condition to the Merger that Owen O.
Freeman, Jr. enter into an agreement not to sell his shares of Bancorp Common
Stock acquired in the Merger except in accordance with the requirements of the
Securities Act and the regulations thereunder.
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Expenses
Bancorp and Penncore will each pay 50% of (1) all printing costs for
the Registration Statement and Proxy Statement/Prospectus and (2) all fees and
expenses related to the tax opinion referred to above (see "Certain Federal
Income Tax Consequences" above). Bancorp shall pay for the fees and expenses
related to the issuance of a closing letter by KPMG with respect to Penncore's
consolidated financial position and results of operations. Each party will pay
its own other expenses incurred in connection with the Merger Agreement.
However, the Merger Agreement provides that if the Merger is not consummated as
a result of a willful breach of the Merger Agreement by one party to such Merger
Agreement, then the party so found to have willfully breached the Merger
Agreement shall indemnify the other party for the respective costs, fees and
expenses of its counsel.
Effective Time of the Merger
It is presently anticipated that if the Merger Agreement is approved by
the affirmative vote of 75% of the issued and outstanding shares of Penncore
Common Stock, then the Merger will become effective at 11:59 p.m. (local time),
on July 31, 1997 (the "Effective Time"). However, as noted above, consummation
of the Merger is subject to the satisfaction of a number of conditions, some of
which cannot be waived. There can be no assurance that all conditions to the
Merger will be satisfied or, if satisfied, that they will be satisfied in time
to permit the Merger to become effective within the anticipated time frame. In
addition, as also noted above, Bancorp and Penncore retain the power to abandon
the Merger or to extend the time for performance of conditions or obligations
necessary to its consummation, notwithstanding prior approval by the requisite
number of shares of Penncore Common Stock.
Accounting Treatment
Upon consummation of the Merger, the transaction will be accounted for
as a purchase, and all of the assets and liabilities of Penncore will be
recorded in Bancorp's consolidated financial statements at their estimated fair
value at the Effective Time. The amount by which the purchase price paid by
Bancorp exceeds the fair value of the net assets acquired by Bancorp will be
recorded as goodwill. Bancorp currently expects that based on preliminary
purchase accounting estimates the Merger would result in identifiable
intangibles and goodwill approximating $8,000,000 and yearly amortization of
intangibles and goodwill of approximately $800,000. Bancorp's consolidated
financial statements will include the operations of Penncore after the Effective
Time of the Merger.
Indemnification of Directors and Officers of Penncore and Commonwealth State
Bank by Bancorp
After the Effective Time of the Merger, Bancorp has agreed to indemnify
and hold harmless each director and officer of Penncore and Commonwealth State
Bank who is serving or has served as a director or officer of Penncore or
Commonwealth State Bank, or both and who is serving or has served as a director
or trustee of another entity expressly at Penncore's or Commonwealth State
Bank's request or direction against any and all costs or expenses (including
reasonable attorneys' fees), incurred in connection with any and all claims,
actions, suits, proceedings or investigations, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters arising
out of or in connection with such person's position to the extent and in the
manner provided under Article 23 of Penncore's bylaws (relating to director and
officer indemnification) in effect on the date of the Merger Agreement.
Furthermore, Penncore has applied for an additional six-year term on the current
directors' and officers' liability insurance coverage.
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Listing on NASDAQ Stock Market
Bancorp shall use its best efforts following the Effective Time of the
Merger, subject to the conditions and requirements of the National Association
of Securities Dealers, Inc. for such listing, to cause the shares of Bancorp
Common Stock to be issued pursuant to the Merger Agreement to be included for
listing on the NASDAQ National Market System.
Advisory Board; Commonwealth State Bank
Bancorp agrees, promptly following the Effective Time of the Merger, to
appoint an advisory board of Bancorp which may include members of the Boards of
Directors of Penncore and Commonwealth State Bank requested by Bancorp and
willing to serve on such advisory board (the "Advisory Board"). The Advisory
Board shall be responsible to interact with the officers of Bancorp for purposes
of generating new deposit and loan business in the Bucks and Montgomery
Counties, Pennsylvania, and Mercer County, New Jersey, market areas. Bancorp
shall appoint Owen O. Freeman, Jr. as the Chairman of the Advisory Board. The
members of the Advisory Board shall be paid for each meeting that they attend as
determined by the Board of Directors of Bancorp.
After such Effective Time, all offices of the Commonwealth State Bank
shall be placed under the organizational structure of Main Line Bank as an
operating division and designated for marketing purposes as "Commonwealth State
Bank, a division of Main Line Bank."
This Advisory Board and the divisional designation shall continue so
long as they are deemed to be in the best interests of Bancorp as determined by
the Board of Directors of Bancorp.
COMPARISON OF BANCORP COMMON STOCK
AND PENNCORE COMMON STOCK
General
Upon consummation of the Merger, some shareholders of Penncore will
become shareholders of Bancorp. Because the Articles of Incorporation
("Articles") and By-Laws of Bancorp and Penncore are not the same, the Merger
will result in certain changes in the rights of the holders of Penncore Common
Stock who hold Bancorp Common Stock as a result of the Merger. The material
differences in the rights of holders of Bancorp Common Stock and Penncore Common
Stock are discussed below.
Voting Rights
General
The holders of Bancorp Common Stock, like the holders of Penncore
Common Stock, are generally entitled to one vote for each share held of record
on all matters submitted to a shareholder vote. In addition, the Articles of
both Bancorp and Penncore provide that shareholders do not have cumulative
voting rights in the election of directors. The absence of cumulative voting
means that a nominee for director must receive the votes of a plurality of the
shares voted in order to be elected.
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Supermajority Votes for Certain Transactions
Penncore's Articles require that certain transactions involving
Penncore be approved by the affirmative vote of the holders of at least 75% of
the issued and outstanding shares of Penncore Common Stock. The transactions
subject to Penncore's special voting requirements are: (1) a merger or
consolidation; (2) the liquidation or dissolution of the corporation; or (3) any
action that would result in the sale or other disposition of all or
substantially all of the assets of the corporation.
Bancorp's Articles do not contain special provisions concerning the
vote required to approve mergers, consolidations, voluntary dissolution, asset
sales and the like. Pursuant to the BCL, approval of such transactions generally
requires the affirmative vote of the holders of a majority of the outstanding
shares of Bancorp Common Stock.
Board of Directors
Classified Boards
The Articles and By-Laws of Bancorp and the By-Laws of Penncore divide
the Board of Directors into classes.
The Board of Directors of Bancorp consists of four classes, each
consisting of one-fourth (or as near as may be possible) of the whole number of
the Board of Directors. One class of directors is elected at each Annual Meeting
of Shareholders, and each class serves for a term of four years. The number of
directors which constitute the full Board of Directors of Bancorp may be
increased or decreased by a vote of a majority of the Board of Directors.
However, the number of directors may not be less than five nor more than
fifteen. Vacancies, including vacancies caused by an increase in the number of
directors, may generally be filled by a majority vote of the directors then in
office, whether or not a quorum is present, or by a sole remaining director.
Directors elected by the Board to fill vacancies serve for the full remainder of
the term of the class to which they have been elected.
The Board of Directors of Penncore consists of three classes, each
consisting of one-third (or as near as may be) of the whole number of the Board
of Directors. One class of directors is elected at each Annual Meeting of
Shareholders, and each class serves for a term of three years. The number of
directors which constitute the full Board of Directors of Penncore may be
increased or decreased by a vote of a majority of the Board of Directors.
However, the number of directors may not be less than three nor more than
twenty-five. Vacancies, including vacancies caused by an increase in the number
of directors, are filled by a majority vote of the directors then in office,
whether or not a quorum is present, or by a sole remaining director. Directors
elected by the Board to fill vacancies serve for the full remainder of the term
of the class to which they have been elected.
Removal of Directors
Bancorp's Articles provide that, in general, any director may be
removed from office without cause by an affirmative vote of not less than 75% of
the total votes eligible to be cast by shareholders at a duly constituted
meeting of shareholders called expressly for such purpose. Any director may be
removed for cause by an affirmative vote of not less than a majority of the
total votes eligible to be cast by shareholders. Cause for removal is defined to
exist only if the director whose removal is sought has been declared of unsound
mind by an order of a court of competent jurisdiction, convicted of a felony or
of an offense punishable by imprisonment for a term of more than one year by a
court of competent jurisdiction, or deemed liable by a court of competent
jurisdiction for gross negligence or misconduct in the performance of such
director's duties to the corporation.
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Penncore's By-Laws provide that the Board of Directors may declare
vacant the office of a director if he is declared of unsound mind by an order of
court or convicted of felony or for any other proper cause. Under the BCL,
because Penncore has a classified Board, the entire Board, any class of
directors or any individual director may be removed from office only for cause
by a majority of the votes cast at a meeting of the Penncore shareholders. In
addition, the entire Board may be removed from office with or without cause by
the unanimous vote or consent of the holders of Penncore Common Stock.
Nomination of Director Candidates
The Articles of Bancorp and the By-Laws of Penncore require that any
shareholder intending to nominate a candidate for election as a director must
give the corporation advance written notice of the nomination, containing
certain specified information. Bancorp's Articles require that the notice be
given not later than 60 days prior to the anniversary date of the immediately
preceding Annual Meeting of Shareholders. Penncore's By-Laws require notice to
be given no less than 60 days prior to the meeting at which the Annual Meeting
at which the election is to be held.
Amendment of Articles and By-Laws
Proposal of Amendments
Under the BCL, because the Common Stock of Bancorp is registered under
the Exchange Act, the shareholders of Bancorp are not entitled by statute to
propose amendments to the Articles of the corporation. Any amendments to the
Articles of Bancorp must first be proposed by the Board of Directors. Amendments
to the Articles of Penncore may be proposed by either (1) the Board of Directors
or (2) the petition of shareholders entitled to at least 30% of the votes that
all shareholders are entitled to cast thereon.
Approval of Amendments
Bancorp's Articles require that amendments to the company's Articles
and By-Laws be approved by shareholders. Approval requires the votes of the
holders of a majority of the shares entitled to vote generally in an election of
directors, voting together as a single class, as well as such additional vote of
the Preferred Stock as may be required by the provisions of any series thereof,
to approve any amendment to Bancorp's Articles or ByLaws. Notwithstanding the
prior sentence, the Articles require the affirmative vote of the holders of at
least 75% of the shares of the corporation entitled to vote generally in an
election of directors, voting together as a single class, as well as such
additional vote of the Preferred Stock as may be required by the provisions of
any series thereof, to amend, adopt, alter, change or repeal any provision of
the Articles or By-Laws inconsistent with certain Articles or By-Laws relating
to directors generally, the number and powers of directors, changes in number of
directors, filling vacancies on the Board of Directors, and removing directors;
preemptive rights; indemnification of officers, directors, employees and agents
and limitations on personal liability of directors; meetings of shareholders,
organization and conduct of such meetings and shareholder proposals;
restrictions on offers and acquisitions of the corporation's equity securities;
and amendments of Articles and By-Laws.
Penncore's Articles require that an amendment to Article 7 be approved
by the affirmative vote of the holders of at least 75% of the outstanding Common
Stock of the company. Article 7 is the provision requiring that merger,
consolidation, liquidation, dissolution, or any other action that would result
in the sale or other disposition of all or substantially all of the assets of
the company be approved by the affirmative vote of the holders of at least 75%
of the issued and outstanding Common Stock of the company. Under the BCL, other
Articles may be amended by a majority of the votes cast at a meeting of Penncore
shareholders.
Penncore's By-Laws require the vote of at least 80% of the outstanding
Penncore Common Stock to adopt any amendment to the By-Laws of Penncore. Except
as to matters for which a shareholder vote is required by
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statute, Penncore's Board may also amend the By-Laws without shareholder
approval by a majority vote of the members of the Board of Directors. Penncore's
By-Laws also specifically require the approval of at least 80% of the
outstanding Penncore Common Stock in order to amend Section 23.6 of the By-Laws,
which generally requires that the company obtain an opinion from its counsel
that an indemnification payment to an officer or director will not constitute an
unsound banking practice prior to making such payment.
Restrictions on Offers and Acquisitions of Bancorp's Equity Securities
Bancorp's Articles provide that for a period of five years from the
completion of the conversion of Main Line Federal Savings Bank (now known as
Main Line Bank) from mutual to stock form, no person or entity shall directly or
indirectly offer to acquire or acquire the "beneficial ownership" of (i) more
than 10% of the issued and outstanding shares of any class of an equity security
of Bancorp, or (ii) any securities convertible into, or exercisable for, any
equity securities of Bancorp if, assuming conversion or exercise by such person
or entity of all securities of which such person or entity is the beneficial
owner which are convertible into, or exercisable for, such equity securities
(but of no securities convertible into, or exercisable for, such equity
securities of which such person or entity is not the beneficial owner), such
person or entity would be the beneficial owner of more than 10% of any class of
an equity security of Bancorp. Beneficial ownership is generally defined to
entail the possession of voting rights and other shareholder rights pursuant to
direct or indirect ownership of shares of Bancorp Common Stock, or pursuant to
some contract, agreement, or other arrangement with the owner of such shares.
The status of beneficial owner extends to certain parties who are associated
with beneficial owners and to persons or entities who control, are controlled
by, or under common control with a beneficial owner.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to Bancorp by underwriters or a selling
group acting on its behalf, (ii) any tax qualified employee benefit plan or
arrangement established by Bancorp or by Main Line Bank and any trustee of such
plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of Bancorp's Board of Directors.
In the event that shares are acquired in violation of the restrictions
on offers and acquisitions, all shares beneficially owned by any person or
entity in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or entity or counted as voting shares in
connection with any matter submitted to shareholders for a vote. In addition,
the Board of Directors may cause such shares in excess of 10% to be transferred
to an independent trustee for sale on the open market or otherwise, with the
expenses of such trustee to be paid out of the proceeds of the sale.
The conversion of Main Line Federal Savings Bank from mutual to stock
form was completed on August 11, 1994. These restrictions on offers and
acquisitions will expire on August 10, 1999.
Pennsylvania Business Corporation Law
The provisions of the Articles and By-Laws of Bancorp and Penncore
described under "Voting Rights" and "Board of Directors" above and the
provisions of Bancorp's Articles described under "Restriction on Offers and
Acquisitions of Bancorp's Equity Securities" above are in addition to certain
provisions of Chapter 25 of the BCL which may have the effect of discouraging or
rendering more difficult a hostile takeover attempt.
Unlike Penncore, Bancorp's shares of Common Stock are registered with
the SEC under the Exchange Act and, therefore, Bancorp is deemed to be a
registered corporation under Pennsylvania law. Therefore, the following
provisions of Chapter 25 (relating to registered corporations) of the BCL apply
to Bancorp but not to Penncore.
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Under Section 2538 of the BCL, any merger, consolidation, share
exchange or sale of assets between Bancorp or its subsidiary and any shareholder
of the corporation, any division of Bancorp in which any shareholder receives a
disproportionate amount of any shares or other securities of any corporation
resulting from the division, any voluntary dissolution of Bancorp in which a
shareholder is treated differently from other shareholders of the same class or
any reclassification in which any Bancorp shareholder's voting or economic
interest in the corporation is materially increased relative to substantially
all other shareholders must, in addition to any other shareholder vote required,
be approved by a majority of the votes which all shareholders other than the
shareholder receiving the special treatment are entitled to cast with respect to
the transaction. This special vote requirement does not apply to a transaction
(1) which has been approved by a majority vote of the Board, without counting
the vote of certain directors affiliated with or nominated by the interested
shareholder or (2) in which the consideration to be received by the shareholders
is not less than the highest amount paid by the interested shareholder in
acquiring shares of the same class.
Under Subchapter 25E of the BCL, if any person or group acting in
concert acquires voting power over Bancorp shares representing 20% or more of
the votes which all shareholders of the corporation would be entitled to cast in
an election of directors, any other shareholder may demand that such person or
group purchase such shareholder's shares at a price determined in an appraisal
proceeding.
Under Subchapter 25G of the BCL, Bancorp may not engage in merger,
consolidation, share exchange, division, asset sale or a variety of other
"business combination" transactions with a person which becomes the "beneficial
owner" of shares representing 20% or more of the voting power in an election of
directors of the corporation unless (1) the business combination or the
acquisition of the 20% interest is approved by the Board of Directors of the
corporation prior to the date the 20% interest is acquired, (2) the person
beneficially owns at least 80% of the outstanding shares and the business
combination (a) is approved by a majority vote of the disinterested shareholders
and (b) satisfies certain minimum price and other conditions prescribed in
Subchapter 25F, (3) the business combination is approved by a majority vote of
the disinterested shareholders at a meeting called no earlier than five years
after the date the 20% interest is acquired or (4) the business combination (a)
is approved by shareholder vote at a meeting called no earlier than five years
after the date the 20% interest is acquired and (b) satisfies certain minimum
price and other conditions prescribed in Subchapter 25F.
Subchapter 25H of the BCL requires a person or group to disgorge to
Bancorp any profits received from a sale of Bancorp's equity securities within
18 months after the person or group acquires or offers to acquire 20% of
Bancorp's voting power or publicly discloses an intention to acquire control of
Bancorp.
Dissenters' Rights
The BCL provides for dissenters' rights in a variety of transactions
including: (i) mergers or consolidations to which a corporation is a party
(other than mergers not requiring a shareholder vote); (ii) certain sales,
leases or exchanges of all or substantially all of the assets of a corporation;
and (iii) certain share exchanges or plans of division. However, except in the
case of (1) a merger, consolidation, share exchange or division in which their
shares would be converted into or exchanged for something other than shares of
the surviving, new, acquiring or other corporation (or cash in lieu of
fractional shares) or (2) a transaction in which certain shareholders receive
materially different treatment from that accorded other holders of the same
class or series of shares, shareholders of a Pennsylvania business corporation
are not entitled to dissenters' rights in any of the transactions mentioned
above if their stock is either listed on a national securities exchange or held
of record by 2,000 or more shareholders.
Bancorp is listed on the NASDAQ National Market System. Therefore,
shareholders of Bancorp are not permitted to exercise dissenters' rights.
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Penncore is not listed on a national securities exchange, and Penncore
has fewer than 2,000 shareholders of record. Shareholders of Penncore will have
the right to dissent from the Merger. See "APPROVAL OF AGREEMENT AND PLAN OF
MERGER--Rights of Dissenting Shareholders."
Preferred Stock
Penncore's Articles do not authorize any class of stock other than
Penncore Common Stock. The Articles of Bancorp authorize Bancorp to issue up to
5,000,000 shares of Bancorp preferred stock.
The authorized shares of Bancorp preferred stock are issuable in one or
more series on the terms set by the resolution or resolutions of Bancorp's Board
of Directors providing for the issuance thereof. Each series of preferred stock
would have such voting rights, designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights and other
special or relative rights, if any, as Bancorp's Board of Directors may
determine. Except for such rights as may be granted to the holders of any series
of preferred stock in the resolution establishing such series or as required by
law, all of the voting and other rights of the shareholders of Bancorp belong
exclusively to the holders of Bancorp Common Stock.
Dividend Rights
The holders of Bancorp Common Stock and Penncore Common Stock are
entitled to dividends when, as and if declared by their Board of Directors out
of funds legally available therefor. However, if Bancorp preferred stock is
issued, the Board of Directors of Bancorp may grant preferential dividend rights
to the holders of such stock which would prevent payment of dividends on the
Bancorp Common Stock unless and until specific dividends on the preferred stock
had been paid.
Liquidation Rights
Upon liquidation, dissolution or winding up of Bancorp or Penncore,
whether voluntary or involuntary, the holders of Bancorp or Penncore Common
Stock are entitled to share ratably in the assets of the corporation available
for distribution after all liabilities of the corporation have been satisfied.
However, if preferred stock is issued by Bancorp, the Board of Directors of
Bancorp may grant preferential liquidation rights to the holders of such stock
which would entitle them to be paid out of the assets of the corporation
available for distribution before any distribution is made to the holders of
Bancorp Common Stock.
Miscellaneous
There are no preemptive rights, sinking fund provisions, conversion
rights, or redemption provisions applicable to Bancorp or Penncore Common Stock.
Holders of fully paid shares of Bancorp or Penncore Common Stock are not subject
to any liability for further calls or assessments.
DESCRIPTION OF BANCORP
ML Bancorp, Inc. is a unitary savings and loan holding company
conducting business through its wholly-owned subsidiary, Main Line Bank, which
is a federal savings bank. Main Line Bank is a federally-chartered, SAIF-insured
savings institution operating through its 24 business centers located in Bucks,
Chester, Delaware and
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Montgomery Counties, Pennsylvania, and 9 mortgage loan production offices
located in Eastern Pennsylvania, Southern New Jersey, Northern Delaware and
Florida. Bancorp's headquarters is located at Two Aldwyn Center, Lancaster
Avenue and Route 320, Villanova, Pennsylvania 19085.
Bancorp is a community oriented institution which has historically
offered a wide range of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by
single-family residential properties, residential construction and development
projects and selected commercial properties. As a full-service community banking
institution, Bancorp also offers consumer loans and small business commercial
loans.
Bancorp's service areas are characterized by intense competition for
banking business among commercial banks, savings and loan associations, mutual
savings banks, credit unions and other financial institutions. Bancorp actively
competes with such banks and institutions for local retail and commercial
accounts. Bancorp also is subject to competition from other banks and financial
institutions in Southeastern Pennsylvania, as well as other financial
institutions outside its service areas, for certain types of banking business.
Many competitors have substantially greater financial resources and larger
branch systems than those of Bancorp.
Other competitors, including consumer finance companies, factors,
insurance companies, and money market mutual funds, compete with certain lending
and deposit gathering services offered by Bancorp. Bancorp also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in corporate and trust investment management
services.
As of March 31, 1997, Bancorp had a total of 401 full-time employees
and 45 part-time employees.
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BANCORP MARKET PRICES AND DIVIDENDS
Bancorp Common Stock is currently, and after the consummation of the
Merger will be, traded on the NASDAQ National Market System under the symbol
"MLBC." The following table sets forth high and low closing sales prices for
Bancorp Common Stock for the periods indicated, in each case as reported by
NASDAQ, and the cash dividends per share declared on Bancorp Common Stock for
such periods.
Cash
Quarterly Closing Sales Dividends
Price Range Declared
High Low
Fiscal 1994
Quarter Ended September 30, 1994 ...... $8.38 $7.63 N/A
Quarter Ended December 31, 1994 ....... 8.00 6.13 N/A
Quarter Ended March 31, 1995 .......... 8.07 6.69 N/A
Fiscal 1995
Quarter Ended June 30, 1995 ........... $9.82 $7.88 $0.05
Quarter Ended September 30, 1995 ...... 11.94 9.50 $0.06
Quarter Ended December 31, 1995 ....... 12.32 10.50 $0.07
Quarter Ended March 31, 1996 .......... 12.38 10.88 $0.08
Fiscal 1996
Quarter Ended June 30, 1996 ........... $12.50 $11.38 $0.095
Quarter Ended September 30, 1996 ...... 14.06 11.88 0.095
Quarter Ended December 31, 1996 ....... 14.88 13.88 0.095
Quarter Ended March 31, 1997 .......... 17.75 13.75 0.095
On February 3, 1997, the last NASDAQ trading day prior to the first
public announcement of the Merger, the closing sale price for Bancorp Common
Stock was $14.625. On May 15, 1997, the closing sale price for the Bancorp
Common Stock was $15.875. On May 16, 1997, there were 11,276,554 shares of
Bancorp Common Stock outstanding, held by approximately 1,200 shareholders of
record.
While Bancorp is not obligated to pay cash dividends, Bancorp's Board
of Directors presently intends to continue the policy of paying quarterly cash
dividends. Future dividends will depend, in part, upon the earnings and
financial condition of Bancorp.
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DESCRIPTION OF PENNCORE
Business
Penncore Financial Services Corporation was organized in 1986 as a
registered bank holding company to hold all of the outstanding shares of the
common stock of Commonwealth State Bank. Penncore is supervised by The Federal
Reserve Bank of Philadelphia acting under delegated authority from the Board of
Governors of the Federal Reserve System ("FRB"). Penncore's headquarters is the
main office of Commonwealth State Bank located at 3 Friends Lane, Newtown,
Pennsylvania 18940-1880. Substantially all of Penncore's income is derived from
the operations of Commonwealth State Bank.
Commonwealth State Bank was organized in 1986. It is a
Pennsylvania-chartered banking institution and a member of the FRB. Its deposits
are insured under the Bank Insurance Fund of the Federal Deposit Insurance
Corporation. Commonwealth State Bank has a main office and one branch office
located in Yardley, Pennsylvania.
Commonwealth State Bank leases the land and buildings for its offices.
Commonwealth State Bank is a full service commercial bank providing a
wide range of services to individuals and small to medium sized businesses in
its Bucks County, Pennsylvania and Mercer County, New Jersey market areas. Among
its services, Commonwealth State Bank accepts time, demand and savings deposits
and makes secured and unsecured commercial, real estate and consumer loans.
Commonwealth State Bank's business is not seasonal in nature and is not
dependent upon any single customer or small group of customers for deposits or
loans.
As of December 31, 1996, Commonwealth State Bank had 32 full-time
equivalent employees.
Competition
Penncore competes with other local credit unions, commercial banks,
thrifts and other financial institutions, most of which are larger than
Commonwealth State Bank, as well as with major regional banking and financial
institutions. These competitors include First National Bank and Trust Company of
Newtown, CoreStates Bank, Frankford Bank, Prime Bank, Beneficial Savings Bank,
PNC Bank and Trenton Savings Bank. Commonwealth State Bank is generally
competitive in its service area with respect to interest rates paid on time and
savings, deposits, service charges on deposit, accounts and interest charged on
loans.
Supervision and Regulation
The operations of Commonwealth State Bank are subject to federal and
state statutes applicable to banks chartered under the banking laws of the
Commonwealth of Pennsylvania, to members of the FRB, and to banks, whose
deposits are insured by the FDIC. Commonwealth State Bank's operations are also
subject to regulations of the Department of Banking (the "Department"), the FRB
and the FDIC.
Federal and state banking laws and regulations govern, among other
things, a bank's scope of business, investments, reserves against deposits,
loans and collateral, mergers and consolidations and establishment of branches.
All banks in Pennsylvania are permitted to maintain branch offices in any county
of the state. Branches may be established only after approval by the Department.
The Department is required to grant approval only if it finds that there is a
need for banking services or facilities such as are contemplated by the proposed
branch. The Department may disapprove an application if the applicant bank does
not have the requisite capital and surplus or if the application relates to the
establishment of a branch in a county contiguous to the county in which the
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applicant's principal place of business is located, and another banking
institution that has its principal place of business in the county in which the
proposed branch would be located has, in good faith, notified the Department of
its intention to establish a branch in the same municipal location in which the
proposed branch would be located.
The laws of Pennsylvania applicable to Commonwealth State Bank include,
among other things, provisions that: (1) require the maintenance of certain
reserves against deposits; (2) limit the type and amount of loans that may be
made and the interest that may be earned thereon; (3) restrict investments and
other activities; and (4) limit the payment of dividends. The amount of funds
that Commonwealth State Bank may lend to a single borrower is limited generally
under Pennsylvania law to fifteen percent (15%) of the aggregate of its capital,
surplus, undivided profits, loan loss reserves and capital securities of
Commonwealth State Bank (all as defined by statute and regulation).
Applicable Pennsylvania law also requires that a bank obtain the
approval of the Department prior to effecting any merger where the surviving
bank would be a Pennsylvania-chartered bank. In reviewing any merger
application, the Department would consider, among other things, whether the
merger would be consistent with adequate and sound banking practices and whether
the merger would be in the public interest on the basis of several factors,
including the potential effect of the merger on competition and the convenience
and needs of the area primarily to be served by Commonwealth State Bank
resulting from the merger.
Federal law also prohibits acquisitions of control of a bank, such as
Commonwealth State Bank, without prior notice to the FRB. "Control" is defined
for this purpose as the power, directly or indirectly, to direct the management
or policies of Commonwealth State Bank or to vote twenty-five percent (25%) or
more of its capital securities.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of Commonwealth State Bank. It cannot be predicted whether any
such legislation will be adopted or how such legislation would affect the
business of Commonwealth State Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, Commonwealth
State Bank's business is particularly susceptible to being affected by federal
legislation and regulations that may increase the cost of doing business.
For example, under the Community Reinvestment Act of 1977 ("CRA"), the
FRB is required to assess the record of all financial institutions regulated by
it to determine if these institutions are meeting the credit needs of the
community (including low- and moderate-income neighborhoods). The FRB must take
a bank's community reinvestment record into account when evaluating any
application made by the particular bank for, among other things, approval of a
branch or deposit facility, an office relocation, a merger, or an acquisition of
bank shares. The FRB is required by law to make publicly available each bank's
CRA record. CRA evaluations include a descriptive rating ("outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance") and a
statement describing the basis for the rating. Commonwealth State Bank's most
recent rating pursuant to the CRA was "satisfactory."
Effect of Government Monetary Policies
The earnings of Penncore are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies.
The monetary policies of the FRB have had, and will likely continue to
have, an important impact on the operating results of commercial banks through
the FRB's power to implement national monetary policy in order, among other
things, to curb inflation or combat recession. The FRB has a major effect upon
the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation,
among other things, of the discount rate on borrowing of member banks and the
reserve
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requirements against member bank deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal policies.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Penncore and Commonwealth State Bank.
Legal Proceedings
In the opinion of the management of Penncore and Commonwealth State
Bank, there are no proceedings pending to which Penncore and Commonwealth State
Bank are a party or to which their property is subject, which, if determined
adversely to Penncore and Commonwealth State Bank, would be material in relation
to Penncore's and Commonwealth State Bank's undivided profits or financial
condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of Penncore and Commonwealth State Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Penncore or Commonwealth State Bank by government
authorities.
Environmental Issues
There are several federal and state statutes that govern the
obligations of financial institutions with respect to environmental issues.
Besides being responsible under such statutes for its own conduct, a bank also
may be held liable under certain circumstances for actions of borrowers or other
third parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, Penncore and Commonwealth State Bank are not a party to any
pending legal proceedings under any environmental statute nor is Penncore and
Commonwealth State Bank aware of any circumstances that may give rise to
liability of Penncore or Commonwealth State Bank under any such statute.
Regulatory Capital Requirements
The following table presents Penncore's consolidated capital ratios at
December 31, 1996.
(dollar amounts in thousands)
Tier I Capital ............................ $9,504
Tier II Capital ........................... 1,005
--------
Total Capital ............................. $10,509
========
Adjusted Total Average Assets ............. $134,502
Total Adjusted Risk-Weighted Assets(1) .... $80,164
Tier I Risk-Based Capital Ratio(2) ........ 11.86%
Required Tier I Risk-Based Capital Ratio... 4.00%
Excess Tier I Risk-Based Capital Ratio .... 7.86%
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Total Risk-Based Capital Ratio(3) ........ 13.11%
Required Total Risk-Based Capital Ratio... 8.00%
Excess Total Risk-Based Capital Ratio .... 5.11%
Tier I Leverage Ratio(4) ................. 7.07%
Required Tier I Leverage Ratio ........... 4.00%
Excess Tier I Leverage Ratio ............. 3.07%
-----
(1) Includes off-balance sheet items at credit-equivalent values less
intangible assets.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Adjusted Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted
Total Average Assets.
Penncore's ability to maintain the required levels of capital is
substantially dependent upon the success of Penncore's capital and business
plans; the impact of future economic events on Penncore loan customers; and
Penncore's ability to manage its interest rate risk and investment portfolio and
control its growth and other operating expenses.
PENNCORE MARKET PRICES AND DIVIDENDS
Penncore Common Stock Prices and Common Stock Dividends
There is no established public trading market for Penncore Common
Stock. Occasionally, individuals sell and buy shares of Penncore Common Stock in
privately negotiated transactions. Penncore acts as its own transfer agent and
keeps its own stock transfer ledger. According to such ledger, the following
number of shares were transferred during the years indicated:
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Year Number of Shares Transferred
1996 33,490
1995 95,865
1994 24,975
The lowest and highest prices per share known by the management of
Penncore for the above years were between $17.00 and $28.00 per share,
respectively. These prices may or may not include any mark-up, mark-down or
commission.
In 1996, Penncore paid a cash dividend of $0.15 per share. Previous
cash dividends paid were $0.12 per share during 1995 and 1994, and $0.10 per
share during 1993.
On February 3, 1997, the last business day preceding public
announcement of the Merger, the last known stock price was $32.00 per share.
As of March 31, 1997, there were 161 holders of record of Penncore
Common Stock.
Dividend Restrictions on Commonwealth State Bank
In order for Penncore to declare and pay dividends, Commonwealth State
Bank must generate sufficient income to pay dividends to Penncore. Any future
dividends of Commonwealth State Bank are subject to certain regulatory
considerations and the discretion of its Board of Directors and will depend upon
a number of factors, including operating results, financial conditions and
general business conditions. The shareholders are entitled to receive dividends,
as and when declared by the Board of Directors of Penncore and Commonwealth
State Bank, out of funds legally available therefor, subject to the restrictions
set forth in the Pennsylvania Banking Code of 1965 (the "Pennsylvania Banking
Code") and the Federal Deposit Insurance Act.
Certain restrictions exist regarding the ability of Commonwealth State
Bank to transfer funds to Penncore Financial Services Corporation in the form of
cash dividends. The approval of Federal banking regulators is required to pay
dividends in excess of the total of the Bank's net earnings of the current year
combined with the retained earnings, as defined, of the proceeding two years. As
of January 1, 1997, approximately $995,000 of undistributed earnings of the Bank
were available for distribution to Penncore Financial Services Corporation as
dividends without prior regulatory approval.
Under the BCL, Penncore may not pay a dividend if, after giving effect
thereto, either (a) Penncore would be unable to pay its debts as they become due
in the usual course of business or (b) Penncore's total assets would be less
than its total liabilities. The determination of total assets and liabilities
may be based upon: (i) financial statements prepared on the basis of generally
accepted accounting principles, (ii) financial statements that are prepared on
the basis of other accounting practices and principles that are reasonable under
the circumstances, or (iii) a fair valuation or other method that is reasonable
under the circumstances.
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PENNCORE SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated data, except for the per common share and
ratio information, presented below for, and as of the end of, each of the years
in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of Penncore, which financial statements have
been audited by KPMG. The per common share and ratio information presented have
not been audited. The consolidated financial statements as of December 31, 1996
and 1995, and for each of the years in the three-year period ended December 31,
1996, and the report thereon, are contained in Annex F hereto.
<TABLE>
<CAPTION>
For years ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data: (Dollars in thousands, except for earnings per share)
Interest income $10,360 $9,529 $7,357 $6,123 $5,105
Interest expense 6,177 6,071 4,093 3,160 2,671
--------------------------------------------------------------------------
Net interest income 4,183 3,458 3,264 2,963 2,434
Provision for loan losses 340 262 240 210 194
--------------------------------------------------------------------------
Net interest income after provision for loan losses 3,843 3,196 3,024 2,753 2,240
Other income 244 226 150 200 181
Other expense 3,100 2,712 2,595 2,399 2,123
--------------------------------------------------------------------------
Income before income tax expense, extraordinary credit and
cumulative effect of change in accounting principle 987 710 579 554 298
Income tax expense 312 239 196 202 102
Income before extraordinary credit and cumulative effect of
change in accounting principle 675 471 383 352 196
Extraordinary credit - utilization of tax loss carryovers 0 0 0 0 40
Cumulative effect of change in accounting principle 0 0 0 35 0
--------------------------------------------------------------------------
Net income $675 $471 $383 $387 $236
==========================================================================
Per Common Share:
Income before extraordinary credit and cumulative effect of
change in accounting principle $1.69 $1.22 $0.99 $0.91 $0.51
Extraordinary credit - utilization of tax loss carryovers 0 0 0 0 0.10
Cumulative effect of change in accounting principle 0 0 0 0.09 0
--------------------------------------------------------------------------
Net income - fully diluted 1.69 1.22 0.99 1.00 0.61
--------------------------------------------------------------------------
Book Value 24.94 23.64 19.37 21.05 20.14
Dividends 0.15 0.12 0.12 0.10 0.00
Ratios:
Return on average assets 0.50% 0.37% 0.34% 0.41% 0.33%
Return on average equity 7.36% 5.59% 4.88% 4.87% 3.08%
Financial Condition Data:
Total assets $137,779 $135,117 $119,318 $103,491 $85,387
Securities available for sale 42,651 51,462 32,681 37,488 0
Securities held to maturity 11,284 5,339 20,158 14,918 37,576
Loans (net of unearned income) 78,405 69,474 56,373 46,375 38,005
Allowance for loan losses 1,205 861 1,013 796 606
Deposits 94,916 105,844 93,274 77,650 67,512
Borrowed funds 29,587 16,606 16,097 15,767 6,973
Shareholders' equity 9,629 9,127 7,480 8,126 7,777
</TABLE>
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION OF PENNCORE
The following discussion is an analysis of the financial condition at
December 31, 1996 and 1995, and the results of operations of Penncore and its
wholly owned subsidiary, Commonwealth State Bank, for each of the three-year
periods ended December 31, 1996, 1995 and 1994 and should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and the Selected
Consolidated Financial Data included elsewhere in this Proxy
Statement/Prospectus.
Results of Operations
Net Income
Penncore's net income for the year ended December 31, 1996 was $675
thousand compared to $471 thousand for the same period of 1995, an increase of
$204 thousand or 43.3%. The increase in net income was attributable to an
increase in interest and fees on loans, an improvement in the yield on the
investment portfolio, a lowering of the cost of other borrowed funds and
improved noninterest income. Offsetting these factors was an increase in the
provision for loan losses and increased noninterest expense. Net income for the
year ended December 31, 1995 increased $88 thousand or 23.0% compared to the
results for the same period of 1994. Similar factors as those discussed above
resulted in the increase in net income from 1994 to 1995.
Net Interest Income
Penncore's primary revenue source is net interest income. Net interest
income represents the difference between interest earned on its interest-earning
assets, such as loans and investments, and the interest paid on interest-bearing
liabilities, such as deposits and borrowed funds. Changes in net interest income
from period to period result from increases or decreases in the average balances
of interest-earning assets and interest-bearing liabilities and the increases or
decreases in the net interest margin, or spread, between the average yield
earned on such assets and average rates paid on such liabilities.
A portion of Penncore's interest income is derived from investments
that are exempt from Federal income taxes. In order to make the pre-tax
comparison of income and yields consistent, the interest earned on these
interest earning assets has been adjusted to reflect a fully tax-equivalent
basis.
To provide a more in depth analysis of net interest income, the tables
on the following pages present for the years indicated: (i) average principal
balances, interest earned/paid, average rates, and net interest spread and
margin; and (ii) a rate/volume analysis, detailing the variance in interest
income due to changes in average principal balances and changes in average
yield. Yields are calculated using the tax equivalent interest income.
57
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Interest
(amounts in thousands) Average Balance income/expense Yield/Cost
<S> <C> <C> <C>
Assets
Interest earning assets
Loans, net (3) $74,113 $6,842 9.23%
Investments (1):
Taxable securities 51,972 3,272 6.30
Tax exempt securities (2) 1,488 103 6.92
Other:
Federal funds sold 2,204 117 5.31
Interest bearing deposits with banks 856 47 5.49
----------------------------------------------------------------
Total interest earning assets $130,633 $10,381 7.95%
Non-interest earning assets
Cash and due from banks 3,302
Allowance for loan losses (1,050)
Other assets 1,818
------------------------
Total Assets $134,703
========================
Liabilities and Shareholders' Equity
Interest bearing liabilities
Interest bearing demand deposits $13,588 $399 2.94%
Saving deposits 6,623 198 2.99
Time deposits 72,155 4,325 5.99
Borrowed funds 21,670 1,255 5.79
----------------------------------------------------------------
Total interest bearing liabilities $114,036 $6,177 5.42%
Non-interest bearing liabilities
Demand deposits 8,460
Other liabilities 3,037
Shareholders' equity 9,170
------------------------
Total liabilities & shareholders' equity $134,703
========================
Net interest income/net interest spread $4,204 2.53%
====== =====
Net yield on interest earning assets 3.22%
=====
<FN>
Notes:
(1) All securities including securities available for sale, are presented at
amortized cost for purpose of this schedule.
(2) In order to make pretax income and resultant yields on tax exempt
investments comparable to those on taxable investments, a tax equivalent
adjustment is made to interest income. The tax equivalent adjustment has
been computed using a Federal income tax rate of 34% and has increased
interest income by $21,000, $3,000 and $2,000 in 1996, 1995, 1994
respectively.
(3) For the purpose of calculating loan yields, average loan balances include
nonaccrual loans with no related interest income.
</FN>
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Interest
(amounts in thousands) Average Balance income/expense Yield/Cost
<S> <C> <C> <C>
Assets
Interest earning assets
Loans, net (3) $63,444 $5,904 9.31%
Investments (1):
Taxable securities 57,182 3,366 5.89
Tax exempt securities (2) 227 16 7.05
Other:
Federal funds sold 3,175 188 5.92
Interest bearing deposits with banks 967 58 6.00
-----------------------------------------------------------------------
Total interest earning assets $124,995 $9,532 7.63%
Non-interest earning assets
Cash and due from banks 3,905
Allowance for loan losses (1,035)
Other assets 2,045
--------------------------
Total Assets $129,910
==========================
Liabilities and Shareholders' Equity
Interest bearing liabilities
Interest bearing demand deposits $12,727 $370 2.91%
Saving deposits 7,898 234 2.96
Time deposits 74,647 4,466 5.98
Borrowed funds 17,174 1,001 5.83
-----------------------------------------------------------------------
Total interest bearing liabilities $112,446 $6,071 5.40%
Non-interest bearing liabilities
Demand deposits 5,880
Other liabilities 2,945
Shareholders' equity 8,639
--------------------------
Total liabilities & shareholders' equity $129,910
==========================
Net interest income/net interest spread $3,461 2.23%
====== =====
Net yield on interest earning assets 2.77%
=====
<FN>
Notes:
(1) All securities including securities available for sale, are presented at
amortized cost for purpose of this schedule.
(2) In order to make pretax income and resultant yields on tax exempt
investments comparable to those on taxable investments, a tax equivalent
adjustment is made to interest income. The tax equivalent adjustment has
been computed using a Federal income tax rate of 34% and has increased
interest income by $21,000, $3,000 and $2,000 in 1996, 1995, 1994
respectively.
(3) For the purpose of calculating loan yields, average loan balances include
nonaccrual loans with no related interest income.
</FN>
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
Interest
(amounts in thousands) Average Balance income/expense Yield/Cost
<S> <C> <C> <C>
Assets
Interest earning assets
Loans, net (3) $50,402 $4,560 9.05%
Investments (1):
Taxable securities 52,485 2,630 5.01
Tax exempt securities (2) 132 11 8.33
Other:
Federal funds sold 2,964 128 4.32
Interest bearing deposits with banks 689 30 4.35
-----------------------------------------------------------------------
Total interest earning assets $106,672 $7,359 6.90%
Non-interest earning assets
Cash and due from banks 3,171
Allowance for loan losses (912)
Other assets 2,447
--------------------------
Total Assets $111,378
==========================
Liabilities and Shareholders' Equity
Interest bearing liabilities
Interest bearing demand deposits $13,795 $354 2.57%
Saving deposits 9,584 284 2.96
Time deposits 55,393 2,677 4.83
Borrowed funds 17,505 777 4.44
-----------------------------------------------------------------------
Total interest bearing liabilities $96,277 $4,092 4.25%
Non-interest bearing liabilities
Demand deposits 4,996
Other liabilities 1,895
Shareholders' equity 8,210
--------------------------
Total liabilities & shareholders' equity $111,378
==========================
Net interest income/net interest spread $3,267 2.65%
====== =====
Net yield on interest earning assets 3.05%
=====
<FN>
Notes:
(1) All securities including securities available for sale, are presented at
amortized cost for purpose of this schedule.
(2) In order to make pretax income and resultant yields on tax exempt
investments comparable to those on taxable investments, a tax equivalent
adjustment is made to interest income. The tax equivalent adjustment has
been computed using a Federal income tax rate of 34% and has increased
interest income by $21,000, $3,000 and $2,000 in 1996, 1995, 1994
respectively.
(3) For the purpose of calculating loan yields, average loan balances include
nonaccrual loans with no related interest income.
</FN>
</TABLE>
60
<PAGE>
Net interest income also may be analyzed by segregating the volume and
rate components of interest income and interest expense. Tho following table
demonstrates the impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in interest
rates earned and paid.
<TABLE>
<CAPTION>
For the year ended: 12/31/96 For the year ended: 12/31/95
compared to 12/31/95 compared to 12/31/94
Increase (Decrease) Due to change in Increase (Decrease) Due to change in
Average Average Average Average
(In thousands) volume rate Net volume rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net $985 $(47) $938 $1,210 $134 $1,344
Investments:
Taxable (319) 225 (94) 249 487 736
Tax exempt 87 0 87 7 (2) 5
Federal funds sold (53) (18) (71) 10 50 60
Interest bearing balances with banks (6) (5) (11) 14 14 28
------------------------------------------------------------------------------------
Total interest income $694 $155 $849 $1,490 $683 $2,173
------------------------------------------------------------------------------------
Interest bearing liabilities:
Interest bearing demand deposits 25 4 29 (29) 45 16
Savings deposits (38) 2 (36) (50) 0 (50)
Time deposits (149) 8 (141) 1,062 727 1,789
Borrowed funds 260 (6) 254 (15) 239 224
------------------------------------------------------------------------------------
Total interest expense 98 8 106 968 1,011 1,979
------------------------------------------------------------------------------------
Net interest income $596 $147 $743 $522 $(328) $194
====================================================================================
</TABLE>
Tax equivalent interest income for 1996 was $10.4 million compared to
$9.5 million in 1995. This represented a $900 thousand or 9.5% increase from
1995 to 1996 and was primarily due to an increase in average balances resulting
from internal growth and an increase in the rates on earning assets. 1995 tax
equivalent interest income of $9.5 million increased from $7.4 million in 1994.
Interest on taxable securities was $3.3 million in 1996 compared to
$3.4 million in 1995. The $100 thousand or 3.0% decline was due to a $5.2
million or 9.1% decrease in the average balance when comparing 1996 to 1995.
Offsetting this decrease in the average balances was an increase in the yield
from 5.89% for 1995 to 6.30% in 1996. This increase was accomplished by
purchasing higher rate investments as lower rate investments were called,
matured or prepaid. This replacement combined with rate increases on adjustable
rate mortgage backed securities accounted for the yield improvement. Interest
income on taxable securities of $3.4 million in 1995 compared to $2.6 million in
1994 had an increase of $800 thousand or 30.7%. This increase was due to a 9.0%
increase in average balances and a 17.6% increase in the investment yields when
comparing 1995 to 1994.
In 1996, management expanded the municipal bond portfolio from $227
thousand at year end 1995 to $1.5 million at year end 1996. This $1.3 million or
560.7% increase was the primary cause of the $87 thousand increase in tax
equivalent interest income to $103 thousand for 1996 compared to $16 thousand
for 1995. Partially offsetting this increase was a decline in yield on tax free
municipal bonds. The tax equivalent interest income of $16 thousand in 1995
compared to $11 thousand in 1994. Similar factors causing the change from 1995
to 1996 resulted in the increase from 1995 to 1994.
61
<PAGE>
Interest and fees on loans totalled $6.8 million in 1996 compared to
$5.9 million in 1995. The average balance of loans was $74.1 million with an
average yield of 9.23% in 1996 compared to an average balance of $63.4 million
with an average yield of 9.31% in 1995. The increase in the average balance was
a result of management's continued focus on increasing the loan portfolio.
Growth was recorded in commercial, mortgage and installment loans with the
greatest increase in commercial loans. The decrease in yields on the loan
portfolio was primarily attributable to the 25 basis point drop in prime in
February 1996. A significant portion of the loan portfolio consisted of loans
with rates tied to the prime rate of interest. Interest and fees on loans of
$4.6 million was recorded for 1994. The $1.3 million increase in interest and
fees on loans from 1994 to 1995 reflected the increase in average balances and
yields during the respective years.
Interest expense on total deposits was $4.9 million in 1996 compared to
$5.1 million in 1995. The average balance of total deposits was $92.4 million
with an average cost of 5.33% compared to an average balance of $95.3 million
and an average cost of 5.31% in 1995. Despite a higher interest rate
environment, average deposit costs remained nearly unchanged due to an increase
in interest bearing balances and the runoff of higher cost certificates of
deposit. Interest expense totaled $5.1 million in 1995 compared to $3.3 million
in 1994. The increase from 1994 to 1995 was attributed to an increase in average
balances and rates paid on higher cost certificates of deposit.
Interest expense on other borrowed funds was $1.3 million for 1996
compared to $1.0 million in 1995. The average balance of borrowed funds was
$21.7 million with an average cost of 5.79% compared to an average balance of
$17.2 million with an average cost of 5.83% for 1995. The increase in the
outstanding balance was due to a shift in funding mix away from certificates of
deposit and into primarily longer term FHLB advances. This shift to Federal Home
Loan Bank ("FHLB") advances reduced interest rate risk and provided for more
stable interest costs in the event of rising rates. Interest expense on borrowed
funds in 1994 was $777 thousand. The increase in interest expense from 1994 to
1995 of $223 thousand or 28.7% was primarily due to the increase in the rates
paid on borrowed funds.
Other Income
Penncore has historically relied on fee income to generate additional
earnings. For the year ended December 31, 1996 noninterest income was $244
thousand and represented a $17 thousand or 7.5% increase over same the period in
1995. Service fees on deposit accounts increased $13 thousand with the increase
due to an increase in the number of deposit accounts in 1996. Other fees and
commissions increased $16 thousand primarily due to growth in all types of
services provided by Penncore as the number of customers using these services
increased. Gains on sale of securities decreased $7 thousand as higher interest
rates precluded opportunities to sell securities. Offsetting this decrease was a
$13 thousand increase in the gain on the sale of mortgages. This increase was
attributable to the fact that Penncore only began selling mortgages in the
second half of 1995 so that the comparison represented a full year of activity
in 1996 compared with six months in 1995. In 1995, Penncore recognized a gain of
$22 thousand on the sale of other real estate owned. For the entirety 1996,
Penncore had no other real estate holdings and no gains or losses on sales.
Other noninterest income increased $4.7 thousand in 1996 compared to 1995.
Noninterest income increased $77 thousand when comparing 1995 to 1994. The
causes for this increase were an increase in gain on sale of mortgages of $13
thousand, gain on sale of other real estate owned of $22 thousand and similar
factors causing the change from 1995 to 1996.
Other Expense
For the year ended December 31, 1996 total noninterest expense was $3.1
million and represented a $388 thousand or 14.3% increase over the same period
of 1995. Salaries and wages for 1996 were $1.3 million and represented an
increase of $300 thousand or 30.0% over 1995 salaries and wages of $1.0 million.
This increase resulted from normal salary increases, increased staffing levels
and increases in incentive compensation expense. Total employee benefit expense
for 1996 was $269 thousand and represented an increase of $30 thousand or 12.6%
compared to 1995. This increase resulted from higher payroll taxes, pension and
profit sharing expenses. Occupancy expense for 1996 was $320 thousand and
represented an increase of $6 thousand or 1.9% over 1995
62
<PAGE>
occupancy expense of $314 thousand. Outside services for 1996 were $565 thousand
and represented an increase of $180 thousand or 46.8% over 1995 outside services
cost of $385 thousand. A substantial portion of this increase was caused by
payments for legal services relating to the resolution of a loan work-out
situation. Other causes for this increase included higher data processing fees
and higher escrow accounting fees. Other noninterest expenses for 1996 were $630
thousand and represented a decline of $107 thousand or 14.5% from the 1995 other
noninterest expense of $737 thousand. Other noninterest expenses included all
costs associated with the operation of Penncore not included in the other items.
The major expenses in this type included: communication, office supplies,
marketing and business development, FDIC assessment, insurance and Pennsylvania
state taxes. The primary cause for the decrease in other noninterest expenses
was a $118 thousand decline in FDIC assessment and other insurance costs.
Offsetting this decline was modest increases in the other miscellaneous
categories caused by higher level of activity. Noninterest expense increased
$118 thousand in 1995 when compared to 1994. An increase in salaries and wages
of $102 thousand was the primary cause for the increase in noninterest expenses
for 1995 when compared to 1994.
Provision for Loan Losses
The provision for loan losses represented managements' determination of
the amount necessary to bring the allowance for loan losses to a level that
management considered adequate to reflect the risk of future losses inherent in
Penncore's loan portfolio. The provision for 1996 was $340 thousand and
represented an increase of $78 thousand or 29.8% over the 1995 provision for
loan losses of $262 thousand. The composition of the loan portfolio continued to
become more heavily weighted toward commercial loans, which inherently required
a higher level of reserves. Therefore, the increase in the provision was
necessary to maintain the reserve at adequate levels as the commercial loan
portfolio continues to grow.
Effects of Inflation and Changing Prices
The consolidated financial statements and related consolidated
financial data incorporated by reference or presented herein have been prepared
in accordance with generally accepted accounting principles, which required the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to 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 do general levels of inflation. Interest rates do not
necessarily move in the same direction and magnitude as the prices of goods and
services.
A significant portion of Penncore's loan portfolio is secured by
residential or non-residential real estate. Any decline in the market value of
real estate could adversely affect the value of Penncore's collateral, and thus
the quality of the loan portfolio.
Financial Condition
Penncore experienced asset growth in 1996, with total consolidated
assets increasing $2.7 million from $135.1 million at December 31, 1995 to
$137.8 million at December 31, 1996. On the asset side, growth was in the loan
portfolio. Partially offsetting this growth was a decline in cash and cash
equivalents and the securities portfolio. On the liability side, borrowed funds
and securities sold under agreements to repurchase increased. Partially
offsetting this increase was a decline in savings and time deposits.
63
<PAGE>
Loan portfolio
The following table presents an analysis of outstanding loans as of the
dates indicated:
<TABLE>
<CAPTION>
As of December 31,
1996 1995
(dollar amounts in thousands) Amount Percentage Amount Percentage
<S> <C> <C> <C> <C>
Commercial $58,857 75.07% $52,710 75.87%
Real estate mortgage 16,904 21.56 14,604 21.02
Installment 2,645 3.37 2,159 3.11
----------------------------------------------------------------------------------
Total loans 78,406 100.00% 69,473 100.00%
=================== ===================
Less:
Allowance for loan losses $(1,205) $(861)
---------------- ----------------
Loans, net $77,201 $68,612
================ ================
</TABLE>
Penncore's gross loan portfolio increased as a percentage of total
assets from 56.9% at December 31, 1996 compared to 51.4% at December 31, 1995.
Total loans increased $8.9 million or 12.9% to $78.4 million at December 31,
1996 as compared to $69.5 million at December 31, 1995. The largest percentage
of the growth was in commercial loans which accounted for $6.1 million or 68.5%
of the total. Real estate mortgage and installment loans also increased from
December 31, 1995 to December 31, 1996. This growth was in line with
management's strategy of focusing on commercial lending opportunities.
The following table sets forth information on the maturity and
repricing on the loan portfolio as of December 31, 1996.
<TABLE>
<CAPTION>
Due after 1
Due in 1 year through Due after
(In thousands) year or less 5 years 5 years Total
<S> <C> <C> <C> <C>
Commercial loans $22,018 $30,472 $6,367 $58,857
Mortgage loans 2,934 3,234 10,736 16,904
Installment loans 64 1,530 1,051 2,645
----------------------------------------------------------------------------------
$25,016 $35,236 $18,154 $78,406
==================================================================================
Interest rates:
Predetermined $5,919 $20,645 $17,144 $43,708
Floating 19,097 14,591 1,010 34,698
----------------------------------------------------------------------------------
$25,016 $35,236 $18,154 $78,406
==================================================================================
</TABLE>
64
<PAGE>
Loan Quality
The lending activities of Penncore are guided by the basic lending
policy established by the Board of Directors. Loans must meet criteria which
include consideration of the character, capacity, cash flow and the capital
position of the borrower, collateral provided for the loan and prevailing
economic conditions. Management continues to pursue new lending opportunities
focusing primarily on commercial loan customers with financing needs of less
than $2.0 million located in its lending area. Penncore's lending area is
primarily concentrated in Montgomery and Bucks Counties in Pennsylvania and
Mercer County in New Jersey.
Regardless of the credit standards, there is risk of loss inherent in
every loan portfolio. The allowance for loan losses is a reserve established for
inherent loan losses based on management's continuing evaluation of the loan
portfolio. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, industry
experience, collateral value and current economic conditions that may affect the
borrower's ability to pay. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require Penncore to recognize additions to
the allowance based on their judgments of information available to them at the
time of their examination.
The allowance for loan losses is increased by periodic charges against
earnings called provisions for loan losses, and decreased periodically by
charge-offs of loans (or parts of loans) management has determined to be
uncollectible, net of actual recoveries on loans previously charged-off.
Penncore adopted SFAS No. 114 "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures," on January 1, 1995. This standard
requires that a creditor measure impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable.
Management, considering current information and events regarding the
borrowers ability to repay their obligations, considers a loan to be impaired
when it is probable that the corporation will be unable to collect all amounts
due in accordance with the contractual terms of the loan agreement. Impairment
losses are included in the allowance for loan losses through provisions charged
to operations. At December 31, 1996 the balance of impaired loans was $156
thousand compared to the balance of impaired loans at December 31, 1995 of $1.1
million, and the related allowance was $29.9 thousand and $86.7 thousand as of
December 31, 1996 and 1995, respectively.
Nonperforming Assets
Nonperforming assets consisted of nonaccrual loans, loans past due 90
days or more and still accruing interest and other real estate owned.
Nonperforming loans at December 31, 1996 decreased $687 thousand or
59.3% to $471 thousand from $1.158 million at December 31, 1996. The decline in
nonperforming loans was attributable to the successful workout of one
nonperforming loan. Penncore had no other real estate owned, at either December
31, 1996 or 1995.
65
<PAGE>
The following table sets forth information regarding nonperforming
assets as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
(dollar amounts in thousands) 1996 1995
Nonaccrual loans:
<S> <C> <C>
Commercial loans $156 $0
Mortgage loans 0 21
Installment loans 31 0
-----------------------------------------------
Total nonaccruing loans 187 21
Loans past due 90 days or more and accruing:
Commercial loans 261 1,115
Mortgage loans 14 0
Installment loans 9 22
-----------------------------------------------
Total loans past due 90 days or more and still accruing $284 $1,137
===============================================
Total non-performing loans $471 $1,158
===============================================
Total non-performing assets $471 $1,158
===============================================
Non-accrual loans to total loans net 0.24% 0.03%
Non-performing loans to total loans, gross 0.60% 1.69%
Non-performing loans to total loans, net 0.61% 1.67%
Non-performing loans to total assets 0.34% 0.86%
The following table presents Penncore's loan loss experience during the
periods indicated:
(dollar amounts in thousands) 1996 1995
----------------------------------------------
Balance at the beginning of year $861 $1,013
Loans charged-off:
Loans secured by real estate 37 82
Commercial loans 2 350
Installment loans 46 0
----------------------------------------------
Total charged-off loans 85 432
Recoveries of loans previously charged-off:
Loans secured by real estate 17 0
Commercial loans 60 18
Installment loans 12 0
----------------------------------------------
Total recoveries 89 18
----------------------------------------------
Net loans (recoveries) charged-off (4) 414
Provision charged to expense 340 262
----------------------------------------------
Balance at year end $1,205 $861
==============================================
Ratio of net charge-offs during the year to
average loans outstanding during the year -- 0.65%
Allowance for loan losses at year end to net
loans outstanding at year end 1.54% 1.24%
Allowance for loan losses to nonperforming
loans outstanding at year end 255.84% 0.74%
</TABLE>
66
<PAGE>
Allocation of the Allowance for Loan Losses
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information as of the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Allowance Percentage of Percentage of loans
(dollar amounts in thousands) Amount Allowance to total loans
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $1,064 88.30% 75.07%
Real Estate mortgage 71 5.89 21.56
Installment 70 5.81 3.37
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,205 100.00% 100.00%
=================================================================================
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
Allowance Percentage of Percentage of loans
(dollar amounts in thousands) Amount Allowance to total loans
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $732 85.02% 75.87%
Real Estate mortgage 64 7.43 21.02
Installment 65 7.55 3.11
- ---------------------------------------------------------------------------------------------------------------------------
Total $861 100.00% 100.00%
===============================================================================
</TABLE>
Securities
The securities portfolio decreased $2.6 million or 4.8% to $53.7
million at December 31, 1996 from $56.4 million at December 31, 1995. Penncore's
policy was to purchase securities that addressed interest rate risk objectives.
A significant portion of the securities purchased were adjustable rate mortgage
backed securities. Throughout 1996, management changed the mix between the
investment securities portfolio and the available for sale portfolio. At
December 31, 1995, available for sale securities were $51.1 million or 90.6% of
total investments, compared to $42.5 million or 79.1% of total investments at
December 31, 1996. This shift resulted in held to maturity investments
increasing $6.0 million to $11.3 million at December 31, 1996 as compared to
$5.3 million at December 31, 1995. In 1996, Penncore expanded its portfolio of
tax exempt municipal bonds and began to expand callable agency debentures. All
newly purchased municipal bonds were classified as held to maturity as well as a
portion of callable bonds purchased.
The following tables present amortized cost and market values for
investment securities and their contractual maturities, without prepayments or
calls.
67
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Market Amortized Market
cost Value cost Value
(amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C>
US Treasury securities $ 0 $ 0 $ 1,999 $ 1,996
US government agencies 3,712 3,740 4,737 4,711
Mortgage-backed securities 35,689 35,832 42,907 43,299
Other securities 3,061 3,079 1,456 1,456
------------------------------------------------------------------------------------
Total securities available for sale $42,462 $42,651 $51,099 $51,462
Investment securities:
US Treasury securities 0 0 750 744
US government agencies 7,500 7,422 3,000 2,938
Mortgage-backed securities 835 818 938 937
Other securities 2,949 2,964 651 661
------------------------------------------------------------------------------------
Total investment securities 11,284 11,204 5,339 5,280
------------------------------------------------------------------------------------
Total $53,746 $53,855 $56,438 $56,742
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and market values on December 31, 1996 by contractual maturity is shown below:
December 31, 1996
Amortized cost Market value
(amount in thousands)
<S> <C> <C>
Securities available for sale:
Due after five years through ten years $8,168 $8,137
Due after ten years 34,294 34,514
--------------------------------------------------------
Total available for sale $42,462 $42,651
Investment securities:
Due after one year through five years $3,115 $3,066
Due after five years through ten years 4,886 4,878
Due after ten years 3,283 3,260
--------------------------------------------------------
Total investment securities $11,284 $11,204
--------------------------------------------------------
Total $53,746 $53,855
========================================================
</TABLE>
68
<PAGE>
Deposits
Penncore relied on its deposit base to fund its lending needs and
provide liquidity. Management focused on increasing lower cost funding sources
such as: demand deposits, interest bearing demand deposits and savings deposits.
At the same time, management allowed higher cost certificates of deposit to
runoff and be replaced by other borrowed funds. Deposits decreased $10.9 million
or 10.3% to $94.9 million at December 31, 1996 when compared to December 31,
1995. Time deposits decreased $12.7 million and this decrease was partially
offset by increases in demand and interest bearing demand deposits when
comparing balances at December 31, 1996 and 1995.
The following table provides information on average deposits for the
years indicated.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Average Average
(dollar amounts in thousands) Balance Yield Balance Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing demand $8,460 -- $5,880 --
Interest bearing:
Demand 13,588 2.94% 12,727 2.91%
Savings 6,623 2.99 7,898 2.96
Time 72,155 5.99 74,647 5.98
- -----------------------------------------------------------------------------------------------------------------------
Total $100,826 4.88% $101,152 5.01%
===============================================================================
</TABLE>
The following table provides information on the maturity distribution
of time deposits $100,000 and over for the period indicated:
- -------------------------------------------------------------------------------
(dollar amounts in thousands) December 31, 1996
- -------------------------------------------------------------------------------
Maturity range:
Within three months $6,197
After three but within six months 4,677
After six but within twelve months 789
After twelve months 1,278
- -------------------------------------------------------------------------------
Total $12,941
===========================
Borrowed funds
Penncore relies on borrowed funds to provide liquidity for both loan
and investment purposes. Management uses both repurchase agreements and FHLB
advances. FHLB Advances represented 89.2% of borrowed funds at December 31, 1996
as compared to 84.9% at December 31, 1995. Total borrowed funds increased $13.0
million or 78.3% to $29.6 million at December 31, 1996 from $16.6 million at
year end 1995. This increase was due to management's strategy of shifting the
funding mix away from certificates of deposit to other less costly sources of
funding. Other borrowed funds were 21.5% of total assets at December 31, 1996
compared to 12.3% of assets at December 31, 1995.
69
<PAGE>
Liquidity
Liquidity is the ability to provide, promptly and economically, the
cash necessary to meet customer credit needs and satisfy deposit withdrawal
requirements. The primary sources of funds are deposits, payments of loans, and
investment security maturities. Loan repayments and investment maturities are
predictable sources of funds. Deposit in-flows are affected by unpredictable
influences of movements in interest rates, economic conditions, and competition.
Management relies on cash flow from both loans and investments combined with
short term borrowing from the FHLB to provide liquidity as required.
Asset Liability Management
Penncore actively manages its interest rate risk sensitivity positions.
The objectives of interest rate risk management are to control exposure of net
interest income to risks associated with interest rate movements and to achieve
consistent growth in net interest income. Management using policies and
procedures approved by the Board of Directors is responsible for managing
Penncore's rate sensitivity position by changing the mix and repricing
characteristics of assets and liabilities through the investment portfolio and
offering of loan and deposit terms. Management utilizes three principal reports
to measure and monitor interest rate risk: gap analysis reports, net interest
margin reports and asset/liability simulation reports. The table below shows the
interest rate sensitivity gap position as of December 31, 1996. The table
presents data at a single point in time and includes assumptions utilizing
historical prepayment rates modified by management's anticipation of changes in
the interest rate environment. Interest bearing demand accounts and savings
accounts have always been considered a stable source of funds. Although the
rates are subject to change, rates on these accounts historically have not
changed as quickly or as often as other deposits included in this analysis.
<TABLE>
<CAPTION>
Three Over three Over one
months months to year to Over five
($ amounts in thousands) or less one year five years years
- ------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
<S> <C> <C> <C> <C>
Federal funds sold $913 $0 $0 $0
Interest bearing deposits with banks 231 0 0 0
Investments 13,168 15,208 13,887 11,482
Loans 15,314 9,701 35,236 18,154
------------------------------------------------------------------------------
Total rate sensitive assets $29,626 $24,909 $49,123 $29,636
------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits $6,751 $0 $6,750 $0
Savings deposits 0 0 5,995 0
Time deposits 27,000 21,687 16,286 0
Borrowed funds 14,387 2,000 13,200 0
------------------------------------------------------------------------------
Total rate sensitive liabilities $48,138 $23,687 $42,231 $0
------------------------------------------------------------------------------
Incremental gap ($18,512) $1,222 $6,892 $29,636
==============================================================================
Cumulative gap ($18,512) ($17,290) ($10,398) $19,238
==============================================================================
As a % of earning assets (13.9%) (13.0%) (7.8%) 14.4%
==============================================================================
</TABLE>
70
<PAGE>
Capital
Penncore had shareholders equity of $9.6 million at December 31, 1996
compared to $9.1 million at December 31, 1995. The increase in shareholders
equity was primarily due to Penncore's net income.
The Board of Governors of the Federal Reserve System has guidelines to
implement risk-based capital requirements for Federal Reserve member banks and
holding companies. The guidelines establish a risk-based framework consisting of
(1) a definition of capital consisting of Tier 1 capital, which includes common
shareholders equity (less certain intangibles) and certain types of perpetual
preferred stock, and supplementary component called Tier II capital, which
includes a portion of the allowance for loan losses, mandatory convertible debt,
certain qualifying long-term debt and preferred stock which does not qualify for
Tier I capital, and (2) a system for assigning assets and off-balance sheet
items to one of several weighted risk categories, with higher levels of capital
being required for categories perceived as representing a greater risk. An
institutions' risk-based ratio is determined by dividing its qualifying capital
by its risk-weighted assets. The guidelines make regulatory capital requirements
more sensitive to differences in risk profiles among banking institutions, take
off-balance sheet items into account in assessing capital adequacy, and minimize
disincentives to holding liquid low-risk assets. The minimum risk-based capital
ratio is 8.0%, of which at least 4.0% must be Tier I capital, and the minimum
leverage ratio (Tier I capital as a percentage of quarterly average tangible
assets) is 4.0%. At December 31, 1996, Penncore had capital ratios well in
excess of required levels. (See note 9 to Penncore's 1996 consolidated financial
statements).
The following table presents the capital ratios of Commonwealth State
Bank at December 31, 1996;
(dollar amounts in thousands) Actual amount Ratio
Total capital to risk weighted assets $10,085 12.56%
Tier I capital to risk weighted assets $9,079 11.31%
Tier I capital to average assets $9,079 6.54%
Recently Issued Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board Issued SFAS No.
125, "Accounting for Transfers and Serving of Financial Assets and
Extinguishments of Liabilities." This statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996 and the application is prospective. The adoption will not have
a material effect on the consolidated financial statements of Penncore.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." SFAS 128 supersedes APB Opinion No. 15, "Earnings
Per Share," and specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. This statement is effective for financial statements
for periods ending after December 15, 1997. The adoption of this Statement
should not have a material effect on the consolidated financial statements of
Penncore.
71
<PAGE>
PRINCIPAL BENEFICIAL SHAREHOLDERS OF PENNCORE
The following table sets forth, as of May 16, 1997, the name and
address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of
outstanding Penncore Common Stock, the number of shares beneficially owned by
such person and the percentage of outstanding Penncore Common Stock so owned.
<TABLE>
<CAPTION>
Amount and Nature of % of Outstanding Common
Name and Address Beneficial Ownership(3) Stock Beneficially Owned
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Penn Investment Company
3411 Silverside Road
Wilmington, Delaware 19801 87,541(1) 21.53%
Owen O. Freeman, Jr.
32 South Chancellor Street
Newtown, Pennsylvania 18940 34,422(2) 8.28%
<FN>
- -------------------------
(1) A wholly owned subsidiary of National Penn Bancshares, Inc. of
Boyertown, Pennsylvania, the parent holding company of The National
Bank of Boyertown. National Penn holds presently 79,774 shares or 20%
of the outstanding Common Stock. National Penn may, at any time,
purchase up to 7,767 additional shares of the Common Stock pursuant to
a Stock Purchase Agreement. In calculating the tabulated percent of
class, the 7,767 additional shares were added to shares of Common Stock
presently held by National Penn and to the total outstanding shares
assuming all outstanding warrants held by National Penn were exercised.
(2) Mr. Owen O. Freeman, Jr. beneficially owns 17,350 shares of Common
Stock or 4.35% of the outstanding shares, of which 3,200 are held by
various relatives. Mr. Freeman may, at any time, purchase up to 17,072
additional shares of Common Stock pursuant to a stock warrant
agreement. See "Information Concerning Penncore Directors, Officers and
Nominee--Stock Purchase Warrants." In calculating the tabulated percent
of class, the 17,072 additional shares were added to the shares of
Common Stock currently held by Mr. Freeman and to the total outstanding
shares, assuming all outstanding warrants held by Mr. Freeman were
exercised.
(3) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the SEC and may include securities
owned by or for the individual's spouse and minor children and any
other relative who has the same home address, as well as securities to
which the individual has or shares voting or investment power or has
the right to acquire beneficial ownership within 60 days after May 16,
1997. Beneficial ownership may be disclaimed as to certain of the
securities.
</FN>
</TABLE>
73
<PAGE>
INFORMATION CONCERNING PENNCORE
DIRECTORS, OFFICERS AND NOMINEE
The following table contains certain information with respect to
Executive Officers, the current Class A Director whose term of office expires in
1997 and who is the Nominee for Class A Director whose term expires in 2000, and
the current Class B Directors and Class C Directors whose terms of office expire
in 1998 and 1999, respectively:
<TABLE>
<CAPTION>
Age as of Penncore/
March 31, Principal Occupation for Past Five Years and Positions Commonwealth State
Name 1997 Held with Penncore and Commonwealth State Bank Bank Director Since
- -----------------------------------------------------------------------------------------------------------------------------
Current Class A Director Whose Term Expires in 1997 and
Nominee for Class A Director Whose Term Expires in 2000
<S> <C> <C> <C>
Ashton Harvey 68 Chairman, U.S. Trust Company of New Jersey, Princeton, NJ, 1988/--
(2)(3)(5) since 1992; prior thereto, Managing Director of Delafield,
Harvey, Tabell, Inc. (Investment Advisors), Princeton, NJ
Class B Directors Whose Terms Expire in 1998
David A. Friedman 64 Vice President, Technology Management and Funding, Princeton, 1987/1987
(1)(2)(4)(5) NJ, since 1994; prior thereto, Attorney-at-Law with the firm
Ridolfi, Friedman, Frank & Edelstein, Lawrenceville, NJ
Albert S. Bencivengo 73 Self-employed Certified Public Accountant, Mercerville, NJ 1987/1987
(1)(2)(3)
Class C Directors Whose Terms Expire in 1999
Owen O. Freeman, Jr. 62 Chairman of the Boards, Penncore Financial Services Corporation 1987/1987
(1)(2)(3)(4)(5) Commonwealth State Bank; Chairman of the Board and Director,
First Capitol Bank, York, Pennsylvania
H. Paul Lewis 53 President and Chief Executive Officer, Penncore Financial 1987/1987
(1)(2)(4) Services Corporation and Commonwealth State Bank
<FN>
- -------------------------
(1) Member of the Executive Committee and Board of Directors of Commonwealth State Bank.
(2) Member of the Asset/Liability Investment Management Committee of Commonwealth State Bank.
(3) Member of the Audit Committee of Commonwealth State Bank.
(4) Member of the Marketing/Strategic Planning Committee of Commonwealth State Bank.
(5) Member of the Compensation Committee of Commonwealth State Bank.
</FN>
</TABLE>
Members of the Board of Directors of Commonwealth State Bank received
$200 for attendance at each meeting, and members of the Executive,
Asset/Liability Investment Management, Audit, Marketing/Strategic Planning, Risk
Management and Compensation Committees of Commonwealth State Bank received $100
for attendance at each meeting. The Board of Directors of the Commonwealth State
Bank met 12 times in 1996; the Executive Committee met 40 times in 1996; the
Audit Committee met one time in 1996; the Risk Management Committee met four
times in 1996; and the Compensation Committee met three times in 1996. The
Marketing/Strategic Planning Committee and the Asset/Liability Management
Committee did not meet in 1996. Commonwealth State Bank paid in the aggregate
$50,900 in directors' fees in 1996.
During 1996, the Board of Directors of Penncore held three meetings.
Directors received $300 for attendance at the meeting of the Board of Directors
of Penncore. In 1996, Penncore paid in the aggregate $4,200 in directors' fees.
Each of the Directors of Penncore attended at least seventy-five (75%)
percent of the combined total number of meetings of Penncore's and Commonwealth
State Bank's Board of Directors and Executive Committee of the Commonwealth
State Bank on which he is a member.
73
<PAGE>
The Board of Directors of Penncore has at present no standing
committees. Because Penncore does not have a nominating committee, a shareholder
who desires to propose an individual for consideration by the Board of Directors
as a nominee for Director should submit a proposal in writing to the President
of Penncore in accordance with Section 10.1 of Penncore's By-Laws. Any
shareholder who intends to nominate or to cause to have nominated any candidate
for election to the Board of Directors must notify the Secretary of Penncore in
writing not less than sixty (60) days prior to the date of the meeting of the
shareholders called for the election of directors.
Beneficial Ownership by Officers, Directors and Nominee
The following table sets forth, as of May 16, 1997, the amount and
percentage of the Common Stock beneficially owned by each Director, each nominee
and all Owners and Directors of Penncore as a group.
<TABLE>
<CAPTION>
Name of Individual or Amount and Nature of Beneficial
Entity or Group(4) Ownership(1)(2) Percentage of Class(3)(11)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Owen O. Freeman, Jr.(6) 34,422(8) 8.28%
H. Paul Lewis(6) 6,650(9) 1.65%
David A. Friedman(5) 15,869(10) 3.88%
Albert S. Bencivengo(5) 1,750 --
Ashton Harvey(7) 2,500 --
All Officers and Directors as a
Group (7 persons) 92,622 21.54%
<FN>
- -------------------------
(1) Information furnished by the Directors and Penncore.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Securities and Exchange Commission and
may include securities owned by or for the individual's spouse and minor
children and any other relative who has the same home address, as well as
securities to which the individual has or shares voting or investment power
or has the right to acquire beneficial ownership within 60 days after May
16, 1997. Beneficial ownership may be disclaimed as to certain of the
securities.
(3) Less than 1% unless otherwise indicated.
(4) Each named individual has full authority to vote those securities
beneficially owned.
(5) A Class B Director whose term expires in 1998.
(6) A Class C Director whose term expires in 1999.
(7) A current Class A Director whose term expires in 1997 and a Nominee for
Class A Director whose term expires in 2000.
(8) Mr. Owen O. Freeman, Jr. beneficially owns 17,350 shares of Common Stock or
4.35% of the outstanding shares, of which 3,200 are held by various
relatives. Mr. Freeman may, at an time, purchase up to 17,072 additional
shares of Common Stock pursuant to a stock warrant agreement. See "Stock
Purchase Warrants" below. In calculating the tabulated percent of class,
the 17,072 additional shares were added to the shares of Common Stock
currently held by Mr. Freeman and to the total outstanding shares, assuming
all outstanding warrants held by Mr. Freeman were exercised.
(9) Mr. H. Paul Lewis currently holds 2,900 shares of Common Stock or .73% of
the outstanding shares. Mr. Lewis may, at any time, purchase up to 3,750
additional shares of Common Stock pursuant to a stock warrant agreement.
See "Stock Purchase Warrants" below. In calculating the tabulated percent
of class, the 3,750 additional shares were added to the shares of Common
Stock currently held by Mr. Lewis and to the total outstanding shares,
assuming all outstanding warrants held by Mr. Lewis were exercised.
(10) Mr. David A. Friedman currently owns 5,625 shares of Common Stock or 1.41%
of the outstanding shares. Mr. Friedman may, at any time, purchase up to
10,244 additional shares of Common Stock pursuant to a stock warrant
agreement. See "Stock Purchase Warrants" below. In calculating the
tabulated percent of class, the 10,244 additional shares were added to the
shares of Common Stock currently held by Mr. Friedman and to the total
outstanding shares. Assuming all outstanding warrants held by Mr. Friedman
were exercised.
(11) In calculating the total percent of class, the 31,066 additional shares
that may, at any time, be purchased pursuant to stock warrant agreements by
the Directors and Officers were added to the total amount of outstanding
shares and to the total amount of shares directly owned by the Officers,
Directors and nominees, assuming all outstanding warrants held by the
Directors and Officers were exercised.
</FN>
</TABLE>
74
<PAGE>
Compensation of Officers
The following table sets forth all remuneration for services in all
capacities paid by Penncore and Commonwealth State Bank during 1996 to Owen 0.
Freeman, Jr., the Chairman of Penncore and Commonwealth State Bank, and H. Paul
Lewis, the President and Chief Executive Officer of Penncore and Commonwealth
State Bank. No other officer's aggregate salary and bonus exceeded $100,000
during 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
LONG TERM COMPENSATION
ANNUAL COMPENSATION
AWARDS PAYOUTS
Other Annual Restricted All Other
Name and Principal Position Salary Bonus Compensa- Stock Options/ LTIP Compensa-
Year ($) ($) tion(1)($) Award(s) SARs Payouts tion(2)($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owen O. Freeman, Jr 1996 130,000(3) -0- 38,554 -0- -0- -0- 183
Chairman of the Board of
Penncore and Commonwealth
State Bank
H. Paul Lewis
President/CEO of Penncore
and Commonwealth State Bank 1996 125,000 20,000 32,473 -0- -0- -0- 183
<FN>
(1) Includes directors' fees; life, medical and disability insurance premiums;
pension and 401(K) plan payments; automobile use and country club dues.
Messrs. Freeman and Lewis reimburse Penncore and Commonwealth State Bank
for any personal use of their automobiles on a mileage basis.
(2) Amounts appearing in this column represent payments for term life insurance
coverage, which is available under a group plan offered on the same terms
to all employees of Penncore and the Commonwealth State Bank.
(3) In consideration for his time spent on his duties as the Chairman of the
First Capitol Bank, Penncore and Commonwealth State Bank were reimbursed by
First Capitol Bank in the amount of $65,000 for a portion of Mr. Freeman's
salary.
</FN>
</TABLE>
Profit Sharing Plan
During 1990, the Commonwealth State Bank established a noncontributory
Profit Sharing Plan (the "Plan") for the benefit of its employees. Any eligible
employee who has completed one (1) year of service after which 1,000 hours have
been worked and has attained age 21 shall be eligible to participate under the
Plan as of the date he or she has satisfied such requirements. An eligible
employee shall become a participant effective as of the earlier of the first day
of the Plan year or the first day of the seventh month of such Plan year
coinciding with or next following the date such employee met the eligibility
requirements, following his or her completion of one year of service, provided
he or she receives compensation for at least 1,000 hours of employment during
any Plan year before that enrollment date or during his or her first employment
year, provided said employee was still employed as of such date. Approximately
24 employees, including all of the executive officers of Commonwealth State Bank
were eligible to participate in the Plan for the 1996 Plan year.
The formula for determining Commonwealth State Bank's contribution to
the Plan is set forth as follows. For each Plan year, Commonwealth State Bank
shall contribute to the Plan such amount as shall be determined by the Board of
Directors. Notwithstanding the foregoing, the Commonwealth State Bank's
contribution for any Plan year shall not exceed the maximum amount allowable as
a deduction to Commonwealth State Bank under the provisions of Internal Revenue
Code Section 404. To the extent necessary to provide the top heavy minimum
allocations, Commonwealth State Bank shall make a contribution even if it
exceeds the amount which is deductible under Code Section 404. All contributions
by the Commonwealth State Bank shall be made in cash or in such
75
<PAGE>
property as is acceptable to the Trustee. The Administrator shall allocate to
each participant's account a dollar amount equal to the same proportion which
compensation is in excess of the Social Security Taxable Wage Base ("excess
compensation"). The maximum amount which can be allocated is 5.7% of the sum of
each participant's total compensation plus excess compensation. If Commonwealth
State Bank does not contribute such amount for all participants, each
participant will be allocated a share of the contribution in the same proportion
that his or her total compensation plus his or her total excess compensation for
the Plan year bears to the total compensation plus the total excess compensation
of all participants for that year. The balance of Commonwealth State Bank's
contributions over the amount allocated above, if any, shall be allocated to
each participant's account in the same proportion that his or her total
compensation for the Plan year bears to the total compensation of all
participants for such year.
At normal retirement age and upon death, participants are entitled to
100% of their account balance. If employment terminates for any other reason,
participants are entitled to receive only the vested percentage of their account
balance, and the remainder of the account will be forfeited. The vested
percentage is determined as follows: zero but less than 2 years of service - 0%:
2 years of service - 25%; 3 years of service - 50%; 4 years of service - 75%; 5
years of service - 100%. Total cash contribution to the Plan for the fiscal year
ended December 31, 1996, was $58,000.
On October 1, 1993, an amendment and restatement of the Commonwealth
State Bank Profit Sharing Plan was completed whereby a 401(k) Safe Harbor Plan
was adopted in order to provide retirement and preretirement benefits to the
employees of Commonwealth State Bank. Employees shall be eligible to participate
in the Plan on the Entry Date after attaining age 21 and the completion of one
year of service after which 1,000 hours have been worked. Approximately 24
employees, including all of the executive officers of Commonwealth State Bank
were eligible to participate in the 401(k) Plan for the 1994 Plan year, and the
Plan, as of December 31, 1996, is not considered to be Top Heavy. The types of
contributions which may be made into the Plan include nonmatching employer
contributions, qualified nonelective employer contributions, matching employer
contributions, qualified matching employer contributions, and salary reduction
contributions. Nonmatching employer contributions and qualified nonelective
employer contributions shall be made at a discretionary amount as determined by
the employer. Matching employer contributions for the Plan year ending December
31, 1996, were made at 100% of the amount contributed by each participant to a
maximum of three (3%) percent of each participant's compensation. The matching
contribution may be changed at any time on a discretionary basis. A minimum
contribution equal to 3% of non-key employees compensation may be required if
the plan is considered to be Top Heavy. Rollover contributions and transfer
contributions from other tax-qualified plans are permitted, however, after-tax
participant contributions are not permitted. Each participant shall be permitted
to self-direct their account funds, and the four investment funds selected are
uniformly available to all participants. If employment terminates, participants
are entitled to receive only the vested percentage of their account balance, and
the remainder of the account will be forfeited. Benefits under the plan shall
vest according to the same schedule as the Profit Sharing Plan mentioned above.
Loans to participants are permitted as are withdrawals for financial hardship.
Total employer match cash contribution to the Plan for the fiscal year ended
December 31, 1996, was $27,800.
Employment Agreements
Owen O. Freeman, Jr.
Penncore and Commonwealth State Bank have renewed the Executive
Employment Agreement (the "Agreement") with Mr. Owen O. Freeman, Jr. for a
two-year period beginning January 1, 1997, and concluding as of the close of
business on December 31, 1998. Penncore and Commonwealth State Bank may choose
not to renew Mr. Freeman's contract without cause or reason. The Agreement
provides for Mr. Freeman's employment as Chairman of the Board of Penncore and
Commonwealth State Bank at an Annual Direct Salary of not less than $145,000 per
year, which shall be reviewed by the Board of Directors on each anniversary of
the Agreement and shall be adjusted in accordance with the prevailing market
value of the position and the current pay increase
76
<PAGE>
practices of Penncore and Commonwealth State Bank. During 1996, Mr. Freeman
received a direct annual salary of $130,000 under the Agreement. As a member of
the Board of Directors of Penncore and Commonwealth State Bank, Mr. Freeman is
also eligible to receive fees for services equal to fees received by outside
Directors of the organizations.
At the start of each fiscal year, Mr. Freeman shall ensure that
Business Plans delineating the financial and business goals of Penncore and
Commonwealth State Bank are established. The Business Plans shall be presented
to and reviewed by the appropriate Board of Directors, which may in their sole
discretion alter or modify the Business Plans prior to adoption. Upon adoption
of the Plans by the appropriate Boards of Directors, an Incentive Compensation
Plan for Mr. Freeman shall be established to provide an incentive pay
opportunity consistent with the practices of similar organizations in rewarding
their senior executives. The incentive award will be paid if the financial and
business goals of Penncore and Commonwealth State Bank are met for that year, or
at a lesser amount in the event some but not all of the financial and business
goals of Penncore and/or Commonwealth State Bank are met for the year in
question. Although Mr. Freeman elected not to participate in the Incentive
Compensation Plan, the Board of Directors awarded him a $30,000 bonus for his
performance in 1996 which was paid in 1997.
Mr. Freeman is also entitled to an additional, annual bonus in an
amount sufficient on an after-tax basis to pay the premium on his supplemental
Long-Term Disability Insurance Policy.
Mr. Freeman is also entitled to participate in or receive benefits
under all Penncore and/or Commonwealth State Bank employee benefit plans,
including but not limited to group life, disability, and medical or
health-and-accident plans, profit-sharing plan, and vacation. Mr. Freeman is
also entitled to life insurance at an amount equal to three times his salary to
a maximum of $500,000; the use of a Penncore or Commonwealth State Bank
purchased or leased Lincoln Town Car or its equivalent, as well as reimbursement
for all operating expenses; and social membership in the Trenton Country Club
and membership in the Trenton Club.
If Mr. Freeman's employment is terminated because of death, disability,
or for cause, Penncore and Commonwealth State Bank shall pay his full annual
direct salary and any other amounts owing through the date of termination, and
Penncore and Commonwealth State Bank shall have no further obligations to Mr.
Freeman.
If Mr. Freeman's employment is terminated without cause, or if Mr.
Freeman voluntarily terminates his employment for good reason, as defined in the
Agreement, Mr. Freeman becomes entitled to severance benefits under the
Agreement to include the payment of his full Annual Direct Salary from the date
of notice of termination for a total of twelve months; provided, however, he
shall make reasonable efforts to mitigate damages by seeking other comparable
employment. If Mr. Freeman's employment is terminated by Penncore and
Commonwealth State Bank for other than death, disability, or cause, as defined
in the Agreement, or if Mr. Freeman voluntarily terminates his employment for
good reason, within twelve months following a change of control, as defined in
the Agreement, then Mr. Freeman becomes entitled to the payment of his full
annual direct salary from the date of notice of termination for the remaining
term of the Agreement or twenty-four months, whichever is longer. Termination of
Mr. Freeman's employment under these scenarios also entitles him to the
continued participation in all employee benefit plans and programs to which he
was entitled prior to termination (or, if ineligible, a dollar amount equal to
the benefit forfeited as a result of such ineligibility for as long as the
annual direct salary is paid).
In the event of termination or nonrenewal of Mr. Freeman's employment
other than for cause, Mr. Freeman shall have the right to sell to Penncore and
Commonwealth State Bank, and upon exercise of such right Penncore and
Commonwealth State Bank shall be required to purchase, all of the shares of
Penncore's stock or Commonwealth State Bank's stock he owns and desires to sell,
for fair market value, as determined within the Agreement.
As mentioned previously, in consideration for the time spent on matters
concerning First Capitol Bank, Penncore and Commonwealth State Bank were
reimbursed for a portion of Mr. Freeman's salary in the amount of $65,000 of
compensation earned during 1996. Additionally, First Capitol Bank will reimburse
Penncore and
77
<PAGE>
Commonwealth State Bank for a portion of salary paid to Mr. Freeman during 1997,
in the amount of $72,500. First Capitol Bank, Penncore, and Commonwealth State
Bank will negotiate any further reimbursements prior to the commencement of the
year in question.
H. Paul Lewis
Penncore and Commonwealth State Bank have renewed the Executive
Employment Agreement (the "Agreement") with Mr. H. Paul Lewis for the two-year
period beginning January 1, 1997. The term of the agreement will automatically
renew each anniversary date unless written notice is provided. The Agreement
provides for Mr. Lewis' employment as President and Chief Executive Officer of
Penncore and Commonwealth State Bank at an Annual Direct Salary of not less than
$140,000 per year, which shall be reviewed by the Board of Directors on each
anniversary of the Agreement and shall be adjusted in accordance with the
prevailing market value of the position and the current pay increase practices
of Penncore and Commonwealth State Bank. During 1996, Mr. Lewis received direct
annual salary of $125,000 under the agreement. As a member of the Board of
Directors of Penncore and Commonwealth State Bank, Mr. Lewis is also eligible to
receive fees for services equal to fees received by outside Directors of the
organizations.
At the start of each fiscal year, Mr. Lewis shall prepare a Business
Plan establishing the financial and business goals of Commonwealth State Bank.
The Business Plan shall be presented to and reviewed by the Board of Directors,
which may in their sole discretion alter or modify the Business Plan prior to
adoption. Upon adoption of the Plan, an Incentive Compensation Plan for Mr.
Lewis shall be established to provide an incentive pay opportunity consistent
with the practices of similar organizations in rewarding their senior
executives. The incentive award will be paid if the financial and business goals
of Commonwealth State Bank are met for that year, or at a lesser amount in the
event some but not all of the financial and business goals of Commonwealth State
Bank are met for the year in question. Mr. Lewis received a bonus of $35,000 in
recognition of the financial and business goals of Commonwealth State Bank
achieved in 1996.
Mr. Lewis is also entitled to an additional, annual bonus in an amount
sufficient on an after-tax basis to pay the premium on his supplemental
Long-Term Disability Insurance Policy.
Mr. Lewis is also entitled to participate in or receive benefits under
all Penncore and/or Commonwealth State Bank employee benefit plans, including
but not limited to group life, disability, and medical or health-and-accident
plans, profit-sharing plan, and vacation. Mr. Lewis is also entitled to life
insurance at an amount equal to three times his salary to a maximum of $350,000,
and the use of a Commonwealth State Bank purchased or leased Buick LeSabre or
its equivalent, as well as reimbursement for all operating expenses.
If Mr. Lewis' employment is terminated because of death, disability, or
for cause, Commonwealth State Bank shall pay his full Annual Direct Salary and
any other amounts owing through the date of termination, and Penncore and
Commonwealth State Bank shall have no further obligations to Mr. Lewis.
If Mr. Lewis' employment is terminated without cause, or if Mr. Lewis
voluntarily terminates his employment for good reason, as defined in the
Agreement, Mr. Lewis becomes entitled to severance benefits under the Agreement
to include the payment of his full Annual Direct Salary from the date of notice
of termination for a total of nine months: provided, however, he shall make
reasonable efforts to mitigate damages by seeking other comparable employment.
If Mr. Lewis' employment is terminated by Commonwealth State Bank for other than
death, disability, or cause, as defined in the Agreement, or if Mr. Lewis
voluntarily terminates his employment for good reason, within twelve months
following a change of control, as defined in the Agreement, then Mr. Lewis
becomes entitled to the payment of his full Annual Direct Salary from the date
of notice of termination for the remaining term of the Agreement or eighteen
months, whichever is longer. Termination of Mr. Lewis' employment under these
scenarios also entitles him to the continued participation in all employee
benefit plans and programs to which he was entitled prior to termination (or, if
ineligible, a dollar amount equal to the benefit forfeited as a result of such
ineligibility for as long as the annual direct salary is paid).
78
<PAGE>
In the event of termination or nonrenewal of Mr. Lewis' employment
other than for cause, Mr. Lewis shall have the right to sell to Penncore and
Commonwealth State Bank, and upon exercise of such right Penncore and
Commonwealth State Bank shall be required to purchase, all of the shares of
Penncore's stock or Commonwealth State Bank's stock he owns and desires to sell,
for fair market value, as determined within the Agreement.
Stock Purchase Warrants
In consideration of the risk borne by Owen O. Freeman, Jr., David A.
Friedman and John G. Williams (the "Organizers") for guaranteeing the payment of
all preorganizational and offering expenses, and in inducing, in part, H. Paul
Lewis to accept the positions of President of Penncore and Commonwealth State
Bank, Penncore has issued warrants to purchase an aggregate of 41,310 shares of
Common Stock to the Organizers and Mr. Lewis. The exercise price is (1) $21.00
per share at any time within the first five fiscal years of operation and (2)
the lesser of $24.00 per share or the book value per share, adjusted for the
allowance for loan losses, at the end of the fifth fiscal year, at any time
within the sixth through tenth fiscal years of operation. Such warrants will
expire on December 31, 1998. On April 8, 1997, John G. Williams exercised all of
his warrants and purchased 10,244 shares of Penncore Common Stock at a purchase
price of $21.32 per share or $218,402.08 in the aggregate.
Phantom Stock Plan
On April 14, 1996, Penncore adopted the Penncore Financial Services
Corporation Phantom Stock Plan ("Phantom Stock Plan"). Certain officers of
Penncore and Commonwealth State Bank are eligible for grants of phantom stock
which have the same attributes as stock appreciation rights ("SARs"). The Board
of Directors of Penncore grants SARs under the Phantom Stock Plan for each year
1993 through 1997, based on Penncore's financial performance for that year. The
Chairman of the Board of Directors is responsible for administration of the
Phantom Stock Plan.
Each SAR entitles a participant to receive at maturity the increase in
the fair market value of a share of Penncore Common Stock over the "base amount"
with respect to that SAR. Fair market value is defined as the net worth of
Penncore divided by the number of shares of its Common Stock outstanding.
However, if another corporation acquires all or substantially all of the common
stock (or assets) of Penncore, the fair market value of the Common Stock is the
selling price received by the stockholders of Penncore (or by Penncore). The
Board of Directors fixes the base amount by reference to the value of a share of
common stock as of the grant date of an SAR.
SARs mature on January 2, 1998, or the earlier date of a participant's
termination of employment or acquisition of Penncore or its assets. A
participant is entitled to receive in cash the value of his SARs once they
mature. However, if a participant is discharged for cause, his SARs are
forfeited. In the event of a participant's death, the then value of his SARs is
paid in cash to his designated beneficiary.
Certain Transactions
There have been no material transactions between Penncore and
Commonwealth State Bank, nor any material transactions proposed, with any
Director or Executive Officer of Penncore and Commonwealth State Bank, or any
associate of any of the foregoing persons. Penncore and Commonwealth State Bank
have had and intend to continue to have banking and financial transactions in
the ordinary course of business with Directors and Executive Officers of
Penncore and Commonwealth State Bank and their associates on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. Total loans outstanding
from Commonwealth State Bank as of December 31, 1996, to Penncore's and
Commonwealth State Bank's Executive Officers and Directors as a group and
members of their immediate families and companies
79
<PAGE>
in which they had an ownership interest of 10% or more was $1,828,818, or
approximately 19.24% of the total equity capital of the Commonwealth State Bank.
Loans to such persons were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features. The aggregate amount of indebtedness outstanding as of
March 31, 1997, to the above described group was $1,665,708 or approximately
17.33% of the total equity capital of the Bank.
ITEM 3: RATIFICATION OF INDEPENDENT AUDITORS
Unless instructed to the contrary, it is intended that votes will be
cast pursuant to the Proxies for the ratification of the selection of KPMG, as
Penncore's independent public accountants for its fiscal year ending December
31, 1997. Penncore has been advised by KPMG that none of its members has any
financial interest in Penncore. Ratification of KPMG will require an affirmative
vote of a majority of the outstanding shares of Common Stock represented at the
Annual Meeting. KPMG served as Penncore's independent public accountants for the
year ended December 31, 1996.
KPMG performed customary audit services and provided assistance in
connection with regulatory matters, charging Penncore for such services at its
customary hourly billing rates. The non-audit services were approved by
Penncore's Board of Directors, after due consideration of the effect of the
performance thereof on the independence of the accountants and after the
conclusion by Penncore's Board of Directors that there was no effect on the
independence of the accountants.
In the event that the shareholders do not ratify the selection of KPMG
as Penncore's independent public accountants for the 1997 fiscal year, another
accounting firm will be chosen to provide independent public accountant audit
services for the 1997 fiscal year. The Board of Directors recommends that the
shareholders vote FOR the ratification of the selection of KPMG as the auditors
for Penncore for the year ending December 31, 1997.
It is understood that even if the selection of KPMG is ratified, the
Board of Directors, in its discretion, may direct the appointment of a new
independent auditing firm at any time during the year if the Board of Directors
determines that such a change would be in the best interests of Penncore and its
shareholders.
ITEM 4: ADJOURNMENT OF ANNUAL 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 Annual
Meeting, such proposal could not be approved unless the Annual Meeting were
adjourned in order to permit further solicitation of Proxies. In order to allow
Proxies that have been received by Penncore at the time of the Annual Meeting to
be voted for such adjournment, if necessary, Penncore has submitted the question
of adjournment under such circumstances to its shareholders as a separate matter
for their consideration.
If the Annual Meeting is adjourned, it will be adjourned only from day
to day or for such longer periods not in excess of fifteen days each as may be
directed by the shareholders present in person or by Proxy at the Annual
Meeting. A majority of the shares represented and voting at the Annual Meeting
is required in order to approve any such adjournment. The Board of Directors of
Penncore recommends that shareholders vote their Proxies in favor of such
adjournment so that their Proxies may be used for such purposes in the event it
should become necessary. Properly executed Proxies will be voted in favor of any
such adjournment unless otherwise
80
<PAGE>
indicated thereon. If it is necessary to adjourn the Annual Meeting, notice of
the time and place of the adjourned meeting may be given by announcement at the
meeting.
SHAREHOLDER PROPOSALS
In the event that the proposed Merger is not consummated, a shareholder
who wishes to submit a proposal for inclusion in Penncore's Proxy Statement for
its 1998 Annual Meeting of Shareholders must deliver such proposal in writing
addressed to the Secretary, Penncore Financial Services Corporation, 3 Friends
Lane, P.O. Box 202, Newtown, Pennsylvania 18940, not later than January 20,
1998.
LEGAL OPINIONS
Opinions with respect to certain legal matters in connection with the
Merger will be rendered by Dilworth, Paxson, Kalish & Kauffman LLP,
Philadelphia, Pennsylvania, as counsel for Bancorp, and by Schnader, Harrison,
Segal & Lewis, Harrisburg, Pennsylvania, as counsel for Penncore.
EXPERTS
The consolidated financial statements of Bancorp at March 31, 1996 and
1995, and for each of the years in the three year period ended March 31, 1996,
which are incorporated by reference in this Proxy Statement/Prospectus, have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
as set forth in their reports thereon incorporated by reference herein, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Penncore at December 31, 1996
and 1995, and for each of the years in the three year period ended December 31,
1996, which are included in this Proxy Statement/Prospectus, have been audited
by KPMG Peat Marwick LLP, independent certified public accountants, as set forth
in their reports thereon included herein, and are included in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
OTHER MATTERS
The Board of Directors of Penncore does not know of any other matters
intended to be presented for shareholder action at the Annual Meeting. If any
other matter does properly come before the Annual Meeting and is put to a
shareholder vote, the Proxies solicited hereby will be voted in accordance with
the judgment of the proxyholders named thereon.
81
<PAGE>
ANNEX F
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PENNCORE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report....................................................................................F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................................F-4
Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994..........................F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
December 31, 1996, 1995 and 1994................................................................................F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994......................F-7
Notes to Consolidated Financial Statements............................................................F-8 thru F-29
</TABLE>
THE ABOVE INDEPENDENT AUDITORS' REPORT, AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO OF PENNCORE ARE INCLUDED IN THEIR ENTIRETY IN THIS
PROXY STATEMENT/PROSPECTUS.
F-1
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Penncore Financial Services Corporation:
We have audited the accompanying consolidated balance sheets of Penncore
Financial Services Corporation and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 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 consolidated 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 Penncore Financial
Services Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
February 21, 1997
KPMG Peat Marwick LLP
Princeton, New Jersey
F-3
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Cash and due from banks (note 2) $4,100,412 5,381,194
Federal funds sold 913,000 2,202,000
------------ -----------
Total cash and cash equivalents 5,013,412 7,583,194
------------ -----------
Interest bearing deposits with banks 230,688 406,917
Securities available for sale (note 3) 42,651,012 51,461,999
Investment securities (market value of $11,203,929 in
1996 and $5,280,344 in 1995) (note 3) 11,283,599 5,339,309
Loans, net (note 4) 77,199,791 68,612,198
Bank premises and equipment, net (note 5) 273,265 334,650
Accrued interest receivable and other assets (note 7) 1,127,214 1,378,986
------------ -----------
Total assets $137,778,981 135,117,253
============ ============
Liabilities and Shareholders' Equity
Deposits:
Demand - noninterest bearing 10,447,136 9,101,506
Demand - interest bearing 13,501,240 11,588,411
Savings 5,995,012 7,461,517
Time 52,031,494 58,418,663
Time - $100,000 and over 12,941,033 19,274,143
------------ -----------
Total deposits 94,915,915 105,844,240
Other liabilities:
Securities sold under agreements to repurchase (note 6) 3,186,417 2,506,535
Borrowed funds (note 6) 26,400,800 14,100,000
Accrued interest payable 2,551,607 2,885,891
Accrued taxes and other liabilities 1,095,246 653,623
------------ -----------
Total other liabilities 33,234,070 20,146,049
------------ -----------
Total liabilities 128,149,985 125,990,289
------------ -----------
Commitments and contingencies (notes 5, 10 and 16).
Shareholders' equity (notes 9, 11 and 16):
Common stock, $5.00 par value, authorized 2,000,000
shares, issued and outstanding 386,063 shares 1,930,315 1,930,315
Capital surplus 5,751,519 5,751,519
Retained earnings 1,822,124 1,205,229
Unrealized gain on securities available for sale, net of tax 125,038 239,901
------------ -----------
Total shareholders' equity 9,628,996 9,126,964
------------ -----------
Total liabilities and shareholders' equity $137,778,981 135,117,253
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $6,841,598 5,903,806 4,560,317
Interest on deposits with banks 46,729 57,982 30,331
Interest on Federal funds sold 116,508 188,103 128,524
Interest on securities available for sale 2,776,554 2,172,884 1,694,091
Interest on investment securities 578,877 1,206,383 943,774
----------- ----------- -----------
Total interest income 10,360,266 9,529,158 7,357,037
----------- ----------- -----------
Interest expense:
Demand - interest bearing and savings 597,371 604,555 638,358
Time 3,265,012 3,471,317 2,266,124
Time - $100,000 and over 1,060,186 994,332 410,941
Borrowed funds 1,254,739 1,001,224 777,170
----------- ----------- -----------
Total interest expense 6,177,308 6,071,428 4,092,593
----------- ----------- -----------
Net interest income 4,182,958 3,457,730 3,264,444
Provision for loan losses (note 4) 340,000 262,448 240,000
----------- ----------- -----------
Net interest income after provision for
loan losses 3,842,958 3,195,282 3,024,444
----------- ----------- -----------
Noninterest income:
Service fees on deposit accounts 78,399 65,460 58,832
Other fees and commissions 89,620 73,212 50,578
Gain on sale of securities, net (note 3) 29,425 36,777 31,613
Gain on sale of mortgages 25,711 13,032 --
Gain on sale of other real estate owned -- 22,448 --
Other 20,438 15,736 8,871
----------- ----------- -----------
Total noninterest income 243,593 226,665 149,894
----------- ----------- -----------
Noninterest expense:
Salaries and wages 1,315,481 1,036,854 934,423
Employee benefits (note 13) 269,468 238,848 238,182
Occupancy expense (note 5) 320,075 314,254 309,762
Outside services 564,591 385,419 367,233
Other (note 8) 630,406 737,094 744,888
----------- ----------- -----------
Total noninterest expense 3,100,021 2,712,469 2,594,488
Income before income tax expense 986,530 709,478 579,850
Income tax expense (note 7) 311,726 238,800 196,393
----------- ----------- -----------
Net income $674,804 470,678 383,457
=========== =========== ===========
Earnings per share:
Primary $1.74 1.22 0.99
Fully diluted 1.69 1.22 0.99
=========== =========== ===========
Weighted average shares outstanding:
Primary 388,110 386,063 386,063
Fully diluted 398,385 386,063 386,063
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Statements of
Changes in Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
gain
(loss) on
securities
available
Common Capital Retained for sale, net
stock surplus earnings of tax Total
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $1,930,315 5,751,519 443,750 -- 8,125,584
Net income -- -- 383,457 -- 383,457
Cash dividend
($.12 per share) -- -- (46,328) -- (46,328)
Unrealized loss on
securities available
for sale, net of tax -- -- -- (982,831) (982,831)
--------- --------- ------- -------- ---------
Balance, December 31, 1994 1,930,315 5,751,519 780,879 (982,831) 7,479,882
Net income -- -- 470,678 -- 470,678
Cash dividend
($.12 per share) -- -- (46,328) -- (46,328)
Change in unrealized
gain (loss) on
securities available
for sale, net of tax -- -- -- 1,222,732 1,222,732
--------- --------- ------- -------- ---------
Balance, December 31, 1995 1,930,315 5,751,519 1,205,229 239,901 9,126,964
Net income -- -- 674,804 -- 674,804
Cash dividend
($.15 per share) -- -- (57,909) -- (57,909)
Change in unrealized
gain on securities
available for sale,
net of tax -- -- -- (114,863) (114,863)
--------- --------- ------- -------- ---------
Balance, December 31, 1996 $1,930,315 5,751,519 1,822,124 125,038 9,628,996
========== ========= ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $674,804 470,678 383,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 88,464 76,416 61,248
Provision for loan losses 340,000 262,448 240,000
Amortization and accretion, net 92,676 93,795 229,305
Gain on sale of securities, net (29,425) (36,777) (31,613)
Gain on sale of other real estate owned -- (22,448) --
(Increase) decrease in accrued interest
receivable and other assets 310,654 (228,882) (187,826)
Increase (decrease) in accrued interest payable (334,284) 987,475 680,851
Increase in accrued taxes and other liabilities 441,623 84,547 (161,338)
----------- ---------- ----------
Net cash provided by operating activities 1,584,512 1,687,252 1,214,084
----------- ---------- ----------
Cash flows from investing activities:
Net decrease in interest bearing deposits 176,229 493,727 (557,147)
Purchase of securities available for sale (18,073,731) (15,196,628) (10,474,089)
Proceeds from maturities, calls and paydowns of
securities available for sale 12,195,264 5,235,533 11,100,529
Proceeds from sales of securities available for sale 14,464,212 6,730,860 2,722,629
Purchase of investment securities (6,812,072) (2,798,700) (5,523,433)
Proceeds from maturities, calls and paydowns of
investment securities 856,028 3,919,308 54,227
Net increase in loans (8,927,593) (14,245,324) (10,020,831)
Bank premises and equipment expenditures (27,079) (116,000) (31,721)
Proceeds from sale of other real estate owned -- 730,845 202,702
----------- ---------- ----------
Net cash used in investing activities (6,148,742) (15,246,379) (12,527,134)
----------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits and
savings accounts 1,791,954 270,667 (4,857,327)
Net increase (decrease) in certificates of deposit (12,720,279) 12,299,190 20,481,699
Net increase (decrease) in securities sold under
agreements to repurchase 679,882 (2,390,124) 729,274
Net change in short-term borrowings 12,300,800 2,900,000 (400,000)
Dividends paid (57,909) (46,328) (46,328)
----------- ---------- ----------
Net cash provided by financing activities 1,994,448 13,033,405 15,907,318
----------- ---------- ----------
Net decrease in cash and cash equivalents (2,569,782) (525,722) 4,594,268
Cash and cash equivalents, beginning of year 7,583,194 8,108,916 3,514,648
----------- ---------- ----------
Cash and cash equivalents, end of year $5,013,412 7,583,194 8,108,916
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $6,511,592 5,083,953 3,411,742
Income taxes 75,500 170,500 215,946
=========== ========== ==========
</TABLE>
Supplemental schedule of noncash investing activities:
During 1995, the Company transferred $13,698,132 of investment securities to
securities available for sale.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(1) Organization and Summary of Significant Accounting Policies
Business
Penncore Financial Services Corporation provides banking services
to individual and corporate customers in Bucks County,
Pennsylvania.
Consolidation
The consolidated financial statements include the accounts of
Penncore Financial Services Corporation and its subsidiary,
Commonwealth State Bank (the Corporation). All significant
intercompany accounts and transactions have been eliminated.
Basis of financial statement presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. 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 date of the
balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses and the valuation of real estate
owned.
A substantial portion of the Corporation's loans are secured by
real estate in markets in Pennsylvania and New Jersey.
Accordingly, the ultimate collectibility of a substantial portion
of the Corporation's loan portfolio is susceptible to changes in
economic conditions in Pennsylvania and New Jersey and the
Corporation's market area.
Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions, particularly in
Pennsylvania and New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses.
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.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts due from
banks and Federal funds sold. Generally, Federal funds are
purchased or sold for one-day periods.
F-8
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Securities available for sale
Securities classified as available for sale may be used by the
Corporation as funding and liquidity sources and can be used to
manage the Corporation's balance sheet interest rate sensitivity
position. These securities are carried at their market value with
unrealized gains and losses carried, net of income tax, as
adjustments to shareholders' equity. Amortization of premium and
accretion of discount are recognized as an adjustment to interest
income, on a level yield basis. Gains and losses on disposition
are included in earnings using the specific identification method.
Investment securities
Investment securities are composed of securities that the
Corporation has the positive intent and ability to hold to
maturity. These securities are stated at cost, adjusted for
amortization of premium or accretion of discount. The premium or
discount amortization and accretion is recognized as an adjustment
to interest income, on a level yield basis. Unrealized losses due
to fluctuations in market value are recognized as investment
security losses when a decline in value is assessed as being other
than temporary.
Interest on loans
Interest income on loans is credited to operations based upon the
principal amount outstanding. Loans are placed on nonaccrual
status when a default of principal or interest has existed for a
period of 90 days except when, in the opinion of management, the
collection of the principal or interest is reasonably anticipated.
Generally, once a loan is placed on nonaccrual status, interest
previously accrued and uncollected is charged against current
earnings and interest is included in earnings thereafter only to
the extent actually received in cash.
Allowance for loan losses
The allowance for loan losses is maintained at a level considered
by management to be adequate to provide for potential loan losses.
The allowance is increased by provisions charged to operations and
reduced by net charge-offs. The level of the allowance is based on
management's evaluation of potential losses in the portfolio,
after consideration of such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may
affect the borrowers' ability to pay.
F-9
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
The Corporation adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" on January 1, 1995.
Management, considering current information and events regarding
the borrowers' ability to repay their obligations, considers a
loan to be impaired when it is probable that the Corporation will
be unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is considered to be
impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the
collateral. Impairment losses are included in the allowance for
loan losses through provisions charged to operations.
Deferred loan fees
Loan origination and commitment fees less certain costs are
deferred, and the net amount is amortized as an adjustment to the
related loan's yield.
Bank premises and equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is charged to
operations on a straight-line basis over the estimated useful
lives of the assets. Leasehold improvements are amortized to
operations over the shorter of the term of the respective lease or
the estimated useful life of the improvements. Maintenance and
repairs are charged to expense as incurred.
Income taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-10
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Earnings per share
Earnings per share are computed based on the weighted average number of
shares outstanding, including common stock equivalents, during the
period of computation.
(2) Cash and Due from Banks
The Corporation maintains various deposits at the Federal Reserve Bank
of Philadelphia and in other banks to satisfy Federal regulatory
requirements.
(3) Securities
The amortized cost and estimated market value of securities available
for sale and investment securities as of December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Securities available for sale:
<S> <C> <C> <C> <C>
U.S. Government agencies $3,711,611 34,990 6,215 3,740,386
Mortgage-backed securities 35,688,700 393,197 250,021 35,831,876
Other securities 3,061,250 17,500 -- 3,078,750
----------- ----------- ----------- -----------
$42,461,561 445,687 256,236 42,651,012
=========== =========== =========== ===========
Investment securities:
U.S. Government agencies 7,500,000 1,960 79,855 7,422,105
Mortgage-backed securities 834,316 18,424 35,624 817,116
Other securities 2,949,283 31,636 16,211 2,964,708
----------- ----------- ----------- -----------
$11,283,599 52,020 131,690 11,203,929
=========== =========== =========== ===========
</TABLE>
F-11
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Securities, cont.
<TABLE>
<CAPTION>
1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Securities available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,998,878 880 3,858 1,995,900
U.S. Government agencies 4,736,627 -- 25,252 4,711,375
Mortgage-backed securities 42,907,348 491,422 99,996 43,298,774
Other securities 1,455,950 -- -- 1,455,950
----------- ----------- ----------- -----------
$51,098,803 492,302 129,106 51,461,999
=========== =========== =========== ===========
Investment securities:
U.S. Treasury securities 749,674 -- 6,049 743,625
U.S. Government agencies 3,000,000 -- 61,800 2,938,200
Mortgage-backed securities 938,594 159 1,161 937,592
Other securities 651,041 25,276 15,390 660,927
----------- ----------- ----------- -----------
$5,339,309 25,435 84,400 5,280,344
=========== =========== =========== ===========
</TABLE>
Gross gains of $70,211, $44,509 and $31,613 were realized on sales of
securities available for sale in 1996, 1995 and 1994, respectively. Gross
losses of $40,786 and $7,732 were realized on those sales in 1996 and
1995, respectively.
The amortized cost and estimated market value of securities available for
sale and investment securities as of December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Market Value
Securities available for sale:
Due after five through ten years $3,000,000 3,030,610
Due after ten years 3,772,861 3,788,526
----------- -----------
6,772,861 6,819,136
Mortgage-backed securities 35,688,700 35,831,876
----------- -----------
$42,461,561 42,651,012
=========== ==========
F-12
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Securities, cont.
Estimated
Amortized market
cost value
Investment securities:
Due after one year through five years $3,114,831 3,066,042
Due after five years through ten years 4,886,171 4,878,477
Due after ten years 2,448,281 2,442,294
----------- ----------
10,449,283 10,386,813
Mortgage-backed securities 834,316 817,116
----------- ----------
$11,283,599 11,203,929
=========== ==========
On December 19, 1995 the Corporation made a one-time reassessment of its
investment portfolio categories as provided for in the FASB Special
Report "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities - Questions and
Answers". Accordingly, the Corporation transferred $13,698,132 of held to
maturity investments to the available for sale category to more
accurately reflect the intent of the Corporation regarding these
securities. The net unrealized gain related to this one-time transfer
amounted to $92,615 and is reflected in the unrealized gain component of
shareholders' equity.
Securities with an amortized cost of $12,942,726 and $18,888,559 as of
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
As of December 31, 1996, Federal Home Loan Bank (FHLB) stock with a
carrying value of $2,869,700 was held by the Corporation as required by
the FHLB (note 6) and is included in securities available for sale in the
accompanying consolidated balance sheet.
F-13
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Loans and Allowance for Loan Losses
Major classifications of loans as of December 31, 1996 and 1995 are
summarized as follows:
1996 1995
Commercial $58,856,752 52,710,162
Real estate - mortgage 16,903,684 14,604,401
Installment 2,644,940 2,159,011
----------- -----------
Total loans 78,405,376 69,473,574
Less allowance for loan losses 1,205,585 861,376
----------- -----------
Loans, net $77,199,791 68,612,198
As of December 31, 1996 and 1995, the Corporation had related party loans
to officers, directors and their affiliated interests. The Corporation
has not entered into any transactions with these individuals or entities
in which the terms and conditions were less favorable to the Corporation
than they would have been for similar transactions with other borrowers.
The following table for the years ended December 31, 1996 and 1995
summarizes the activity with respect to such loans:
1996 1995
Balance as of beginning of year $2,742,273 2,908,084
Additions 360,250 301,608
Less repayments and resignations 790,259 467,419
----------- ----------
Balance as of end of year $2,312,264 2,742,273
=========== ==========
Changes in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
Balance as of beginning of year $861,376 1,012,629 795,945
Provision for loan losses 340,000 262,448 240,000
Net (charge-offs) recoveries 4,209 (413,701) (23,316)
---------- ---------- ----------
Balance as of end of year $1,205,585 861,376 1,012,629
========== ========== ==========
F-14
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Loans and Allowance for Loan Losses, cont.
The nonperforming loan category includes loans on which accrual of
interest has been discontinued with subsequent interest payments
credited to principal or income as received and loans 90 days past due
or greater on which interest is still accruing. The Corporation has no
properties acquired through foreclosure as of December 31, 1996 and
1995.
Nonperforming loans as a percentage of total loans were 0.60% as of
December 31, 1996 and 1.67% as of December 31, 1995.
A summary of nonperforming loans as of December 31, 1996 and 1995 is as
follows:
1996 1995
Nonaccruing loans:
Commercial loans $155,568 --
Mortgage loans -- 20,578
Installment loans 31,055 --
-------- ---------
Total nonaccruing loans 186,623 20,578
-------- ---------
Past due 90 days or more (accruing):
Commercial loans 260,754 1,114,703
Mortgage loans 14,025 --
Installment loans 9,202 22,404
-------- ---------
Total past due 90 days or more 283,981 1,137,107
-------- ---------
Total nonperforming loans $470,604 1,157,685
======== =========
The Corporation has defined the population of impaired loans to include,
at a minimum, all nonaccrual commercial loans. Smaller balance
homogeneous loans that are collectively evaluated for impairment,
including mortgage and consumer loans, are specifically excluded from the
impaired loan portfolio.
The recorded investment in impaired loans was $155,568 and $1,106,141 and
the related allowance was $29,947 and $86,673 as of December 31, 1996 and
1995, respectively.
F-15
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Loans and Allowance for Loan Losses, cont.
Income before income taxes amounting to approximately $6,000, none and
$104,000 in 1996, 1995 and 1994, respectively would have been
recognized if interest on nonperforming loans had been recorded based
upon original contract terms.
(5) Bank Premises and Equipment
Major classifications of bank premises and equipment as of December 31,
1996 and 1995 are summarized as follows:
1996 1995
Leasehold improvements $295,584 295,584
Furniture and equipment 527,950 500,871
-------- --------
823,534 796,455
Less accumulated depreciation 550,269 461,805
-------- --------
Bank premises and equipment, net $273,265 334,650
======== =======
The lease commitment for the main banking location expires in the year
2002. The agreement provides for renewal options and payment of real
estate taxes and other expenses in addition to base rent.
The following is a schedule of future minimum lease payments for
operating leases (with initial or remaining terms in excess of one year)
as of December 31, 1996:
Year ended
December 31,
1997 $ 156,000
1998 166,000
1999 166,000
2000 166,000
2001 166,000
Thereafter 76,000
=========
Rent expense charged to operations amounted to approximately $184,000,
$198,000 and $205,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-16
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Securities Sold Under Agreements to Repurchase and Borrowed Funds
A summary of certain information regarding securities sold under
agreements to repurchase for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Average amount outstanding for the year $3,151,622 4,271,271 5,289,863
Maximum amount outstanding at any
month end 3,799,283 5,389,676 7,068,000
Average interest rate on year end
balance 5.39% 5.44% 5.85%
========== ========= =========
</TABLE>
Borrowed funds as of December 31, 1996 and 1995 consist of advances from
the Federal Home Loan Bank of Pittsburgh aggregating $26,400,800 and
$14,100,000, respectively at terms ranging from one day to five years.
Interest rates on such advances range from 4.97% to 8.42% in 1996 and
4.82% to 8.42% in 1995. The average rate on the advances as of December
31, 1996 is 5.83%. Interest is payable monthly, quarterly or at maturity.
The advances are secured by a blanket lien on the assets of the
Corporation.
The following is a schedule of stated maturities for borrowed funds as of
December 31, 1996:
Year ended
December 31,
1997 $3,400,000
1998 6,000,000
1999 3,000,000
2000 2,000,000
2001 12,000,000
-----------
$26,400,000
===========
(7) Income Taxes
The current and deferred Federal income tax provision (benefit) for the
years ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
Statement of Income:
Federal income tax provision (benefit):
Current $279,958 241,316 232,276
Deferred 31,768 (2,516) (35,883)
-------- ------- -------
$311,726 238,800 196,393
======== ======== ========
F-17
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, cont.
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting
purposes and such amounts measured by tax laws. Temporary differences
which give rise to a significant portion of deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Loans, principally due to allowance
for loan loss and unearned income $338,828 369,689
Bank premises and equipment,
principally due to depreciation 24,423 18,168
Accrued liability not currently
deductible for tax 86,105 86,467
-------- -------
449,356 474,324
-------- -------
Deferred tax liabilities:
Investment securities, principally due
to accretion 22,190 15,390
Unrealized gain on securities available
for sale 64,413 123,586
-------- -------
86,603 138,976
-------- -------
Net deferred tax asset $362,753 335,348
======== =======
There was no valuation allowance for deferred tax assets as of December
31, 1996 or 1995. Management believes based upon current information,
that it is more likely than not that there will be sufficient taxable
income through carryback to prior years and future taxable income to
realize the net deferred tax asset. However, there can be no assurance
regarding the level of earnings in the future.
F-18
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes, cont.
A reconciliation of the difference between what the annual tax
provision would have been if computed on the Federal statutory rate of
34% and what was actually provided for financial reporting purposes, as
shown in the foregoing summary for the years ended December 31, 1996,
1995 and 1994 is as follows:
1996 1995 1994
Federal income tax expense at
statutory rate $335,423 241,223 197,149
Tax exempt interest income (27,393) (3,602) (2,388)
Meals and entertainment 2,321 1,886 4,303
Other 1,375 (707) (2,671)
--------- --------- ---------
$311,726 238,800 196,393
========= ========= =========
(8) Other Noninterest Expense
Other noninterest expense for the years ended December 31, 1996, 1995
and 1994 consisted of the following:
1996 1995 1994
Communication $93,184 80,244 74,661
Office supplies 51,322 64,673 60,745
Marketing and business development 121,152 99,225 82,559
FDIC assessment and insurance 62,817 181,240 216,507
Pennsylvania state taxes 114,791 123,600 117,300
Other 187,140 188,112 193,116
-------- -------- --------
$630,406 737,094 744,888
======== ======== ========
(9) Dividend Restriction and Regulatory Matters
Certain restrictions exist regarding the ability of Commonwealth State
Bank to transfer funds to Penncore Financial Services Corporation in
the form of cash dividends. The approval of Federal banking regulators
is required to pay dividends in excess of the total of the Bank's net
earnings of the current year combined with the retained earnings, as
defined, of the preceding two years. As of January 1, 1997,
approximately $995,000 of undistributed earnings of the Bank were
available for distribution to Penncore Financial Services Corporation
as dividends without prior regulatory approval.
F-19
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Dividend Restriction and Regulatory Matters, cont.
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the Bank met the standards to be considered
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios and capital adequacy
requirements are presented in the table below.
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk- $10,084,815 12.56% $6,437,467 8.0% $8,046,833 10.0%
weighted assets)
Tier I capital (to risk- 9,078,961 11.31 3,218,733 4.0 4,828,100 6.0
weighted assets)
Tier I capital (to average 9,078,961 6.54 5,385,429 4.0 6,731,786 5.0
assets)
As of December 31, 1995:
Total capital (to risk- 9,348,500 12.42 6,020,403 8.0 7,525,504 10.0
weighted assets)
Tier I capital (to risk- 8,487,500 11.28 3,010,201 4.0 4,515,302 6.0
weighted assets)
Tier I capital (to average 8,487,500 6.58 5,159,677 4.0 6,449,597 5.0
assets) ========= ==== ========= === ========= ===
</TABLE>
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDIC Improvement Act") became law. While
the FDIC Improvement Act primarily addresses additional sources of
funding for the Bank Insurance Fund, which insures the deposits of
commercial banks and saving banks, it also imposes a number of new
mandatory supervisory measures on savings associations and banks.
F-20
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Commitments and Contingencies
In the normal course of business, the Corporation enters into a variety
of financial instruments with off-balance sheet risk. These financial
instruments include commitments to extend credit and standby letters of
credit both of which involve to varying degrees, elements of risk in
excess of the amount recognized in the consolidated financial
statements. Credit risk, the risk that a counterparty of a particular
financial instrument will fail to perform, is the contract amount of
commitments to extend credit and standby letters of credit. The credit
risk associated with these financial instruments is essentially the
same as that involved in extending loans to customers. Credit risk is
managed by limiting the total amount of arrangements outstanding and by
applying normal credit policies to all activities with credit risk.
Collateral is obtained based on management's credit assessment of the
customer. As of December 31, 1996, the Corporation had commitments to
make loans and outstanding letters of credit totaling $8,043,000 (of
this amount, outstanding letters of credit totaled $575,000).
The Corporation is party, in the ordinary course of business, to
litigation involving collection matters, contract claims and other
miscellaneous causes of action arising from its business. Management
does not consider that any such proceedings depart from usual routine
litigation, and in its judgment, the Corporation's consolidated
financial position will not be affected materially by the final outcome
of any pending legal proceedings.
(11) Common Stock
The Corporation has issued warrants to purchase 41,310 shares of common
stock. Such warrants are exercisable at $21.32 per share as of December
31, 1996. On December 3, 1996, the Board approved a two-year extension
of the original expiration date of December 31, 1996. As of December
31, 1996, none of the outstanding warrants have been exercised.
On May 17, 1994, the Board of Directors of the Bank approved a Stock
Appreciation Rights Plan (the Plan) for the purpose of rewarding
selected key officers of the Bank for their contribution to the success
of the Corporation, and to give them the same kind of incentive to
maximize the value of the Corporation that the shareholders have.
The Board of Directors determines, on the basis of the Corporation's
financial performance each year, how many Rights to award for that
year. Each year, the number of Rights awarded to each Participant shall
be determined by applying the percentage derived from dividing each
Participant's annual salary by the total salary pool for all
Participants, to the total number of Rights awarded for that year. By
December 31, 1996, the Corporation had issued rights totalling 27,850,
with each Right having a Strike Price defined as the book value per
share of the Corporation, which shall include the Allowance for Loan
Losses, at the end of the fifth fiscal year of the operation of the
Corporation, December 31, 1991, which was $21.32. The Strike Price
shall remain constant during the duration of the Plan. The Plan
includes a Settlement Date, which means the earlier of (i) January 2,
1998; (ii) the date on which the employment of a Participant terminates
for any reason; or, (iii) the date on which all or substantially all of
the Common Stock or the assets of the Corporation is acquired by
another corporation. If a Participant's Settlement Date occurs by
reason of resignation prior to the sale of the Corporation, the value
of the Rights would be the difference of the market value per share of
the Common Stock of the Corporation as determined by the most recent
arms-length transaction, over the Strike Price for those Rights to
which the Participant is entitled. If a Participant's Settlement Date
occurs by reason of acquisition of the Corporation, the value of the
Rights to which the Participant is entitled would be the difference of
the selling price consisting of the cash and the fair market value of
the property received by the shareholders, per share, of the
Corporation over the Strike Price.
F-21
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Common Stock, cont.
Participants are entitled to payment for Rights only if they become
vested. Rights, once awarded, shall be vested annually on December 31,
and Participants must be employed on December 31 of a particular year
in order to partake in the vesting for that year. Rights shall be
vested at an appropriate annual rate so as to be 100% vested by January
2, 1998. In the event of an acquisition or the sale of the Corporation
to another corporation, any Rights which have been approved for vesting
shall be accelerated and become fully vested.
As of December 31, 1996, none of the outstanding, vested Rights have
been redeemed. Expense recorded associated with the Rights for the year
ended December 31, 1996 was $146,793. There was no expense recorded for
the years ended December 31, 1995 or 1994.
(12) Parent Corporation Information
The condensed financial statements of the parent company only are
presented below:
PENNCORE FINANCIAL SERVICES CORPORATION
(Parent Corporation)
Condensed Balance Sheets
December 31, 1996 and 1995
1996 1995
Assets:
Cash $491,609 391,206
Investment in Commonwealth State Bank 9,192,468 8,727,068
Securities available for sale 77,500 42,500
Other assets 49,180 --
---------- ---------
Total assets $9,810,757 9,160,774
========== =========
Liabilities and shareholders' equity:
Other liabilities 181,761 33,810
---------- ---------
Shareholders' equity:
Common stock 1,930,315 1,930,315
Capital surplus 5,751,519 5,751,519
Retained earnings 1,822,124 1,205,229
Unrealized gain on securities available
for sale 125,038 239,901
---------- ---------
Total shareholders' equity 9,628,996 9,126,964
Total liabilities and shareholders' equity $9,810,757 9,160,774
========== =========
F-22
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Parent Corporation Information, cont.
PENNCORE FINANCIAL SERVICES CORPORATION
(Parent Corporation)
Condensed Statements of Income
Years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income:
Interest $13,769 12,806 8,381
Dividends from subsidiary 150,000 60,000 100,000
Management fee 24,000 24,000 24,000
Other 7,875 -- --
-------- ------- -------
195,644 96,806 132,381
-------- ------- -------
Expenses:
Salaries 156,793 -- 1,000
Other 11,000 29,009 23,399
-------- ------- -------
Total expenses 167,793 29,009 24,399
-------- ------- -------
Income before income tax benefit
and equity in undistributed
earnings of subsidiary 27,851 67,797 107,982
Income tax benefit 55,140 -- --
-------- ------- -------
82,991 67,797 107,982
Equity in undistributed earnings of subsidiary 591,813 402,881 275,475
-------- ------- -------
Net income $674,804 470,678 383,457
======== ======= =======
</TABLE>
F-23
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Parent Corporation Information, cont.
PENNCORE FINANCIAL SERVICES CORPORATION
(Parent Corporation)
Condensed Statements of Cash Flows
Years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $674,804 470,678 383,457
Less equity in undistributed earnings
of subsidiary 591,813 402,881 275,475
-------- ------- -------
82,991 67,797 107,982
Adjustment to reconcile net income to net
cash provided by operating activities:
Increase in other assets (49,180) -- --
Increase (decrease) in other liabilities 147,951 57 (2,454)
-------- ------- -------
Net cash provided by operating activities 181,762 67,854 105,528
-------- ------- -------
Cash flows from investing activities:
Purchase of securities available for sale (23,450) -- --
-------- ------- -------
Net cash used in investing activities (23,450) -- --
-------- ------- -------
Cash flows from financing activities:
Dividends paid (57,909) (46,328) (46,328
-------- ------- -------
Net cash used in financing activities (57,909) (46,328) (46,328)
-------- ------- -------
Net increase in cash 100,403 21,526 59,200
Cash, beginning of year 391,206 369,680 310,480
-------- ------- -------
Cash, end of year $491,609 391,206 369,680
======== ======= =======
Supplemental information:
Cash paid during the year for income taxes $75,500 170,500 215,946
======== ======= =======
</TABLE>
F-24
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Retirement Savings Plan
The Corporation has a 401(k) plan which covers substantially all
employees. The plan permits all eligible employees to make basic
contributions to the plan up to 10% of base compensation. Under the
plan, the Corporation provides a matching contribution of 100% up to 3%
of base compensation. Contributions to the plan amounted to $85,800 in
1996, $73,408 in 1995 and $74,967 in 1994.
(14) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
asset or obligation could be exchanged in a current transaction between
willing parties.
The following fair value estimates, methods and assumptions were used
to measure the fair value of each class of financial instruments for
which it is practical to estimate that value:
Cash and cash equivalents
For such short-term investments, the carrying amount was
considered to be a reasonable estimate of fair value.
Investment securities
The carrying amounts for short-term investments approximate fair
value because they mature in 90 days or less and do not present
unanticipated credit concerns. The fair value of longer-term
investments and mortgage-backed securities, except certain state
and municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other
than dealer quotations, so fair value estimates are based on
quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments
being valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage and other
consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms.
F-25
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments, cont.
The fair value of loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. The estimate of maturity
is based on the Corporation's historical experience with repayments for
each loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions. For residential
mortgage loans, fair value is estimated by discounting contractual cash
flows adjusted for prepayment estimates using discount rates based on
secondary market sources adjusted to reflect differences in servicing
and credit costs.
Deposit liabilities
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings, and NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand. The
fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and borrowed funds
The carrying value of securities sold under agreements to repurchase is
considered to approximate fair value. Fair value of borrowed funds is
based on rates currently available to the Corporation for borrowed
funds with similar terms and remaining maturities.
The estimated fair values of the Corporation's financial instruments as
of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Carrying Fair Carrying Fair
value value value value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $5,013,412 5,013,412 7,583,194 7,583,194
Securities available
for sale 42,651,012 42,651,012 51,461,999 51,461,999
Investment securities 11,283,599 11,203,929 5,339,309 5,280,344
Loans, net 77,199,791 78,126,287 68,612,198 67,761,116
</TABLE>
F-26
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments, cont.
<TABLE>
<CAPTION>
1996 1995
Carrying Fair Carrying Fair
value value value value
Financial liabilities:
<S> <C> <C> <C> <C>
Deposits $94,915,915 94,906,434 105,844,240 105,898,230
Securities sold under
agreements to
repurchase 3,186,417 3,186,417 2,506,535 2,506,535
Borrowed funds 26,400,800 26,436,459 14,100,000 14,174,804
</TABLE>
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, and
as the fair value for these financial instruments were not
material, these disclosures are not included above.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Corporation's
entire holdings of a particular financial instrument. Because no market
exists for a significant portion of the Corporation's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
F-27
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Amended Bank Shares Tax
On March 13, 1990, the Bank received an assessment for an additional
amount of approximately $332,000 for the 1989 Amended Bank Shares Tax
from the Commonwealth of Pennsylvania. On September 8, 1995, the Bank
filed Petitions for review with the Commonwealth Court of Pennsylvania
for its 1989-1994 Bank Shares Tax including the 1989 Amended Bank
Shares Tax. On March 8, 1996, in order to comply with the provisions of
rule 1782 of the Rules of the Appellate Procedure, Commonwealth State
Bank filed appropriate security with the Prothonotary of the
Commonwealth Court.
On December 26, 1996, this matter was resolved. As a result of this
settlement, the Bank remitted $300,000 on December 20, 1996, in full
payment of the debt and interest on the stipulated judgment. This
amount had been previously accrued. In addition, the security filed
with the Prothonotary of the Commonwealth Court was released.
(16) Plan of Merger
The Corporation entered into an Agreement and Plan of Merger (the
Merger Agreement) dated February 4, 1997 with ML Bancorp, Inc.
(Bancorp). The Merger is subject to approval by the Corporation's
Shareholders and various regulatory authorities. The Merger Agreement,
if approved, would result in the Corporation being merged with and into
Bancorp. In addition, the Corporation's wholly-owned subsidiary,
Commonwealth State Bank, would be merged with and into the principal
subsidiary of Bancorp, Main Line Bank, with headquarters in Villanova,
Pennsylvania. At the time of the merger, each share of the
Corporation's common stock outstanding will converted into the right to
receive $36.56 cash without interest, 2.50 shares of Bancorp common
stock (the Exchange Ratio), or a combination of cash and shares of
Bancorp common stock in accordance with the Merger Agreement.
Regardless of the election by the Corporation's shareholders, no more
than 70% and no less than 51% of the Corporation's shares can be
exchanged for Bancorp common stock.
As the market value of Bancorp common stock may change prior to
consummation of the merger, the number of Bancorp common stock shares
to be exchanged for each share of the Corporation's shares could vary
from the 2.50 shares listed above. Any adjustment in the Exchange Ratio
will be determined by the average of the last reported sale prices of
Bancorp common stock, as reported by NASDAQ, for the ten trading days
ending on the 11th day before the merger becomes effective (the Average
Price). If the Average Price of Bancorp common stock exceeds $16.75,
the Exchange Ratio shall be decreased from 2.50 to a number equal to
$41.875 (which is $16.75 x 2.50) divided by the Average Price. However,
if there has been any public announcement prior to the ten trading days
ending on the 11th day before the merger becomes effective, of the
proposed acquisition or sale of all of Bancorp's common stock or
substantially all of Bancorp's assets, then the Exchange Ratio shall
remain at 2.50 even if the Average Price exceeds $16.75.
F-28
<PAGE>
PENNCORE FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Plan of Merger, cont.
The Corporation's Board of Directors may terminate the Merger Agreement
in the event that the Average Price of Bancorp's common stock is less
than $12.50 unless Bancorp elects to increase the Exchange Ratio to a
number equal to $31.25 divided by the Average Price. Upon exercise of
the Bancorp Exchange Ratio Option, the Merger Agreement will remain in
full force and effect.
As a condition to the execution of the Merger Agreement, Bancorp and
the Corporation entered into a Stock Option Agreement whereby Bancorp
has been granted the option to purchase up to 95,900 newly issued or
treasury shares of the Corporation's common stock at a price of $24 per
share. The $24 exercise price is a negotiated price representing the
approximate book value of the Corporation's common stock immediately
prior to the announcement of the merger. The purpose of the Option
Agreement is to increase the likelihood that the merger will be
consummated in accordance with the terms of the Merger Agreement.
F-29
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated February 4, 1997 ("Agreement"), by
and between PENNCORE FINANCIAL SERVICES CORPORATION ("Penncore") and ML BANCORP,
INC. ("Bancorp").
RECITALS:
A. Penncore. Penncore is a bank holding company duly organized and
validly existing in good standing under the laws of Pennsylvania with its
principal executive office located in Newtown, Pennsylvania. As of the date
hereof, Penncore has 2,000,000 authorized shares of common stock, par value
$5.00 per share, of which 386,063 shares of common stock are issued and
outstanding ("Penncore Common Stock"). Penncore owns all the outstanding capital
stock of Commonwealth State Bank ("Commonwealth"), a bank duly organized and
validly existing in good standing under the laws of Pennsylvania.
B. Bancorp. Bancorp is a unitary savings and loan holding company duly
organized and validly existing in good standing under the laws of Pennsylvania,
with its principal executive office located in Villanova, Pennsylvania. As of
the date hereof, Bancorp has 30,000,000 authorized shares of common stock, par
value $0.01 per share, of which 11,471,810 shares of common stock are issued and
outstanding ("Bancorp Common Stock"). Bancorp owns all the outstanding capital
stock of Main Line Bank ("Main Line"), a federally chartered stock savings bank
duly organized and validly existing in good standing under the laws of the
United States.
C. Board Approvals. The Boards of Directors of the parties deem it to
be in the best interests of the parties and their shareholders that Penncore
merge into Bancorp and Commonwealth merge into Main Line in the manner
prescribed herein, and they have authorized the execution of this Agreement in
counterparts.
D. Stock Option Agreement. Bancorp and Penncore have entered into a
Stock Option Agreement of even date herewith, annexed hereto as Annex 1 and
forming an integral part of this Agreement ("Stock Option Agreement").
In consideration of the representations and warranties, mutual promises
and obligations contained herein, and intending to be legally bound hereby, the
parties hereto adopt and make this Agreement and prescribe the terms and
conditions thereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
THE MERGERS
1.1 The Merger. Subject to the terms and conditions of this Agreement,
on the Effective Date (as defined in Article VII), Penncore shall merge with and
into Bancorp (the "Merger") with Bancorp being the surviving entity, in
accordance with the provisions of, and with the effect provided in, the
Pennsylvania Business Corporation Law (the "PBCL"). At the Effective Time (as
defined in Article VII), the articles of incorporation and the bylaws of the
corporation surviving the merger shall be the articles of incorporation and the
bylaws of Bancorp in effect immediately prior to the Effective Time. At the
Effective Time, the directors and officers of the surviving corporation shall be
the directors and officers of Bancorp; provided that, at the Effective Time,
Bancorp shall cause Owen O. Freeman, Jr. to become a member of the Board of
Directors of Bancorp and Main Line.
1.2 Consideration; Effect on Outstanding Shares.
(a) On the Effective Time, by virtue of the Merger and without
any further action on the part of Bancorp or Penncore, each share of Penncore
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares of Penncore Common Stock to be canceled pursuant to Section
1.2(k)) shall be converted, as the case may be, into:
(i) the right to receive $36.56 cash without interest (the
"Per Share Cash Amount");
A-1
<PAGE>
(ii) the right to receive 2.50 shares of Bancorp Common Stock
(the "Exchange Ratio"); or
(iii) the right to receive a combination of cash and shares
of Bancorp Common Stock determined in accordance with this
Section 1.2;
provided, however, that no such conversion shall be made in respect of any share
of Penncore Common Stock the holder of which, pursuant to the PBCL, is entitled
to receive payment of the fair value of such share, and such holder shall have
only the rights provided in the PBCL (such shares of Penncore Common Stock in
respect of which the holders thereof have perfected their rights under the PBCL
being hereinafter referred to as "Dissenting Shares"). If the Average Price (as
defined in Section 8.1(h) hereof) of Bancorp Common Stock exceeds $16.75, the
Exchange Ratio shall be decreased from 2.5 to a number equal to $41.875 divided
by the Average Price (calculated to the nearest 1/1000); provided, however, that
there shall be no such adjustment in the Exchange Ratio if prior to the
Averaging Period (as defined in Section 8.1(h) hereof) there has been any public
announcement of the proposed acquisition or sale of all of Bancorp's Common
Stock or substantially all of Bancorp's assets.
(b) The number of shares of Penncore Common Stock to be converted
into the right to receive Bancorp Common Stock in the Merger (the "Stock
Election Number") shall be determined as set forth in this Section 1.2(b). If
the Stock Election Shares (as defined in Section 1.2(d) below) are 70% or more
than the number of shares of Penncore Common Stock outstanding immediately prior
to the date of the Penncore shareholders' meeting to be held as provided in
Section 4.3 hereof (the "Outstanding Penncore Shares"), the Stock Election
Number shall be equal to 70% of the Outstanding Penncore Shares. If the Stock
Election Shares are 51% or less than the Outstanding Penncore Shares, the Stock
Election Number shall be equal to 51% of the Outstanding Penncore Shares. If the
Stock Election shares are between 70% and 51% of the Outstanding Penncore
Shares, the Stock Election Number shall be equal to the Stock Election Shares.
The number of shares of Penncore Common Stock to be converted into the right to
receive cash in the Merger (the "Cash Election Number") shall be equal to the
difference between the Outstanding Penncore Shares and the Stock Election
Number.
(c) Subject to the allocation and election procedures set forth in
this Section 1.2, each record holder immediately prior to the Penncore
shareholders' meeting of shares of Penncore Common Stock will be entitled (i) to
elect to receive cash for all of such shares (a "Cash Election"), (ii) to elect
to receive Bancorp Common Stock for all of such shares (a "Stock Election"), or
(iii) to indicate that such record holder has no preference as to the receipt of
cash or Bancorp Common Stock for such shares (a "Non-Election"). At the date of
mailing of the notice of the Penncore shareholders' meeting to be held as
provided in Section 4.3 of this Agreement, Penncore shall request each of its
shareholders, subject to the consummation of the transactions contemplated
hereby, to make a legally binding election as set forth above. Except as
otherwise permitted by Bancorp, a Penncore shareholder shall only be permitted
to make such election with respect to all shares of Penncore Common Stock held
by him, her or it and failure by a Penncore shareholder to make the required
election shall constitute a Non-Election. Any Penncore shareholder who makes an
election shall have the right to revoke such election as to any or all of the
shares with respect to which such election was made by such shareholder after
giving written notice to Penncore of such revocation prior to the vote at the
meeting of Penncore shareholders contemplated by Section 4.3 of this Agreement.
All such elections shall be made on a form designed for that purpose (a "Form of
Election"). Holders of record of shares of Penncore Common Stock who hold such
shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Forms of Election, provided that such
Representative certifies that each such Form of Election covers all the shares
of Penncore Common Stock held by each Representative for a particular beneficial
owner.
(d) If the aggregate number of shares covered by Cash Elections
(the "Cash Election Shares") exceeds the Cash Election Number, all shares of
Penncore Common Stock covered by Stock Elections (the "Stock Election Shares")
and all shares of Penncore Common Stock covered by Non-Elections (the
"Non-Election Shares") shall be converted into the right to receive Bancorp
Common Stock, and the Cash Election Shares shall be converted into the right to
receive Bancorp Common Stock and cash in the following manner:
each Cash Election Share shall be converted into the right to receive
(i) an amount in cash, without interest, equal to the product of (x)
the Per Share Cash Amount and (y) a fraction (the "Cash Fraction"),
the numerator of which shall be the Cash Election Number and the
denominator of which shall be the total number of Cash Election
Shares, and (ii) a number of shares of Bancorp Common Stock equal to
the product of (x) the Exchange Ratio and (y) a fraction equal to one
minus the Cash Fraction (the result shall be rounded to two decimal
points, with a third decimal point rounded upward if it equals .005 or
more and ignored if it equals less than .005);
(e) If the aggregate number of Stock Election Shares exceeds the
Stock Election Number, all Cash Election Shares and all Non-Election Shares
shall be converted into the right to receive cash, and all Stock Election Shares
shall be converted into the right to receive Bancorp Common Stock and cash in
the following manner:
A-2
<PAGE>
each Stock Election Share shall be converted into the right to receive
(i) a number of shares of Bancorp Common Stock equal to the product of
(x) the Exchange Ratio and (y) a fraction (the "Stock Fraction"), the
numerator of which shall be the Stock Election Number and the
denominator of which shall be the total number of Stock Election
Shares, and (ii) an amount in cash, without interest, equal to the
product of (x) the Per Share Cash Amount and (y) a fraction equal to
one minus the Stock Fraction (the result shall be rounded to two
decimal points, with a third decimal point rounded upward if it equals
.005 or more and ignored if it equals less than .005);
(f) In the event that neither Section 1.2(d) nor Section 1.2(e)
above is applicable, all Cash Election Shares shall be converted into the right
to receive cash, all Stock Election Shares shall be converted into the right to
receive Bancorp Common Stock, and the Non-Election Shares, if any, shall be
converted into the right to receive Bancorp Common Stock and cash in the
following manner:
each Non-Election Share shall be converted into the right to receive
(i) an amount in cash, without interest, equal to the product of (x)
the Per Share Cash Amount and (y) a fraction (the "Non-Election
Fraction"), the numerator of which shall be the excess of the Cash
Election Number over the total number of Cash Election Shares and the
denominator of which shall be the excess of (A) the Outstanding
Penncore Shares over (B) the sum of the total number of Cash Election
Shares and the total number of Stock Election Shares and (ii) a number
of shares of Bancorp Common Stock equal to the product of (x) the
Exchange Ratio and (y) a fraction equal to one minus the Non-Election
Fraction.
(g) Elections shall be made by holders of Penncore Common Stock by
mailing to Penncore a Form of Election for delivery to the Exchange Agent (as
defined in Section 1.3(a)). To be effective, a Form of Election must be properly
completed, signed and submitted to the Exchange Agent. Bancorp will have the
discretion, which it may delegate in whole or in part to the Exchange Agent, to
determine whether Forms of Election have been properly completed, signed and
submitted or revoked and to disregard immaterial defects in Forms of Election.
The decision of Bancorp (or the Exchange Agent) in such matters shall be
conclusive and binding. Neither Bancorp nor the Exchange Agent will be under any
obligation to notify any person of any defect in a Form of Election submitted to
the Exchange Agent. The Exchange Agent shall also make all computations
contemplated by this Section 1.2 and all such computations shall be conclusive
and binding on the holders of Penncore Common Stock.
(h) For the purposes hereof, a holder of Penncore Common Stock who
does not submit a Form of Election which is received by the Exchange Agent prior
to the Election Deadline (as hereinafter defined) shall be deemed to have made a
Non-Election. If Bancorp or the Exchange Agent shall determine that any
purported Cash Election or Stock Election was not properly made, such purported
Cash Election or Stock Election shall be deemed to be of no force and effect and
the shareholder making such purported Cash Election or Stock Election shall for
purposes hereof, be deemed to have made a Non-Election.
(i) Bancorp and Penncore shall cooperate in mailing the Form of
Election to all holders of Penncore Common Stock prior to the Penncore
shareholders' meeting. A Form of Election must be received by Penncore by the
close of business on the last business day prior to the date of the Penncore
shareholders' meeting (the "Election Deadline") in order to be effective. All
elections may be revoked until the Election Deadline.
(j) Dissenting Shares, if any, shall be purchased and paid for in
accordance with the PBCL and shall be entitled to no Merger Consideration (as
defined in Section 1.3(b)).
(k) Each of the shares of Penncore Common Stock held by Penncore,
Commonwealth, Bancorp, Main Line, or any of their subsidiaries, in each case
other than in a fiduciary capacity or as a result of debts previously
contracted, shall be canceled and retired on the Effective Date, and no Merger
Consideration shall be issued in exchange therefor.
(l) In the event that, subsequent to the date of this Agreement,
but prior to the Effective Time, the outstanding shares of the common stock of
Bancorp shall have been increased, decreased, changed into or exchanged for a
different number or kind of shares or securities through reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or like changes in Bancorp's capitalization, then an appropriate and
proportionate adjustment shall be made in the Exchange Ratio.
(m) From the Effective Time, each certificate which, prior to the
Effective Time, represented shares of Penncore Common Stock shall evidence
ownership of either: (i) the number of shares of Bancorp Common Stock into which
the shares of Penncore Common Stock represented by such certificate shall have
been converted, together with the right to receive any cash to which a Penncore
shareholder is entitled in lieu of the issuance of a fractional share; or (ii)
the right to receive cash.
A-3
<PAGE>
(n) On and after the Effective Time, all of the shares of Bancorp
Common Stock issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding.
1.3 Exchange Procedure.
(a) On the Effective Date, Bancorp shall deposit with its transfer
agent, Chase Mellon Shareholder Services (the "Exchange Agent"), for the benefit
of the holders of shares of Penncore Common Stock, for exchange in accordance
with this Article I, through the Exchange Agent, (i) certificates evidencing
such number of shares of Bancorp Common Stock equal to the Exchange Ratio
multiplied by the Stock Election Number and, (ii) cash in the amount equal to
the Per Share Cash Amount multiplied by the Cash Election Number (such
certificates for shares of Bancorp Common Stock, together with any dividends or
distributions with respect thereto and cash, being hereinafter referred to as
the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions in the letters of transmittal pursuant to Section 1.3(b), deliver
the Bancorp Common Stock and cash contemplated to be issued pursuant to Section
1.2 out of the Exchange Fund. Except as contemplated by Section 1.3(e) hereof,
the Exchange Fund shall not be used for any other purpose.
(b) As soon as reasonably practicable after the Effective Time,
Bancorp will instruct the Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
evidenced outstanding shares of Penncore Common Stock (other than Dissenting
Shares) (the "Certificates"), (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange Agent
and shall be in such form and have such other provisions as Bancorp may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates evidencing shares of Bancorp
Common Stock or cash. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, and such
other customary documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in exchange therefor (A)
certificates evidencing that number of whole shares of Bancorp Common Stock
which such holder has the right to receive in respect of the shares of Penncore
Common Stock formerly evidenced by such Certificate in accordance with Section
1.2, (B) cash to which such holder is entitled to receive in accordance with
Section 1.2, (C) cash in lieu of fractional shares of Bancorp Common Stock to
which such holder is entitled pursuant to Section 1.3(e) and (D) any dividends
or other distributions to which such holder is entitled pursuant to Section
1.3(c), (the shares of Bancorp Common Stock, dividends, distributions and cash
described in clauses (A), (B), (C) and (D) being collectively, the "Merger
Consideration") and the Certificate so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of shares of Penncore Common Stock which
is not registered in the transfer records of Penncore, a certificate evidencing
the proper number of shares of Bancorp Common Stock and/or cash may be issued
and/or paid in accordance with this Article I to a transferee if the Certificate
evidencing such shares of Penncore Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 1.3, each Certificate
shall be deemed at any time after the Effective Time to evidence only the right
to receive upon such surrender the Merger Consideration.
(c) No dividends or other distributions declared or made after the
Effective Time with respect to Bancorp Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Bancorp Common Stock evidenced thereby, and no other
part of the Merger Consideration shall be paid to any such holder, until the
holder of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates evidencing whole shares of
Bancorp Common Stock issued in exchange therefor, without interest, (i)
promptly, the amount of any cash payable with respect to a fractional share of
Bancorp Common Stock to which such holder is entitled pursuant to Section 1.3(e)
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Bancorp
Common Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole shares of Bancorp Common Stock. No interest shall be paid on the
Merger Consideration.
(d) All shares of Bancorp Common Stock issued and cash paid upon
conversion of the shares of Penncore Common Stock in accordance with the terms
hereof shall be deemed to have been issued or paid in full satisfaction of all
rights pertaining to such shares of Penncore Common Stock.
(e) No certificates or scrip evidencing fractional shares of
Bancorp Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a shareholder of Bancorp. In lieu of any
such fractional shares, each holder of Penncore Common Stock upon surrender of a
Certificate for exchange pursuant to this Section 1.3 shall be paid an amount in
cash (without interest), rounded to the nearest cent, determined by multiplying
(a) the per share closing price on the National Association of Securities
Dealers Automated Quotation
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National Market System ("NASDAQ") of Bancorp Common Stock on the date of the
Effective Time (or, if shares of Bancorp Common Stock do not trade on the NASDAQ
on such date, the first date of trading of such Bancorp Common Stock on the
NASDAQ after the Effective Time) by (b) the fractional interest to which such
holder would otherwise be entitled (after taking into account all shares of
Penncore Common Stock then held of record by such holder). As soon as
practicable after the determination of the amount of cash, if any, to be paid to
holders of Penncore Common Stock with respect to any fractional share interests,
the Exchange Agent shall promptly pay such amounts to such holders of Penncore
Common Stock subject to and in accordance with the terms of Section 1.3(c).
(f) Any portion of the Exchange Fund which remains undistributed
to the holders of Penncore Common Stock for six months after the Effective Time
shall be delivered to Bancorp, upon demand, and any holders of Penncore Common
Stock who have not theretofore complied with this Article I shall thereafter
look only to Bancorp for the Merger Consideration to which they are entitled. In
the event that any Certificates are not surrendered for exchange within 24
months of the Effective Time, the Bancorp Common Stock that would otherwise have
been delivered in exchange for the unsurrendered Certificates shall be sold by
Bancorp and the net proceeds of the sale shall be held for the holders of the
unsurrendered Certificates to be paid to them upon surrender of their
Certificates. From and after such sale, the sole right of the holders of the
unsurrendered Certificates shall be the right to collect the net sales proceeds
held for their account without any interest thereon.
(g) Bancorp shall not be liable to any holder of shares of
Penncore Common Stock for any such shares of Bancorp Common Stock, cash (or
dividends or distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(h) Bancorp shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Penncore Common Stock such amounts as Bancorp is required to deduct
and withhold with respect to the making of such payment under the Internal
Revenue Code of 1986, as amended (the "Code"), or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by Bancorp, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Penncore Common Stock in respect of
which such deduction and withholding was made by Bancorp.
(i) At the Effective Time, the stock transfer books of Penncore
shall be closed and there shall be no further registration of transfers of
shares of Penncore Common Stock thereafter on the records of Penncore. On or
after the Effective Time, any certificates presented to the Exchange Agent or
Bancorp for any reason shall be converted into the Merger Consideration.
1.4 Treatment of Stock Purchase Warrants. Penncore and Bancorp agree
that, at the Effective Time, all warrants to purchase shares of Penncore Common
Stock which are outstanding immediately prior to the Effective Date, whether or
not vested or exercisable (each, a "Warrant"), shall be canceled and be of no
force or effect. With respect to those Warrants with an exercise price per share
that is less than $36.56, each holder thereof will be entitled to receive
immediately prior to the Effective Time, in settlement thereof, solely a cash
payment from Penncore in an amount equal to the excess of $36.56 over the
exercise price per share of Penncore Common Stock covered by the Warrant,
multiplied by the total number of shares of Penncore Common Stock covered by the
Warrant. The number of outstanding Warrants as of the date hereof and the
exercise prices therefor are set forth in Penncore Disclosure Schedule 2.2.
1.5 The Bank Merger. Simultaneously with or following the Merger,
Bancorp intends to take the necessary corporate action to cause the business of
Commonwealth to be merged with and into Main Line. The merger described in the
preceding sentence is referred to herein as the "Bank Merger." The Merger and
the Bank Merger are sometimes referred to collectively herein as the "Mergers."
Consummation of the Bank Merger is conditioned upon the prior or simultaneous
consummation of the Merger. Consummation of the Merger is not conditioned upon
the consummation of the Bank Merger.
1.6 Treatment of Penncore Phantom Shares. On or prior to the Effective
Time, Penncore agrees to pay each participant under Penncore's Phantom Stock
Plan at the Effective Time of the Merger in cash the difference between the
Value and the Base Amount of Shares credited to each participant's account. The
terms "Value," "Base Amount" and "Shares" shall have those meanings set forth
under such plan for purposes of this Section 1.6.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PENNCORE
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Except as Previously Disclosed by Penncore or as set forth in a
Penncore Disclosure Schedule, Penncore hereby represents and warrants to Bancorp
as follows:
2.1 Corporate Standing. Penncore is duly organized and validly existing
under the laws of Pennsylvania, with its principal executive office located in
Newtown, Pennsylvania, is duly registered and regulated as a bank holding
company under the federal Bank Holding Company Act, and is duly qualified to do
business in each jurisdiction in which the nature of its business or the
properties or assets owned or leased by it makes such qualification necessary
except where the failure to be so qualified would not have a Material Adverse
Effect (as defined in Section 9.8) on the financial condition or operations of
Penncore. Penncore has the corporate power to carry on its business as and where
conducted, to own, lease and operate its properties, to execute and deliver this
Agreement and the Stock Option Agreement and to consummate the transactions
contemplated hereby and thereby, subject (as to this Agreement only) to having
obtained all requisite shareholder and regulatory approvals contemplated by this
Agreement.
2.2 Capitalization. The capital stock of Penncore consists solely of
2,000,000 authorized shares of Penncore Common Stock, of which, as of the date
of this Agreement, 386,063 shares are validly issued and outstanding, fully paid
and nonassessable, and subject to no preemptive rights. Except as set forth in
Penncore Disclosure Schedule 2.2, there are no treasury shares and no
outstanding subscriptions, conversion privileges, options, warrants, agreements,
understandings or arrangements to which Penncore is a party or by which it is
bound pursuant to which Penncore may be obligated to issue shares of capital
stock; and Penncore is not a party to, and has no knowledge of, any contracts,
commitments, understandings or arrangements relating to the voting or
disposition of Penncore Common Stock.
2.3 Subsidiaries. A true and correct list of all entities (including,
without limitation, corporations, partnerships, joint ventures, limited
liability companies, firms or other entities) in which Penncore has greater than
a 5% direct or indirect equity or other ownership interest (each such entity in
which Penncore has a 25% or greater direct or indirect equity or other ownership
interest is referred to herein individually as a "Penncore Subsidiary" and
collectively as the "Penncore Subsidiaries"), is set forth in Penncore
Disclosure Schedule 2.3 including for each of the Penncore Subsidiaries the
following: its date and jurisdiction of organization; each other jurisdiction in
which it is authorized to transact business; its authorized, issued and
outstanding capital stock, other equity securities and other ownership
interests; and the percentage ownership interest of Penncore or any Penncore
Subsidiary therein. Each of the Penncore Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has all necessary corporate or other power to own its
properties and assets and to carry on its business as now conducted. Each of the
Penncore Subsidiaries is duly authorized to conduct its business and is in good
standing in each jurisdiction in which it is incorporated. The shares of capital
stock and other equity securities of the Penncore Subsidiaries are duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
subject to no preemptive rights and are owned directly or indirectly by
Penncore, free and clear of all liens, claims, agreements or encumbrances. There
are no shares of any other class of capital stock, other equity securities or
other ownership interests of any of the Penncore Subsidiaries outstanding and
there are no treasury shares and no outstanding subscriptions, conversion
privileges, options, warrants, agreements, understandings or arrangements to
which Penncore or any of the Penncore Subsidiaries is a party by which Penncore
or any Penncore Subsidiary is bound relating to its authorized or issued capital
stock, or pursuant to which such Penncore Subsidiary may be obligated to issue
shares of capital stock, and there are no contracts, commitments, understandings
or arrangements relating to the rights of Penncore to vote or to dispose of such
shares. Commonwealth is a member in good standing of the Federal Reserve System
and its deposits are insured under the Bank Insurance Fund of the Federal
Deposit Insurance Corporation.
2.4 Authorization. Each of this Agreement and the Stock Option
Agreement, subject (as to this Agreement only) to receipt of the necessary
shareholder approval referred to in Section 6.1(a), has been duly authorized by
all necessary corporate action of Penncore, and each of this Agreement and the
Stock Option Agreement is a valid and binding agreement of Penncore enforceable
against Penncore in accordance with its terms, subject to the conservatorship
and receivership provisions of the Federal Deposit Insurance Act ("FDIA") and to
bankruptcy, insolvency, fraudulent conveyance and other laws of general
applicability relating to or affecting creditors' rights generally and to
general equity principles, except that the availability of equitable remedies,
including specific performance and injunctive relief, is subject to the
discretion of the court before which any proceedings may be brought. The
execution and delivery of this Agreement by Penncore do not, and the
consummation of the transactions contemplated hereby by Penncore will not,
constitute (a) a breach or violation of, or a default under, any judgment,
decree, order, governmental permit or license applicable to Penncore or any of
the Penncore Subsidiaries or to which Penncore or any of the Penncore
Subsidiaries is subject or bound, or (b) a breach or violation of, or a default
under, Penncore's charter or bylaws, or, under any material agreement, indenture
or instrument of Penncore or any of the Penncore Subsidiaries or to which
Penncore or any of the Penncore Subsidiaries is subject or bound. The
consummation of the transactions contemplated by this Agreement will not require
any consent, waiver, non-objection or approval under any such judgment, decree,
order, governmental permit or license, or the consent, waiver, non- objection or
approval of any other party to any such agreement, indenture or instrument,
other than the approvals of Penncore shareholders and applicable regulatory
authorities referred to in Section 6.1(b). The execution and delivery of the
Stock Option Agreement by Penncore do not, and the consummation of the
transactions contemplated thereby by Penncore will not, constitute (a)
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a breach or violation of, or a default under, any judgment, decree, order,
governmental permit or license applicable to Penncore or to which Penncore is
subject or bound, or (b) a breach or violation of, or a default under, its
charter or bylaws, or under any material agreement, indenture or instrument of
Penncore or to which Penncore is subject or bound. The consummation of the
transactions contemplated by the Stock Option Agreement will not require any
consent, waiver, non-objection or approval under any such judgment, decree,
order, governmental permit or license, or the consent, waiver, non-objection or
approval of any other party to any such agreement, indenture or instrument,
except as set forth under Section 3(c) of such Stock Option Agreement.
2.5 Filings; Financial Statements. Penncore has delivered to Bancorp,
its audited consolidated statements of financial condition as of December 31,
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended and similar
consolidated statements, unaudited, as of December 31, 1996 (such reports being
referred to herein as the "Penncore Financial Reports"), which Penncore
Financial Reports conformed in all material respects to applicable legal
requirements. As of their respective dates, the Penncore Financial Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading; and each of the consolidated balance sheets contained in or
incorporated by reference into the Penncore Financial Reports (including the
related notes and schedules thereto) presents fairly the consolidated financial
position of Penncore and its consolidated Penncore Subsidiaries as of its date,
and each of the statements of consolidated earnings, consolidated shareholders'
equity and consolidated cash flows or equivalent statements in the Penncore
Financial Reports (including any related notes and schedules thereto) presents
fairly the results of operations, shareholders' equity and cash flows, as the
case may be, of Penncore and its consolidated Subsidiaries for the periods set
forth therein, in each case in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as may
be noted therein, subject to normal year-end audit adjustments in the case of
unaudited statements. Penncore had no material liabilities or obligations,
contingent or otherwise, other than as and to the extent disclosed or reserved
against in the Penncore Financial Reports and those which would not have a
Material Adverse Effect on Penncore.
2.6 Absence of Material Adverse Effect. Since October 31, 1996, there
has not occurred a Material Adverse Effect with respect to Penncore.
2.7 Conduct of Business; Compliance with Laws.
(a) To the knowledge of Penncore and the Penncore
Subsidiaries, they have conducted their business in compliance in all material
respects with all applicable federal, state, and local laws, ordinances and
regulations, including applicable banking laws, federal and state securities
laws, and laws and regulations concerning discrimination, truth-in-lending,
usury, fair credit reporting, fair lending, consumer protection, occupational
safety, fair employment practices and fair labor standards, including, without
limitation, the Equal Credit Opportunity Act, the Fair Housing Act, and the
Community Reinvestment Act, except where the failure to so comply would not have
a Material Adverse Effect on Penncore. Neither Penncore nor any Penncore
Subsidiary has received any notification or communication from any agency or
department of any federal, state or local government or regulatory authority or
the staffs thereof, asserting that either Penncore or any of the Penncore
Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances that such agency, department or regulatory authority enforces, which
noncompliance would have a Material Adverse Effect on Penncore, or threatening
to revoke any license, franchise, permit or governmental authorization the
revocation of which would have a Material Adverse Effect on Penncore.
(b) Each of Penncore and the Penncore Subsidiaries:
(i) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with, all
regulatory authorities that are required in order to permit it to own its
businesses as presently conducted and that are material to the business of
Penncore and the Penncore Subsidiaries, all such permits, licenses, certificates
of authority, orders and approvals are in full force and effect and, to the
knowledge of Penncore, no suspension or cancellation of any of them is
threatened; and all such filings, applications and registrations are current;
(ii) has received no notification or communication from
any regulatory authority or the staff thereof (A) threatening to revoke any
license, franchise, permit or governmental authorization, which revocation would
have a Material Adverse Effect on Penncore, or (B) requiring or suggesting that
any of Penncore or the Penncore Subsidiaries (or any of its officers, directors,
trustees or controlling persons) enter into a cease and desist order, agreement
or memorandum of understanding (or requiring the board of directors or board of
trustees thereof to adopt any resolution or policy) which has not been
terminated;
2.8 Litigation; Regulatory Matters. Except for matters which would not
have a Material Adverse Effect on Penncore, neither Penncore nor any of the
Penncore Subsidiaries is a party to any, and there are no pending or, to
Penncore's knowledge, threatened, legal, administrative, arbitral or other
proceedings, claims, actions or governmental or regulatory investigations of any
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nature against Penncore or any of the Penncore Subsidiaries (including without
limitation any such proceeding, claim, action or investigation which alleges
claims under fair lending laws or other laws relating to discrimination,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, and the Home Mortgage Disclosure
Act, or under any similar disclosure law or regulation), or challenging the
validity or propriety of the transactions contemplated by this Agreement; except
as set forth in Penncore Disclosure Schedule 2.8, neither Penncore nor any of
the Penncore Subsidiaries is a party to or is subject to any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, any federal or state governmental
agency or authority charged with the supervision or regulation of depository
institutions or engaged in the insurance of deposits which restricts or purports
to restrict the conduct of the business of Penncore or any of the Penncore
Subsidiaries, or the capital, liquidity, credit policies or management of
Penncore or any of the Penncore Subsidiaries, which restrictions would have a
Material Adverse Effect on Penncore; and, to Penncore's knowledge, neither
Penncore nor any of the Penncore Subsidiaries has been advised by any such
regulatory authority that such authority is contemplating issuing or requesting
any such order, decree, agreement, memorandum of understanding, commitment
letter or similar arrangement or submission, or requiring Penncore or any of the
Penncore Subsidiaries to adopt any resolution or similar board action with
respect thereto.
2.9 Material Contracts; Employment Obligations.
(a) Except as set forth in Penncore Disclosure Schedule 2.9(a)
and except for this Agreement, the Stock Option Agreement, and arrangements made
in the ordinary course of business consistent with prior practice, neither
Penncore nor any of the Penncore Subsidiaries is bound by any contracts,
understandings or arrangements to be performed after the date hereof involving
payments by Penncore or any of the Penncore Subsidiaries in excess of $10,000
for any 12 month period or pursuant to which Penncore or any of the Penncore
Subsidiaries may incur liability in excess of $25,000 for termination or breach
thereof. Except as set forth in Penncore Disclosure Schedule 2.9(a), (i) there
are no contracts, understandings or arrangements between Penncore or any of the
Penncore Subsidiaries and any director, officer or employee of Penncore or any
of the Penncore Subsidiaries, and (ii) neither Penncore nor any of the Penncore
Subsidiaries has any written or oral bonus, pension, profit sharing, retirement,
deferred compensation, savings, stock purchase, stock option, severance,
hospitalization, insurance or other plan providing employee benefits or any
employment, agency, consulting or similar contract.
(b) Each of the contracts, understandings and arrangements set
forth in Penncore Disclosure Schedule 2.9(a) is in full force and effect and no
party to such contract, understanding or arrangement is in default thereunder or
has breached any material terms or provisions thereof.
(c) No third party has raised with Penncore any claim, dispute
or controversy with respect to any of the contracts, understandings and
arrangements set forth in Penncore Disclosure Schedule 2.9(a) nor has Penncore
or any Penncore Subsidiary received notice or warning of alleged nonperformance,
delay in delivery or noncompliance by Penncore with respect to its obligations
under any of such contracts, understandings or arrangements.
2.10 Employee Benefit Plans.
(a) Set forth in Penncore Disclosure Schedule 2.10(a) is a
complete list of all bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock and stock option plans, all employment or severance
plans and contracts (other than those set forth in Penncore Disclosure Schedule
2.9(a)), all medical, dental, health and life insurance plans, all other
employee benefit plans, contracts or arrangements and any applicable "change of
control" or similar provisions in any plan, contract or arrangement maintained
or contributed to by Penncore or any of the Penncore Subsidiaries for the
benefit of employees, former employees, directors, former directors or their
beneficiaries (the "Compensation and Benefit Plans"). True and complete copies
of all Compensation and Benefit Plans, including, but not limited to, any trust
instruments and/or insurance contracts, if any, forming a part thereof, and all
amendments thereto have been, or will be upon request, supplied to Bancorp.
(b) All "employee benefit plans" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), other than "multiemployer plans" within the meaning of Section 3(37)
of ERISA ("Multiemployer Plans"), covering employees or former employees of
Penncore and the Penncore Subsidiaries (the "ERISA Plans"), to the extent
subject to ERISA, are in substantial compliance with all applicable requirements
of ERISA. Except as set forth in Penncore Disclosure Schedule 2.10(b) each ERISA
Plan which is an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA ("Pension Plan") and which is intended to be qualified under
Section 401(a) of the Internal Revenue Code ("Code") has received a favorable
determination letter from the Internal Revenue Service, and Penncore is not
aware of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter or the inability to receive
such a favorable determination letter. There is no material pending or, to
Penncore's knowledge, threatened litigation relating to the ERISA
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Plans. Neither Penncore nor any of the Penncore Subsidiaries has engaged in a
transaction with respect to any ERISA Plan that could subject it or any of the
Penncore Subsidiaries to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA in an amount which would be material to
Penncore's financial condition or operations.
(c) No liability under Subtitle C or D of Title IV of ERISA
has been or is expected to be incurred by Penncore or any of the Penncore
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001 (a) (15) of ERISA, currently or
formerly maintained by any of them, or the single-employer plan of any entity
which is considered one employer with it under Section 4001 (a) (15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Neither Penncore nor any of the
Penncore Subsidiaries presently contributes to a Multiemployer Plan, nor have
they contributed to such a plan within the past five calendar years. No notice
of a "reportable event", within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to be
filed for any Pension Plan or by any ERISA Affiliate within the past 12-month
period.
(d) All contributions required to be made under the terms of
any ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. Neither Penncore nor any of the Penncore
Subsidiaries has provided, or is required to provide, security to any Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a) (29) of the Code.
(e) No Pension Plan is a single-employer plan.
(f) Neither Penncore nor any of the Penncore Subsidiaries has
any obligation for retiree health and life benefits under any plan except for
continuation coverage under Section 4980 B of the Code and Part 6 of Title I of
ERISA. There are no restrictions on the rights of Penncore or any of the
Penncore Subsidiaries to amend or terminate any such plan without incurring any
material liability thereunder.
(g) Except as set forth in Penncore Disclosure Schedule
2.10(g), neither the execution and delivery of this Agreement or the Stock
Option Agreement nor the consummation of the transactions contemplated hereby or
thereby will (i) result in any payment (including, without limitation,
severance, golden parachute or otherwise) becoming due to any director or any
employee of Penncore or any of the Penncore Subsidiaries under any Compensation
and Benefit Plan or otherwise from Penncore or any of the Penncore Subsidiaries,
(ii) increase any benefits otherwise payable under any Compensation and Benefit
Plan, or (iii) result in any acceleration of the time of payment or vesting of
any such benefit.
2.11 Labor Matters. Neither Penncore nor any of the Penncore
Subsidiaries is a party to, or is bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor is Penncore or any of the Penncore Subsidiaries the subject of
a proceeding asserting that it or any such Penncore Subsidiary has committed an
unfair labor practice (within the meaning of the National Labor Relations Act)
or seeking to compel it or any such Penncore Subsidiary to bargain with any
labor organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving Penncore's or any of the Penncore
Subsidiaries pending or, to Penncore's knowledge, threatened, nor is Penncore
aware of any activity involving Penncore or any of the Penncore Subsidiaries'
employees seeking to certify a collective bargaining unit or engaging in any
other labor organization activity.
2.12 Classified Assets. Penncore has Previously Disclosed a list of the
aggregate amounts of loans, extensions of credit or other assets of Penncore and
the Penncore Subsidiaries that have been classified as of December 31, 1996, by
Penncore (the "Asset Classification") as "Other Loans Specially Mentioned",
"Substandard", "Doubtful", or "Loss"; and except as Previously Disclosed no
amounts of loans, extensions of credit or other assets that have been classified
as of December 31, 1996, by any regulatory examiner as "Other Loans Specially
Mentioned", "Substandard", "Doubtful", or "Loss" are excluded from the amounts
disclosed in the Asset Classification, other than amounts of loans, extensions
of credit or other assets that were charged off by Penncore prior to December
31, 1996.
2.13 Title to Properties. To Penncore's knowledge, Penncore and the
Penncore Subsidiaries have good, and in the case of real property, marketable,
title to all their properties and assets and interests therein, real and
personal, reflected in the latest audited balance sheet included in the Penncore
Financial Reports prior to the date of this Agreement or acquired after the date
thereof (except as since sold or otherwise disposed of in the ordinary course of
business), free and clear of all liens and encumbrances, except for liens for
current taxes not yet due and payable, and liens which are not, in the
aggregate, material in relation to the assets of Penncore and except also for
such imperfections of title, easements and encumbrances, if any, as do not
materially interfere with the present use of the properties subject thereto or
affected thereby, or otherwise materially impair business operations or the
marketability or value of the properties subject thereto. Except as set forth in
Penncore Disclosure Schedule 2.13, all material leases pursuant to
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which Penncore or the Penncore Subsidiaries, as lessee, leases real or personal
property are in full force and effect, and there is not, under any of such
leases, any material existing default by Penncore or the Penncore Subsidiaries
or any event which with notice or lapse of time or both would constitute such a
default, and, none of such leases contains a prohibition against assignment by
Penncore or the Penncore Subsidiaries or any other provision which would
preclude Bancorp from occupying and using the leased premises for the same
purposes and upon the same rental and other terms as are applicable to the
occupation and use by Penncore or the Penncore Subsidiaries.
2.14 Taxes. (a) All reports and returns with respect to Taxes (as
defined below) and tax related information reporting requirements that are
required to be filed by or with respect to Penncore or the Penncore
Subsidiaries, including, without limitation, income tax returns of Penncore and
the Penncore Subsidiaries (collectively, the "Penncore Tax Returns"), have been
duly filed, or requests for extensions have been timely filed and have not
expired, and such Penncore Tax Returns were true, complete and accurate in all
material respects; (b) all Taxes shown to be due on the Penncore Tax Returns
have been paid in full except as may be contested in good faith; (c) the
Penncore Tax Returns have been examined by the Internal Revenue Service or the
appropriate state, local or foreign taxing authority or the period for
assessment of the Taxes in respect of which such Penncore Tax Returns were
required to be filed has expired; (d) all Taxes due with respect to completed
and settled examinations have been paid in full; (e) to the knowledge of
Penncore, no issues have been raised by the relevant taxing authority in
connection with the examination of any of the Penncore Tax Returns which would
have a Material Adverse Effect on Penncore, except as specifically reserved
against in the Penncore Financial Reports for periods ended prior to the date of
this Agreement; and (f) no waivers of statutes of limitations have been given by
or requested with respect to any Taxes of Penncore or the Penncore Subsidiaries.
For purposes of this Agreement, the term "Tax" shall mean all federal,
state, local or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, license, excise, franchise, employment,
premium, recording, documentary, transfer, back-up withholding or similar taxes,
together with any interest, additions, or penalties with respect thereto and any
interest in respect of such additions or penalties (collectively, "Taxes").
2.15 Brokers' and Finders' Fees. Penncore has taken no action that
would give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment, other than fees to be paid by
Penncore to Danielson Associates, Inc. of Rockville, Maryland, in the amount of
$25,000, plus out-of-pocket expenses, that has acted as financial advisor to
Penncore.
2.16 Reports. Since January 1, 1993, each of Penncore and the Penncore
Subsidiaries has filed all reports and statements, together with any amendments
required to be made with respect thereto, required to be filed with (i) the
FDIC, (ii) the Pennsylvania Department of Banking, (iii) the Federal Reserve
Board or Bank, and (iv) any other applicable regulatory authorities. As of their
respective dates (and without giving effect to any amendments or modifications
filed after the date of this Agreement with respect to reports and documents
filed before the date of this Agreement), each of such reports and documents,
including the financial statements, exhibits and schedules thereto, complied in
all material respects with all of the statutes, rules and regulations enforced
or promulgated by the regulatory authority with which they were filed and did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
2.17 Allowance for Loan Losses. The allowance for loan losses shown on
the consolidated balance sheets of Penncore included in the Penncore Financial
Reports was, in the opinion of Penncore, adequate, as determined in accordance
with generally accepted accounting principles, to provide for losses, net of
recoveries relating to loans previously charged off, on loans outstanding as of
the date thereof. Except as set forth in Penncore Disclosure Schedule 2.17, the
allowances for loan losses, allowances for losses on real estate owned and
allowances or reserves with regard to any other items set forth in the Penncore
Financial Reports have been calculated in accordance with generally accepted
accounting principles, consistently applied, or, where different and applicable,
in accordance with all applicable laws, rules and regulations; and as of the
date of such Penncore Financial Reports, Penncore had made all charge-offs
deemed uncollectible in accordance with generally accepted accounting principles
consistently applied, in accordance with applicable laws, rules or regulations,
or as directed by any bank regulatory agency having oversight authority with
respect to Penncore. Except as set forth on Penncore Disclosure Schedule 2.17,
as of the date of the Penncore Financial Reports, Penncore's allowances for loan
losses, allowance for losses on real estate owned and allowances or reserves
with regard to any other items were, in the opinion of management of Penncore
after due investigation, adequate to provide for all known and reasonably
expected losses on loans outstanding, real estate owned and all other items as
of the date thereof.
2.18 Insurance. Each of Penncore and the Penncore Subsidiaries has
taken all requisite action (including, without limitation, the making of claims
and the giving of notices) pursuant to its directors' and officers' liability
insurance policy or policies in order to preserve all rights thereunder with
respect to all matters (other than matters arising in connection with this
Agreement and the transactions contemplated hereby) that are known to Penncore.
A list of all insurance policies maintained by or
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for the benefit of Penncore or the Penncore Subsidiaries or its directors,
officers, employees or agents is set forth in Penncore Disclosure Schedule 2.18.
2.19 Environmental Matters.
(a) To Penncore's knowledge, Penncore and each of the Penncore
Subsidiaries, the Participation Facilities and the Loan/Fiduciary Properties
(each as defined below) are, and have been, in compliance with all Environmental
Laws (as defined below), except for instances of noncompliance which would not
have a Material Adverse Effect on Penncore.
(b) There is no proceeding pending or, to Penncore's
knowledge, threatened before any court, governmental agency or board or other
forum in which it or any of the Penncore Subsidiaries or any Participation
Facility has been, or with respect to threatened proceedings, reasonably would
be expected to be, named as a defendant or potentially responsible party (i) for
alleged noncompliance (including by any predecessor) with any Environmental Law,
or (ii) relating to the release or threatened release into the environment of
any Hazardous Material (as defined below), whether or not occurring at or on a
site owned, leased or operated by it or any of the Penncore Subsidiaries or any
Participation Facility.
(c) There is no proceeding pending, or to Penncore's
knowledge, threatened before any court, governmental agency or board or other
forum in which any Loan/Fiduciary Property (or Penncore or any of the Penncore
Subsidiaries in respect of any Loan/Fiduciary Property) has been, or with
respect to threatened proceedings, reasonably would be expected to be, named as
a defendant or potentially responsible party (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (ii) relating to
the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property.
(d) To Penncore's knowledge, during the period of (i) its or
any of the Penncore Subsidiaries' ownership or operation of any of their
respective current properties, (ii) its or any of the Penncore Subsidiaries'
participation in the management of any Participation Facility, or (iii) its or
any of the Penncore Subsidiaries' holding of a security or other interest in a
Loan/Fiduciary Property, there have been no releases of Hazardous Material in,
on, under or affecting any such property, Participation Facility or
Loan/Fiduciary Property.
(e) To Penncore's knowledge, prior to the period of (i) its or
any of the Penncore Subsidiaries' ownership or operation of any of their
respective current properties, (ii) its or any of the Penncore Subsidiaries'
participation in the management of any Participation Facility, or (iii) its
holding of a security or other interest in a Loan/Fiduciary Property, there were
no releases of Hazardous Material in, on, under or affecting any such property,
Participation Facility or Loan/Fiduciary Property.
(f) The following definitions apply for purposes of this
Section 2.19: "Loan/Fiduciary Property" means any nonresidential property owned
or controlled by Penncore or any of the Penncore Subsidiaries or in which it
holds a security, fiduciary, or other interest, and, where required by the
context, includes any such property where Penncore or any of the Penncore
Subsidiaries constitutes the owner or operator of such property, but only with
respect to such property; "Participation Facility" means any facility in which
it or any of the Penncore Subsidiaries participates in the management of such
property, but only with respect to such property; "Environmental Law" means (i)
any federal, state and local law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, legal doctrine, order,
judgment, decree, injunction, requirement or agreement with any governmental
entity, relating to (a) the protection, preservation or restoration of the
environment, (including, limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, and animal
life or any other natural resource), or to human health or safety, or (b) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of Hazardous Material, in each case as amended and as now in effect and
includes, without limitation, the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Disposal and the federal Toxic Substances Control Act, and the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and
Health Act of 1970, each as amended and as now in effect, and (ii) any common
law or equitable doctrine (including, without limitation, injunctive relief and
tort doctrines such as negligence, nuisance, trespass and strict liability) that
may impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Material; "Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
and includes, without limitation, any oil or other petroleum product, toxic
waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous
waste, special waste or petroleum or any derivative or by-product thereof,
radon, radioactive material. asbestos, asbestos containing material, urea
formaldehyde foam insulation, and polychlorinated biphenyl.
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2.20 Option Shares. The Penncore Common Stock, if and when issued upon
exercise of the Option under the Stock Option Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and subject to no
preemptive rights, except as disclosed in Penncore Disclosure Schedule 2.20.
2.21 Derivatives Contracts. Neither Penncore nor any Penncore
Subsidiary is a party to, nor has agreed to enter into, an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract, or any other contract not included on its balance sheet which is a
financial derivative contract, including various combinations thereof (each a
"Derivatives Contract").
2.22 No Knowledge. As of the date of this Agreement, Penncore knows of
no reason why the regulatory approvals referred to in Article VI should not be
obtained.
2.23 Proxy Statement/Prospectus. etc. None of the information relating
to Penncore or any Penncore Subsidiary contained in the Proxy
Statement/Prospectus (as defined in Section 4.1) or in any amendment or
supplement thereto, at the time the Registration Statement (as defined in
Section 4.1) is declared effective, at the time the Proxy Statement/Prospectus
is mailed to the shareholders of Penncore or at the date of the Shareholders'
Meeting of Penncore to consider the Merger, will contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. All documents which Penncore or any
Penncore Subsidiary is responsible for filing with any regulatory agency in
connection with the Mergers will comply as to form in all material respects with
the requirements of applicable law, and all of the information relating to
Penncore or any Penncore Subsidiary in any document filed with the Securities
and Exchange Commission ("SEC"), the Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Pennsylvania Department of Banking, the Office of
Thrift Supervision ("OTS") or any other regulatory agency in connection with
this Agreement or the transactions contemplated thereby shall be true and
correct in all material respects.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BANCORP
Except as Previously Disclosed by Bancorp or set forth in a Bancorp
Disclosure Schedule, Bancorp hereby represents and warrants to Penncore as
follows:
3.1 Corporate Standing. Each of Bancorp and Main Line is duly
organized, validly existing and in good standing under the laws of its
incorporation; is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of its business or the properties or assets
owned or leased by it makes such qualification necessary; and has the corporate
power to carry on its business as and where conducted, to own, lease and operate
its properties, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to having obtained all requisite
regulatory approvals contemplated by this Agreement.
3.2 Capitalization. The capital stock of Bancorp consists of 30,000,000
authorized shares of Bancorp Common Stock of which, as of the date of this
Agreement, 11,471,810 shares are issued and outstanding, and 5,000,000 shares of
Preferred Stock, no par value, of which no shares have been issued as of the
date hereof. All of such issued and outstanding shares are, and upon
consummation of the Merger the shares of Bancorp Common Stock to be issued
pursuant to the Merger will be, validly issued, fully paid and nonassessable,
and subject to no preemptive rights.
3.3 Authorization. This Agreement and the Stock Option Agreement have
been duly authorized by all necessary corporate action of Bancorp and are valid
and binding agreements enforceable against it in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditors' rights generally and
to general equity principles, except that the availability of equitable
remedies, including specific performance and injunctive relief, is subject to
the discretion of the court before which any proceedings may be brought. The
execution and delivery of this Agreement and the Stock Option Agreement by
Bancorp does not, and the consummation of the transactions contemplated hereby
and thereby will not, constitute, (a) a breach or violation of, or a default
under, any judgment, decree, order, governmental permit or license applicable to
Main Line or Bancorp or to which Main Line or Bancorp is subject or bound, or
(b) a breach or violation of, or a default under, Main Line's or Bancorp's
governing documents, or, under any agreement, indenture or instrument of Main
Line or Bancorp or to which Main Line or Bancorp is subject or bound. The
consummation of the transactions contemplated by this Agreement will not require
any consent, waiver, non-objection or approval under any such judgment, decree,
order, governmental permit or license, or the consent, waiver, non-objection or
approval of any other party to any such agreement, indenture or instrument,
other than the approvals of applicable regulatory authorities referred to in
Section 6.1(b).
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3.4 Filings; Financial Statements. Bancorp has delivered and will
promptly deliver, as applicable, to Penncore, Bancorp's Annual Report on Form
10-K, for the fiscal year ended March 31, 1996, and all other documents filed or
to be filed by Bancorp subsequent to March 31, 1996, under Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
in the form filed with the SEC (the "Bancorp Financial Reports"), which Bancorp
Financial Reports conformed in all material respects to applicable legal
requirements. As of their respective dates, the Bancorp Financial Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
3.5 Conduct of Business; Compliance with Law. To their knowledge,
Bancorp and Main Line have conducted their business in compliance with all
federal, state, and local laws, ordinances and regulations, including applicable
banking laws, federal and state securities laws, and laws and regulations
concerning truth-in-lending, usury, fair credit reporting, fair lending, the
Community Reinvestment Act, consumer protection, occupational safety, fair
employment practices and fair labor standards. Neither Main Line nor Bancorp has
received any notification or communication from any agency or department of any
federal, state or local government or regulatory authority or the staffs
thereof, asserting that either they are not currently in compliance with any of
the statutes, regulations or ordinances that such agency, department or
regulatory authority enforces, which noncompliance would have a Material Adverse
Effect on them, or threatening to revoke any license, franchise, permit or
governmental authorization the revocation of which would have a Material Adverse
Effect on them.
3.6 Brokers' and Finders' Fees. Bancorp has taken no action that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment.
3.7 No Knowledge. As of the date of this Agreement, Bancorp knows of no
reason why the regulatory approvals referred to in Article VI should not be
obtained.
3.8 Accuracy of Information. The statements with respect to Main Line
and Bancorp contained in this Agreement, the Stock Option Agreement, and any
other written documents executed and delivered by or on behalf of Bancorp in
connection with this Agreement are true and correct in all material respects,
and such statements and documents do not omit any material fact necessary to
make the statements contained therein, in light of the circumstances under which
they made, not misleading.
3.9 Ownership of Penncore Common Stock; Affiliates and Associates.
Except for the Stock Option Agreement or as disclosed in Bancorp Disclosure
Schedule 3.9, neither Bancorp nor any of its affiliates or associates (as such
terms are defined under the Exchange Act), (i) beneficially own, directly or
indirectly, or (ii) is a party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, in each case, any
shares of Penncore Common Stock;
3.10 Legal Proceedings. As of the date of this Agreement, there are no
judicial, administrative, arbitral or other actions, suits, proceedings or
investigations pending or, to Bancorp's knowledge, threatened, against Bancorp
which if adversely determined, would materially adversely affect the ability of
Bancorp to consummate the transactions contemplated hereby. As of the date of
this Agreement, to Bancorp's knowledge, there is no reasonable basis for any
other proceeding, claim, action or governmental investigation against Bancorp,
except such proceedings, claims, actions or governmental investigations which
would not have a Material Adverse Effect on the ability of Bancorp to consummate
the transactions contemplated hereby.
3.11 Absence of Certain Changes or Events. Since April 1, 1995, no
events involving Main Line or Bancorp have occurred which, individually or in
the aggregate, materially impair the ability of Bancorp to perform its
obligations under this Agreement or to consummate any of the transactions
contemplated hereby.
3.12 Registration Statement. Except for information relating to
Penncore and the Penncore Subsidiaries, neither the Registration Statement, the
Proxy Statement/Prospectus (as defined in Section 4.1) nor any amendment or
supplement thereto, at the time the Registration Statement is declared
effective, at the time the Proxy Statement/Prospectus is mailed to the
shareholders of Penncore or at the date of the Shareholders' Meeting of Penncore
to consider the Merger, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading. All documents which Bancorp or Main Line is responsible
for filing with the SEC or any regulatory agency in connection with the Mergers
will comply as to form in all material respects with the requirements of
applicable law, and all of the information relating to Bancorp and its
subsidiaries in any document filed with the SEC or any other regulatory agency
in connection with this Agreement or the transactions contemplated thereby shall
be true and correct in all material respects.
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3.13 Environmental Matters.
(a) To Bancorp's knowledge, Bancorp and Main Line, the
Participation Facilities and the Loan/Fiduciary Properties (each as defined
below) are, and have been, in compliance with all Environmental Laws (as defined
below), except for instances of noncompliance which would not have a Material
Adverse Effect on Bancorp.
(b) There is no proceeding pending or, to Bancorp's knowledge,
threatened before any court, governmental agency or board or other forum in
which it Main Line or any Participation Facility has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a defendant
or potentially responsible party (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law, or (ii) relating to the release or
threatened release into the environment of any Hazardous Material (as defined
below), whether or not occurring at or on a site owned, leased or operated by it
or Main Line or any Participation Facility.
(c) There is no proceeding pending, or to Bancorp's knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or Bancorp or Main Line in respect of any
Loan/Fiduciary Property) has been, or with respect to threatened proceedings,
reasonably would be expected to be, named as a defendant or potentially
responsible party (i) for alleged noncompliance (including by any predecessor)
with any Environmental Law, or (ii) relating to the release or threatened
release into the environment of any Hazardous Material, whether or not occurring
at or on a Loan/Fiduciary Property.
(d) To Bancorp's knowledge, during the period of (i) its or
Main Line's ownership or operation of any of their respective current
properties, (ii) its or Main Line's participation in the management of any
Participation Facility, or (iii) its or any of the Penncore Subsidiaries'
holding of a security or other interest in a Loan/Fiduciary Property, there have
been no releases of Hazardous Material in, on, under or affecting any such
property, Participation Facility or Loan/Fiduciary Property.
(e) To Bancorp's knowledge, prior to the period of (i) its or
Main Line's ownership or operation of any of their respective current
properties, (ii) its or Main Line's participation in the management of any
Participation Facility, or (iii) its holding of a security or other interest in
a Loan/Fiduciary Property, there were no releases of Hazardous Material in, on,
under or affecting any such property, Participation Facility or Loan/Fiduciary
Property.
(f) The following definitions apply for purposes of this
Section 3.13: "Loan/Fiduciary Property" means any nonresidential property owned
or controlled by Bancorp or Main Line or in which it holds a security,
fiduciary, or other interest, and, where required by the context, includes any
such property where Bancorp or Main Line constitutes the owner or operator of
such property, but only with respect to such property; "Participation Facility"
means any facility in which it or Main Line participates in the management of
such property, but only with respect to such property; "Environmental Law" means
(i) any federal, state and local law, statute, ordinance, rule, regulation,
code, license, permit, authorization, approval, consent, legal doctrine, order,
judgment, decree, injunction, requirement or agreement with any governmental
entity, relating to (a) the protection, preservation or restoration of the
environment, (including, limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, and animal
life or any other natural resource), or to human health or safety, or (b) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of Hazardous Material, in each case as amended and as now in effect and
includes, without limitation, the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Disposal and the federal Toxic Substances Control Act, and the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and
Health Act of 1970, each as amended and as now in effect, and (ii) any common
law or equitable doctrine (including, without limitation, injunctive relief and
tort doctrines such as negligence, nuisance, trespass and strict liability) that
may impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Material; "Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
and includes, without limitation, any oil or other petroleum product, toxic
waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous
waste, special waste or petroleum or any derivative or by-product thereof,
radon, radioactive material. asbestos, asbestos containing material, urea
formaldehyde foam insulation, and polychlorinated biphenyl.
3.14 Allowance for Loan Losses. The allowance for loan losses shown on
the consolidated balance sheets of Bancorp included in the Bancorp Financial
Reports was, in the opinion of Bancorp, adequate, as determined in accordance
with generally accepted accounting principles, to provide for losses, net of
recoveries relating to loans previously charged off, on loans outstanding as of
the date thereof. Except as set forth in Bancorp Disclosure Schedule 3.14, the
allowances for loan losses, allowances for losses on real estate owned and
allowances or reserves with regard to any other items set forth in the Bancorp
Financial Reports have been
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calculated in accordance with generally accepted accounting principles,
consistently applied, or, where different and applicable, in accordance with all
applicable laws, rules and regulations; and as of the date of such Bancorp
Financial Reports, Bancorp had made all charge-offs deemed uncollectible in
accordance with generally accepted accounting principles consistently applied,
in accordance with applicable laws, rules or regulations, or as directed by any
bank regulatory agency having oversight authority with respect to Bancorp.
Except as set forth on Bancorp Disclosure Schedule 3.14, as of the date of the
Bancorp Financial Reports, Bancorp's allowances for loan losses, allowance for
losses on real estate owned and allowances or reserves with regard to any other
items were, in the opinion of management of Bancorp after due investigation,
adequate to provide for all known and reasonably expected losses on loans
outstanding, real estate owned and all other items as of the date thereof.
3.15 Employee Benefit Plans.
(a) All "employee benefit plans" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), other than "multiemployer plans" within the meaning of Section 3(37)
of ERISA ("Multiemployer Plans"), covering employees or former employees of
Bancorp and Main Line (the "ERISA Plans"), to the extent subject to ERISA, are
in substantial compliance with all applicable requirements of ERISA. Except as
set forth in Bancorp Disclosure Schedule 3.15(b) each ERISA Plan which is an
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA
("Pension Plan") and which is intended to be qualified under Section 401(a) of
the Internal Revenue Code ("Code") has received a favorable determination letter
from the Internal Revenue Service, and Bancorp is not aware of any circumstances
reasonably likely to result in the revocation or denial of any such favorable
determination letter or the inability to receive such a favorable determination
letter. There is no material pending or, to Bancorp's knowledge, threatened
litigation relating to the ERISA Plans. Neither Bancorp nor Main Line has
engaged in a transaction with respect to any ERISA Plan that could subject it or
any of the Main Line to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA in an amount which would be material to
Bancorp's financial condition or operations.
(b) No liability under Subtitle C or D of Title IV of ERISA
has been or is expected to be incurred by Bancorp or Main Line with respect to
any ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001 (a) (15) of ERISA, currently or formerly maintained by any of them,
or the single-employer plan of any entity which is considered one employer with
it under Section 4001 (a) (15) of ERISA or Section 414 of the Code (an "ERISA
Affiliate"). Neither Bancorp nor Main Line presently contributes to a
Multiemployer Plan, nor have they contributed to such a plan within the past
five calendar years. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the past 12-month period.
(c) All contributions required to be made under the terms of
any ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. Neither Bancorp nor Main Line has provided, or is
required to provide, security to any Pension Plan or to any single-employer plan
of an ERISA Affiliate pursuant to Section 401(a) (29) of the Code.
ARTICLE IV
COVENANTS AND ACTIONS PENDING THE EFFECTIVE TIME
4.1 Securities Registration and Disclosure. As soon as practicable
after the date hereof, Bancorp will file with the SEC under the Securities Act
of 1933, as amended ("Securities Act"), a registration statement for the
registration of the shares of Bancorp Common Stock to be issued pursuant to the
Merger (the "Registration Statement"). The parties shall cooperate in the
preparation of the Proxy Statement/Prospectus ("Proxy Statement/Prospectus")
contained in the Registration Statement and any amendments or supplements
thereto, and each party shall be responsible for providing all information
concerning itself and its subsidiaries required to be included therein. Bancorp
shall take any action required to be taken under any applicable state securities
or "blue sky" laws in connection with the issuance of shares of Bancorp Common
Stock pursuant to the Merger, and Penncore shall furnish Bancorp all information
concerning Penncore and its shareholders as Bancorp may reasonably request in
connection with any such action. Each party will promptly provide the other with
copies of all correspondence, comment letters, notices or other communications
to or from the SEC relating to the Registration Statement, the Proxy
Statement/Prospectus or any amendment or supplement thereto, and Bancorp will
advise Penncore promptly after it receives notice thereof, of the effectiveness
of the Registration Statement, of the issuance of any stop order with respect to
the effectiveness thereof, of the suspension of the qualification of the Bancorp
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or of the initiation or threat of any proceeding for any such
purpose.
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4.2 Regulatory Approvals. As soon as practicable after the date hereof,
the parties shall prepare and file (i) with the OTS an application for its
approval of the Merger under the Savings and Loan Holding Company Act, (ii) with
the Pennsylvania Department of Banking application(s) for its approval of the
Bank Merger under the Pennsylvania Banking Code and (iii) with any other
regulatory agencies having jurisdiction any other applications for approvals or
consents which may be necessary for the consummation of the Merger. Subject to
the limitations herein provided, the parties will take or cause to be taken all
actions necessary for such applications to be approved, and each party will
promptly provide the other with copies of all correspondence, notices or other
communications to or from such agencies relating to such applications.
4.3 Penncore Shareholders' Meeting. Penncore will take appropriate
action, in accordance with applicable law and its articles of incorporation and
bylaws, to call a meeting of its shareholders (the "Penncore Shareholders'
Meeting"), to be held not more than 45 days following the effective date of the
Registration Statement, to consider approval of this Agreement and the Merger.
The members of the Penncore Board of Directors shall vote shares held by them in
favor of this Agreement and the Merger, and, except to the extent legally
required for the discharge by the Penncore Board of Directors of its fiduciary
duties, shall recommend that the holders of Penncore Common Stock vote in favor
of and approve this Agreement and the Merger at the Penncore Shareholders'
Meeting. In connection with the Penncore Shareholders' Meeting, Penncore will
duly solicit the vote of its shareholders by mailing or delivering to each such
shareholder, as soon as practicable after the effectiveness of the Registration
Statement, the Proxy Statement/Prospectus, and as soon as practicable
thereafter, any amendments or supplements thereto as may be necessary to assure
that at the date of the Penncore Shareholders' Meeting the Proxy
Statement/Prospectus shall conform to the requirements of Sections 2.23 and 3.12
hereof.
4.4 Penncore Affiliates' Agreements. Penncore will furnish to Bancorp a
list of all persons known to Penncore who at the date of the Penncore
Shareholders' Meeting may be deemed to be "affiliates" of Penncore within the
meaning of Rule 145 under the Securities Act ("Penncore Affiliates"). Penncore
will use its best efforts to cause each Penncore Affiliate to deliver to Bancorp
not later than 30 days prior to the Effective Time a written agreement providing
that such person will not sell, pledge, transfer or otherwise dispose of (a) the
Bancorp Common Stock received by such person in the Merger or any other shares
of Bancorp Common Stock or Penncore Common Stock held by such person during the
period commencing 30 days prior to the Effective Time and ending at such time as
financial results covering at least 30 days of post-Merger combined operations
have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies or (b) the Bancorp Common Stock
received in the Merger except in compliance with the applicable provisions of
the Securities Act and the rules and regulations thereunder.
4.5 Public Announcements. The initial press release announcing this
Agreement shall be a joint press release and thereafter Penncore and Bancorp
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and in
making any filings with any governmental entity or with any national securities
exchange with respect thereto.
4.6 Notice of Certain Events. Pending the Effective Time, each party
will promptly notify the other of (i) any material change in the normal course
of its business or in the operation of its properties, (ii) any event which may
cause any of its representations and warranties hereunder to be inaccurate in
any material respect as of the time of the Closing and (iii) any actions, claims
or legal, administrative or arbitration proceedings or investigations threatened
or commenced against it or its subsidiaries which are or may be material to
their business or assets or to the consummation of the Mergers and the
transactions contemplated hereby.
4.7 All Reasonable Efforts. Subject to the terms and conditions herein
provided, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, using reasonable efforts to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the Merger; provided, however, that nothing contained herein shall
require Bancorp to agree to any condition or requirement which is sought or
imposed by any regulatory authority in connection with the regulatory approvals
referred to in Article VI hereof and which Bancorp reasonably considers to be
materially adverse to its interests. Each party agrees to use all reasonable
efforts to fulfill, or cause to be fulfilled, all conditions provided hereunder
to the obligations of the other party to consummate the Merger. Each party will,
and will cause its subsidiaries to, use its best efforts to obtain all consents
of third parties required in connection with this Agreement or the transactions
contemplated hereby under any other contract or agreement of such party or its
subsidiaries.
4.8 Inconsistent Activities. Unless and until the Merger has been
consummated or this Agreement has been terminated in accordance with its terms,
Penncore will not (i) solicit or encourage, directly or indirectly, any
inquiries or proposals to acquire more than 1% of the Penncore Common Stock, any
other capital stock of itself or any Penncore Subsidiary or any significant
portion of its or any Penncore Subsidiary's assets (whether by tender offer,
merger, purchase of assets or other transactions of any type); (ii) afford any
third party which may be considering any such transaction access to its or any
Penncore Subsidiary's properties, books
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or records except as required by mandatory provisions of law; (iii) enter into
any discussions or negotiations for, or enter into any agreement or
understanding which provides for, any such transaction or (iv) authorize or
permit any of its directors, officers, employees or agents to do or permit any
of the foregoing; provided, however, that notwithstanding the foregoing,
Penncore may afford such access, enter into any such discussions, negotiations
or agreements or understandings, or authorize or permit any of its directors,
officers, employees or agents to do so if the Board of Directors of Penncore,
after consulting with counsel, determines that such actions should be taken or
permitted in the exercise of its fiduciary duties. If Penncore becomes aware of
any offer or proposed offer to acquire any such shares of capital stock of
itself or any Penncore Subsidiary or any significant portion of its or any
Penncore Subsidiary's assets (regardless of the form of the proposed
transaction) or of any other matter which could adversely affect this Agreement
or the Mergers, Penncore shall immediately give notice thereof to Bancorp.
4.9 Bank Merger. Subject to the condition that the Bank Merger shall
not be consummated unless the Merger shall have been consummated prior thereto
or simultaneously therewith and to the other limitations herein provided,
promptly upon the request of Bancorp, Penncore shall, and shall cause
Commonwealth to, (a) cooperate with Bancorp by providing to Bancorp, promptly
upon request, such information and assistance as Bancorp may reasonably request
in order to prepare and file (i) with the OTS an application(s) for its approval
of the Bank Merger, (ii) with the Pennsylvania Department of Banking
application(s) for its approval of the Bank Merger under the Pennsylvania
Banking Code and (iii) with any other regulatory agencies having jurisdiction
any other applications for approvals or consents which may be necessary for the
consummation of the Bank Merger and (b) take or cause to be taken such
additional actions as Bancorp may reasonably determine to be necessary for such
applications to be approved and for the Bank Merger to be consummated
simultaneously with or promptly following the Merger, including without
limitation execution and approval of one or more agreements between Main Line
and Commonwealth in such form as Bancorp may reasonably request. Each party will
promptly provide the other with copies of all correspondence, notices or other
communications to or from such agencies relating to such applications.
4.10 Access to Information. Upon reasonable notice Penncore shall (and
shall cause the Penncore Subsidiaries to) afford to Bancorp and its officers,
employees, accountants, consultants, legal counsel and other representatives
reasonable access during normal business hours to information concerning the
business, properties, contracts, records and personnel of Penncore or the
Penncore Subsidiaries as Bancorp may reasonably request (other than reports or
documents which Penncore is not permitted to disclose under applicable law);
provided, that no investigation pursuant to this Section 4.10 shall affect or be
deemed to modify or waive any representation or warranty made by Penncore or the
conditions of the obligation of Bancorp to consummate the transactions
contemplated by this Agreement. Penncore shall not be required to provide access
to or to disclose information where such access or disclosure would violate or
prejudice the rights of Penncore's customers, jeopardize any attorney-client
privilege or contravene any law, rule, regulation, order, judgment, decree,
fiduciary duty or binding agreement entered into prior to the date of this
Agreement. The parties hereto will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply. Bancorp will hold all such information in confidence to the
extent required by, and in accordance with, the provisions of the
Confidentiality Agreement, dated December 6, 1996, between Bancorp and Penncore
(the "Confidentiality Agreement").
ARTICLE V
CONDUCT OF PENNCORE'S
BUSINESS PENDING THE EFFECTIVE TIME
Pending the Effective Time, except as otherwise consented to in writing
by Bancorp or as contemplated by this Agreement or the Stock Option Agreement:
5.1 General. Penncore will and will cause each Penncore Subsidiary to
(i) conduct its business only in the ordinary course thereof as conducted on the
date hereof and (ii) use its best efforts to preserve its good will with its
customers and others having business relations with it.
5.2 Dividends; Changes in Stock; Issuance of Securities. Neither
Penncore nor any Penncore Subsidiary shall make, declare or pay any dividend
(other than dividends from Penncore Subsidiaries to Penncore) or declare or make
any distribution on, or combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock (other than in a fiduciary capacity in
the ordinary course of its business or in connection with stock received on a
debt previously contracted ("dpc") basis), or authorize the creation or issuance
of, or issue, any additional shares of its capital stock, or any additional
options, calls or commitments relating to its capital stock or any additional
securities or obligations convertible into or exchangeable for, or giving any
person any right to subscribe for or acquire from it shares of its capital stock
or any additional securities or obligations convertible into or exchangeable
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for shares of its capital stock; provided, however, that Penncore may issue
shares of Penncore Common Stock in accordance with the agreements, programs,
arrangements, rights and contracts set forth in Penncore Disclosure Schedule
5.2.
5.3 Compensation. Neither Penncore nor any of the Penncore Subsidiaries
shall enter into any employment contracts with, increase the rate of
compensation of, or pay or agree to pay any bonus to any of its directors,
officers or employees except as set forth in Penncore Disclosure Schedule 5.3.
5.4 Benefit Plans. Except (i) as set forth in Penncore Disclosure
Schedule 5.4 or (ii) as required by applicable law, neither Penncore nor any of
the Penncore Subsidiaries shall enter into or modify any pension, retirement,
severance, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement or other benefit agreement or
contract, or any trust agreement related thereto, in respect of any of its
directors, officers or other employees, including, without limitation, taking
any action that accelerates (i) the vesting or exercise of any benefits payable
thereunder, or (ii) the right to exercise any employee stock options or stock
appreciation rights outstanding thereunder.
5.5 No Disposition or Acquisitions. Neither Penncore nor any of the
Penncore Subsidiaries shall dispose of or discontinue any portion of its assets,
business or properties, which is material to Penncore and the Penncore
Subsidiaries taken as a whole, or merge or consolidate with, or acquire all or
any substantial portion of, the business or property of any other entity which
is material to Penncore and the Penncore Subsidiaries taken as a whole (except
foreclosures, acquisitions of control, or securitization transactions, in each
case in the ordinary course of business consistent with past practice).
5.6 Line of Business; Operating Procedures; Etc. Except as may be
directed by any regulatory agency or required by law or regulation or regulatory
pronouncements, neither Penncore nor any of the Penncore Subsidiaries shall (i)
change its lending, investment, liability management, accounting procedure, or
other material banking policies in any material respect, except as such changes
are in accordance and in an effort to comply with Section 5.12 or, in the case
of accounting practices, are required under generally accepted accounting
principles or regulatory accounting principles, or (ii) commit to incur any
further capital expenditures beyond those set forth in Penncore Disclosure
Schedule 5.6 other than in the ordinary course of business and not exceeding
$25,000 individually or $50,000 in the aggregate, and except for an unexpected
business emergency in order to continue operating Penncore in the ordinary
course, in which case Bancorp's consent shall not be unreasonably withheld.
5.7 Indebtedness; Liabilities; Etc. Other than in the ordinary course
of business consistent with past practice, neither Penncore nor any of the
Penncore Subsidiaries shall incur any indebtedness for borrowed money with a
maturity of more than one year, or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any other
individual, corporation or other entity.
5.8 Liens and Encumbrances. Penncore shall not impose, or suffer the
imposition, on any shares of stock of Penncore any of the Penncore Subsidiaries,
any lien, charge or encumbrance, or permit any such lien, charge or encumbrance
to exist.
5.9 Governing Documents. Neither Penncore nor any of the Penncore
Subsidiaries shall amend its articles of incorporation or bylaws.
5.10 Contracts. Neither Penncore nor any of the Penncore Subsidiaries
shall enter into, terminate or make any change in any material contract,
agreement or lease, except in the ordinary course of business consistent with
past practice.
5.11 Claims. Neither Penncore nor any of the Penncore Subsidiaries
shall settle any claim, action or proceeding involving any material liability
for money damages or restrictions upon the operations of Penncore or any of the
Penncore Subsidiaries.
5.12 Certain Policies of Penncore. Penncore shall, consistent with
generally accepted accounting principles and regulatory accounting principles,
use its best efforts to record any accounting adjustments required to conform
its and the Penncore Subsidiaries' loan, litigation and other reserve and real
estate valuation policies and practices (including loan classifications and
levels of reserves) so as to reflect consistently on a mutually satisfactory
basis the policies and practices of Main Line, provided, however, that Penncore
shall not be obligated to record any such accounting adjustments pursuant to
this Section 5.12 unless and until Penncore shall be satisfied that the
conditions to the obligation of the parties to consummate the Mergers will be
satisfied or waived on or before the Effective Time, and (ii) in no event, until
the day prior to the Effective Time. The representations, warranties and
covenants of Penncore contained in this Agreement shall not be deemed to be
untrue or breached in any respect for any purpose as a consequence
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of any action undertaken on account of Section 5.12 and the actions taken
pursuant to Section 5.12 shall not constitute grounds for termination of this
Agreement by Bancorp.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 Mutual Conditions. The respective obligations of Bancorp, on the
one hand, and Penncore, on the other hand, to effect the Merger shall be subject
to the satisfaction of the following conditions, or waiver thereof (to the
extent permitted by applicable law) by Bancorp and Penncore:
(a) Shareholder Approval. This Agreement and the Merger shall
have been approved at the Penncore Shareholders' Meeting by the affirmative vote
of the holders of at least 75% of the issued and outstanding shares of Penncore
Common Stock.
(b) Regulatory Approvals. All authorizations, consents, orders
or approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any governmental authority necessary for the consummation of
the transactions contemplated by this Agreement including, but not limited to,
approval of, the OTS, shall have been filed, occurred or been obtained;
provided, however, that no such approval or consent shall have imposed any
condition or requirement which, in the good faith reasonable judgment of Bancorp
would so materially adversely impact the economic or business benefits to
Bancorp of the transactions contemplated by this Agreement so as to render
inadvisable the consummation of the Merger.
(c) Securities Act Registration. The Registration Statement
shall have been filed by Bancorp with the SEC under the Securities Act, and
shall have been declared effective prior to the time the Proxy
Statement/Prospectus is first mailed to the shareholders of Penncore, and no
stop order with respect to the effectiveness of the Registration Statement shall
have been issued nor any proceeding therefor initiated or threatened. In
addition, the shares of Bancorp Common Stock to be issued pursuant to this
Agreement shall be duly registered or qualified under the securities or "blue
sky" laws of all states in which such action is required for purposes of the
initial issuance of such stock and its distribution to the shareholders of
Penncore entitled to receive it.
(d) Federal Tax Opinion. There shall have been received by the
parties an opinion of KPMG to the effect that 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 Bancorp and Penncore will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code.
(e) Legal Action. There shall not be in effect any temporary
restraining order, preliminary injunction or permanent injunction, or other
decree or injunction of any court or agency of competent jurisdiction that
enjoins or prohibits consummation of the Merger or the transactions contemplated
hereby, and there shall be pending no litigation instituted by any governmental
agency seeking the issuance of such an order, decree or injunction.
(f) No Illegality. No action shall have been taken, and no
statute, rule, regulation or order shall have been enacted, promulgated, or
issued or been deemed applicable to the Merger by any governmental authority,
which would make the consummation of the Merger illegal.
6.2 Conditions to Bancorp's Obligations. The obligations of Bancorp to
effect the Merger shall be subject to the satisfaction of the following
additional conditions, or waiver thereof by Bancorp:
(a) Opinion of Penncore's Counsel. Bancorp shall have received
the opinion of Schnader Harrison Segal & Lewis, dated the Effective Time, in
form and substance reasonably satisfactory to Bancorp and its counsel as to such
matters related to this Agreement and the transactions contemplated herein as
Bancorp may reasonably request.
(b) Representations, Warranties, Agreements and Covenants of
Penncore. (i) Each of the representations and warranties contained herein of
Penncore shall be true and correct as of the date of this Agreement and upon the
Effective Time with the same effect as though all such representations and
warranties had been made on the Effective Time, except for any such
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representations and warranties made as of a specified date, which shall be true
and correct as of such date, provided, however, that for purposes of this clause
(i), no effect shall be given to any exception in such representations and
warranties relating to materiality or a Material Adverse Effect, provided
further however, that notwithstanding anything to the contrary contained in this
clause (i), the condition contained in this clause (i) shall be deemed to have
been satisfied even if such representations and warranties are not true and
correct unless the failure of any of the representations and warranties to be so
true and correct, individually or in the aggregate, would represent a Material
Adverse Effect on Penncore; (ii) each and all of the agreements and covenants of
Penncore to be performed and complied with pursuant to this Agreement and the
other agreements contemplated hereby prior to the Effective Time shall have been
duly performed and complied with in all material respects; and (iii) Bancorp
shall have received a certificate signed by the Chairman of the Board and the
President/Chief Executive Officer of Penncore, dated the Effective Time, to such
effect.
(c) Accountant's Letter. Bancorp shall have received from KPMG
a letter, dated the date of or shortly prior to the Effective Time, in form and
substance reasonably satisfactory to Bancorp, with respect to Penncore's
consolidated financial position and results of operations, which letter shall be
based upon "agreed upon procedures" customarily undertaken by such firm.
(d) Penncore Affiliates' Agreements. Bancorp shall have
received executed affiliates agreements in the form and from the persons
specified in Section 4.4.
(e) Stock Purchase Warrants and Penncore Phantom Shares. All
Penncore Stock Purchase Warrants and Phantom Shares shall have been canceled and
payment therefor shall have been received by the holders thereof on or prior to
the Effective Time in accordance with Sections 1.4 and 1.6 and evidence thereof
reasonably satisfactory to Bancorp shall be delivered by Penncore to Bancorp on
or prior to the Effective Time.
6.3 Conditions to Penncore's Obligations. The obligations of Penncore
to effect the Merger shall be subject to the satisfaction of the following
additional conditions, or the waiver thereof by Penncore:
(a) Opinion of Bancorp's Counsel. Penncore shall have received
the opinion of Dilworth, Paxson, Kalish & Kauffman, dated the Effective Time, in
form and substance reasonably satisfactory to Penncore and its counsel as to
such matters related to this Agreement and the transactions contemplated herein
as Penncore may reasonably request.
(b) Representations, Warranties, Agreements and Covenants of
Bancorp. (i) Each of the representations and warranties contained herein of
Bancorp shall be true and correct as of the date of this Agreement and upon the
Effective Time with the same effect as though all such representations and
warranties had been made on the Effective Time, except for any such
representations and warranties made as of a specified date, which shall be true
and correct as of such date, provided, however, that for purposes of this clause
(i), no effect shall be given to any exception in such representations and
warranties relating to materiality or a Material Adverse Effect, provided
further however, that notwithstanding anything to the contrary contained in this
clause (i), the condition contained in this clause (i) shall be deemed to have
been satisfied even if such representations and warranties are not true and
correct unless the failure of any of the representations and warranties to be so
true and correct, individually or in the aggregate, would represent a Material
Adverse Effect on Bancorp; (ii) each and all of the agreements and covenants of
Bancorp to be performed and complied with pursuant to this Agreement and the
other agreements contemplated hereby prior to the Effective Time shall have been
duly performed and complied with in all material respects; and (iii) Penncore
shall have received a certificate signed by the Chief Executive Officer and the
Chief Financial Officer of Bancorp, dated the Effective Time, to such effect.
(c) Fairness Opinion. Penncore shall have received the opinion
of Danielson Associates, Inc. of Rockville, Maryland, dated within ten days of
the date of mailing the Proxy Statement/ Prospectus, to the effect that the
Merger is fair to the shareholders of Penncore from a financial point of view.
ARTICLE VII
CLOSING; EFFECTIVE DATE AND TIME
Subject to the terms and conditions of this Agreement, on the tenth
business day after which the last of the conditions set forth in Article VI
(other than the delivery of certificates, opinions, comfort letters and the
like) is satisfied or waived, or such other date as shall be mutually agreed by
the parties, the parties hereto shall exchange all documents and instruments
required by the terms
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of this Agreement to be delivered at or prior to consummation of the Merger at
3200 Mellon Bank Center, 1735 Market Street, Philadelphia PA 19103, or such
other location as may be mutually agreed upon by the parties (the "Closing"),
and articles of merger shall be executed and filed in accordance with
appropriate legal requirements. The Merger shall become effective on the date of
the Closing (the "Effective Date") at the close of business or such other time
on the Effective Date as may be agreed by the parties (the "Effective Time").
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated as set forth below
prior to the Effective Date, at any time either before or after receipt of
required shareholder and other approvals:
(a) By the mutual consent of Bancorp and Penncore;
(b) By either Bancorp or Penncore, in the event of (i) a
breach by the other party of any representation or warranty contained herein,
which breach cannot be or has not been cured within 30 days after the giving of
written notice to the breaching party of such breach and which breach or
breaches would result in a failure to satisfy any condition set forth in Article
VI hereof or (ii) a material breach by the other party of any of the covenants
or agreements contained herein, which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of such
breach; provided, that the non- breaching party provides the breaching party
with a written notice of termination within ten days after the earlier of the
expiration of such 30-day period or the date it receives a written notice from
the breaching party stating that it is unable or unwilling to cure such breach;
provided, however, that neither party shall have the right to terminate this
Agreement pursuant to this Section 8.1(b) unless the breach of representation or
warranty, together with all other such breaches, would entitle the party
receiving such representation not to consummate the transactions contemplated
hereby under Section 6.2(b) (in the case of a breach of representation or
warranty by Penncore) or Section 6.3(b) (in the case of a breach of
representation or warranty by Bancorp);
(c) By either Bancorp or Penncore, upon written notice to the
other party (i) 60 days after the date on which any request or application for a
requisite regulatory approval shall have been denied or withdrawn at the request
or recommendation of the governmental agency which must grant such approval,
unless within the 60-day period following such denial or withdrawal a petition
for rehearing or an amended application has been filed with the applicable
governmental agency; provided, however, that no party shall have the right to
terminate this Agreement pursuant to this Section 8.1(c) if such denial or
request or recommendation for withdrawal shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe the covenants
and agreements of such party set forth herein, or (ii) if any governmental
agency of competent jurisdiction shall have issued a final nonappealable order
enjoining or otherwise prohibiting the consummation of any of the transactions
contemplated by this Agreement;
(d) By Bancorp or Penncore in the event that the Effective
Time is not on or prior to September 30, 1997 (the "Termination Date");
(e) By either Bancorp or Penncore, in the event that any
shareholder approval required by Section 6.1(a) is not obtained at a meeting or
meetings or any adjournment thereof called for the purpose of obtaining such
approval;
(f) By either Bancorp or Penncore, if (i) there shall be a
final nonappealable order of federal or state court restraining or prohibiting
the consummation of the Merger, or (ii) there shall be any action taken (except
with respect to any protest hearing or procedure under the provision of the
Community Reinvestment Act of 1977, as amended), or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger by any governmental authority, which would make the consummation of the
Merger illegal;
(g) By Bancorp, if the Board of Directors of Penncore fails to
recommend the Merger to its shareholders or withdraws, modifies or changes its
recommendation of this Agreement or the Merger in a manner adverse to Bancorp;
or
(h) By Penncore, if Penncore's Board of Directors so
determines in the event that the Average Price (as hereinafter defined) of
Bancorp's Common Stock is less than $12.50, unless the Bancorp Exchange Ratio
Option (as hereinafter described) is
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exercised by Bancorp. The Average Price equals the average of the last reported
sale prices of Bancorp's Common Stock (as reported by NASDAQ) for the 10 trading
days ending on the 11th day before the Effective Date (the "Averaging Period").
Bancorp shall have the option (the "Bancorp Exchange Ratio Option") to increase
the Exchange Ratio to a number equal to $31.25 divided by the Average Price
(calculated to the nearest 1/1000). If Penncore elects to terminate pursuant to
this Section 8.1(h), it shall give written notice to Bancorp prior to the fifth
business day before the Effective Date, and Bancorp shall thereupon have five
business days from receipt of such notice in which to exercise the Bancorp
Exchange Ratio Option, such exercise to be by written notice to Penncore. Upon
exercise of the Bancorp Exchange Ratio Option, this Agreement shall remain in
full force and effect and Penncore's notice of termination under this Section
8.1(h) shall be null and void.
8.2 Approval by Board of Directors. Any termination of this Agreement
as provided in Sections 8.1(a) through 8.1(h) must be approved by the Board of
Directors of the party seeking termination.
8.3 Effect of Termination. In the event of termination of this
Agreement as provided in Sections 8.1 through 8.9, this Agreement shall
forthwith become null and void and there shall be no liability or obligation on
the part of Bancorp or Penncore or their respective officers or directors,
except that nothing herein shall relieve any party hereto from any liability for
willful breach of this Agreement, and except for (a) the agreements and
representations of the parties contained in this Section 8.3 and Sections 9.3,
9.4, 9.7 and 9.9; (b) the obligations of confidentiality contained in Section
9.6; and (c) the obligations of the parties and liabilities contained in Section
9.5, all of which agreements, representations, obligations and liabilities shall
survive any such termination.
ARTICLE IX
OTHER MATTERS
9.1 Survival. If the Effective Time occurs, the agreements of the
parties contained in Sections 1.1, 9.4, 9.5, 9.11, 9.12, 9.13 and 9.14 shall
survive the Effective Time; all other representations, warranties, agreements
and covenants contained in this Agreement shall not survive the Effective Time.
9.2 Waiver; Amendment. Prior to the Effective Date, any provision of
this Agreement may be (i) waived by the party benefitted by the provision, or
(ii) amended or modified at any time (including the structure of the
transaction), by an agreement in writing among the parties hereto providing for
such amendment or modification approved by their respective Boards of Directors
and executed in the same manner as this Agreement, except that, after the vote
by the shareholders of Penncore, the form and the amount of consideration to be
received by the shareholders of Penncore and the holders of Warrants for each
share of Penncore Common Stock shall not thereby be decreased (other than as
permitted by Section 8.1(h)).
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original. This
Agreement shall become effective when one counterpart has been signed by each
party hereto.
9.4 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the Commonwealth of Pennsylvania, determined
without regard to principles of conflicts of laws, except as federal law may be
applicable.
9.5 Expenses. Each party hereto will bear all expenses incurred by it
in connection with this Agreement and the transactions contemplated hereby
(including legal, accounting, investment banking, and travel expenses), except
that: (i) whether or not the Merger shall be consummated, Bancorp and Penncore
shall each pay 50% of all printing costs for the Registration Statement and
Proxy Statement/Prospectus and of all fees and expenses related to the tax
opinion referred to in Section 6.1(d) and (ii) Bancorp shall pay for the fees
and expenses related to the accountants' letter referred to in Section 6.2(c);
provided, however, that in the event of termination of this Agreement, which
termination shall be judicially determined to have been caused by willful breach
of this Agreement, then, in addition to other remedies at law or equity for
breach of this Agreement, the party so found to have willfully breached this
Agreement shall indemnify the other party for the respective costs, fees and
expenses of its counsel.
9.6 Confidentiality. Except as permitted in the Confidentiality
Agreement, each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed.
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9.7 Notices. All notices, requests and other communications hereunder
shall be in writing and may be made by (i) certified or registered mail, return
receipt requested; (ii) hand delivery; (iii) telefax transmittal; or (iv) by
courier service, and shall be deemed to have been duly given (a) when delivered
by hand, (b) three days after mailing, in the case of certified or registered
mail; (c) when electronic confirmation is received and recorded, in the case of
telefax, and (d) one business day after being forwarded to a nationally
recognized overnight courier service for overnight delivery; in each case
correctly addressed to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto:
If to Bancorp, to: ML Bancorp, Inc.
Two Aldwyn Center
Villanova, Pennsylvania 19085
Attn: Brian M. Hartline
Chief Financial Officer
Telephone No. (610) 526-6460
Telefax No. (610) 526-6227
Copy to: J. Roger Williams, Jr., Esquire
Dilworth, Paxson, Kalish & Kauffman
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, Pennsylvania 19103
Telephone No. (215) 575-7050
Telefax No. (215) 575-7200
If to Penncore to: Owen O. Freeman, Jr.
Chairman of the Board
Penncore Financial Services
Corporation
3 Friends Lane
Newtown, Pennsylvania 18940
Telephone No. (215) 860-4200
Telefax No. (215) 860-2032
Copy to: John B. Lampi, Esquire
Schnader, Harrison, Segal & Lewis
30 North Third Street, Suite 700
Harrisburg, Pennsylvania 17101-1713
Telephone No. (717) 231-4000
Telefax No. (717) 231-4012
9.8 Definitions. Any term defined anywhere in this Agreement shall have
the meaning ascribed to it for all purposes of this Agreement (unless expressly
noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a party
shall mean the knowledge, after reasonable inquiry, of any "executive officer"
of such party, as such term is defined in Regulation "0" of the Federal Reserve
Board.
(b) the term "Material Adverse Effect", when applied to a
party shall mean, taken individually or in the aggregate with all other events,
circumstances, occurrences and conditions, an event, occurrence, circumstance or
condition (including without limitation (i) the making of any provisions for
loan and lease losses, write-downs of other real estate owned (other than as
required by Section 5.12 or as otherwise directed by or consented to by Bancorp
or Penncore, as the case may be), and (ii) any breach of a representation or
warranty by such party) which (A) has or is reasonably likely to have a material
adverse effect on the financial condition, results of operations or business of
the party and its subsidiaries, taken as a whole, or (B) would materially impair
the party's ability to perform its obligations under this Agreement; provided,
that material adverse effect and material impairment shall not be deemed to
include the impact of (x) changes in banking and similar laws of general
applicability or interpretations thereof by courts or governmental authorities,
or (y) changes in generally accepted accounting principles, regulatory
accounting requirements and market conditions applicable to stock savings banks,
savings and loan holding companies, banks and bank holding companies
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generally, and (z) the effects of the fees and expenses of all counsel,
accountants and financial advisors relating to the transactions contemplated by
this Agreement and the costs and expenses incurred in connection with the
Penncore Shareholders' Meeting.
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure that is delivered by that party to
the other party prior to the execution of this Agreement which identifies
exceptions to the representations, warranties and covenants delivered by that
party; provided, that any information so disclosed shall apply only to the
provisions of this Agreement pursuant to which such information is identified as
being disclosed.
9.9 Entire Understanding; No Third Party Beneficiaries. This Agreement,
the Stock Option Agreement, the written disclosures which have been Previously
Disclosed, and the Confidentiality Agreement between Penncore and Bancorp
represent the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and supersede any and all other
oral or written agreements heretofore made. Nothing in this Agreement expressed
or implied, is intended to confer upon any person, other than the parties hereto
or their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, other than as provided in Sections 1.1,
9.10, 9.11 9.12, 9.13 and 9.14.
9.10 Benefit Plans.
(a) As soon as administratively practicable after consummation
of the Merger, employees of Penncore and the Penncore Subsidiaries shall be
generally entitled to participate in Bancorp's employee benefit, health, welfare
and similar plans (other than Bancorp's defined benefit pension plan and
Employee Stock Ownership Plan as described below) on substantially the same
terms and conditions as employees of Bancorp, giving effect (except for the
accrual of benefits under such plans) to years of service with Penncore and the
Penncore Subsidiaries as if such service were with Bancorp; provided that, no
employee of Penncore or the Penncore Subsidiaries presently participating in
Penncore's or Penncore's Subsidiaries' medical plan shall be precluded from
participating in medical plans of Bancorp on account of a pre-existing medical
condition, and shall receive credit toward any deductible and co-payments under
any welfare benefit plans sponsored by Bancorp to the extent such deductibles
and co-payments have been satisfied under the respective Penncore welfare
benefit plans.
(b) Upon consummation of the Merger or as soon thereafter as
practicable, all participants in Penncore's 401(k) Plan shall be automatically
and fully vested in all amounts contained in or allocable to their accounts in
accordance with the terms of such Plan, Penncore's 401(k) Plan shall be merged
into the Bancorp's 401(k) Plan and (i) Penncore employees who remain employees
of Bancorp shall have the right to participate therein on the same terms and
conditions as other participating employees, but shall in all events be fully
vested in their accounts transferred from Penncore's 401(k) Plan in accordance
with the terms of such Plan; and (ii) all other Penncore employees shall be
entitled to roll their respective accounts into an individual retirement account
and to all other rights to which they would have been entitled had they been
fully vested and terminated their employment with Penncore immediately preceding
the Effective Date, in accordance with the terms of the Plan and applicable law.
(c) Employees of Bancorp hired after July 31, 1993 and
Penncore employees who remain employees of Bancorp after the Effective Date are
not eligible to participate in Bancorp's defined benefit pension plan.
(d) Employees of Penncore and the Penncore Subsidiaries shall
be entitled to participate in Bancorp's Employee Stock Ownership Plan on the
same basis as any new employee of Bancorp, but will receive no credit for
vesting purposes for service with Penncore.
9.11 Indemnification.
(a) From and after the Effective Time, Bancorp agrees to
indemnify and hold harmless each present director and officer of Penncore or its
Subsidiaries and each officer or employee of Penncore or its Subsidiaries that
is serving or has served as a director or trustee of another entity expressly at
Penncore's request or direction (the "Indemnified Parties"), against any and all
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any and all claims, actions, suits, proceedings or
investigations, whether civil, criminal, administrative or investigative,
arising out of or pertaining to matters arising out of or in connection with
such party's position as, or actions taken as, a director or officer of Penncore
or a Subsidiary or director or trustee of another entity at the request or
direction of Penncore, at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the extent and in the
manner provided in Article 23 of Penncore's bylaws in effect on the date hereof.
If such indemnity is determined not to be available as a
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matter of law with respect to any Indemnified Party, then Bancorp and the
Indemnified Party shall contribute to the amount payable in such proportion as
is appropriate to reflect relative faults and benefits and other relevant
equitable considerations.
(b) Any Indemnified Party wishing to claim indemnification
under Section 9.11(a), upon learning of any such claim, action, suit, proceeding
or investigation, shall promptly notify Bancorp thereof, but the failure to so
notify shall not relieve Bancorp of any liability it may have to such
Indemnified Party if such failure does not materially prejudice Bancorp. In the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time): (i) Bancorp shall have the right to
assume the defense thereof and Bancorp shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the defense
thereof, except that if Bancorp elects not to assume such defense, the
Indemnified Parties may retain counsel satisfactory to them, and Bancorp shall
pay the reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; (ii) the Indemnified Parties will
cooperate in the defense of any such matter; and (iii) Bancorp shall not be
liable for any settlement effected without its prior written consent which shall
not be unreasonably withheld.
9.12 Listing. Bancorp shall use its best efforts following the
Effective Time, as promptly as practicable following the Effective Time, subject
to the conditions and requirements of the National Association of Securities
Dealers, Inc. for such listing, to cause the shares of Bancorp Common Stock to
be issued pursuant hereto to be included for listing on THE NASDAQ NATIONAL
MARKET.
9.13 Advisory Board; Commonwealth State Bank.
(a) Bancorp agrees, promptly following the Effective Time, to
appoint an advisory board of Bancorp which may include members of the Boards of
Directors of Penncore and Commonwealth requested by Bancorp and willing to serve
on such advisory board (the "Advisory Board"). The Advisory Board shall be
responsible to interact with the officers of Bancorp for purposes of generating
new deposit and loan business in the Bucks and Montgomery County, Pennsylvania
market area. Bancorp shall appoint Owen O. Freeman, Jr. as the Chairman of the
Advisory Board. The members of the Advisory Board shall be paid for each meeting
that they attend as determined by the Board of Directors of Bancorp.
(b) After the Effective Time, all offices of Commonwealth
shall be placed under the organizational structure of Main Line as an operating
division and designated for marketing purposes as "Commonwealth State Bank, a
division of Main Line Bank."
(c) The Advisory Board and/or the divisional designation
specified in this Section 9.13 shall continue so long as they are deemed to be
in the best interests of Bancorp as determined by the Board of Directors of
Bancorp.
9.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
ATTEST: PENNCORE FINANCIAL SERVICES
CORPORATION
By:/s/ Sharon M. Fink
Sharon M. Fink By:/s/ Owen O. Freeman, Jr.
Assistant Secretary Owen O. Freeman, Jr.
Chairman of the Board
ATTEST: ML BANCORP, INC.
By:/s/ Lynn O. Robinson By:/s/ Dennis S. Marlo
Lynn O. Robinson Dennis S. Marlo
Assistant Secretary President and Chief
Executive Officer
A-26
<PAGE>
ANNEX B
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT dated as of the 4th day of February 1997
(this "Agreement"), by and between Penncore Financial Services Corporation
("Penncore") and ML Bancorp, Inc. ("Bancorp").
RECITALS:
A. Penncore and Bancorp have entered into an Agreement and Plan of
Merger of even date herewith ("Merger Agreement") providing for the merger of
Penncore with and into Bancorp with Bancorp as the surviving entity; and
B. As a condition and inducement to Bancorp's entry into the Merger
Agreement, Penncore has agreed to grant to Bancorp the option set forth herein
to purchase authorized but unissued shares of Penncore Common Stock;
NOW, THEREFORE, in consideration of the representations and mutual
promises and obligations herein contained, the parties agree as follows:
1. Definitions.
Capitalized terms defined in the Merger Agreement and used
herein shall have the same meanings as in the Merger Agreement.
2. Grant of Option.
Subject to the terms and conditions set forth herein, Penncore
hereby grants to Bancorp an option ("Option") to purchase up to 95,900 newly
issued or treasury shares of Penncore Common Stock, at a price of $24.00 per
share payable in cash as provided in Section 4 hereof.
3. Exercise of Option.
(a) Bancorp may exercise the Option, in whole or part, at any
time or from time to time if a Purchase Event (as defined below) shall have
occurred and be continuing; provided, that to the extent the Option shall not
have been exercised, it shall terminate and be of no further force and effect
upon the earliest to occur of (i) the Effective Time, (ii) termination of the
Merger Agreement in accordance with the provisions thereof prior to the
occurrence of a Purchase Event (other than a termination resulting from a
willful breach by Penncore of any covenant contained therein), or (iii) 12
months after termination of the Merger Agreement if such termination follows the
occurrence of a Purchase Event or is due to a willful breach by Penncore of any
covenant contained therein; and provided further, that any such exercise shall
be subject to compliance with applicable provisions of law. The Option shall not
be exercisable in the event Bancorp is in material breach of its covenants or
obligations contained in the Merger Agreement.
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(b) As used herein, a "Purchase Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Penncore or any Penncore subsidiary, without having
received Bancorp's prior written consent, shall have entered into an agreement
with any person (other than Bancorp or one of its subsidiaries) to (x) merge or
consolidate, or enter into any similar transaction, with Penncore, (y) purchase,
lease or otherwise acquire all or substantially all of the assets of Penncore
or, (z) purchase or otherwise acquire (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 10% or more of the voting power of Penncore or any Penncore
subsidiary;
(ii) Except with respect to a certain Stock Purchase
Agreement between Penncore and National Penn Investment Company, any person
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of 10% or more of the outstanding shares of Penncore Common Stock (the
term "beneficial ownership" for purposes of this Agreement having the meaning
assigned thereto in Section 13(d) of the Exchange Act and the regulations
promulgated thereunder); or
(iii) any person (other than Bancorp) (x) shall have
made a bona fide proposal to Penncore by public announcement or written
communication that is or becomes the subject of public disclosure to acquire
Penncore by merger, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, (y) shall have commenced a bona fide
tender or exchange offer to purchase shares of Penncore Common Stock such that
upon consummation of such offer such person would own or control 10% or more of
the outstanding shares of Penncore Common Stock, or (z) shall have filed an
application or notice with the Federal Reserve Board or any other federal or
state regulatory agency for clearance or approval to engage in any transaction
described in clause (i) or (ii) above, and thereafter the holders of Penncore
Common Stock shall have not approved the Merger Agreement and the transactions
contemplated thereby at the meeting of such stockholders held for such purpose
or such meeting shall not have been held or shall have been canceled prior to
termination of the Merger Agreement.
If more than one of the transactions giving rise to a Purchase
Event under this Section 3(b) is undertaken or effected, then all such
transactions shall give rise only to one Purchase Event, which Purchase Event
shall be deemed continuing for all purposes hereunder until all such
transactions are abandoned. As used in this Agreement, "person" shall have the
meanings specified in Sections 3(a) (9) and 13(d) (3) of the Exchange Act.
(c) In the event Bancorp wishes to exercise the Option, it
shall send to Penncore a written notice (the date of which being herein referred
to as "Notice Date") specifying (i) the total number of shares it will purchase
pursuant to such exercise, and (ii) a place and date not earlier than three
business days nor later than 30 business days from the Notice Date for the
closing of such purchase ("Closing Date"); provided, that if prior notification
to or approval of any federal or state regulatory agency is required in
connection with such purchase, Bancorp shall promptly file the required notice
or application for approval and shall expeditiously process the same and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which any required notification period has expired or
been terminated or such approval has been obtained and any requisite waiting
period shall have passed.
4. Payment and Delivery of Certificates.
(a) At the closing referred to in Section 3 hereof, Bancorp
shall pay to Penncore the aggregate purchase price for the shares of Penncore
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by a wire transfer to a bank account designated by Penncore.
B-2
<PAGE>
(b) At such closing, simultaneously with the delivery of cash
as provided in subsection (a), Penncore shall deliver to Bancorp a certificate
or certificates representing the number of shares of Penncore Common Stock
purchased by Bancorp, and Bancorp shall deliver to Penncore a letter agreeing
that Bancorp will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(c) Certificates for Penncore Common Stock delivered at a
closing hereunder may be endorsed with a restrictive legend which shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the
registered holder hereof and Penncore Financial Services
Corporation and to resale restrictions arising under federal
law, a copy of which agreement is on file at the principal
office of Penncore Financial Services Corporation. A copy of
such agreement will be provided to the holder hereof without
charge upon receipt by Penncore Financial Services Corporation
of a written request."
It is understood and agreed that the above legend shall be
removed by delivery of substitute certificate(s) without such legend if Bancorp
shall have delivered to Penncore a copy of a letter from the staff of the
appropriate regulatory authority or an opinion of counsel, in form and substance
satisfactory to Penncore and its counsel, to the effect that such legend is not
required for purposes of applicable federal law.
5. Representations.
(a) Penncore hereby represents, warrants and covenants to
Bancorp as follows:
(i) Penncore shall at all times maintain sufficient
authorized but unissued shares of Penncore Common Stock so that the Option may
be exercised without authorization of additional shares of Penncore Common
Stock.
(ii) The shares to be issued upon due exercise, in whole
or in part, of the Option, when paid for as provided herein, will be duly
authorized, validly issued, fully paid and nonassessable.
(iii) Penncore has corporate power and authority to
enter into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Penncore. This Agreement has been duly executed and delivered by Penncore.
(b) Bancorp hereby represents and warrants to Penncore as
follows:
(i) Bancorp has corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Bancorp. This Agreement has been duly executed and delivered by Bancorp.
(ii) This Option is not being acquired with a view to
the public distribution thereof and neither this Option nor any shares of
Penncore Common Stock will be transferred or otherwise disposed of except in a
transaction registered or exempt from registration under the Securities Act.
B-3
<PAGE>
6. Adjustment Upon Changes in Capitalization.
In the event of any change in Penncore Common Stock by reason of stock
dividends, split-ups, recapitalization, combinations, exchanges of shares or the
like, the type and number of shares subject to the Option, and the purchase
price per share, as the case may be, shall be adjusted appropriately. In the
event that any additional shares of Penncore Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement), the number of shares of Penncore Common Stock
subject to the Option shall be adjusted so that, after such issuance, it equals
19.9% of the number of shares of Penncore Common Stock then issued and
outstanding after giving effect to any shares subject or issued pursuant to the
Option. Nothing contained in this Section 6 shall be deemed to authorize
Penncore to breach any provision of the Merger Agreement.
7. Registration Rights.
Penncore shall, if requested by Bancorp or any Bancorp assignee, as
expeditiously as possible following the occurrence of a Purchase Event and prior
to the second anniversary thereof, prepare a registration statement
("registration statement") under federal and any state law if necessary in order
to permit the sale or other disposition of the shares of Penncore Common Stock
that have been acquired upon exercise of the Option in accordance with the
intended method of sale or other disposition requested by Bancorp. Bancorp shall
provide all information reasonably requested by Penncore for inclusion in any
registration statement to be filed hereunder. Penncore will use its best efforts
to cause such registration statement first to become effective and then to
remain effective for such period not in excess of 180 days from the day such
registration statement first becomes effective as may be reasonably necessary to
effect such sales or other dispositions. The registration effected under this
Section 7 shall be at Penncore's expense except for underwriting commissions and
the fees and disbursements of Bancorp's or any of Bancorp assignee's counsel
attributable to the registration of such Penncore Common Stock. In no event
shall Penncore be required to effect more than one registration hereunder. The
filing of any registration statement hereunder may be delayed for such period of
time as may reasonably be required to facilitate any public distribution by
Penncore of Penncore Common Stock. If requested by Bancorp or any Bancorp
assignee, in connection with any such registration, Penncore will become a party
to any underwriting agreement relating to the sale of such shares, but only to
the extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting
agreements. Upon receiving any request from a Bancorp assignee under this
Section 7, Penncore agrees to send a copy of such request to Bancorp and to any
other Bancorp assignee known to Penncore, in each case by promptly mailing the
same, postage prepaid, to the address of record of the persons entitled to
receive such copies.
8. Severability.
If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Option will not permit the holder to acquire the full number of shares
of Penncore Common Stock provided in Section 2 hereof (as adjusted pursuant to
Section 6 hereof), it is the express intention of Penncore to allow the holder
to acquire or to require Penncore to repurchase such lesser number of shares as
may be permissible, without any amendment or modification hereof.
9. Miscellaneous.
(a) Except as otherwise provided herein, each of the parties hereto
shall bear and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
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(b) Except as otherwise expressly provided herein, this Agreement
contains the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and assigns. Nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, and their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
(c) Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Purchase Event shall have occurred and be continuing Bancorp may
assign in whole or in part its rights and obligations hereunder without the
express written consent of Penncore.
(d) All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
overnight express or by registered or certified mail, postage prepaid, addressed
as provided in the Merger Agreement. A party may change its address for notice
purposes by written notice to the other party hereto.
(e) 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.
(f) The parties agree that damages would be an inadequate remedy for a
breach of the provisions of this Agreement by either party hereto and that this
Agreement may be enforced by either party hereto through injunctive or other
equitable relief.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania applicable to agreements made
and entirely to be performed within such state and such federal laws as may be
applicable.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day and year first written above.
ATTEST: PENNCORE FINANCIAL SERVICES
CORPORATION
By:/s/ Sharon M. Fink By:/s/ Owen O. Freeman, Jr.
Sharon M. Fink Owen O. Freeman, Jr.
Assistant Secretary Chairman of the Board
ATTEST: ML BANCORP, INC.
By:/s/ Brian M. Hartline By:/s/ Dennis S. Marlo
Brian M. Hartline Dennis S. Marlo
Executive Vice President and President and Chief
Chief Financial Officer Executive Officer
B-5
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ANNEX C
DANIELSON ASSOCIATES INC.
6110 EXECUTIVE BOULEVARD
SUITE 504
ROCKVILLE, MARYLAND 20852-3903
TEL: (301) 468-4884
FAX: (301) 468-0013
PITTSBURGH OFFICE
TEL: (412) 262-3207
May 13, 1997
Board of Directors
Penncore Financial Services Corporation
Route 332 & Friends Lane
Newtown, Pennsylvania 18940
Dear Members of the Board:
Set forth herein is the updated opinion as to the "fairness," from a
financial point of view, of the offer by ML Bancorp, Inc. ("ML") of Villanova,
Pennsylvania to acquire all of the shares of the common stock of Penncore
Financial Services Corporation ("Penncore") of Newton, Pennsylvania and its
banking subsidiary, Commonwealth State Bank ("Commonwealth State" and the
"Bank") also of Newtown. The ML offer is to exchange 2.5 shares of ML common
stock for each share of Penncore stock up to 70% of the total shares
outstanding, to acquire the remainder for cash at a price of $36.56 per share
and to cash out the warrants and SARs at $36.56 per share. The "fair" sale value
is defined as the price at which all of the shares of Penncore's common stock
would change hands between a willing seller and a willing buyer, each having
reasonable knowledge of the relevant facts. In opining as to the "fairness" of
the offer, it also must be determined if the ML common stock to be exchanged for
Penncore common stock is "fairly" valued.
Danielson Associates Inc. ("Danielson Associates"), as part of its
investment banking business, is regularly engaged in the valuation of banks,
bank holding companies and thrifts in connection with mergers, acquisitions and
other securities transactions. Danielson Associates has knowledge of, and
experience with, Pennsylvania banking markets and banking organizations
operating in those markets.
C-1
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Board of Directors
May 13, 1997
Page Two
This opinion is based partly on data supplied to Danielson Associates
by Penncore, but it relies on some public information, all of which is believed
to be reliable, but neither the completeness nor accuracy of such information
can be guaranteed. In particular, the opinion assumes, based on management's
representation, that there are no significant asset quality problems beyond what
is stated in recent reports to regulatory agencies and in the monthly report to
the directors.
In preparing the original opinion dated February 3, 1997, we reviewed
(a) annual reports of Penncore and ML for 1994 and 1995; (b) call report data on
each from 1989 through 1996, including quarterly reports for March 31, 1996,
June 30, 1996, September 30, 1996; (c) recently reported prices and trading
activities of, and dividends paid on, the common stock of ML; and (d) certain
other publicly available information, including data relating to the current
economic and acquisition environment generally and the banking market in
particular.
In preparing the opinion, the Bank's market was analyzed and its
business and prospects were discussed with management. In addition, we conducted
such other financial analyses as we deemed appropriate such as comparable
company analyses, comparable transaction analyses, and pro forma dilution
analyses. Any unique characteristics also were considered.
We believe that such analyses as described above must be considered as
a whole and that consideration of portions of such analyses and the factors
considered therein, without considering all factors and analyses, could create
an incomplete view of the analyses and the process underlying this opinion. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analyses and summary
description.
In the analyses, we made certain assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond ML's or Penncore's control. Any estimates contained in our analyses
are not necessarily indicative of future results of value, which may be
significantly more or less favorable than such estimates.
C-2
<PAGE>
Board of Directors
May 13, 1997
Page Three
Subsequently there has been no change in the performance of ML or
deterioration in its stock price. Based on the foregoing, it is our opinion
that, as of the date hereof, the offer by ML Bancorp to acquire Penncore is
fair, from a financial point of view, to Penncore and its shareholders.
Respectfully submitted,
Arnold G. Danielson
Chairman
Danielson Associates Inc.
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<PAGE>
ANNEX D
PROVISIONS OF PENNSYLVANIA BUSINESS CORPORATION LAW
RELATING TO DISSENTERS' RIGHTS
PENNSYLVANIA BUSINESS CORPORATION LAW
Subchapter D. - Dissenters Rights
ss. 1571. Application and effect of subchapter.
(a) General Rule. - Except as otherwise proved in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on transfer of
a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions. -
(1) Except as otherwise provided in paragraph (2), the holders
of the shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any section 1930, 1931(d), 1932(c) or 1952(d) is to be
voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders; shall
not have the right to obtain payment of the fair value of any such shares under
this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights
shall be available without regard to the exception provided in that paragraph in
the case of:
(i) Shares converted by a plan if the shares are not
converted solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of fractional shares.
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(ii) Shares of any preferred or special class unless the
articles, the plan or the terms of the transaction entitle all shareholders of
the class to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the votes
cast by all the shareholders of the class.
(iii) Shares entitled to dissenters rights under section
1906(c) (relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by
purchase, lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the other
corporation and with or without the intervention of another corporation or other
person, shall not be entitled to the rights and remedies of dissenting
shareholders provided in this subchapter regardless of the fact, if it be the
case, that the acquisition was accomplished by the issuance of voting shares of
the corporation to be outstanding immediately after the acquisition sufficient
to elect a majority or more of the directors of the corporation.
(c) Grant of option dissenters rights. - The bylaws or a resolution of
the board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights. - Unless otherwise provided by
statute, if a proposed corporate action that would give rise to dissenters
rights under this subpart is submitted to a vote at a meeting of shareholders,
there shall be included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that
the shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes. - The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. - This subchapter may
not be relaxed by any provision of the articles.
(g) Cross references. - See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
ss. 1572. Definitions.
The following words and phrases when used in this subchapter shall have
the meaning given to them in this section unless the content clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking into
account all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors including the average
rate currently paid by corporation on its principal bank loans.
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ss. 1573. Record and beneficial holders and owners.
(a) Record holders of shares. - A record holder of shares on a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. - A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
ss. 1574. Notice of intention to dissent.
If the proposed action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed corporate
action shall constitute the written notice required by this section.
ss. 1575. Notice to demand payment.
(a) General rule. - If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of the shareholders, the corporation shall send to
all shareholders who are entitled to dissent and demand payment of the fair
value of their shares a notice of the adoption of the plan or other corporation
action. In either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent
transfer of shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a
request for certification of the date on which the shareholder, or the person on
whose behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. - The time set for receipt
of the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of this notice.
ss. 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. - A shareholder who fails
to timely demand payment, or fails (in the case of certificated shares) to
timely deposit certificates, as required by a notice pursuant to section 1575
(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.
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(b) Restriction on uncertificated shares. - If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. - The dissenter shall retain all
other rights of a shareholder until those rights are modified by effectuation of
the proposed corporate action.
ss. 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. - Within 60 days after the
date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. - When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
(c) Payment of fair value of shares. - Promptly after effectuation of
the proposed corporate action, or upon timely receipt of demand for payment if
the corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair market value of the shares, or give written notice that no
remittance under this section will be made. The remittance or notice shall be
accompanied by:
(1) The closing balance sheet and statement of income of the
issuer of the shares held or owned by the dissenter for a fiscal year ending not
more than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair
value of the shares.
(3) A notice of the right of the dissenter to demand payment
or supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. - If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided by subsection
(c), it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had after
making demand for payment for their fair value.
ss. 1578. Estimate by dissenter of fair value of shares.
(a) General rule. - If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment in the amount or
the deficiency.
(b) Effect of failure to file estimate. - Where the dissenter does not
file his own estimate under subsection (a) within 30 days after the mailing by
the corporation of this remittance or notice, the dissenter shall be entitled to
no more than the amount stated in the notice or remitted to him by the
corporation.
ss. 1579. Valuation proceedings generally.
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(a) General rule. - Within 60 days after the latest of :
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section
1575 (relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissents. - All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceedings as
in an action against their shares. A copy of application shall be served on each
such dissenter. If a dissenter is a nonresident, the copy may be served on him
in the manner provided or prescribed by or pursuant to 42 Pa. C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
[Footnote omitted].
(c) Jurisdiction of the court. - The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. - Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. - If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
ss. 1580. Costs and expenses of valuation proceedings.
(a) General rule. - The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. - Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in
respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters. - If the court
finds that the services of counsel for any dissenter were of substantial benefit
to other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefitted.
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