-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E32ACtP+2cYF4o9KP7iRAqyVlfKQ1A98uEa2K2r5dkMEahYuSobjggAgWnL5Jd88 /DpI2IRSLuQPyYQdPpUqaA== 0000950109-00-001112.txt : 20000327 0000950109-00-001112.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950109-00-001112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSQUEHANNA BANCSHARES INC CENTRAL INDEX KEY: 0000700863 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232201716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10674 FILM NUMBER: 577441 BUSINESS ADDRESS: STREET 1: 26 N CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 BUSINESS PHONE: 7176264721 MAIL ADDRESS: STREET 2: 26 NORTH CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ------------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-10674 ----------- Susquehanna Bancshares, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Pennsylvania 23-2201716 - -------------------------------------------- ------------------------------ (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 26 North Cedar St., Lititz, Pennsylvania 17543 - -------------------------------------------- ------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (717) 626-4721 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: common stock, par value $2.00 per share - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $516,273,439 as of February 29, 2000, based upon the closing price on the Nadsaq National Market reported for such date. Shares of common stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares issued and outstanding of the registrant's common stock as of February 29, 2000, was 39,296,003. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 26, 2000, are incorporated by reference into Part III. PART I Item 1. Business - ------ -------- General Susquehanna Bancshares, Inc. ("Susquehanna") is a multi-state bank holding company headquartered in Lititz, Pennsylvania. As of December 31, 1999, Susquehanna operated as a super-community bank holding company with nine commercial banks, one federal savings bank and two non-bank subsidiaries. As of December 31, 1999, Susquehanna had consolidated assets of $4.3 billion, loans receivable of $3.0 billion, deposits of $3.2 billion and shareholders' equity of $404 million. The relative sizes and profitability of Susquehanna's operating subsidiaries as of and for the year ended December 31, 1999, are depicted in the following table: (Dollars in Millions)
- --------------------------------------------------------- --------------- ---------------------- ---------------- ------------------ Subsidiary* Assets Percent of Total Net Income Percent of Total ----------- ------ ---------------- ---------- ---------------- - --------------------------------------------------------- --------------- ---------------------- ---------------- ------------------ Farmers First Bank $1,080 25% $19 44% Farmers & Merchants Bank and Trust 616 14 7 16 First National Trust Bank 301 7 4 9 Williamsport National Bank 246 6 4 9 Citizens National Bank of Southern Pennsylvania 199 5 3 7 First American National Bank of Pennsylvania 139 3 2 5 First Capitol Bank 109 3 - - Susquehanna Bank** 1,079 25 9 21 Equity Bank, National Association*** 336 8 4 9 Founders' Bank*** 143 3 2 5 Susque-Bancshares Leasing Co., Inc. (leasing) 48 - - - Susque-Bancshares Life Insurance Co. (life insurance) 4 - - - Consolidation adjustments, including Susquehanna, Susquehanna South and Susquehanna East) 11 1 (11) (25) - --------------------------------------------------------- --------------- ---------------------- ---------------- ------------------ Total $4,311 100% $43 100% - --------------------------------------------------------- --------------- ---------------------- ---------------- ------------------
* Includes operations of wholly-owned subsidiaries. ** Subsidiary of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares South, Inc. ("Susquehanna South"), a non-operating holding company. *** Subsidiaries of Susquehanna's wholly-owned subsidiary, Susquehanna Bancshares East, Inc. ("Susquehanna East"), a non-operating holding company. Susquehanna's depository institution subsidiaries are located in Pennsylvania, Maryland and New Jersey, and provide commercial and retail banking services in central and south central Pennsylvania, principally in Franklin, Lancaster, Northumberland, Snyder, Union, Columbia, York and Lycoming Counties; in southeastern Pennsylvania principally in Montgomery, Chester and Delaware Counties; in southwestern Pennsylvania principally in Bedford and Blair Counties; in western Maryland, principally in Allegany, Garrett and Washington Counties; in northwestern, central and southeastern Maryland, including Allegany County, Washington County, Baltimore County, Baltimore City, Carroll County, Harford County, Worcester County, Wicomico County and Anne Arundel County; and in southern New Jersey, principally in Camden, Burlington and Gloucester Counties. Susquehanna's non-depository institution subsidiaries provide commercial leasing services in Pennsylvania, New Jersey, Maryland and Delaware and credit life insurance services in central and southeastern Pennsylvania. On February 1, 2000, Susquehanna acquired an additional non-depository institution subsidiary, Boston Service Company, Inc. (t/a Hann Financial Service Corporation), which provides consumer automobile 2 financing services principally in New Jersey, eastern Pennsylvania, New York and Connecticut. On March 3, 2000, Susquehanna also acquired an additional non-depository institution subsidiary, Valley Forge Asset Management Corp., an asset management company which provides services principally in southeastern Pennsylvania (Philadelphia, Bucks, Montgomery, Delaware and Chester Counties), New Jersey and Delaware. As a "super-community" bank holding company, Susquehanna's strategy has been to manage its subsidiaries on a decentralized basis, allowing each subsidiary operating in different markets to retain its name and board of directors as well as substantial autonomy in its day to day operations. Susquehanna believes that this strategy permits these institutions greater flexibility to better serve their markets, increasing responsiveness to local needs, and differentiates Susquehanna from other large competitors. Susquehanna continues, however, to implement consolidations in selected lines of business, operations and support functions in order to achieve greater economies of scale and cost savings. Consistent with this philosophy, Susquehanna is continuing its program initiated in 1997 to convert all of its subsidiaries to a uniform computer system. Seven of its depository institution subsidiaries were converted to this system by March 31, 1999, with the remaining three to be converted by mid-2000. Through the formation of Susquehanna Trust & Investment Company, a subsidiary of Farmers First Bank which became operational in May of 1999, and selection of a uniform processing system, Susquehanna anticipates further integration of its trust department operations. Mortgage banking operations are also expected to undergo increased consolidation. Susquehanna also provides its banking subsidiaries guidance in the areas of credit policy and administration, strategic planning, investment portfolio management and other financial and administrative services. In October of 1999, Susquehanna determined to undertake a detailed process change in the way Susquehanna and its subsidiaries conduct their business. Specifically, it determined to consolidate, outsource and restructure certain back-office operations. The goal of this effort is to improve operational efficiencies, maximize the return on Susquehanna's investment in technology, provide superior customer service and to provide employees with consistent, reliable service support. Susquehanna anticipates that detailed restructuring for all centralized functions will be conducted to include the utilization of available technology features, elimination of non-value added steps, documentation of detailed work processes, productivity standards, service standards, staffing models, coordination with Susquehanna compliance and audit personnel to ensure consistency with company policy and revalidation of work processes post implementation. During this process, jobs will be re-defined, processes will be refined and some jobs will be created, relocated or eliminated. Susquehanna subsidiaries will continue to maintain their decision-making autonomy and individual identities. Existing boards of directors will remain in place. The new operating environment will consolidate support functions that are currently provided from multiple locations across the Susquehanna enterprise. Some activities will be outsourced to specialists in their industries, and new technology will be added. See "Management's Discussion and Analysis of Results of Operations and Financial Conditions - Other Expenses" for further discussion. As of December 31, 1999, Susquehanna had 130 full-time and 35 part-time employees, and Susquehanna and its subsidiaries, on a consolidated basis, had 1,622 full-time and 300 part-time employees. Susquehanna was incorporated in Pennsylvania in 1982. Its executive offices are located at 26 North Cedar Street, Lititz, Pennsylvania 17543, and its telephone number is (717) 626-4721. Business Susquehanna, through its subsidiaries, provides a wide range of retail and commercial banking and financial services. Its retail banking business strategy is to expand its deposit and other product market share through a high level of customer service, new product offerings, application of new technologies and delivery systems, and selective acquisitions. Susquehanna operates an extensive branch network and has a strong market presence in its primary markets in Pennsylvania, Maryland and New Jersey. As a result of the development of 3 broad banking relations with its customers, core deposits fund Susquehanna's lending and investing activities almost entirely. Susquehanna's retail banking services include checking and savings accounts, money market accounts, certificates of deposit, individual retirement accounts, Christmas clubs, mutual funds and annuities (see discussion below), home equity lines of credit, residential mortgage loans, home improvement loans, student loans, automobile loans and personal loans. Susquehanna also offers credit cards, and in 1996 introduced a check card in Pennsylvania and Maryland. As of December 31, 1999, there were over 89,000 active debit cards. The acquisition of certain Maryland thrifts in 1995 and 1996 substantially enhanced Susquehanna's mortgage origination and mortgage banking capabilities. The consolidation in 1996 of several mortgage operations into Susquehanna Mortgage Company (formerly known as "Atlantic First Mortgage Company"), a mortgage subsidiary of Susquehanna Bank, further enhanced the expansion of Susquehanna's mortgage banking operations in its Maryland and Pennsylvania markets. Susquehanna's consolidated commercial lending operations include commercial, financial and agricultural lending (11% of the total loan portfolio at December 31, 1999), real estate construction lending (9%), and commercial mortgage lending (20%). Loans originated by each subsidiary are subject to central review and uniform Susquehanna credit standards. Nearly all of Susquehanna's loans are concentrated in the markets served by its subsidiary commercial and savings banks. Certain of Susquehanna's subsidiary depository institutions, namely Farmers First Bank, through its subsidiary, Susquehanna Trust & Investment Company, Citizens National Bank of Southern Pennsylvania, First National Trust Bank, Williamsport National Bank and Farmers & Merchants Bank and Trust also render services as trustee, executor, administrator, guardian, managing agent, custodian and investment advisor and perform other fiduciary activities authorized by law. Through its subsidiary, Susque-Bancshares Life Insurance Co., Susquehanna offers certain credit related insurance products. Susquehanna also offers certain leasing services through its subsidiary Susque-Bancshares Leasing Co., Inc., and its wholly owned subsidiary, Susquebanc Lease Co. Susquehanna expanded its leasing service capabilities through its acquisition in February of 2000 of Hann Financial Service Corporation, which provides comprehensive consumer automobile financing services. In 1999, Susquehanna also acquired a less than 5% equity interest in AExpert, Inc., and entered into an arrangement with its wholly-owned subsidiary, AExpert Advisory, Inc. AExpert Advisory, Inc. is a registered investment advisor and offers fee-based management account services combining its proprietary computer-based market-timing forecasting tool with certain mutual funds. Susquehanna and certain of its subsidiaries share the fees received by AExpert Advisory, Inc. in connection with the accounts specifically referred to it by them. Susquehanna's subsidiaries also have similar referral fee arrangements with other non-affiliated investment advisors/broker-dealers. Through Susquehanna's acquisition of Valley Forge Asset Management Corp. in March of 2000, which represented Susquehanna's first acquisition of an investment advisory services corporation, Susquehanna and its subsidiaries expect to be able to offer a broader range of investment advisory, asset management and brokerage services to its customers. On February 4, 2000, Farmers First Bank and First Capitol Bank, both wholly-owned subsidiaries of Susquehanna, signed an Agreement and Plan of Merger pursuant to which First Capitol Bank will be merged with and into Farmers First Bank. Farmers First Bank will be the surviving institution in the merger and will continue its existence as a bank and trust company under Pennsylvania law with its present name. The merger is currently pending approval of the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (the "FDIC") and is expected to be completed in the first half of 2000. 4 Susquehanna and its subsidiaries do not have any portion of their business dependent upon a single or limited number of customers, the loss of which would have a material adverse effect on their business; no substantial portion of their loans or investments are concentrated within a single industry or group of related industries. The businesses of Susquehanna and its subsidiaries are not seasonal in nature. Susquehanna contemplates that in the future it will evaluate and may acquire, or may cause its subsidiaries to acquire, other banks or savings associations or other entities permitted by applicable law. Susquehanna may acquire state and national banks whose principal business activities are in Pennsylvania and in states which have not opted out of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (as described below). Susquehanna may also seek to enter businesses closely related to banking or that are financial in nature, or to acquire existing companies already engaged in such activities, which includes savings associations. Any acquisition by Susquehanna may require notice to or approval of the Board of Governors of the Federal Reserve System, the Pennsylvania Department of Banking, other regulatory agencies and, in some instances, its shareholders. Recent Acquisitions Hann Financial Service Corporation. On February 1, 2000, Susquehanna ---------------------------------- completed the acquisition of Boston Service Company, Inc., t/a Hann Financial Service Corporation ("Hann"), a New Jersey chartered business corporation headquartered in Jamesburg, New Jersey. The acquisition of Hann was completed through the exchange of 2,360,000 shares of Susquehanna common stock for all the outstanding capital stock of Hann. The transaction qualified for pooling of interests accounting treatment. Hann is engaged in consumer automobile financing which involves marketing and origination services, structuring and placement of lease financing arrangements and retail installment sales contracts and acting as an intermediary between automobile dealers and financial institutions. As of February 1, 2000, the date of Susquehanna's acquisition of Hann, Hann had total assets of $607 million, total shareholder's equity of $11 million and serviced over $800 million in automobile related receivables. Valley Forge Asset Management Corp. On March 3, 2000, Susquehanna completed ----------------------------------- the acquisition of Valley Forge Asset Management Corp. ("VFAM"), a Pennsylvania business corporation headquartered in King of Prussia, Pennsylvania. VFAM and its predecessor companies have been in business as a broker-dealer and investment adviser since 1970. The firm is registered under the federal Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. It is a member of the National Association of Securities Dealers. All of its business activity is related directly or indirectly to managing client investment portfolios on a fully discretionary basis. As of March 3, 2000, the date of Susquehanna's acquisition of VFAM, VFAM had approximately $900 million assets under management. Other than as described above, Susquehanna currently has no formal commitments with respect to the acquisition of any entities, although discussions with prospects occur on a regular and continuing basis. Supervision and Regulation General. Susquehanna is a bank holding company registered with the Board of ------- Governors of the Federal Reserve System ("Board") and is subject to regulation under the Bank Holding Company Act of 1956, as amended. This law (the "BHC Act") requires prior approval of an acquisition of assets or of ownership or control of voting shares of any bank if the acquisition would give Susquehanna more than 5% of the voting shares of any bank or bank holding company. It also imposes restrictions, summarized below, on the assets or voting shares of non-banking companies which Susquehanna may acquire. 5 Susquehanna's commercial and federal savings bank subsidiaries are also subject to regulation and supervision. Farmers First Bank, a state bank, is subject to regulation and periodic examination by the Pennsylvania Department of Banking and the FDIC. Founders' Bank and First Capitol Bank are state member banks subject to regulation and periodic examination by the Board and the Pennsylvania Department of Banking. Citizens National Bank of Southern Pennsylvania, First National Trust Bank, Williamsport National Bank, First American National Bank of Pennsylvania and Equity Bank, National Association, are national banks and are subject to regulation and periodic examination by the Office of the Comptroller of the Currency (the "OCC"). Farmers & Merchants Bank and Trust, a state bank, is subject to regulation and periodic examination by the Maryland Banking Commission and the FDIC. Susquehanna Bank, a federal savings bank, is subject to regulation and periodic examination by the Office of Thrift Supervision (the "OTS"). Susquehanna South is also subject to supervision and regulation by the OTS as a savings and loan holding company. Because Susquehanna is a bank holding company, all of its subsidiaries are subject to examination by the Board even if not otherwise regulated by the Board. Consistent with the requirements of the BHC Act, Susquehanna's only lines of business in 1999 consisted of providing to its customers commercial banking, thrift and other banking-related services and products. These included commercial banking through its nine subsidiary banks, thrift activities through its federal savings bank subsidiary, credit life insurance through another subsidiary and leasing operations through an additional subsidiary. Of these activities, however, commercial banking and savings activities accounted for more than 97% of Susquehanna's gross revenues in each of 1998 and 1999. Regulations governing Susquehanna and its subsidiary depository institutions restrict extensions of credit by such institutions to Susquehanna and, with some exceptions, the other Susquehanna affiliates. For these purposes, extension of credit include loans and advances to and guarantees and letters of credit on behalf of Susquehanna and such affiliates. These regulations also restrict investments by Susquehanna's depository institution subsidiaries in the stock or other securities of Susquehanna and the covered affiliates as well as the acceptance of such stock or other securities as collateral for loans to any borrower, whether or not related to Susquehanna. Susquehanna's commercial and savings bank subsidiaries are subject to comprehensive federal and state regulations dealing with a wide variety of subjects, including reserve requirements, loan limitations, restrictions as to interest rates on loans and deposits, restrictions as to dividend payments, requirements governing the establishment of branches and numerous other aspects of their operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders. Financial Modernization Legislation. In late 1999, Congress enacted the ----------------------------------- Gramm-Leach-Bliley Act (the "GLB Act") to modernize the legal structure of the U.S. financial services industry. The GLB Act permits a bank holding company, all of whose depository institution subsidiaries meet certain tests (discussed below), to elect to become a "financial holding company" (an "FHC"). The Susquehanna depository institutions meet these tests, and Susquehanna recently elected to become an FHC. As an FHC, Susquehanna will be permitted to engage, directly or through subsidiaries, in a wide variety of activities not previously allowed to it which are financial in nature or are incidental or complimentary to a financial activity. Susquehanna may still engage in all of the activities previously allowed to it, whether or not presently conducted. The new activities additionally permitted to Susquehanna as an FHC (if it so determines to conduct them) include, among others, insurance and securities underwriting, merchant banking activities, issuing and selling annuities and securitized interests in financial assets and engaging domestically in activities that bank holding companies previously have been permitted to engage in only overseas. It is expected that in the future other activities will be added to the permitted list. All of these listed activities can be conducted, through an acquisition or on a start-up basis, without prior Board approval and with only notice to the Board after the fact. The GLB Act also generally permits well-capitalized national banks with proper regulatory approval (and, if state law permits, state chartered banks as well), to form or acquire financial subsidiaries to engage in most of these same activities, with the exception of certain specified activities (insurance underwriting, for example) which must be conducted only at the level of the holding company or a nonbank subsidiary. 6 As an FHC, Susquehanna will generally be subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the Board. However, in some respects the regulation is modified as a result of FHC status. For example, Susquehanna must continue to satisfy certain conditions (discussed below) to preserve its full flexibility as an FHC. On the other hand, as an FHC, Susquehanna, unlike traditional bank holding companies, will be permitted to embark on several new types of activities and several additional types of acquisitions without Board approval and with only notice afterward. To qualify as an FHC, Susquehanna had to certify that all of its commercial and savings bank subsidiaries were well-capitalized and well-managed and were rated "satisfactory" or better in their most recent Community Reinvestment Act ("CRA") examinations. An FHC ceasing to meet these standards will be subject to a variety of restrictions, depending on the nature of the problem. If the Board determines that any of the FHC's subsidiary depository institutions are either not well-capitalized or not well-managed, it must notify the FHC. Until compliance is restored, the Board has broad discretion to impose appropriate limitations on the FHC's activities. If compliance is not restored within 180 days, the Board may ultimately require the FHC to divest its depository institutions. The potential restrictions are different if the lapse pertains to the CRA requirement. In that case, until all the subsidiary institutions are restored to at least "satisfactory" CRA rating status, the FHC may not engage, directly or through a subsidiary, in any of the new activities permissible under the GLB Act nor make additional acquisitions of companies engaged in the new activities. However, completed acquisitions and new activities and affiliations previously begun are left undisturbed, as the GLB Act does not require divestiture for this type of problem. Capital Adequacy. Under the risk-based capital requirements applicable to ---------------- them, bank holding companies must maintain a ratio of total capital to risk-weighted assets (including the asset equivalent of certain off-balance sheet activities such as acceptances and letters of credit) of not less than 8% (10% to be "well-capitalized"). At least 4% out of the total capital (6% to be well capitalized) must be composed of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, after deducting goodwill and certain other intangibles ("tier 1 capital"). The remainder of total capital ("tier 2 capital") may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance. At December 31, 1999, Susquehanna's tier 1 capital and total capital (i.e., tier 1 plus tier 2) ratios were 12.7% and 15.6%, respectively. The Board has also established minimum leverage ratio guidelines for bank holding companies. These guidelines mandate a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets less certain amounts ("leverage amounts") equal to 3% for bank holding companies meeting certain criteria (including those having the highest regulatory rating). All other banking organizations are generally required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The Board's guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Board will continue to consider a "tangible tier 1 leverage ratio" (i.e., after deducting all intangibles) in evaluating proposals for expansion or new activities. The Board has not advised Susquehanna of any specific minimum leverage ratio applicable to it. At December 31, 1999, Susquehanna's leverage ratio was 9.1%. Susquehanna's subsidiary depository institutions are all subject to similar capital standards promulgated by their respective federal regulatory agencies. No such agency has advised any of Susquehanna's subsidiary institutions of any specific minimum leverage ratios applicable to it. FDICIA Capital Categories. The Federal Deposit Insurance Corporation ------------------------- Improvement Act of 1991 ("FDICIA") requires the federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Well-capitalized institutions significantly exceed the required minimum level for each capital measure (currently, risk-based and leverage). Adequately capitalized institutions 7 include depository institutions that meet the required minimum level for each capital measure. Undercapitalized institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. Significantly undercapitalized characterizes depository institutions with capital levels significantly below the minimum requirements. Currently, all of Susquehanna's depository institution subsidiaries qualify as well-capitalized. Cross Guarantees. Susquehanna's subsidiary commercial and federal savings ---------------- bank subsidiaries are also subject to cross-guaranty liability under federal law. This means that if one FDIC-insured depository institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess "commonly controlled" depository institutions for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed subsidiary institution and on Susquehanna as the common parent. While the FDIC's cross-guaranty claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates. Source of Strength Doctrine. Under Board policy, a bank holding company is --------------------------- expected to serve as a source of financial strength to each of its subsidiary banks and to stand prepared to commit resources to support each of them. Consistent with this policy, the Board has stated that, as a matter of prudent banking, a bank holding company should generally not maintain a given rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. Interstate Banking and Branching. Under the Pennsylvania Banking Code of -------------------------------- 1965, there is no limit on the number of banks that may be owned or controlled by a Pennsylvania-based bank holding company and the Pennsylvania bank subsidiaries may branch freely throughout the Commonwealth and, with Department of Banking approval, abroad. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies. The same Act generally permits the federal banking agencies to approve merger transactions resulting in the creation of branches by banks outside their home states and permits the OCC to authorize the creation by national banks of branches outside their home states if the host state into which they propose to branch has enacted authorizing legislation. Of the middle-Atlantic states, Pennsylvania, New Jersey, Ohio and West Virginia have enacted legislation authorizing such "de novo" branching by banks located in states offering reciprocal treatment to their institutions. Maryland has as well, but without the requirement of reciprocity. Delaware and New York do not allow de novo branching by sister-state banks and require that they enter the state through mergers of established institutions. Qualifying federal savings associations are also generally permitted to establish interstate branches. Liberalizing the branching laws in recent years has had the effect of increasing competition within the markets in which Susquehanna now operates. Regulation of Nonbank Subsidiaries. Susquehanna has four direct non-bank ---------------------------------- subsidiaries, all wholly-owned: Susque-Bancshares Life Insurance Company ("SBLIC"), a reinsurance company, Susque-Bancshares Leasing Co., Inc. ("SBLC"), a leasing company, Hann, a consumer automobile financing and leasing company, and VFAM, an investment advisory firm. SBLIC is organized under Arizona law to operate as a credit life, health and accident reinsurer to the extent permitted by Pennsylvania law. SBLIC is regulated by the Arizona Department of Insurance and is subject to periodic review by that Department. SBLC is organized under the laws of the Commonwealth of Pennsylvania and owns a single leasing company subsidiary with commercial finance powers. Hann is organized under New Jersey law and is also authorized to do business in Pennsylvania, New York and Connecticut. It is regulated by Connecticut as a motor vehicle leasing company, by Delaware as a finance or small loan agency, and by New Jersey and Pennsylvania as a sales finance company. VFAM is organized under the laws of Pennsylvania. It is registered with the Securities and Exchange Commission (the "SEC") as an investment advisor under the Investment Advisers Act of 1940, and is licensed under the state securities laws of 17 states. VFAM is also a registered broker-dealer, is a member of the National Association of Securities Dealers (the "NASD") and is registered in Canada as an International Advisor. 8 Privacy. The new GLB Act has provisions intended to increase the level of ------- privacy protection afforded to customers of financial institutions, including the securities and insurance affiliates of such institutions, partly in recognition of the increased cross-marketing opportunities created by the Act's elimination of many of the boundaries previously separating various segments of the financial services industry. Among other things, these provisions will require institutions to have in place administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information, to protect against anticipated threats or hazards to the security or integrity of such records and to protect against unauthorized access to or use of such records that could result in substantial harm or inconvenience to a customer. The Act will also require institutions to furnish consumers at the outset of the relationship and annually thereafter written disclosures concerning the institution's privacy policies. Although these provisions of the GLB Act will result in important operational modifications within all affected financial institutions, Susquehanna included, they are not expected to have a material effect on the operating results of Susquehanna and its subsidiaries. Environmental Impact Statement. Compliance by Susquehanna and its ------------------------------ subsidiaries with federal, state and local environmental protection laws during 1999 had no material effect upon capital expenditures or earnings or upon the competitive position of Susquehanna and its subsidiaries and is also not expected to materially affect such expenditures, earnings or competition during 2000. Pending Legislation. From time to time, legislation is proposed for ------------------- enactment before the United States Congress and before the Pennsylvania General Assembly which could result in various changes in the laws and regulations applicable to Susquehanna and its subsidiaries. It is not possible at this time to predict if or when any such legislation might become law or the extent to which it might affect the business or competitive status of Susquehanna and its subsidiaries. National Monetary Policy. In addition to being affected by general economic ------------------------ conditions, the earnings and growth of Susquehanna and its subsidiaries are affected by the policies of regulatory authorities, including the OCC, the Board, the FDIC, the OTS, the SEC, the NASD and state agencies. An important function of the Board is to regulate the money supply and credit conditions. Among the instruments used by the Board to implement these objectives are open market operations in U.S. Government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use may also affect interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of Susquehanna and its subsidiaries cannot be predicted. Competition Bank and financial holding companies and their subsidiaries compete with many institutions for deposits, loans, trust services and other banking-related and financial services. Susquehanna and its subsidiaries are subject to competition from less heavily regulated entities such as brokerage firms, money market funds, consumer finance and credit card companies and other financial services companies. The recently enacted GLB Act has liberalized many of the regulatory restrictions previously imposed on Susquehanna and its subsidiaries. Further legislative proposals are pending or may be introduced which could further effect the financial services industry. It is not possible to assess whether any of such proposals will be enacted, and if enacted, what effect such a proposal would have on the competitive positions of Susquehanna in its market place. As a result of state and federal legislation enacted over the past 20 years, consolidation in the industry has continued at a rapid pace. Further, as a result of relaxation of laws and regulations pertaining to branch banking in the state, and the opportunity to engage in interstate banking, the consolidation within the banking industry has had a significant competitive effect on Susquehanna and its markets. At present, Susquehanna and its subsidiary 9 depository institutions compete with numerous super-regional institutions with significantly greater resources and assets which conduct banking business throughout the region. Business Trends Current business trends include an increasing interest rate environment, a relatively strong and diverse local economy and continuing consumer confidence. While conditions are presently stable, a variety of factors (e.g., any substantial rise in the inflation or unemployment rates), may effect such stability, both in Susquehanna's markets as well as national markets. Susquehanna will continue its emphasis on control of funding costs and lending rates to effectively maintain profitability. In addition, Susquehanna will seek relationships which can generate fee income which is not directly tied to lending relationships. Susquehanna anticipates that this approach will help dampen its earnings fluctuations which are driven by movement in interest rates, business and consumer loan cycles, and local economic factors. Executive Officers The executive officers of Susquehanna, their ages and their positions with Susquehanna, is set forth in the following table:
Name Age Title - ---- -- ----- Robert S. Bolinger(1)(2) 63 Chairman of the Board and Chief Executive Officer William J. Reuter(3) 50 President Gregory A. Duncan(4) 44 Executive Vice President Drew K. Hostetter(5) 45 Senior Vice President, Treasurer and Chief Financial Officer William T. Belden(6) 50 Vice President Frederick W. Bisbee(7) 61 Vice President Richard M. Cloney(1) (8) 58 Vice President Charles L. Luppert(9) 58 Vice President Peter C. Zimmerman(10) 53 Vice President
(1) Robert S. Bolinger and Richard M. Cloney are also principal executive officers of Farmers First Bank and have been employed by that subsidiary bank in substantially equivalent positions for more than the past five years. (2) Mr. Bolinger has also served as a principal executive officer of Susquehanna South since its inception in 1994, and has also been a principal executive officer of Susquehanna East since its inception in 1997. (3) William J. Reuter was appointed Senior Vice President of Susquehanna on January 21, 1998 and promoted to President of Susquehanna on January 19, 2000. He is also the principal executive officer of Farmers & Merchants Bank and Trust and has been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. In 1996 Mr. Reuter was named an executive officer of Susquehanna South, and in 1997, its wholly-owned subsidiary, Susquehanna Bank. (4) Gregory A. Duncan was also the principal executive officer of Citizens National Bank of Southern Pennsylvania until September 1, 1999, and had been employed by that subsidiary bank in a substantially equivalent position since 1992. He was appointed Senior Vice President - Administration, of Susquehanna on January 21, 1998 and promoted to his current position on January 19, 2000. He was also appointed President of SBLIC on June 14, 1999 and Secretary of SBLC on July 15, 1998. (5) Drew K. Hostetter was appointed Assistant Treasurer of Susquehanna in 1995, was promoted to Treasurer in 1996 and promoted to Vice President, Treasurer and Chief Financial Officer in 1998. He was promoted to his current position on January 19, 2000. Mr. Hostetter was also appointed Treasurer and Assistant Secretary of Susquebanc Lease Co. on September 17, 1998 and Assistant Treasurer of Susquehanna East on April 18, 1997. 10 Prior to joining Susquehanna, Mr. Hostetter served as Senior Vice President and Corporate Controller of MNC Financial, Baltimore, Maryland, from 1990 to 1994. (6) William T. Belden is also a principal executive officer of Farmers First Bank, having been appointed as President and Chief Operating Officer in 1995 and promoted to President and Chief Executive Officer on March 22, 1999. (7) Frederick W. Bisbee is also the President Emeritus of First National Trust Bank, having been appointed to that position on January 1, 2000. Prior to that, he served as the principal executive officer of that subsidiary bank for more than the past five years. He has also been a Vice President of SBLIC since 1992. (8) Mr. Cloney is also a Vice President of SBLIC, having been appointed to that position in 1984, the President of SBLC, having been appointed to that position in 1986, and the President and Chief Executive Officer of Susquebanc Lease Co., a Susquehanna subsidiary, having been appointed to that position in 1988. (9) Charles W. Luppert is also the principal executive officer of Williamsport National Bank and has been employed by that subsidiary bank in a substantially equivalent position for more than the past five years. (10) Mr. Zimmerman is also an Executive Vice President of Susquehanna East, having been appointed to that position on April 1, 1998, and the Vice Chairman of Equity Bank, National Association, a Susquehanna subsidiary, having been appointed to that position on April 22, 1998. He was also appointed President and Chief Executive Officer of Susquehanna Trust & Investment Company, also a Susquehanna subsidiary, in May of 1999. Prior to joining Susquehanna, Mr. Zimmerman was the President and Chief Operating Officer of Financial Trust Corp. from 1995 to 1997 and the President and Chief Executive Officer of Financial Trust Company in 1997. There are no family relationships among the executive officers of Susquehanna nor are there any arrangements or understandings between any of them and any other person pursuant to which any of them was selected an officer of Susquehanna. Item 2. Properties - ------- ---------- Susquehanna reimburses its subsidiaries for space and services utilized. It also leases office space located at Topflight Airpark, Showalter Road, Hagerstown, Maryland for its new loan servicing center, and office space located at 701 South Broad Street, Lititz, Pennsylvania, for its Audit, Human Resources, Loan Review, Marketing and Sales Support departments. Susquehanna's subsidiary depository institutions operate 120 full-service branches, 20 limited-service branches and 38 free-standing automated teller machines. The depository institutions own 80 of the branches and lease the remaining 60. Ten additional locations are owned or leased by subsidiary banks to facilitate operations and expansion. Management of Susquehanna believes that the properties currently owned and leased by its subsidiaries are adequate for present levels of operation. As of December 31, 1999, the offices (including executive offices) of Susquehanna's depository institution subsidiaries, were as follows:
Executive Office Location of Offices Subsidiary Location of Executive Office Owned/Leased (including executive office) - ---------- ---------------------------- ------------ ---------------------------- Farmers First Bank 9 East Main Street Owned 29 full-service and 11 Lititz, Pennsylvania limited-service banking offices in Lancaster and York Counties, Pennsylvania Citizens National Bank of 35 North Carlisle Street Owned 7 full-service banking offices in
11
Executive Office Location of Offices Subsidiary Location of Executive Office Owned/Leased (including executive office) - ---------- ---------------------------- ------------ ---------------------------- Southern Pennsylvania Greencastle, Pennsylvania Franklin County, Pennsylvania First National Trust Bank 400 Market Street Owned 11 full-service and 1 Sunbury, Pennsylvania limited-service banking offices in Northumberland, Snyder, Columbia and Union Counties, Pennsylvania Williamsport National Bank 329 Pine Street Owned 6 full-service and 1 limited Williamsport, Pennsylvania service banking offices in Lycoming County, Pennsylvania Farmers & Merchants Bank and 59 West Washington Street Owned 22 full-service and 6 limited Trust Hagerstown, Maryland service banking offices in Washington, Allegany and Garrett Counties, Maryland Susquehanna Bank 100 West Road Leased 21 full-service banking offices Towson, Maryland located in Baltimore City and Baltimore, Harford, Anne Arundel, Carroll, Worcester and Wicomico Counties, Maryland First American National Bank 140 East Main Street Owned 5 full-service banking offices of Pennsylvania Everett, Pennsylvania in Bedford and Blair Counties, Pennsylvania Equity Bank, National 8000 Sagemore Drive Leased 11 full-service and 1 Association Suite 8101 limited-service banking offices Marlton, New Jersey in Camden, Gloucester and Burlington Counties, New Jersey Founders' Bank 101 Bryn Mawr Avenue Leased 3 full-service banking offices Bryn Mawr, Pennsylvania in Montgomery, Chester and Delaware Counties, Pennsylvania First Capitol Bank 2951 Whiteford Road Leased 5 full-service banking offices York, Pennsylvania in York County, Pennsylvania
The executive offices of Hann, a non-depository institution subsidiary of Susquehanna that was acquired on February 1, 2000, are located at One Centre Drive, Jamesburg, New Jersey. Hann leases both this facility and a second facility located at 1051 North Black Horse Pike, Williamstown, New Jersey. The executive offices of VFAM, another non-depository institution subsidiary of Susquehanna that was acquired on March 3, 2000, are located at 120 South Warner Road, King of Prussia, Pennsylvania. VFAM leases this facility. 12 Item 3. Legal Proceedings. - ------ ----------------- There are no material proceedings to which Susquehanna or any of its subsidiaries are a party or by which they, or any of them, are threatened. All legal proceedings presently pending or threatened against Susquehanna and its subsidiaries involve routine litigation incidental to the business of Susquehanna or the subsidiary involved and are not material in respect to the amount in controversy. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1999. 13 PART II ------- Item 5. Market for Susquehanna Capital Stock and Related Shareholder Matters. - ------ -------------------------------------------------------------------- Susquehanna common stock is listed for quotation on the National Association of Securities Dealers National Market System. Set forth below are the quarterly high and low bid prices of Susquehanna's common stock as reported on the Nasdaq National Market System for the years 1998 and 1999, and cash dividends paid. The table represents prices between dealers and does not include retail markups, markdowns or commissions and does not necessarily represent actual transactions. - -------------------------------------------------------------------------------- Price Range Per Share* ---------------------- - -------------------------------------------------------------------------------- Cash ---- Dividends --------- Year Period Paid Low Bid High Bid ---- ------ ---- ------- -------- 1998 1st Quarter $.14 $21.67 $26.00 Common 2nd Quarter .14 22.67 26.08 Common 3rd Quarter .14 17.88 26.75 Common 4th Quarter .15 15.50 22.75 Common 1999 1st Quarter $.15 $16.50 $21.25 Common 2nd Quarter .15 17.00 19.38 Common 3rd Quarter .15 15.75 18.50 Common 4th Quarter .17 14.88 18.25 Common - ----------- ------------------- -------------- ------------- ---------------- *Prices and dividends have been adjusted to reflect Susquehanna's three-for-two stock split paid on July 1, 1998 to shareholders of record on June 15, 1998. As of February 29, 2000, there were 6,700 record holders of Susquehanna common stock. Dividends paid by Susquehanna are provided from dividends paid to it by its subsidiaries. Susquehanna's ability to pay dividends is largely dependent upon the receipt of dividends from its bank and savings bank subsidiaries. Both federal and state laws impose restrictions on the ability of these subsidiaries to pay dividends. These include the Pennsylvania Banking Code in the case of Farmers First Bank, the Financial Institutions Article of the Annotated Code of Maryland in the case of Farmers & Merchants Bank and Trust, the National Bank Act in the case of First National Trust Bank, Williamsport National Bank, Citizens National Bank of Southern Pennsylvania, Equity Bank, National Association and First American National Bank of Pennsylvania, the Federal Reserve Act in the case of Founders' Bank and First Capitol Bank, and the Home Owners Loan Act in the case of Susquehanna Bank and the applicable regulations under such laws. The net capital rules of the SEC under the Securities Exchange Act of 1934 also limit the ability of VFAM to pay dividends to Susquehanna. In addition to the specific restrictions, summarized below, the banking, thrift and securities regulatory agencies also have broad authority to prohibit otherwise permitted dividends proposed to be made by an institution regulated by them if the agency determines that their distribution would constitute an unsafe or unsound practice. 14 The Board and the FDIC have issued policy statements which provide that, as a general matter, insured banks and bank holding companies may pay dividends only out of current operating earnings. For national banks and state-chartered banks which are members of the Federal Reserve System (like Founders' Bank and First Capitol Bank), the approval of the applicable federal regulatory agency is required for the payment of dividends by the bank subsidiary in any calendar year if the total of all dividends declared by the bank in that calendar year exceeds the current year's retained net income combined with the retained net income for the two preceding years. "Retained net income" for any period means the net income for that period less any common or preferred stock dividends declared in that period. Moreover, no dividends may be paid by such bank in excess of its undivided profits account. Dividends payable by a Pennsylvania state-chartered bank are restricted by the requirement that the bank set aside to a surplus fund each year at least 10% of its net earnings until the bank's surplus equals the amount of its capital (a requirement presently satisfied in the case of all of the Pennsylvania state bank subsidiaries of Susquehanna). Furthermore, a Pennsylvania bank may not pay a dividend if the payment would result in a reduction of the surplus available to the bank. A Maryland state-chartered bank may pay dividends out of undivided profits or, with the approval of the Maryland Bank Commissioner, from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, cash dividends may not be paid in excess of 90% of net earnings. As indicated above, Susquehanna looks to distributions from Susquehanna Bank (along with the other Susquehanna operating subsidiaries) as the source of funds to distribute as dividends. However, federal regulations impose restrictions on dividend payments by savings institutions which converted from the mutual to stock form of ownership and were federally insured at the time of the conversion, as was the case with the two predecessors of Susquehanna Bank, the former Atlantic Federal Savings Bank ("Atlantic Federal") and Reisterstown Federal Savings Bank ("Reisterstown Federal"). Upon their conversion to stock form, mutual savings institutions are required by regulation to establish a "liquidation account" by restricting a portion of their net capital for the benefit of eligible savings account holders who continue to maintain their savings accounts with the institution after the conversion. In the event of a subsequent complete liquidation of the institution (and only in such event), each savings account holder who continues to maintain a savings account would be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to the institution's capital stock. This account is proportionally reduced for any decreases in the eligible holder's savings accounts. Susquehanna Bank has succeeded to the liquidation account obligations of Atlantic Federal and Reisterstown Federal. Under federal regulations, savings institutions such as Atlantic Federal and Reisterstown Federal which have converted from mutual form may not declare or pay a cash dividend on common stock if the dividend would cause the institution's capital to be reduced below the amount required for the maintenance of the liquidation account or for regulatory capital requirements generally. Savings associations such as Susquehanna Bank are subject to federal regulatory limitations on the amount of cash dividends they may pay, depending on the level of their regulatory capital in relation to regulatory capital requirements. At present, Susquehanna Bank may, after notice to but without approval of the OTS, make capital distributions during a calendar year of up to 100% of its year to date net income plus such additional amounts as would not reduce by more than one-half its surplus capital at the beginning of the calendar year, or, if greater, 75% of its net income for the most recent four-quarter period. However, the OTS has overriding authority to prohibit an otherwise permissible cash dividend proposed to be made by a federal savings bank if the OTS determines that the distribution would result in an unsafe or unsound practice. The capital requirements applicable to federal savings banks require them to maintain tangible capital of at least 1.5% of adjusted total assets, a leverage ratio or core capital of at least 3% of adjusted total assets, and overall risk-based capital of at least 8% of total risk-weighted assets. For these purposes, tangible capital consists of 15 common stockholder's equity net of certain intangible assets phased out over several years, and core capital consists of tangible capital augmented by "supervisory" goodwill and certain other items. The risk-based capital requirement involves the risk weighting of various classes of assets (including the asset equivalent of certain commitments and obligations) and is comparable to the risk-based capital regimen applicable to banks. The capital rules applicable to federal savings banks include provisions intended to measure the sensitivity of the institution's portfolio market values to hypothetical shifts in market interest rates. If interest rate risk is found to exist at levels above certain thresholds prescribed by these rules, an additional level of capital is required. Susquehanna Bank has not to date been required to maintain additional capital as a result of the interest rate risk component of the risk-based capital rule. Within the regulatory restrictions described above, each of the commercial and federal savings bank subsidiaries of Susquehanna presently has the ability to pay dividends and at December 31, 1999, $56.8 million in the aggregate was available for dividend distributions during calendar 2000 to Susquehanna from its commercial and savings bank subsidiaries without regulatory approval. Susquehanna presently expects that cash dividends will continue to be paid by its subsidiaries in the future at levels comparable with those of prior years. 16 Item 6. Selected Financial Data. - ------ ----------------------- See Page 18. 17 Selected Financial Data
Dollars in thousands, except per share - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 299,770 $ 300,842 $ 282,011 $ 269,313 $ 222,475 Interest expense 138,848 142,713 126,852 120,959 97,563 Net interest income 160,922 158,129 155,159 148,354 124,912 Provision for loan and lease losses 7,200 5,333 4,731 4,989 5,323 Other income 39,979 31,188 24,651 22,900 17,775 Other expenses 131,882 118,064 112,763 117,099 94,424 Income before taxes 61,819 65,920 62,316 49,166 42,940 Net income 43,397 45,163 42,734 33,260 30,523 Cash dividends declared on common stock 22,918 20,132 18,371 16,226 13,156 Dividend payout ratio 52.8% 44.6% 43.0% 48.8% 43.1% Per Common Share Amounts* - ----------------------------------------------------------------------------------------------------------------------------------- Net income--basic $ 1.17 $ 1.22 $ 1.18 $ 0.92 $ 0.93 --diluted 1.17 1.21 1.17 0.92 0.93 Cash dividends declared on common stock 0.62 0.57 0.55 0.52 0.49 Financial Ratios - ----------------------------------------------------------------------------------------------------------------------------------- Return on average total assets 1.04% 1.13% 1.18% 0.96% 1.07% Return on average stockholders' equity 10.73 11.62 12.13 10.14 11.27 Net interest margin 4.27 4.36 4.72 4.72 4.85 Average stockholders' equity to average assets 9.66 9.70 9.74 9.46 9.48 Tangible Operating Results - ----------------------------------------------------------------------------------------------------------------------------------- Tangible net income $ 46,372 $ 47,415 $ 45,709 $ 36,077 $ 31,750 Tangible earnings per share 1.25 1.29 1.26 1.00 0.97 Return on tangible average shareholders' equity 12.48% 13.41% 15.46% 13.31% 12.93% Return on tangible average assets 1.12 1.19 1.26 1.04 1.11 Year-End Balances - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $4,310,606 $4,176,026 $3,762,469 $3,558,414 $3,034,182 Investment securities 912,048 951,744 723,745 729,234 766,073 Loans and leases, net of unearned income 2,995,152 2,847,185 2,714,779 2,483,371 1,967,061 Deposits 3,180,520 3,216,879 3,041,466 2,933,301 2,511,104 Total borrowings 674,921 513,177 294,758 229,574 158,676 Stockholders' equity 404,390 402,081 373,906 337,040 317,002 Selected Share Data* - ----------------------------------------------------------------------------------------------------------------------------------- Common shares outstanding (period end) 37,023 36,902 36,915 36,035 35,511 Average common shares outstanding--basic 36,960 36,868 36,296 35,989 32,645 --diluted 37,137 37,188 36,551 36,067 32,714 At December 31: Book value per share $ 10.92 $ 10.91 $ 10.14 $ 9.38 $ 8.95 Market price per common share 15.88 20.47 25.50 15.39 11.78 Common stockholders 6,719 6,661 6,237 5,693 5,759
* Amounts adjusted for the three-for-two stock splits in July 1997 and 1998. 18 Item 7. Management's Discussion and Analysis of Results of Operations - ------ ------------------------------------------------------------- and Financial Condition ----------------------- See Pages 20-34. 19 Management's Discussion and Analysis of Results of Operations and Financial Condition The following pages of this report present management's discussion and analysis of the consolidated financial condition and results of operations of Susquehanna Bancshares, Inc., including its subsidiaries: Farmers First Bank; Farmers & Merchants Bank and Trust; First American National Bank of Pennsylvania; First Capitol Bank; First National Trust Bank; Williamsport National Bank; Citizens National Bank of Southern Pennsylvania; Susquehanna Bancshares East, Inc. and its commercial bank subsidiaries Equity Bank, N.A., and Founders' Bank; Susquehanna Bancshares South, Inc. and its savings bank subsidiary Susquehanna Bank; Susque-Bancshares Leasing Co., Inc.; and Susque-Bancshares Life Insurance Company. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective," and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, Susquehanna's potential exposures to various types of market risks, such as interest rate risk and credit risk. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, future income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to, general economic conditions in market areas which Susquehanna has significant business activities or investments; the monetary and interest rate policies of the Board of Governors of the Federal Reserve System; inflation; deflation; unanticipated turbulence in interest rates; changes in laws, regulations and taxes; changes in competition and pricing environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of Susquehanna in managing the risks involved in the foregoing. RESULTS OF OPERATIONS Summary of 1999 Compared to 1998 Several significant transactions occurred which affected the comparability of Susquehanna's financial performance for the years ended December 31, 1999 and 1998. These transactions are described in the following paragraphs. On January 24, 2000, Susquehanna announced that it recognized $10.8 million of pre-tax special charges relating to the consolidation of Susquehanna's back office operations and a special bonus. The restructure charge of $7.4 million represents severance, employee and employment assistance services, consulting, and asset write-offs related to a reduction in the work force. This reduction in the work force should result in an estimated net annual savings of $6.0 million, of which approximately 50% will be realized in the year 2000 with 100% realization in years after 2000. The special bonus is awarded to Susquehanna employees (excluding executive and senior management) for extraordinary efforts in 1999. On January 4, 1999, Susquehanna acquired First Capitol Bank, a Pennsylvania commercial bank with $111 million in assets and $93 million in deposits at the acquisition date. Susquehanna issued 1,055,247 shares of its common stock to the shareholders of First Capitol based upon an exchange ratio of 2.028 shares of Susquehanna common stock for each outstanding share of First Capitol. The transaction was accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of First Capitol for all periods presented. On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc. ("Cardinal"), a Pennsylvania bank holding company with $138 million in assets and $114 million in deposits at the acquisition date. Susquehanna issued 2,027,296 shares of its common stock to the shareholders of Cardinal based upon an exchange ratio of 2.048 shares of Susquehanna common stock for each outstanding share of Cardinal. The transaction was accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Cardinal for all periods presented. Susquehanna's net income for the year ended December 31, 1999, decreased to $43.4 million, or 4% below 1998 net income of $45.2 million. Excluding the special charges noted above, Susquehanna's net income for 1999 would have been $51.0 million, or a 13% increase over annual 1998 earnings. Susquehanna's earnings performance was affected by significant growth in non-interest income resulting primarily from the purchase of certain insurance-related products, such as bank-owned life insurance ("BOLI"), and a one-time $3.3 million pre-tax gain on the sale of two branch offices. Non-interest income increased $8.8 million, or 28%, in 1999 over 1998. Diluted earnings per common share ("EPS"), were $1.17 in 1999 compared to $1.21 in 1998. Excluding the special 20 charges noted above, Susquehanna's diluted EPS would have been $1.37 for 1999, 13% higher than 1998 diluted EPS. Return on average assets ("ROA") and return on average equity ("ROE") decreased from 1.13% and 11.62%, respectively, in 1998 to 1.04% and 10.73%, respectively, in 1999. Excluding the special charges noted above, Susquehanna's ROA and ROE for 1999 would have been 1.22% and 12.60%, respectively. During 1995 and 1996, Susquehanna acquired two Maryland savings banks under the purchase method of accounting. These purchase transactions created an intangible asset, goodwill, of $34 million, which significantly affects Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash charge to earnings. Tangible net income is actual net income increased by the tax-effected amortization of those intangible assets that are deducted from equity in determining Tier 1 capital. For 1999, tangible net income, earnings per share, ROA and ROE were $46.4 million, $1.25, 1.12% and 12.48%, respectively, compared to actual net income, basic earnings TABLE 1--Distribution of Average Assets, Liabilities, and Stockholders' Equity Interest Rates and Interest Differential--Tax Equivalent Basis
- ---------------------------------------------------------------------------------------------------------------------------------- Dollars in thousands 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Average Rate Average Rate Average Rate Assets Balance Interest % Balance Interest % Balance Interest % - ---------------------------------------------------------------------------------------------------------------------------------- Short-term investments $ 49,673 $ 2,420 4.87 $ 80,924 $ 4,289 5.30 $ 75,408 $ 4,131 5.48 Investment securities: Taxable 811,255 50,394 6.21 766,342 48,578 6.34 594,467 37,604 6.33 Tax-advantaged 116,037 8,189 7.06 122,691 8,731 7.12 120,261 8,598 7.15 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 927,292 58,583 6.32 889,033 57,309 6.45 714,728 46,202 6.46 - ---------------------------------------------------------------------------------------------------------------------------------- Loans (net of unearned income): Taxable 2,848,901 238,740 8.38 2,708,037 238,946 8.82 2,546,473 231,755 9.10 Tax-advantaged 49,380 4,451 9.01 54,612 5,077 9.30 47,098 4,511 9.58 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 2,898,281 243,191 8.39 2,762,649 244,023 8.83 2,593,571 236,266 9.11 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 3,875,246 304,194 7.85 3,732,606 305,621 8.19 3,383,707 286,599 8.47 ================================================================================================================================== Allowance for loan losses (36,530) (36,206) (36,228) All other non-earning assets 348,450 308,171 271,012 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 4,187,166 $ 4,004,571 $ 3,618,491 ================================================================================================================================== Liabilities & Stockholders' Equity Deposits: Interest-bearing demand $ 966,906 $ 27,901 2.89 $ 900,160 $ 28,795 3.20 $ 805,808 $ 25,401 3.15 Savings 444,938 8,172 1.84 449,022 10,102 2.25 463,609 11,732 2.53 Time 1,337,536 69,940 5.23 1,361,984 75,807 5.57 1,342,077 73,717 5.49 Other borrowings 477,050 25,354 5.31 377,287 20,707 5.49 163,476 8,757 5.36 Long-term debt 95,000 7,481 7.87 91,370 7,302 7.99 90,000 7,245 8.05 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,321,430 $ 138,848 4.18 3,179,823 $142,713 4.49 2,864,970 $126,852 4.43 - ---------------------------------------------------------------------------------------------------------------------------------- Demand deposits 421,055 390,231 351,311 Other liabilities 40,132 45,889 49,942 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 3,782,617 3,615,943 3,266,223 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 404,549 388,628 352,268 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities & equity $ 4,187,166 $ 4,004,571 $ 3,618,491 ================================================================================================================================== Net interest income/yield on average earning assets $ 165,346 4.27 $ 162,908 4.36 $159,747 4.72 ==================================================================================================================================
For purposes of calculating loan yields, the average loan volume includes nonaccrual loans. For purposes of calculating yields on tax-advantaged interest income, the taxable equivalent is made to equate tax-advantaged interest on the same basis as taxable interest. The marginal tax rate is 35%. 21 per share, ROA and ROE of $43.4 million, $1.17, 1.04% and 10.73%, respectively. Excluding the special charges, tangible net income, EPS, ROA and ROE were $53.9 million, $1.46, 1.30% and 14.51%, respectively. Tangible net income, earnings per share, ROA and ROE for 1998 were $47.4 million, $1.29, 1.19% and 13.41%, respectively. Net Interest Income--Taxable Equivalent Basis The major source of operating revenues is net interest income, which rose to a level of $160.9 million in 1999, $2.8 million, or 2%, above the $158.1 million attained in 1998. The net interest margin, on a tax equivalent basis, declined to 4.27% during 1999 from 4.36% in 1998. Net interest income is the income which remains after deducting from total income generated by interest-earning assets the interest expense attributable to the acquisition of the funds required to support interest-earning assets. Income from interest-earning assets includes income from loans and leases, income from investment securities, and income from short-term investments. The amount of interest income is dependent upon many factors including the volume of interest-earning assets, the general level of interest rates, the dynamics of the change in interest rates, and levels of non-performing loans. The cost of funds varies with the amount of funds necessary to support interest-earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds, and the levels of non-interest-bearing demand deposits and equity capital. Table 1 presents average balances, taxable equivalent interest income and expenses and yields earned or paid on these assets and liabilities of Susquehanna. For purposes of calculating taxable equivalent interest income, tax-advantaged interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Net interest income as a percentage of net interest income and other income was 80%, 84%, and 86% for the twelve months ended December 31, 1999, 1998, and 1997, respectively. Table 2 illustrates that the decline in interest income in 1999 compared with 1998 was attributed to interest rates. The average growth in interest-earning assets of $143 million in 1999 over 1998 was due to a $136 million increase in loans and a $38 million increase in the investment portfolio. As shown in Table 1, the tax equivalent yield on interest-earning assets for 1999 declined to 7.85% from 8.19% in interest 1998. This decline was primarily due to lower reinvestment rates on loans and investments, and market forces impacting product pricing. Table 2 illustrates the decline in interest expense in 1999 compared with 1998
TABLE 2--Changes in Net Interest Income--Tax Equivalent Basis - ------------------------------------------------------------------------------------------------------------------------------------ 1999 Versus 1998 1998 Versus 1997 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Dollars in thousands Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income Short-term investments $ (1,546) $ (323) $ (1,869) $ 295 $ (137) $ 158 Investment securities: Taxable 2,805 (989) 1,816 10,895 79 10,974 Tax-advantaged (471) (71) (542) 173 (40) 133 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 2,334 (1,060) 1,274 11,068 39 11,107 Loans (net of unearned income): Taxable 12,112 (12,318) (206) 14,401 (7,210) 7,191 Tax-advantaged (475) (151) (626) 702 (136) 566 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 11,637 (12,469) (832) 15,103 (7,346) 7,757 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets $ 12,425 $(13,852) $ (1,427) $ 26,466 $ (7,444) $ 19,022 ==================================================================================================================================== Interest Expense Deposits: Interest-bearing demand $ 2,045 $ (2,939) $ (894) $ 3,013 $ 381 $ 3,394 Savings (91) (1,839) (1,930) (360) (1,270) (1,630) Time (1,342) (4,525) (5,867) 1,101 989 2,090 Other borrowings 5,320 (673) 4,647 11,730 220 11,950 Long-term debt 287 (108) 179 109 (52) 57 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 6,219 (10,084) (3,865) 15,593 268 15,861 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin $ 6,206 $ (3,768) $ 2,438 $ 10,873 $ (7,712) $ 3,161 ====================================================================================================================================
Changes which are due in part to volume and in part to rate are allocated in proportion to their relationship to the amounts of changes attributed directly to volume and rate. 22 1998 was primarily attributed to interest rates. Increased levels of demand deposits and a general reduction in all rates paid for interest-bearing deposits and borrowings were the primary reasons for the $3.9 million decrease in interest expense. The average funding costs declined to 4.18% in 1999 compared with 4.49% in 1998, as increased levels of lower cost interest-bearing demand deposits outpaced the declines in savings and time deposit balances. As a result of the preceding comments, Susquehanna's net interest margin, on a taxable equivalent basis, declined from 4.36% in 1998 to 4.27% in 1999. Variances do occur in the net interest margin as an exact repricing of assets and liabilities is not possible. A further explanation of the impact of asset and liability repricing is found in the Market Risks section of this discussion. Provision and Allowance for Loan and Lease Losses Susquehanna's provision for loan and lease losses is based upon management's quarterly loan portfolio review. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets its affiliates serve. Commercial and real estate loans and leases are rated by loan officers and, periodically, by loan review personnel. Consumer and residential real estate loans are generally reviewed in the aggregate as they are of relative small dollar size and homogeneous in nature. In addition to economic conditions, loan portfolio diversification, delinquency, and historic loss experience, consideration is also given to examinations performed by the regulatory authorities. To determine the allowance and corresponding provision, the amount required for specific allocation is first determined. For all types of commercial loans and leases and construction loans, this amount is based upon specific borrower data determined by reviewing individual non-performing, delinquent, or potentially troubled credits. In addition, a general allocation is also determined using the same criteria applied to the total commercial portfolio. Consumer and residential real estate allowances, which may include specific allocations, generally are based upon recent charge-off and delinquency history, other known trends, and expected losses over the remaining lives of these loans, as well as the condition of local, regional, and national economies. The unallocated portion of the allowance is the amount which, when added to these allocated amounts, brings the total to the amount deemed adequate by management at that time. This unallocated portion is available to absorb losses sustained anywhere within the loan portfolio. Table 10 presents this allocation. The loan and lease portfolio represents loans and leases made primarily within Susquehanna's market area which includes central and southeastern Pennsylvania, Maryland, southern New Jersey, and to a lesser extent, southwestern Pennsylvania, Delaware, West Virginia, northern Virginia, and the southern tier of New York state. Determining the level of the allowance for possible loan and lease losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information which is often subjective, and changing rapidly. The review of the loan portfolio is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. In management's opinion, the allowance for loan and lease losses is adequate at December 31, 1999. As illustrated in Table 3, the provision for loan and lease losses was $7.2 million for 1999 compared to $5.3 million in 1998. This increase was due to a growing loan portfolio and increased charge-offs. Net charge-offs, as seen in Table 3, were $6.1 million in 1999 compared with $5.7 million in 1998. As a result, the allowance for loan and lease losses at December 31, 1999, was 1.26% of period-end loans and leases, or $37.2 million compared with 1.27% or $36.2 million at December 31, 1998. The allowance for loan and lease losses as a percentage of non-performing loans decreased from 167% at December 31, 1998 to 164% at December 31, 1999. Should the economic climate no longer continue to improve or begin to deteriorate, borrowers may experience difficulty, and the level of non-performing loans and assets, charge-offs, and delinquencies could rise and require further increases in the provision. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan and lease losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination. It is the policy of Susquehanna not to renegotiate the terms of a loan simply because of a delinquency status. Rather, a loan is transferred to non-accrual status if it is not well secured and in the process of collection, and is delinquent in payment of either principal or interest beyond 90 days. Interest income received on non-performing loans in 1999 and 1998 was $0.5 million and $0.9 million, respectively. Interest income which would have been recorded on these loans under the original terms was $1.9 million and $2.3 million for 1999 and 1998, respectively. At December 31, 1999, Susquehanna had no outstanding commitments to advance additional funds with respect to these non-performing loans. Table 3 is an analysis of the provision levels as well as the activity in the allowance for loan and lease losses for the past five years. Table 4 reflects the five-year history of non-performing assets and loans contractually past due 90 days and still accruing. Total non-performing assets at December 31, 1999 and 1998, of $27.5 and $26.4 million, respectively, includes $4.7 million in other real estate acquired through foreclosure. Non-performing assets as a percentage of period-end loans and other real estate owned was 0.93% at December 31, 1999, unchanged from Decem- 23 ber 31, 1998 Real estate acquired through foreclosure is carried at the lower of the recorded amount of the loan for which the foreclosed property served as collateral or the fair market value of the property as determined by a current appraisal less estimated costs to sell (fair value). Prior to foreclosure,
TABLE 3--Provision and Allowance for Loan and Lease Losses - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses, January 1 $ 36,158 $ 36,481 $ 35,704 $ 31,564 $ 27,798 Allowance acquired in business combination 0 0 1,460 4,229 3,323 Change in fiscal year 0 0 0 0 (8) Additions to provision for loan and lease losses charged to operations 7,200 5,333 4,731 4,989 5,323 Loans and leases charged off during the year: Commercial, financial, agricultural, and leases 3,128 2,039 1,612 1,944 2,145 Real estate--mortgage 2,050 1,657 1,355 2,124 1,683 Consumer 3,188 3,413 3,820 2,686 2,367 - ------------------------------------------------------------------------------------------------------------------------------------ Total charge-offs 8,366 7,109 6,787 6,754 6,195 - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans and leases previously charged-off: Commercial, financial, agricultural, and leases 550 428 413 601 320 Real estate--mortgage 812 182 71 100 200 Consumer 879 843 889 975 803 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 2,241 1,453 1,373 1,676 1,323 - ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs 6,125 5,656 5,414 5,078 4,872 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses, December 31 $ 37,233 $ 36,158 $ 36,481 $ 35,704 $ 31,564 ==================================================================================================================================== Average loans and leases outstanding $ 2,898,281 $ 2,762,649 $ 2,593,571 $ 2,395,371 $ 1,878,693 Period-end loans and leases 2,955,152 2,847,185 2,714,779 2,483,371 1,967,061 Net charge-offs as a percentage of average loans and leases 0.21% 0.20% 0.21% 0.21% 0.26% Allowance as a percentage of period-end loans and leases 1.26 1.27 1.34 1.44 1.60 ==================================================================================================================================== TABLE 4--Non-Performing Assets - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands - ------------------------------------------------------------------------------------------------------------------------------------ At December 31 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Loans contractually past due 90 days and still accruing $ 10,160 $ 10,529 $ 7,169 $ 9,059 $ 5,651 ==================================================================================================================================== Non-performing assets: Nonaccrual loans: Commercial, financial, agricultural, and leases $ 1,510 $ 1,659 $ 934 $ 2,299 $ 3,213 Real estate--mortgage 20,989 18,409 21,995 17,665 19,502 Consumer 271 343 622 477 574 Restructured loans -- 1,258 93 6,429 6,873 Other real estate owned 4,703 4,745 4,547 7,849 6,483 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-performing assets $ 27,473 $ 26,414 $ 28,191 $ 34,719 $ 36,645 ==================================================================================================================================== Total non-performing assets as a percentage of period-end loans and leases and other real estate owned 0.93% 0.93% 1.04% 1.39% 1.86% ==================================================================================================================================== Allowance for loan and lease losses as a percentage of non-performing loans 164% 167% 154% 133% 105% ====================================================================================================================================
24 the recorded amount of the loan is reduced, if necessary, to fair value by charging the allowance for loan losses. Subsequent to foreclosure, gains or losses on the sale of real estate acquired through foreclosure are recorded in operating income and any losses determined as a result of periodic valuations are charged to other operating expense. Loans with principal and/or interest delinquent 90 days or more which are still accruing interest were $10.2 million at December 31, 1999, down from the $10.5 million at December 31, 1998. Although the economy is stable, softness in certain areas of the economy may adversely affect certain borrowers and may cause additional loans to become past due beyond 89 days or be placed on nonaccrual status because of uncertainty of receiving full payment of either principal or interest on these loans. Potential problem loans consist of loans which are performing but for which potential credit problems have caused Susquehanna to place them on its internally monitored loan list. At December 31, 1999, such loans, not included in Table 4, amounted to $32.5 million. Depending upon the state of the economy and the impact thereon to these borrowers, as well as future events such as regulatory examination assessment, these loans and others not currently so identified could be classified as non-performing assets in the future. Other Income Non-interest income, recorded as other income, consists of: service charges on deposit accounts; commissions; fees received for credit cards, travelers' check sales, and money orders; fees for trust services; income generated from bank- owned life insurance and reinsurance activities; gains and losses on security transactions; net gains on sales of mortgages; net gains on sales of other real estate owned; and other miscellaneous income, such as safe deposit box rents and gains on the sale of branch offices. Other income as a percentage of net interest income and other income was 20%, 16%, and 14% for 1999, 1998, and 1997, respectively. Non-interest income increased $8.8 million or 28%, in 1999 over 1998. Service charges on deposit accounts were up $1.5 million or 17%. Gain on sale of mortgage loans decreased $1.5 million, as loans originated for sale were $95 million less than 1998. During the third quarter of 1999, Susquehanna sold two of its branch locations in Elkton, Md., and a pre-tax gain of $3.3 million was realized as a result of that sale. Merchant credit card fees increased $2.4 million over 1998 as Susquehanna's merchant program expanded over the prior year. Income on bank-owned life insurance increased $1.2 million in 1999 over 1998, as Susquehanna purchased an additional $50.0 million of insurance in the second quarter of 1999. Gains on the sale of investment securities were $0.9 million higher in 1999 compared with 1998. Other Expenses Non-interest expenses are categorized into six main groupings: employee-related expenses, which include salaries, TABLE 5--Analysis of Other Expenses - -------------------------------------------------------------------------------- Dollars in thousands - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Advertising, marketing, and public relations $ 3,789 $ 3,781 $ 3,444 Audits and examinations 723 933 945 Communications 2,689 2,559 2,065 Directors' fees 1,212 1,337 1,320 Legal and professional 4,678 5,597 2,492 Life Insurance Company related expenses 924 679 970 Other real estate 1,089 1,083 814 Outside services 3,692 3,192 3,219 PA shares/capital stock tax 2,407 2,295 2,155 Postage and delivery 3,317 3,030 2,728 Stationery and supplies 3,132 2,971 2,785 FDIC insurance 769 729 760 Credit card assessments 3,122 984 822 All other 12,106 8,958 8,445 - -------------------------------------------------------------------------------- Total $43,649 $38,128 $32,964 ================================================================================ fringe benefits, and employment taxes; occupancy expenses, which include depreciation, rents, maintenance, utilities, and insurance; equipment expenses, which include depreciation, rents, and maintenance; amortization of intangible assets; restructuring charges; and other expenses (detailed in Table 5) incurred in operating Susquehanna's business. Non-interest expense increased $13.8 million, or 12%, in 1999 over 1998, primarily due to a special $7.4 million pre-tax restructure charge relating to the consolidation of back office operations. Salaries and employee benefits, excluding bonuses, increased $2.1 million, or 4%, from 1998 to 1999. Susque-hanna's annual bonus program, based upon certain financial benchmarks, earned zero in 1999 and $3.6 million in 1998. However, due to extraordinary efforts by employees during 1999 related to mergers, systems conversions and Year 2000 computer preparations, Susquehanna's Board of Directors approved a special bonus for all Susquehanna employees excluding executive and senior management. This bonus, including related benefits, totals $3.4 million. Charges for occupancy and equipment remained stable with only a slight increase in 1999 over 1998. Amortization of intangible assets declined $1.0 million in 1999 from 1998 as certain intangibles have reached the end of their amortization period. The $7.4 million restructuring charge represents severance, employee and employment assistance services, consulting, and asset write-offs related to a reduction in the work force. This reduction in the work force should result in an annual, estimated net savings of $6.0 million of which approximately 50% will be realized in 2000 and 100% realized in years after 2000. All other expenses increased $5.5 million, (see Table 5), with increases in credit card assessments of $2.1 million, amortization of 25 capitalized data processing systems conversion costs of $2.2 million, and data processing and related communications charges of $0.6 million. Income Taxes Susquehanna's effective tax rate for 1999 was 29.80% compared to 31.49% in 1998. The effective rate for 1999 was reduced because of increased levels of tax-advantaged income. Since 1997, Susquehanna purchased $110 million of insurance-related products and recognized $4.9 million and $3.4 million in 1999 and 1998, respectively, of tax-advantaged income from the increase in cash surrender values and insurance proceeds. As tax-advantaged loans and securities continue to mature, and the opportunities for investment in additional tax-advantaged enterprises become less attractive due to certain provisions of the Tax Reform Act of 1986, effective tax rates may increase in the years ahead. Susquehanna recognizes deferred tax liabilities for taxable temporary differences (the difference between financial and tax bases), and deferred tax assets for deductible temporary differences. Management believes the deferred tax assets recognized at December 31, 1999, will be realized in future tax returns. While the ultimate realization of deferred tax assets is dependent on future taxable income, taxable income in prior carry-back years and future reversals of existing taxable temporary differences are sufficient to offset the future reversals of deductible temporary differences without implementing any tax strategies or assuming future taxable income. FINANCIAL CONDITION Investment Securities Susquehanna follows SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities." This accounting pronouncement requires the segregation of investment securities into three categories, each having a distinct accounting treatment. Securities identified as "held-to-maturity" continue to be carried at their amortized cost, and, except for limited circumstances, may not be sold prior to maturity. Securities identified as "available-for-sale" must be reported at their market or "fair" value and the difference between that value and their amortized cost recorded in the equity section, net of taxes. As a result, total equity of Susquehanna was negatively impacted by $19.6 million as the "unrealized gains or losses for available-for-sale securities net of taxes," changed from a positive $6.0 million at December 31, 1998, to a negative $13.6 million at December 31, 1999. Securities identified as "trading account securities" are marked-to-market with the change recorded in the income statement. Presently, Susquehanna does not engage in trading activity, but does engage in active portfolio management which requires the majority of its security portfolio to be identified as "available-for-sale." While SFAS 115 requires segregation into "held-to-maturity" and "available-for-sale" categories (see Table 6), it does not change Susquehanna's policy concerning the purchase of only high-quality securities. Strategies employed address liquidity, capital adequacy, and net interest margin considerations which then determine the assignment of purchases into these two categories. Table 7 illustrates the maturities of these security portfolios and the weighted average yields based upon amortized costs. Yields are shown on a tax equivalent basis assuming a 35% federal income tax rate. At December 31, 1999, Susquehanna held no securities of one issuer, other than U.S. Government obligations, where the aggregate book value exceeded ten percent of stockholders' equity. Loans Table 8 presents the loans outstanding, by type of loan, for the past five years. Loan growth for 1999 was 5%, or $148 million, over 1998. Loan growth in 1999 was realized in all major loan types, except construction loans. Consumer loans increased $50 million, leases increased $45 million, mortgages increased $27 million, and commercial loans grew by $26 million. As noted in Table 11, Susquehanna's loan portfolio contains no significant concentrations other than geographic locations and housing developments. Susquehanna's banking subsidiaries have historically reported a significant amount of loans secured by real estate, as depicted in Table 8. Many of these loans have real estate collateral taken as additional security not related to the acquisition of the real estate pledged. Open-end home equity loans amounted to $96 million at year end and an additional $186 million was lent against junior liens on residential properties. Senior liens on one- to four- family residential properties totaled $875 million, and much of the
TABLE 6--Carrying Value of Investment Securities - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Available- Held-to- Available- Held-to- Available- Held-to- Dollars in thousands for-Sale Maturity for-Sale Maturity for-Sale Maturity - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury $ 16,683 $ 0 $ 67,955 $ 500 $121,633 $ 750 U.S. Government agencies 338,990 0 215,966 55,810 268,078 0 State and municipal 69,599 32,070 71,990 0 34,824 75,882 Other securities 17,682 0 35,392 25 72,672 50 Mortgage-backed securities 399,428 1,020 466,534 3,502 112,741 6,420 Equity securities 36,576 0 34,070 0 26,011 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities $878,958 $ 33,090 $891,907 $ 59,837 $635,959 $ 83,102 ====================================================================================================================================
26
TABLE 7--Investment Securities - ------------------------------------------------------------------------------------------------------------------------------------ Within After 1 Year but After 5 Years but After Dollars in thousands 1 Year Within 5 Years Within 10 Years 10 Years Total - ------------------------------------------------------------------------------------------------------------------------------------ Available-for-Sale U.S. Treasury Fair value $ 13,425 $ 3,258 $ 16,683 Amortized cost 13,414 3,244 16,658 Yield 6.07% 5.92% 6.04% U.S. Government agencies Fair value $ 2,249 $328,277 $ 5,426 $ 3,038 $338,990 Amortized cost 2,253 335,181 5,567 3,040 346,041 Yield 5.45% 6.34% 7.45% 7.66% 6.36% Corporate debt securities Fair value $ 1,266 $ 14,448 $ 995 $ 973 $ 17,682 Amortized cost 1,264 14,590 980 961 17,795 Yield 6.78% 6.79% 7.05% 6.49% 6.79% Mortgage-backed securities Fair value $ 1,760 $ 3,511 $ 24,118 $370,039 $399,428 Amortized cost 1,769 3,539 24,525 384,484 414,317 Yield 6.38% 6.49% 6.59% 6.49% 6.50% State and municipal securities Fair value $ 2,943 $ 53,913 $ 7,383 $ 5,360 $ 69,599 Amortized cost 2,933 54,274 7,437 5,492 70,136 Yield 7.19% 6.58% 7.48% 7.45% 6.77% Equity securities Fair value $ 36,576 Amortized cost 34,588 Yield 7.20% Held-to-Maturity Mortgage-backed securities Fair value $ 1,011 $ 1,011 Amortized cost 1,020 1,020 Yield 6.49% 6.49% State and municipal securities Fair value $ 14,229 $ 10,888 $ 2,331 $ 5,002 $ 32,450 Amortized cost 14,192 10,780 2,168 4,930 32,070 Yield 6.77% 7.42% 10.18% 7.87% 7.40% Total Securities Fair value $ 35,872 $415,306 $ 40,253 $384,412 $912,419 Amortized cost 35,825 422,628 40,677 398,907 932,625 Yield 6.44% 6.30% 6.97% 6.29% 6.10%
$605 million in loans secured by non-farm, non-residential properties represented collateralization of operating lines, or term loans that finance equipment, inventory, or receivables. Loans secured by farmland totaled $39 million, while loans secured by multifamily residential properties totaled $49 million at December 31, 1999. Table 9 represents the maturity of commercial, financial, and agricultural loans as well as real estate construction loans. These loans with maturities after 2000 consist of $150 million with fixed rate pricing and $150 million with variable rate pricing. Deposits Susquehanna's deposit base is consumer-oriented, consisting of time deposits, primarily certificates of deposit of various terms, interest-bearing demand accounts, savings accounts, and demand deposits. The average amounts of deposits by type are summarized in Table 12. Susquehanna does not rely upon time deposits of $100,000 or more as a principal source of funds as they represent only 6% of total deposits. Table 13 presents a breakdown by maturity of time deposits of $100,000 or more as of December 31, 1999. Market Risks The types of market risk exposures generally faced by banking entities include interest rate risk, liquidity risk, equity market price risk, foreign currency risk, and com- 27
TABLE 8--Loan and Lease Portfolio - ------------------------------------------------------------------------------------------------------------------------------------ At December 31 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Percentage Percentage of Loans to of Loans to Dollars in thousands Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 327,670 10.9% $ 301,385 10.6% Real estate--construction 255,054 8.5 256,451 9.0 Real estate--mortgage 1,850,375 61.8 1,821,485 64.0 Consumer 395,566 13.2 346,180 12.2 Leases 166,487 5.6 121,684 4.2 - ------------------------------------------------------------------------------------------------------------------------------------ Total $2,995,152 100.0% $2,847,185 100.0% ==================================================================================================================================== TABLE 9--Loan Maturity and Interest Sensitivity - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands - ------------------------------------------------------------------------------------------------------------------------------------ At December 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Under One One to Five Over Five Maturity Year Years Years Total - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $141,654 $115,212 $ 70,804 $327,670 Real estate--construction 141,561 85,529 27,964 255,054 - ------------------------------------------------------------------------------------------------------------------------------------ $283,215 $200,741 $ 98,768 $582,724 ==================================================================================================================================== Rate sensitivity of loans with maturities greater than 1 year: Variable rate $149,957 Fixed rate 149,552 - ------------------------------------------------------------------------------------------------------------------------------------ $299,509 ==================================================================================================================================== TABLE 10--Allocation of Allowance for Loan and Lease Losses - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands - ------------------------------------------------------------------------------------------------------------------------------------ At December 31 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial, and agricultural $ 5,773 $ 5,212 $ 5,184 $ 4,700 $ 5,122 Real estate--construction 6,018 5,937 5,994 5,810 2,480 Real estate--mortgage 8,000 8,014 7,698 7,632 7,151 Consumer 6,981 5,500 5,225 5,020 3,918 Leases 1,881 1,375 1,125 1,097 602 Unused commitments 2,937 2,366 2,558 1,656 2,063 Unallocated 5,643 7,754 8,697 9,789 10,228 - ------------------------------------------------------------------------------------------------------------------------------------ Total $37,233 $36,158 $36,481 $35,704 $31,564 ====================================================================================================================================
modity price risk. Due to the nature of its operations, only interest rate risk and liquidity risk are significant to Susquehanna. Liquidity and interest rate risk are related but distinctly different from one another. The maintenance of adequate liquidity--the ability to meet the cash requirements of its customers and other financial commitments--is a fundamental aspect of Susquehanna's asset/liability management strategy. Susquehanna's policy of diversifying its funding sources--purchased funds, repurchase agreements, and deposit accounts--allows it to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At December 31, 1999, Susquehanna's subsidiary banks and savings bank have an unused line of credit available to them from the Federal Home Loan Bank for more than $600 million. However, liquidity is not entirely dependent on increasing Susquehanna's liability balances. Liquidity can also be generated from maturing or readily marketable assets. The carrying value of investment securities maturing within one year amounted to $36 million at December 31, 1999. 28
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Percentage Percentage Percentage of Loans to of Loans to of Loans to Amount Total Loans Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------------------------------------------------------------ $ 327,598 12.1% $ 272,442 11.0% $ 251,573 12.8% 231,120 8.5 230,212 9.3 190,895 9.7 1,761,763 64.9 1,629,559 65.6 1,232,352 62.6 329,876 12.2 296,613 11.9 269,450 13.7 64,422 2.3 54,545 2.2 22,791 1.2 - ------------------------------------------------------------------------------------------------------------------------------------ $2,714,779 100.0% $2,483,371 100.0% $1,967,061 100.0% ====================================================================================================================================
TABLE 11--Loan Concentrations Substantially all of Susquehanna's loans and leases are to enterprises and individuals in Pennsylvania, New Jersey, and Maryland. At December 31, 1999, Susquehanna's portfolio included the following concentrations:
- ------------------------------------------------------------------------------------------------------------------------------------ Total As a % of % Nonperforming Dollars in thousands Permanent Construction All Other Amount Total Loans in each category - ------------------------------------------------------------------------------------------------------------------------------------ Housing developments $ 70,260 $225,694 $13,283 $309,237 10.3 1.3 Office buildings and warehouses 133,003 14,138 1,867 149,008 5.0 0.0 Retailing 89,862 2,565 44,003 136,430 4.6 0.9 Agricultural 39,838 427 18,911 59,176 2.0 0.6 Manufacturing 29,779 0 24,621 54,400 1.8 8.4 Hotels/motels 34,328 2,559 10,926 47,813 1.6 0.0
These maturing investments represent 4% of total investment securities. Cash and due from banks amounted to $145 million and short-term investments amounted to $18 million, which represent additional sources of liquidity. Closely related to the management of liquidity is the management of interest rate risk. Interest rate risk focuses on maintaining stability in the net interest margin, an important factor in earnings growth. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. It is the objective of management to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors to maximize earnings in an environment of changing interest rates. However, there is a lag in maintaining the desired matching because the repricing of products does occur at varying time intervals. Susquehanna employs a variety of methods to monitor interest rate risk. By dividing the assets and liabilities into three groups--fixed rate, floating rate, and those which reprice only at management's discretion--strategies are developed which are designed to minimize exposure to interest rate fluctuations. Management also utilizes gap analysis to evaluate rate sensitivity at a given point in time. Table 14 illustrates Susquehanna's estimated interest rate sensitivity and periodic and cumulative gap positions as calculated at December 31, 1999 and 1998. These estimates include anticipated paydowns on mortgage-backed securities and certain assumptions regarding core deposits. An institution with more assets repricing than liabilities over a given time frame is considered asset sensitive, and one with more liabilities repricing than assets is consid- TABLE 12--Average Deposit Balances - -------------------------------------------------------------------------------- Dollars in thousands - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Demand deposits $ 421,055 $ 390,231 $ 351,311 Interest-bearing demand deposits 966,906 900,160 805,808 Savings deposits 444,938 449,022 463,609 Time deposits 1,337,536 1,361,984 1,342,077 - -------------------------------------------------------------------------------- Total $3,170,435 $3,101,397 $2,962,805 ================================================================================ TABLE 13--Deposit Maturity - -------------------------------------------------------------------------------- Maturity of time deposits of $100 or more at December 31, 1999 - -------------------------------------------------------------------------------- Dollars in thousands - -------------------------------------------------------------------------------- Three months or less $ 66,621 Over three months through six months 37,752 Over six months through twelve months 43,948 Over twelve months 41,705 - -------------------------------------------------------------------------------- Total $190,026 ================================================================================ 29
TABLE 14--Balance Sheet Gap Analysis - ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands 1-3 3-12 1-3 Over 3 At December 31, 1999 months months years years Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets Short-term investments $ 17,689 $ 17,689 Investments 41,067 $ 96,746 $ 273,186 $ 501,049 912,048 Loans and leases, net of unearned income 1,827,043 449,271 389,370 329,468 2,995,152 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,885,799 $ 546,017 $ 662,556 $ 830,517 $3,924,889 ==================================================================================================================================== Liabilities Interest-bearing demand $ 612,453 $ 178,411 $ 82,455 $ 78,584 $ 951,903 Savings 315,759 42,101 31,871 31,281 421,012 Time 286,086 480,556 214,629 206,254 1,187,525 Time in denominations of $100 or more 72,317 83,847 17,268 16,594 190,026 Total borrowings 314,832 149,250 210,839 674,921 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,601,447 $ 784,915 $ 495,473 $ 543,552 $3,425,387 ==================================================================================================================================== Interest Sensitivity Gap: Periodic $ 284,352 $ (238,898) $ 167,083 $ 286,965 Cumulative 45,454 212,537 499,502 Cumulative gap as a percentage of earning assets 7% 1% 5% 13% - ------------------------------------------------------------------------------------------------------------------------------------ 1-3 3-12 1-3 Over 3 At December 31, 1998 months months years years Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets Short-term investments $ 83,063 $ 83,063 Investments 67,423 $ 150,662 $ 228,949 $ 504,901 951,935 Loans and leases, net of unearned income 1,703,185 438,106 371,763 334,132 2,847,186 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,853,671 $ 588,768 $ 600,712 $ 839,033 $3,882,184 ==================================================================================================================================== Liabilities Interest-bearing demand $ 490,690 $ 104,776 $ 192,764 $ 209,488 $ 997,718 Savings 222,314 75,209 75,151 76,156 448,830 Time 579,240 581,047 4,744 4,741 1,169,772 Time in denominations of $100 or more 45,715 123,421 1,825 200 171,161 Total borrowings 141,448 11,810 17,891 342,028 513,177 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,479,407 $ 896,263 $ 292,375 $ 632,613 $3,300,658 ==================================================================================================================================== Interest Sensitivity Gap: Periodic $ 374,264 $ (307,495) $ 308,337 $ 206,420 Cumulative 66,769 375,106 581,526 Cumulative gap as a percentage of earning assets 10% 2% 10% 15%
ered liability sensitive. An asset sensitive institution will generally benefit from rising rates, and a liability sensitive institution will generally benefit from declining rates. Sus-quehanna currently has a positive gap position (asset-sensitive) at one year and, therefore, would be negatively affected by a decline in interest rates. See Table 16 for the estimated net interest income effect of Susquehanna's positive gap position. In addition to periodic gap reports comparing the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates, management also utilizes a quarterly report prepared for Susquehanna by independent third-party consultants based on information provided by Susquehanna which measures Susquehanna's exposure to interest rate risk. The model calculates the income effect and the present value of assets, liabilities, and equity at current interest rates, and at hypothetical higher and lower interest rates at one percent intervals. The income effect and present value of each major category of financial instrument is calculated by the model using estimated cash flows based on prepayments, early withdrawals, and weighted average contractual rates and 30
TABLE 15--Balance Sheet Shock Analysis - ------------------------------------------------------------------------------------------------------------------------------------ Base Dollars in thousands Present At December 31, 1999 -2% -1% Value 1% 2% - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 144,562 $ 144,562 $ 144,548 $ 144,534 $ 144,534 Short-term investments 17,691 17,689 17,689 17,689 17,687 Investment securities: Held-to-maturity 36,598 34,984 33,461 32,027 30,674 Available-for-sale 932,544 906,389 878,958 852,306 824,614 Loans net of unearned income 2,969,042 2,945,163 2,923,709 2,906,701 2,902,792 Other assets 275,980 275,980 275,980 275,980 275,980 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281 ==================================================================================================================================== Liabilities Deposits: Non-interest-bearing $ 415,513 $ 411,840 $ 408,410 $ 405,114 $ 403,865 Interest-bearing 2,787,660 2,761,592 2,736,328 2,712,028 2,693,073 Total borrowings 716,559 693,893 672,786 653,110 634,740 Other liabilities 70,447 61,282 50,776 40,413 30,242 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,990,179 3,928,607 3,868,300 3,810,665 3,761,920 Total economic equity 386,238 396,160 406,045 418,572 434,361 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity $ 4,376,417 $ 4,324,767 $ 4,274,345 $ 4,229,237 $ 4,196,281 ==================================================================================================================================== Economic equity ratio 9% 9% 9% 10% 10% Value at risk $ (19,807) $ (9,885) -- $ 12,527 $ 28,316 % Value at risk -5% -2% -- 3% 7% - ------------------------------------------------------------------------------------------------------------------------------------ Base Present At December 31, 1998 -2% -1% Value 1% 2% - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 117,450 $ 117,450 $ 117,439 $ 117,428 $ 117,428 Short-term investments 83,071 83,063 83,063 83,063 83,055 Investment securities: Held-to-maturity 66,500 63,687 61,020 58,512 56,145 Available-for-sale 942,778 919,441 892,811 867,068 841,676 Loans net of unearned income 2,939,204 2,918,314 2,894,817 2,871,542 2,849,045 Other assets 211,752 211,752 211,752 211,752 211,752 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101 ==================================================================================================================================== Liabilities Deposits: Non-interest-bearing $ 415,850 $ 410,333 $ 405,183 $ 400,274 $ 397,829 Interest-bearing 2,850,564 2,822,582 2,795,357 2,779,230 2,766,489 Total borrowings 570,331 546,138 523,610 502,606 482,990 Other liabilities 60,892 52,969 43,889 34,931 26,140 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,897,637 3,832,022 3,768,039 3,717,041 3,673,448 Total economic equity 463,118 481,685 492,863 492,324 485,653 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and equity $ 4,360,755 $ 4,313,707 $ 4,260,902 $ 4,209,365 $ 4,159,101 ==================================================================================================================================== Economic equity ratio 11% 11% 12% 12% 12% Value at risk $ (29,745) $ (11,178) -- $ (539) $ (7,210) % Value at risk -6% -2% -- 0% -1%
31 terms. For present value calculations, the model also considers discount rates for similar financial instruments. The resulting present value of longer-term fixed-rate financial instruments are more sensitive to change in a higher or lower market interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing date. A substantial portion of Susquehanna's loans and mortgage-backed securities are residential mortgage loans containing significant imbedded options which permit the borrower to prepay the principal balance of the loan prior to maturity ("prepayments") without penalty. A loan's propensity for prepayment is dependent upon a number of factors, including, the current interest rate, the interest rate on the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinanc-ing, availability of refinancing at attractive terms, as well as economic and other factors in specific geographic areas which affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease on fixed- and adjustable-rate loans depending on the current relative levels and expectations of future short- and long-term interest rates. Since a significant portion of Susquehanna's loans are variable rate loans, prepayments on such loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates, making fixed-rate loans more desirable. Investment securities, other than those with early call provisions, generally do not have significant imbedded options and repay pursuant to specific terms until maturity. While savings and checking deposits generally may be withdrawn upon the customer's request without prior notice, a continuing relationship with customers resulting in
TABLE 16--Net Interest Income Shock Analysis - ------------------------------------------------------------------------------------------------------------------------------------ Base Dollars in thousands Present At December 31, 1999 -2% -1% Value 1% 2% - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Short-term investments $ 982 $ 1,290 $ 1,597 $ 1,904 $ 2,212 Investments 56,098 57,054 57,786 58,482 59,045 Loans and leases 208,505 234,103 260,144 284,142 310,029 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 265,585 292,447 319,527 344,528 371,286 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest-bearing demand and savings 16,470 27,269 37,910 48,398 58,735 Time 64,589 69,607 74,599 79,584 85,059 Total borrowings 36,783 42,611 48,519 54,502 60,572 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 117,842 139,487 161,028 182,484 204,366 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 147,743 $ 152,960 $ 158,499 $ 162,044 $ 166,920 ==================================================================================================================================== Net interest income at risk $ (10,756) $ (5,539) -- $ 3,545 $ 8,421 % Net interest income at risk -7% -3% -- 2% 5% - ------------------------------------------------------------------------------------------------------------------------------------ Base Present At December 31, 1998 -2% -1% Value 1% 2% - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Short-term investments $ 1,954 $ 2,635 $ 3,291 $ 3,930 $ 4,554 Investments 59,642 61,352 62,571 63,758 64,913 Loans and leases 214,268 231,222 247,655 263,985 280,201 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 275,864 295,209 313,517 331,673 349,668 Interest expense: Interest-bearing demand and savings 26,492 34,797 42,049 49,136 56,946 Time 55,879 63,703 71,449 79,149 86,829 Total borrowings 23,197 24,339 25,481 26,616 27,758 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 105,568 122,839 138,979 154,901 171,533 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 170,296 $ 172,370 $ 174,538 $ 176,772 $ 178,135 ==================================================================================================================================== Net interest income at risk $ (4,242) $ (2,168) -- $ 2,234 $ 3,597 % Net interest income at risk -2% -1% -- 1% 2%
32 future deposits and withdrawals is generally predictable, resulting in a dependable and uninterruptible source of funds. Time deposits generally have early withdrawal penalties, while term FHLB borrowings and subordinated notes have prepayment penalties which discourage customer withdrawal of time deposits and prepayment of FHLB borrowings and subordinated notes prior to maturity. Susquehanna's loans and mortgage-backed securities are primarily indexed to the national interest indices. When such loans and mortgage-backed securities are funded by interest-bearing liabilities which are determined by other indices, primarily deposits and FHLB borrowings, a changing interest rate environment may result in different levels of changes in the different indices, resulting in disproportionate changes in the value of, and the net earnings generated from, Susquehanna's financial instruments. Each index is unique and is influenced by different external factors; therefore, the historical relationships in various indices may not be indicative of the actual change which may result in a changing interest rate environment. Tables 15 and 16 reflect the estimated income effect and present value of assets, liabilities, and equity calculated using certain assumptions determined by Susquehanna as of December 31, 1999 and 1998, at current interest rates and at hypothetical higher and lower interest rates of one and two percent. As noted in Table 15, the economic equity at risk is only five percent at an interest rate change of minus two percent, while Table 16 discloses that net interest income at risk is seven percent at an interest rate change of minus two percent. Capital Adequacy Risk-based capital ratios focus upon credit risk. Assets and certain off-balance sheet items are segmented into one of four broad-risk categories and weighted according to the relative percentage of credit risk assigned by the regulatory authorities. Off-balance sheet instruments are converted into a balance sheet credit equivalent before being assigned to one of the four risk-weighted categories. To supplement the risk-based capital ratios, the regulators issued a minimum leverage ratio guideline (Tier 1 capital as a percentage of average assets less excludable intangibles). Capital elements are segmented into two tiers. Tier 1 capital represents shareholders' equity reduced by excludable intangibles, while total capital represents Tier 1 capital plus certain allowable long-term debt, the portion of the allowance for loan losses equal to 1.25% of risk-adjusted assets, and 45% of the unrealized gain on equity securities. The maintenance of a strong capital base at both the parent company level as well as at each bank affiliate is an important aspect of Susquehanna's philosophy. Table 17 illustrates these capital ratios for each bank and savings bank subsidiary and Susquehanna on a consolidated basis. Susquehanna and each of its banking and savings bank subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered "well capitalized" under regulatory guidelines. Impact of the Year 2000 Issue The "Year 2000 Issue" dealt with computer programs having been written using two digits rather than four to define the applicable year (i.e., date- sensitive software or date-sensitive hardware recognizing a date using "00" as the Year 1900 rather than the Year 2000. Based on system assessments, Susquehanna determined that it was necessary to modify or replace portions of its software and hardware so that its computer systems would properly utilize dates beyond December 31, 1999. Susque-hanna has determined that as a result of its modifications to existing software and hardware and conversions to new TABLE 17--Capital Adequacy - -------------------------------------------------------------------------------- At December 31, 1999 - -------------------------------------------------------------------------------- Tier I Capital Total Capita Leverage Ratio (A) Ratio (B) Ratio (C) - -------------------------------------------------------------------------------- Required Ratio 4.00% 8.00% 4.00% Citizens National Bank of Southern Pennsylvania 12.23 13.25 8.14 Equity Bank, N.A. 10.78 12.03 7.57 Farmers First Bank 12.28 13.53 10.75 Farmers & Merchants Bank and Trust 11.08 11.74 7.76 First American National Bank of Pennsylvania 18.22 19.14 12.96 First Capitol Bank 10.96 12.21 8.74 First National Trust Bank 14.42 15.68 8.37 Founders' Bank 11.18 12.43 7.97 Susquehanna Bank 10.30 14.86 6.76 Williamsport National Bank 17.51 18.77 12.50 Total Susquehanna 12.70% 15.56% 9.11% ================================================================================ (A) Tier I capital divided by year-end risk-adjusted assets, as defined by the risk-based capital guidelines. (B) Total capital divided by year-end risk-adjusted assets. (C) Tier I capital divided by average total assets less disallowed intangible assets. 33 software and hardware, the Year 2000 Issue has been successfully mitigated. The total cost of the Year 2000 and systems conversion projects was approximately $12.0 million. Of the total project's cost, $7.8 million was attributable to the purchase of new software and hardware which was capitalized. The remaining $4.2 million was expensed as incurred during 1998 ($2.7 million) and 1999 ($1.5 million). Summary of 1998 Compared to 1997 Several significant transactions occurred which have affected the comparability of Susquehanna's financial performance for the years ended December 31, 1998 and 1997. These transactions are described in the following paragraphs. On February 28, 1997, Susquehanna completed the acquisition of ATCORP, Inc. ("AI"), a New Jersey bank holding company with $210 million in assets and $186 million in deposits at the acquisition date. Susquehanna issued one share (prior to Susquehanna's stock splits) of common stock to the shareholders of AI for each of the 771,750 outstanding common shares of AI. The transaction was accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of AI for all periods presented. Also on February 28, 1997, Susquehanna completed the acquisition of Farmers Banc Corp ("FBC"), a New Jersey bank holding company with $88 million in assets and $77 million of deposits at the acquisition date. Susquehanna issued 692,398 shares of common stock (prior to Susquehanna's stock splits) to the shareholders of FBC based on an exchange ratio of 2.281 shares (prior to Susquehanna's stock splits) of Susquehanna common stock for each outstanding share of FBC. The transaction was accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of FBC for all periods presented. On May 1, 1997, Susquehanna combined its three savings banks located in and around Baltimore, Md., into one savings bank named Susquehanna Bank. As a result of this combination, there was a reduction in the work force of Susquehanna Bank with related severance packages. Consequently, Susquehanna recorded pre-tax severance of $1.3 million in 1997 related to these reductions. The annual pre-tax cost savings related to these reductions approximates $1.3 million. On July 31, 1997, Susquehanna acquired Founders' Bank ("Founders'"), Bryn Mawr, Pa., through an exchange of 560,353 shares (prior to the 1998 stock split) of Susque-hanna common stock to the shareholders of Founders' based on an exchange ratio of 0.566 shares of Susquehanna common stock for each share of Founders' outstanding capital stock. The transaction was accounted for under the pooling-of-interests method of accounting. At the time of the acquisition, Founders' reported total assets of $103 million. Results of operations for Founders' prior to the acquisition were not significant to Susquehanna's consolidated financial statements, and, accordingly, Susquehan-na's prior period consolidated financial statements have not been restated for Founders'. On December 16, 1998, Susquehanna acquired Cardinal Bancorp, Inc., a Pennsylvania bank holding company with $138 million in assets and $114 million in deposits at the acquisition date. Susquehanna issued 2,027,296 shares of its common stock to the shareholders of Cardinal, based upon an exchange ratio of 2.048 shares of Susquehanna common stock for each outstanding share of Cardinal. The transaction was accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Cardinal for all periods presented. Susquehanna's net income for the year ended December 31, 1998, increased to $45.2 million, or 6%, above 1997 net income of $42.7 million. Susquehanna's earnings performance was affected by significant growth in non-interest income resulting primarily from an increase in mortgage-banking activities and the purchase of certain insurance-related products, such as bank-owned life insurance ("BOLI"). Non-interest income increased $6.5 million, or 27%, in 1998 over 1997. Diluted earnings per common share were $1.21 in 1998 compared to $1.17 in 1997. ROA and ROE decreased from 1.18% and 12.13%, respectively, in 1997 to 1.13% and 11.62%, respectively, in 1998. During 1995 and 1996, Susquehanna acquired two Maryland savings banks under the purchase method of accounting. These purchase transactions created an intangible asset, goodwill, of $34 million, which significantly affects Susquehanna's earnings and financial ratios. Goodwill amortization is a non-cash charge to earnings. For 1998, tangible net income, earnings per share, ROA and ROE were $47.4 million, $1.29, 1.19% and 13.41%, respectively, compared to actual net income, basic earnings per share, ROA and ROE of $45.2 million, $1.22, 1.13% and 11.62%, respectively. Tangible net income, earnings per share, ROA and ROE for 1997 were $45.7 million, $1.26, 1.26% and 15.46%, respectively. Tangible net income is actual net income increased by the tax-effected amortization of those intangible assets which are deducted from equity in determining Tier 1 capital. 34 Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- The following consolidated financial statements of Susquehanna are submitted herewith:
Page Reference -------------- Consolidated Balance Sheets at December 31, 1999 and 1998................... 36 Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997.................................. 37 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997.................................. 38 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997.............. 39 Notes to Consolidated Financial Statements.................................. 40 Report of Independent Accountants........................................... 56 Summary of Quarterly Financial Data......................................... 57
35 Consolidated Balance Sheets SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Dollars in thousands - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 - -------------------------------------------------------------------------------- Assets Cash and due from banks $ 144,548 $ 113,210 Short-term investments 17,689 83,063 Investment securities available-for-sale 878,958 891,907 Investment securities held-to-maturity (Fair values of $33,461 and $61,019) 33,090 59,837 Loans and leases, net of unearned income 2,995,152 2,847,185 Less: Allowance for loan and lease losses 37,233 36,158 - -------------------------------------------------------------------------------- Net loans 2,957,919 2,811,027 - -------------------------------------------------------------------------------- Premises & equipment (net) 54,404 55,566 Accrued income receivable 23,763 22,774 Bank-owned life insurance 108,105 53,736 Other assets 92,130 84,906 - -------------------------------------------------------------------------------- Total assets $4,310,606 $4,176,026 ================================================================================ Liabilities Deposits: Noninterest-bearing $ 430,054 $ 433,133 Interest-bearing 2,750,466 2,783,746 - -------------------------------------------------------------------------------- Total deposits 3,180,520 3,216,879 - -------------------------------------------------------------------------------- Short-term borrowings 207,507 104,531 FHLB borrowings 372,414 313,636 Long-term debt 95,000 95,010 Other liabilities 50,775 43,889 - -------------------------------------------------------------------------------- Total liabilities 3,906,216 3,773,945 - -------------------------------------------------------------------------------- Commitments and contingencies (Note 17) Stockholders' Equity Preferred stock, $1.80 series A cumulative convertible (no par value) authorized 5,000,000 shares; issued and out- standing--none -- -- Common stock ($2.00 par value), authorized 100,000,000 shares; issued: 37,034,094 and 36,967,572 at December 31, 1999 and 1998, respectively 74,068 73,935 Surplus 62,589 61,882 Retained earnings 281,522 261,043 Accumulated other comprehensive income net of taxes of ($6,961) and $3,225 at December 31, 1999 and 1998, respectively (13,616) 6,004 Less: Treasury stock (11,641 and 65,050 common shares at cost at December 31, 1999 and 1998, respectively) 173 783 - -------------------------------------------------------------------------------- Total stockholders' equity 404,390 402,081 - -------------------------------------------------------------------------------- Total liabilities & stockholders' equity $4,310,606 $4,176,026 ================================================================================ The accompanying notes are an integral part of these financial statements. 36 Consolidated Statements of Income SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Dollars in thousands, except per share - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Interest Income Interest and fees on loans and leases $241,633 $242,300 $234,687 Interest on investment securities 55,717 54,253 43,193 Interest on short-term investments 2,420 4,289 4,131 - -------------------------------------------------------------------------------- Total interest income 299,770 300,842 282,011 - -------------------------------------------------------------------------------- Interest Expense Interest on deposits 106,013 114,704 110,850 Interest on short-term borrowings 8,574 5,477 4,778 Interest on long-term debt 24,261 22,532 11,224 - -------------------------------------------------------------------------------- Total interest expense 138,848 142,713 126,852 - -------------------------------------------------------------------------------- Net interest income 160,922 158,129 155,159 Provision for loan and lease losses 7,200 5,333 4,731 - -------------------------------------------------------------------------------- Net interest income after provision for loan and lease losses 153,722 152,796 150,428 - -------------------------------------------------------------------------------- Other Income Service charges on deposit accounts 10,054 8,570 7,186 Other service charges, commissions, and fees 4,419 4,184 3,742 Income from fiduciary-related activities 4,028 3,958 3,675 Gain on sale of mortgages 3,427 4,923 2,820 Income from bank-owned life insurance 4,528 3,374 1,122 Other income 12,545 6,104 5,840 Investment security gains 978 75 266 - -------------------------------------------------------------------------------- Total other income 39,979 31,188 24,651 - -------------------------------------------------------------------------------- Other Expenses Salaries and employee benefits 60,545 58,994 61,217 Net occupancy expense 9,010 8,958 8,281 Furniture and equipment expense 7,790 7,452 6,008 Amortization of intangible assets 3,476 4,532 4,293 Restructuring charge 7,412 0 0 Other expenses 43,649 38,128 32,964 - -------------------------------------------------------------------------------- Total other expenses 131,882 118,064 112,763 - -------------------------------------------------------------------------------- Income before income taxes 61,819 65,920 62,316 Provision for income taxes 18,422 20,757 19,582 - -------------------------------------------------------------------------------- Net Income $ 43,397 $ 45,163 $ 42,734 ================================================================================ Per share information: Basic earnings $ 1.17 $ 1.22 $ 1.18 Diluted earnings 1.17 1.21 1.17 Cash dividends 0.62 0.57 0.55 Average shares outstanding: Basic 36,960 36,868 36,296 Diluted 37,137 37,188 36,551 ================================================================================ The accompanying notes are an integral part of these financial statements. 37 Consolidated Statements of Cash Flows SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------- Dollars in thousands - -------------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------------- Operating Activities Net income $ 43,397 $ 45,163 $ 42,734 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 11,628 9,492 11,338 Provision for loan and lease losses 7,200 5,333 4,731 Gain on sale of branch offices (3,352) 0 0 Gain on securities transactions (978) (75) (266) Gain on sale of loans (3,427) (4,923) (2,820) Gain/(loss) on sale of other real estate owned 6 (274) (327) Mortgage loans originated for resale (187,017) (282,073) (155,138) Sale of mortgage loans originated for resale 203,158 273,707 150,932 (Increase)/decrease in accrued interest receivable (989) 691 (695) Increase in accrued interest payable 734 1,255 2,268 Increase/(decrease) in accrued expenses and taxes payable 2,635 (2,018) (1,683) Other, net 9,226 2,073 4,181 - -------------------------------------------------------------------------------------- Net cash provided by operating activities 82,221 48,351 55,255 - -------------------------------------------------------------------------------------- Investing Activities Proceeds from the sale of available-for- sale securities 47,719 37,933 83,471 Proceeds from the maturity of investment securities 264,783 360,343 257,675 Purchase of available-for-sale securities (302,763) (625,038) (310,933) Purchase of held-to-maturity securities 0 0 (1,373) Net increase in loans and leases (174,148) (133,109) (156,260) Capital expenditures (5,400) (7,722) (7,226) Net cash received on sale of branch deposits (22,381) 0 0 Purchase of insurance products (50,000) (9,438) (50,000) Net cash and cash equivalents acquired in acquisition 0 0 3,579 Other, net 0 0 137 - -------------------------------------------------------------------------------------- Net cash used for investing activities (242,190) (377,031) (180,930) - -------------------------------------------------------------------------------------- Financing Activities Net increase/(decrease) in deposits (13,978) 175,413 18,589 Net increase in short-term and FHLB borrowings 161,754 205,014 60,107 Proceeds from issuance of long-term debt 0 10,000 0 Repayment of long-term debt (10) (5,018) (17) Proceeds from issuance of common stock 1,372 1,675 1,410 Cash paid for treasury stock (287) (742) 0 Dividends paid (22,918) (20,132) (18,371) Other, net 0 26 (43) - -------------------------------------------------------------------------------------- Net cash provided by financing activities 125,933 366,236 61,675 - -------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents (34,036) 37,556 (64,000) Cash and cash equivalents at January 1 196,273 158,717 222,717 - -------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717 ====================================================================================== Cash and cash equivalents: Cash and due from banks $ 144,548 $ 113,210 $ 106,913 Short-term investments 17,689 83,063 51,804 - -------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 162,237 $ 196,273 $ 158,717 ====================================================================================== The accompanying notes are an integral part of these financial statements.
38 Consolidated Statements of Changes in Stockholders' Equity SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999, 1998, and 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Dollars in thousands, Common Retained Comprehensive Treasury Total except per share data Stock Surplus Earnings Income Stock Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $ 32,678 $ 92,647 $211,327 $ 643 $ (255) $337,040 Net income 42,734 42,734 Change in unrealized gain on securities, net of taxes of $2,021 and reclassification adjustment of $266 3,376 3,376 - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 42,734 3,376 46,110 Transfer of retained earnings 14 (14) 0 Stock issued under employee benefit plans 411 922 1,333 Effect of three-for-two stock split 16,206 (16,167) 39 Acquisition of Founders' Bank 1,121 6,497 336 (194) 7,760 Cash paid for fractional shares of acquired entities (5) (5) Cash dividends declared: By pooled entities (672) (672) Per common share of $0.55 (17,699) (17,699) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 50,416 83,908 236,012 3,825 (255) 373,906 Net income 45,163 45,163 Change in unrealized gain on securities, net of taxes of $954 and reclassification adjustment of $75 2,179 2,179 - --------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 45,163 2,179 47,342 Stock issued under employee benefit plans 12 325 214 551 Effect of three-for-two stock split 23,507 (22,346) 1,161 Purchase of treasury stock (742) (742) Cash paid for fractional shares of acquired entities (5) (5) Cash dividends declared: By pooled entities (847) (847) Per common share of $0.57 (19,285) (19,285) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 73,935 61,882 261,043 6,004 (783) 402,081 Net income 43,397 43,397 Change in unrealized loss on securities, net of taxes of $(10,186) and reclassification adjustment of $978 (19,620) (19,620) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 43,397 (19,620) 23,777 Stock issued under employee benefit plans (includes related tax benefit of $365) 133 707 897 1,737 Purchase of treasury stock (287) (287) Cash dividends declared: Per common share of $0.62 (22,918) (22,918) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ 74,068 $ 62,589 $281,522 $(13,616) $ (173) $404,390 ==================================================================================================================================
The accompanying notes are an integral part of these financial statements. 39 Notes to Consolidated Financial Statements YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (Dollars in thousands, except as noted and per share data) - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies The accounting and reporting policies of Susquehanna Bancshares, Inc. and subsidiaries ("Susquehanna") conform to generally accepted accounting principles and to general practices in the banking industry. The more significant policies follow: Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Susquehanna and its wholly-owned subsidiaries: Farmers First Bank and subsidiaries ("Farmers"), Farmers & Merchants Bank and Trust and subsidiaries ("F&M"), First American National Bank of Pennsylvania ("FANB"), First Capitol Bank ("First Capitol"), First National Trust Bank ("First National"), Williamsport National Bank ("Williamsport"), Citizens National Bank of Southern Pennsylvania ("Citizens"), Susquehanna Bancshares East, Inc. and subsidiaries ("Susquehanna East"), Susquehanna Bancshares South, Inc. and subsidiaries ("Susquehanna South"), Susque-Bancshares Life Insurance Co. ("SBLIC"), and Susque-Bancshares Leasing Company, Inc. and subsidiary ("SBLC"), as of and for the years ended December 31, 1999, 1998, and 1997. All material intercompany transactions have been eliminated. Income and expenses are recorded on the accrual basis of accounting except for trust and certain other fees which are recorded principally on the cash basis. This does not materially affect the results of operations or financial position of Susquehanna. Nature of Operations. Susquehanna is a multi-financial institution which operates nine commercial banks and one savings bank based upon the sound principles of super-community banking. These subsidiaries provide financial services from 140 branches located in central and southeastern Pennsylvania, Maryland, and southern New Jersey. In addition, Susquehanna operates two non-bank subsidiaries that provide leasing and credit insurance services. Susquehanna's primary source of revenue is derived from loans to customers, who are predominately small- and middle-market businesses and middle-income individuals. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Purchase Method of Accounting. Net assets of companies acquired in purchase transactions are recorded at the fair value at the date of acquisition. Core deposit and other intangible assets are amortized on a straight-line basis over 10 years. The excess of purchase price over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis generally over 15 years. The unamortized amount of goodwill was $31,106 and $34,101 at December 31, 1999 and 1998, respectively. Consolidated Statements of Income. Included in the consolidated Statements of Income is a $7.4 million restructuring charge. The restructuring plan was approved by Susquehanna's Board of Directors and communicated to employees in the fourth quarter of 1999. The following summarizes the components of that charge as accrued in the fourth quarter of 1999. - -------------------------------------------------------------------------------- Expense - -------------------------------------------------------------------------------- Employee severance benefits $3,170 Professional fees related to reduction in work force 2,850 Employment services for terminated employees 660 Asset disposals/write-downs 732 - -------------------------------------------------------------------------------- Total restructuring costs $7,412 ================================================================================ Consolidated Statement of Cash Flows. Interest paid on deposits, short-term borrowings, and long-term debt was $138,114 in 1999, $141,733 in 1998, and $124,558 in 1997. Income taxes paid were $16,409 in 1999, $19,805 in 1998, and $17,286 in 1997. Amounts transferred to other real estate owned were $7,342 in 1999, $8,408 in 1998, and $5,516 in 1997. On July 30, 1997, Susquehanna acquired Founders' Bank, Bryn Mawr, Pa., using the pooling-of-interests method. Results of operations for Founders' prior to the acquisition were not material to Susquehanna's consolidated results and, therefore, prior periods were not restated. Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash due from banks, and short-term investments. Short-term investments consist of interest-bearing deposits in other banks, federal funds sold, and money market funds with an original maturity of three months or less. Investment Securities. Susquehanna classifies debt and equity securities as either "held-to-maturity" or "available-for-sale." Susquehanna does not have any securities classified as "trading" at December 31, 1999, or 1998. Investments for which management has the intent, and Susquehanna has the ability, to hold to maturity are carried at the lower of cost or market adjusted for amortization of premium and accretion of discount. Amortization and accre- 40 tion are calculated principally on the interest method. All other securities are classified as "available-for-sale" and reported at fair value. Changes in unrealized gains and losses for "available-for-sale" securities are recorded as a component of shareholders' equity. Securities classified as "available-for-sale" include investments management intends to use as part of its asset/ liability management strategy, and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors. Realized gains and losses on the sale of securities are recognized using the specific identification method and are included in Other Income in the Consolidated Statements of Income. Allowance for Loan and Lease Losses. The loan and lease loss provision charged to operating expense reflects the amount deemed appropriate by management to produce an adequate reserve to meet the present and foreseeable risk characteristics of the loan and lease portfolio. Loan and lease losses are charged directly against the allowance for loan and lease losses, and recoveries on previously charged-off loans and leases are added to the allowance. Susquehanna considers a loan to be impaired, based upon current information and events, if it is probable that Susquehanna will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Larger groups of small-balance loans, such as residential mortgage and installment loans, are collectively evaluated for impairment. Only commercial loans exceeding $100 are individually evaluated for impairment. An insignificant delay or shortfall in the amounts of payments, when considered independent of other factors, would not cause a loan to be rendered impaired. Insignificant delays or shortfalls may include, depending on specific facts and circumstances, those that are associated with temporary operational downturns or seasonal delays. Management performs periodic reviews of Susquehanna's loan portfolio to identify impaired loans. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When an impaired loan or portion of an impaired loan is determined to be uncollectible, the portion deemed uncollectible is charged against the related valuation allowance, and subsequent recoveries, if any, are credited to the valuation allowance. Depreciable Assets. Buildings, leasehold improvements, and furniture and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related property as follows: buildings, 40 years; and furniture and equipment, 3 to 20 years. Leasehold improvements are amortized over the shorter of the lease term or 10 to 20 years. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings and furniture and equipment are capitalized. Gain or loss on disposition is reflected in operations. Long-lived assets and certain intangible assets are evaluated for impairment by management on an ongoing basis. An impairment may occur whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Other Real Estate. Other real estate property acquired through foreclosure or other means is recorded at the lower of its carrying value, or fair value, of the property at the transfer date less estimated selling costs. Costs to maintain other real estate are expensed as incurred. Interest Income on Loans and Leases. Interest income on commercial, consumer, and mortgage loans is recorded on the interest method. Interest income on installment loans is recorded on the sum-of-the-years digits and the actuarial methods. Loan fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment to the related loan yield on the interest method, generally over the contractual life of the related loans. Nonaccrual loans are those on which the accrual of interest has ceased and where all previously accrued and unpaid interest is reversed. Loans, other than consumer loans, are placed on nonaccrual status when principal or interest is past due 90 days or more and the loan is not well collateralized and in the process of collection, or immediately, if, in the opinion of management, full collection is doubtful. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income. Susquehanna does not accrue interest on impaired loans. While a loan is considered impaired or on nonaccrual status, subsequent cash payments received either are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of the ultimate collectibility of principal and interest. In any case, the deferral or non-recognition of interest does not constitute forgiveness of the borrower's obligation. Consumer loans are recorded in accordance with the Uniform Retail Classification regulation. Generally, the regulation requires that consumer loans are charged off to the allowance for loan losses when they become 120 days or more past due. Federal Income Taxes. Deferred income taxes reflect the temporary tax consequences on future years of differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Earnings Per Share. All share, per share, and option data in these financial statements have been adjusted to give effect to the three-for-two stock splits of 1998 and 1997. 41 Consolidated Statements of Changes in Stockholders' Equity - -------------------------------------------------------------------------------- Common Shares Outstanding - -------------------------------------------------------------------------------- Balance, January 1, 1997 15,922,939 Stock issued under employee benefit plans 24,997 Exercise of stock-warrants of pooled entity 36,008 Effect of three-for-two stock split 7,982,333 Acquistion of Founders' Bank 560,354 - -------------------------------------------------------------------------------- Balance, December 31, 1997 24,526,631 Stock issued under employee benefit plans 27,167 Exercise of stock-warrants of pooled entity 76,814 Effect of three-for-two stock split 12,304,910 Purchase of treasury stock (33,000) - -------------------------------------------------------------------------------- Balance, December 31, 1998 36,902,522 Stock issued under employee benefit plans 134,931 Purchase of treasury stock (15,000) Balance, December 31, 1999 37,022,453 ================================================================================ Recent Accounting Pronouncements. During 1998, Susquehanna adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which established standards for the reporting and disclosure of comprehensive income and its components (revenues, expenses, gains, and losses). SFAS 130 requires all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes a reclassification adjustment for net realized investment gains included in net income of $978, $75, and $266 for the years ended December 31, 1999, 1998, and 1997, respectively. The new standard requires only additional disclosures in the consolidated financial statements; it does not affect Susquehanna's financial position or results of operations. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), in 1997. SFAS 131 establishes standards for disclosures about products, services, geographic areas, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has reviewed SFAS 131 and determined that Susquehanna has one qualifying segment and therefore no additional disclosure is required. During 1998, Susquehanna also adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits" (SFAS No. 132), which revises employers' disclosures about pensions and other Post-retirement benefit plans. It standardizes the disclosure requirements for pensions and other Post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were under previous pronouncements. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS 133 establishes standards for recording derivative financial instruments on the balance sheet at their fair value. This Statement requires that changes in the fair value of derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. As amended, this Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management anticipates that the adoption of SFAS 133 will not have a material effect on Susquehanna's financial condition or results of operations. SFAS 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," requires that after a securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interest based on its ability and intent to sell or hold those investments. This Statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by non-mortgage banking enterprises. The Statement was effective for the first fiscal quarter of 1999 and did not have a material effect on Susquehanna's financial condition or results of operations. - -------------------------------------------------------------------------------- 2. Completed Acquisitions On January 4, 1999, Susquehanna completed the acquisition of First Capitol Bank ("FCB"), a Pennsylvania commercial bank company with $111 million in assets and $93 million in deposits at the acquisition date. Susquehanna issued 2.028 shares of common stock to the shareholders of FCB for each of the 520,393 outstanding common shares of FCB. The transaction is accounted for under the pooling-of-interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of FCB for all periods presented. Previously reported information has been restated as follows: 42 - -------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------- Susquehanna FCB Susquehanna As Reported As Reported Restated - -------------------------------------------------------------------------------- Net interest income $154,190 $ 3,939 $158,129 Provision for loan and lease losses 5,247 86 5,333 Other income 30,921 267 31,188 Other expense 113,206 4,858 118,064 - -------------------------------------------------------------------------------- Income before taxes 66,658 (738) 65,920 Taxes 21,084 (327) 20,757 - -------------------------------------------------------------------------------- Net income $ 45,574 $ (411) $ 45,163 ================================================================================ Earnings per share: Basic $ 1.27 $ 1.22 Diluted $ 1.26 $ 1.21 Average shares outstanding: Basic 35,859 1,009 36,868 Diluted 36,179 1,009 37,188 - -------------------------------------------------------------------------------- 1997 - -------------------------------------------------------------------------------- Susquehanna FCB Susquehanna As Reported As Reported Restated - -------------------------------------------------------------------------------- Net interest income $151,392 $ 3,767 $155,159 Provision for loan and lease losses 4,557 174 4,731 Other income 24,374 277 24,651 Other expense 109,832 2,931 112,763 - -------------------------------------------------------------------------------- Income before taxes 61,377 939 62,316 Taxes 19,315 267 19,582 - -------------------------------------------------------------------------------- Net income $ 42,062 $ 672 $ 42,734 ================================================================================ Earnings per share: Basic $ 1.19 $ 1.18 Diluted $ 1.18 $ 1.17 Average shares outstanding: Basic 35,413 883 36,296 Diluted 35,628 923 36,551 - -------------------------------------------------------------------------------- 3. Short-Term Investments The book value of short-term investments and weighted average interest rates on December 31, 1999 and 1998, were as follows: - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Book Book Value Rates Value Rates - -------------------------------------------------------------------------------- Interest-bearing deposits in other banks $ 4,817 3.99% $18,151 4.66% Federal funds sold 3,418 4.52 51,258 4.75 Money market funds 9,454 5.30 13,654 5.10 - -------------------------------------------------------------------------------- Total $17,689 $83,063 ================================================================================ 43 - -------------------------------------------------------------------------------- 4. Investment Securities The amortized cost and fair values of investment securities at December 31, 1999 and 1998, are as follows: - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair At December 31, 1999 Cost Gains Losses Value - -------------------------------------------------------------------------------------------- Available-for-Sale: U.S. Treasury $ 16,658 $ 49 $ 24 $ 16,683 U.S. Government agencies 346,041 36 7,087 338,990 State and municipal 70,136 201 738 69,599 Corporate debt securities 17,795 52 165 17,682 Mortgage-backed securities 414,317 47 14,936 399,428 Equity securities 34,588 1,988 0 36,576 - -------------------------------------------------------------------------------------------- $899,535 $ 2,373 $22,950 $878,958 - -------------------------------------------------------------------------------------------- Held-to-Maturity: State and municipal $ 32,070 $ 388 $ 8 $ 32,450 Mortgage-backed securities 1,020 0 9 1,011 - -------------------------------------------------------------------------------------------- $ 33,090 $ 388 $ 17 $ 33,461 - -------------------------------------------------------------------------------------------- Total investment securities $932,625 $ 2,761 $22,967 $912,419 ============================================================================================ - -------------------------------------------------------------------------------------------- At December 31, 1998 - -------------------------------------------------------------------------------------------- Available-for-Sale: U.S. Treasury $ 67,043 $ 912 $ 0 $ 67,955 U.S. Government agencies 214,841 1,249 124 215,966 State and municipal 70,417 1,649 76 71,990 Corporate debt securities 34,993 399 0 35,392 Mortgage-backed securities 466,005 856 327 466,534 Equity securities 29,379 4,701 10 34,070 - -------------------------------------------------------------------------------------------- $882,678 $ 9,766 $ 537 $891,907 - -------------------------------------------------------------------------------------------- Held-to-Maturity: U.S. Treasury $ 500 $ 0 $ 0 $ 500 U.S. Government agencies 55,810 1,155 0 56,965 Corporate debt securities 25 0 0 25 Mortgage-backed securities 3,502 27 0 3,529 - -------------------------------------------------------------------------------------------- $ 59,837 $ 1,182 $ 0 $ 61,019 - -------------------------------------------------------------------------------------------- Total investment securities $942,515 $10,948 $ 537 $952,926 ============================================================================================
44 At December 31, 1999 and 1998, investment securities with a carrying value of $463,071 and $291,285 respectively, were pledged to secure public funds and for other purposes as required by law. There were no investment securities whose ratings were less than investment grade at December 31, 1999 or 1998. The amortized cost and fair values of U.S. Treasury, government agency, state and municipal, corporate debt, and mortgage-backed securities, at December 31, 1999, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- -------------------------------------------------------------------------------- Amortized Fair Cost Value - -------------------------------------------------------------------------------- Securities Available-for-Sale: Within one year $ 21,633 $ 21,643 After one year but within five years 410,828 403,407 After five years but within ten years 38,509 37,922 After ten years 393,977 379,410 - -------------------------------------------------------------------------------- 864,947 842,382 - -------------------------------------------------------------------------------- Securities Held-to-Maturity: Within one year $ 14,192 $ 14,229 After one year but within five years 11,800 11,899 After five years but within ten years 2,168 2,331 After ten years 4,930 5,002 - -------------------------------------------------------------------------------- 33,090 33,461 - -------------------------------------------------------------------------------- Total debt securities $898,037 $875,843 ================================================================================
The gross realized gains and gross realized losses on investment securities transactions are summarized below. During 1999, 1998, and 1997, certain securities classified as held-to-maturity were called for early redemption by the issuer. The results of those transactions are recorded in the corresponding category.
- -------------------------------------------------------------------------------- Available-for-Sale Held-to-Maturity - -------------------------------------------------------------------------------- For the year ended December 31, 1999 - -------------------------------------------------------------------------------- Gross gains $998 $ 1 Gross losses 18 3 - -------------------------------------------------------------------------------- Net gains $980 $ (2) ================================================================================ For the year ended December 31, 1998 - -------------------------------------------------------------------------------- Gross gains $210 $ 0 Gross losses 133 2 - -------------------------------------------------------------------------------- Net gains $ 77 $ (2) ================================================================================ For the year ended December 31, 1997 - -------------------------------------------------------------------------------- Gross gains $687 $ 1 Gross losses 419 3 - -------------------------------------------------------------------------------- Net gains $268 $ (2) ================================================================================
Interest earned on investment securities for the years ended December 31 was as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Taxable $50,485 $48,587 $37,605 Tax-advantaged 5,232 5,666 5,588 - -------------------------------------------------------------------------------- Total $55,717 $54,253 $43,193 ================================================================================
45 - -------------------------------------------------------------------------------- 5. Loans and Leases At December 31, loans and leases, net of unearned income ($37,233 at December 31, 1999, and $26,293 at December 31, 1998), were as follows:
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 327,670 $ 301,385 Real estate--construction 255,054 256,451 Real estate--mortgage 1,850,375 1,821,485 Consumer 395,566 346,180 Leases 166,487 121,684 - -------------------------------------------------------------------------------- Total $2,995,152 $2,847,185 ================================================================================
Certain directors and executive officers of Susquehanna and its affiliates, including their immediate families and companies in which they are principal owners (more than 10%), were indebted to banking subsidiaries. In the opinion of management, such loans are consistent with sound banking practices and are within applicable regulatory bank lending limitations. Susquehanna relies on the directors and executive officers for the identification of their associates. The activity of loans to such persons whose balance exceeded $60 during 1999, 1998, and 1997 follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Balance--January 1 $27,225 $27,740 $29,653 Additions 28,273 20,379 12,477 Deductions: Amounts collected 24,657 20,894 11,971 Other changes 5,134 0 (2,419) - -------------------------------------------------------------------------------- Balance--December 31 Current $35,975 $27,225 $27,740 ================================================================================
Substantially all of Susquehanna's loans and leases are to enterprises and individuals in Pennsylvania, New Jersey, and Maryland. Susquehanna has no concentration of loans to borrowers in any one industry, or related industry, which exceeds 10% of total loans with the exception of housing developments. An analysis of impaired loans at December 31, 1999 and 1998, is presented as follows:
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Impaired loans without a related reserve $11,491 $ 9,437 Impaired loans with a reserve 1,460 3,571 - -------------------------------------------------------------------------------- Total impaired loans $12,951 $13,008 ================================================================================ Reserve for impaired loans $ 532 $ 591 ================================================================================
An analysis of impaired loans for the years ended Decem- ber 31, 1999 and 1998 is presented as follows:
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Average balance of impaired loans $10,560 $11,869 Interest income on impaired loans (cash basis) 134 242 ================================================================================
- -------------------------------------------------------------------------------- 6. Allowance for Loan and Lease Losses Changes in the allowance for loan and lease losses were as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Balance--January 1 $ 36,158 $ 36,481 $ 35,704 Allowance acquired in business combination 0 0 1,460 Provision charged to operating expenses 7,200 5,333 4,731 - -------------------------------------------------------------------------------- 43,358 41,814 41,895 - -------------------------------------------------------------------------------- Charge-offs (8,366) (7,109) (6,787) Recoveries 2,241 1,453 1,373 - -------------------------------------------------------------------------------- Net charge-offs (6,125) (5,656) (5,414) - -------------------------------------------------------------------------------- Balance--December 31 $ 37,233 $ 36,158 $ 36,481 ================================================================================
46 - -------------------------------------------------------------------------------- 7. Premises and Equipment Property, buildings, and equipment, at December 31, were as follows:
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Land $ 8,393 $ 8,504 Buildings 45,346 45,321 Furniture and equipment 51,184 54,172 Leasehold improvements 6,321 6,461 Land improvements 1,136 1,148 - -------------------------------------------------------------------------------- 112,380 115,606 - -------------------------------------------------------------------------------- Less: accumulated depreciation and amortization 57,976 60,040 - -------------------------------------------------------------------------------- $ 54,404 $ 55,566 ================================================================================
Depreciation and amortization expense charged to operations amounted to $6,652 in 1999, $5,808 in 1998, and $5,468 in 1997. All subsidiaries lease certain banking branches and equipment under operating leases which expire on various dates through 2011. Renewal options are available for periods up to 20 years. Minimum future rental commitments under non-cancellable leases, as of December 31, 1999, are as follows:
- -------------------------------------------------------------------------------- Operating Leases - -------------------------------------------------------------------------------- 2000 $ 3,058 2001 2,730 2002 2,396 2003 2,070 2004 1,898 Subsequent years 7,582 - -------------------------------------------------------------------------------- $19,734 ================================================================================
Total rent expense charged to operations amounted to $3,320 in 1999, $3,113 in 1998, and $2,915 in 1997. - -------------------------------------------------------------------------------- 8. Deposits Deposits at December 31 were as follows:
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Noninterest-bearing: demand $ 430,054 $ 433,133 Interest-bearing: Interest-bearing demand 951,904 997,718 Savings 421,012 448,865 Time 1,187,524 1,166,002 Time of $100 or more 190,026 171,161 - -------------------------------------------------------------------------------- Total deposits $3,180,520 $3,216,879 ================================================================================
- -------------------------------------------------------------------------------- 9. Borrowings Short-Term Borrowings Short-term borrowings and weighted average interest rates, at December 31, were as follows:
- --------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------- Amount Rate Amount Rate - --------------------------------------------------------------------------------------------- Securities sold under repurchase agreements $179,278 5.02% $ 98,694 4.46% Treasury tax and loan notes 14,010 4.54 4,837 5.00 Federal funds purchased 14,219 5.07 1,000 5.43 - --------------------------------------------------------------------------------------------- $207,507 $104,531 =============================================================================================
47 Federal Home Loan Bank Borrowings
- -------------------------------------------------------------------------------- December 31 1999 1998 - -------------------------------------------------------------------------------- Due 1999, 4.50% to 6.30% $ 0 $ 36,420 Due 2000, 4.05% to 6.16% 107,325 55,000 Due 2001, 5.27% to 6.33% 13,750 2,250 Due 2002, 5.30% to 6.08% 10,000 26,000 Due 2003, 5.69% to 5.98% 115,500 116,300 Due 2004, 4.65% 15,000 0 Due 2006, 6.65% 788 875 Due 2008, 5.43% to 5.50% 75,000 75,000 Due 2009, 5.30% to 5.34% 33,000 0 Due 2011, 3.25% 85 90 Due 2012, 3.25% 155 164 Due 2013, 5.94% 210 222 Due 2014, 5.00% to 6.51% 1,057 1,077 Due 2018, 6.00% 347 238 Due 2019, 4.50% 197 0 - -------------------------------------------------------------------------------- $372,414 $313,636 ================================================================================
Susquehanna subsidiary banks are members of the Federal Home Loan Banks ("FHLB") of Atlanta, New York, and Pittsburgh and, as such, can take advantage of the FHLB program for overnight and term advances at published daily rates. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying first mortgages. In addition, all of the subsidiaries' stock in the FHLB is pledged as collateral for such debt. Advances available under this agreement are limited by available and qualifying collateral and the amount of FHLB stock held by the borrower. Under this program Susquehanna subsidiaries have lines of credit available to them totalling $1.0 billion and $691 million, of which $372 million and $314 million were outstanding at December 31, 1999 and 1998, respectively. At December 31, 1999, Susquehanna subsidiaries could borrow an additional $633 million based on qualifying collateral. Such additional borrowings would require the subsidiaries to increase their investment in FHLB stock by approximately $12 million. Long-Term Debt
- ------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------ Amount Rate Amount Rate - ------------------------------------------------------------------------------------ Installment note due June 2, 1999 $ 0 0.00% $ 10 9.00% Term note due July 19, 2003 10,000 6.09 10,000 6.09 Subordinate notes due February 1, 2005 50,000 9.00 50,000 9.00 Senior notes due February 1, 2003 35,000 6.30 35,000 6.30 - ------------------------------------------------------------------------------------ $95,000 $95,010 ====================================================================================
The installment note was a demand note with a final maturity of June 2, 1999. The term note is payable with interest only payments being made until maturity. This note is guaranteed by Susquehanna. On February 9, 1995, Susquehanna issued $50 million of its 9.00% subordinated notes due 2005. The proceeds were used to retire $10 million in short-term borrowings and the balance was used for acquisitions and for general corporate purposes. On January 29, 1996, Susquehanna issued $35 million of its 6.30% senior notes due 2003. The proceeds were used for acquisitions and general corporate purposes. 48 - -------------------------------------------------------------------------------- 10. Income Taxes The components of the provision for income taxes are as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Current $ 19,009 $ 17,250 $ 17,286 Deferred (587) 3,507 2,296 - -------------------------------------------------------------------------------- Total $ 18,422 $ 20,757 $ 19,582 ================================================================================
The provision for income taxes differs from the amount derived from applying the statutory income tax rate to income before income taxes as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Provision at statutory rates $ 21,637 $ 23,079 $ 21,801 Tax-advantaged income (2,857) (3,144) (2,963) Other, net (358) 822 744 - -------------------------------------------------------------------------------- Total $ 18,422 $ 20,757 $ 19,582 ================================================================================
Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the net deferred tax asset as of December 31 were as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Reserve for loan losses $ 13,429 $ 13,406 $ 13,004 Accrued pension expense 1,180 1,314 1,473 Deferred directors' fees 564 811 760 Deferred compensation 775 451 177 Nonaccrual loan interest 1,398 1,078 1,065 Core deposit intangible 101 25 490 Purchase accounting 493 449 (519) Unrealized investment (gains) and losses 6,961 (3,225) (2,425) Other assets 4,835 1,248 1,147 Deferred tax liabilities: Deferred loan costs (1,914) (404) 817 FHLB stock dividends (395) (395) (395) Premises and equipment (2,208) (2,160) (2,178) Operating lease income, net (8,490) (6,770) (4,731) Recapture of savings banks' bad debt reserve (344) (598) (1,016) Other liabilities (2,551) (2,169) (301) - -------------------------------------------------------------------------------- Net deferred income tax assets $ 13,834 $ 3,061 $ 7,368 ================================================================================
- -------------------------------------------------------------------------------- 11. Financial Instruments with Off-Balance Sheet Risk Susquehanna is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to orginate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statement of condition. The contract or notional amount of those instruments reflects the extent of involvement Susquehanna has in particular classes of financial instruments. Susquehanna's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the contractual amount of these instruments. Susquehanna uses the same credit policies for these instruments as it does for on-balance sheet instruments. Standby letters of credit are conditional commitments issued by Susquehanna to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash requirements. Susquehanna evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Susquehanna upon extension of credit, is based on management's credit evaluation of the borrower. Financial instruments with off-balance sheet risk at December 31, 1999 and 1998, are as follows:
- -------------------------------------------------------------------------------- Contractual 1999 1998 - -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Standby letters of credit $ 36,426 $ 34,711 Commitments to originate loans 136,257 93,746 Unused portion of home equity and credit card lines 188,043 175,331 Other unused commitments, principally commercial lines of credit 418,387 381,866
49 - -------------------------------------------------------------------------------- 12. Fair Value of Financial Instruments Susquehanna's estimated fair value information about financial instruments is presented below. Some of this information is presented whether it is recognized in the Consolidated Balance Sheet or not, and if it is practicable to estimate that value. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques. As a result, Susquehanna's ability to actually realize these derived values cannot be assured. The estimated fair values disclosed herewith may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The disclosure requirements exclude disclosure of nonfinancial assets such as buildings as well as certain financial instruments such as leases. Susquehanna also has several intangible assets which are not included in the fair value disclosures such as mortgage servicing rights, customer lists, and core deposit intangibles. Accordingly, the aggregate estimated fair values presented do not represent the underlying value of Susquehanna. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. Cash and Due from Banks and Short-Term Investments. The fair value of cash and due from banks and short-term investments is deemed to be the same as their carrying value. Investment Securities. The fair value of investment securities is estimated based on quoted market prices, where available. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans. Variable rate loans which do not expose Susquehanna to interest rate risk have a fair value that equals their carrying value, discounted for estimated future credit losses. The fair value of fixed rate loans was based upon the present value of projected cash flows. The discount rate was based upon the U.S. Treasury yield curve, adjusted for credit risk. Deposits. The fair values of demand, interest-bearing demand, and savings deposits are the amounts payable on demand at the balance sheet date. The carrying value of variable rate time deposits represents a reasonable estimate of fair value. The fair value of fixed rate time deposits is based upon the discounted value of future cash flows expected to be paid at maturity. Discount rates are calculated off the U.S. Treasury yield curve. Short-Term Borrowings. The carrying amounts reported in the balance sheet represent a reasonable estimate of fair value since these liabilities mature in less than one year. Long-Term Debt. Fair values were based upon quoted rates of similar instruments, issued by banking companies with similar credit ratings. Off-Balance Sheet Items. The fair value of unused commitments to lend and standby letters is deemed to be the same as their carrying value. The following table represents the carrying amount and estimated fair value of Susquehanna's financial instruments at December 31:
- --------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value - --------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 144,548 $ 144,548 $ 113,210 $ 113,210 Short-term investments 17,689 17,689 83,063 83,063 Investment securities 912,048 912,419 951,744 952,926 Loans, net of unearned income and allowance 2,793,313 2,923,709 2,690,668 2,772,868 Liabilities: Deposits 3,180,520 3,176,336 3,216,879 3,225,168 Short-term borrowings 207,507 207,507 104,531 104,531 FHLB borrowings 372,414 372,559 313,636 320,037 Long-term debt 95,000 95,379 95,010 102,040
50 - -------------------------------------------------------------------------------- 13. Benefit Plans Susquehanna maintains a single non-contributory pension plan that covers substantially all full-time employees. In addition, Susquehanna offers life insurance and other benefits to its retirees. A summary of the plans at December 31 is as follows:
- ----------------------------------------------------------------------------------------------------- Pension Benefits Other Benefits - ----------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 39,605 $ 35,549 $ 3,251 $ 2,888 Service cost 1,916 1,529 146 116 Interest cost 2,505 2,238 212 197 Plan participants' contributions 0 0 66 72 Amendments 21 (3,936) 32 120 Actuarial (gain)/loss (7,709) 2,860 (437) 36 Acquisitions 0 2,345 0 0 Benefits paid (1,187) (980) (171) (178) - ----------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 35,151 $ 39,605 $ 3,099 $ 3,251 - ----------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $ 44,600 $ 37,496 $ 0 $ 0 Actual return on plan assets 3,939 2,734 0 0 Acquisitions 0 3,789 0 0 Employer contributions 0 0 105 106 Plan participants' contributions 0 0 66 72 Benefits paid (1,187) (980) (171) (178) - ----------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 47,352 $ 43,039 $ 0 $ 0 - ----------------------------------------------------------------------------------------------------- Funded status $ 12,202 $ 3,434 $ (3,099) $ (3,251) Unrecognized net actuarial gain (13,306) (4,363) (1,131) (722) Unrecognized prior service cost (2,562) (2,861) 386 395 Unrecognized transition asset (481) (548) 1,477 1,590 - ----------------------------------------------------------------------------------------------------- Accrued benefit cost $ (4,147) $ (4,338) $ (2,367) $ (1,988) ===================================================================================================== Components of Net Periodic Benefit Expense /(Income) - ------------------------------------------------------------------------------------------------------------- Pension Benefits Other Benefits - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Service cost $ 1,916 $ 1,529 $ 1,959 $ 146 $ 116 $ 92 Interest cost 2,505 2,238 2,216 212 197 191 Expected return on plan assets (3,962) (3,332) (2,707) 0 0 0 Amortization of prior service cost (277) (279) 102 41 27 24 Amortization of transition asset (68) (67) (86) 113 113 113 Amortization of net actuarial gain (305) (322) (326) (28) (36) (42) - ------------------------------------------------------------------------------------------------------------- Net periodic benefit expense/(income) $ (191) $ (233) $ 1,158 $ 484 $ 417 $ 378 ============================================================================================================= Weighted-Average Assumptions at Year-End Discount rate 8.00% 6.75% 7.25% 8.00% 6.75% 7.25% Expected return on plan assets 9.00% 9.00% 9.00% 0.00% 0.00% 0.00% Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
The plan assets were invested principally in U.S. Government securities and listed stocks and bonds including 31,751 and 30,697 shares of Susquehanna common stock at December 31, 1999 and 1998, respectively. Susquehanna maintains a 401(k) savings plan which allows employees to invest a percentage of their earnings, matched up to a certain amount specified by Susquehanna. Contributions to the savings plan which are included in salaries and benefits expense amounted to $1,192 in 1999, $1,213 in 1998, and $1,007 in 1997. 51 Susquehanna offers an Employee Stock Purchase Plan ("ESPP"), which allows employees to purchase Susquehanna common stock up to 5% of their salary at discount to the market price, through payroll deductions. Susquehanna implemented a nonqualified Equity Compensation Plan (the "Compensation Plan"), in 1997, under which Susquehanna may grant options to its employees and directors for up to 1,462,500 shares of common stock. Under the Compensation Plan, the exercise price of each option equals the market price of the company's stock on the date of grant, and an option's maximum term is 10 years. Options are granted upon approval of the Board of Directors and typically vest one-third at the end of years three, four, and five. The option prices range from a low of $6.44 to a high of $24.75. On January 1, 1996, Susquehanna adopted SFAS 123 and as permitted by SFAS 123, Susquehanna has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the Compensation Plan. Accordingly, no compensation cost has been recognized for options granted under the Compensation Plan. For purposes of disclosure, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model based upon the assumptions noted below. Option data noted below has been adjusted for the three-for-two stock splits of 1998 and 1997. The pro forma effects on net income include both the Compensation Plan and the ESPP.
- ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 892,870 $15.36 676,151 $12.22 566,523 $11.33 Granted 294,117 18.19 224,219 24.75 120,878 16.47 Exercised 92,362 7.81 7,500 13.00 11,250 13.00 - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22 ================================================================================================================================== Outstanding at end of year: Granted prior to 1997 459,507 $11.96 547,773 $11.28 555,273 $11.30 Granted 1997 116,782 16.69 120,878 16.47 120,878 16.47 Granted 1998 224,219 24.75 224,219 24.75 0 0 Granted 1999 294,117 18.19 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,094,625 $16.76 892,870 $15.36 676,151 $12.22 ================================================================================================================================== Options exercisable at year-end: Granted prior to 1997 233,314 $10.96 208,485 $ 8.47 215,985 $ 9.25 Granted 1997 69,534 16.18 73,629 15.85 73,629 15.85 Granted 1998 0 0 0 0 0 0 Granted 1999 0 0 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 302,848 $12.16 282,114 $10.40 289,614 $10.46 ================================================================================================================================== Weighted average remaining contractual maturity of options outstanding at year-end: Granted prior to 1997 6 years Granted 1997 7 years Granted 1998 8 years Granted 1999 9 years - ---------------------------------------------------------------------------------------------------------------------------------- Total 7 years
52
- ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Dollars Per Share Dollars Per Share Dollars Per Share - ---------------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $1,321 $4.49 $1,348 $6.01 $521 $4.31 Fair value disclosures (pro forma) effect on: Net income (328) (484) (428) Basic earnings per share (0.01) (0.01) (0.01) Diluted earnings per share (0.01) (0.01) (0.01) - ---------------------------------------------------------------------------------------------------------------------------- Weighted-average fair value assumptions: Dividend yield 3.0% 3.0% 3.0% Expected volatility 22.0% 22.0% 20.0% Risk-free interest rate 5.7% 5.5% 6.7% Expected term 7 years 7 years 7 years
- -------------------------------------------------------------------------------- 14. Susquehanna Bancshares, Inc. (Parent Only) Condensed Balance Sheets - -------------------------------------------------------------------------------- December 31 1999 1998 - -------------------------------------------------------------------------------- Assets Cash in subsidiary bank $ 247 $ 746 Short-term investments 0 62 Investment in consolidated subsidiaries at equity in net assets 485,166 476,604 Other investment securities 2,920 5,275 Premises and equipment (net) 320 215 Other assets 7,588 11,308 - -------------------------------------------------------------------------------- Total assets $ 496,241 $ 494,210 ================================================================================ Liabilities Long-term debt $ 85,000 $ 85,000 Accrued taxes and expenses payable 6,851 7,129 - -------------------------------------------------------------------------------- Total liabilities 91,851 92,129 - -------------------------------------------------------------------------------- Equity Preferred stock (no par) 0 0 Common stock ($2 par value) 74,068 73,935 Surplus 62,589 61,882 Retained earnings 281,522 261,043 Accumulated other comprehensive income, net of taxes (13,616) 6,004 Less: Treasury stock at cost 173 783 - -------------------------------------------------------------------------------- Total stockholders' equity 404,390 402,081 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 496,241 $ 494,210 ================================================================================ - -------------------------------------------------------------------------------- Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Income - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Income Dividends from subsidiaries $ 35,814 $ 68,266 $ 28,611 Interest, dividends, and gains on sales of investment securities 959 231 191 Interest and management fee from subsidiaries 3,408 4,137 4,115 - -------------------------------------------------------------------------------- Total income 40,181 72,634 32,917 - -------------------------------------------------------------------------------- Expenses Interest expense 6,864 6,864 6,861 Recurring charges 3,410 0 0 Other expenses 7,145 4,036 4,096 - -------------------------------------------------------------------------------- Total expenses 17,419 10,900 10,957 - -------------------------------------------------------------------------------- Income before taxes, and equity in undistributed income of subsidiaries 22,762 61,734 21,960 Income taxes (1,470) 241 (386) Equity in undistributed income of subsidiaries 19,165 (16,330) 20,388 - -------------------------------------------------------------------------------- Net Income $ 43,397 $ 45,163 $ 42,734 ================================================================================ 53 - -------------------------------------------------------------------------------- Susquehanna Bancshares, Inc. (Parent Only) Condensed Statements of Cash Flows - -------------------------------------------------------------------------------- Year ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Operating Activities Net income $ 43,397 $ 45,163 $ 42,734 Adjustment to reconcile net income to cash provided by operating activities: Depreciation and amortization 357 313 158 Equity in undistributed income of subsidiaries and income of subsidiaries accrued not received (19,165) 16,330 (20,388) Increase in other assets (651) (5,752) (520) Increase/(decrease) in accrued expenses payable (278) 1,271 602 Other, net (959) 0 0 - -------------------------------------------------------------------------------- Net cash provided from operating activities 22,701 57,325 22,586 - -------------------------------------------------------------------------------- Investing Activities Purchase of investment securities (500) 0 (8,489) Proceeds from the sale/ maturities of investment securities 1,089 8,500 0 Capital expenditures (204) (179) (72) Net infusion of investment in subsidiaries (1,814) (46,006) (1,200) - -------------------------------------------------------------------------------- Net cash used for investing activities (1,429) (37,685) (9,761) - -------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of common stock $ 1,372 $ 51 $ 619 Dividends paid (22,918) (20,132) (18,371) Cash paid for treasury stock (287) (742) 0 Other, net 0 32 (43) - -------------------------------------------------------------------------------- Net cash used for financing activities (21,833) (20,291) (17,795) - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (561) (651) (4,970) Cash and cash equivalents at January 1 808 1,459 6,429 - -------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 247 $ 808 $ 1,459 ================================================================================ Cash and cash equivalents: Cash in subsidiary bank $ 247 $ 746 $ 794 Short-term investments 0 62 665 - -------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 247 $ 808 $ 1,459 ================================================================================ - -------------------------------------------------------------------------------- 15. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share for the years ended below: - ----------------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Income available to common stockholders $43,397 36,960 $1.17 $45,163 36,868 $1.22 $42,734 36,296 $1.18 Effect of diluted securities: Stock options outstanding 177 320 255 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Income available to common stockholders and assumed conversion $43,397 37,137 $1.17 $45,163 37,188 $1.21 $42,734 36,551 $1.17 ===================================================================================================================================
54 - -------------------------------------------------------------------------------- 16. Regulatory Restrictions of Banking Subsidiaries Susquehanna is limited by regulatory provisions in the amount it can receive in dividends from its banking subsidiaries. Accordingly, at December 31, 1999, $56,819 is available for dividend distribution to Susquehanna in 2000 from its banking subsidiaries. Included in cash and due from banks are balances required to be maintained by banking subsidiaries on deposit with the Federal Reserve. The amounts of such reserves are based on percentages of certain deposit types and totalled $2,231 and $5,807 at December 31, 1999 and 1998, respectively. - -------------------------------------------------------------------------------- 17. Contingent Liabilities Susquehanna is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against Susquehanna. In the opinion of management, all such matters are adequately covered by insurance or, if not covered, are without merit or are of such kind, or involve such amounts, as would not have a material effect on the financial position, results of operations, and cash flows of Susquehanna, if disposed of unfavorably. - -------------------------------------------------------------------------------- 18. Subsequent Events On February 1, 2000, Susquehanna completed the acquisition of Boston Service Company, Inc. (t/a Hann Financial Service Corporation) ("Hann"), a closely held consumer automobile financing company, for 2,360,000 shares of Susquehanna common stock. Hann, headquartered in Jamesburg, New Jersey, originates high-quality automobile loans and leases in the New Jersey, eastern Pennsylvania, New York, and Connecticut market areas. Hann services more than $800 million in automobile-related receivables. The acquisition of Hann will be accounted for under the pooling-of-interests method of accounting. Pro forma information that gives effect of the acquisition of Hann is as follows: Pro forma: Susquehanna and Hann - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- Net interest income and other income $212,245 $196,843 $188,251 Net income 44,182 46,804 44,770 Earning per share--basic $ 1.12 $ 1.19 $ 1.16 --diluted 1.12 1.18 1.15 On March 3, 2000, Susquehanna completed the acquisition of Valley Forge Asset Management Corp., King of Prussia, Pa. ("VFAM"), and its holding company, Valley Forge Investment Companies, Inc., for $12.7 million. VFAM provides investment advisory services and, at the time of the acquisition, had approximately $900 million in assets under management. The acquisition of VFAM will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. Goodwill of approximately $9.0 million was created in this transaction and will be amortized to other operating expense on a straight-line basis over 25 years. In this transaction, there is also contingent cash payments totalling $6.0 million. These contingent cash payments are based upon certain earnings targets and will be recorded as goodwill if earned. 55 PriceWaterhouseCoopers LLP One South Market Square Harrisburg, PA 17101-9916 Telephone (717) 231-5900 Facsimile (717) 232-5672 Report of Independent Accountants To the Board of Directors and Stockholders of Susquehanna Bancshares, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Susquehanna Bancshares, Inc. (Susquehanna) and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Susquehanna's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP January 24, 2000, except as to Note 18 which is as of March 3, 2000 56 Summary of Quarterly Financial Data The unaudited quarterly results of operations for the years ended December 31, 1999 and 1998, are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands, except per share 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Quarter Ended Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income $76,876 $75,257 $74,176 $73,461 $75,435 $75,897 $75,649 $73,861 Interest expense 36,231 34,978 33,508 34,131 35,639 36,209 35,928 34,937 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 40,645 40,279 40,668 39,330 39,796 39,688 39,721 38,924 Provision for loan and lease losses 2,986 1,496 1,294 1,424 1,427 1,375 1,262 1,269 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan and lease losses 37,659 38,783 39,374 37,906 38,369 38,313 38,459 37,655 - ------------------------------------------------------------------------------------------------------------------------------------ Other income 10,956 13,771 7,919 7,333 7,700 7,890 8,392 7,206 Other expenses 42,872 30,989 29,902 28,119 30,407 29,225 29,784 28,648 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 5,743 21,565 17,391 17,120 15,662 16,978 17,067 16,213 Applicable income taxes 1,185 6,711 5,176 5,350 4,775 5,400 5,580 5,002 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 4,558 $14,854 $12,215 $11,770 $10,887 $11,578 $11,487 $11,211 ==================================================================================================================================== Earnings per common share: Basic $ 0.12 $ 0.40 $ 0.33 $ 0.32 $ 0.30 $ 0.31 $ 0.31 $ 0.30 Diluted 0.12 0.40 0.33 0.32 0.29 0.31 0.31 0.30
Market for Susquehanna Capital Stock Since November 5, 1985, Susquehanna common stock has been listed for quotation on the National Association of Securities Dealers National Market System. Set forth below are the high and low sales prices of Susquehanna's common stock as reported on the Nasdaq National Market System for the years 1999 and 1998.
- --------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------- Quarterly Quarterly Market Price Dividend Market Price Dividend - --------------------------------------------------------------------------------- First Quarter $21.25-$16.50 $0.15 $26.00-$21.67 $0.14 Second Quarter $19.38-$17.00 $0.15 $26.08-$22.67 $0.14 Third Quarter $18.50-$15.75 $0.15 $26.75-$17.88 $0.14 Fourth Quarter $18.25-$14.88 $0.17 $22.75-$15.50 $0.15
Common stock prices and dividends have been adjusted to reflect Susquehanna's three-for-two stock splits of 1999 and 1998. 57 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure. - ------ -------------------------------------------------------------------- There has been no change in Susquehanna's principal accountants in over two years. There have been no disagreements with such principal accountants on any matters of accounting principles, practices, financial statement disclosure, auditing scope or procedures. 58 PART III -------- Item 10. Directors and Executive Officers of Susquehanna. - ------- ----------------------------------------------- The information required by this Item will be included in Susquehanna's Proxy Statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy Statement") in the Election of Directors section and the Director and Executive Officer Compensation section, each of which sections is incorporated herein by reference. Item 11. Executive Compensation - ------- ---------------------- The information required by this Item will be included in the 2000 Proxy Statement in the Director and Executive Officer Compensation section, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- The information required by this Item will be included in the 2000 Proxy Statement in the Principal Holders of Voting Securities and Holdings of Management section, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- The information required by this Item will be included in the 2000 Proxy Statement in the Certain Relationships and Related Transaction section, and is incorporated herein by reference. 59 PART IV ------- Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. - ------- -------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial Statements. See Item 8 of this report for the consolidated financial statements of Susquehanna and its subsidiaries (including the index to financial statements). (2) Financial Statement Schedules. Not Applicable. (3) Exhibits. A list of the Exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits. (b) Report on Form 8-K. (1) Susquehanna filed a Current Report on form 8-K, dated November 17, 1999, to report the execution of a definitive Share Exchange Agreement, dated November 17, 1999, to acquire all of the outstanding stock of Boston Service Company, Inc. (t/a Hann Financial Service Corporation), filed pursuant to Item 5. (2) Susquehanna filed a Current Report on Form 8-K, dated December 23, 1999, to report the execution of a definitive Stock Purchase Agreement with Valley Forge Asset Management Corp. ("VFAM") and a definitive Agreement and Plan of Reorganization with Valley Forge Investment Company, Inc. ("VFICO"), to acquire all of the outstanding stock of VFAM and VFICO, filed pursuant to Item 5. (c) Exhibits. The exhibits required to be filed as part of this report pursuant to Item 601 of Regulation S-K are filed herewith or incorporated by reference. (d) Financial Statement Schedule. None Required. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SUSQUEHANNA BANCSHARES, INC. By:/s/ Robert S. Bolinger ---------------------- Robert S. Bolinger, Chairman of the Board and Chief Executive Officer Dated: March 20, 2000 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Robert S. Bolinger Chairman of the Board, Chief Executive March 20, 2000 - ------------------------------------ Officer and Director (Robert S. Bolinger) /s/ Drew K, Hostetter Sr. Vice President, Treasurer March 20, 2000 - ------------------------------------ and Chief Financial Officer (Drew K. Hostetter) /s/ William J. Reuter President and Director March 20, 2000 - ------------------------------------ (William J. Reuter) /s/ Richard M. Cloney Vice President and Director March 22, 2000 - ------------------------------------ (Richard M. Cloney) /s/ James G. Apple Director March 20, 2000 - ------------------------------------ (James G. Apple) /s/ Trudy B. Cunningham Director March 20, 2000 - ------------------------------------ (Trudy B. Cunningham) /s/ John M. Denlinger Director March 20, 2000 - ------------------------------------ (John M. Denlinger) /s/ Owen O. Freeman, Jr. Director March 21, 2000 - ------------------------------------ (Owen O. Freeman, Jr.) /s/ Henry H. Gibbel Director March 20, 2000 - ------------------------------------ (Henry H. Gibbel) /s/ Marley R. Gross Director March 21, 2000 - ------------------------------------ (Marley R. Gross) /s/ T. Max Hall Director March 20, 2000 - ------------------------------------ (T. Max Hall)
61 SECURITIES AND EXCHANGE COMMISSION SUSQUEHANNA BANCSHARES, INC. Form 10-K, December 31, 1999 [SIGNATURES CONTINUED] Signature Title Date - --------- ----- ---- /s/ Edward W. Helfrick Director March 22, 2000 - ------------------------------------ (Edward W. Helfrick) /s/ C. William Hetzer, Jr. Director March 20, 2000 - ------------------------------------ (C. William Hetzer, Jr.) /s/ Guy W. Miller, Jr. Director March 22, 2000 - ------------------------------------ (Guy W. Miller, Jr.) /s/ George J. Morgan Director March 23, 2000 - ------------------------------------ (George J. Morgan) /s/ Clyde R. Morris Director March 20, 2000 - ------------------------------------ (Clyde R. Morris) /s/ Roger V. Wiest Director March 20, 2000 - ------------------------------------ (Roger V. Wiest) [END OF SIGNATURE PAGES] 62 EXHIBIT INDEX Exhibit Numbers Description and Method of Filing - --------------- -------------------------------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. (i) Share Exchange Agreement dated as of November 17, 1999 by among Susquehanna, Boston Service Company, Inc. (t/a Hann Financial Service Corporation) and the shareholders of Hann. The Disclosure Annexes to this agreement are omitted. Pursuant to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy of such schedules to the Commission upon request. (ii) Stock Purchase Agreement dated as of December 23, 1999 by and among Susquehanna, Susquehanna Bancshares Central, Inc., Valley Forge Asset Management Corp. and certain of the shareholders of VFAM. The Disclosure Annexes to this agreement are omitted. Pursuant to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy of such schedules to the Commission upon request. (iii) Agreement and Plan of Reorganization dated as of December 23, 1999 by and among Susquehanna, Susquehanna Bancshares Central, Inc. and Valley Forge Investment Company, Inc. The Disclosure Annexes to this agreement are omitted. Pursuant to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy of such schedules to the Commission upon request. (3) (i) Articles of Incorporation. Incorporated by reference to Attachment E to Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's Registration Statement on Form S-4, Registration No. 33-13276 and to Exhibit 3.3 of Susquehanna's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (ii) By-laws. Incorporated by reference to Exhibit (3)(b) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (4) Instruments defining the rights of security holders including indentures. The rights of the holders of Susquehanna's Common Stock and the rights of Susquehanna's note holders are contained in the following documents or instruments, which are incorporated herein by reference. (i) Articles of Incorporation. Incorporated by reference to Attachment E to Susquehanna's Joint Proxy Statement/Prospectus on Susquehanna's Registration Statement on Form S-4, Registration No. 33-76319 and to Exhibit 3.3 of Susquehanna's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. (ii) By-laws. Incorporated by reference to Exhibit (3)(b) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (iii) Form of Subordinated Note/Indenture incorporated by reference to Exhibit 4.1 to Susquehanna's Registration Statement on Form S-3, Registration No. 33-87624. (9) Voting trust agreement. Not Applicable (10) Material Contracts. 63 (i) Susquehanna's Key Employee Severance Pay Plan, adopted in 1999, is filed herewith as Exhibit 10. (ii) Susquehanna's Executive Deferred Income Plan, effective January 1, 1999, is incorporated by reference to Exhibit 10(a) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (iii) Susquehanna's Performance Award Plan as amended in 1995, is incorporated by reference to Exhibit (a)(10) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (iv) Susquehanna's Equity Compensation Plan, as adopted in 1996, is incorporated by reference to Exhibit (a)(10) of Susquehanna's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (11) Statement re: computation of per share earnings. Not Applicable. (12) Statements re: computation of ratios. Not applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders. Not applicable. (16) Letter re: change in certified accountant. Not applicable. (18) Letter re: change in accounting principles. Not Applicable. (19) Report furnished to security holders. Not Applicable. (21) Subsidiaries of the registrant. Filed herewith. (22) Published report regarding matters submitted to vote of security holders. Not Applicable. (23) Consents of experts and counsel. Filed herewith. (24) Power of Attorney. Not Applicable. (27) Financial Data Schedule. Filed herewith. (99) Additional Exhibits. Not Applicable. 64 EX-2.I 2 SHARE EXCHANGE AGREEMENT Exhibit 2(i) ------------ Share Exchange Agreement dated as of November 17, 1999 by among Susquehanna, Boston Service Company, Inc. (t/a Hann Financial Service Corporation) and the shareholders of Hann. SHARE EXCHANGE AGREEMENT DATED AS OF THE 17TH DAY OF NOVEMBER, 1999 BY AND AMONG SUSQUEHANNA BANCSHARES, INC., BOSTON SERVICE COMPANY, INC. (t/a HANN FINANCIAL SERVICE CORPORATION) AND THE SHAREHOLDERS LISTED ON THE SIGNATURE PAGES HERETO TABLE OF CONTENTS
Page(s) ------- ARTICLE I THE SHARE EXCHANGE 2 SECTION 1.1 The Share Exchange; Closing 2 SECTION 1.2 Effect on Outstanding Shares 3 SECTION 1.3 Surrender and Exchange of BSC Certificates 3 ARTICLE II CONDUCT PENDING THE SHARE EXCHANGE 3 SECTION 2.1 Conduct of BSC Businesses 3 SECTION 2.2 Forbearance by BSC 3 SECTION 2.3 Cooperation 5 ARTICLE III REPRESENTATIONS AND WARRANTIES 5 SECTION 3.1 Representations and Warranties of BSC Shareholders and BSC 5 SECTION 3.2 Representations, Warranties and Covenants of the BSC Shareholders 20 SECTION 3.3 Representations and Warranties of SBI 23 ARTICLE IV COVENANTS 26 SECTION 4.1 Acquisition Proposals 26 SECTION 4.2 Securities Registration and Disclosure 26 SECTION 4.3 Employees 27 SECTION 4.4 Access and Information 27 SECTION 4.5 Certain Filings, Consents and Arrangements 28 SECTION 4.6 Additional Agreements 29 SECTION 4.7 Publicity 29 SECTION 4.8 Listing Application 29 SECTION 4.9 Notification of Certain Matters 29 SECTION 4.10 Insurance 29 SECTION 4.11 Board Seat 30 SECTION 4.12 Pooling; Reorganization 30 SECTION 4.13 General Release 30 SECTION 4.14 Employment Agreement 30 SECTION 4.15 Real Property Leases 30 SECTION 4.16 Consents 30
ii SECTION 4.17 BSC Shares 30 SECTION 4.18 Non-Competition 31 ARTICLE V CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE 31 SECTION 5.1 Conditions to Closing 31 SECTION 5.2 Conditions to Obligations of SBI 32 SECTION 5.3 Conditions to the Obligations of BSC and the BSC Shareholders 33 ARTICLE VI NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION, ETC. 34 SECTION 6.1 Survival of Representations and Warranties, Indemnities 34 ARTICLE VII TERMINATION 37 SECTION 7.1 Termination 37 SECTION 7.2 Effect of Termination 38 SECTION 7.3 Expenses 38 SECTION 7.4 Extension, Waiver 38 SECTION 7.5 Approval of Federal Reserve Board 38 ARTICLE VIII OTHER MATTERS 38 SECTION 8.1 Certain Defined Terms 38 SECTION 8.2 Parties in Interest 42 SECTION 8.3 Waiver and Amendment 42 SECTION 8.4 Counterparts 42 SECTION 8.5 Governing Law 42 SECTION 8.6 Expenses 42 SECTION 8.7 Notices 43 SECTION 8.8 Entire Agreement; Etc 43 SECTION 8.9 Severability 44 SECTION 8.10 Interpretation 44 SECTION 8.11 Waivers 44 SECTION 8.12 Incorporation of Schedules and Exhibits 44 SECTION 8.13 Enforcement of Agreement 44 SECTION 8.14 Knowledge 44 SECTION 8.15 Representative 45
iii Schedules Schedule 1.1 - Exchange Ratio Schedule 3.1(a) - Foreign Qualifications Schedule 3.1(b) - Outstanding Rights with Respect to Capital Stock Schedule 3.1(c) - Ownership of Capital Stock or Equity Securities Schedule 3.1(e) - No Violation Schedule 3.1(h) - Taxes and Tax Returns Schedule 3.1(i) - Litigation and Liabilities Schedule 3.1(j) - Contracts Schedule 3.1(k) - Employee Relations Schedule 3.1(l) - Employee Benefit Plans Schedule 3.1(m) - Title to Assets Schedule 3.1(n) - Authorizations Schedule 3.1(o) - Brokers & Finders Schedule 3.1(p) - Environmental Matters Schedule 3.1(q) - Interests of Certain Persons Schedule 3.1(r) - Insurance Schedule 3.1(s) - Dividends Schedule 3.1(t) - Books and Records Schedule 3.1(v) - Intellectual Property Schedule 3.1(w) - Absence of Undisclosed Liabilities Schedule 3.1(x) - Condition of Tangible Assets Schedule 3.1(y) - Year 2000 Compliance Schedule 3.2(a) - Ownership of BSC Shareholders Schedule 3.3(g) - Absence of Undisclosed Liabilities of SBI Schedule 4.3(b) - Employee Plans Exhibits Exhibit A - Registration Rights Agreement Exhibit B - General Release Exhibit C - Employment Agreement Exhibit D - Real Property Leases Exhibit E - Opinion of Counsel to BSC Exhibit F - Servicing Agreement Exhibit G - Opinion of Counsel to SBI iv This SHARE EXCHANGE AGREEMENT dated as of the 17th day of November, 1999 (this "Agreement"), is entered into by and among Susquehanna Bancshares, Inc., a --------- Pennsylvania corporation ("SBI"), Boston Service Company, Inc., t/a Hann --- Financial Service Corporation, a New Jersey corporation ("BSC"), and Michael J. --- Wimmer, Terry Wimmer, Sydell Lourie and Michael J. Wimmer, Custodian for the benefit of Brad Wimmer under the Uniform Gift to Minors Act (the "Custodial --------- Shareholder") (each a "BSC Shareholder" and collectively, the "BSC - ----------- --------------- --- Shareholders"). - ------------ RECITALS: WHEREAS, SBI is a multi-state, multi-institution bank holding company; WHEREAS, BSC is a corporation engaged in automobile financing arrangements with a strong record of performance; WHEREAS , SBI wishes to acquire from the BSC Shareholders, on the terms and conditions set forth in this Agreement, all of the issued and outstanding shares of the capital stock of BSC through a share exchange (the "Share ----- Exchange"); - -------- WHEREAS, the BSC Shareholders are the owners of 200 shares of common stock, no par value per share of BSC (the "BSC Shares"); ---------- WHEREAS, the BSC Shares represent all of the issued and outstanding capital stock of BSC, and the BSC Shareholders desire to exchange the BSC Shares for shares of the common stock, par value $2.00 per share, of SBI (the "SBI --- Shares"); - ------ WHEREAS, the parties desire to make certain representations, warranties, covenants and agreements in connection with this Agreement and to set forth the conditions to the Share Exchange; and WHEREAS, for federal income tax purposes, it is intended that the Share Exchange shall qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and for financial ---- accounting purposes shall be accounted for as a pooling of interests. NOW, THEREFORE, in consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Agreement and prescribe the terms and conditions hereof and the manner and basis of carrying it into effect, which shall be as follows: 1 ARTICLE I THE SHARE EXCHANGE SECTION 1.1 The Share Exchange; Closing --------------------------- (a) Subject to the terms and conditions of this Agreement, on the Closing Date (as defined below), subject to the provisions of Section 1.3 hereof with respect to the payment of fractional shares in cash, each BSC Share shall be exchanged for the number of SBI Shares determined in conformity with the Exchange Ratio set forth at Schedule 1.1 hereof (such SBI Shares, determined on the basis of the Exchange Ratio, as to each BSC Shareholder and, collectively to all BSC Shareholders, is the "Share Exchange Consideration"). On the Closing ---------------------------- Date, SBI shall become the holder of record and beneficial owner of all the issued and outstanding BSC Shares. Moreover, on the Closing Date, (i) SBI shall direct that its transfer agent issue a certificate to each BSC Shareholder for the required number of SBI Shares representing that BSC Shareholder's Share Exchange Consideration with the restrictions set forth in this Agreement and deliver the certificates by overnight courier to the BSC Shareholders and (ii) the BSC Shareholders shall deliver to SBI certificates (each, a "BSC --- Certificate" and collectively, the "BSC Certificates") representing all of the - ----------- ---------------- outstanding BSC Shares registered in the name of such BSC Shareholder, appropriately endorsed by such BSC Shareholder for transfer. (b) The closing of the Share Exchange (the "Closing") shall take place at ------- such place and time and on such date as shall be agreed upon by all parties, which date shall not be later than the 10th business day after the day on which the last to be fulfilled or waived of the conditions set forth in Article V shall be fulfilled or waived in accordance herewith. Notwithstanding the foregoing, in no event shall the Closing take place prior to January 1, 2000. The date on which the Closing occurs is hereinafter referred to as the "Closing ------- Date." - ---- (c) Notwithstanding any of the provisions of this Article I, if any of the BSC Shareholders shall fail or refuse to deliver any of the BSC Certificates representing BSC Shares, or if any of the BSC Shareholders shall fail or refuse to consummate the transactions described in this Agreement, such failure or refusal shall not relieve the other BSC Shareholders of any of their obligations under this Agreement, and SBI, at its option and without prejudice to its rights against any defaulting BSC Shareholder, may either (i) acquire the remaining BSC Shares which it is entitled to acquire hereunder, or (ii) refuse to acquire the remaining BSC Shares and thereby terminate all of its obligations hereunder. The BSC Shareholders acknowledge that the BSC Shares are unique and otherwise not available and agree that in addition to any other remedies, SBI may invoke any equitable remedies to enforce delivery of the BSC Shares hereunder, including, without limitation, an action or suit for specific performance. 2 SECTION 1.2 Effect on Outstanding Shares. If prior to the Closing ---------------------------- Date, the number of outstanding SBI Shares shall have been increased or decreased through a reclassification, stock dividend, stock split or reverse stock split, or other similar change, appropriate adjustment shall be made to the Exchange Ratio. SECTION 1.3 Surrender and Exchange of BSC Certificates. ------------------------------------------ (a) No certificates for fractional SBI Shares shall be issued in connection with the Share Exchange. In lieu thereof, SBI shall issue to a BSC Shareholder otherwise entitled to a fractional share, upon surrender of such certificates, a check for an amount of cash equal to the fraction of an SBI Share represented by the certificates so surrendered multiplied by the Average Closing Price per SBI Share as determined in conformity with Schedule 1.1 and as defined therein. No interest will be paid or accrued on the cash in lieu of fractional shares, if any, payable to holders of BSC Shares. (b) In the event any BSC Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the BSC Shareholder claiming such BSC Certificate to be lost, stolen or destroyed and agreeing to indemnify SBI against any claim that may be made against it with respect to such Certificate, SBI will issue in exchange for such lost, stolen or destroyed BSC Certificate, the SBI Shares into which such BSC Certificates has been converted pursuant to this Agreement and cash in lieu of fractional shares. ARTICLE II CONDUCT PENDING THE SHARE EXCHANGE SECTION 2.1 Conduct of BSC Businesses. Except as expressly provided in ------------------------- this Agreement, during the period from the date of this Agreement to the Closing, BSC shall (i) conduct its business in the usual, regular and ordinary course consistent with past practice, (ii) maintain and preserve intact its business organization, assets, leases, properties, employees and advantageous business relationships and retain the services of its officers and key employees, (iii) not take any action which would affect or delay its ability to obtain any necessary approvals, consents or waivers of any governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements on a timely basis under this Agreement and (iv) not take any action that would have an adverse effect on the business, operations or prospects of BSC. SECTION 2.2 Forbearance by BSC. During the period from the date of this ------------------ Agreement to the Closing, BSC shall not, without the prior written consent of SBI: (a) other than in the ordinary course of business consistent with past practice: (i) make any advance or loan; (ii) incur any indebtedness for borrowed money, under existing credit lines or otherwise; or (iii) assume, guarantee, endorse or otherwise as an accommodation become responsible for, the obligations of any other individual, corporation or other person; 3 (b) issue any equity securities or options, warrants, rights or convertible securities; adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend or make any distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock; cause its assets to be distributed to any of its shareholders, except in the form of compensation to employees who are shareholders consistent with subsection (d) of this Section 2.2; or grant any stock appreciation rights or grant, sell or issue to any individual, corporation or other person any shares of its capital stock or any right to acquire, or any securities evidencing a right to convert into or acquire, any shares of its capital stock; (c) other than in the ordinary course of business, consistent with past practice and pursuant to policies, if any, currently in effect: (i) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties, leasehold interests or assets; (ii) cancel, release or assign any indebtedness of any such person; or (iii) assign any contracts or agreements as in force at the date of this Agreement; (d) increase in any manner the annual compensation or fringe benefits of any of its employees, other than the payment of bonuses in the ordinary course of business consistent with past practice and not in excess of 10% of each such employee's annual base compensation or annual salary increases not in excess of 5%, or pay any pension or retirement allowance not required by law or by any existing plan or agreement to any such employees, or become a party to, amend, increase, terminate, otherwise modify or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee, or grant any unusual or extraordinary bonuses, benefits or other forms of direct or indirect compensation to any employee, officer, director, or consultant, or voluntarily accelerate the vesting of any stock options or other compensation or benefit; (e) amend its articles of incorporation, or its bylaws, except as expressly contemplated by this Agreement or required by law or regulation, in each case as concurred in by its counsel; (f) change its accounting principles or maintain its books in a manner inconsistent with past practices or fail to promptly advise SBI in writing of any material change in its business, earnings, assets, liabilities, financial or other condition or results of operations; (g) take any action that would prevent BSC from consummating the transactions contemplated by this Agreement; (h) take or agree to take any action that would prevent the Share Exchange from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code, or 4 prevent the Share Exchange from being treated as a pooling of interests for financial accounting purposes; (i) transfer any interest in the BSC Shares owned by them, or pledge or otherwise encumber the BSC Shares owned by them; or (j) fail to take any action that would be necessary to cause BSC to perform its obligations under this Agreement. SECTION 2.3 Cooperation. BSC and each BSC Shareholder shall cooperate ----------- with SBI, and SBI shall cooperate with BSC, in completing the transactions contemplated hereby and each shall not knowingly take, or cause to be taken, or knowingly agree or make any commitment to take, any action (i) that would cause any of the representations or warranties of it that are set forth in Article III hereof not to be true and correct in all material respects, (ii) that would cause it to fail to comply with the covenants set forth in Article IV or (iii) in the case of BSC, that is inconsistent with or prohibited by Section 2.1 or Section 2.2. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of BSC Shareholders and BSC. ---------------------------------------------------------- BSC, and each BSC Shareholder jointly and severally, represents and warrants to SBI that, except as specifically disclosed by BSC to SBI in writing in the disclosure schedules being delivered to SBI (the "BSC Schedules") which shall ------------- identify the specific sections or subsections in the Agreement to which each such disclosure relates: (a) Corporate Organization and Qualification. BSC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Jersey and is in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated, or the business conducted, by BSC requires such qualification, except for such failure to qualify or be in such good standing which, when taken together with all other such failures, would not have a material adverse effect on BSC. Each such jurisdiction is listed on Schedule 3.1(a). BSC has the requisite corporate and other power and authority (including all federal, state, local and foreign governmental authorizations) to carry on its businesses as now being conducted and to own its properties and assets. BSC has made available to SBI a complete and correct copy of the articles of incorporation and bylaws of BSC and such articles and bylaws are in full force and effect as of the date hereof. (b) Authorized Capital. The authorized capital stock of BSC consists of 3,000 shares of common stock, no par value per share, of which only the 200 BSC Shares were issued and outstanding as of the date of this Agreement. No other equity securities are authorized for issuance by BSC. All of the BSC Shares have been duly authorized and are validly issued, fully 5 paid and nonassessable, and are held of record and beneficially owned by the BSC Shareholders. BSC does not have any shares of capital stock reserved for issuance. BSC does not have any outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with shareholders on any matter. The BSC Shares have not been issued in violation of any preemptive rights. Except as set forth in Schedule 3.1(b), there are no outstanding subscriptions, options, warrants, rights, convertible securities or other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of BSC. After the Closing, SBI will not have any obligation to issue, transfer or sell any shares of capital stock pursuant to any Employee Plan (as defined in Section 3.1(l)). (c) Subsidiaries. BSC does not have any Subsidiaries. Except as set forth in Schedule 3.1(c), BSC does not own any capital stock or other equity securities of any corporation, has no direct or indirect equity or ownership interest in, by way of stock ownership or otherwise, any corporation, partnership, joint venture, association or business enterprise and is not contemplating acquiring any such interest. BSC owns beneficially and of record all shares of capital stock or other interests of any entity which shall be set forth as owned by it in Schedule 3.1(c), free and clear of any mortgage, claim, lien, pledge, option, security interest or other similar interest, encumbrance, easement, judgment or imperfection of title of any nature whatsoever (each an "Encumbrance"), and, except as set forth on Schedule 3.1(c), none of such shares ----------- or interests is subject to any covenant or other contractual restriction preventing or limiting the right to transfer such shares. (d) Corporate Authority. Subject to the regulatory approvals specified in Section 5.1(b) hereof, BSC has the requisite corporate power and authority, and legal right, and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions applicable to BSC contemplated hereby. This Agreement has been duly and validly executed and delivered by BSC and constitutes the valid and binding obligations of BSC, enforceable against BSC in accordance with its terms, except to the extent enforcement is limited by bankruptcy, insolvency and other similar laws affecting creditors' rights or the application by a court of equitable principles. (e) No Violations. The execution, delivery and performance of this Agreement by it does not, and the consummation of the transactions contemplated hereby by it will not, constitute (i) subject to receipt of the required regulatory approvals specified in Section 5.1(b), a breach or violation of, or a default under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, to which it (or any of its respective properties) is subject, (ii) a breach or violation of, or a default under BSC's articles of incorporation or bylaws, (iii) a breach of any duty owed by BSC to any person holding an interest in BSC, or (iv) except as disclosed in Schedule 3.1(e), a breach or violation of, or a default under (or an event which with due notice or lapse of time or both would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the properties or assets of it under any of the 6 terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which it is a party, or to which any of their respective properties or assets may be bound or affected; and the consummation of the transactions contemplated hereby will not require any approval, consent or waiver under any such law, rule, regulation, judgment, decree, order, governmental permit or license or the approval, consent or waiver of any other party to any such agreement, indenture or instrument, other than the required approvals, consents and waivers of governmental authorities referred to in Section 5.1(b). (f) Financial Reports. BSC's audited statements of financial condition as of and for the years ended December 31, 1996, 1997 and 1998, previously provided to SBI (including in each case any related notes and schedules) fairly presents or will fairly present the financial position of BSC as of its date and each of the statements of income and stockholders' equity and of cash flows provided therewith (including in each case any related notes and schedules), fairly presents the results of operations, stockholders' equity and cash flows, as the case may be, of BSC for the periods set forth therein, in each case in accordance with generally accepted accounting principles consistently applied ("GAAP") during the periods involved, except as may be noted therein, and except ---- as qualified as indicated in the audited statements of financial condition for the years ended December 31, 1996 and 1997. (g) Absence of Certain Changes or Events. Since December 31, 1998, to the date hereof, it has not incurred any material liability, except in the ordinary course of its business consistent with past practice. Additionally, since December 31, 1998, there has been no material adverse change in the financial condition, properties, assets, business, results of operations or prospects of it, nor has it taken any of the actions set forth in Section 2.2 of this Agreement. (h) Taxes. i. For purposes of this Agreement, the term "Taxes" shall mean all ----- taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, employment excise, withholding, property, sales, use, transfer, license, payroll and franchise taxes, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof. For purposes of this Agreement, the term "Tax --- Return" shall mean any report, return or other information required to be - ------ supplied to a taxing authority in connection with Taxes. All citations to provisions of the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments thereto and any substitute or successor provisions thereto. ii. BSC has duly filed all Tax Returns required to be filed as of the date hereof (and will file all Tax Returns required to be filed on or before the Closing Date). All such Tax Returns are (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) true, correct and complete in all material respects and were (and, as to 7 Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) filed on a timely basis. Except as disclosed in Schedule 3.1(h), BSC has not requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. True and complete copies of the federal, state and local income Tax Returns of BSC for the last three years have been provided to SBI prior to the date hereof. The reserves for Taxes reflected in the financial statements of BSC are sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the date of such financial statements and for all years and periods ended prior thereto, and the reserve for Taxes reflected in the balance sheet is sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the Closing Date and for all years and periods ended prior thereto. Since December 31, 1998, BSC has not incurred any liability for Taxes other than in the ordinary course of business, which Taxes would result in a material decrease in the net worth of BSC. There are no liens for taxes upon the assets of BSC or for any liability, whenever assessed, arising pursuant to U.S. Treasury Regulation Section 1.1502-6 or any comparable provision of state or local law. No waiver or extension of any statute of limitations relating to Taxes has been given to, or requested by, the Internal Revenue Service (the "IRS"), or any --- state or local taxing authority. No claim is currently being made by any authority in a jurisdiction where BSC does not file Tax Returns that they are or may be subject to Taxes in that jurisdiction. iii. Except as set forth on Schedule 3.1(h), BSC has compiled (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the withholding and payment of Taxes, including, without limitation, the withholding and reporting requirements under Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as well as similar provisions under any other laws, and have, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required. BSC has undertaken in good faith to appropriately classify all service providers as either employees or independent contractors for all Tax purposes. iv. Neither the consolidated federal income Tax Returns nor the state or local income Tax Returns of BSC have been examined by the IRS or relevant state taxing authorities, except as set forth on Schedule 3.1(h). All deficiencies asserted as a result of the examinations referred to on Schedule 3.1(h) have been paid, and no issue has been raised by any federal, state, local or foreign income tax authority in any such examination which, by application of the same or similar principles to similar transactions, could reasonably be expected to result in a proposed deficiency for any subsequent period. Further, to the best of BSC's knowledge, no state of facts exists or has existed which would constitute grounds for the assessment of any material liability for Taxes with respect to the periods which have not been audited by the IRS or other taxing authority. Except as described on Schedule 3.1(h), there are no examinations or other administrative or court proceedings relating to Taxes in progress or pending nor has BSC received a revenue agents report asserting a tax deficiency. To the best of 8 BSC's knowledge, there are no threatened actions, suits, proceedings, investigations or claims relating to or asserted for Taxes of BSC and there is no basis for any such claim. v. Since 1993, BSC has not been a member of any affiliated group of corporations that filed a consolidated income tax return. vi. Since the date of its incorporation, BSC has not (A) filed any consent or agreement under Section 341(f) of the Code, (B) applied for any tax ruling, (C) entered into a closing agreement with any taxing authority, (D) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), (E) made any payments, or been a party to an agreement (including this Agreement) that under any circumstances could obligate it to make payments that will not be deductible because of Section 280G of the Code, or (F) been a party to any tax allocation or tax sharing agreement. (i) Litigation and Liabilities. Except as set forth in Schedule 3.1(i), there are no (i) civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings before any court, governmental agency or otherwise pending or, to the best of BSC's Knowledge, threatened against it or (ii) obligations or liabilities, whether or not accrued, contingent or otherwise, including, without limitation, those relating to environmental and occupational safety and health matters, or any other facts or circumstances of which its management is aware that could reasonably be expected to result in any claims against or obligations or liabilities of it, or to hinder or delay the consummation of the transactions contemplated by this Agreement. There are no judgements, decrees, injunctions, rules or orders of any court or governmental department or agency outstanding against BSC. (j) Agreements. i. Schedule 3.1(j) contains an accurate list of all commitments, contracts, leases (other than automobile leases entered into in the ordinary course of business) and agreements to which BSC is a party or by which BSC is bound which involves a commitment or obligation in excess of $50,000 in the aggregate for each such commitment contract, lease or agreement or is otherwise material to the business of BSC (including, without limitation, joint venture or partnership agreements, employment agreements, contracts, tenant leases, equipment leases, equipment maintenance agreements, agreements with municipalities and labor organizations, loan agreements, bonds, mortgages, liens or other security agreements) (the "Contracts"). BSC has delivered true, --------- correct and complete copies of such Contracts to SBI. Except as set forth in Schedule 3.1(j) attached hereto, as of the date of this Agreement it is not a party to, or bound by, any oral or written: (A) "material contract" as such term is defined in Item 601(b)(10) of Regulation S-K promulgated by the Securities and Exchange Commission (the "SEC"); --- 9 (B) consulting agreement not terminable on thirty (30) days' or less notice involving the payment of more than $10,000 per annum, in the case of any such agreement; (C) agreement with any officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction of the nature contemplated by this Agreement; (D) agreement with respect to any officer providing any term of employment or compensation guarantee extending for a period longer than one year or for a payment in excess of $50,000; (E) agreement or plan, including any stock option plan, stock appreciation rights plan, employee stock ownership plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (F) agreement containing covenants that limit its ability to compete in any line of business or with any person, or that involve any restriction on the geographic area in which, or method by which, it may carry on its business (other than as may be required by law or any regulatory agency); (G) agreement, contract or understanding, other than this Agreement, regarding the capital stock of BSC or committing to dispose of substantially all of the assets of BSC; (H) collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization; (I) any employment contracts or any other contracts, agreements or commitments to or with individual employees or agents of BSC which involves a commitment or obligation in excess of $50,000 in the aggregate for each such contract, agreement or commitment and any contracts, agreements or commitments with consultants or other independent contractors; (J) any power of attorney given by BSC; (K) any contracts or commitments providing for payments based in any manner on the revenues or profits of BSC; 10 (L) any contract under which BSC has agreed (i) to maintain the confidentiality of third party information, (ii) not to compete or solicit for hire employees of a third party or (iii) to otherwise limit or restrict its operations; (M) any instruments relating to indebtedness for borrowed money, including any note, bond, deed of trust mortgage, indenture or agreement to borrow money or any agreement of guarantee or indemnification, whether written or oral, in favor of any person or entity; or (N) any other contract or commitment, whether in the ordinary course of business or not, which involves future payments, performance of services or delivery of goods or materials, to or by BSC of any amount or value in excess of $50,000 in the aggregate for each such contract or commitment. ii. The Contracts constitute valid and legally binding obligations of the parties thereto and are enforceable in accordance with their terms, assuming due authorization, execution and delivery by parties other than BSC and except (i) as may be affected by bankruptcy, insolvency, reorganization, moratorium or similar laws or by equitable principles relating to or limiting creditors rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. iii. Each Contract constitutes the entire agreement by and between the respective parties thereto with respect to the subject matter thereof. iv. All obligations required to be performed under the terms of the Contracts have been performed, no act or omission has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default by BSC under the Contracts. v. Except as expressly set forth on Schedule 3.1(j), none of the Contracts requires the consent of the other parties thereto in order for it to be in full force and effect with respect to BSC as controlled by SBI after the Closing or would give rise to the other party's right to terminate any Contract; and BSC will use its best efforts to obtain any required consents prior to the Closing. Except as expressly set forth on Schedule 3.1(j), BSC has no plans, programs, commitments or arrangements to which they are parties, or to which they are subject, pursuant to which payments may be required or acceleration of benefits may be required upon change of control of BSC. (k) Employee Relations. Except as set forth on Schedule 3.1(k) there are no pending claims by any current or former personnel of BSC against BSC other than for compensation and benefits due in the course of employment; (ii) there are no pending claims against BSC arising out of any statute, ordinance or regulation relating to employment practices 11 or occupational or safety and health standards; (iii) there are no pending or, to the best knowledge of BSC threatened labor disputes, strikes or work stoppages against BSC; and (iv) to the best knowledge of BSC, there are no union organizing activities in process or contemplated with respect to the BSC. No collective bargaining units have been certified or recognized by BSC. Schedule 3.1(k) also identifies all employees on leave of absence and all current or former employees and their dependents receiving health benefits, or eligible to receive health benefits, as required by the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Notice of the availability of COBRA ----- coverage has been provided to all persons entitled thereto since June 30, 1996, and all persons electing such coverage are being (or have been, if applicable) provided such coverage. (l) Employee Benefit Plans. Schedule 3.1(l) contains a complete list of all pension, retirement, stock option, stock purchase, stock ownership, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, group insurance, severance and other employee incentive and welfare contracts and plans, and all trust agreements related thereto, that it maintains or to which it contributes for any of its present or former directors, officers, or other employees (hereinafter referred to collectively as the "Employee -------- Plans"). - ----- i. All of the Employee Plans comply in all material respects with all applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code and other applicable laws; it has not ----- engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan which is likely to result in any penalties, taxes or other events under Section 502(i) of ERISA or Section 4975 of the Code. ii. No liability to the Pension Benefit Guaranty Corporation has been or is expected by it to be incurred with respect to any Employee Plan which is subject to Title IV of ERISA ("Pension Plan"), or with respect to any ------------ "single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained by it or any entity which is considered one employer with BSC under Section 4001 of ERISA or Section 414 of the Code (an "ERISA ----- Affiliate"). - --------- iii. No Pension Plan or single-employer plan of an ERISA Affiliate had an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether or not waived)) as of the last date of the end of the most recent plan year ending prior to the date hereof; all contributions to any Pension Plan or single-employer plan of an ERISA Affiliate that were required by Section 302 of ERISA and were due prior to the date hereof have been made on or before the respective dates on which such contributions were due; the fair market value of the assets of each Pension Plan or single-employer plan of an ERISA Affiliate exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA Affiliate as of the end of the most recent plan year with respect to the respective Pension Plan or single-employer plan of an ERISA Affiliate ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the 12 most recent actuarial valuation for such Pension Plan or single-employer plan of an ERISA Affiliate as of the date hereof, and no notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the reporting requirement has not been waived has been required to be filed for any Pension Plan or single- employer plan of an ERISA Affiliate within the 12-month period ending on the date hereof. iv. Neither has it provided, nor is it required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401 (a)(29) of the Code. v. Neither it nor any ERISA Affiliate has contributed to any "multi-employer plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980. vi. Each Employee Plan of it which is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401 (a) of the Code (a "Qualified Plan") has received a -------------- favorable determination letter from the IRS covering the requirements of the Tax Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; it is not aware of any circumstances likely to result in revocation of any such favorable determination letter; each such Employee Plan has been amended to reflect the requirements of subsequent legislation applicable to such plans; and each Qualified Plan has complied at all relevant times in all material respects with all applicable requirements of Section 401 (a) of the Code. vii. Each Qualified Plan which is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of the Code and the regulations thereunder. viii. Neither it nor any ERISA Affiliate has committed any act or omission or engaged in any transaction that has caused it to incur, or created a material risk that it may incur, liability for any excise tax under Sections 4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which heretofore have been paid and fully reflected in its financial statements. ix. There is no pending or threatened litigation, administrative action or proceeding relating to any Employee Plan other than routine claims for benefits. x. Except as disclosed in Schedule 3.1(l), there has been no announcement or legally binding commitment by it to create an additional Employee Plan, or to amend an Employee Plan except for amendments required by applicable law which do not materially increase the cost of such Employee Plan, and it does not have any obligations for retiree health and life benefits under any Employee Plan that cannot be terminated without incurring any liability thereunder except as required to be maintained by COBRA. 13 xi. Except as disclosed in Schedule 3.1(l), the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any payment or series of payments by BSC to any person which is an "excess parachute payment" (as defined in Section 28OG of the Code) under any Employee Plan, increase any benefits payable under any Employee Plan, or accelerate the time of payment or vesting of any such benefit. xii. Except as disclosed in Schedule 3.1(l), all required annual reports have been filed timely with respect to each Employee Plan, and it has made available to SBI a true and correct copy of (A) reports on the applicable form of the Form 5500 series filed with the IRS for plan years beginning after 1987, (B) such Employee Plan, including amendments thereto, (C) each trust agreement and insurance contract relating to such Employee Plan, including amendments thereto, (D) the most recent summary plan description for such Employee Plan, including amendments thereto, if the Employee Plan is subject to Title I of ERISA, and (E) the most recent actuarial report or valuation if such Employee Plan is a Pension Plan and (F) the most recent determination letter issued by the IRS if such Employee Plan is a Qualified Plan. (m) Title to Assets. Except as disclosed on Schedule 3.1(m), it has good and marketable title to its properties and assets (other than property as to which it is lessee), free and clear of all Encumbrances, except for (i) such items shown in the BSC consolidated financial statements or notes thereto; (ii) liens on real property for current real estate taxes not yet delinquent or (iii) such minor defects in title which would not, individually or in the aggregate, adversely effect the intended use of the property. BSC does not own any real property. With respect to any property leased by it which is set forth on Schedule 3.1(m), there are no defaults by it, or any of the other parties thereto, or any events which, with the giving of notice or lapse of time or both, would become defaults by it or any of the other parties thereto, under any of such leases; and all such leases are in full force and effect and are enforceable against it, as the case may be, and there is no circumstance existing as of the date of this Agreement which causes or would cause such leases to be unenforceable against any of the other parties thereto except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally as well as principles of equity to the extent enforcement by a court of equity is required. (n) Compliance with Laws. i. BSC holds all licenses, franchises, certificates, consents, permits, approvals, certificates of public convenience and necessity, concessions, rights and authorizations ("Authorizations") from all federal, -------------- state, local and foreign governmental entities and other persons or entities which are necessary for the lawful conduct of its business and its use and occupancy of its assets and properties in the manner heretofore conducted, used and occupied. A complete and correct list of the Authorizations held by BSC is 14 set forth in Schedule 3.1(n). All of such Authorizations are valid, in good standing and in full force and effect, not subject to any default and no suspension or cancellation of any of which is threatened, and BSC has duly performed in all material respects all of their respective obligations under such Authorizations. No event has occurred with respect to the material Authorizations which permits, or after notice or lapse of time or both would permit, revocation or termination thereof or would result in any other material impairment of the rights of the holder of any of the Authorizations, and no terminations thereof have been, to the knowledge of BSC, threatened. Except as disclosed in Schedule 3.1(n), all such Authorizations are renewable by their terms or in the ordinary course of business and will not be adversely affected by the transactions contemplated by this Agreement. ii. BSC is in compliance with all applicable laws, statutes, ordinances, codes, rules and regulations of any governmental entities, and BSC has not received any notice from a governmental entity within five years of the date hereof of any such violation. iii. Except as expressly set forth on Schedule 3.1(n), none of the Authorizations requires the consent of any governmental entity or any other party in order for it to be in full force and effect with respect to BSC as controlled by SBI after the Closing or would give rise to a governmental entity's or any other party's right to terminate any Authorization as a result of the Share Exchange; and BSC will use its best efforts to obtain any required consents prior to the Closing. (o) Brokers and Finders. Except as set forth in Schedule 3.1(o) attached hereto, BSC and its officers, directors, employees or agents, and the BSC Shareholders have not employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions, finders' fees or similar fees or expenses and no broker or finder has acted directly or indirectly for BSC or any BSC Shareholder in connection with this Agreement or the transactions contemplated hereby and no investment banking, financial advisory or similar fees have been incurred or are or will be payable by BSC or any BSC Shareholder in connection with this Agreement or the transactions contemplated hereby. (p) Environmental Matters. i. Except as disclosed in Schedule 3.1(p): (A) BSC has been and is in full compliance with all Environmental Laws (as defined below) applicable to the operations of, and the property owned, operated, occupied or otherwise used by, BSC. To the best knowledge of BSC, there are no circumstances that may prevent or interfere with such full compliance in the future. (B) BSC has obtained all Permits (as defined below) necessary for the operation of their businesses and the ownership, operation, occupation or other use of their properties, all such Permits are in good standing and BSC is in compliance with all terms 15 and conditions of such Permits. There has been no material change in the facts or circumstances reported or assumed in the applications for or the granting of such Permits. (C) There is no lawsuit, claim, action, cause of action, judicial or administrative proceeding, investigation, summons, or written notice by any person pending, or to BSC's knowledge, threatened, against BSC alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries or penalties) arising out of or resulting from (i) the violation of any Environmental Law or (ii) the presence or Release of any Hazardous Substance (as defined below) at any location, whether or not owned, operated, occupied or otherwise used by BSC. (D) BSC is not subject to any writ, injunction, order, decree or settlement addressing (i) any alleged violation of any Environmental Law or (ii) the alleged presence, or Release into the environment of any Hazardous Substance at any location, whether or not owned, operated, occupied or otherwise used by BSC. (E) No Environmental Lien (as defined below) has attached to any of the property owned, operated, occupied or otherwise used by BSC. (F) There has been no Release of any Hazardous Substance at, to or from any of the properties owned, operated, occupied or otherwise used by BSC. (G) BSC has not transported or arranged for the transport of any Hazardous Substance to any facility or site for the purpose of treatment, storage, disposal or recycling which (i) is included on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar ------ state list which is required by any state Environmental Law to be kept, or (ii) is presently subject to a governmental enforcement action under CERCLA or the Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state Environmental Law. (H) All of the third parties with which BSC presently has arrangements, engagements or contracts to accept, treat, transport, store, dispose, remove or recycle any Hazardous Substances generated or present at any of the properties owned, operated, occupied or otherwise used by BSC is properly permitted under Environmental Laws to perform the foregoing activities or conduct. (I) BSC has no liability for the violation of any Environmental Law or the Release of any Hazardous Substance in connection with any business or property previously owned, operated, occupied or otherwise used by BSC or any of the predecessors of BSC. 16 (J) There are no past or present actions, activities, circumstances, conditions, event or incidents, including, without limitation, the generation, handling, transportation, treatment, storage, Release, presence, disposal or arranging for disposal of any Hazardous Substance, that could form the basis of any claim against BSC under any Environmental Law. (K) Without in any way limiting the generality of the foregoing, (i) all underground storage tanks, and the capacity and contents of such tanks, located on the real property owned or operated by BSC are identified in Schedule 3.1(p), (ii) except as identified in Schedule 3.1(p), there is no asbestos contained in or forming part of any building, building component, structure or office space owned or operated by BSC, and (iii) no polychlorinated biphenyls (PCBS) are used or stored at any part of the property owned or operated by BSC. (L) The following terms shall have the following meanings: 1. "Environmental Laws" means all federal, state, local and foreign laws, statutes, codes, ordinances, rules, regulations, orders, directives, binding policies, common law, or Permits as amended and in effect on the date hereof and on the Closing Date relating to or addressing the environment, health or safety, including, but not limited to, any law, statute, code, ordinance, rule, regulation, order, directive, binding policy, common law or Permit relating to the generation, use, handling, treatment removal, storage, production, manufacture, transportation, remediation, disposal, arranging for disposal, or Release of Hazardous Substances. 2. "Environmental Lien" means a lien in favor of any conventional authority for any (a) liability under any Environmental Law or (b) damages arising from, or costs incurred by, such governmental authority in response to a release or threatened release of a Hazardous Substance into the environment. 3. "Hazardous Substances" means any toxic or hazardous substances (including, without limitation, wastes), pollutants, explosives, radioactive materials or substances (including, without limitation, wastes), including, without limitation, asbestos, PCBs, petroleum products and byproducts, and substances (including, without limitation, wastes) defined in or regulated under Environmental Law. 4. "Permit" means any permit, license, consent or other approval or authorization required under any Environmental Law. 5. "Release" means the release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migrating of any Hazardous Substance through or in the air, soil, surface water, or groundwater. 17 (q) Interests of Certain Persons. Except as noted in Schedule 3.1(q), none of its respective officers or directors, or any BSC Shareholder, or any "associate" (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of any such officer or director or ------------ any BSC Shareholder, has any interest in (i) any contract or property (real or personal), tangible or intangible, used in or pertaining to its business, except in connection with his or her service as an employee in the ordinary course of business or (ii) any business that furnished goods or services to BSC since July 1, 1996, except for an interest of less than 5% of the stock of a company whose securities are traded on a national securities exchange. (r) Insurance. Set forth in Schedule 3.1(r) is a complete and accurate list and description of all policies of fire, liability, product liability, workers compensation, health and other forms of insurance presently in effect with respect to the business and properties of BSC, true and correct copies of which have been furnished to SBI. Schedule 3.1(r) includes, without limitation, the carrier, a summary description of coverage, the limits of coverage, retention or deductible amounts, amount of annual premiums, date of expiration with respect to each such policy, and any pending claims in excess of $5,000. No such policy (nor any previous policy) is subject to any currently enforceable retroactive rate or premium adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events arising prior to the date hereof. Schedule 3.1(r) indicates each policy as to which (a) the coverage limit has been reached or (b) the total incurred losses to date equal 75% or more of the coverage limit. No notice of cancellation or termination has been received with respect to any such policy, and no act or omission of BSC could result in cancellation of any such policy prior to its scheduled expiration date. BSC has not been refused any insurance with respect to any aspect of the operations of the business nor has its coverage been limited by any insurance carrier to which it has applied for insurance or with which it has carried insurance during the last five (5) years. BSC has duly and timely made all claims it has been entitled to make under each policy of insurance. BSC has not received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance and, to the best knowledge of BSC, no such improvements or expenditures are required. (s) Dividends. The only dividends or other distributions which it has made on its capital stock since January 1, 1999 are set forth in Schedule 3.1(s). (t) Books and Records. Except as set forth on Schedule 3.1(t), its books and records have been, and are being, maintained in accordance with applicable legal and accounting requirements and reflect in all material respects the substance of events and transactions that should be included therein. (u) Board Action. Its board of directors (at a meeting duly called and held) has been duly convened and by the requisite vote of all directors (a) determined that the Share 18 Exchange is advisable and in the best interests of it and its shareholders and (b) approved this Agreement and the transactions contemplated hereby and thereby. (v) Intellectual Property. BSC, directly or indirectly, possesses or has adequate rights to all licenses, permits and all other franchises, trademarks, trade names, service marks, inventions, patents, copyrights, and any applications therefor, trade secrets, research and development, know-how, technical data, computer software programs or applications and technology systems necessary to operate its business and required by applicable law (the "Intellectual Property"). Except as set forth on Schedule 3.1(v), all right, - ---------------------- title and interest in and to each item of Intellectual Property is owned by BSC, is not subject to any license, royalty arrangement or pending or threatened claim or dispute and is valid and in full force and effect. None of the Intellectual Property owned or used by BSC, infringes any Intellectual Property right of any other entity and no Intellectual Property owned by BSC is infringed upon by any other entity. (w) Absence of Undisclosed Liabilities. Except (i) as and to the extent specifically reserved against in BSC's audited balance sheet as of December 31, 1998, and in the notes to such balance sheet for the period then ended, (ii) liabilities which have been incurred since December 31, 1998 in the ordinary course of business consistent with past practice as a result of arm's length negotiations and (iii) liabilities and obligations specifically disclosed on Schedule 3.1(w), BSC has no material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise and whether due or to become due). BSC and the BSC Shareholders have no reason to believe that any reserves for liabilities are inadequate. Except as and to the extent described in BSC's audited balance sheet as of December 31, 1998 or in Schedule 3.1(w), neither BSC nor any BSC Shareholder has knowledge of any basis for the assertion against BSC of any liability and there are no circumstances, conditions, happenings, events or arrangements, contractual or otherwise which may give rise to liabilities, except commercial liabilities and obligations incurred in the ordinary course of BSC's business and consistent in amount and nature with past practice. Except as set forth on Schedule 3.1(w), BSC's audited balance sheet as of December 31, 1998 reflects a reasonable residual value for the total portfolio of the leases pursuant to which BSC acts as lender, lessor or sublessor, finances, leases or subleases automobiles. (x) Condition of Tangible Assets. Except as set forth in Schedule 3.1(x), in all material respects all the real property leased by it is free from structural defects, and to the best knowledge of BSC the operation and use of the real property conform in all material respects to all applicable laws, ordinances, regulations, permits, licenses and certificates. (y) Year 2000 Compliance. Except as provided in Schedule 3.1(y) hereof, BSC has undertaken an assessment of its software and hardware in order to reveal those portions thereof which will require modification or replacement to utilize properly dates beyond December 31, 1999, and has contracted with appropriate third parties to modify or replace such existing software and hardware so that such software and hardware will not be affected by the 19 change in the Year 2000. BSC has contacted its vendors and borrowers in order to assess their efforts to mitigate any adverse effects to their computer programs and systems beyond December 31, 1999. (z) SBI Stock Ownership. BSC does not own any SBI Shares or other securities convertible into SBI Shares. (aa) Pooling of Interests. Neither BSC nor any BSC Shareholder has taken or failed to take any action or has knowledge of any fact or circumstance that would, or would be reasonably likely to, prevent the accounting for the Share Exchange as a pooling of interests in accordance with GAAP and the published pronouncements of the SEC. (bb) Tax Reorganization. Neither BSC nor any BSC Shareholder has taken or failed to take any action, or has knowledge of any fact or circumstance, that would, or would be reasonably likely to, adversely affect the status of the Share Exchange as a reorganization under Section 368(a) of the Code. (cc) Disclosure. No representation or warranty by BSC and/or any BSC Shareholder contained in this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of BSC or the BSC Shareholders pursuant to this Agreement or in any documents delivered by BSC or the BSC Shareholders to SBI in connection with the transactions contemplated by this Agreement, contains or shall contain any untrue statement of material fact or omits or shall omit a material fact necessary to make the statements contained therein not misleading. All statements and information contained in any such certificate, instrument, schedule or document delivered by or on behalf of BSC and/or any BSC Shareholder shall be deemed representations and warranties by BSC and the BSC Shareholders. SECTION 3.2 Representations, Warranties and Covenants of the BSC ---------------------------------------------------- Shareholders. The BSC Shareholders severally and not jointly represent, warrant - ------------ and covenant to SBI that, except as specifically disclosed by the BSC Shareholders to SBI in writing in the disclosure schedules being delivered to SBI (the "BSC Shareholder Schedules") and which BSC Shareholder Schedules shall ------------------------- identify the specific sections or subsections in the Agreement to which each such disclosure relates: (a) Ownership; Authority. i. Such BSC Shareholder owns beneficially and of record the number of shares set forth opposite his or her name on Schedule 3.2(a) free and clear of all Encumbrances and such BSC Shareholder has the authority to execute and deliver this Agreement, and no other acts or other proceedings on the part of the BSC Shareholders are necessary to authorize this Agreement or the transactions contemplated hereby or thereby. This Agreement has been duly and validly executed and delivered by such BSC Shareholder and constitutes the legal, valid and 20 binding obligation of such BSC Shareholder, enforceable against each BSC Shareholder in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights in general, or by general principles of equity. ii. Neither the execution and delivery by such BSC Shareholder of this Agreement nor the consummation of the transactions contemplated hereby or thereby nor compliance by such BSC Shareholder with any of the provisions hereof or thereof will (i) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Encumbrance upon any of the BSC Shares owned by such BSC Shareholder under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, sublease, option agreement or other instrument or obligation to which such BSC Shareholder is a party, or by which he or she or the BSC Shares owned by such BSC Shareholder may be bound or affected, (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such BSC Shareholder or the BSC Shares owned by such BSC Shareholder or (iii) require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any person or entity applicable to such BSC Shareholder. (b) Brokers or Finders. Such BSC Shareholder has not entered into and will not enter into any agreement, arrangement or understanding with any broker, finder or investment banker pertaining to the Share Exchange. (c) No Other Agreements to Sell Shares. Other than pursuant to this Agreement, no BSC Shareholder has any legal obligation, absolute or contingent, to any other person or firm to sell any of the BSC Shares or to enter into any agreement with respect thereto. (d) Economic Risk; Sophistication. Each BSC Shareholder represents and warrants that such BSC Shareholder has not relied on any purchaser representative, or on BSC or any other BSC Shareholder, in connection with the acquisition of shares of SBI Shares hereunder. Such BSC Shareholders is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"); and (a) has such -------------- knowledge, sophistication and experience in business and financial matters that such BSC Shareholder is capable of evaluating the merits and risks of an investment in the SBI Shares, (b) fully understands the nature, scope and duration of the limitations on transfer contained in this Agreement and (c) can bear the economic risk of an investment in the SBI Shares and can afford a complete loss of such investment. Such BSC Shareholder has had an adequate opportunity to ask questions and receive answers from the officers of SBI concerning any and all matters relating to the transactions described herein including without limitation the background and experience of the officers and directors of SBI, the plans for the operations of the business of SBI, the business, operations and financial condition of SBI, and any plans for additional acquisitions and the like. Such BSC Shareholder has asked any and all questions of the nature 21 described in the preceding sentence and all questions have been answered to his or her satisfaction. Additionally, such BSC Shareholder has received from SBI copies of (i) SBI's Annual Report on Form 10-K for the year ended December 31, 1998, (ii) SBI's Quarterly Report on Form 10-Q for the period ended March 31, 1999 and (iii) the Proxy Statement for SBI's 1999 annual shareholder meeting, and have also obtained such other information as such BSC Shareholder requires in order to evaluate an investment in the Shares. (e) Private Placement; Resale Restrictions. i. By execution and delivery of this Agreement, each BSC Shareholder represents and warrants to SBI that the representing BSC Shareholder does not have any contract, undertaking, agreement or arrangement, written or oral, with any other person to sell, transfer or grant participations in any SBI Shares to be acquired by such BSC Shareholder. Additionally, each BSC Shareholder represents and warrants that the SBI Shares are being acquired by each of the BSC Shareholders for his or her own account, and not with a view to the sale or distribution of any part thereof, except pursuant to a registration statement filed pursuant to the Securities Act or an exemption from registration thereunder. ii. Each BSC Shareholder understands that the Shares have not been registered under the Securities Act on the basis that the sale to the BSC Shareholders in connection with the Share Exchange is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and the SBI's reliance on such exemption is predicated on the BSC Shareholder's representations set forth herein. iii. Each BSC Shareholder will not directly or indirectly, offer, sell, contract to sell, pledge or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any SBI Shares unless (i) registered under the Securities Act, (ii) pursuant to an exemption from registration under the Securities Act, (iii) in a transaction not requiring registration under the Securities Act or (iv) accompanied by an opinion of counsel satisfactory to SBI that registration is not required. iv. The certificate or certificates evidencing the SBI Shares to be delivered to the BSC Shareholders pursuant to the Share Exchange will bear a legend substantially in the form set forth below and containing such other information as SBI may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD, TRANSFERRED, OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE THEREOF UNDER THE SECURITIES ACT OR AN 22 OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO SUSQUEHANNA BANCSHARES, INC. ("SUSQUEHANNA") THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, THE TRANSFER OF THESE SHARES IS RESTRICTED UNTIL SUSQUEHANNA HAS PUBLICLY RELEASED ITS FIRST REPORT INCLUDING THE COMBINED FINANCIAL RESULTS OF SUSQUEHANNA AND BOSTON SERVICE COMPANY, INC. FOR A PERIOD OF AT LEAST 30 DAYS OF COMBINED OPERATIONS. v. Notwithstanding anything herein contained to the contrary, each BSC Shareholder will not sell, transfer or otherwise dispose of any of the SBI Shares, or any option, right or other interest with respect to the SBI Shares that such BSC Shareholder will acquire pursuant to this Agreement, or any securities that may be paid as a dividend thereon or with respect thereto or issued or delivered in exchange or substitution therefor, or offer or agree to sell, transfer or otherwise dispose of, or in any other way reduce such BSC Shareholder's risk of ownership or investment in the SBI Shares until SBI has publicly released its first report including the combined financial results of SBI and BSC for a period of at least thirty (30) days of combined operations. After the release of the report described in the immediately preceding sentence, certificates evidencing the SBI Shares delivered at or after the Closing Date, may at the BSC Shareholder's election, be surrendered for cancellation and reissuance with a legend relating only to the restriction on the transfer of the SBI Shares pursuant to the Securities Act. vi. Each BSC Shareholder acknowledges that SBI may place stop transfer instructions with the transfer agent with respect to the SBI Shares. SECTION 3.3 Representations and Warranties of SBI. SBI represents and -------------------------------------- warrants to the BSC Shareholders (and the word "it" in this Article III refers to SBI and each of its Subsidiaries), that, except as specifically disclosed by SBI to the BSC Shareholders in writing in the disclosure schedules being delivered to the BSC Shareholders (the "SBI Schedules") and which SBI Schedules ------------- shall identify the specific sections or subsections in the Agreement to which each such disclosures relates, to the best of its knowledge: (a) Corporate Organization and Qualification. SBI is a corporation duly incorporated, validly existing and duly subsisting under the laws of the Commonwealth of Pennsylvania and is in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated, or the business conducted, by SBI requires such qualification, except for such failure to qualify or be in such good standing which, when taken together with all other such failures, would not have a material adverse effect on SBI. It has the requisite corporate and other power and authority (including all federal, state, local and foreign governmental authorizations) to carry on its business as now conducted and to own its properties and assets. 23 (b) Corporate Authority. Subject only to the regulatory approvals specified in Section 5.1(a) hereof, SBI has the requisite corporate power and authority, and legal right, and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions applicable to SBI contemplated hereby. This Agreement has been duly and validly executed and delivered by SBI and constitutes the valid and binding obligations of SBI enforceable against SBI, in accordance with its terms, except to the extent enforcement is limited by bankruptcy, insolvency and other similar laws affecting creditors' rights or the application by a court of equitable principles. (c) Capitalization. As of June 30, 1999, SBI common stock was held of record by more than 6,700 shareholders and the authorized capital stock of SBI consisted of 100,000,000 shares of SBI common stock, of which approximately 36,977,488 shares are issued and outstanding (an additional 12,612 shares are held as treasury stock) and 5,000,000 shares of Preferred Stock, no par value per share, of which none are outstanding. Sufficient shares of authorized, but unissued, SBI common stock to effect the transactions herein contemplated will be reserved by SBI for such purpose. (d) No Violations. The execution, delivery and performance of this Agreement by SBI does not, and the consummation of the transactions contemplated hereby by SBI will not, constitute (i) a breach or violation of, or a default under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument to which SBI (or any of SBI's respective properties or assets) is subject, (ii) a breach or violation of, or a default under, SBI's articles of incorporation or bylaws or (iii) a breach or violation of, or a default under (or an event which with due notice or lapse of time or both would constitute a default under), or result in the termination of, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of SBI's properties or assets under, any of the terms, conditions or provisions of any note, bond, indenture, deed of trust, loan agreement or other agreement, instrument or obligation to which it is a party, or to which any of SBI's properties or assets may be bound or affected; and the consummation of the transactions contemplated hereby will not require any approval, consent or waiver under any such law, rule, regulation, judgment, decree, order, governmental permit or license or the approval, consent or waiver of any other party to any such agreement, indenture or instrument, other than (i) the required approvals, consents and waivers of governmental authorities referred to in Section 5.1(b) and (ii) any such approval, consent or waiver that already has been obtained. (e) Board Action. SBI's board of directors (at a meeting duly called and held) has been duly convened and by the requisite vote of all directors (a) determined that the Share Exchange is advisable and in the best interests of it and its shareholders, and (b) approved this Agreement and the transactions contemplated hereby, subject to the receipt of the opinion of SBI's financial advisor to the effect that the Exchange Ratio and the Share Exchange Consideration are fair from a financial point of view to the holders of SBI Shares, as set forth in Section 5.2(f). 24 (f) SBI SEC Reports and Financial Statements. SBI has furnished to the BSC Shareholders copies of the Annual Report of SBI on Form 10-K for the fiscal year ended December 31, 1998, any proxy statements and other reports (including Quarterly Reports on Form 10-Q) under the Exchange Act, filed by SBI after such date (collectively, the "SEC Reports"), each as filed with the SEC, ----------- and SBI's 1998 Annual Report to Shareholders (the "1998 Annual Report"). As of ------------------ their respective dates, each SEC Report and any proxy statements and other reports filed by SBI with the SEC after the date of this Agreement (i) compiled, or will comply with on the date of such filing, as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act and (ii) did not, or will not, on the date of filing or the date as of which information is set forth therein, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representation in clause (ii) of the immediately preceding sentence shall not apply to any misstatement or omission in any SEC Report filed prior to the date hereof which was superseded by a subsequent SEC Report filed prior to the date hereof. The financial statements (including any related schedules and/or notes) included in the SEC Reports and the 1998 Annual Report have been prepared in accordance with GAAP consistently applied (except as may be indicated in the notes thereto) throughout the periods involved and fairly present the financial position, results of operations and cash flows as of the dates and for the periods indicated therein. (g) Absence of Undisclosed Liabilities. Except (i) as disclosed in, or reflected in the financial statements included in, the SEC Reports, (ii) liabilities which have been incurred since March 31, 1999 in the ordinary course of business consistent with past practice as a result of arm's length negotiations, which liabilities would not be reasonably likely to have a material adverse effect on the business, earnings, assets, liabilities, financial or other condition or results of operations of SBI and its Subsidiaries taken as a whole and (iii) liabilities and obligations specifically disclosed on Schedule 3.3(g), neither SBI nor any of its Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise and whether due or to become due). (h) SBI Shares. The issuance and delivery by SBI of the SBI Shares in connection with the Share Exchange and this Agreement have been duly and validly authorized by all necessary corporate action on the part of SBI. The SBI Shares to be issued in connection with the Share Exchange and this Agreement, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable. (i) Pooling of Interests. Neither SBI nor any of its Subsidiaries has taken or failed to take any action or has knowledge of any fact or circumstance that would, or would be reasonably likely to, prevent the accounting for the Share Exchange as a pooling of interests in accordance with GAAP and the pronouncements of the SEC. 25 (j) Tax Reorganization. SBI understands that this transaction is intended by the BSC Shareholders to qualify as a tax-free reorganization under Section 368(a) of the Code. Neither SBI nor any of its Subsidiaries has taken, failed to take or will take any action, or has knowledge of any fact or circumstances that would, or would be reasonably likely to, adversely affect the status of the Share Exchange as a tax-free reorganization under Section 368(a) of the Code. ARTICLE IV COVENANTS SECTION 4.1 Acquisition Proposals. BSC and the BSC Shareholders agree --------------------- that they shall not, and that they shall direct and use their best efforts to cause the BSC employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by them) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to their shareholders) with respect to a merger, acquisition, consolidation, reorganization, share exchange, tender offer, exchange offer or similar transaction involving, or any purchase, sale or other disposition of all or any significant portion of the assets or any equity securities of, BSC (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or, engage in any negotiations concerning, or provide -------------------- any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. BSC and the BSC Shareholders agree that they will take the necessary steps to inform the appropriate individuals or entities referred to in the first sentence hereof of the obligations undertaken by each of them in this Section 4.1. BSC and the BSC Shareholders agree that they will notify SBI immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations, or discussions are sought to be initiated or continued with, them. SECTION 4.2 Securities Registration and Disclosure. Following the -------------------------------------- publication of financial results covering at least thirty (30) days of combined operations of SBI and BSC have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies, SBI will promptly prepare and file with the SEC under the Securities Act a registration statement for the registration of the resale of the SBI Shares to be issued pursuant hereto (the "Registration Statement"), as provided in the Registration ---------------------- Rights Agreement between the BSC Shareholders and SBI set forth in Exhibit A attached hereto. SBI shall take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of SBI Shares pursuant to this Agreement and the BSC Shareholders shall furnish SBI all information concerning them as SBI may reasonably request in connection with any such action. SBI shall use reasonable efforts to provide a copy of the Registration Statement to the BSC Shareholders for their review ten (10) business days prior to its filing with the SEC. Each 26 party will promptly provide the other with copies of all correspondence, comment letters, notices or other communications to or from the SEC or the Board relating to the Registration Statement, or any amendment or supplement thereto, and SBI will advise the BSC Shareholders promptly after it receives notice thereof, of the effectiveness of the Registration Statement, of the issuance of any stop order with respect to the effectiveness thereof, of the suspension of the qualification of the SBI Shares issuable in connection herewith for offering or sale in any jurisdiction, or the initiation or threat of any proceeding for any such purpose. SECTION 4.3 Employees. --------- (a) Each person employed by BSC prior to the Closing who remains an employee of BSC following the Closing (each a "Continued Employee") shall be ------------------ entitled to participate in whatever employee benefit plans, as defined in Section 3(3) of ERISA, or whatever stock option, bonus or incentive plans or other fringe benefit programs that may be in effect generally for employees of SBI or SBI's Subsidiaries from time to time ("SBI's Plans"), if such Continued ----------- Employee shall be eligible or selected for participation therein and otherwise shall not be participating in a similar plan which continues to be maintained by the BSC for such employee. All such participation shall be subject to such terms of such plans as may be in effect from time to time provided, further that Continued Employees will be eligible to participate in SBI's plans on the same basis as similarly situated employees of SBI or SBI's Subsidiaries. Such Continued Employees will receive credit for past service with BSC for purposes of eligibility and vesting, but not benefit accrual, under SBI's Plans. (b) BSC shall take all timely and necessary action to cease participation or accrual of benefits, effective as of the Closing, by each person employed by BSC prior to the Closing in each Employee Plan (as defined in Section 3.1(l), including timely notice to all participants under Section 204(h) of ERISA, if applicable, and to terminate each Employee Plan, other than an Employee Plan containing a cash or deferred arrangement qualified under Section 401(k) of the Code ("Employee 401(k) Plan") and other than those specified in -------------------- Schedule 4.3(b), effective as of the Closing; provided that SBI may, in its sole discretion, give notice to BSC not less than twenty (20) days prior to the Closing, that any Employee Plan shall not be terminated and/or participation or accrual of benefits thereunder shall not cease pursuant to this Section 4.3(b). At the sole discretion of SBI, any Employee 401(k) Plan shall be merged with any similar such plan maintained and designated by SBI, effective at or after the Closing, as elected by SBI, and BSC shall take any and all timely and necessary action to effect such merger. SECTION 4.4 Access and Information. Upon reasonable notice, and ---------------------- subject to applicable laws relating to the exchange of information, each party to this Agreement shall provide the other party and its representatives (including, without limitation, directors, officers and employees of the party and its affiliates, and counsel, accountants and other professionals retained) such access during normal business hours throughout the period prior to the Closing to the facilities, books, records (including, without limitation, tax returns and work papers of independent auditors), properties, personnel and such other information as the requesting party 27 may reasonably request (other than reports or documentation which are not permitted to be disclosed under applicable law); provided, however, that no investigation pursuant to this Section 4.4 shall affect or be deemed to modify any representation or warranty made herein. Each of the parties will not, and will cause their respective representatives not to, use any information obtained pursuant to this Section 4.4 or Section 3.1 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement and in no event will any party directly or indirectly use such information for any competitive or commercial purpose. Subject to the requirements of law, each party to this Agreement will keep confidential, and will cause its representatives to keep confidential, all information and documents obtained pursuant to this Section 4.4 and Section 3.1 unless such information (i) is generally available to or known by the public other than as a result of improper disclosure by the receiving party or (ii) is obtained by a receiving party from a source other than another party to this Agreement, provided that such source was not bound by a duty of confidentiality with respect to such information. Without in any way limiting the foregoing, BSC shall provide to SBI within forty-five (45) days of the end of each calendar quarter financial statements (including a balance sheet and income statement) (except for the calendar quarter financial statements for the calendar quarter ended December 31, 1999, which shall be provided to SBI within thirty (30) days) as of the end of, and for, such period prepared in each case on a basis consistent with past practice for the quarters ended March 31, 1999, June 30, 1999 (each as restated to conform with GAAP) and September 30, 1999 and December 31, 1999, if applicable, as prepared in conformance with GAAP and the representations set forth in Section 3.1(f) for the quarters ended September 30, 1999 and December 31, 1999, if applicable. In the event that this Agreement is terminated or the transactions contemplated by this Agreement shall otherwise not be consummated, each party shall, if so requested, promptly cause all copies of documents or extracts thereof containing information and data as to another party hereto (or an affiliate of any party hereto) to be returned to the party which furnished the same. SECTION 4.5 Certain Filings, Consents and Arrangements. SBI shall use ------------------------------------------ all reasonable efforts to obtain all necessary approvals required to be obtained by SBI to carry out the transactions contemplated by this Agreement and to consummate the Share Exchange. BSC shall cooperate with SBI in connection therewith, including without limitation furnishing all information concerning BSC as may be reasonably requested by SBI in connection with any such action. BSC shall use all reasonable efforts to obtain all necessary approvals required to be obtained by BSC to carry out the transactions contemplated by this Agreement and to consummate the Share Exchange. SBI shall cooperate with BSC in connection therewith, including without limitation furnishing all information concerning SBI as may be reasonably requested by BSC in connection with any such action. Each party will consult with the other party with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and governmental authorities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other party apprised of the status of matters relating to completion of the transactions contemplated hereby. Each party shall promptly furnish the other party with copies of applications to any governmental authority in respect of the transactions contemplated hereby. 28 SECTION 4.6 Additional Agreements. Subject to the terms and --------------------- conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable, including using efforts to obtain all necessary actions or non- actions, extensions, waivers, consents and approvals from all applicable governmental authorities, or other entities, effecting all necessary registrations, applications and filings and obtaining any required contractual consents and regulatory approvals. SECTION 4.7 Publicity. Except and to the extent required by law, --------- without the prior written consent of the other parties, none of the parties to this Agreement shall, and each shall direct its representatives not to, directly or indirectly, make any public comment, statement or communication with respect to, or otherwise disclose or permit the disclosure of any information regarding this Agreement or the transactions described herein. Prior to issuing any press release or making any public filings under securities laws which makes any reference to BSC, SBI shall provide a copy to BSC for comment and in all such instances the parties shall cooperate. SECTION 4.8 Listing Application. Following the disclosure of ------------------- financial results covering at least thirty (30) days of combined operations of SBI and BSC, SBI shall promptly prepare and submit to the Nasdaq National Market a listing application covering the SBI Shares issuable in the Share Exchange, and shall use its best efforts to obtain, prior to the effectiveness of the Registration Statement, approval for the listing of such SBI Shares, subject to official notice of issuance. SECTION 4.9 Notification of Certain Matters. Each party shall give ------------------------------- prompt notice to the others of (a) any notice of, or other communication relating to, a default or event that, with notice or lapse of time or both, would become a default, received by it or any of its subsidiaries subsequent to the date of this Agreement and prior to the Closing, under any contract material to the financial condition, properties, businesses, results of operations or prospects of it to which it is a party or is subject; and (b) any material adverse change in its financial condition, properties, business, or results of operations taken as a whole or the occurrence of any event which, so far as reasonably can be foreseen at the time of its occurrence, is reasonably likely to result in any such change. Each party shall give prompt notice to the other parties of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement. SECTION 4.10 Insurance. BSC shall use its best efforts to retain no --------- less than the level of insurance coverage presently held by it as of the date hereof. 29 SECTION 4.11 Board Seat. At the meeting of the SBI Board of ---------- Directors next following the Closing Date, Michael J. Wimmer shall be appointed as a director of SBI in the class of directors whose term expires upon the election of the successors to that class at the annual meeting of SBI shareholders in or around May of 2000. So long as Michael J. Wimmer remains employed under the Employment Agreement between Michael J. Wimmer and BSC, the SBI Board of Directors shall recommend him for reelection as a director of SBI in the class of directors whose term expires upon the election of the successors to that class at the annual meeting of SBI shareholders in or around May of 2003. SECTION 4.12 Pooling; Reorganization. From and after the date ----------------------- hereof and until the Closing, neither SBI nor BSC nor any of their respective subsidiaries or other affiliates nor any BSC Shareholder shall (i) take any action, or fail to take any action, that could jeopardize the qualification of the Share Exchange as a "pooling of interests" for accounting purposes; (ii) take any action, or fail to take any action, that could jeopardize qualification of the Share Exchange as a reorganization under Section 368(a) of the Code; or (iii) enter into any contract, agreement, commitment or arrangement with respect to either of the foregoing. At the Closing, the auditors of BSC will deliver a letter to PricewaterhouseCoopers, as accountants for SBI, to the effect that BSC has complied with all pooling requirements applicable to BSC in form and substance satisfactory to PricewaterhouseCoopers. SECTION 4.13 General Release. At the Closing, each BSC Shareholder --------------- shall deliver a general release to SBI, in the form attached hereto as Exhibit B, releasing SBI and the directors, officers, agents and employees of SBI from all liabilities to the Closing Date. SECTION 4.14 Employment Agreement. At the Closing, BSC and ----------------- Michael J. Wimmer will enter into an Employment Agreement, substantially in the form attached hereto as Exhibit C. SECTION 4.15 Real Property Leases. At the Closing, real property -------------------- leases substantially in the form of Exhibit D hereto will be entered into by BSC and MTW Realty, L.L.C. SECTION 4.16 Consents. BSC and the BSC Shareholders will use their -------- best efforts prior to Closing to obtain all consents necessary for the consummation of the transactions contemplated by this Agreement. SECTION 4.17 BSC Shares. Between the date of this Agreement and the ---------- Closing Date, the BSC Shareholders will not transfer any of the BSC Shares or convey any interest in the BSC Shares, nor will the BSC Shareholders vote the BSC Shares in any way to cause a breach of this Agreement. 30 SECTION 4.18 Non-Competition. (a) Subject to the Closing, and as --------------- an inducement to SBI to execute this Agreement and complete the transactions contemplated hereby, and in order to preserve the goodwill associated with the business of BSC being acquired pursuant to this Agreement, BSC and the BSC Shareholders hereby covenant and agree that for a period of five (5) years from the Closing Date, they will not, directly for themselves or any third party, become engaged in any business or activity which is directly in competition with any services or financial products sold by, or any business or activity engaged in by, BSC, SBI or any of their affiliates including, without limitation, any business or activity engaged in by any leasing company or any federally or state chartered bank, savings bank, savings and loan association, trust company and/or credit union, and/or any services or financial products sold by such entities, including, without limitation, the taking and accepting of deposits, the provision of trust services, the making of loans and/or the extension of credit, brokering loans and/or leases and the provision of insurance and investment services, within the states of New Jersey, New York, Pennsylvania, Delaware, Maryland and Virginia; provided, however that Michael J. Wimmer may continue, consistent with past practice, to engage in business activities with Auto Lenders Liquidation Center, Inc. This provision shall not restrict BSC or the BSC Shareholders from owing or investing in publicly traded securities of financial institutions, so long as their respective aggregate holdings in any financial institution do not exceed ten percent (10%) of the outstanding capital stock of such institution. In the event that a court of competent jurisdiction determines that the provisions of this covenant not to compete are excessively broad as to duration, geographical scope or activity, it is expressly agreed that this covenant not to compete shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such over broad provisions shall be deemed, without further action on the part of any person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable in such jurisdiction. ARTICLE V CONDITIONS TO CONSUMMATION OF THE SHARE EXCHANGE SECTION 5.1 Conditions to Closing. The respective obligations of --------------------- the parties to effect the Share Exchange shall be subject to the satisfaction or waiver prior to the Closing of the following conditions: (a) All of the required approvals, consents or waivers of governmental authorities with respect to this Agreement and the transactions contemplated hereby including, without limitation, the approvals, notices to, consents or waivers of (i) the Board of Governors of the Federal Reserve and (ii) jurisdictions with respect to "blue sky" obligations; and the parties shall have procured all other regulatory approvals, consents or waivers of governmental authorities that are necessary or appropriate to the consummation of the transactions contemplated by this Agreement. 31 (b) No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Share Exchange, or any other transaction contemplated by this Agreement, and no litigation or proceeding shall be pending against any of the parties herein or any of their subsidiaries brought by any governmental agency seeking to prevent consummation of the transactions contemplated hereby. In the event any order or injunction shall have been issued, each party to this Agreement agrees to use its reasonable efforts to have any such injunction lifted. (c) No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental authority which prohibits, restricts or makes illegal consummation of the Share Exchange, or any other transaction contemplated by this Agreement. SECTION 5.2 Conditions to Obligations of SBI. The obligations of -------------------------------- SBI to effect the Share Exchange shall be subject to the satisfaction or waiver prior to the Closing of the following additional conditions: (a) Each of the representations and warranties of BSC and the BSC Shareholders contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects as of the Closing Date as if made on such date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date); BSC shall have performed each of its covenants and agreements, contained in this Agreement; and SBI shall have received a certificate signed by the Chief Executive Officer and the Controller of the BSC, dated the Closing Date, to the foregoing effect. (b) SBI shall have received an opinion or opinions dated as of the Closing Date, from Capehart & Scatchard, P.A., counsel to BSC, substantially in the form attached hereto as Exhibit E. (c) There shall not have occurred any material adverse change in the financial condition, prospects, properties, assets, liabilities (including contingent liabilities), business or results of operation of BSC. (d) The Share Exchange shall as of the date of the Closing meet the requirements for pooling-of-interests accounting treatment under GAAP and under the published accounting rules of the SEC, and SBI shall have received a letter from PricewaterhouseCoopers LLP in form and substance reasonably satisfactory to SBI as to the matters specified in this Section 5.2(d). (e) Michael J. Wimmer shall have entered into an Employment Agreement with BSC, substantially in the form of Exhibit C hereto. 32 (f) SBI shall have received the opinion from its financial advisor to the effect that the Exchange Ratio and the Share Exchange Consideration are fair from a financial point of view to the holders of SBI Shares. (g) BSC shall have entered into an agreement with Auto Lenders Liquidation Center with respect to the provision of services, substantially in the form attached hereto as Exhibit F. (h) M.R. Weiser & Co., LLP, or such other accounting firm as is acceptable to the parties, shall have furnished to SBI an "agreed upon procedures" letter, dated the Closing Date, in form and substance satisfactory to SBI to the effect that, based upon procedures performed with respect to the financial condition of BSC for the period from December 31, 1998 to a specified date not more than five (5) business days prior to the date of such letter, including but not limited to (i) their inspection of the minute books of BSC, (ii) inquiries made by them of officers and other employees of BSC and affiliates responsible for financial and accounting matters as to transactions and events during the period, as to consistency of GAAP with prior periods and as to the existence and disclosure of any material contingent liabilities, and (iii) other specified procedures and inquiries performed by them, noting in the letter based only upon the procedures noted above, (A) during the period from December 31, 1998 to a specified date not more than five (5) business days prior to the date of such letter, any change in the capitalization of BSC on a consolidated basis, (B) any material adjustments that would be required to the audited financial statements for the period ended December 31, 1998 in order for them to be in conformity with GAAP applied on a consistent basis with prior periods or (C) any material adjustments which would be required to the unaudited financial statements for the most recent quarter end period prior to the Closing in order for them to be in conformity with GAAP applied on a consistent basis with prior periods. SECTION 5.3 Conditions to the Obligations of BSC and the BSC ------------------------------------------------ Shareholders. The obligations of BSC and the BSC Shareholders to effect the - ------------ Share Exchange shall be subject to the satisfaction or waiver prior to the Closing of the following additional conditions: (a) Each of the representations, warranties and covenants of SBI contained in this Agreement and in any document delivered in connection herewith shall be true and correct in all material respects on the Closing Date as if made on such date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date); SBI shall have performed each of its covenants and agreements, which are material to its operations and prospects, contained in this Agreement; and BSC shall have received certificates signed by the President or Vice President and Secretary or Assistant Secretary of SBI, dated the Closing Date, to the foregoing effect. (b) BSC shall have received an opinion dated as of the Closing Date, from Counsel of SBI, substantially in the form attached hereto as Exhibit G. 33 ARTICLE VI NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION, ETC. SECTION 6.1 Survival of Representations and Warranties, Indemnities. ------------------------------------------------------- (a) All covenants and agreements of the parties made in this Agreement or provided herein shall survive the Closing Date to the extent expressly provided herein. All representations and warranties of the parties made in this Agreement or as provided herein shall be made as of the date hereof and shall survive the Closing for a period of two years (the "Survival Period"), except --------------- that (a) any intentional or knowing misrepresentation shall survive the Closing indefinitely, and (b) Sections 3.1(a), (b), (d), (h), (n) and (p) and Section 3.2(a) shall survive the expiration of the fifteen (15) day period commencing on the expiration date of the relevant statute of limitations period (including any applicable extensions thereof), if longer than the two-year period previously specified (provided that if there is no relevant statute of limitations, survival shall be indefinite), unless survival is governed by the preceding clause (a). (b) The BSC Shareholders (other than the Custodial Shareholder), jointly and severally, hereby agree to defend, indemnify and hold SBI and its Subsidiaries and their officers, directors and employees (collectively, the "SBI --- Indemnitees") harmless from and against any and all claims, liabilities, losses, - ----------- damages, deficiencies, penalties, fines, costs or expenses (including, without limitation, the fees and expenses of investigation and counsel) (collectively, "Losses"), arising out of or resulting from (i) any breach of the ------ representations and warranties contained in Section 3.1; (ii) any breach in any material respect by the BSC Shareholder or BSC of any covenant or agreement of the BSC Shareholder or BSC contained in or arising out of this Agreement or (iii) any and all actions, suits, proceedings, claims, demands, assessments and judgments incidental to the foregoing to the enforcement of such indemnification. Each BSC Shareholder, jointly and severally, hereby agrees to defend, indemnify and hold the SBI Indemnitees harmless from and against any and all Losses arising out of or resulting from any breach of any representation or warranty by such BSC Shareholder contained in Section 3.2. (c) Notwithstanding anything to the contrary in this Agreement, the BSC Shareholders shall not be liable to the SBI Indemnitees for any Losses until the Losses incurred by the SBI Indemnitees exceed Five Hundred Thousand Dollars ($500,000) (the "Threshold Amount"), and then the BSC Shareholders shall be ---------------- liable to indemnify and hold the SBI Indemnitees harmless hereunder only to the extent such Losses exceed the Threshold Amount; provided that this Section 6.1(c) shall not apply to any intentional or knowing misrepresentations or breaches of covenants or agreements by BSC or the BSC Shareholders. (d) Notwithstanding anything to the contrary in this Agreement, the BSC Shareholders shall not have any liability under this Article VI to the extent that any such liability exceeds Three Million Dollars ($3,000,000). 34 (e) SBI hereby agrees to defend, indemnify and hold the BSC Shareholders (collectively, the "BSC Shareholder Indemnitees") harmless from and --------------------------- against any and all Losses, arising out of or resulting from (i) any breach of the representations and warranties contained in Section 3.3; (ii) any breach in any material respect by SBI of any covenant or agreement of SBI contained in or arising out of this Agreement or (iii) any and all actions, suits, proceedings, claims, demands, assessments and judgments incidental to the foregoing to the enforcement of such indemnification. (f) Notwithstanding anything to the contrary in this Agreement, SBI shall not have any liability under this Article VI to the extent that any such liability exceeds Three Million Dollars ($3,000,000), except that nothing contained in this subparagraph shall limit SBI's obligation to provide validly issued SBI Shares to the BSC Shareholders in the amount provided for in this Agreement. (g) Promptly after the receipt by the SBI Indemnitees of a notice of any claim, action, suit or proceeding of any third party which is subject to indemnification hereunder, such party or parties (the "Indemnified Buyer Party") ----------------------- shall give written notice of such claim (a "Notice of Claim") to the party or --------------- parties obligated to provide indemnification hereunder (collectively, the "Indemnifying Shareholder Party"), stating the nature and basis of such claim ------------------------------ and the amount thereof, to the extent known. The failure of the Indemnified Buyer Party to so notify the Indemnifying Shareholder Party shall not impair the Indemnified Buyer Party's ability to seek indemnification from the Indemnifying Shareholder Party, except to the extent that the Indemnifying Shareholder Party is materially prejudiced. The Indemnifying Shareholder Party shall be entitled to participate in the defense or settlement of such matter and the parties agree to cooperate in any such defense or settlement and to give each other full access to all information relevant thereto. The Indemnifying Shareholder Party shall not be obligated to indemnify an Indemnified Buyer Party hereunder for any settlement entered into without the Indemnifying Shareholder Party's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. If any Notice of Claim relates to a claim by a person or persons other than any federal state, local or foreign tax authority; and the amount of such claim is acknowledged by the Indemnifying Shareholder Party to be fully covered by the foregoing indemnity, as limited herein, the Indemnifying Shareholder Party may elect to defend against such claim at its own expense, in lieu of the Indemnified Buyer Party assuming such defense; provided, that the -------- Indemnified Buyer Party shall be entitled to participate in or monitor such defense at its own expense and the Indemnifying Shareholder Party will fully cooperate with the Indemnified Buyer Party and its counsel with respect thereto. If the Indemnifying Shareholder Party elects to assume such defense, the Indemnifying Shareholder Party shall retain counsel reasonably satisfactory to the Indemnified Buyer Party. No compromise or settlement of such claim may be effected by the Indemnifying Shareholder Party without the consent of the Indemnified Buyer Party (which shall not be unreasonably withheld, conditioned or delayed) unless (i) there is no finding or admission of any violation of law and no effect on any other claims that may be made against such Indemnified Buyer Party and (ii) the sole relief provided is monetary damages that are paid --- in full by the Indemnifying Shareholder Party. If a Notice of 35 Claim relates to a claim by a federal, state, local or foreign Tax authority and the Indemnifying Shareholder Party requests that the Indemnified Buyer Party accept a settlement offer (other than an offer conditioned upon the Indemnified Buyer Party's agreement with respect to any other issue not deemed a Loss hereunder) and agrees to pay the indemnity with respect thereto, then the Indemnified Buyer Party shall either (i) accept such settlement offer or (ii) not accept such settlement offer, in which case the Indemnifying Shareholder Party shall only be liable to the Indemnified Buyer Party for the amount the Indemnifying Shareholder Party would have been required to pay the Indemnified Buyer Party had the Indemnified Buyer Party accepted the settlement offer. (h) All claims for indemnification by a BSC Shareholder Indemnitee under this Article VI shall be asserted and resolved under the procedures set forth above substituting in the appropriate place "Indemnified Shareholder Party" for "Indemnified Buyer Party" and variations thereof and "SBI" for "Indemnifying Shareholder Party." (i) Notwithstanding any provision in this Article VI to the contrary, any claim for indemnification in respect of which notice is given in accordance with the provisions of Section 6.1(a) hereof prior to the expiration of the Survival Period shall survive with respect to such claim until final resolution thereof. (j) Notwithstanding any provision in this Article VI to the contrary, no party shall be able to avoid the limitations of this Article by electing to pursue some other remedy, except with respect to remedies relating to fraud or intentional or knowing misrepresentation. 36 ARTICLE VII TERMINATION SECTION 7.1 Termination. This Agreement may be terminated, and the ----------- Share Exchange abandoned, prior to the Closing: (a) by the mutual, written consent of BSC and SBI; (b) by BSC if (i) there has been a material breach by SBI of any representation, warranty, covenant or agreement contained herein and such breach is not cured or not curable within ten (10) days after written notice of such breach is given to SBI by BSC; or (ii) any condition precedent to BSC's obligations as set forth in Article V of this Agreement has not been met or waived by BSC at such time as such condition can no longer be satisfied. (c) by SBI by written notice to BSC and the BSC Shareholders, in the event (1) of a material breach by BSC or any BSC Shareholder of any representation, warranty, covenant or agreement contained herein and such breach is not cured or not curable within ten (10) days after written notice of such breach is given to BSC and the BSC Shareholders by SBI; or (ii) any condition precedent to SBI's obligations as set forth in Article V of this Agreement has not been met or waived by SBI at such time as such condition can no longer be satisfied. (d) by SBI or BSC by written notice to the other, in the event that the Share Exchange is not consummated by February 28, 2000, unless the failure to so consummate by such time is due to the breach of any representation, warranty or covenant contained in this Agreement by the party seeking to terminate; provided, however, that such date may be extended by the written agreement of SBI and BSC, and such date will be automatically extended until May 31, 2000 if the approval set forth in Section 7.5 of this Agreement has not been received by such date. (e) by BSC, by giving written notice of such election to SBI within one (1) business day following determination of the Average Closing Price per SBI Share in connection with Closing if such Average Closing Price is greater than $25.00 per share (subject to adjustment in accordance with Section 1.1 herein) at the time such calculation is required to be made pursuant to Schedule 1.1 hereof (f) by SBI, by giving written notice of such election to BSC within one (1) business day following determination of the Average Closing Price per SBI Share in connection with Closing if such Average Closing Price is less than $15.00 per share (subject to adjustment in accordance with Section 1.1 herein) at the time such calculation is required to be made pursuant to Schedule 1.1 hereof. 37 SECTION 7.2 Effect of Termination. In the event of the termination --------------------- of this Agreement, as provided above, this Agreement shall thereafter become void and have no effect, except that the provisions of Sections 3.1(o) (fees), 4.4 (as applicable to confidentiality and return of documents), 4.7 (publicity) and 7.3 (expenses) of this Agreement shall survive any such termination and abandonment. SECTION 7.3 Expenses. Any termination of this Agreement pursuant to -------- Sections 7.1(a), 7.1(d), 7.1(e) or 7.1(f) hereof shall be without cost, expense or liability on the part of any party to the others. Any termination of this Agreement pursuant to Section 7.1(b) or 7.1(c) hereof shall also be without cost, liability or expense on the part of any party to the others, unless the breach of a representation or warranty or covenant is caused by the willful conduct or gross negligence of a party, in which event said party shall be liable to the other parties for all out-of-pocket costs and expenses, including without limitation, reasonable legal and accounting, incurred by such other party in connection with their entering into this Agreement and their carrying out of any and all acts contemplated hereunder ("Expenses"). -------- SECTION 7.4 Extension, Waiver. At any time prior to the Closing, any ----------------- party hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. SECTION 7.5 Approval of Federal Reserve Board. Notwithstanding the --------------------------------- foregoing or any other provision of this Agreement to the contrary, in the event that SBI is required to file with the Federal Reserve Bank an approval request, with respect to the transactions contemplated by this Agreement, BSC and the BSC Shareholders hereby agree to extend the date of this Agreement until such approval is granted, or May 31, 2000, whichever is earlier, and BSC and the BSC Shareholders hereby agree that the time period required for the filing of such an approval request and the receipt of approval from the Federal Reserve Bank shall not give rise to a right to terminate this Agreement under Section 7.1(d). ARTICLE VII OTHER MATTERS SECTION 8.1 Certain Defined Terms. As used in the Agreement, the --------------------- following terms shall have the meanings indicated: "1998 Annual Report" shall be defined as at Section 3.3(f). "Acquisition Proposal" shall be defined as at Section 4.1. 38 "Agreement" shall be this Share Agreement dated as of the 17th day of November, 1999 by and among Susquehanna Bancshares, Inc., Boston Service Company, Inc., t/a Hann Financial Services Corporation and Michael Wimmer, Terry Wimmer and Sydell Lourie. "Authorizations" shall be defined as at Section 3.1(n). "Average Closing Price" means the average closing price per share of SBI common stock as determined in conformity with Schedule 1.1 and as defined therein. "BSC" shall mean Boston Service Company, Inc. (t/a Hann Financial Service Corporation). "BSC Certificate" shall be defined as at Section 1.1(a). "BSC Schedules" shall be defined as at Section 3.1. "BSC Shareholder Indemnitees" shall be defined as at Section 6.1(e). "BSC Shareholder Schedules" shall be defined as at Section 3.2. "BSC Shareholders" shall mean Michael J. Wimmer, Terry Wimmer and Sydell Lourie. "BSC Shares" shall be defined in the recitals to this Agreement. "CERCLA" shall be defined as at Section 3.1(p)(i)(G). "COBRA" is the Consolidated Omnibus Budget Reconciliation Act of 1985 and shall be defined as at Section 3.1(k). "Closing" shall be defined as at Section 1.1(b). "Closing Date" shall be defined as at Section 1.1(b). "Code" is the Internal Revenue Code of 1986, as amended and shall be defined in the recitals to this Agreement. "Continued Employee" shall be defined as at Section 4.3(a). "Contracts" shall be defined as at Section 3.1(j)(i). "corporate affiliate" shall mean, with respect to a person, any other corporation controlling, controlled by, or under common control with, such person. 39 "Custodial Shareholder" shall mean Terry Wimmer, custodian for the benefit of Brad Wimmer under the Uniform Gift to Minors Act. "ERISA" is the Employee Retirement Income Security Act and defined as at Section 3.1(l)(i). "ERISA Affiliate" shall be defined as at Section 3.1(l)(ii). "Employee 401(k) Plan" shall be defined as at Section 4.3(b). "Employee Plans" shall be defined as at Section 3.1(l). "Encumbrance" shall be defined as at Section 3.1(c). "Environmental Laws" shall be defined as at Section 3.1(p)(i)(L)(1). "Environmental Lien" shall be defined as at Section 3.1(p)(i)(L)(2). "Exchange Act" is the Securities Exchange Act of 1934, as amended, and defined as at Section 3.1(q). "Exchange Ratio" shall be described on Schedule 1.1 hereof "Expenses" shall be described as at Section 7.3. "GAAP" shall be described as at Section 3.1(f). "Hazardous Substances" shall be described as at Section 3.1(p)(i)(L)(3). "Indemnified Buyer Party" shall be defined as at Section 6.1(g). "Indemnified Shareholder Party" shall be defined as at Section 6.1(h). "Indemnifying Shareholder Party" shall be defined as at Section 6.1(g). "IRS" is the Internal Revenue Service and shall be defined as at Section 3.1(h)(ii). "Losses" shall be defined as at Section 6.1(b). "material" means material to the party in question (as the case may be) and its respective subsidiaries, taken as a whole. "Notice of Claim" shall be defined as at Section 6.1(g). 40 "Pension Plan" is an employee benefit plan subject to Title IV of ERISA and shall be defined as at Section 3.1(l)(ii). "Permit" shall be defined as at Section 3.1(p)(i)(L)(4). "person" includes an individual, corporation, partnership, association, trust or unincorporated organization. "Qualified Plan" shall be defined as at Section 3.1(l)(vi). "Registration Statement" shall be defined as at Section 4.2. "Release" shall be defined as at Section 3.1(p)(i)(L)(5). "Representative" shall be defined as at Section 8.15. "SBI" shall be Susquehanna Bancshares, Inc., a Pennsylvania corporation and a multi-state, multi-institutional bank holding company. "SBI Indemnitees" shall be defined as at Section 6.1(b). "SBI Schedules" shall be defined as at Section 3.3. "SBI Shares" shall be defined in the recitals to this Agreement. "SBI's Plans" shall be defined as at Section 4.3. "SEC" is the Securities and Exchange Commission and shall be defined as at Section 3.1(j)(i)(A). "SEC Reports" shall be defined as at Section 3.3(f). "Securities Act" is the Securities Act of 1933, as amended, and shall be defined as at Section 3.2(d). "Share Exchange" shall be defined in the recitals to this Agreement. "Share Exchange Consideration" shall be determined on the basis of the Exchange Ratio set forth at Schedule 1.1 hereof, and shall be defined as at Section 1.1(a). "Subsidiary" means, with respect to any party, any corporation, limited liability company, partnership, joint venture, or other business association or entity, at least a majority of 41 the voting securities or economic interests of which is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries. "Survival Period" shall be defined as at Section 6.1(a). "Tax Return" shall be defined as at Section 3.1(h)(i). "Threshold Amount" shall be defined as at Section 6.1(c). When a reference is made in this Agreement to Exhibits, Sections, or Schedules, such reference shall be to a Section of, or Exhibit, or Schedule to, this Agreement unless otherwise indicated. The table of contents, tie sheet and headings contained in this Agreement are for ease of reference only and shall not affect the meaning or interpretation of this Agreement. Whenever the words "include," "includes," or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation." Any singular term in this Agreement shall be deemed to include the plural and any plural term the singular. SECTION 8.2 Parties in Interest. This Agreement shall be binding ------------------- upon and inure solely to the benefit of each party hereto and their respective successors and assigns, and, other than the right to receive the consideration payable in the Share Exchange pursuant to Article I hereof, is not intended to and shall not confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 8.3 Waiver and Amendment. Prior to the Closing, any -------------------- provision of this Agreement may be: (i) waived by the party benefited by the provision; or (ii) amended or modified at any time (including the structure of the transaction) by an agreement in writing between the parties hereto approved by their respective boards of directors, except that no amendment or waiver may be made that would change the form or the amount of the Share Exchange Consideration or otherwise have the effect of prejudicing the BSC shareholders' interest in the Share Exchange Consideration. SECTION 8.4 Counterparts. This Agreement may be executed in ------------ counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same instrument. SECTION 8.5 Governing Law. This Agreement shall be governed by, and ------------- interpreted in accordance with, the laws of the Commonwealth of Pennsylvania, or, to the extent it may control, federal law, without reference to the choice of law principles thereof. SECTION 8.6 Expenses. Subject to the provisions of Section 7.3 -------- hereof, SBI will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby and, at the election of the BSC Shareholders, BSC will pay up to One Hundred Thousand Dollars ($100,000) of the expenses incurred by them in connection with this 42 Agreement; provided, however, that all filing and other fees (other than federal and state income taxes) required to be paid to any governmental agency or authority in connection with the consummation of the transactions contemplated hereby shall be borne by SBI. SECTION 8.7 Notices. All notices, requests, acknowledgments and ------- other communications hereunder to a party shall be in writing and shall be deemed to have been duly given when delivered by hand, telecopy, telegram or telex (confirmed in writing) to such party at its address set forth below or such other address as such party may specify by notice to the other party hereto. If to BSC, to: Boston Service Company, Inc. (t/a Hann Financial Service Corporation) One Centre Drive Jamesburg, NJ 08831 Attention: Michael J. Wimmer President and Chief Executive Officer With copies to: Capehart & Scatchard, P.A. 8000 Midlantic Drive, Suite 300 Mt. Laurel, NJ 08054 Attention: Charles A. Rizzi, Jr., Esquire If to SBI, to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, PA 17543 Attention: Robert S. Bolinger President and Chief Executive Officer With copies to: Morgan, Lewis & Bockius llp 1701 Market Street Philadelphia, PA 19103-2921 Attention: John F. Bales, III, Esquire SECTION 8.8 Entire Agreement; Etc. This Agreement, together with --------------------- other agreements as are executed by the parties in connection herewith, on the such Date hereof, represent 43 the entire understanding of the parties hereto with reference to the transactions contemplated hereby and thereby and supersede any and all other oral or written agreements heretofore made. All terms and provisions of this Agreement, together with such other agreements as are executed by the parties in connection herewith, on the date hereof, and thereof, shall be binding upon and shall inure to the benefit of the parties hereto and thereto and their respective successors and assigns. Nothing in this Agreement is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement except as expressly provided. SECTION 8.9 Severability. If any provision of this Agreement or the ------------ application thereof to any person or circumstances is held invalid or unenforceable in any jurisdiction, the remainder of this Agreement, and the application of such provision to such person or circumstances in any other jurisdiction or to the other person or circumstances in any jurisdiction shall not be affected thereby, and to this end the provisions of this Agreement shall be severable. SECTION 8.10 Interpretation. In this Agreement, unless the context -------------- otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. SECTION 8.11 Waivers. Except as provided in this Agreement, no ------- action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder. SECTION 8.12 Incorporation of Schedules and Exhibits. All --------------------------------------- Schedules and Exhibits attached hereto and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. SECTION 8.13 Enforcement of Agreement. The parties hereto agree that ------------------------ irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any Delaware Court, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 8.14 Knowledge. As used in this Agreement, the words --------- "knowledge of BSC" or "best of BSC's knowledge" or "known to BSC" or similar phrases shall mean the actual knowledge of the BSC Shareholders and the executive officers of BSC and the knowledge 44 reasonably imputed to such persons assuming prudent performance of their respective duties as officers and directors of the BSC. SECTION 8.15 Representative. Each of the BSC Shareholders hereby -------------- appoints Michael J. Wimmer as his exclusive agent and attorney-in-fact to act on his behalf with respect to any and all matters, claims, controversies, or disputes arising out of the terms of this Agreement (the "Representative"). SBI -------------- shall have the right to rely on any actions taken or omitted to be taken by the Representative as being the act or omission of the BSC Shareholders, without the need for any inquiry, and any such actions or omissions shall be binding upon the BSC Shareholders. The BSC Shareholders shall have the right to change the identity of the Representative and shall deliver to SBI prompt written notice of any such change of identity, which upon receipt by SBI will effect said change. The BSC Shareholders agree to hold the Representative free and harmless from and indemnify the Representative against any and all loss, damage or liability which he may sustain as a result of any action taken in good faith hereunder, including, without limitation, any legal fees and expenses. 45 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. SUSQUEHANNA BANCSHARES, INC. By: /s/ Robert S. Bolinger -------------------------------------------- Name: Robert S. Bolinger Title: President and CEO BOSTON SERVICE COMPANY, INC. (t/a HANN FINANCIAL SERVICE CORPORATION) By: /s/ Michael J. Wimmer -------------------------------------------- Name: Michael J. Wimmer Title: President and CEO MICHAEL J. WIMMER By: /s/ Michael J. Wimmer -------------------------------------------- TERRY WIMMER By: /s/ Terry L. Wimmer, by Michael J. -------------------------------------------- Wimmer, Attorney-In-Fact ------------------------ SYDELL LOURIE By: /s/ Sydell Lourie, by Michael J. Wimmer, -------------------------------------------- Attorney-In-Fact ---------------- MICHAEL J. WIMMER, Custodian f/b/o BRAD WIMMER under the UNIFORM GIFT TO MINORS ACT By: /s/ Michael J. Wimmer -------------------------------------------- 46 EX-2.II 3 STOCK PURCHASE AGREEMENT Exhibit 2(ii) ------------- Stock Purchase Agreement dated as of December 23, 1999 by and among Susquehanna, Susquehanna Bancshares Central, Inc., Valley Forge Asset Management Corp. and certain of the shareholders of VFAM. EXHIBIT 2(ii) STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of December 23, 1999, by and among SUSQUEHANNA BANCSHARES, INC., a Pennsylvania business corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("SBI"), SUSQUEHANNA BANCSHARES CENTRAL, INC., a Pennsylvania corporation ("Buyer"), VALLEY FORGE ASSET MANAGEMENT CORPORATION, a Pennsylvania corporation ("VFAM") and the undersigned holders of common stock of VFAM (such individuals are hereinafter referred to individually as "Shareholder" and collectively as "Shareholders"). WHEREAS, Shareholders own the issued and outstanding shares of Voting and Non-Voting Common Stock, no par value, of VFAM (the "Common Stock"), set forth opposite his/her name on Annex I to this Agreement; WHEREAS, the Shareholders, together with Valley Forge Investment Company, Inc., a Pennsylvania business corporation ("VFICO"), own all of the issued and outstanding shares of capital stock of VFAM and all options or other rights to purchase shares of capital stock of VFAM; WHEREAS, Buyer is a wholly-owned subsidiary of SBI; WHEREAS, on this date, SBI, Buyer and VFICO entered into an Agreement and Plan of Reorganization (the "VFICO Agreement") pursuant to which Buyer, simultaneously with the closing under this Agreement, will merge with and into VFICO (Buyer is defined in this Agreement to include VFICO after consummation of such merger); WHEREAS, Shareholders desire to sell to Buyer, and Buyer desires to purchase from Shareholders, the shares of Common Stock set forth opposite his/her name on Annex I to this Agreement (the "Shares"); WHEREAS, upon the completion of the transactions contemplated by this Agreement and the VFICO Agreement, VFICO will become a wholly-owned subsidiary of SBI, and VFICO will hold all of the issued and outstanding shares of capital stock of VFAM; NOW, THEREFORE, to consummate the purchase of the Shares, and in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto, intending to be legally bound hereby agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES SECTION 1.01 Purchase and Sale of Stock. Upon the terms and conditions -------------------------- of this Agreement, at Closing, as defined in Section 1.04 hereof, Buyer agrees to purchase from the Shareholders, and the Shareholders agree to sell to Buyer, the Shares. In consideration therefore, Buyer agrees to pay at Closing an aggregate amount of $4,200,000 for the Shares. Of the total amount paid at Closing, $200,000 ("Escrow Funds") shall be paid to a bank escrow agent (the "Escrow Agent") in accordance with the escrow agreement attached hereto as Exhibit 1.02 (the "Escrow Agreement"), if any shareholder of VFICO shall have provided notice on or before Closing of intention to dissent (in respect of the merger contemplated by the VFICO Agreement) in accordance with Section 1574 of the Pennsylvania Business Corporation Law. The Escrow Agent shall be selected prior to the Closing Date by SBI and the Shareholder Representative appointed pursuant to Section 1.02. In exchange for their Shares, each Shareholder shall be entitled to receive the amount set forth on Annex I hereto (the "Share Consideration"). SECTION 1.02 Shareholder Representative. Simultaneously with the -------------------------- execution of this Agreement, Shareholders appoint David S. Foulke (the "Shareholder Representative") as his or her agent and as his or her true and lawful attorney in fact, for such Shareholder and in such Shareholder's name (i) to hold his or her Shares and deliver the same to Buyer at Closing, (ii) to receive his or her check for his or her respective share of the Share Consideration at Closing and to have such Shareholder Representative deliver such check to him or her, and (iii) to act on behalf of such Shareholder at Closing in connection with any and all issues that may arise at Closing in connection with the transactions contemplated by this Agreement and to execute and deliver all instruments and documents or every kind incident thereto. This power of attorney is a power of coupled with an interest as provided by applicable law and shall survive, bankruptcy or mental incapacity of each Shareholder to the extent that such Shareholder may legally contract for such survival. All parties to this Agreement and any person to whom any of the agreements, undertakings, consents and other documents referred to in this Agreement relate may conclusively presume and rely upon this power of attorney without further inquiry. This appointment of the Shareholder Representative may only be revoked in a writing which shall name a successor who agrees to be bound by the terms of this Agreement and shall be signed by a majority of the Shareholders. The Shareholder Representative shall at all times be the same person who serves as the Associates' Representative, as that term is used and defined in the Contingent Earnings Agreement set forth as Exhibit 9.02(i) hereto. SECTION 1.03 Deliveries. ---------- (a) At Closing, (i) the Shareholders, through the Shareholder Representative, shall deliver to Buyer stock certificates for all of the Shares, free and clear of all liens, claims, charges, restrictions, equities, or encumbrances, duly endorsed in blank, or with separate notarized stock transfer powers attached thereto and signed in blank, together with evidence of the appointment of the Shareholder Representative as required by Section 1.02 above, and (ii) VFAM shall deliver to Buyer, as applicable, all of the documents, instruments, certificates, etc. required by Section 10.01 hereof. (b) At Closing, (i) upon receipt of the stock certificates as required by Section 1.03(a) hereof, Buyer shall deliver to the Shareholder Representative, checks for each of the Shareholders in the amount of their respective shares of the Share Consideration less their respective share of the Escrow Funds, and (ii) Buyer shall deliver to the Shareholder Representative, for the benefit of the Shareholders, all of the documents, instruments, certificates, etc. required by Section 10.02 hereof. SECTION 1.04 Closing. The closing of the transactions contemplated ------- herein (the "Closing") will take place at such place and time and on such date as shall be agreed upon by VFAM and Buyer, which date shall not be later than thirty business days after the day on which the last to be fulfilled or -2- waived of the conditions set forth in Article IX shall be fulfilled or waived in accordance herewith. The date on which the closing occurs is hereinafter referred to as the "Closing Date." SECTION 1.05 Post-Closing Adjustment. ----------------------- (a) Post-Closing Audit. Within sixty (60) days following the Closing Date, Buyer at Buyer's expense, shall cause PricewaterhouseCoopers ("Buyer's Accountant") to audit (the "Post-Closing Audit") the books of VFAM and VFICO to determine the accuracy of the information set forth in the VFAM Closing Financial Certificate (as defined in Section 9.02(k) herein) and the VFICO Closing Financial Certificate (as defined in Section 6.02(j) of the VFICO Agreement; and together with the VFAM Closing Financial Certificate the "Closing Financial Certificates"). In the course of the Post-Closing Audit, Buyer's Accountant shall apply generally accepted accounting principles ("GAAP"). The Shareholders shall cooperate with Buyer and Buyer's Accountant in furnishing information, documents, evidence and other assistance to Buyer's Accountant to facilitate the completion of the Post-Closing Audit. In the event that Buyer's accountant determines that (i) the actual tangible net worth of VFAM or VFICO on the Closing Date is less than the Required Amount on the Closing Financial Certificates, (ii) the available cash balance of VFAM or VFICO is less than the Required Amount on the Closing Financial Certificates, (iii) VFAM or VFICO have long term liabilities, (iv) in the case of VFAM, the Net Capital (as defined in Section 9.02(k)) is less than the Required Amount on the VFAM Closing Financial Certificate, (v) and/or in the case of VFAM its cash plus current receivables minus current liabilities must be equal to or greater than $1,200,000, (each of (i) - (v) a "Financial Requirement Deficiency" and together "Financial Requirement Deficiencies"), then Buyer shall promptly deliver a written notice to that effect with supporting documentation to the Shareholder Representative setting forth such Financial Requirement Deficiency or Deficiencies of VFAM and/or VFICO, as the case may be, on the Closing Date ("Adjustment Notice"). As used in this agreement, "Required Amount" means the amounts required by Section 9.02(k) of this Agreement and Section 6.02(j) of the VFICO Agreement. (b) Review by Shareholders' Accountant. As soon as practicable, but in any event within 30 calendar days of receipt of the Adjustment Notice from Buyer, the Shareholders may cause their accountant to provide to Buyer, a report indicating their agreement or objections to the Adjustment Notice. Any such objections shall be set forth in reasonable detail in a report (the "Shareholders' Report") that shall indicate the grounds upon which the Shareholders' accountant disputes the calculation of the Financial Requirement Deficiencies in the Adjustment Notice. (c) Agreement on Financial Information Adjustment. (1) Within 15 calendar days of the receipt by the Buyer of the Shareholders' Report, the Shareholder Representative and the Buyer shall endeavor to agree on any matters in dispute. (2) If the Buyer and the Shareholder Representative are unable to agree on any matters in dispute within 15 calendar days after receipt of the Shareholders' Report, the matters in dispute will be submitted for resolution to the national office of Ernst & Young or such other independent accounting firm of national reputation as may be mutually acceptable to the Shareholder Representative and the Buyer (the "Independent Accounting Firm") which shall within 30 calendar days of such submission determine and issue a written report to the Shareholder Representative and the Buyer upon such disputed items and such written decision shall be final and binding upon the parties. The Shareholders and the Buyer agree to co-operate with each other and each other's representatives to -3- enable the Independent Accounting Firm to render a written decision as promptly as possible. The fees and disbursements of the Independent Accounting Firm shall be shared equally by the Shareholders and the Buyer. (3) The Financial Requirement Deficiencies of VFAM and VFICO, respectively, determined after resolution of matters in dispute (if any) is referred to as the "Actual Financial Requirement Deficiencies". The Actual Financial Requirement Deficiencies have the legal effect of an arbitral award and shall be final, binding and conclusive on the parties hereto. (4) In acting under this Agreement, the Shareholders' accountants, the Buyer's Accountants and the Independent Accounting Firm shall be entitled to the privileges and immunities of arbitrators. (d) Post-Closing Adjustment. The purchase price paid pursuant to Section 1.01 shall be reduced by an aggregate amount of deficiencies (the "Post- Closing Adjustment") equal to the sum of (A) (B) (C) and (D), where (A) (B) (C) and (D) shall be as follows: (A) is the greater of (1) any shortfall between the actual VFICO net worth and the Required Amount of net worth on the VFICO Closing Financial Certificate or (2) any shortfall between the actual available cash balance of VFICO and the Required Amount of available cash balance of VFICO on the VFICO Closing Financial Certificate; (B) is the greatest of (1) any shortfall between the actual Net Capital of VFAM and the Required Amount of Net Capital on the VFAM Closing Financial Certificate or (2) any shortfall between the actual available cash balance of VFAM and the Required Amount of cash balance of VFAM on the VFAM Closing Financial Certificate or (3) any shortfall between the actual VFAM cash plus receivables minus current liabilities compared to the Required Amount on the VFAM Closing Financial Certificate or (4) any shortfall between the actual VFAM net worth and the Required Amount on the VFAM Closing Financial Certificate; (C) is any long term liabilities of VFICO; and (D) is any long term liabilities of VFAM. Within five (5) business days after notification of the amount of the Post- Closing Adjustment, each Shareholder shall pay to Buyer his or her Proportionate Share of the Post-Closing Adjustment. Such Proportionate Share shall equal the fraction the numerator of which is the purchase price paid to such Shareholder at Closing as set forth on Annex I and the denominator of which is the purchase price paid to all Shareholders at Closing as set forth on Annex I. If any Shareholder fails to promptly make such payment, Buyer shall have the right to offset the amount of such payment by a claim against the amounts escrowed for the benefit of such Shareholder under Sections 2.01 and 3.01 of this Agreement. Upon demand by Buyer to the Escrow Agent (with notice to the Shareholder), the Escrow Agent shall pay such Proportionate Share of the Post-Closing Adjustment to Buyer, or the Buyer may deduct any such deficiencies from any payments to which such Shareholder may become entitled under his or her Contingent Earnings Agreement as defined in Section 9.02(i) hereto or Additional Stock Payments as defined in Section 1.07 hereto (or which have been deposited into escrow for the benefit of such shareholder, by demand to the Escrow Agent as provided above). Any amount still not collected from -4- such Shareholder shall remain the personal obligation of that Shareholder. If such Shareholder would not have been entitled to receive funds in escrow which have been paid to Buyer pursuant to this Section 1.05(d) (the "Disqualified Amount") because the conditions to distribution of such funds would not have been satisfied by the continued employment by such Shareholder with VFAM, then the liability of such Shareholder to Buyer shall be increased by the Disqualified Amount. Any amounts not paid by any Shareholder when due shall bear interest from the Closing Date until the date of payment of a rate equal to the prime rate, as reported from time to time in The Wall Street Journal, eastern edition. (e) If a determination is made that the holders of Dissenting Shares (as defined in Section 2.03 of the VFICO Agreement) are entitled to receive an amount which exceeds the per share value of the Cash Consideration ( as defined in the VFICO Agreement), then the Escrow Agent shall pay to SBI the portion of the Escrow Funds (up to the $200,000 deposited at Closing) that is equal to such excess plus costs including reasonable attorney's fees related to the determination. SECTION 1.06 Payment to SBI. Immediately following the Closing, VFAM -------------- shall pay to SBI an amount equal to $1,200,000. SECTION 1.07 Additional Stock Payment. In exchange for the Shares set ------------------------ forth on Annex I, the Shareholders shall be entitled to receive an additional (payment allocated in accordance with Annex I) for the Shares, up to a maximum of $1,500,000 (the "Additional Stock Payment"). SBI shall cause VFAM to pay to Shareholders an Additional Stock Payment in accordance with the terms of this Agreement. Such Additional Stock Payment shall be calculated and paid when and if earned each Fiscal Year until the maximum amount of the Additional Stock Payment has been paid to the Escrow Agent pursuant to this Agreement. For the purposes of this Agreement, the term "Fiscal Year" shall mean a twelve month period ending on December 31; provided, however, that the first Fiscal Year under this Agreement shall commence on the later of January 1, 2000 or the Closing Date and shall end on December 31, 2000. SECTION 1.08 Calculation of Additional Stock Payment. (a) As of the --------------------------------------- end of each Fiscal Year, VFAM shall determine whether an Additional Stock Payment is due with respect to such Fiscal Year. The Additional Stock Payment for a Fiscal Year shall be determined by taking VFAM's Adjusted Pre-tax Profit (hereinafter defined) in excess of $2,000,000 ("Excess Earnings") and multiplying such Excess Earnings by 5, then deducting from that result any amounts paid as an Additional Stock Payment payments for prior Fiscal Years. (b) "Pre-tax Profit" means for a Fiscal Year, VFAM's Income Before Provision for Income Taxes, determined in accordance with Generally Accepted Accounting Principles, and "Adjusted Pre-tax Profit" means for any Fiscal Year the figure obtained after making additions and adjustments to Pre-tax Profit for any applicable items set forth in subsections (c), (d) and (e). (c) In calculating Adjusted Pre-tax Profit, the following items shall be eliminated and not taken as expenses in this calculation: (i) management fees or similar charges or expenses by SBI; provided, however, that charges by SBI for reasonable and necessary business products or services of the type customarily purchased by VFAM which can be provided to VFAM by SBI (for example, insurance or auditing) may be allowed as expenses for up to the amount paid by VFAM for such products or services in the past, plus moderate vendor induced increases, with only the excess being eliminated; (ii) allocation of any overhead by SBI or affiliates thereof; (iii) inter-company interest expense except -5- interest at a reasonable rate on up to $100,000 of debt or equity provided by SBI to VFAM for VFAM to comply with NASD net capital requirements, or inter- company interest expense on any VFAM borrowings or capital infusions approved by Joseph J. Miller, Jr. or the Shareholder Representative; (iv) amortization of good will or other intangible assets; and (v) income taxes. (d) Unless approved by VFAM's Board of Directors and except as otherwise provided in paragraph (e) of this Section 1.08, the following items shall likewise be eliminated and not taken as expenses in this calculation: (i) any category of expense (net of related revenue) not included among the Operating Expenses listed on Schedule 1.08(d) (ii) any expense (net of related revenue) not incurred by VFAM in its normal operations based on its business plan as amended from time to time and (iii) any expense (net of related revenue) resulting from a material change in the way VFAM conducts its business. It is the intention of this paragraph that VFAM shall be operated in such a way as to maximize the realization of the Additional Stock Payment as rapidly as possible without sacrificing altogether opportunities for long term growth or prudent management. (e) Pre-tax Profit shall be adjusted for the net amount of all non- recurring items (including but not limited to items set forth below) as follows: (i) if the net amount of such items plus carryovers from prior Fiscal Years resulting from the application of this subsection is less than $300,000 (whether revenue or expense) in any Fiscal Year, then the full amount thereof shall be included in the determination of Pre-tax Profit for the Fiscal Year; or (ii) if the net amount of such items plus carryovers from prior Fiscal Years is greater than $300,000 (whether revenue or expense), then the amount above $300,000 (whether revenue or expense) shall be eliminated from the calculation of Pre-tax Profit for the current Fiscal Year and carried over into the next Fiscal Year. Non-recurring items subject to this subparagraph (e) shall include but not be limited to (i) commissions on the private placement of securities, net of commissions paid to client representatives; and (ii) "bonuses" owed client representatives pursuant to their contracts if such bonuses are more than 5% above budget for all such representatives in the aggregate, and only the excess above 5% over the budget shall be treated as a non-recurring item. The budget for bonuses in this category shall be reasonable in relation to prior performance and realistic expectations for the future. SECTION 1.09 Payment Date. Upon the earlier of (i) the completion of ------------ the Fiscal Year end audit of the books and records of VFAM; or (ii) sixty days following the Fiscal Year end (the "Calculation Date"), VFAM shall notify SBI and the Shareholder Representative in accordance with Section 1.11 hereof, of the aggregate amount of Additional Stock Payment earned, if any. SECTION 1.10 Acceleration of Payments. All potential Additional ------------------------ Stock Payments up to $1,500,000 not previously paid, less amounts properly retained by SBI to satisfy any Post-Closing Adjustment, or Deficiency as defined in Section 8.02 hereto, shall become due and immediately payable by VFAM, or if VFAM does not or cannot pay, then by SBI, upon the happening of any of the following events: (a) VFAM fails to make an Additional Stock Payment when due (after dispute resolution where applicable), provided SBI and VFAM are given thirty (30) days' notice within which to make the past due payment; (b) VFAM discharges any of Bernard A. Francis, Jr., Frank Corace or James Gibson for any reason other than "cause" (as defined and provided for in such employee's employment agreement), unless such discharge is approved by the vote of two- thirds (2/3) or more of VFAM's Board of Directors; (c) SBI commits a material breach of Sections 3.01 or 3.02 of the Contingent Earnings Agreement as defined in Section 9.02(i) and such breach is not cured within thirty (30) days after notice thereof. -6- Section 1.11 Notice of Additional Stock Payment. Each year on the ---------------------------------- Calculation Date, VFAM shall provide the Shareholder Representative, notice of its calculation, with supporting financial statements and appropriate explanations when reasonably requested, of the Additional Stock Payment for fiscal year ("Calculation Notice"); (a) No Objection. If the Shareholder Representative has not given VFAM written notice of an objection to the Additional Stock Payment calculation within thirty (30) days following his or her receipt of the Calculation Notice, then the amount set forth in the Calculation Notice will be deemed the Additional Stock Payment for such fiscal year and SBI shall pay such amounts to the Shareholders (at their addresses provided in Section 13.03) within 45 days. (b) Objection. If the Shareholder Representative has any objections to the Calculation Notice, then he or she must provide VFAM with written notice of the objections within thirty (30) days following his or her receipt of the Calculation Notice. The written notice must describe in reasonable detail the manner in which VFAM allegedly failed to account for or calculate the Additional Stock Payment in accordance with this Agreement. Except with respect to fraud, bad faith or willful misconduct by VFAM, the Shareholder Representative and the Shareholders will be precluded from later raising any objection to the Additional Stock Payment which is not raised in the notice. VFAM and Shareholder Representative will use reasonable efforts to resolve any objections to the Additional Stock Payment calculation. If VFAM and Shareholder Representative do not resolve the objections within thirty (30) days after VFAM's receipt of Shareholder Representative's written notice of objections, then VFAM and Shareholder Representative will select a nationally- recognized accounting firm (excluding their respective regular outside accounting firms) by lot. Any accounting firm agreed to or chosen in this way is hereinafter referred to as the "Accountants". The Shareholder Representative shall be under no obligation to initiate a determination by the Accountants unless and until some or all of the Shareholders agree in writing to pay any fees and expenses incurred in accordance with Section 1.11(c) hereof, and deposit with the Shareholder Representative such amount of money as he or she shall consider sufficient in his or her reasonable judgment to cover the estimated amount of such fees and expenses. If a dispute is submitted to the Accountants for resolution, VFAM and Shareholder Representative: (i) will exchange and furnish or make available to the Accountants at reasonable times and upon reasonable notice, the Additional Stock Payment calculations, and such financial statements, work papers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), including supporting schedules, work papers and back up materials used in preparing the Additional Stock Payment calculation, the books, records, and financial staff of VFAM, the parties' accountants, and summaries by VFAM and the Shareholder Representative of their resolution of any objections thereto; and (ii) will be afforded the opportunity to present to the Accountants any material relating to the Accountants' determination, and to discuss with the Accountants in a hearing with all parties present, the Accountants' determination. The role of the Accountants will be to determine whether VFAM properly accounted for and calculated the Additional Stock Payment in accordance with this Agreement. If the Accountants determine that any disputed items resulted in an incorrect determination of the Additional Stock Payment, then the Accountants will recalculate the Additional Stock Payment for the applicable Fiscal Year and so notify VFAM and Shareholder Representative. Such amount will be deemed the Additional Stock Payment. The Accountants, determination of the Additional Stock Payment for the Fiscal Year in question, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties. -7- (c) Expenses. If the Shareholder Representative in good faith submits any dispute to the Accountants for resolution as provided in this Section 1.11 and the Accountants determine that VFAM's calculation of Additional Stock Payment was understated by $1,000 or more, then the fees and expenses of the Accountants, VFAM and the Shareholder Representative shall be paid by SBI; otherwise, all such fees and expenses shall be paid by the Shareholder Representative from the deposit provided for above and, if the deposit is insufficient, the excess shall be paid by those Shareholders who agreed to pay such fees and expenses. ARTICLE II OPTION BUY OUT SECTION 2.01 Options Buy Out --------------- (a) Closing Date Payments. Immediately prior to the Closing, VFAM shall pay to each holder of outstanding options to purchase VFAM common stock ("Options") identified on Annex II hereto (each an "Option Holder") the amount set forth in Column I on Annex II, less the amount required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. In exchange for such payment at Closing, all of the Options shall be canceled. (b) First Anniversary Option Payments. On the first anniversary of the Closing Date, or the first business day thereafter, VFAM shall cause to be paid out of escrow to each Option Holder who remains an employee of VFAM on such date, the amount set forth in Column II of Annex II (the "First Anniversary Option Payments"), less amounts required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. (c) Second Anniversary Option Payments. On the second anniversary of the Closing Date, or the first business day thereafter, VFAM shall cause to be paid out of escrow to each Option Holder who remains an employee of VFAM on such date, the amount set forth in Column III of Annex II (the "Second Anniversary Option Payments"), less amounts required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. (d) Option Payment Escrow. At the Closing, VFAM shall pay to the Escrow Agent an amount equal to the sum of the First Anniversary Option Payments and the Second Anniversary Option Payments to be held for disbursement by the Escrow Agent in accordance with the terms of the Escrow Agreement. After payment of the Second Anniversary Option Payments in accordance with clause (c) above, any amounts related to the option buy-out remaining in escrow shall be paid to VFAM. (e) Termination of Employment. Notwithstanding the foregoing, if the employment with VFAM of any Option Holder is terminated by VFAM without cause as defined in the form of employment agreements (as defined in Section 9.02(h)) prior to the second anniversary of the Closing Date, then VFAM shall immediately pay any remaining amounts due to such Option Holder. If the employment with VFAM of an Option Holder is terminated because of the death or permanent -8- disability, as defined in the Employment Agreements, of such Option Holder, any amounts due to the Option Holder shall immediately be paid to such Option Holder or, in the case of death, to his or her heirs or estate. ARTICLE III PAYMENTS TO KEY EMPLOYEES SECTION 3.01 Bonus Payments to Key Employees. -------------------------------- (a) Closing Date Payments. On the Closing Date, VFAM shall pay to each employee set forth on Annex III hereto (each a "Key Employee"), the amount set forth next to their name in Column I on Annex III, less the amount required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. (b) First Anniversary Bonus Payments. On the first anniversary of the Closing Date, or the first business day thereafter, VFAM shall cause to be paid out of escrow to each Key Employee who remains an employee of VFAM on such date, the amount set forth in Column II of Annex III (the "First Anniversary Bonus Payments"), less amounts required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. (c) Second Anniversary Bonus Payments. On the second anniversary of the Closing Date, or the first business day thereafter, VFAM shall cause to be paid out of escrow to each Key Employee who remains an employee of VFAM on such date, the amount set forth in Column III of Annex III (the "Second Anniversary Bonus Payments"), less amounts required to be withheld by applicable federal and state income tax withholding laws and less any amounts due in respect of social security or other statutory deductions. (d) Bonus Payment Escrow. At the Closing, VFAM shall pay to the Escrow Agent an amount equal to the sum of the First Anniversary Bonus Payments and the Second Anniversary Bonus Payments to be held for disbursement by the Escrow Agent in accordance with the terms of the Escrow Agreement. After payment of the Second Anniversary Bonus Payment in accordance with clause (c) above, any amounts related to the bonus payments remaining in escrow shall be paid to VFAM. (e) Termination of Employment. Notwithstanding the foregoing, if the employment with VFAM of any Key Employee is terminated by VFAM without cause as defined in the form of Employment Agreement (described in Section 9.02(h)) prior to the second anniversary of the Closing Date, then VFAM shall cause the Escrow Agent to immediately pay any remaining amounts of the First Anniversary Bonus Payments and the Second Anniversary Bonus Payments due to such Key Employee. If the employment with VFAM of a Key Employee is terminated because of the death or permanent disability, as defined in the form of Employment Agreements, of such Key Employee, any amounts of the First Anniversary Bonus Payments and the Second Anniversary Bonus Payments due to the Key Employee shall immediately be paid to such Key Employee or, in the case of death, to his or her heirs or estate. -9- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF VFAM AND THE SHAREHOLDERS As a material inducement to SBI and Buyer to enter into this Agreement and consummate the transactions contemplated herein, the Shareholders and, if the transaction is not consummated, the Shareholders and VFAM make the following representations and warranties to Buyer and SBI. SECTION 4.01 Organization, Registration. -------------------------- (a) VFAM is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has all requisite corporate power and corporate authority and all necessary governmental approvals to own, lease and operate its properties, and to carry on its business, to enter into this Agreement and the other documents and instruments to be executed and delivered by VFAM and to carry out the transactions contemplated hereby and thereby. Except as set forth on Schedule 4.01, VFAM is duly licensed or qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein the character of the properties owned or leased or the nature of its business, make such qualification to do business necessary except for those jurisdictions where the failure to be so qualified would not have a material adverse effect. Schedule 4.01 lists all of the jurisdictions in which VFAM is qualified to do business. VFAM has delivered to Buyer true and correct copies of its Articles of Incorporation and Bylaws, each as in effect on the date hereof. (b) VFAM has all federal, state, local and foreign governmental licenses, permits, or registrations required for its business as currently conducted. Schedule 4.01 lists all of such licenses, permits or registrations currently in effect, the applicable jurisdictions, and the date of expiration, if any. All of such Licenses, permits or registrations are in full force and effect, no violations have occurred or been asserted with respect thereto other than as set forth on NASD and SEC Reports of examination, copies of which have been delivered to Buyer, and no material change in the facts or circumstances reported in any documents submitted by VFAM in connection with any such license, permit or registration has occurred which would require an amendment of such document, license, permit or registration. (c) The officers and directors of VFAM are set forth on Schedule 4.01. (d) VFAM has no subsidiaries. (e) There is no pending or, to the knowledge of VFAM or the Shareholders, any threatened claim or litigation against VFAM (nor to the knowledge of VFAM or the Shareholders does there exist any basis therefor) contesting the validity of or right to use the "Valley Forget Asset Management Corporation" name as currently used by VFAM as its corporate name in connection with its business activities, nor has VFAM received any notice that its use of the "Valley Forge Asset Management Corporation" name conflicts with the asserted rights of others. -10- SECTION 4.02 Investment Advisor/Broker-Dealer Matters. ---------------------------------------- (a) VFAM is and has been since October 10, 1973 duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is and has been since October 10, 1973 duly registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"). VFAM is registered as an investment advisor and as a broker/dealer in the states listed on Schedule 4.02 and is in compliance in all material respects with all laws of such states requiring registration, licensing or qualification as an investment advisor or a broker/dealer. Each such federal and state registration is in full force and effect. VFAM has delivered or made available to Seller a true and complete copy of its Form ADV and Form BD, in each case as amended to date, filed by VFAM with the SEC, copies of all such state registration forms, likewise as amended to date, and copies of all current reports filed by VFAM pursuant to the Advisers Act and rules promulgated thereunder, and pursuant to state statutes applicable to such registrations. The information contained in such forms and reports was true and complete in all material respects at the time of filing. VFAM has filed all amendments required to be filed to its Form ADV and Form BD and such state registration forms under federal and state law. VFAM has filed all reports required to be filed under the 1934 Act and rules promulgated thereunder. As of the Closing Date, VFAM will be registered as an investment advisor and as a broker/dealer in each state where such registration is required. VFAM is not required to disclose any information to clients under SEC Rule 206(4)-4 promulgated under the Advisers Act. (b) VFAM is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), which is required to be registered under the 1940 Act in order to engage in the transactions described in Section 7 of the 1940 Act. VFAM does not act as an investment advisor or subadvisor to any "investment company," as defined in the 1940 Act, which is registered under the 1940 Act. (c) VFAM has adopted a formal code of ethics, a true, complete and accurate copy of which has been provided to Buyer. VFAM's policies with respect to avoiding conflicts of interest are as set forth in its Form ADV, as amended. There have been no violations or allegations of violations of such code or policies. SECTION 4.03 Capitalization. The authorized capital stock of VFAM -------------- consists of 3,000,000 shares of voting common stock, no par value and 12,000,000 shares of non-voting stock, no par value. There are 2,664,928 shares of voting common stock outstanding and 10,659,712 shares of non-voting common stock shares outstanding. All outstanding shares of VFAM Common Stock are validly issued, fully paid and nonassessable and not subject to any preemptive rights. Except as set forth on Schedule 4.03 hereto there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued capital stock of VFAM, and, as of the date hereof, there are no outstanding contractual obligations of VFAM to repurchase, redeem or otherwise acquire any shares of its capital stock. SECTION 4.04 Authority. The execution, delivery and performance of this --------- Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of VFAM and no other corporate proceedings on the part of VFAM are necessary to authorize this Agreement or to consummate the transactions so contemplated. -11- SECTION 4.05 Consents and Approvals; No Violations. This Agreement, the ------------------------------------- Contingent Earnings Agreement, the Employment Agreements (as defined in Section 9.02(h)) and the Lease (as defined in Section 9.02(o)), constitute or when executed and delivered will constitute, valid and binding agreements of VFAM, enforceable in accordance with their respective terms, and, except as such enforceability may be limited by bankruptcy or other similar laws affecting creditors' rights and remedies generally, and except as set forth on Schedule 4.05, the execution and delivery of this Agreement, the Contingent Earnings Agreement, the Lease and/or the Employment Agreements, and the consummation of the transactions contemplated hereby do not or will not (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of VFAM, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any of the Corporation Agreements (as defined in Section 4.11), note, bond, mortgage, indenture, lease or license to which VFAM is a party or by which any of its or their properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to VFAM or any of its properties or assets. Except as set forth in Schedule 4.05, no permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency is required in connection with the execution, delivery or performance by VFAM of this Agreement or the consummation of the transactions contemplated hereby. SECTION 4.06 Financial Statements and Internal Control Structure. --------------------------------------------------- (a) VFAM has delivered to Buyer the audited financial statements of VFAM for the years ended September 30, 1999, 1998 and 1997 (collectively, the "Financial Statements") and except as set forth on Schedule 4.06(a), to the knowledge of VFAM, the Financial Statements have been prepared in accordance with GAAP. The audited balance sheet of VFAM at September 30, 1999, is referred to herein as the "Balance Sheet" and the dates of such Balance Sheet is referred to herein as the "Balance Sheet Date"). The Financial Statements and the notes thereto, if any, were prepared in accordance with the books and records of VFAM and fairly present the assets, liabilities and financial condition of VFAM as at the respective dates thereof, and the corresponding results of operations, retained earnings and cash flows for the periods therein referred to and except as set forth on Schedule 4.06(a), to the knowledge of VFAM, the Financial Statements have been prepared in accordance with GAAP consistently applied throughout the periods involved. (b) VFAM has not received any management letters from its outside auditors. SECTION 4.07 Title to Assets, Properties, Interests in Properties, Rights ------------------------------------------------------------ and Related Matters. - ------------------- (a) VFAM has good title to all of the properties, interest in properties, and assets, real, personal or mixed, reflected on the Balance Sheet and to all property and assets acquired after the Balance Sheet Date, free and clear of any mortgages, pledges, liens, security interests, conditional and installment sale agreements, right of first refusal or similar claims with respect to VFAM, or encumbrances or charges of any kind other than (i) any such claim or encumbrance disclosed in the notes to the Balance Sheet, (ii) the lien of current taxes not yet due and payable; (iii) properties, interests and assets that are leased or have been disposed of by VFAM since the Balance Sheet Date in the ordinary course of business consistent with past practice; and (iv) such imperfections of title, easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or proposed use, of the properties subject thereto. -12- (b) The assets and properties of VFAM on its Balance Sheet constitute the rights, properties and assets (tangible or intangible) necessary for the conduct of VFAM's business as currently conducted. (c) Except as set forth on Schedule 4.07, VFAM has no interest in any real property. SECTION 4.08 Absence of Certain Changes. Since September 30, 1999, VFAM -------------------------- has not experienced, nor to the knowledge of VFAM or the Shareholders has there been threatened, any material adverse change in the condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations of VFAM (except as may have been caused by general stock market conditions) nor has any client of VFAM with respect to any of the Investment Accounts (as defined in Section 4.11) terminated or to the knowledge of VFAM or the Shareholders threatened to terminate its relationship with VFAM except as set forth on Schedule 4.08. SECTION 4.09 Absence of Undisclosed Liabilities. Except to the extent ---------------------------------- set forth in the Balance Sheet, VFAM has no liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on a balance sheet of VFAM, as the case may be (including the notes thereto), and have no claims, debts, liabilities or obligations or any alleged claims, debts, liabilities or obligations of VFAM to any party, including but not limited to claims made by governmental authorities for taxes or otherwise, except for (x) liabilities expressly disclosed in this Agreement and in the Exhibits or Schedules and (y) liabilities incurred between the date of this Agreement and the Closing Date, the occurrence of which is not in violation of the provisions of this Agreement. SECTION 4.10 Litigation. Except as set forth in Schedule 4.10, there ---------- are no claims, actions, suits, orders, proceedings or investigations pending or to the knowledge of VFAM or the Shareholders threatened by or against VFAM, at law or in equity or before or by any federal, state or municipal or other governmental department, commission, board, agency, instrumentality or authority. There is no basis known to VFAM or to the Shareholders for any such claims, actions, suits, orders, proceedings or investigations, which if adversely determined would have a material adverse affect on VFAM. SECTION 4.11 Contracts, Leases, Agreements and Other Commitments. --------------------------------------------------- (a) Schedule 4.11(a) lists the accounts with which VFAM has assets under management (the "Investment Accounts") and Schedule 4.11(a) lists all the Investment Accounts that are party to an agreement with VFAM (each a "Investment Advisory Agreement"). Schedule 4.11(a) lists the Investment Accounts with assets under management valued in excess of $1,000,000 as of September 30, 1999. VFAM and each client with an Investment Account are parties to an Investment Advisory Agreement ("Investment Advisory Agreement"). VFAM has delivered to Buyer copies of all Investment Advisory Agreements between VFAM and Investment Accounts with assets under management in excess of $3,000,000. (b) Schedule 4.11(b) sets forth each written or oral contract, agreement, lease, power of attorney, guaranty, surety agreement or other commitment, including any amendment to any of the foregoing, to which VFAM is a party or by which it is bound other than: -13- (1) Investment Advisory Agreements as described in Section 4.11(a); (2) agreements involving a maximum liability or obligation on the part of VFAM of less than $10,000 each. (c) True, correct and complete copies of all of the items set forth on Schedule 4.11(a) and Schedule 4.11(b) (such items are collectively the "Corporation Agreements") (including all amendments thereto) have been delivered to Buyer (except for Investment Advisory Agreements between VFAM and Investment Accounts with assets under management less than $3,000,000). All of the Corporation Agreements are valid, binding and enforceable in accordance with their terms. Except as shown on Schedules 4.11 (a) and (b), VFAM and, to the best knowledge of the Shareholders, all of the parties to the Corporation Agreements have performed all material obligations required to be performed to date under such Corporation Agreements and VFAM is not and, to the best knowledge of the Shareholders, any such other party is not in default or in arrears under the terms thereof, and, to the best knowledge of the Shareholders, no condition exists or event has occurred which, with the giving of notice of lapse of time or both, would constitute a default thereunder. The Corporation Agreements are in full force and effect in accordance with their terms and are free and clear of any liabilities, claims, liens or encumbrances, of any kind, and, except as set forth on Schedule 4.05, Section 7.03 or otherwise in this Agreement, the consummation of this Agreement and the transactions contemplated hereby will not result in an impairment or termination of any of VFAM's rights under any of the Corporation Agreements and does not require any consents of the parties thereto. SECTION 4.12 Insurance. Schedule 4.12 is a summary of all insurance --------- policies maintained by VFAM (specifying, among other things, the insurer, type of insurance, amount of coverage and policy number). Such policies are in full force and effect and all premiums with respect to such policies are currently paid. VFAM has not been denied or had revoked or rescinded any policy of insurance or received any notice of intent to cancel or not renew during the past three years. SECTION 4.13 Benefit Plans. Schedule 4.13 contains a complete list of ------------- all pension, retirement, stock option, stock purchase, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus group insurance, severance and other employee incentive and welfare contracts and plans, and all trust agreements related thereto, that VFAM maintains or to which it contributes for any of its present of former directors, officers, or other employees (collectively the "Employee Plans"). (a) To the knowledge of the Shareholders, all of the Employee Plans comply in all material respects with all applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code (as defined in Section 4.18) and other applicable laws; VFAM has not engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan which is likely to result in any penalties, taxes or other events under Section 502(i) of ERISA or Section 4975 of the Code. (b) No liability to the Pension Guaranty Corporation has been or is expected by VFAM to be incurred with respect to any Employee Plan which is subject to Title IV of ERISA ("Pension Plan") or with respect to any "single- employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained by it or any entity which is considered on employer with VFAM under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate"). -14- (c) No Pension Plan or single-employer plan of an ERISA Affiliate had an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether or not waived)) as of the last date of the end of the most recent plan year ending prior to the date hereof; all contributions to any Pension Plan or single-employer plan of an ERISA Affiliate that were required by Section 302 of ERISA and were due prior to the date hereof have been made on or before the respective dates on which such contributions were due; the fair market value of the assets of each Pension Plan or single-employer plan of an ERISA Affiliate exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA Affiliate as of the end of the most recent plan year with respect to the respective Pension Plan or single-employer plan of an ERISA Affiliate ending prior to the date hereof, calculated on the basis of actuarial assumption used in the most recent actuarial valuation of such Pension Plan or single-employer plan of an ERISA Affiliate as of the date hereof, and no notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the reporting requirement has not been waived has been required to be filed for any Pension Plan or single-employer plan of an ERISA Affiliate within the 12-month period ending on the date hereof. (d) VFAM is not 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) Neither VFAM nor any ERISA Affiliate has contributed to any "multi-employer plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980. (f) Each Employee Benefit Plan which is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the Code (a "Qualified Plan) has received a favorable determination letter for the IRS covering the requirements of the Tax Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; VFAM and the Shareholders are not aware of any circumstances likely to result in revocation of any such favorable determination letter; each Employee Plan has been amended to reflect the requirements of subsequent legislation applicable to such plans; and each Qualified Plan has complied at all relevant times in all material respects with all applicable requirements of Section 401(a) of the Code. (g) Each Qualified Plan which is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of the Code and the regulations thereunder. (h) Neither VFAM, nor any ERISA Affiliate has committed any act or omission or engaged in any transaction that has caused it to incur, or created a material risk that it may incur, liability for any excise tax under Sections 4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which heretofore have been paid and fully reflected in its financial statements. (i) There is not pending or threatened litigation, administrative action or proceeding relating to any Employee Plan other than routing claims for benefits. (j) Except as disclosed on Schedule 4.13(j), there has been no announcement or legally binding commitment by VFAM to create an additional Employee Plan, or to amend an Employee Plan except for amendments required by applicable law which do not materially increase the cost of such -15- Employee Plan, and VFAM does not have any obligations for retiree health and life benefits under and Employee Plan that cannot be terminated without incurring any liability thereunder except as required to be maintained by COBRA. (k) Except as disclosed on Schedule 4.13(k), the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any payment or series of payments by VFAM to any person which is an "excess parachute payment" (as defined in Section 280G of the Code) under an Employee Plan or under any agreement executed in connection with this Agreement, increase any benefits payable under any Employee Plan, or accelerate the time of payment or vesting of any such benefit. (l) Except as disclosed on Schedule 4.13(l), all required annual reports have been filed timely with respect to each Employee Plan, and VFAM has made available to SBI and Buyer a true and complete copy of (A) reports on the applicable form of the Form 5500 series filed with the IRS for plan years beginning after 1987, (B) Employee Plan, including amendment thereto, (C) each trust agreement and insurance contract relating to such Employee Plan, including amendments thereto, (D) the most recent summary plan description for such Employee Plan, including amendments thereto, if the Employee Plan is subject to Title I of ERISA, and (E) the most recent actuarial report or valuation if such Employee Plan is a Pension Plan and (F) the most recent determination letter issued by the IRS if such Employee Plan is a Qualified Plan. SECTION 4.14 Collective Bargaining Agreements and Employment Agreements. ---------------------------------------------------------- (a) (i) VFAM has not entered into any collective bargaining agreements; (ii) there is no labor strike, slowdown or work stoppage or lockout actually pending or to the knowledge of VFAM or the Shareholders threatened against or affecting VFAM, and during the past four years there has not been any such action; (iii) no union organizational campaign is in progress with respect to the employees of VFAM; (iv) there is no unfair labor practice charge or complaint pending or to the knowledge of VFAM or the Shareholders threatened before the National Labor Relations Board; and (v) no charges with respect to or relating to VFAM is pending before the Equal Employment Opportunity Commission. (b) Schedule 4.14 lists: (1) any employment agreement VFAM has with any of its employees; and (2) any consulting, retainer or service agreement or arrangement VFAM has with any individual or entity. SECTION 4.15 Compliance with Applicable Law. VFAM has in the past ------------------------------ complied and is presently complying, in respect of the assets and operation of its business in all material respects, with the rules of the National Association of Securities Dealers, Inc. ("NASD") and all applicable laws (whether statutory or otherwise), rules, regulations, orders, ordinances, judgments or decrees of all governmental authority (federal, state, local or otherwise), including but not limited to the Advisers Act, the 1940 Act, 1934 Act, the Securities Act of 1933, as amended and, in each case, the rules promulgated thereunder, and except as set forth on Schedule 4.15, VFAM has not received notification of any asserted present or past failure to so comply. VFAM has delivered to Buyer all inspection reports or -16- similar documents received during the past three years from the SEC, state regulatory authorities, or the NASD and VFAM's responses thereto. SECTION 4.16 Actions Since the Balance Sheet Date. Except as set forth on ------------------------------------ Schedule 4.16, since September 30, 1999 and to the date hereof, VFAM: (a) has not taken any action outside of the ordinary course of business; (b) has not borrowed any money or become contingently liable for any obligation or liability of others outside of the ordinary course of business; (c) paid all of its debts and obligations as they became due or otherwise in the ordinary course of business; (d) has not incurred any material debt, liability or obligation of any nature to any party except for obligations arising from the purchase of goods or the rendition of services in the ordinary course of business; (e) has not knowingly waived any right of substantial value; (f) has used its reasonable best efforts to preserve its business organization intact, to keep available the services of its employees, and to preserve its relationships with its customers, suppliers and others with whom it deals; and (g) has not purchased or redeemed any shares of capital stock of VFAM, or transferred, distributed or paid, directly or indirectly any money or other property or assets to the Shareholders; (h) made a change in the number of shares of capital stock of VFAM issued and outstanding; (i) declared, set aside, paid or distributed any dividend or other distribution with respect to its capital stock, or with respect to any split, combination or reclassification of its capital stock; (j) increased the compensation or severance pay payable or to become payable by VFAM to any employee or with respect to any employee welfare, pension, retirement, profit-sharing or similar payment plan or arrangement applicable to any present or former employee; (k) incurred any capital expenditure or authorization for a capital expenditure, acquisition of assets or execution of any lease, or incurred liability therefor, requiring any payment or payments in excess of $10,000 in the aggregate with respect to each individual transaction; (l) borrowed or lent money, issued debt securities or pledged a credit of VFAM or guaranteed any indebtedness of others by VFAM; -17- (m) lost the services of any employee that is, either individually or in the aggregate, material to the conduct of the business of VFAM; incurred the loss or termination of relationship with any supplier, client or customer; or (n) entered into any agreement, arrangement or understanding to do any of the foregoing. SECTION 4.17 Tax Matters. ----------- (a) For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, employment excise, withholding, property, sales, use, transfer, license, payroll and franchise taxes, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof. For purposes of this Agreement, the term "Tax Return" shall mean any report, return or other information required to be supplied to a taxing authority in connection with Taxes. All citations to provisions of the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments thereto and any substitute or successor provisions thereto. (b) VFAM has duly filed all Tax Returns required to be filed as of the date hereof (and will file all Tax Returns required to be filed on or before the Closing Date). All such Tax Returns are (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) true, correct and complete in all material respects and were (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) filed on a timely basis. All taxes shown on such Tax Returns or otherwise due or payable with respect to the income of VFAM (whether or not shown on any Tax Return) have been timely paid except as expressly reserved on the Balance Sheet. Except as disclosed in Schedule 4.17(b), VFAM has not requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. True and complete copies of the federal state and local income Tax Returns of VFAM for the last three years have been provided to SBI prior to the date hereof. The reserves for Taxes reflected in the financial statements of VFAM are sufficient for the payment of all unpaid taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the date of such financial statements and for all years and periods ended prior thereto, and the reserve for Taxes reflected in the balance sheet is sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the Closing Date and for all years and periods ended prior thereto. Since December 31, 1998, VFAM has not incurred any liability for Taxes other than in the ordinary course of business, which Taxes would result in a material decrease in the net worth of VFAM, except any such liability for taxes incurred as a result of the disposition on or before the Closing Date of those private placement assets which appear on the Balance Sheet. No waiver or extension of any statute of limitations relating to Taxes has been given to, or requested by, the Internal Revenue Service (the "IRS"), or any state or local taxing authority. No claim is currently being made by any authority in a jurisdiction where VFAM files Tax Returns that they are or may be subject to Taxes in that jurisdiction. (c) Except as set forth on Schedule 4.17(c), VFAM has complied (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the withholding and payment of Taxes, including, without limitation, the withholding and reporting -18- requirements under Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as well as similar provisions under any other laws, and have, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required. VFAM has under taken in good faith to appropriately classify all service providers as either employees or independent contractors for all Tax purposes. (d) Neither the federal income Tax Returns nor the state or local income Tax Returns of VFAM have been examined by the IRS or relevant state taxing authorities, except as set forth on Schedule 4.17(d). All deficiencies asserted as a result of the examinations referred to on Schedule 4.17(d) have been paid, and no issue has been raised by any federal, state, local or foreign income tax authority in any such examination which, by application of the same or similar principles to similar transactions, could reasonably be expected to result in a proposed deficiency for any subsequent period. Further, to the best of VFAM's knowledge, no state of facts exists or has existed which would constitute grounds for the assessment of any material liability for Taxes with respect to the periods which have not been audited by the IRS or other taxing authority. There are no examinations or other administrative or court proceedings relating to Taxes in progress or pending nor has VFAM received a revenue agent's report asserting a tax deficiency. To the best of VFAM's knowledge, there are no threatened actions, suits, proceedings, investigations or claims relating to or asserted for Taxes of VFAM and there is no basis for any such claim. (e) Since 1993, VFAM has not been a member of any affiliated group of corporations that filed a consolidated income tax return. (f) Since its date of incorporation, VFAM has not (A) filed any consent or agreement under Section 341(f) of the Code, (B) applied for any tax ruling, (C) entered into a closing agreement with any taxing authority, (D) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), (E) made any payments, or been a party to an agreement (including this Agreement) or any transactions related hereto that under any circumstances could obligate it to make payments that will not be deductible because of Section 280G of the Code, or (F) been a party to any tax allocation or tax sharing agreement. SECTION 4.18 Environmental Matters. --------------------- (a) Except as disclosed in Schedule 4.18(a): (i) VFAM has been and is in full compliance with all Environmental Laws (as defined below) applicable to the operations of, and the property owned, operated, occupied or otherwise used by, VFAM. To the best knowledge of VFAM, there are no circumstances that may prevent or interfere with such full compliance in the future. (ii) VFAM has obtained all Permits (as defined below) necessary for the operation of their businesses and the ownership, operation, occupation or other use of their properties, all such Permits are in good standing and VFAM is in compliance with all terms and conditions of such Permits. There has been no material change in the facts or circumstances reported or assumed in the applications for or the granting of such Permits. -19- (iii) There is no lawsuit, claim, action, cause of action, judicial or administrative proceeding, investigation, summons, or written notice by any person pending, or to VFAM's knowledge, threatened, against VFAM alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries or penalties) arising out of or resulting from (i) the violation of any Environmental Law or (ii) the presence or Release of any Hazardous Substance (as defined below) at any location, whether or not owned, operated, occupied or otherwise used by VFAM. (iv) VFAM is not subject to any writ, injunction, order, decree or settlement addressing (i) any alleged violation of any Environmental Law or (ii) the alleged presence, or Release into the environment of any Hazardous Substance at any location, whether or not owned, operated, occupied or otherwise used by VFAM. (v) No Environmental Lien (as defined below) has attached to any of the property owned, operated, occupied or otherwise used by VFAM. (vi) There has been no Release of any Hazardous Substance at, to or from any of the properties owned, operated, occupied or otherwise used by VFAM. (vii) VFAM has not transported or arranged for the transport of any Hazardous Substance to any facility or site for the purpose of treatment, storage, disposal or recycling which (i) is included on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar ------ state list which is required by any state Environmental Law to be kept, or (ii) is presently subject to a governmental enforcement action under CERCLA or the Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state Environmental Law. (viii) All of the third parties with which VFAM presently have arrangements, engagements or contracts to accept, treat, transport, store, dispose, remove or recycle any Hazardous Substances generated or present at any of the properties owned, operated, occupied or otherwise used by VFAM are properly permitted under Environmental Laws to perform the foregoing activities or conduct. (ix) VFAM has no violation of any Environmental Law or the Release of any Hazardous Substance in connection with any business or property previously owned, operated, occupied or otherwise used by VFAM or any of the predecessors of VFAM. (x) There are no past or present actions, activities, circumstances, conditions, event or incidents, including, without limitations, the generation, handling, transportation, treatment, storage, Release, presence, disposal or arranging for disposal of any Hazardous Substance, that could form the basis of any claim against VFAM under any Environmental Law. (xi) Without any way limiting the generality of the foregoing, (i) all underground storage tanks, and the capacity and contents of such tanks, located on the real property owned or operated by VFAM are identified in Schedule 4.18(a), (ii) except as identified in Schedule 4.18(a), there is no asbestos contained in or forming part of any building, building component, structure -20- or office space owned or operated by VFAM, and (iii) no polychlorinated biphenyls (PCBS) are used or stored at any part of the property owned or operated by VFAM. (xii) The following terms shall have the following meanings: A. "Environmental Laws" means all federal, state, local and foreign laws, statues, codes, ordinances, rules, regulations, orders, directives, binding policies, common law, or Permits as amended and in effect on the date hereof and on the Closing Date relating to or addressing the environment, health or safety, including, but not limited to, any law, statute, code, ordinance, rule, regulation, order, directive, binding policy, common law or Permit relating to the generation, use, handling, treatment removal, storage, production, manufacture, transportation, remediation, disposal, arranging for disposal, or Release of Hazardous Substances. B. "Environmental Lien" means a lien in favor of any conventional authority for any (a) liability under any Environmental Law or (b) damages arising from, or costs incurred by, such governmental authority in response to a release or threatened release of a Hazardous Substance into the environment. C. "Hazardous Substances" means any toxic or hazardous substances (including, without limitation, wastes), pollutants, explosives, radioactive materials or substances (including, without limitation, wastes), including, without limitation, asbestos, PCBs, petroleum products and byproducts, and substances (including, without limitation, wastes) defined in or regulated under Environmental Law. D. "Permit" means any permit, license, consent or other approval or authorization required under any Environmental Law. E. "Release" means the release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migrating of any Hazardous Substance through or in the air, soil, surface water, or groundwater. SECTION 4.19 Books and Records. The books and records of VFAM have been, ----------------- and are being, maintained in accordance with applicable legal and accounting requirements and reflect in all material respects the substance of events and transactions that should be included therein. SECTION 4.20 Intellectual Property. VFAM, directly or indirectly, --------------------- possesses or has adequate rights to all licenses, permits and all other franchises, trademarks, trade names, service marks, inventions, patents, copyrights, and any applications therefor, trade secrets, research and development, know-how, technical data, computer software programs or applications and technology systems necessary to operate their respective businesses and required by applicable law (the "Intellectual Property"). Except as set forth on Schedule 4.20, all right, title and interest in and to each item of Intellectual Property is owned by VFAM, is not subject to any license, royalty arrangement or pending or threatened claim or dispute and is valid and in full force and effect. To VFAM's knowledge, none of the Intellectual Property owned or used by VFAM, infringes any Intellectual Property right of any other entity and no Intellectual Property owned by VFAM is infringed upon by any other entity. -21- SECTION 4.21 Condition of Tangible Assets. To VFAM's knowledge, the ---------------------------- operation and use of the property in the business conform in all material respects to all applicable laws, ordinances, regulations, permits, licenses and certificates. SECTION 4.22 Year 2000 Compliance. Except as provided in Schedule 4.22 -------------------- hereof, VFAM has undertaken an assessment of its software and hardware in order to reveal those portions thereof which will require modification or replacement to utilize properly dates beyond December 31, 1999, and have contracted with appropriate third parties to modify or replace such existing software and hardware so that such software and hardware will not be affected by the change in the Year 2000. VFAM and has contacted those vendors and borrowers who are critical to its business operations in order to assess their efforts to mitigate any adverse effects to their computer programs and systems beyond December 31, 1999. SECTION 4.23 Conflicts of Interest. Except as set forth on Schedule 4.23, --------------------- no present or former officer or director, or managerial employee, of VFAM and no Shareholder has (i) any interests in the property, tangible or intangible, including without limitation, licenses, inventions, processes, know how or formula of a proprietary nature used in or pertaining to the business of VFAM, or (ii) any contract, commitment, claim, arrangement or understanding, including, without limitation loan arrangement, with VFAM. To the best knowledge of VFAM, no present officer, director, or managerial employee of VFAM and no Shareholder has any ownership or stock interest in any other enterprise, firm, corporation, trust or any other entity which is engaged in any contractual arrangement or understanding with VFAM or is engaged in any line or lines of business which are the same as, or similar to, or competitive with, the line or lines of business of VFAM. For the purpose of this representations, ownership of not more than 3% of the voting stock of any publicly-held company whose stock is listed on a recognized securities exchange or traded over-the-counter shall be disregarded. SECTION 4.24 VFICO Agreement Representations. The representations and ------------------------------- warranties of VFICO made pursuant to Article III of the VFICO Agreement are true and correct. SECTION 4.25 Disclosure. No representation or warranty by VFAM or the ---------- Shareholders contained in this Agreement, and no statement contained in any Exhibit or Schedule hereto or any lists, certificate or writing delivered in connection herewith or pursuant hereto, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in any such document. ARTICLE V FURTHER REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS As a material inducement to SBI and Buyer to enter into this Agreement and to consummate the transactions contemplated herein, each of the Shareholders makes the following representations and warranties to SBI, Buyer and VFAM: -22- SECTION 5.01 Ownership of Capital Stock of VFAM. Such Shareholder resides ---------------------------------- at the address indicated on Annex I and owns the number of Shares set forth opposite his or her name on Annex I hereto. Such Shareholders has good, marketable and unencumbered title to such Shares, free and clear of all liens, security interests, pledges, claims, options and rights of others. SECTION 5.02 Valid and Binding Agreement. This Agreement constitutes and --------------------------- will constitute the valid and binding obligation of such Shareholder. SECTION 5.03 Marital Status. Such Shareholder has not commenced an action -------------- for divorce or annulment of his or her current marriage in any court. Such Shareholder's Shares are not subject to any lien as security for the payment of alimony, child support or other award granted in any prior divorce or annulment proceeding. SECTION 5.04 Shareholder Agreements. Except the Buy-Sell Agreements among ---------------------- VFAM and the Shareholders which will terminate at Closing, there are no agreements among or between VFAM and such Shareholder and no agreements between such Shareholder and any other Shareholder pertaining to VFAM or the VFAM Common Stock. Except the Buy-Sell Agreements among VFAM and the Shareholders which will terminate at Closing, such Shareholder does not have (i) any interests in the property, tangible or intangible, including without limitation, licenses, inventions, processes, know how or formula of a proprietary nature used in or pertaining to the business of VFAM, or (ii) any contract, commitment, claim, arrangement or understanding, including, without limitation loan arrangement, with VFAM. Such Shareholder does not have any ownership or stock interest in any other enterprise, firm, corporation, trust or any other entity which is engaged in any contractual arrangement or understanding with VFAM or is engaged in any line or lines of business which are the same as, or similar to, or competitive with, the line or lines of business of VFAM. For the purpose of this representations, ownership of not more than 3% of the voting stock of any publicly-held company whose stock is listed on a recognized securities exchange or traded over-the-counter shall be disregarded. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF SBI AND BUYER As a material inducement to VFAM and the Shareholders to enter into this Agreement, SBI and Buyer makes the following representations and warranties to VFAM and the Shareholders: SECTION 6.01 Organization. Each of SBI and Buyer is a corporation duly ------------ organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the corporate power and authority to carry on its business as presently conducted, to enter into this Agreement, and the other documents and instruments to be executed and delivered by SBI and Buyer pursuant hereto and to carry out the transactions contemplated hereby and thereby. SECTION 6.02 Authority. The execution and delivery of this Agreement and --------- the other documents and instruments to be executed and delivered by SBI and Buyer pursuant hereto and the consummation by SBI and Buyer of the transactions contemplated hereby have been duly authorized by their respective Board of Directors. No other corporate act or proceeding on the part of SBI or Buyer is -23- necessary to authorize this Agreement, or the other documents and instruments to be executed and delivered by SBI or Buyer. SECTION 6.03 Consents and Approvals; No Violation. This Agreement ------------------------------------ constitutes or will constitute valid and binding agreements of SBI and Buyer, enforceable in accordance with its terms, and except as such enforceability may be limited by bankruptcy or other similar laws affecting creditors' rights and remedies generally, neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of SBI or Buyer, (ii) result in a violation or breach of, or constitute with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Buyer is a party or by which any of its properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to SBI or Buyer or any of its properties or assets. Except as set forth on Schedule 6.03, no permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency is required in connection with the execution, delivery or performance by SBI or Buyer of this Agreement or the consummation of the transactions contemplated hereby. SECTION 6.04 Disclosure. No representation or warranty by SBI or Buyer ---------- contained in this Agreement, and no statement contained in any Exhibit or Schedule hereto or any lists, certificate or writing delivered in connection herewith or pursuant hereto contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in any such document. SECTION 6.05 SEC Reports and Financial Statements. SBI has delivered to ------------------------------------ VFAM complete (except in certain cases for listed exhibits which are available upon request) and correct copies of SBI's (a) Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 1998; (b) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June 30 and September 30, 1999, in each case as filed by SBI with the SEC pursuant to the 1934 Act (such reports and other filings collectively referred to herein as the "1934 Act Filings"). As of their respective dates, the 1934 Act Filings 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 therein, in light of the circumstances under which they were made, not misleading and, since the date of the last 1934 Act Filing, SBI has not experienced nor to the knowledge of SBI has there been threatened or anticipated any material adverse change in the condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations of SBI taken as a whole. SECTION 6.06 Disciplinary History. Except as set forth on Schedule 6.06, -------------------- there is no information concerning SBI or Buyer, or any person or entity that, upon the consummation of the transactions contemplated by this Agreement and the VFICO Agreement, will be a control affiliate (as such term is defined in Instruction 4(3) to Form BD, Uniform Application for Broker-Dealer Registration ("Form BD") or an advisory affiliate (as such term is defined in Item 11 of Form ADV, Uniform Application for Investment Adviser Registration (Form ADV")) of VFAM (other than persons and entities that are presently control affiliates or advisory affiliates of VFAM), that will be required to be -24- disclosed in response to Item 11 or Schedule DRP of VFAM's Form BD or in response to Item 11 or Schedule E of VFAM's Form ADV. ARTICLE VII CERTAIN COVENANTS PENDING THE CLOSING SECTION 7.01 Access and Information. Between the date hereof and the ---------------------- Closing Date, VFAM will give Buyer and its authorized representatives full and free access during normal business hours, in such manner as not to unduly disrupt normal business activities, to any and all premises, properties, contracts, commitments, books and records, and VFAM will cause its officers to furnish any and all financial, technical and operating data and other information as Buyer and its authorized representatives from time to time reasonably may request. SECTION 7.02 Conduct of the Business of VFAM Pending the Closing Date. -------------------------------------------------------- Except as set forth on Schedule 7.02, between the date hereof and the Closing Date, unless Buyer otherwise consents in writing, VFAM and the Shareholders shall: (a) Not take any action which would render untrue any of the representations or Warranties of VFAM or the Shareholders herein contained; not omit to take any action, the omission of which would render untrue any such representation or warranty; provided, however, VFAM and the Shareholders shall not be obligated to take any action not in the ordinary course of business that would result in the expenditure of funds by VFAM exceeding $5,000 in the aggregate; and not take any action or commit any omission that would have as a result any of the conditions set forth in Article IX not being satisfied. (b) Conduct VFAM's business in a good and diligent manner in the ordinary and usual course. (c) Use their respective best efforts to preserve VFAM's business organization intact, to keep available the services of its employees, and to preserve its relationships with customers, vendors, suppliers and others with whom it deals. (d) Not reveal, orally or in writing, to any party, other than consultants and vendors of services with a need to know and other than Buyer and its authorized agents, any of the confidential business procedures and practices followed by VFAM in the conduct of its business. (e) Not enter into any contract, agreement, commitment or arrangement with any party, other than contracts in the ordinary and usual course of business, and not amend, modify or terminate any of the Corporation Agreements except modifications or amendments to such Corporation Agreements which either are not materially adverse to VFAM or are necessary or desirable to meet the competitive conditions in the industry. (f) Except as contemplated by this Agreement, not redeem or otherwise acquire any shares of its capital stock or issue any capital stock or any stock or any stock option, warrant, preference, call or right relating thereto. -25- (g) Use their best efforts to ensure that at Closing, the financial requirements to which VFAM and VFICO will certify on the Closing Financial Certificates have been met. (h) Use their best efforts to maintain in full force and effect all of the insurance policies presently maintained by VFAM, make no change in any insurance coverage and notify Buyer at least ten days prior to any pending cancellation or lapse of any insurance policy. (i) Keep the premises occupied and owned or leased by VFAM and all of its equipment and other tangible personal property in good order and repair and perform all necessary repairs and maintenance. (j) Continue to maintain all of VFAM's usual business books and records in accordance with its past practices. (k) Not amend or propose to amend VFAM's Articles of Incorporation or Bylaws. (l) Not waive any material right or cancel any material claim without the receipt of adequate consideration. (m) Maintain VFAM's corporate existence and not merge or consolidate it with any other entity. (n) Comply with all material provisions of any of the Corporation Agreements and all applicable laws, rules and regulations. (o) Not make any capital expenditure other than in the ordinary course of business and an amount not exceeding $10,000 in the aggregate. (p) Not place any additional encumbrances on any of the inventory or assets of VFAM not in the ordinary course of business, except that existing encumbrances may attach to inventory or assets of VFAM acquired after the date hereof. (q) Not pay any severance, deferred compensation or other payments to any Shareholder, whether or not accrued except as otherwise expressly provided by this Agreement. (r) Not declare or make any dividend or other payment on or with respect to VFAM's capital stock, and not declare or pay any bonuses or non- periodic compensation to either of the Shareholders. -26- SECTION 7.03 Client Notification. ------------------- (a) As promptly as possible following the date of this Agreement (but in no event later than the fifth business day after the date hereof), VFAM shall provide each client who has an Investment Account written notice of the transactions contemplated hereby (the "Notice Letter"). Buyer and its counsel shall have the opportunity to review the form of the Notice Letter prior to delivery to the Investment Accounts, and the Notice Letter shall be in form and substance reasonably satisfactory to Buyer and its counsel. (b) Prior to the Closing, VFAM shall contact clients as selected by VFAM, but including clients with assets under management valued in excess of $1,000,000 as of September 30, 1999, to discuss by telephone the proposed transaction contemplated by this Agreement. (c) VFAM shall give prompt notice to Buyer of any indications (written or oral) from any client maintaining an Investment Account that such client will not consent to the transactions contemplated by this Agreement. SECTION 7.04 Notices. VFAM shall give prompt notice to Buyer of (i) any ------- notice of, or other communication relating to, a default which would have a material adverse effect on VFAM or event which, with notice or lapse of time or breach of a covenant or other provision or both, would become a default or breach which would have a material adverse effect on VFAM, received by it subsequent to the date of this Agreement and prior to the Closing, under its Articles of Incorporation or Bylaws or any of the Corporation Agreements or pursuant to its investment advisor registrations and (x) by which it is bound or (y) to which it is subject, (ii) any claim, action, suit, proceeding or investigation by any governmental department, taxing authority commission, board, agency, instrumentality or authority involving or relating to its assets, properties or business or the Corporation Agreements (or any communication indicating that the same may he contemplated), (iii) any notice or other communication from any third party (other than Clients) alleging that the consent of such third party is or may be required in connection with the transactions contemplated hereby and (iv) any matter which would cause any material change with respect to any representations made hereunder. SECTION 7.05 Advice of Changes. Each of Buyer and VFAM shall confer on a ----------------- regular and frequent basis with the other, report on operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on such party. SECTION 7.06 No Shopping. The Shareholders and VFAM agree that none of ----------- them shall solicit, enter into or continue any discussions, negotiations or contracts (including any disclosure of business information concerning VFAM) with any person or entity other than Buyer concerning the disposition of VFAM's capital stock or of its assets and business operations, whether by sale, merger or other transaction. SECTION 7.07 Best Efforts. ------------ Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, -27- proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. SECTION 7.08 December 31, 1999 Financial Statements. If the Closing has -------------------------------------- not occurred by January 15, 2000, then VFAM shall deliver to Buyer on or before that date the unaudited financial statements of VFAM for the quarter ended December 31, 1999, prepared in accordance with GAAP (the "December 31, 1999 Financials"). ARTICLE VIII INDEMNIFICATION SECTION 8.01 Basic Provision. The Shareholders severally and not jointly --------------- and (only if the Closing does not occur) VFAM, jointly and severally with the Shareholders, hereby indemnify and agree to hold harmless SBI, Buyer and their Affiliates (as defined herein), successors and assigns, and SBI and Buyer hereby indemnify and agree to hold harmless the Shareholders and VFAM and their respective Affiliates, successors and assigns, from, against and in respect of the amount of any and all Deficiencies (as hereinafter defined); provided, however, that no Shareholder shall be liable for breaches or misrepresentations by the other Shareholders of their representations or warranties contained in Article V of this Agreement. SECTION 8.02 Definitions. As used in this Article VIII, the following ----------- terms have the meanings: (a) "Affiliate" as to any person or entity, means any other person --------- that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such person or entity. (b) "Deficiency" means any and all loss or damage, resulting from (i) ---------- any breach of warranty, or any non-fulfillment of any warranty, representation, covenant or agreement by an Indemnitor contained herein; (ii) any misrepresentation contained in any statement, report, certificate or other document or instrument delivered by an Indemnitor pursuant to this Agreement or contained in any Exhibit or Schedule; (iii) efforts by holders of Dissenting Shares (as defined in Section 7.03 of the VFICO Agreement) to seek dissenters' rights Pennsylvania law, including any payments that exceed the per share value of the Cash Consideration; (iv) claims by any VFAM shareholder or VFICO shareholder that the materials delivered to such shareholder in connection with obtaining approval of the transactions contemplated by this Agreement or the VFICO Agreement contain any untrue statement of material fact or omit to state a material fact or are otherwise defective (a "Shareholder Disclosure Deficiency"); and (v) any and all acts, suits, proceedings, demands, assessments, judgments, reasonable attorneys' fees, costs and expenses incident to any of the foregoing. (c) "Indemnified Party" means the individuals or entities entitled to ----------------- indemnification under this Article VIII consisting of (i) SBI and Buyer, their respective Affiliates, successors and assigns and their respective officers and directors or (ii) VFAM (only if the Closing does not occur), the Shareholders, their respective Affiliates, successors and assigns and their respective officers and directors, as the case may be. -28- (d) "Indemnitor" means the individuals or entities obligated to ---------- provide indemnification under this Article VIII consisting of SBI and Buyer, or VFAM (only if the Closing does not occur) and the Shareholders, as the case may be. SECTION 8.03 Procedures for Establishment of Deficiencies. -------------------------------------------- (a) In the event that any claim shall be asserted by any third party against an Indemnified Party which, if sustained, would result in a Deficiency, such Indemnified Party, within a reasonable time after learning of such claim, shall notify Indemnitor of such claim, and shall extend to Indemnitor a reasonable opportunity to defend against such claim at Indemnitor's sole expense and through legal counsel acceptable to the Indemnified Party, provided that Indemnitor proceed in good faith, expeditiously and diligently. No determination shall be made pursuant to subparagraph (b) below while such defense is still being made until the earlier of (i) the resolution of said claim by Indemnitor with the claimant, or (ii) the termination of the defense by Indemnitor against such claim or the failure of indemnitor to prosecute such defense in good faith in an expeditious and diligent manner. The Indemnified Party shall be entitled to rely upon the opinion of its counsel as to the occurrence of either of said events. The Indemnified Party shall, at its option, have the right to participate in any defense undertaken by Indemnitor with legal counsel of its own selection, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (I) the employment of such counsel shall have been authorized in writing by Indemnitor in connection with the defense of such action, suit, or proceeding, or (II) Indemnitor shall fail actively and diligently to defend such claim, in either of which events the defense of such claim on behalf of the Indemnified Party shall be controlled by the Indemnified Party and that portion of any fees and expenses of counsel related to matters covered by the indemnity agreement contained in Section 8.01 shall be borne by Indemnitor. The Indemnified Party shall be kept fully informed of such claim at all stages thereof whether or not they are so represented. Each party shall make reasonably available to the other party and its attorneys and accountants all books and records of such party relating to such claim and the parties hereto shall render to each other such assistance as they may reasonably require of each other in order to ensure a proper and adequate defense. No settlement or compromise of any claim which may result in a Deficiency may be made by Indemnitor without the prior written consent of the Indemnified party unless (i) prior to such settlement or compromise Indemnitor acknowledges in writing its obligation to pay in full the amount of the settlement or compromise and all associated expenses and (ii) the Indemnified Party is furnished with security reasonably satisfactory to the Indemnified Party that Indemnitor will in fact pay such amount and expenses. (b) In the event that the Indemnified Party asserts the existence of any Deficiency, the Indemnified Party shall give written notice to Indemnitor of the nature and amount of the Deficiency asserted. If Indemnitor, within a period of twenty (20) business days after the giving of the Indemnified Party's notice, shall not give written notice to the Indemnified Party announcing its intent to contest such assertion of the Indemnified Party (such notice by Indemnitor being hereinafter called the "contest notice"), such assertion of the Indemnified Party shall be deemed accepted and the amount of the Deficiency shall be deemed established. In the event, however, that a contest notice is given to the Indemnified Party within said twenty-day period, then the contested assertion of a Deficiency shall be settled by arbitration to be held in Philadelphia, Pennsylvania in accordance with the rules of the American Arbitration Association then obtaining. The arbitrator shall be a firm or person with experience pertaining to registered investment advisors mutually selected by the Shareholders and Buyer (or by the rules of the American Arbitration Association absent such agreement within ten (10) business -29- days after a request for such selection by the Indemnified Party or Indemnitor) which has not been engaged by VFAM, the Shareholders or Buyer or their respective subsidiaries or affiliates during the prior five years. The determination of the arbitrator(s) and the reasons therefor shall be delivered in writing to Indemnitor and the Indemnified Party and shall be final, binding and conclusive upon all of the parties hereto, and the amount of the Deficiency, if any, determined to exist, shall be deemed established. (c) Indemnitor and the Indemnifying Party may agree in writing, at any time, as to the existence and amount of a Deficiency, and, upon the execution of such agreement such Deficiency shall be deemed established. SECTION 8.04 Payment of Deficiencies. ----------------------- VFAM (only if the Closing does not occur) and the Shareholders, severally and not jointly hereby agree to pay the amount of established Deficiencies to SBI and Buyer within twenty (20) days after the establishment thereof in cash. Any amounts not paid by VFAM and the Shareholders when due under this subparagraph shall bear interest from the due date thereof until the date paid at a rate equal to the prime rate, as reported from time to time in The Wall Street Journal, eastern edition. Within five (5) business days after notification of the amount of the Deficiencies, each Shareholder shall pay to Buyer his or her Proportionate Share of the Deficiencies. Such Proportionate Share shall equal the fraction the numerator of which is the purchase price paid to such Shareholder at Closing as set forth on Annex I and the denominator of which is the purchase price paid to all Shareholders at Closing as set forth on Annex I. If any Shareholder fails to promptly make such payment, Buyer shall have the right to offset the amount of such payment by a claim against the amounts escrowed for the benefit of such Shareholder under Sections 2.01 and 3.01 of this Agreement. Upon demand by Buyer to the Escrow Agent (with notice to the Shareholder), the Escrow Agent shall pay such Proportionate Share of the Deficiencies to Buyer. The Buyer may also deduct any such deficiencies not so paid from any payments to which such Shareholder may become entitled under his or her Contingent Earnings Agreement (or which have been or would have been deposited into escrow for the benefit of such shareholder, by demand to the Escrow Agent as provided above) and from and Additional Stock Payments which may become due under this Agreement. Any amount still not collected from such Shareholder shall remain the personal obligation of that Shareholder. If such Shareholder would not have been entitled to receive funds in escrow which have been paid to Buyer pursuant to this Section 8.04 (the "Deficiency Disqualified Amount") because the conditions to distribution of such funds would not have been satisfied by the continued employment by such Shareholder with VFAM, then the liability of such Shareholder to Buyer shall be increased by the Deficiency Disqualified Amount. SECTION 8.05 Survival of Representations, Warranties and Agreements. ------------------------------------------------------ (a) All representations and warranties contained in Articles IV, V and VI of this Agreement and any certificates pertaining thereto to be delivered at the Closing and the rights of the parties to seek indemnification under this Article VIII with respect to such representations and warranties and Closing certificates pertaining thereto, shall survive the Closing Date but, except as set forth below in respect of any claims as to which notice shall have been duly given prior to the relevant expiration date set forth below, shall expire on the second anniversary of the Closing Date provided, however that; -30- (b) All agreements and covenants contained in this Agreement and the rights of the parties to seek indemnification under this Article VIII with respect to such agreements and covenants shall survive Closing. (c) Nothing contained herein shall limit or restrict the Shareholders continuing liability for any breach of representations and warranties contained in Sections 4.01(a), 4.03, 4.04, 4.17, 4.18, 5.01 and 5.02, which in each case shall continue until the expiration of the applicable statute of limitations. (d) Nothing contained in this Section 8.05 shall limit or restrict the Shareholders continuing liability for Deficiencies relating to Section 1.05. (e) Except for claims involving fraud and the provisions of Section 1.05, the indemnification provided in this Article VIII shall be the exclusive remedies the parties have under the terms of this Agreement with respect to Deficiencies. SECTION 8.06 Limitations on Indemnification. ------------------------------ The indemnification provided for in Article VIII shall be subject to the following limitations: (a) Except for a Shareholder Disclosure Deficiency or Deficiency relating to Section 1.05, no Indemnified Party shall make any claim against an Indemnitor for indemnification under this Article VII unless the aggregate amount of the Deficiency pertaining to all such claims exceeds $250,000 (the "Threshold Amount") in which case all Deficiencies incurred shall be subject to indemnification hereunder; provided, however that although Deficiencies under $2,500 ("Indemnification Minimum") shall be counted towards the Threshold Amount, Deficiencies under $2,500 shall not be subject to indemnification hereunder, except for such Deficiencies which arise under related or common facts or circumstances and when aggregated exceed the Indemnification Minimum. (b) The Shareholders' total liability for indemnity to an Indemnified Party in respect of all claims for indemnification under this Article VIII shall not exceed the aggregate Share Consideration received by all Shareholders. ARTICLE IX CONDITIONS TO CLOSING SECTION 9.01 Conditions to Each Party's Obligation To Effect the --------------------------------------------------- Transaction. The respective obligation of each party to effect the transactions - ----------- contemplated hereby shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) No Injunctions or Restraints. No temporary restraining ---------------------------- order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated hereby shall be in effect. -31- (b) Consummation of Closing Under VFICO Agreement. The ---------------------------------------------- transactions contemplated by the VFICO Agreement shall have been closed simultaneously with, Closing under this Agreement. SECTION 9.02 Conditions of Obligations of Buyer and SBI. The obligations ------------------------------------------ of Buyer and SBI to effect the transactions contemplated hereby are subject to the satisfaction of the following conditions unless waived by Buyer: (a) Representations and Warranties. The representations and ------------------------------ warranties of VFAM and the Shareholders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of VFAM and the Shareholders. ------------------------------------------------------- VFAM and the Shareholders shall have performed in all material respects all of their respective obligations required to be performed by them under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, ------------------------ waivers, permits and approvals from any third party or any governmental or regulatory body required by VFAM in connection with the execution, delivery and performance of this Agreement, the Contingent Earnings Agreement, the Lease and the Employment Agreements shall have been duly obtained and shall be in full force and effect on the Closing Date. Pursuant to the notice procedures set forth in Section 7.03, VFAM shall have not received negative responses from clients with Investment Accounts under management representing 10% or more of assets under management at September 30, 1999. (d) Notification. No litigation, governmental action or other ------------ proceedings involving or potentially involving a liability, obligation or loss on the part of VFAM, or which by reason of the nature of the relief sought might have a materially adverse effect on VFAM's business shall be threatened or commenced against VFAM with respect to any matter and no litigation, governmental action or other proceedings shall be threatened or commenced against any person with respect to the consummation of the transactions provided for herein. (e) Other Approvals. All authorizations, consents, orders or --------------- approvals, including, without limitation, all licenses or assignments of licenses, of, or declarations or filings with any governmental entity the failure to obtain which would have a material adverse effect on Buyer, shall have been filed, occurred or been obtained. (f) Closing Documents. All documents required to be delivered ----------------- by the Shareholders and VFAM at or prior to the Closing Date shall have been delivered. (g) Share Transfer Restrictions. Any and all share transfer --------------------------- restrictions on the VFAM common stock, including, without limitation, any restrictions imposed in VFAM's Articles of Incorporation, bylaws or any shareholder agreements, shall be terminated or waived. (h) Employment Agreements. The Key Employees shall have --------------------- terminated any existing employment agreements with VFAM and entered into employment agreements with VFAM in the forms attached hereto as Exhibit 9.02(h) (the "Employment Agreements"). -32- (i) Contingent Earnings Agreement. All parties thereto shall ----------------------------- have executed and delivered a contingent earnings agreement in the form attached hereto as Exhibit 9.02(i) (the "Contingent Earnings Agreement"), as compensation to the "Associates" as defined therein as an incentive to continue to provide services to VFAM. SBI shall have received assurance that Messrs. Francis, Corace, Gibson and Born have each become a party to a Contingent Earnings Agreement. (j) Payment of VFAM's Expenses. Prior to the Closing, VFAM and -------------------------- the Shareholders shall have paid all fees and expenses of VFAM's accountants and counsel whether incident to the negotiations, preparation, execution, delivery and performance of this Agreement or otherwise for the period through the Closing Date, such that no liability or obligation with respect to such fees and expenses shall be included on VFAM's closing balance sheet. VFAM's accountants and counsel shall have executed and delivered to VFAM and Buyer a release agreement in a form satisfactory to Buyer reflecting that as of the Closing Date they have no right to any further payment from VFAM and SBI and Buyer, for any fees or expenses. (k) Tangible Net Worth. SBI and Buyer shall have received a ------------------ certificate (the "VFAM Closing Financial Certificate") dated as of the Closing Date, signed on behalf of VFAM certifying that, after making all payments required or permitted to be made by VFAM under this Agreement except the payment to SBI contemplated in Section 1.06, immediately after the Closing: (i) the tangible net worth of VFAM as of such date is at least $1,450,000; (ii) VFAM has available a cash balance of at least $1,200,000; (iii) VFAM has cash and receivables less current liabilities of at least $1,200,000; (iv) the net capital as defined in Rule 15c 3-1 promulgated under the Securities Exchange Act of 1934 ("Net Capital"), shall not be less than $1,450,000 minus the product obtained by multiplying receivables by 0.415; and (v) VFAM has no long term liabilities. An example of the calculation of such certificate is set forth on Schedule 9.02(k). (l) Tender of Shares. The Shareholders shall have tendered all ----------------- of the Shares as contemplated by Section 1.01 hereof. (m) Cash-Out of Options. The Option Holders shall have -------------------- surrendered and released the Options, as contemplated by Section 2.01 hereof. (n) Lease. VFAM shall have entered into a new lease, or ------ amended its current lease, with Warner Road Associates, in form and substance acceptable to SBI (the "Lease"). (o) Pro Forma Balance Sheet and Income Statements. In addition ---------------------------------------------- to the December 31, 1999 Financials, at least ten days prior to the Closing Date, VFAM shall deliver to SBI, a pro forma balance sheet and income statement and supporting documents for the period from the most recent -33- audited financial statements through the Closing Date which shall confirm the accuracy of the VFAM Closing Financial Certificate. SECTION 9.03 Conditions of Obligations of VFAM and the Shareholders. The ------------------------------------------------------ obligation of VFAM to effect the transactions contemplated herein is subject to the satisfaction of the following conditions unless waived by VFAM and the Shareholders (through the Shareholder Representative): (a) Representations and Warranties. The representations and ------------------------------ warranties of SBI and Buyer set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of Buyer. SBI and Buyer shall ----------------------------------- have performed in all material respects all of its obligations required to be performed under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, ------------------------ waivers, permits and approvals from any governmental or regulatory body required by SBI and Buyer in connection with the execution, delivery and performance of this Agreement shall have been duly obtained and shall be in full force and effect on the Closing Date except for such items which may lawfully be obtained after the Closing Date without a material adverse effect on VFAM or the Shareholders. (d) No Litigation. No litigation, governmental action or other ------------- proceeding shall be threatened or commenced against any person with respect to the consummation of the transaction provided for herein. (e) Closing Documents. All documents required to be delivered ----------------- by SBI and Buyer at or prior to the Closing Date shall have been delivered. ARTICLE X DELIVERIES SECTION 10.1 VFAM's and the Shareholders' Deliveries. At the Closing, the --------------------------------------- Shareholder Representative shall deliver or cause to be delivered to SBI and Buyer, the following: (a) Certificates for all of the Shares outstanding on the Closing Date, duly endorsed by the respective Shareholders in blank, or with stock transfer powers duly executed by the respective Shareholders in blank attached, and with all required transfer tax stamps, if any, affixed. (b) Executed Escrow Agreement. (c) Evidence of the surrender of the Options to VFAM. (d) The legal opinion of David S. Foulke, Esq. in form reasonably acceptable to SBI and Buyer and its counsel; (e) The Closing Financial Certificate described in Section 9.02(k); -34- (f) A "Good Standing Certificate" and/or a certificate of valid registration of VFAM issued by the Secretary of State of each State in which it does business or is registered as an investment advisor or broker/dealer, dated as of recent date; (g) A certified copy of the Articles of Incorporation and all amendments thereto of VFAM issued by the Secretary of State of the Commonwealth of Pennsylvania, dated as of a recent date; (h) Officer's Certificate of VFAM certifying that, as of the Closing Date, (i) each of the representations and warranties of VFAM under this Agreement is true and correct in all material respects, (ii) VFAM has performed all of its obligations under this Agreement, and (iii) each of VFAM's registrations as an investment advisor and broker/dealer is still in effect; (i) Secretary's Certificate certifying and setting forth (i) the names of the directors and officers of VFAM; (ii) a true and complete copy of the Articles of Incorporation and the Bylaws of VFAM, in each case as in effect on the date thereof, and (iii) a true and complete copy of all resolutions adopted by the Board of Directors of VFAM relating to the transactions contemplated by this Agreement. (j) A Certificate of the Shareholder Representative, certifying that as of the Closing Date, no Shareholder has revoked their appointment of such person as their agent and attorney in fact in connection with the transactions contemplated by this Agreement. (k) Releases executed by VFAM's accountants and counsel as provided in Section 9.02(j) that as of the Closing Date they have no right to any further payment from VFAM or Buyer for any fees or expenses relating to work performed on or prior to the Closing Date. (l) The stock books and records, corporate minute books (containing, to the best knowledge of the Shareholders, the originals of all minutes and resolutions ever adopted or consented to or agreed by the shareholders, directors or any committee of directors of VFAM) and corporate seal of VFAM. (m) Copies of all consents or assignments from governmental agencies or third parties necessary for the consummation of the transactions contemplated by this Agreement. SECTION 10.02 SBI and Buyer Deliveries. At the Closing, SBI and Buyer ------------------------ shall deliver or cause to be delivered to the Shareholder Representative, the following: (a) The Shareholder Consideration; (b) Executed Escrow Agreement; (c) The legal opinion of Lisa M. Cavage, Esq., Assistant Secretary and Counsel of SBI, in form reasonably acceptable to VFAM and its counsel; (e) A "Good Standing Certificate" of SBI and a certified copy of the Articles of Incorporation and all amendments thereto issued by the Secretary of State of the Commonwealth of Pennsylvania dated as of a recent date; -35- (f) A "Good Standing Certificate" of Buyer and a certified copy of the Articles of Incorporation and all amendments thereto issued by the Secretary of State of the Commonwealth of Pennsylvania dated as of a recent date; (g) Officer's Certificate of SBI certifying that, as of the Closing Date, (i) each of the representations and warranties of SBI is true and correct in all material respects, and (ii) SBI has performed all of its obligations under this Agreement; (h) Officer's Certificate of Buyer certifying that, as of the Closing Date, (i) each of the representations and warranties of Buyer is true and correct in all material respects, and (ii) Buyer has performed all of its obligations under this Agreement; (i) Secretary's Certificate of SBI certifying that (i) attached thereto is a true and complete copy of the Articles of Incorporation and the Bylaws of SBI, in each case as in effect on the date thereof, and (ii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of SBI relating to the transactions contemplated by this Agreement. (j) Secretary's Certificate of Buyer certifying that (i) attached thereto is a true and complete copy of the Articles of Incorporation and the Bylaws of Buyer, in each case as in effect on the date thereof, and (ii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of Buyer relating to the transactions contemplated by this Agreement. SECTION 10.03 Net Capital Delivery. At and after the Closing, -------------------- notwithstanding the provisions of Section 1.06, SBI shall leave sufficient funds in VFAM's cash account from the $1,200,000 referred to in Section 1.06 so that VFAM will retain at all times Net Capital of at least $350,000. Such amount shall be in the form of an equity investment. However, the capital contributed by SBI to cover the goodwill created by this transaction may be in the form of either equity or subordinated debt. If subordinated debt is selected by SBI, it will not appear on VFAM's books until after the Closing Date. Each of the parties hereto agrees to use its best efforts to obtain appropriate regulatory approval that subordinated debt of VFAM provided by SBI or its affiliates may be included as capital in the calculation of Net Capital. ARTICLE XI TERMINATION AND AMENDMENT SECTION 11.01 Termination. This Agreement may be terminated at any time ----------- prior to the Closing Date: (a) by mutual consent of SBI, Buyer, Shareholders (through the Shareholder Representative) and VFAM; (b) (i) by SBI and Buyer on the one hand or by VFAM or the Shareholders on the other hand, respectively, if there shall have been a material breach of any representation, warranty, covenant or agreement on the part of the other set forth in this Agreement which breach shall not have been cured, in the case of a representation or warranty, within five business days following notice of such breach given to the breaching party by the other party or, in the case of a covenant or agreement, within -36- five (5) business days following receipt by the breaching party of notice of such breach, or (ii) by either SBI and Buyer, together, or VFAM if any permanent injunction or other order of a court or other competent authority preventing the consummation of the transactions contemplated hereby shall have become final and non-appealable; (c) by either SBI and Buyer, together, or VFAM if the Closing shall not have occurred before March 31, 2000. SECTION 11.02 Effect of Termination. In the event of a termination of this --------------------- Agreement by either VFAM or SBI and Buyer as provided in Section 10.01, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of SBI and Buyer, or VFAM or their respective officers or directors, except (y) with respect to the second and third sentences of Section 7.01, and Sections 13.01 and 13.02 and (z) to the extent that such termination results from the willful breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. SECTION 11.03 Amendment. This Agreement may be amended by the parties --------- hereto at any time; provided however, this Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. SECTION 11.04 Extension; Waiver. At any time prior to the Closing Date, ----------------- the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. ARTICLE XII POST-CLOSING COVENANTS SECTION 12.01 Cooperation of Shareholders. The Shareholders shall --------------------------- cooperate with Buyer and VFAM and do all things necessary proper or advisable to ensure that the VFAM retains all necessary federal, state, local and governments licenses, permits or registrations required for the conduct or its business, including, without limitation, all broker/dealer and investment advisor registrations required under federal and state law. SECTION 12.02 Client Notification. As promptly as possible following the ------------------- Closing, VFAM shall notify each client who has an Investment Account that the transactions contemplated by this Agreement have been completed. ARTICLE XIII MISCELLANEOUS -37- SECTION 13.01 Costs and Expenses. All costs and expenses incurred in ------------------ connection with this Agreement and the transactions contemplated hereby shall be paid by the Shareholders to the extent incurred by the Shareholders and/or VFAM (including, without limitation, all expenses incurred in soliciting Client Consents) and paid by SBI and Buyer to the extent incurred by either of them. SECTION 13.02 Brokers or Finders. Except with respect to any amounts that ------------------ might be due under the Contingent Earnings Agreement, VFAM hereby represents and warrants that there is no corporation, firm or person entitled to receive from it or him (or, with respect to the Shareholders, from VFAM) any brokerage commission or finder's fee in connection with this Agreement or the other transactions and agreements provided for herein, and each hereby indemnifies and agrees to save SBI and Buyer harmless from and against any claim for brokerage commission or finder's fee based on any retention or alleged retention of a broker or finder by it or him/her. SECTION 13.03 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if SBI, to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, Pa 17543 Attention: Robert S. Bolinger President and Chief Executive Officer Telecopy No.: 717.626.1874 with a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pa 19103 Attention: John F. Bales, III, Esq. Telecopy No : 215.963.5299 (b) if Buyer, to: SBI Acquisition Corporation c/o Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, Pa 17543 Attention: Robert S. Bolinger President and Chief Executive Officer Telecopy No.: 717.626.1874 -38- with a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pa 19103 Attention: John F. Bales, III, Esq. Telecopy No : 215.963.5299 (c) if VFAM to: Valley Forge Asset Management Corporation P.O. Box 837 Valley Forge, Pa 19482 Attention: Joseph J. Miller Telecopy No.: 610.687.1848 with a copy to: Stradley Ronon, Stevens & Young, LLP 2600 One Commerce Square Philadelphia, Pa 19103 Attention: Dean M. Schwartz, Esq. Telecopy No.: 215.564.8120 (d) if a Shareholder, to the address of the Shareholder set forth on Annex I hereto: with a copy to: Stradley Ronon, Stevens & Young, LLP 2600 One Commerce Square Philadelphia, Pa 19103 Attention: Dean M. Schwartz, Esq. Telecopy No.: 215.564.8120 SECTION 13.04 Publicity. Except as otherwise required by law or the --------- rules of the NASD for so long as this Agreement is in effect, neither VFAM or the Shareholders nor SBI or Buyer shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. SECTION 13.05 Binding Nature of Agreement; No Assignment. This Agreement ------------------------------------------ shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that no party may assign or transfer its rights or obligations under this Agreement (other than as provided herein) without the prior written consent of the other parties hereto. -39- SECTION 13.06 Controlling Law. The Agreement and all questions relating --------------- to its validity, interpretation, performance and enforcement (including without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, other than the choice of law provisions thereof, and without the aid of any canon, custom, or rule of law requiring construction against the drafting party. SECTION 13.07 Exhibits and Schedules. All Exhibits and Schedules attached ---------------------- hereto are hereby incorporated by reference into, and made a part of, this Agreement. SECTION 13.08 Execution in Counterparts. This Agreement may be executed ------------------------- in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signature of all of the parties reflected hereon as the signatories. SECTION 13.09 Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provisions shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. SECTION 13.10 Entire Agreement. This Agreement and the Confidentiality ---------------- Agreement dated April 16, 1999, contain the entire understanding among the parties hereto and with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto. SECTION 13.11 Paragraph Headings and Table of Contents. The headings and ---------------------------------------- the table of contents in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. SECTION 13.12 Gender, Etc. Words used herein, regardless of the number ----------- and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. SECTION 13.13 Knowledge of VFAM and the Shareholders. For purposes of this -------------------------------------- Agreement, "knowledge of VFAM or the Shareholders" or similar words and phrases shall be conclusively deemed to include: (i) actual knowledge of the Shareholders or the officers and directors of VFAM and (ii) that knowledge which any officer or director of VFAM should have obtained after exercising due diligence which a prudent officer or director should have undertaken with respect thereto. In connection therewith, the knowledge (both actual and constructive) of the officers and directors of VFAM shall be imputed to be the knowledge of the Shareholders and, except as to Article V the knowledge of one Shareholder shall be imputed to the other Shareholder. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. VALLEY FORGE ASSET MANAGEMENT CORPORATION By:/s/ Joseph J. Miller, Jr. ----------------------------------------------- Name: Joseph J. Miller, Jr. Title: Chairman SUSQUEHANNA BANCSHARES, INC. By:/s/ Robert S. Bolinger ----------------------------------------------- Name: Robert S. Bolinger Title: President SUSQUEHANNA BANCSHARES CENTRAL, INC. By:/s/ Robert S. Bolinger ----------------------------------------------- Name: Robert S. Bolinger Title: President SHAREHOLDERS /s/ Joseph J. Miller, Jr. -------------------------------------------------- Joseph J. Miller, Jr. /s/ Frank C. Corace by Bernard A. Francis, Jr. POA -------------------------------------------------- Frank C. Corace /s/ Donald Born by Bernard A. Francis, Jr. POA -------------------------------------------------- Donald Born /s/ Bernard A. Francis, Jr. -------------------------------------------------- Bernard A. Francis, Jr. /s/ Kelly C. Malloy -------------------------------------------------- Kelly C. Malloy EX-2.III 4 EXHIBIT 2III Exhibit 2(iii) -------------- Agreement and Plan of Reorganization dated as of December 23, 1999 by and among Susquehanna, Susquehanna Bancshares Central, Inc. and Valley Forge Investment Company, Inc. EXHIBIT 2(iii) AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") dated as of December 23, 1999, by and among SUSQUEHANNA BANCSHARES, INC., a Pennsylvania business corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("SBI"), SUSQUEHANNA BANCSHARES CENTRAL, INC., a Pennsylvania business corporation and a wholly-owned subsidiary of SBI ("Acquisition Corporation") and VALLEY FORGE INVESTMENT COMPANY, INC., a Pennsylvania business corporation ("VFICO"). RECITALS: WHEREAS, SBI is a multi-state, multi-institution bank holding company; WHEREAS, SBI owns all of the issued and outstanding shares of capital stock of Acquisition Corporation; WHEREAS, VFICO is a Pennsylvania corporation; WHEREAS, the Boards of Directors of SBI, Acquisition Corporation and VFICO deem it advisable and in the best interests of the respective corporations and their shareholders to consummate, and have approved, the business combination transaction provided for herein in which Acquisition Corporation would merge with and into VFICO (the "Merger"); WHEREAS, between VFICO and Acquisition Corporation, this Agreement shall constitute a Plan of Merger pursuant to Section 1922 of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"); NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I THE MERGER SECTION 1.01 Effective Time of the Merger. Subject to the provisions of ---------------------------- this Agreement, articles of merger in the form of Exhibit A (the "Articles of Merger") shall be duly prepared and executed by VFICO and Acquisition Corporation and thereafter delivered to the Department of State of the Commonwealth of Pennsylvania for filing, as provided in the BCL, on the Closing Date (as defined in Section 1.02). The Merger shall become effective upon filing of the Articles of Merger with the Secretary of State of the Commonwealth of Pennsylvania (the "Effective Time"). SECTION 1.02 Closing. The closing of the Merger (the "Closing") will take ------- place at such place and at such time and on such date as shall be agreed upon by the parties, which date shall not be later than thirty business days after the day on which the last to be fulfilled or waived 1 of the conditions set forth in Article VI shall be fulfilled or waived in accordance herewith. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." SECTION 1.03 Effects of the Merger. --------------------- (a) At the Effective Time, (i) the separate corporate existence of Acquisition Corporation shall cease and Acquisition Corporation shall be merged with and into VFICO (Acquisition Corporation and VFICO are sometimes referred to herein as the "Constituent Corporations" and VFICO is sometimes referred to herein as the "Surviving Corporation"), (ii) the Articles of Incorporation of Acquisition Corporation as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation, (iii) the Bylaws of Acquisition Corporation as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, (iv) the individuals listed on Exhibit B shall become the directors of the Surviving Corporation, (v) the individuals serving as officers of VFICO immediately prior to the Effective Time shall become the officers of the Surviving Corporation, (vi) the name of the Surviving Corporation shall be "Valley Forge Investment Company, Inc.", and (vii) the registered office of the Surviving Corporation shall be 26 North Cedar Street, Lititz, Pennsylvania 17543. (b) At and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations; and all rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, and all debts due to either of the Constituent Corporations on whatever account, as well as for stock subscription and all other things belonging to each of the Constituent Corporations, shall be deemed to be transferred to and vested in the Surviving Corporation without further action, and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate or any interest herein vested by deed or otherwise in either of the Constituent Corporations, shall not revert or be in any way impaired by reason of the Merger, but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations shall thenceforth attach to the Surviving Corporation, and may be enforced against it to the same extent as if said debts and liabilities had been incurred by it. (c) If at any time after the Closing Date, the Surviving Corporation shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of Acquisition Corporation acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of either Acquisition Corporation or VFICO, all deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of each of such corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation and otherwise to carry out this Agreement. 2 SECTION 1.04 Other Matters. ------------- (a) Notwithstanding any term of this Agreement to the contrary, SBI may, in its discretion at any time prior to the Closing, designate a direct or an indirect wholly-owned subsidiary to substitute for Acquisition Corporation hereunder by written notice to VFICO so long as the exercise of this right does not materially adversely affect the interests of the shareholders of VFICO in a manner that has not been disclosed to them or cause a material delay in the consummation of the transactions contemplated herein; if such right is exercised, this Agreement shall be deemed to be modified to accord such change. (b) Notwithstanding any term of this Agreement to the contrary, after the Closing, SBI may, in its sole discretion, merge or consolidate the Surviving Corporation into, Valley Forge Asset Management Corporation ("VFAM"), or alternatively, merge or consolidate VFAM, into the Surviving Corporation. (c) Nothing in this Agreement shall be deemed to restrict the ability of SBI or any of its subsidiaries to merge with or into another entity so long as no such other transaction shall materially, adversely affect the parties' ability to consummate the transactions contemplated herein or cause a material delay in, or otherwise adversely affect, consummation of the transactions contemplated herein. SECTION 1.05 Dissenters' Rights. In accordance with the provisions of ------------------ Subchapter D of Chapter 15 of the BCL commencing at Section 1571, the shareholders of VFICO shall be entitled to exercise dissenters' rights. SECTION 1.06 Payment to SBI. Immediately following the Closing, VFICO -------------- shall pay to SBI an amount equal to $1,500,000. ARTICLE II CONVERSION; CASH CONSIDERATION FOR SECURITIES SECTION 2.01 Conversion of Capital Stock. As of the Effective Time, by --------------------------- virtue of the Merger and without any action on the part of the holders of any common stock, par value $.01 per share, of VFICO (the "VFCIO Common Stock") or capital stock of Acquisition Corporation: (a) Capital Stock of Acquisition Corporation. Each outstanding ---------------------------------------- share of capital stock of Acquisition Corporation shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. (b) Cash Consideration for VFICO Common Stock. Each outstanding ----------------------------------------- share of VFICO Common Stock (other than shares to be cancelled in accordance with Section 2.01(c) below, and shares the holders of which are exercising appraisal rights pursuant to the BCL) shall be converted into the right to receive cash from Acquisition Corporation in the amount of $8.5 million divided by the number of issued and outstanding shares of VFICO Common Stock immediately prior to Closing (the "Cash Consideration"). All such shares of VFICO Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Cash Consideration, without interest, in 3 consideration therefor upon the surrender of such certificate in accordance with Section 2.02 hereof. (c) Cancellation of VFICO Common Stock. Each share of VFICO ---------------------------------- Common Stock held in treasury at the Effective Time shall be cancelled and no Cash Consideration or other consideration shall be delivered in exchange therefor. SECTION 2.02 Surrender and Exchange of VFICO Common Stock. -------------------------------------------- (a) At the Effective Time, VFICO shall deliver to SBI the certificates representing all of the shares of VFICO Common Stock, accompanied by blank stock powers duly executed with all necessary transfer tax and other revenue stamps affixed and canceled, in exchange for the Cash Consideration, to which each holder is entitled under Section 2.01 hereof. (b) After the Effective Time, there shall be no transfer on the stock transfer books of VFICO or the Surviving Corporation of VFICO Common Stock. VFICO Certificates presented for transfer after the Effective Time, shall be cancelled and Cash Consideration shall be issued in exchange therefor as provided herein. (c) If outstanding certificates for shares of VFICO Common Stock are not surrendered prior to the date on which such certificates would otherwise escheat to or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and other applicable law, become the property of the Surviving Corporation (and to the extent not in its possession shall be paid over to it), free and clear of claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, neither the Surviving Corporation nor its agents nor any other person shall be liable to any former holder of VFICO Common Stock for any property delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (d) In the event any certificates for shares of VFICO Common Stock shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such VFICO Certificate to be lost, stolen or destroyed and, if requested by SBI, the posting by such person of a bond in such amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such certificate, the Surviving Corporation will issue the Cash Consideration in exchange for such lost, stolen or destroyed certificate into which such certificate has been converted pursuant to this Agreement. SECTION 2.03 Dissenting Shares. Notwithstanding anything in this ----------------- Agreement to the contrary, shares of VFICO Common Stock that are outstanding immediately prior to the Effective Time and which are held by shareholders who have perfected dissenters' rights in accordance with Subchapter D of Chapter 15 of the BCL (the "Dissenting Shares") shall not be converted into the Cash Consideration, unless and until such holders shall have failed to perfect or shall have effectively withdrawn or lost such holder's rights to an appraisal under the BCL. Any payments to any holder who has exercised dissenters' rights which exceed the per share value of the Cash Consideration, shall be paid out of the Escrow Funds as defined in the Stock Purchase Agreement among SBI, Acquisition Corporation, VFAM and certain Shareholders of VFAM (the "VFAM Agreement"), or shall be paid as otherwise provided in the VFAM Agreement. If any such holder shall have failed to perfect or shall have effectively withdrawn or lost such holder's rights to appraisal of such shares of VFICO Common Stock under the BCL, such holder's shares shall thereupon be deemed to have been converted into and to have become 4 exchangeable for, at the Effective Time, the right to receive, upon surrender as provided above, the Cash Consideration, without interest, for the certificate or certificates that formerly evidenced such shares of VFICO Common Stock. ARTICLE III REPRESENTATIONS AND WARRANTIES OF VFICO As a material inducement to SBI and Acquisition Corporation to enter into this Agreement and consummate the Merger and the other transactions contemplated herein, VFICO represents and warrants to SBI and Acquisition Corporation that, except as specifically disclosed to SBI and Acquisition Corporation in writing in the disclosure schedules being delivered to SBI and Acquisition Corporation (the "VFICO Schedules") which shall identify the specific sections or subsections in this Agreement to which each such disclosure relates: SECTION 3.01 Organization, Registration. -------------------------- (a) VFICO is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has all requisite corporate power and corporate authority and all necessary governmental approvals to own, lease and operate its properties, and to carry on its business, to enter into this Agreement and the other documents and instruments to be executed and delivered by it and to carry out the transactions contemplated hereby and thereby. VFICO is duly licensed or qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein the character of the properties owned or leased or the nature of its business make such qualification to do business necessary, except for those jurisdictions where the failure to be so qualified would not have a material adverse effect. Schedule 3.01(a) lists all of the jurisdictions in which VFICO is qualified to do business. VFICO has delivered to SBI true and correct copies of its Articles of Incorporation and Bylaws, each as in effect on the date hereof. (b) VFICO has all federal, state, local and foreign governmental licenses, permits, or registrations required for its business as currently conducted, except where the absence would not have a material adverse effect. Schedule 3.01(b) lists all of such licenses, permits or registrations currently in effect, the applicable jurisdictions, and the date of expiration, if any. All of such licenses, permits or registrations are in full force and effect, no violations have occurred or been asserted with respect thereto, and no material change in the facts or circumstances reported or assumed in any documents submitted by VFICO in connection with any such license, permit or registration has occurred which would require an amendment of such document, license, permit or registration. (c) VFICO is not, and has never been, registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not, and has never been, registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"). (d) VFICO is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), which is required to be registered under the 1940 Act in order to engage in the transactions described in Section 7 of the 1940 Act. VFICO does not act as an investment advisor or subadvisor to any "investment company," as defined in the 1940 Act, which is registered under the 1940 Act. 5 (e) Schedule 3.01(e) contains a complete list of all of the directors and officers of VFICO as of the date hereof. (f) There is no pending or, to the knowledge of VFICO, any threatened claim or litigation against VFICO (nor to the knowledge of VFICO does there exist any basis therefor) contesting the validity of or right to use the "Valley Forge Investment Company, Inc." name as currently used by VFICO as its corporate name in connection with its business activities, nor has VFICO received any notice that its use of its respective name conflicts, with the asserted rights of others. (g) VFAM is the only entity in which VFICO holds an equity interest. Except for VFAM, VFICO does not own any capital stock or other equity interest of any corporation, has no direct or indirect equity or ownership interest in, by way of stock ownership or otherwise, any corporation, partnership, joint venture, association or business enterprise and is not contemplating acquiring any such interest. VFICO owns beneficially and of record the shares of stock or other interests of VFAM as set forth on Schedule 3.01(g), free and clear of any mortgage, claim, lien, pledge, option, security interest or other similar interest, encumbrance, easement, judgment or imperfection of title of any nature whatsoever (each an "Encumbrance"), and, except as set forth in Schedule 3.01(g), none of the shares or interests is subject to any covenant or other contractual restriction preventing or limiting the right to transfer such shares. Except as set forth on Schedule 3.01(g), there are not any agreements or understandings to which VFICO or VFAM is a party which respect to the voting of shares of capital stock of VFAM; and VFAM has no outstanding options, calls, rights of conversion or other commitments to purchase or sell any authorized or issued shares of capital stock. There are no contracts, commitments, agreements, understandings or restrictions that require VFICO to sell or deliver any shares of the capital stock of VFAM. SECTION 3.02 Capitalization. The VFICO Common Stock, which constitutes -------------- all of the authorized capital stock of VFICO, consists of 500,000 shares of common stock, $1.00 par value per share, of which 497,800 shares are issued and outstanding and 2,200 shares are held in treasury. All outstanding shares of VFICO Common Stock are validly issued, fully paid and nonassessable and not subject to any preemptive rights. There are no existing options, warrants, calls, subscriptions or other rights (including rights of conversion) or other agreements or commitments of any character (including voting agreements) relating to the issued or unissued capital stock of VFICO, and, as of the date hereof, there are no outstanding contractual obligations of VFICO to repurchase, redeem or otherwise acquire any shares of its capital stock. All securities issued by VFICO, including all shares of VFICO Common Stock, have been issued in compliance with all applicable federal and state securities laws, including applicable provisions of the Securities Act of 1933 (the "1933 Act"). SECTION 3.03 Authority. The execution, delivery and performance of this --------- Agreement and the consummation of the Merger and the other transactions contemplated herein have been duly authorized by all necessary corporate action on the part of VFICO and no other corporate proceedings on the part of VFICO (other than the approval of the adoption of this Agreement and the Merger by the affirmative vote of the holders of a majority of the outstanding shares of VFICO Common Stock in accordance with the BCL) are necessary to authorize this Agreement or to consummate the transactions so contemplated. 6 SECTION 3.04 Consents and Approvals; No Violations. This Agreement ------------------------------------- constitutes or when executed and delivered will constitute, a valid and binding agreement of VFICO enforceable in accordance with its terms, and, except as such enforceability may be limited by bankruptcy or other similar laws affecting creditors' rights and remedies generally, and except as set forth on Schedule 3.04, neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of VFICO, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any of the VFICO Agreements (as defined in Section 3.10(b)), note, bond, mortgage, indenture, lease or license to which VFICO is a party or by which any of its properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to VFICO or any of its properties or assets. No permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency is required in connection with the execution, delivery or performance by VFICO of this Agreement or the consummation of the transactions contemplated hereby. SECTION 3.05 Financial Statements and Internal Control Structure. --------------------------------------------------- (a) VFICO has delivered to SBI the audited financial statements, including the notes thereto, of VFICO for the years ended December 31, 1998 and 1997 accompanied by the report of Maillie Falconiero & Company, LLP with respect thereto (collectively, the "VFICO Financial Statements"), except as set forth on Schedule 3.05(a), to the knowledge of VFICO, the VFICO Financial Statements were prepared in accordance with generally accepted accounting principles ("GAAP"). The audited balance sheet of VFICO at December 31, 1998 is referred to herein as the "VFICO Balance Sheet" and the date of such VFICO Balance Sheet is referred to herein as the "VFICO Balance Sheet Date." The VFICO Financial Statements and the notes thereto, if any, were prepared in accordance with the books and records of VFICO and fairly present the assets, liabilities and financial condition of VFICO as at the respective dates thereof, and the corresponding results of operations, retained earnings and cash flows for the periods therein referred to and except as set forth on Schedule 3.05(a), to the knowledge of VFICO, were prepared in accordance with GAAP consistently applied throughout the periods involved. In addition, VFICO has delivered unaudited financial statements for the nine months ended September 30, 1999, which are contained in the VFICO Financial Statements were prepared on a basis consistent with the audited financial statements of VFICO contained in the VFICO Financial Statements, subject to normal, recurring year-end adjustments. (b) VFICO has not received any management letters from its outside auditors relating to the VFICO Financial Statements. SECTION 3.06 Title to Assets, Properties, Interests in Properties, Rights ------------------------------------------------------------ and Related Matters. - ------------------- (a) VFICO has good title to all of its properties, interest in properties, and assets, free and clear of any mortgages, pledges, liens, security interests, conditional and installment sale agreements, right of first refusal or similar claims or encumbrances or charges of any kind other than any such claim or encumbrance as disclosed in the notes to the VFICO Balance Sheet (i) the lien of current taxes not yet due and payable; (ii) properties, interests and assets that are leased or have been disposed of by VFICO since the VFICO Balance Sheet Date, 7 in the ordinary course of business consistent with past practice; and (iii) such imperfections of title, easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or proposed use, of the properties subject thereto. (b) The assets and properties of VFICO constitute the rights, properties and assets (tangible or intangible) necessary for the conduct of its respective business as currently conducted. (c) VFICO owns no real property. SECTION 3.07 Absence of Certain Changes. Since the VFICO Balance Sheet -------------------------- Date VFICO has not experienced, nor to the knowledge of VFICO has there been threatened, any material adverse change in its condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations. SECTION 3.08 Absence of Undisclosed Liabilities. Except to the extent set ---------------------------------- forth in the VFICO Balance Sheet VFICO has no material liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on its respective balance sheet (including the notes thereto), and it does not have any material claims, debts, liabilities or obligations or any alleged material claims, debts, liabilities or obligations to any party, including but not limited to claims made by governmental authorities for taxes or otherwise, except for (x) liabilities expressly disclosed in this Agreement and in the Exhibits or Schedules and (y) liabilities incurred between the date of this Agreement and the Closing Date, the occurrence of which is not in violation of the provisions of this Agreement. SECTION 3.09 Legal Proceedings. There are no claims, actions, suits, ----------------- orders, proceedings or investigations pending or to the knowledge of VFICO threatened by or against VFICO, at law or in equity or before or by any federal, state or municipal or other governmental department, commission, board, agency, instrumentality or authority. There is no valid basis known to VFICO for any such claims, actions, suits, orders, proceedings or investigations, which if adversely determined could have a material adverse effect on VFICO or the ability of VFICO to consummate the transactions contemplated hereby. There are no judgments, decrees, injunctions or orders of any court or governmental department or agency outstanding against VFICO. SECTION 3.10 Contracts, Leases, Agreements and Other Commitments. --------------------------------------------------- (a) VFICO is not a party to any written or oral investment advisor, administrator, distributor, custodian or agency agreement, contract or understanding or any other agreement, contract or understanding under which VFICO is required to provide investment advice or services. (b) Schedule 3.10(b) contains an accurate list of all commitments, contracts, leases and agreements to which VFICO is a party or by which it is bound which involves a commitment or obligation in excess of $10,000 in the aggregate for each such commitment contract, lease or agreement or is otherwise material to the business of VFICO (including, without limitation, joint venture or partnership agreements, employment agreements, contracts, tenant leases, equipment leases, equipment maintenance agreements, agreements with municipalities and labor organizations, loan agreements, bonds, mortgages, liens or other 8 security agreements) (the "VFICO Agreements"). VFICO has delivered true, correct and complete copies of such agreements to SBI. Except as set forth in Schedule 3.10(b) attached hereto, as of the date of this Agreement, VFICO is not a party to, or bound by, any oral or written: (i) consulting agreement not terminable on thirty (30) days' or less notice involving the payment of more than $10,000 per annum, in the case of any such agreement; (ii) agreement with any officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction of the nature contemplated by this Agreement; (iii) agreement with respect to any officer providing any term of employment or compensation guarantee extending for a period longer than one year or for a payment in excess of $50,000; (iv) agreement or plan, including any stock option plan, stock appreciation rights plan, employee stock ownership plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (v) agreement containing covenants that limit its ability to compete in any line of business or with any person, or that involve any restriction on the geographic area in which, or method by which, it may carry on its business (other than as may be required by law or any regulatory agency); (vi) its agreement, contract or understanding, other than this Agreement, regarding the capital stock or committing to dispose of substantially all of its assets; (vii) collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization; (viii) any employment contracts or any other contracts, agreements or commitments to or with individual employees or agents of VFICO which involves a commitment or obligation in excess of $50,000 in the aggregate for each such contract, agreement or commitment and any contracts, agreements or commitments with consultants or other independent contractors; (ix) any power of attorney given by VFICO; (x) any contracts or commitments providing for payments based in any manner on the revenues or profits of VFICO; (xi) any contract under which VFICO has agreed (i) to maintain the confidentiality of third party information, (ii) not to compete or solicit for hire employees of a third party or (iii) to otherwise limit or restrict its operations; 9 (xii) any instruments relating to indebtedness for borrowed money, including any note, bond, deed of trust, mortgage, indenture or agreement to borrow money or any agreement of guarantee or indemnification, whether written or oral, in favor of any person or entity; or (xiii) any other contract or commitment, whether in the ordinary course of business or not, which involves future payments, performance of services or delivery of goods or materials, to or by VFICO of any amount or value in excess of $50,000 in the aggregate for each such contract or commitment. (c) The VFICO Agreements constitute valid and legally binding obligations of VFICO and are enforceable in accordance with their terms, assuming due authorization, execution and delivery by parties other than VFICO and except (i) as may be affected by bankruptcy, insolvency, reorganization, moratorium or similar laws or by equitable principles relating to or limiting creditors rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. (d) Each VFICO Agreement constitutes the entire agreement by and between the respective parties thereto with respect to the subject matter thereof. (e) All obligations required to be performed under the terms of the VFICO Agreements have been performed by VFICO, and to VFICO's knowledge by the other parties thereto, no act or omission has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default by VFICO under the VFICO Agreements. (f) Except as expressly set forth on Schedule 3.10(f), none of the VFICO Agreements requires the consent of the other parties thereto in order for it to be in full force and effect with respect to the Surviving Corporation or Acquisition Corporation after the Merger or would give rise to the other party's right to terminate any VFICO Agreement; and VFICO will use its best efforts to obtain any required consents prior to the Closing. Except as expressly set forth on Schedule 3.10(f), VFICO has no plans, programs, commitments or arrangements to which they are parties, or to which they are subject, pursuant to which payments may be required or acceleration of benefits may be required upon change of control of VFICO or the consummation of the Merger. SECTION 3.11 Insurance. Schedule 3.11 is a summary of all insurance --------- policies maintained by VFICO (specifying, among other things, the insurer, type of insurance, amount of coverage and policy number). Such policies are in full force and effect and all premiums with respect to such policies are currently paid. VFICO has not been denied or had revoked or rescinded any policy of insurance or received any notice of intent to cancel or not renew during the past three years. SECTION 3.12 Benefit Plans. Schedule 3.12 contains a complete list of all ------------- pension, retirement, stock option, stock purchase, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, group insurance, severance and other employee incentive and welfare contracts and plans, and all trust agreements related thereto, that VFICO maintains or to which it contributes for any of its present or former directors, officers, or other employees (hereinafter referred to collectively as the "Employee Plans"). 10 (a) To the knowledge of VFICO, all of the Employee Plans comply in all material respects with all applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code (as defined in Section 3.16 hereto) and other applicable laws; VFICO has not engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan which is likely to result in any penalties, taxes or other events under Section 502(i) of ERISA or Section 4975 of the Code. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by VFICO to be incurred with respect to any Employee Plan which is subject to Title IV of ERISA ("Pension Plan"), or with respect to any "single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained by it or any entity which is considered one employer with VFICO under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate"). (c) No Pension Plan or single-employer plan of an ERISA Affiliate had an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether or not waived)) as of the last date of the end of the most recent plan year ending prior to the date hereof; all contributions to any Pension Plan or single-employer plan of an ERISA Affiliate that were required by Section 302 of ERISA and were due prior to the date hereof have been made on or before the respective dates on which such contributions were due; the fair market value of the assets of each Pension Plan or single-employer plan of an ERISA Affiliate exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(6) of ERISA) under such Pension Plan or single-employer plan of an ERISA Affiliate as of the end of the most recent plan year with respect to the respective Pension Plan or single-employer plan of an ERISA Affiliate ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such Pension Plan or single- employer plan of an ERISA Affiliate as of the date hereof, and no notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the reporting requirement has not been waived has been required to be filed for any Pension Plan or single-employer plan of an ERISA Affiliate within the 12-month period ending on the date hereof. (d) VFICO has not provided, nor been 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) Neither VFICO nor any ERISA Affiliate has contributed to any "multi-employer plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980. (f) Each Employee Plan of VFICO which is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the Code (a "Qualified Plan") has received a favorable determination letter from the IRS covering the requirements of the Tax Equity and Fiscal Responsibility Act of 1982, the Retirement Equity Act of 1984 and the Deficit Reduction Act of 1984 and the Tax Reform Act of 1986; VFICO is not aware of any circumstances likely to result in revocation of any such favorable determination letter; each such Employee Plan has been amended to reflect the requirements of subsequent legislation applicable to such plans; and each Qualified Plan has complied at all relevant times in all material respects with all applicable requirements of Section 401 (a) of the Code. 11 (g) Each Qualified Plan which is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of the Code) has at all relevant times satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of the Code and the regulations thereunder. (h) Neither VFICO, nor any ERISA Affiliate has committed any act or omission or engaged in any transaction that has caused it to incur, or created a material risk that it may incur, liability for any excise tax under Sections 4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which heretofore have been paid and fully reflected in its financial statements. (i) There is no pending or threatened litigation, administrative action or proceeding relating to any Employee Plan other than routine claims for benefits. (j) Except as disclosed in Schedule 3.12(j), there has been no announcement or legally binding commitment by VFICO to create an additional Employee Plan, or to amend an Employee Plan except for amendments required by applicable law which do not materially increase the cost of such Employee Plan, and VFICO does not have any obligations for retiree health and life benefits under any Employee Plan that cannot be terminated without incurring any liability thereunder except as required to be maintained by COBRA. (k) Except as disclosed in Schedule 3.12(k), the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any payment or series of payments by VFICO, to any person which is an "excess parachute payment" (as defined in Section 28OG of the Code) under any Employee Plan or under any agreement executed in connection with this Agreement, increase any benefits payable under any Employee Plan, or accelerate the time of payment or vesting of any such benefit. (l) Except as disclosed in Schedule 3.12(l), all required annual reports have been filed timely with respect to each Employee Plan, and VFICO has made available to SBI a true and correct copy of (A) reports on the applicable form of the Form 5500 series filed with the IRS for plan years beginning after 1987, (B) such Employee Plan, including amendments thereto, (C) each trust agreement and insurance contract relating to such Employee Plan, including amendments thereto, (D) the most recent summary plan description for such Employee Plan, including amendments thereto, if the Employee Plan is subject to Title I of ERISA, and (E) the most recent actuarial report or valuation if such Employee Plan is a Pension Plan and (F) the most recent determination letter issued by the IRS if such Employee Plan is a Qualified Plan. 12 SECTION 3.13 Collective Bargaining Agreements and Employment Agreements. ---------------------------------------------------------- (a) VFICO has not entered into any collective bargaining agreements; (ii) there is no labor strike, slowdown or work stoppage or lockout actually pending or to the knowledge of VFICO threatened against or affecting VFICO, and during the past five years there has not been any such action; (iii) no union organizational campaign is in progress with respect to the employees of VFICO; (iv) there is no unfair labor practice charge or complaint pending or to the knowledge of VFICO threatened before the National Labor Relations Board; and (v) no charges with respect to or relating to VFICO is pending before the Equal Employment Opportunity Commission. VFICO does not have any plans, programs, commitments or arrangements to which either such entity is a party, or to which either such entity may be subject, pursuant to which payments may be required or acceleration of benefits may be required upon change of control of VFICO. (b) Set forth on Schedule 3.13 are: i. any employment agreement VFICO has with any of its employees; and ii. any consulting, retainer or service agreement or arrangement VFICO has with any individual or entity. SECTION 3.14 Compliance with Applicable Law. VFICO has in the past ------------------------------ complied and is presently complying, in respect of the assets and operation of its respective business in all material respects, with all applicable laws (whether statutory or otherwise), rules, regulations, orders, ordinances, judgments or decrees of all governmental authorities (federal, state, local or otherwise), including but not limited to the 1934 Act, the 1933 Act, the Advisers' Act and the 1940 Act and, in each case, the rules promulgated thereunder, and VFICO has not received notification of any asserted present or past failure to so comply. VFICO has delivered to SBI all inspection reports or similar documents received during the past three years from the SEC or state regulatory authorities, and their responses thereto. SECTION 3.15 Actions since the Balance Sheet Date. Except as set forth on ------------------------------------ Schedule 3.15 VFICO has not, since the VFICO Balance Sheet Date and to date hereof: (a) taken any action outside of the ordinary course of business; (b) borrowed any money or become contingently liable for any obligation or liability of others outside of the ordinary course of business; (c) not paid all of its debts and obligations as they became due or otherwise in the ordinary course of business; (d) incurred any material debt, liability or obligation of any nature to any party except for obligations arising from the purchase of goods or the rendition of services in the ordinary course of business; (e) knowingly waived any right of substantial value; 13 (f) failed to use its reasonable best efforts to preserve its business organization intact, kept available the services of its employees, and preserved relationships with customers, suppliers and others with whom it deals; and (g) purchased or redeemed any shares of its capital stock, or transferred, distributed or paid, directly or indirectly, any money or other property or assets to its shareholders; (h) made a change in the number of shares of capital stock of VFICO issued and outstanding; (i) declared, set aside, paid or distributed any dividend or other distribution with respect to its capital stock, or with respect to any split, combination or reclassification of its capital stock; (j) increased the compensation or severance pay payable or to become payable by VFICO to any employee or with respect to any employee welfare, pension, retirement, profit-sharing or similar payment plan or arrangement applicable to any present or former employee; (k) incurred any capital expenditure or authorization for a capital expenditure, acquisition of assets or execution of any lease, or incurred liability therefor, requiring any payment or payments in excess of $10,000 in the aggregate with respect to each individual transaction; (l) borrowed or lent money, issued debt securities or pledges a credit of VFICO or guaranteed any indebtedness of others by VFICO; (m) lost the services of any employee that is, either individually or in the aggregate, material to the conduct of the business of VFICO; incurred the loss or termination of relationship with any supplier, client or customer; or (n) entered into any agreement, arrangement or understanding to do any of the foregoing. SECTION 3.16 Tax Matters. ------------ (a) For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, employment excise, withholding, property, sales, use, transfer, license, payroll and franchise taxes, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof. For purposes of this Agreement, the term "Tax Return" shall mean any report, return or other information required to be supplied to a taxing authority in connection with Taxes. All citations to provisions of the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments thereto and any substitute or successor provisions thereto. (b) VFICO has duly filed all Tax Returns required to be filed as of the date hereof (and will file all Tax Returns required to be filed on or before the Closing Date). All such 14 Tax Returns are (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) true, correct and complete in all material respects and were (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) filed on a timely basis. All taxes shown on such Tax Returns or otherwise due or payable with respect to the income of VFICO (whether or not shown on any Tax Return) have been timely paid except as expressly reserved on the VFICO Balance Sheet. Except as disclosed in Schedule 3.16(b), VFICO has not requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. True and complete copies of the federal, state and local income Tax Returns of VFICO for the last three years have been provided to SBI prior to the date hereof. The reserves for Taxes reflected in the financial statements of VFICO are sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the date of such financial statements and for all years and periods ended prior thereto, and the reserve for Taxes reflected in the balance sheet is sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the Closing Date and for all years and periods ended prior thereto. Since December 31, 1998, VFICO has not incurred any liability for Taxes other than in the ordinary course of business, which Taxes would result in a material decrease in the net worth of VFICO. No waiver or extension of any statute of limitations relating to Taxes has been given to, or requested by, the Internal Revenue Service (the "IRS"), or any state or local taxing authority. No claim is currently being made by any authority in a jurisdiction where neither VFICO nor any Subsidiary files Tax Returns that they are or may be subject to Taxes in that jurisdiction. (c) Except as set forth on Schedule 3.16(c), VFICO has complied (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the withholding and payment of Taxes, including, without limitation, the withholding and reporting requirements under Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as well as similar provisions under any other laws, and has, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required. VFICO has undertaken in good faith to appropriately classify all service providers as either employees or independent contractors for all Tax purposes. (d) Neither the federal income Tax Returns nor the state or local income Tax Returns of VFICO have been examined by the IRS or relevant state taxing authorities, except as set forth on Schedule 3.16(d). All deficiencies asserted as a result of the examinations referred to on Schedule 3.16(d) have been paid, and no issue has been raised by any federal, state, local or foreign income tax authority in any such examination which, by application of the same or similar principles to similar transactions, could reasonably be expected to result in a proposed deficiency for any subsequent period. Further, to the best of VFICO's knowledge, no state of facts exists or has existed which would constitute grounds for the assessment of any material liability for Taxes with respect to the periods which have not been audited by the IRS or other taxing authority. Except as described on Schedule 3.16(d), there are no examinations or other administrative or court proceedings relating to Taxes in progress or pending nor has VFICO received a revenue agent's report asserting a tax deficiency. To the best of VFICO's knowledge, there are no threatened actions, suits, proceedings, investigations or claims relating to or asserted for Taxes of VFICO and there is no basis for any such claim. (e) Since 1993, VFICO has not been a member of any affiliated group of corporations that filed a consolidated income tax return. 15 (f) Since its date of incorporation, VFICO has not (A) filed any consent or agreement under Section 341(f) of the Code, (B) applied for any tax ruling, (C) entered into a closing agreement with any taxing authority, (D) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), (E) made any payments, or been a party to an agreement (including this Agreement), or any transactions related thereto that under any circumstances could obligate it to make payments that will not be deductible because of Section 280G of the Code, or (F) been a party to any tax allocation or tax sharing agreement. SECTION 3.17 Environmental Matters. --------------------- (a) Except as disclosed in Schedule 3.17(a): (i) VFICO has been and is in full compliance with all Environmental Laws (as defined below) applicable to the operations of, and the property owned, operated, occupied or otherwise used by, VFICO. To the best knowledge of VFICO, there are no circumstances that may prevent or interfere with such full compliance in the future. (ii) VFICO has obtained all Permits (as defined below) necessary for the operation of their businesses and the ownership, operation, occupation or other use of their properties, all such Permits are in good standing and VFICO are in compliance with all terms and conditions of such Permits. There has been no material change in the facts or circumstances reported or assumed in the applications for or the granting of such Permits. (iii) There is no lawsuit, claim, action, cause of action, judicial or administrative proceeding, investigation, summons, or written notice by any person pending, or to VFICO's knowledge, threatened, against VFICO alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries or penalties) arising out of or resulting from (i) the violation of any Environmental Law or (ii) the presence or Release of any Hazardous Substance (as defined below) at any location, whether or not owned, operated, occupied or otherwise used by VFICO. (iv) VFICO is not subject to any writ, injunction, order, decree or settlement addressing (i) any alleged violation of any Environmental Law or (ii) the alleged presence, or Release into the environment of any Hazardous Substance at any location, whether or not owned, operated, occupied or otherwise used by VFICO. (v) No Environmental Lien (as defined below) has attached to any of the property owned, operated, occupied or otherwise used by VFICO. (vi) There has been no Release of any Hazardous Substance at, to or from any of the properties owned, operated, occupied or otherwise used by VFICO. (vii) VFICO has not transported or arranged for the transport of any Hazardous Substance to any facility or site for the purpose of treatment, storage, disposal or recycling which (i) is included on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under the 16 Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar state list which is required by ------ any state Environmental Law to be kept, or (ii) is presently subject to a governmental enforcement action under CERCLA or the Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state Environmental Law. (viii) All of the third parties with which VFICO presently have arrangements, engagements or contracts to accept, treat, transport, store, dispose, remove or recycle any Hazardous Substances generated or present at any of the properties owned, operated, occupied or otherwise used by VFICO are properly permitted under Environmental Laws to perform the foregoing activities or conduct. (ix) VFICO does not have any liability for the violation of any Environmental Law or the Release of any Hazardous Substance in connection with any business or property previously owned, operated, occupied or otherwise used by VFICO or any of the predecessors of VFICO. (x) There are no past or present actions, activities, circumstances, conditions, event or incidents, including, without limitation, the generation, handling, transportation, treatment, storage, Release, presence, disposal or arranging for disposal of any Hazardous Substance, that could form the basis of any claim against VFICO under any Environmental Law. (xi) Without in any way limiting the generality of the foregoing, (i) all underground storage tanks, and the capacity and contents of such tanks, located on the real property owned or operated by VFICO are identified in Schedule 3.17(a), (ii) except as identified in Schedule 3.17(a), there is no asbestos contained in or forming part of any building, building component, structure or office space owned or operated by VFICO, and (iii) no polychlorinated biphenyls (PCBS) are used or stored at any part of the property owned or operated by VFICO. (xii) The following terms shall have the following meanings: A. "Environmental Laws" means all federal, state, local and foreign laws, statutes, codes, ordinances, rules, regulations, orders, directives, binding policies, common law, or Permits as amended and in effect on the date hereof and on the Closing Date relating to or addressing the environment, health or safety, including, but not limited to, any law, statute, code, ordinance, rule, regulation, order, directive, binding policy, common law or Permit relating to the generation, use, handling, treatment removal, storage, production, manufacture, transportation, remediation, disposal, arranging for disposal, or Release of Hazardous Substances. B. "Environmental Lien" means a lien in favor of any conventional authority for any (a) liability under any Environmental Law or (b) damages arising from, or costs incurred by, such governmental authority in response to a release or threatened release of a Hazardous Substance into the environment. C. "Hazardous Substances" means any toxic or hazardous substances (including, without limitation, wastes), pollutants, explosives, radioactive materials or substances (including, without limitation, wastes), including, without limitation, asbestos, PCBs, 17 petroleum products and byproducts, and substances (including, without limitation, wastes) defined in or regulated under Environmental Law. D. "Permit" means any permit, license, consent or other approval or authorization required under any Environmental Law. E. "Release" means the release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migrating of any Hazardous Substance through or in the air, soil, surface water, or groundwater. SECTION 3.18 Books and Records. The books and records of VFICO have ----------------- been, and are being, maintained in accordance with applicable legal and accounting requirements and reflect in all material respects the substance of events and transactions that should be included therein. SECTION 3.19 Intellectual Property. VFICO, directly or indirectly, --------------------- possess or has adequate rights to all licenses, permits and all other franchises, trademarks, trade names, service marks, inventions, patents, copyrights, and any applications therefor, trade secrets, research and development, know-how, technical data, computer software programs or applications and technology systems necessary to operate its business and required by applicable law (the "Intellectual Property"). Except as set forth on Schedule 3.19, all right, title and interest in and to each item of Intellectual Property is owned by VFICO, is not subject to any license, royalty arrangement or pending or threatened claim or dispute and is valid and in full force and effect To VFICO's knowledge, none of the Intellectual Property owned or used by VFICO, infringes any Intellectual Property right of any other entity and no Intellectual Property owned by VFICO is infringed upon by any other entity. SECTION 3.20 Condition of Tangible Assets. Except as set forth in ---------------------------- Schedule 3.20, in all material respects: (i) all buildings, structures and improvements on the real property leased by VFICO are in good condition, ordinary wear and tear excepted, and are free from structural defects, and (ii) the equipment, including heating, air conditioning and ventilation equipment owned by VFICO, is in good operating condition, ordinary wear and tear excepted. The operation and use of the property in the business conform in all material respects to all applicable laws, ordinances, regulations, permits, licenses and certificates. SECTION 3.21 Year 2000 Compliance. Except as provided in Schedule 3.21 -------------------- hereof, VFICO has undertaken an assessment of its software and hardware in order to reveal those portions thereof which will require modification or replacement to utilize properly dates beyond December 31, 1999, has contracted with appropriate third parties to modify or replace such existing software and hardware so that such software and hardware will not be affected by the change in the Year 2000. VFICO has contacted its critical vendors and borrowers in order to assess their efforts to mitigate any adverse effects to their computer programs and systems beyond December 31, 1999. SECTION 3.22 Conflict of Interest. No present or former officer or -------------------- director managerial employee, of VFICO and no shareholder of VFICO has (i) any interest in the property, tangible or intangible, including, without limitation, licenses, inventions, processes, know how or formula of a proprietary nature used in or pertaining to the business of VFICO, (ii) any contract, commitment, claim, arrangement or understanding, including, without limitation, any loan arrangement, with VFICO. Except as set forth on Schedule 3.22, to the knowledge of 18 VFICO, no present officer, director or managerial employee of VFICO and no shareholder of VFICO, has any ownership or stock interest in any other enterprise, firm, corporation, trust or any other entity which is engaged in any contractual arrangement or understanding with VFICO or is engaged in any line or lines of business which are the same as, or similar to, or competitive with, the line or lines of business or VFICO. For the purpose of this representation, ownership of not more than 3% of the voting stock of any publicly-held company whose stock is listed on a recognized securities exchange or traded over-the- counter shall be disregarded. SECTION 3.23 Vote Required. The affirmative vote of the holders of a ------------- majority of the outstanding shares of VFICO Common Stock is necessary in order to approve this Agreement, the Merger and the other transactions contemplated herein. SECTION 3.24 Disclosure. No representation or warranty by VFICO ---------- contained in this Agreement, and no statement contained in any Exhibit or Schedule hereto or any lists, certificates or writing delivered in connection herewith or pursuant hereto to the knowledge of VFICO, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in such document. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SBI AND ACQUISITION CORPORATION As a material inducement to VFICO to enter into this Agreement and consummate the Merger and the other transactions contemplated herein, SBI and Acquisition Corporation, jointly and severally, represent and warrant to VFICO that, except as specifically disclosed to VFICO in writing in the disclosure schedules being delivered to VFICO (the "SBI Schedules") which shall identify the specific sections or subsections in this Agreement to which each such disclosure relates: SECTION 4.01 Organization. Each of SBI and Acquisition Corporation is a ------------ corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the corporate power and authority to carry on its business as presently conducted, to enter into this Agreement, and the other documents and instruments to be executed and delivered by it pursuant hereto and to carry out the transactions contemplated hereby and thereby. SECTION 4.02 Authority. The execution and delivery of this Agreement and --------- the other documents and instruments to be executed and delivered by SBI and Acquisition Corporation pursuant hereto and the consummation by SBI and Acquisition Corporation of the transactions contemplated hereby have been duly authorized by the Board of Directors of SBI and Acquisition Corporation, respectively. No other corporate act or proceeding on the part of SBI or Acquisition Corporation or their respective shareholders (other than the approval of the merger by SBI as the sole shareholder of Acquisition Corporation) is necessary to authorize this Agreement, the Merger or the other documents and instruments to be executed and delivered by SBI or Acquisition Corporation. 19 SECTION 4.03 Consents and Approvals; No Violation. This Agreement ------------------------------------ constitutes a valid and binding agreements of each of SBI and Acquisition Corporation, enforceable in accordance with its respective terms, and except as such enforceability may be limited by bankruptcy or other similar laws affecting creditors' rights and remedies generally, neither the execution and delivery of this Agreement nor the consummation of the Merger or the other transactions contemplated hereby (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of SBI or Acquisition Corporation, (ii) result in a violation or breach of, or constitute with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which SBI or Acquisition Corporation is a party or by which any of its properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to SBI or Acquisition Corporation or any of their respective properties or assets. Except as set forth in Schedule 4.03, no permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency is required in connection with the execution, delivery or performance by SBI or Acquisition Corporation of this Agreement, the Merger or the consummation of the transactions contemplated hereby. SECTION 4.04 SEC Reports and Financial Statements. SBI has delivered to ------------------------------------ VFICO complete (except in certain cases for listed exhibits which are available upon request) and correct copies of SBI's (a) Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 1998; (b) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June and September 30, 1999, in each case as filed by SBI with the SEC pursuant to the 1934 Act (such reports and other filings collectively referred to herein as the "1934 Act Filings"). As of their respective dates, the 1934 Act Filings 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 therein, in light of the circumstances under which they were made, not misleading and, since the date of the last 1934 Act Filing, SBI has not experienced nor to the knowledge of SBI has there been threatened or anticipated any material adverse change in the condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations of SBI taken as a whole. SECTION 4.05 Disclosure. No representation or warranty by SBI or ---------- Acquisition Corporation contained in this Agreement, and no statement contained in any Exhibit or SBI Schedule hereto or any lists, certificate or writing delivered in connection herewith or pursuant hereto, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in any such document. SECTION 4.06 Vote Required. SBI, as the sole shareholder of Acquisition ------------- Corporation, has executed or will execute prior to the Closing Date, an Action by Written Consent approving this Agreement, the Merger and the transactions contemplated hereby and thereby. SECTION 4.07 Disciplinary History. Except as set fort on Schedule 4.07, -------------------- there is no information concerning SBI or Buyer, or any person or entity that, upon the consummation of the transactions contemplated by this Agreement and the VFAM Agreement, will be a control affiliate (as such term is defined in Instruction 4(3) to Form BD, Uniform Application for Broker-Dealer Registration ("Form BD") or an advisory affiliate (as such term is defined in Item 20 11 of Form ADV, Uniform Application for Investment Adviser Registration (Form ADV")) of VFICO (other than persons and entities that are presently control affiliates or advisory affiliates of VFAM), that will be required to be disclosed in response to Item 11 or Schedule DRP of VFAM's Form BD or in response to Item 11 or Schedule E of VFAM's Form ADV. ARTICLE V CERTAIN COVENANTS PENDING THE CLOSING SECTION 5.01 Access and Information. Between the date hereof and the ---------------------- Closing Date, VFICO will give SBI and Acquisition Corporation and their authorized representatives full and free access during normal business hours, in such manner as not to unduly disrupt normal business activities, to any and all premises, properties, contracts, commitments, books and records, and VFICO will cause its officers to furnish any and all financial, technical and operating data and other information as SBI and Acquisition Corporation and their authorized representatives from time to time reasonably may request. SECTION 5.02 Conduct of the Business of VFICO pending the Closing Date. --------------------------------------------------------- Except as set forth on Schedule 5.02, between the date hereof and the Closing Date, unless SBI otherwise consents in writing or unless otherwise required by the VFAM Agreement (as defined in Section 6.01(b) hereof), VFICO shall: (a) Not take any action which would render untrue any of the representations or warranties of VFICO herein contained; not omit to take any action, the omission of which would render untrue any such representation or warranty; provided, however, it shall not be obligated to take any action not in the ordinary course of business that would result in the expenditure of funds by it exceeding $5,000 in the aggregate; and not take any action or commit any omission that would have as a result any of the conditions set forth in Article VI not being satisfied. (b) Conduct its business in a good and diligent manner in the ordinary and usual course. (c) Use its best efforts to preserve its business organization intact, to keep available the services of its employees, and to preserve its relationships with customers, vendors, suppliers and others with whom it deals. (d) Not reveal, orally or in writing, to any party, other than consultants and vendors of services with a need to know and other than SBI and Acquisition Corporation and their authorized agents, any of the confidential business procedures and practices followed by it in the conduct of its business. (e) Not enter into any contract, agreement, commitment or arrangement with any party, other than contracts in the ordinary and usual course of business. (f) Not redeem or otherwise acquire any shares of its capital stock or issue any capital stock or any stock or any stock option, warrant, preference, call or right relating thereto. 21 (g) Use its best efforts to maintain in full force and effect all of the insurance policies presently maintained by it, make no change in any insurance coverage and notify SBI at least ten days prior to any pending cancellation or lapse of any insurance policy. (h) Keep the premises occupied and owned or leased by it and all of its equipment and other tangible personal property in good order and repair and perform all necessary repairs and maintenance. (i) Continue to maintain all of its usual business books and records in accordance with its past practices. (j) Not amend or propose to amend its Articles of Incorporation or Bylaws. (k) Not waive any material right or cancel any material claim without the receipt of adequate consideration. (l) Maintain its respective corporate existence and not merge or consolidate it with any other entity. (m) Comply with all material provisions of any of the VFICO Agreements and all applicable laws, rules and regulations. (n) Not make any capital expenditure other than in the ordinary course of its business and in an amount not exceeding $10,000 in the aggregate. (o) Not place any additional encumbrances on any of its inventory or assets not in the ordinary course of business, except that existing encumbrances may attach to its inventory or assets acquired after the date hereof. (p) Not pay any severance, deferred compensation or other payments to any shareholder, whether or not accrued. (q) Not declare or make any dividend or other payment on or with respect to its capital stock, and not declare or pay any bonuses or non-periodic compensation to any of its shareholders or employees (r) Not engage in any transaction of the type listed in Section 3.15. SECTION 5.03 Notices. VFICO shall give prompt notice to SBI of (i) any ------- notice of, or other communication relating to, a default which would have a material adverse effect on VFICO or event which, with notice or lapse of time or both, would become a default which would have a material adverse effect on VFICO, received by it subsequent to the date of this Agreement and prior to the Closing, under its Articles of Incorporation or Bylaws or any of the VFICO Agreements and (x) by which it is bound or (y) to which it is subject, (ii) any claim, action, suit, proceeding or investigation by any governmental department, taxing authority commission, board, agency, instrumentality or authority involving or relating to its assets, properties or business or the VFICO Agreements (or any communication indicating that the same may he contemplated), (iii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions 22 contemplated hereby and (iv) any matter which would cause any material change with respect to any representations made hereunder. SECTION 5.04 Advice of Changes. Each of SBI, Acquisition Corporation and ----------------- VFICO shall confer on a regular and frequent basis with the other, report on operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on such party. SECTION 5.05 Legal Conditions to Stock Purchase. Each of SBI, Acquisition ---------------------------------- Corporation and VFICO will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the transactions contemplated hereby (which actions shall include, without limitation, approvals or filings with any governmental entity) and will promptly cooperate with and furnish information to each other with any such requirements imposed upon any of them in connection with the same. Each of SBI, Acquisition Corporation and VFICO will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any governmental entity or other public or private third party, required to be obtained by SBI, Acquisition Corporation or VFICO in connection with the taking of any action contemplated by this Agreement. Each of SBI, Acquisition Agreement and VFICO will use its best efforts to effectuate the transactions and agreements contemplated by this Agreement, and, in furtherance thereof, shall make and execute, under the corporate seal of SBI, Acquisition Corporation or VFICO, if required, whatever certificates and documents are required by the appropriate federal and state regulatory authorities to effect the transactions contemplated hereby, and to cause the same to be filed, in the manner provided by law, and to do all things whatsoever, whether within or without the Commonwealth of Pennsylvania, which would be necessary and proper to effect the transactions and agreements contemplated herein. SECTION 5.06 Best Efforts. Subject to the terms and conditions of this ------------ Agreement, each of the parties hereto agrees to use best efforts to take, or cause to be taken, all action 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. SECTION 5.07 VFICO Shareholder Approval. VFICO shall use its best efforts -------------------------- to cause to be prepared, as promptly as possible following the date of this Agreement, proxy materials for the Special Meeting of its shareholders, and to use its best efforts to cause such proxy solicitation to be undertaken as soon as practicable, in accordance with the BCL and VFICO's Articles of Incorporation and Bylaws. VFICO shall bear the full cost of such solicitation, meeting and approval. SBI and its counsel shall have the opportunity to review all Special Meeting materials prior to their delivery to the VFICO shareholders, and all such materials shall be in form and substance reasonably satisfactory to SBI and its counsel. The Board of Directors of VFICO shall recommend to its shareholders that they approve the Merger and the consummation of the transactions contemplated by this Agreement. SECTION 5.08 December 31, 1999 Financial Statements. If the Closing has -------------------------------------- not occurred by January 15, 2000, then VFICO shall deliver to SBI the unaudited financial statement of VFICO for the year ended December 31, 1999, prepared in accordance with GAAP (the "December 31, 1999 Financials"). 23 ARTICLE VI CONDITIONS TO CLOSING SECTION 6.01 Conditions to Each Party's Obligation To Effect the --------------------------------------------------- Transaction. The respective obligation of each party to effect the Merger shall - ----------- be subject to the satisfaction prior to the Closing Date of the following conditions: (a) No Injunctions or Restraints. No temporary restraining order, ---------------------------- preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect. (b) Consummation of Closing under VFAM Agreement. The Closing -------------------------------------------- contemplated in Section 1.04 of the VFAM Agreement shall have occurred prior to, or shall occur simultaneously with, Closing under this Agreement. (c) Shareholder Approval. This Agreement, the Merger and the -------------------- transactions contemplated hereby shall have been approved in the manner required by applicable law by the holders of the issued and outstanding shares of VFICO Common Stock. SECTION 6.02 Conditions of Obligations of SBI and Acquisition Corporation. ------------------------------------------------------------ The obligations of SBI and Acquisition Corporation to effect the Merger are subject to the satisfaction of the following conditions unless waived by SBI and Acquisition Corporation: (a) Representations and Warranties. The representations and ------------------------------ warranties of VFICO set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of VFICO. VFICO shall have performed ----------------------------------- in all material respects all of its obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, waivers, ------------------------ permits and approvals from any governmental or regulatory body required by VFICO in connection with the execution, delivery and performance of this Agreement as listed in Schedule 3.04 shall have been duly obtained and shall be in full force and effect on the Closing Date. No litigation, governmental action or other proceedings involving or potentially involving a liability, obligation or loss on the part of VFICO, or which by reason of the nature of the relief sought might have a materially adverse effect on VFICO's business, shall be threatened or commenced against VFICO with respect to any matter and no litigation, governmental action or other proceedings shall be threatened or commenced against any person with respect to the consummation of the transactions provided for herein. (d) Other Approvals. Other than the filing provided for by Section --------------- 1.01, all authorizations, consents, orders or approvals, including, without limitation, all licenses or assignments of licenses, of, or declarations or filings with any governmental entity by VFICO the failure to obtain which would have a material adverse effect on SBI shall have been filed, occurred or been obtained. 24 (e) Closing Documents. All documents required to be delivered by ----------------- VFICO at or prior to the Closing Date shall have been delivered. (f) Lease Termination. VFICO shall have terminated any written or ----------------- verbal lease arrangement that it may have with Warner Road Associates. (g) Share Transfer Restrictions. Any and all share transfer --------------------------- restrictions on the VFICO Common Stock, including, without limitation, any restrictions imposed in VFICO's articles of incorporation, bylaws or any shareholder agreements, shall be terminated or waived. (h) VFICO Dissenting Shareholders. Holders of less than 5 percent of ----------------------------- the outstanding VFICO Common Stock shall have elected to exercise their dissenters' rights. (i) Payment of VFICO's Expenses. VFICO shall have paid all fees and --------------------------- expenses of its advisors, accountants and counsel, whether incident to the negotiations, preparation, execution, delivery and performance of this Agreement or otherwise for the period through the Closing Date, such that no liability or obligation with respect to such fees and expenses shall be included on VFICO's closing balance sheet. VFICO's and VFICO's advisors and accountants shall have executed and delivered to VFICO, and SBI a release agreement in a form satisfactory to SBI reflecting that all such amounts have been paid and that as of the Closing Date they have no right to any further payment from VFICO, Acquisition Corporation or SBI for any fees or expenses. (j) VFICO Closing Financial Certificate. SBI shall have received a ----------------------------------- certificate, (the "VFICO Closing Financial Certificate") dated as of the Closing Date, signed on behalf of VFICO, certifying that: (i) the tangible net worth of VFICO as of the Closing Date is at least $2,000,000; (ii) VFICO has a cash balance of at least $1,500,000 plus current liabilities; and (iii) VFICO has no long term liabilities. An example of the calculation of such certificate is set forth on Schedule 6.02(j). (k) Pro Forma Balance Sheet and Income Statements. In addition to --------------------------------------------- the December 31, 1999 Financials, at least ten days prior to the Closing Date, VFICO shall deliver to SBI a pro forma balance sheet and income statement and supporting documents for the period from the most recent audited financial statements through the Closing Date, which shall confirm the accuracy of the VFICO Closing Financial Certificate. SECTION 6.03 Conditions of Obligations of VFICO. The obligation of VFICO ---------------------------------- to effect the transactions contemplated herein is subject to the satisfaction of the following conditions unless waived by VFICO: 25 (a) Representations and Warranties. The representations and ------------------------------ warranties of SBI and Acquisition Corporation set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of SBI and Acquisition Corporation. ------------------------------------------------------------- SBI and Acquisition Corporation shall have performed in all material respects all of their respective obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, ------------------------ waivers, permits and approvals from any governmental or regulatory body required by SBI or Acquisition Corporation in connection with the execution, delivery and performance of this Agreement as listed in Schedule 4.03, including, without limitation, the approval of the Board of Governors of the Federal Reserve System, shall have been duly obtained and shall be in full force and effect on the Closing Date except for such items which may lawfully be obtained after the Closing Date without a material adverse effect on VFICO. No litigation, governmental action or other proceedings involving a liability, obligation or loss on the part of SBI or Acquisition Corporation, or which by reason of the nature of the relief sought might have a materially adverse effect on SBI's business, shall be threatened or commenced against SBI or Acquisition Corporation with respect to any matter, and no litigation, governmental action or other proceedings shall be threatened or commenced against any person with respect to the consummation of the transactions provided for herein. (d) Other Approvals. Other than the filing provided for by Section --------------- 1.01, all authorizations, consents, orders or approvals shall have been filed, occurred or been obtained. (e) Closing Documents. All documents required to be delivered by SBI ----------------- or Acquisition Corporation at or prior to the Closing Date shall have been delivered. ARTICLE VII DELIVERIES SECTION 7.01 VFICO's Deliveries. At the Closing, VFICO shall deliver or ------------------ cause to be delivered to SBI, the following: (a) The legal opinion of David S. Foulke, Esq. in form reasonably acceptable to SBI and its counsel; (b) The VFICO Closing Financial Certificate; (c) A "Good Standing Certificate" and/or a certificate of valid registration of VFICO issued by the Secretary of State of each State in which it is qualified or registered to do business, dated as of recent date; (d) A certified copy of the Articles of Incorporation and all amendments thereto of VFICO issued by the Secretary of State of the Commonwealth of Pennsylvania, dated as of a recent date; (e) An Officer's Certificate of VFICO certifying that, as of the Closing Date, (i) each of the representations and warranties of VFICO is true and correct in all material 26 respects, (ii) VFICO has performed all of its obligations under this Agreement, and (iii) attached thereto is a true and correct copy of any and all approvals, consents, etc. required to be obtained by VFICO pursuant to Section 3.04 hereof, and that the same are in full force and effect on the Closing Date; (f) A Secretary's Certificate certifying (i) that the persons identified in such certificate are the officers of VFICO; (ii) that attached thereto is a true and complete copy of the Articles of Incorporation and the Bylaws of VFICO as in effect on the date thereof, (iii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of VFICO relating to the transactions contemplated by this Agreement, and (iv) the vote of the shareholders of VFICO at the Special Meeting (including, without limitation, the existence of a quorum, the number of votes cast for or against this Agreement, the Merger and the other transactions contemplated herein, and the number of shares that abstained from voting); (g) The stock books and records, corporate minute books (containing the originals of all minutes and resolutions ever adopted or consented to or agreed by the shareholders, directors or any committee of directors of VFICO and corporate seal of VFICO); (h) Releases executed by each of VFICO's advisors and accountants reflecting that all fees and expenses as provided in Section 6.02(i) have been paid and that as of the Closing Date they have no right to any further payment from VFICO, Acquisition Corporation or SBI for any fees or expenses relating to work performed on or prior to the Closing Date. SECTION 7.02 SBI's and Acquisition Corporation's Deliveries. At the ---------------------------------------------- Closing, SBI and Acquisition Corporation shall deliver or cause to be delivered to VFICO, the following: (a) Proof that Acquisition Corporation has obtained the $8.5 million necessary for the Cash Consideration; (b) The legal opinion of SBI's and Acquisition Corporation's legal counsel in form reasonably acceptable to VFICO and its counsel; (c) A "Good Standing Certificate" of each of SBI and Acquisition Corporation and a certified copy of the Articles of Incorporation and all amendments thereto issued by the Secretary of State of the Commonwealth of Pennsylvania, dated as of a recent date; (d) An Officer's Certificate of each of SBI and Acquisition Corporation certifying that, as of the Closing Date, (i) each of the representations and warranties of SBI and Acquisition Corporation is true and correct in all material respects, and (ii) each of SBI and Acquisition Corporation has performed all of its obligations under this Agreement, and (iii) attached thereto is a true and correct copy of any and all approvals, consents, etc. required to be obtained by SBI or Acquisition Corporation pursuant to Section 4.03 hereof, and that the same are in full force and effect on the Closing Date; and; (e) A Secretary's Certificate of each of SBI and Acquisition Corporation, certifying that (i) attached thereto is a true and complete copy of the Articles of Incorporation and the Bylaws of SBI and Acquisition Corporation, as the case may be, in each case as in effect on the date thereof, and (ii) that attached thereto is a true and complete copy of all resolutions 27 adopted by the Board of Directors of SBI and Acquisition Corporation, as the case may be, relating to the transactions contemplated by this Agreement. ARTICLE VIII TERMINATION AND AMENDMENT SECTION 8.01 Termination. This Agreement may be terminated at any time ----------- prior to the Effective Time, whether before or after approval of the matters presented in connection with the transactions contemplated herein: (a) by mutual consent of VFICO, SBI and Acquisition Corporation; (b) (i) by SBI and Acquisition Corporation on the one hand or by VFICO on the other hand, respectively, if there shall have been a material breach of any representation, warranty, covenant or agreement on the part of the other set forth in this Agreement which breach shall not have been cured, in the case of a representation or warranty, within five business days following notice of such breach given to the breaching party by the other party or, in the case of a covenant or agreement, within five business days following receipt by the breaching party of notice of such breach, or (ii) by either SBI and Acquisition Corporation or VFICO if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Merger or the other transactions contemplated hereunder shall have become final and non-appealable; or (c) by SBI and Acquisition Corporation or VFICO if the transactions contemplated herein shall not have been consummated before March 31, 2000. SECTION 8.02 Effect of Termination. In the event of a termination of this --------------------- Agreement by either VFICO or SBI and Acquisition Corporation as provided in Section 8.01, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of SBI, Acquisition Corporation or VFICO, or their respective officers or directors, except (y) with respect to the second and third sentences of Section 5.01, and Sections 9.01 and 9.02, and (z) to the extent that such termination results from the willful breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. SECTION 8.03 Amendment. This Agreement may be amended by the parties --------- hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by VFICO's shareholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. SECTION 8.04 Extension; Waiver. At any time prior to the Effective Time, ----------------- the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 28 ARTICLE IX MISCELLANEOUS SECTION 9.01 Costs and Expenses. All costs and expenses incurred in ------------------ connection with this Agreement and the transactions contemplated hereby shall be paid by VFICO to the extent incurred by it and paid by SBI and Acquisition Corporation to the extent incurred by them. SECTION 9.02 Brokers or Finders. Except with respect to any amounts that ------------------ might be due to VFICO's advisors, including without limitation any amounts that may be due to James E. Bickley (any of which amounts shall be paid by VFICO), each of SBI, Acquisition Corporation and VFICO hereby represents and warrants that there is no corporation, firm or person entitled to receive from it any brokerage commission or finder's fee in connection with this Agreement or the transactions and agreements provided for herein, and each hereby indemnifies and agrees to save the other parties hereto harmless from and against any claim for brokerage commission or finder's fee based on any retention or alleged retention of a broker or finder by it. SECTION 9.03 Statements as Representations. All statements contained ----------------------------- herein or in any Schedule, Exhibit, certificate, list or other document delivered pursuant hereto or in connection with the transactions contemplated herein shall be deemed representations, warranties and covenants within the meaning of Articles III, IV and V hereof. SECTION 9.04 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if SBI or Acquisition Corporation, to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, PA 17543 Attention: Robert S. Bolinger, President and Chief Executive Officer Telecopy No.: 717.626.1874 with a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 Attention: John F. Bales, III, Esquire Telecopy No : 215.963.5299 (b) if VFICO, to: VFICO P.O. Box 837 Valley Forge, PA 19482 29 Attention: Joseph J. Miller Telecopy No.: 610.687.1848 with a copy to: Stradley Ronon, Stevens & Young LLP 2600 One Commerce Square Philadelphia, PA 19103 Attention: Dean M. Schwartz, Esq. Telecopy No.: 215.564.8120 SECTION 9.05 Publicity. Except as otherwise required by law or the rules --------- of the NASD for so long as this Agreement is in effect, neither VFICO, SBI nor Acquisition Corporation shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. Until a press release of the execution of this Agreement has been made in accordance with the rules of the NASD, all of the parties hereto shall treat the Agreement and the terms thereof in the strictest confidence. SECTION 9.06 Binding Nature of Agreement; No Assignment. This Agreement ------------------------------------------ shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that no party may assign or transfer its rights or obligations under this Agreement (other than as provided herein) without the prior written consent of the other parties hereto; provided, however, that any substitute corporation as provided in Section 1.04 hereof shall be entitled to the same rights and privileges as those of SBI and Acquisition Corporation pursuant to this Agreement. SECTION 9.07 Controlling Law. The Agreement and all questions relating --------------- to its validity, interpretation, performance and enforcement (including without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, other than the choice of law provisions thereof, and without the aid of any canon, custom, or rule of law requiring construction against the drafting party. SECTION 9.08 Exhibits and Schedules. All Exhibits and Schedules attached ---------------------- hereto are hereby incorporated by reference into, and made a part of, this Agreement. SECTION 9.09 Execution in Counterparts. This Agreement may be executed ------------------------- in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signature of all of the parties reflected hereon as the signatories. SECTION 9.10 Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provisions shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 30 SECTION 9.11 Entire Agreement. This Agreement and the Confidentiality ---------------- Agreement dated April 16, 1999 contain the entire understanding among the parties hereto and with respect to the subject matter hereof, and together supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto. SECTION 9.12 Paragraph Headings. The headings in this Agreement are for ------------------ convenience only; they form no part of this Agreement and shall not affect its interpretation. SECTION 9.13 Gender, Etc. Words used herein, regardless of the number ----------- and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. SECTION 9.14 Knowledge of VFICO. For purposes of this Agreement, ------------------ "knowledge of VFICO" or similar words and phrases shall be conclusively deemed to include: (i) actual knowledge of VFICO or the officers and directors of VFICO, and (ii) that knowledge which any officer or director of VFICO should have obtained after exercising due diligence which a prudent officer or director should have undertaken with respect thereto. 31 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. SUSQUEHANNA BANCSHARES, INC. By: /s/ Robert S. Bolinger ------------------------------------- Name: Robert S. Bolinger Title: President SUSQUEHANNA BANCSHARES CENTRAL, INC. By: /s/ Robert S. Bolinger ------------------------------------ Name: Robert S. Bolinger Title: President VALLEY FORGE INVESTMENT COMPANY, INC. By: /s/ Joseph J. Miller, Jr. ------------------------------------ Name: Joseph J. Miller, Jr. Title: Chairman 32 EX-10 5 KEY EMPLOYEE SEVERANCE PAY PLAN Exhibit 10 ---------- Key Employee Severance Pay Plan SUSQUEHANNA BANCSHARES, INC. KEY EMPLOYEE SEVERANCE PAY PLAN ------------------ ARTICLE I PURPOSE OF PLAN --------------- Section 1.01 Purpose of the Plan. The Susquehanna Bancshares, Inc. ------------------- Key Employee Severance Pay Plan (the "Plan"), as set forth herein, is intended to alleviate financial hardships which may be experienced by senior executives and other key employees of Susquehanna Bancshares, Inc. (the "Company") whose employment is terminated under specified circumstances within one (1) year following a Change of Control of the Company, and to reinforce and encourage the continued attention and dedication of those senior executives and other key employees to their assigned duties without distraction from a potential Change of Control of the Company. The Plan is not intended to be an "employee pension benefit plan" or a "pension plan" as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Rather, this Plan is intended to meet the criteria set forth in 29 C.F.R. (S) 2510.3-2(b) for a "severance pay plan" that is an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA. Accordingly, the benefits paid by the Plan are not deferred compensation. ARTICLE II DEFINITIONS ----------- Section 2.01 "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. Section 2.02 "Beneficial Owner" of any securities shall mean: (i) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial -------- ------- Owner" of securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; (ii) that such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including without limitation pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a Person shall -------- ------- not be deemed the "Beneficial Owner" of any security under this subsection (ii) as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) where voting securities are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subsection (ii) above) or disposing of any voting securities of the Company; provided, however, that nothing in this Section 2.02 shall cause a Person - -------- ------- engaged in business as an underwriter of securities to be the "Beneficial Owner" of any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of such acquisition. Section 2.03 "Benefit" or "Benefits" shall mean any or all of the benefits that a Participant is entitled to receive pursuant to Article IV of the Plan. Section 2.04 "Board of Directors" shall mean the Board of Directors of the Company. Section 2.05 "Change of Control" shall be deemed to have taken place if (i) any Person (except the Company or any employee benefit plan of the Company or of any Affiliate, any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such employee benefit plan), together with all Affiliates and Associates of such Person, shall become the Beneficial Owner in the aggregate of thirty percent (30%) or more of the equity of the Company then outstanding, (ii) any Person together with all Affiliates and Associates of such Person purchases substantially all of the assets of the Company, or (iii) during any twenty-four (24) month period, individuals who at the beginning of such period constituted the Board cease for any reason (other than death or compulsory retirement at the age of seventy-two (72) years) to constitute a majority of the continuing directors thereof, unless the election, or the nomination for election by the Company's shareholders, of at least seventy-five percent (75%) of the directors who were not directors at the beginning of such period was approved by a vote of at least seventy-five percent (75%) of the directors in office at the time of such election or nomination who were directors at the beginning of such period. 2 Section 2.06 "Company" shall mean Susquehanna Bancshares, Inc., or any successor thereto. Section 2.07 "Compensation" shall mean one hundred ten percent (110%) of the sum of the Participant's annual base salary, determined as the greater of (a) the amount in effect on the first day of the calendar quarter immediately preceding a Change of Control or (b) the amount in effect on the first day of the calendar quarter immediately preceding his or her Termination following a Change of Control. Section 2.08 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Section 2.09 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. Section 2.10 "Participant" shall mean any senior executive or other key employee of the Company who is designated by the Compensation Committee and approved by the Board of Directors as eligible to participate in the Plan. Section 2.11 "Person" shall mean any individual, firm, corporation, partnership or other entity. Section 2.12 "Plan" shall mean the Susquehanna Bancshares, Inc. Key Employee Severance Pay Plan, as set forth herein, and as the same may from time to time be amended. Section 2.13 "Subsidiary" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. Section 2.14 "Termination Date" shall mean the date of receipt of the Notice of Termination described in Article III hereof or any later date specified therein, as the case may be. Section 2.15 "Termination of Employment" shall mean the termination of the Participant's actual employment relationship with the Company. Section 2.16 "Termination following a Change of Control" shall mean a Termination of Employment within one (1) year after a Change of Control either: (i) initiated by the Company for any reason other than (a) the Participant's continuous illness, injury or incapacity for a period of twelve (12) consecutive months or (b)for "cause," which shall mean misappropriation of funds, habitual insobriety, substance abuse, conviction of a crime involving moral turpitude, or gross negligence in the performance of 3 duties, which gross negligence has had a material adverse effect on the business, operations, assets, properties or financial condition of the Company and its Subsidiaries taken as a whole; or (ii) initiated by the Participant upon one or more of the following occurrences: (A) any change resulting in a significant reduction by the Company of the authority, duties or responsibilities of the Participant; (B) any removal by the Company of the Participant from the employment grade, compensation level or officer positions which the Participant holds as of the Change of Control except in connection with promotions to higher office; (C) the requirement that the Participant undertake business travel (or commuting in excess of fifty miles each way) to an extent substantially greater than is reasonable and customary for the position the Participant holds. ARTICLE III NOTICE OF TERMINATION --------------------- Any Termination following a Change of Control shall be communicated by a Notice of Termination to the other party given in accordance with Section 8.05 hereof. For purposes of this Plan, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Plan relied upon, (ii) briefly summarizes the facts and circumstances deemed to provide a basis for termination of the Participant's employment under the provision so indicated, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than fifteen (15) days after the giving of such notice). ARTICLE IV BENEFIT ------- Section 4.01 Amount of Immediate Cash Benefit. Upon a Participant's -------------------------------- Termination following a Change of Control, the Company shall pay the Participant an amount 4 equal to one and one-half times his Compensation in a lump sum within fifteen (15) days after the Termination Date. Section 4.02 Additional Benefits. For a period of one (1) year ------------------- following the Participant's Termination Date, the Participant shall be entitled to participate in all employee benefit plans or programs, and to receive all benefits, perquisites and emoluments, for which any salaried employees of the Company are eligible under any plan or program in effect on the Participant's Termination Date and maintained by the Company for officers at a comparable level (other than any severance or termination pay plan or program or bonus, stock option or other long-term incentive plan or program), to the fullest extent permissible under the general terms and provisions of such plan or program and in accordance with the provisions thereof, including group hospitalization, health, dental care, life or other insurance, tax-qualified pension and savings plans, stock purchase plan, and disability insurance. Notwithstanding the foregoing, if any such Benefits cannot lawfully be provided, or the provision thereof would disqualify any plan for favorable tax treatment under the Internal Revenue Code or result in adverse tax consequences to the Participant, the Company shall pay to the Participant a lump sum amount equal on an after-tax basis to the actuarial present value of such Benefits, as determined by an actuary chosen by the Participant, within fifteen (15) days after such determination by such actuary. Further notwithstanding the foregoing, nothing in this Plan shall preclude the amendment or termination of any such plan or program, provided that such amendment or termination is applicable generally to the officers of the Company or any Subsidiary or affiliate. Section 4.03. Other Payments. The Benefits due under this Article IV -------------- shall be in addition to and not in lieu of any payments or benefits due to the Participant under any other plan, policy or program of the Company, except that no payments shall be due to the Participant under the Company's otherwise applicable severance or termination pay plan for employees, if any. ARTICLE V ENFORCEMENT AND REMEDIES ------------------------ Section 5.01 Interest. In the event that the Company shall fail or -------- refuse to make payment of any amounts or provide any other Benefits due the Participant under Article IV hereof within the respective time periods provided therein, the Company shall pay to the Participant, in addition to the payment of any other sums provided in this Plan, interest, compounded daily, on any amount remaining unpaid (including the amount of any other Benefit due but unpaid) from the date payment is required under Article IV, as appropriate, until paid to the Participant, at the rate from time to time announced by Chase Manhattan Company as its "prime rate" plus two percent (2%), each change in such rate to take effect on the effective date of the change in such prime rate. 5 Section 5.02 Expenses. It is the intent of the Company that the -------- Participant not be required to incur any expenses associated with the enforcement of his rights under this Plan by arbitration, litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Participant hereunder. Accordingly, the Company shall pay the Participant on demand the amount necessary to reimburse the Participant in full for all expenses (including attorneys' fees and legal expenses) incurred by the Participant in enforcing any of the obligations of the Company under this Plan. Section 5.03 No Mitigation. The Participant shall not be required to ------------- mitigate any Benefit provided for in this Plan by seeking other employment or otherwise, nor shall any Benefit provided for herein be reduced by any compensation earned or benefit received through other employment or otherwise. Section 5.04 No Set-Off. The Company's obligation to make the ---------- payments provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Participant or others. Section 5.05 Taxes. Any payment required under this Plan shall be ----- subject to all requirements of the law with regard to the withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. ARTICLE VI AMENDMENT AND TERMINATION ------------------------- Section 6.01 Amendment, Suspension and Termination. The Company, ------------------------------------- acting through the Board of Directors, retains the right, at any time and from time to time prior to a Change of Control, to amend, suspend or terminate the Plan in whole or in part, for any reason, and without either the consent of or the prior notification to any Participant. No such amendment, suspension or termination shall be permitted upon or after a Change of Control. No such amendment shall give the Company the right to recover any amount paid to a Participant prior to the date of such amendment or to cause the cessation and discontinuance of Benefits to any person or persons under the Plan already receiving Benefits. 6 ARTICLE VII CLAIMS PROCEDURES ----------------- Section 7.01 Application for Benefits. Each Participant believing ------------------------ himself/herself eligible for Benefits under this Plan may apply for such Benefits by filing with the Board of Directors a written request for Benefits, which request may comprise a Notice of Termination delivered by the Participant. Section 7.02 Appeals of Denied Claims for Benefits. In the event ------------------------------------- that any claim for Benefits is denied in whole or in part, the Participant (or beneficiary, if applicable) whose claim has been so denied shall be notified of such denial in writing by the Board of Directors. The notice advising of the denial shall specify the reason or reasons for denial, make specific reference to pertinent Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed), and shall advise the Participant of the procedure for the appeal of such denial. All appeals shall be made by the following procedure: (a) The Participant whose claim has been denied shall file with the Board of Directors a notice of desire to appeal the denial. Such notice shall be filed within sixty (60) days of notification by the Board of Directors of claim denial, shall be made in writing, and shall set forth all of the facts upon which the appeal is based. (b) The Board of Directors shall, within thirty (30) days of receipt of the Participant's notice of appeal, establish a hearing date on which the Participant may make an oral presentation to the Board of Directors in support of his/her appeal. The Participant shall be given not less than ten (10) days notice of the date set for the hearing. (c) The Board of Directors shall consider the merits of the claimant's written and oral presentations, the merits of any facts or evidence in support of the denial of benefits, and such other facts and circumstances as the Board of Directors shall deem relevant. If the claimant elects not to make an oral presentation, such election shall not be deemed adverse to his/her interest, and the Board of Directors shall proceed as set forth below as though an oral presentation of the contents of the claimant's written presentation had been made. 7 (d) The Board of Directors shall render a determination upon the appealed claim, within sixty (60) days of the hearing date, which determination shall be accompanied by a written statement as to the reasons therefor. ARTICLE VIII MISCELLANEOUS ------------- Section 8.01 Nonalienation of Benefits. None of the payments, ------------------------- Benefits or rights of any Participant shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, Benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant. No Participant shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the Benefits or payments which he/she may expect to receive, contingently or otherwise, under this Plan. Section 8.02 No Contract of Employment. Neither the establishment of ------------------------- the Plan, nor any modification thereof, nor the payment of any Benefits shall be construed as giving any Participant, or any person whosoever, the right to be retained in the service of the Company, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been adopted. Section 8.03 Severability of Provisions. If any provision of this -------------------------- Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. Section 8.04 Successors, Heirs, Assigns, and Personal ---------------------------------------- Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant, present and future. The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, or a division thereof, to acknowledge expressly that this Plan is binding upon and enforceable against the Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Plan in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Section 8.05 Notice. Any Notice of Termination delivered pursuant to ------ Article III shall be delivered, if by the Company, to the Participant at his or her last known address, and if by the Participant, to the Corporate Secretary of the Company at the Company's corporate 8 headquarters, personally, by registered or certified mail, return receipt requested, or by overnight express courier service. Any such notice shall be deemed delivered and effective when received in the case of personal delivery, five (5) days after deposit, postage prepaid, with the U.S. Postal Service in the case of registered or certified mail, or on the next business day in the case of overnight express courier service. Section 8.06 Headings and Captions. The headings and captions herein --------------------- are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. Section 8.07 Gender and Number. Except where otherwise clearly ----------------- indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. Section 8.08 Unfunded Plan. The Plan shall not be funded. The ------------- Company may, but shall not be required to, set aside or earmark an amount necessary to provide the Benefits specified herein (including the establishment of trusts). In any event, no Participant shall have any right to, or interest in, any assets of the Company which may be applied by the Company to the payment of Benefits. Section 8.09 Payments to Incompetent Persons, Etc. Any benefit ------------------------------------ payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Company, the Board of Directors and all other parties with respect thereto. Section 8.10 Lost Payees. A Benefit shall be deemed forfeited if the ----------- Board of Directors is unable to locate a Participant to whom a Benefit is due. Such Benefit shall be reinstated if application is made by the Participant for the forfeited Benefit while this Plan is in operation. Section 8.11 Controlling Law. This Plan shall be construed and --------------- enforced according to the laws of the Commonwealth of Pennsylvania to the extent not preempted by Federal law. 9 IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers and its corporate seal to be affixed hereto as of the 20th day of January, 1999. SUSQUEHANNA BANCSHARES, INC. Attest: /s/ Lisa M. Cavage By: /s/ Robert S. Bolinger - ------------------------------ -------------------------------- Assistant Secretary President 10 EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANT 1. Farmers First Bank, 9 East Main Street, Lititz, Pennsylvania; a Bank and Trust Company organized under the Pennsylvania Banking Code of 1965. 2. The Citizens National Bank of Southern Pennsylvania, 35 North Carlisle Street, Greencastle, Pennsylvania; a National Bank organized under the National Bank Act. 3. First National Trust Bank, 400 Market Street, Sunbury, Pennsylvania; a National Bank organized under the National Bank Act. 4. Williamsport National Bank, 329 Pine Street, Williamsport, Pennsylvania; a National Bank organized under the National Bank Act. 5. Farmers & Merchants Bank and Trust, 59 West Washington Street, Hagerstown, Maryland; a Bank and Trust Company organized under the Maryland Banking Code. 6. Susque-Bancshares Life Insurance Company, Phoenix, Arizona; an insurance company organized under the laws of the State of Arizona. 7. Susque-Bancshares Leasing Company, Inc., 9 East Main Street, Lititz, Pennsylvania; a company organized under the laws of the Commonwealth of Pennsylvania. 8. Susquehanna Bancshares South, Inc., 100 West Road, Baltimore, Maryland; a thrift holding company organized under the laws of the State of Delaware. 9. Susquehanna Bank, 100 West Road, Towson, Maryland; a wholly-owned subsidiary of Susquehanna Bancshares South, Inc. 10. Susquehanna Bancshares East, Inc., 114 North Main Street, Mullica Hill, New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares, Inc. 11. Equity Bank, National Association, 8000 Sagemore Drive, Suite 8101, Marlton, New Jersey; a wholly-owned subsidiary of Susquehanna Bancshares East, Inc. 12. Founders' Bank, 101 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania; a wholly-owned subsidiary of Susquehanna Bancshares East, Inc. 13. First American National Bank of Pennsylvania, 140 East Main Street, Everett, Pennsylvania, a National Bank organized under the National Bank Act. 14. First Capitol Bank, 2951 Whiteford Road, York, Pennsylvania; a Bank organized under the Pennsylvania Banking Code of 1965. 15. Boston Service Company, Inc. (t/a Hann Financial Service Corporation), One Centre Drive, Jamesburg, New Jersey, a consumer automobile finance company (acquired February 1, 2000). 16. Valley Forge Asset Management Corp., 120 South Warner Road, King of Prussia, Pennsylvania, an asset management company (acquired March 3, 2000). EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 ---------- PriceWaterhouseCoopers LLP One South Market Square Harrisburg, PA 17101-9916 Telephone (717) 231-5900 Facsimile (717) 232-5672 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 33-92512 and 333-385655) of Susquehanna Bancshares, Inc. of our report dated January 24, 2000, except as to Note 18 which is as of March 3, 2000, relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP March 24, 2000 EX-27 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE SUSQUEHANNA BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 144,548 4,817 12,872 0 878,958 33,090 33,461 2,995,152 37,233 4,310,606 3,180,520 207,507 50,755 467,414 0 0 74,068 330,322 4,310,606 241,633 55,717 2,420 299,770 106,013 138,848 160,922 7,200 978 131,882 61,819 61,819 0 0 43,397 1.17 1.17 7.85 22,770 10,160 0 32,500 36,158 8,366 2,241 37,233 37,233 0 0
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