AGREEMENT AND PLAN OF MERGER BY AND BETWEEN SVB FINANCIAL SERVICES, INC. AND FULTON FINANCIAL CORPORATION JANUARY 11, 2005 TABLE OF CONTENTS

 

Exhibit 2.1

 

A GREEMENT AND P LAN OF M ERGER

 

B Y AND B ETWEEN

 

SVB F INANCIAL S ERVICES , I NC .

 

AND

 

F ULTON F INANCIAL C ORPORATION

 

J ANUARY 11, 2005

 

 

TABLE OF CONTENTS

 

 

 

- ii -

 

- iii -

 

INDEX OF SCHEDULES

 

 

- iv -

 

INDEX OF EXHIBITS

 

 

- v -

 

A GREEMENT AND P LAN OF M ERGER

 

AGREEMENT AND PLAN OF MERGER made as of the 11th day of January, 2005, by and between FULTON FINANCIAL CORPORATION, a Pennsylvania business corporation having its administrative headquarters at One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania 17604 (“ Fulton ”), and SVB FINANCIAL SERVICES, INC., a New Jersey corporation having its administrative headquarters at 70 East Main Street, Somerville, New Jersey 08876 (“ Somerset ”).

 

BACKGROUND:

 

Fulton is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the “ BHC Act ”). Somerset is a bank holding company registered under the BHC Act and is the parent of Somerset Valley Bank, a New Jersey banking corporation (“ Somerset Bank ”). In addition to Somerset Bank, Somerset has two directly owned 100% subsidiaries: SVB Bald Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II in connection with its issuance of subordinated debentures. Somerset Bank has one directly owned 100% subsidiary: Somerset Valley Investment Company, Inc., which owns 100% of the stock of West End One Corp., which is incorporated in the State of Delaware and manages an investment portfolio. Somerset Bank and all other wholly-owned subsidiaries of Somerset and Somerset Bank are collectively referred to herein as the “ Somerset Subsidiaries ”. Fulton and Somerset wish to merge with each other, resulting in Somerset Bank becoming a subsidiary of Fulton. Subject to the terms and conditions of this Agreement, the foregoing transaction will be accomplished by means of a merger (the “ Merger ”) in which (i) Somerset will be merged with and into Fulton, (ii) Fulton will survive the Merger, and (iii) all of the outstanding shares of the common stock of Somerset, $2.09 par value per share (“ Somerset Common Stock ”), will be converted into cash and shares of the common stock of Fulton, par value $2.50 per share, and the associated Fulton Rights (as such term is defined in Section 2.1 herein) (“ Fulton Common Stock ”).

 

In connection with the execution of this Agreement, the parties are to enter into a Warrant Agreement in substantially the form of Exhibit A attached hereto (the “ Warrant Agreement ”), which provides for the delivery by Somerset of a warrant in substantially the form of Exhibit B attached hereto (the “ Warrant ”) entitling Fulton to purchase shares of the Somerset Common Stock in certain circumstances. In addition, Somerset has obtained voting agreements in the form of Exhibit C attached hereto, from the directors and executive officers listed on Exhibit C , who have agreed to vote shares of voting capital stock beneficially owned by them in Somerset in favor of this Agreement, the Merger and, to the extent required, all transactions incident thereto (collectively, the “ Voting Agreements ”).

 

 

WITNESSETH:

 

NOW, THEREFORE , in consideration of the mutual covenants contained herein and intending to be legally bound, the parties hereby agree as follows:

 

ARTICLE I - THE MERGER

 

Subject to the terms and conditions of this Agreement, Somerset shall merge with and into Fulton in accordance with the following:

 

Section 1.1 Merger. At the Effective Time (as defined in Section 9.2 herein) (i) Somerset shall merge with and into Fulton pursuant to the provisions of the Pennsylvania Business Corporation Law of 1988, as amended (the “ BCL ”), and the New Jersey Business Corporation Act (the “ BCA ”), whereupon the separate existence of Somerset shall cease, and Fulton shall be the surviving corporation (hereinafter sometimes referred to as the “ Surviving Corporation ”), and (ii) the Somerset Common Stock will be converted into Fulton Common Stock and cash pursuant to the provisions of Article II hereof.

 

Section 1.2 Name. The name of the Surviving Corporation shall be “Fulton Financial Corporation”. The address of the principal office of the Surviving Corporation will be One Penn Square, P.O. Box 4887, Lancaster, Pennsylvania 17604.

 

Section 1.3 Articles of Incorporation. The Articles of Incorporation of the Surviving Corporation shall be the Articles of Incorporation of Fulton as in effect at the Effective Time.

 

Section 1.4 Bylaws. The Bylaws of the Surviving Corporation shall be the Bylaws of Fulton as in effect at the Effective Time.

 

Section 1.5 Directors and Officers. The directors and officers of the Surviving Corporation shall be the directors and officers of Fulton in office at the Effective Time. Each of such directors and officers shall serve until such time as his successor is duly elected and has qualified.

 

ARTICLE II - CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES

 

Section 2.1 Conversion of Shares. At the Effective Time (as defined in Section 9.2 herein) the shares of Somerset Common Stock then outstanding shall be converted into shares of Fulton Common Stock and cash, as follows:

 

(a) Conversion of Somerset Shares . Except as set forth in subsection (d) below, each share of Somerset Common Stock (a “ Somerset Share ”) issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holders thereof, cease to be outstanding and be cancelled and extinguished and converted into the right to receive, upon the surrender of the share certificates evidencing the Somerset Shares, the Fulton Stock Consideration or the Cash Consideration, or a combination of Fulton Stock Consideration and the Cash Consideration, without any interest thereon, as specified in this Article II hereof (the “ Merger Consideration ”) in accordance with Section 2.2 herein.

 

- 2 -

(b) Definitions . For purposes hereof, the following terms have the following respective meanings:

 

“ Cash Consideration ” means a per Company Share amount in cash equal to $21.00

 

“ Conversion Ratio ” means .9519

 

“ Outstanding Shares ” means the aggregate number of Somerset Shares outstanding immediately prior to the Effective Time, but excluding Somerset Shares to be cancelled pursuant to Section 2.1(d), which number will not be greater than the number of shares outstanding on the date of this Agreement (except as permitted in Section 5.1 herein)

 

“ Fulton Rights ” means rights to purchase common stock of Fulton distributed to holders of Fulton Common Stock pursuant to a Rights Agreement dated June 20, 1989, as amended and restated as of April 27, 1999 (the “ Fulton Rights Agreement ”).

 

“ Fulton Stock Consideration ” means that number of shares of Fulton Common Stock equal to one share multiplied by the Conversion Ratio. In the event that between the date of this Agreement and the Effective Time, the issued and outstanding shares of Fulton Common Stock shall have been effected or changed into a different number of shares or a different class of shares as a result of a stock split, reverse stock split, stock dividend, spin-off, extraordinary dividend, recapitalization, reclassification, subdivision, combination of shares or other similar transaction, or there shall have been a record date declared for any such matter, the Fulton Stock Consideration shall be proportionately adjusted.

 

(c) No Fractional Shares . No fractional shares of Fulton Common Stock shall be issued in connection with the Merger. In lieu of the issuance of any fractional share to which he would otherwise be entitled, each former shareholder of Somerset shall receive in cash an amount equal to the fair market value of his fractional interest, which fair market value shall be determined by multiplying such fraction by the Closing Market Price.

 

(d) Cancelled Somerset Shares . Notwithstanding the provisions of Section 2.1(a) herein, the following shares of Somerset Common Stock shall not be converted into Fulton Common Stock, and shall be cancelled, at the Effective Time: (i) shares of Somerset Common Stock then owned by Fulton or any direct or indirect subsidiary of Fulton (except for trust account shares or shares acquired in connection with debts previously contracted); and (ii) shares of Somerset Shares owned by Somerset or any direct or indirect subsidiary of Somerset (except for trust account shares or shares acquired in connection with debts previously contracted).

 

(e) Closing Market Price . For purposes of this Agreement, the “Closing Market Price ” shall be the average of the per share closing bid and asked prices for Fulton Common Stock, calculated to two decimal places, for the ten (10) consecutive trading days immediately preceding the date which is two (2) business days before the Effective Date (as such term is defined in Section 9.2 herein), as reported on the National Market System of the National Association of Securities Dealers Automated Quotation System (“ NASDAQ ”), the

 

- 3 -

foregoing period of ten (10) trading days being hereinafter sometimes referred to as the “ Price Determination Period ” (For example, if June 30, 2005 were to be the Effective Date, then the Price Determination Period would be June 14-17, June 20-24 and June 27, 2005). In the event that NASDAQ shall fail to report closing bid and asked prices for Fulton Common Stock for any trading day during the Price Determination Period, the closing bid and asked prices for that day shall be equal to the average of the closing bid and asked prices as quoted: (i) by F. J. Morrissey & Company, Inc. and by Ryan, Beck & Co.; or (ii) in the event that both of these firms are not then making a market in Fulton Common Stock, by two brokerage firms then making a market in Fulton Common Stock to be selected by Fulton and approved by Somerset.

 

Section 2.2 Exchange of Stock Certificates. Somerset Common Stock certificates shall be exchanged for certificates evidencing the Fulton Stock Consideration and the Cash Consideration in accordance with the following procedures:

 

(a) Election Procedure . Each holder of Somerset Shares (other than holders of Somerset Shares to be cancelled as set forth in Section 2.1(d)) shall have the right to submit a request specifying either that such holder’s Somerset Shares shall be converted into the Fulton Stock Consideration, Cash Consideration or a combination of Cash Consideration and Fulton Stock Consideration, without interest, in the Merger in accordance with the following procedures:

 

(i) Each holder of Somerset Stock may specify in a request made in accordance with the provisions of this Section 2.2 (herein called an “ Election ”) to either: (i) convert each Somerset Share owned by such holder into the right to receive the Fulton Stock Consideration in the Merger (a “ Stock Election ”); (ii) convert each Somerset Share owned by such holder into the right to receive the Cash Consideration in the Merger (a “ Cash Election ”); or (iii) convert a portion of the Somerset Shares owned by such holder into the right to receive the Cash Consideration in the Merger, and a portion of the Somerset Shares owned by each such holder into the right to receive the Fulton Stock Consideration in the Merger, in the ratio of Fulton Stock Consideration to Cash Consideration of either 80%/20% or 60%/40% (a “ Cash/Stock Election ”). A Form of Election (as defined below) shall be included with each copy of the Proxy Statement/Prospectus (as defined in Section 6.1(b)) mailed to shareholders of Somerset in connection with the meeting of shareholders called to consider the approval of this Agreement. Fulton and Somerset shall each use its reasonable best efforts to mail or otherwise make available the Form of Election to all persons who become holders of Somerset Shares during the period between the record date for such shareholder meeting and the Election Deadline (as defined in Section 2.2(a)(iv)).

 

(ii) Fulton shall prepare a form (the “ Form of Election ”), which shall be in form and substance acceptable to Somerset, pursuant to which each holder of Somerset Shares, no later than at the close of business on the Election Deadline, may make an Election and which shall be mailed to the Somerset shareholders in

 

- 4 -

accordance with Section 2.2(a)(i) so as to permit Somerset’s shareholders to exercise their right to make an Election on or prior to the Election Deadline.

 

(iii) Holders of record of Somerset Shares who hold such shares as nominees, trustees, or in other representative capacities may submit multiple Forms of Election, provided that such representative certifies that each Form of Election covers all Somerset Shares held by such representative for a particular beneficial owner.

 

(iv) Not later than the filing of the Proxy Statement/Prospectus with the Securities and Exchange Commission (the “ SEC ”), as contemplated in Section 6.1(b) hereof, Fulton shall appoint Fulton Financial Advisors, National Association, as the person to receive Forms of Election and to act as exchange agent under this Agreement (the “ Exchange Agent ”). Any Somerset shareholder’s Election shall have been made properly only if the Exchange Agent shall have received, by 5:00 p.m. local time in the city in which the principal office of such Exchange Agent is located, on the date of the Election Deadline, a Form of Election properly completed and signed and accompanied by certificates for the Somerset Shares to which such Form of Election relates (or by an appropriate guarantee of delivery of such certificates, as set forth in such Form of Election, from a member of any registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company in the United States provided such certificates are in fact delivered to the Exchange Agent by the time required in such guarantee of delivery). Failure to deliver Somerset Shares covered by such a guarantee of delivery within the time set forth on such guarantee shall be deemed to invalidate any otherwise properly made Election. As used herein, “ Election Deadline ” means the date announced by Fulton (which date shall be agreed upon by Somerset), as the last day on which Forms of Election will be accepted. In the event this Agreement shall have been terminated prior to the Effective Time, the Exchange Agent shall immediately return all Election Forms and Certificates for Somerset Shares to the appropriate Somerset shareholders.

 

(v) Any Somerset shareholder may at any time prior to the Election Deadline change his Election by written notice received by the Exchange Agent prior to the Election Deadline accompanied by a revised Form of Election properly completed and signed.

 

(vi) Any Somerset shareholder may, at any time prior to the Election Deadline, revoke his Election by written notice received by the Exchange Agent prior to the Election Deadline or by withdrawal prior to the Election Deadline of his certificates for Somerset Common Stock, or of the guarantee of delivery of such certificates, previously deposited with the Exchange Agent. All Elections shall be revoked automatically if the Exchange Agent is notified in writing by Fulton or Somerset that this Agreement has been terminated. Any Somerset shareholder who shall have deposited certificates for Somerset Shares with the

 

- 5 -

Exchange Agent shall have the right to withdraw such certificates by written notice received by the Exchange Agent prior to the Election Deadline and thereby revoke his Election as of the Election Deadline if the Merger shall not have been consummated prior thereto.

 

(vii) Fulton shall have the right to make rules, not inconsistent with the terms of this Agreement, governing the validity of the Forms of Election, the manner and extent to which Elections are to be taken into account in making the determinations prescribed by Section 2.2, the issuance and delivery of certificates for Fulton Common Stock into which Somerset Shares are converted in the Merger and the payment of cash for Somerset Shares converted into the right to receive the Cash Consideration in the Merger.

 

(b) Issuance of Fulton Stock Consideration and Payment of Cash Consideration; Proration . The manner in which each Somerset Share (except Somerset Shares to be cancelled as set forth in Section 2.1(d)) shall be converted into the Fulton Stock Consideration, the Cash Consideration or the right to receive a combination of Fulton Stock Consideration and Cash Consideration at the Effective Time shall be as set forth in this Section 2.2(b).

 

(i) As is more fully set forth below, the number of Shares to be converted into the right to receive the Cash Consideration in the Merger pursuant to this Agreement shall not exceed forty percent (40%) of all Outstanding Shares (the “ Maximum Cash Percentage ”) and shall not be less than twenty percent (20%) of all Outstanding Shares (the “ Minimum Cash Percentage ”); provided, however, that (A) for federal income tax purposes, it is intended that the Merger should qualify as a reorganization under the provisions of Section 368(a) of the Code and, notwithstanding anything to the contrary contained herein, in order that the Merger will not fail to satisfy continuity of interest requirements under applicable federal income tax principles relating to reorganizations under Section 368(a) of the Code, as reasonably determined by Barley, Snyder, Senft & Cohen, LLC, Fulton shall increase the number of Outstanding Shares that will be converted into the Fulton Stock Consideration and reduce the number of Outstanding Shares that will be converted into the right to receive the Cash Consideration and (B) any shares issuable under Fulton Stock Options issued under Section 2.3 herein shall be considered as having been issued in the Merger in calculating compliance with the Maximum Cash Percentage and the Minimum Cash Percentage.

 

(ii) If the percentage of Outstanding Shares for which a Cash Election is made (including the cash portion of any Cash/Stock Elections) exceeds the Minimum Cash Percentage and is less than the Maximum Cash Percentage, all Elections shall be honored as submitted and all Non-Electing Shares shall be converted into Fulton Stock Consideration.

 

- 6 -

(iii) If the percentage of Outstanding Shares for which a Cash Election is made (including the cash portion of any Cash/Stock Elections) exceeds the Maximum Cash Percentage: (A) Each Somerset Share for which the holder made a Stock Election, the portion of each Cash/Stock Election electing Fulton Stock Consideration (collectively, the “ Aggregate Stock Elections ”) and each Non-Electing Share shall be converted in the Merger into the Fulton Stock Consideration. Each Somerset Share for which a Cash Election has been received and the portion of a Cash/Stock Election electing Cash Consideration (collectively, the “ Aggregate Cash Elections ”) shall be converted into the right to receive Cash Consideration and Fulton Stock Consideration in the following manner:

 

(A) Each Somerset Shareholder shall have the Pro-rated Cash Percentage of the shares for which he or she elected Cash Consideration (including the cash portion of any Cash/Stock Election) converted into the Cash Consideration;

 

(B) Each Somerset Shareholder shall have the Remaining Stock Percentage of the shares for which he or she elected Cash Consideration (including the portion of any Cash/Stock Election electing Cash Consideration) converted into the Fulton Stock Consideration; and

 

(C) For the purposes of the foregoing:

 

“ Aggregate Cash Election Percentage ” shall mean the percentage of Outstanding Shares represented by the Aggregate Cash Elections.

 

“ Pro-rated Cash Percentage ” shall mean the percentage determined by the following formula:

 

1 – [( Aggregate Cash Election Percentage – 40%)/40% ]

 

“ Remaining Stock Percentage ” shall mean the percentage determined by subtracting the Pro-rated Cash Percentage from 100%.

 

(iv) If Cash Elections (including the cash portion of any Cash/Stock Elections) are less than the Minimum Cash Percentage: Each Somerset Share for which the Aggregate Cash Elections have been made and each Non-Electing Share shall be converted in the Merger into the Cash Consideration. Each Somerset Share for which a Aggregate Stock Elections have been made shall be converted into the right to receive the Cash Consideration and Fulton Stock Consideration in the following manner:

 

(A) Each Somerset Shareholder shall have the Pro-rated Stock Percentage of the shares for which he or she elected Fulton Stock Election converted into the Fulton Stock Consideration;

 

- 7 -

(B) Each Somerset Shareholder shall have the Remaining Cash Percentage of the shares for which he or she elected Fulton Stock Consideration (including the portion of any Cash/Stock Election electing Fulton Stock Consideration) converted into the Cash Consideration; and

 

(C) For the purposes of the foregoing:

 

“ Aggregate Stock Election Percentage ” shall mean the percentage of Outstanding Shares represented by the Aggregate Stock Elections.

 

“ Pro-rated Stock Percentage ” shall mean the percentage determined by the following formula:

 

1-[( Aggregate Stock Election Percentage – 80%)/80]

 

“ Remaining Cash Percentage ” shall mean the percentage determined by subtracting the Pro-rated Stock Percentage from 100%.

 

(v) If Non-Electing Shares are not converted under Sections (i)-(iv) above, the Exchange Agent shall convert each Non-Electing Share into the Fulton Stock Consideration.

 

(vi) For the purposes of this Section 2.2, Outstanding Shares as to which an Election is not in effect at the Election Deadline shall be called “ Non-Electing Shares .” If Fulton shall determine that any Election is not properly made with respect to any Somerset Shares, such Election shall be deemed to be not in effect, and the Somerset Shares covered by such Election shall, for purposes hereof, be deemed to be Non-Electing Shares. Fulton and the Exchange Agent shall have no obligation to notify any person of any defect in any Form of Election submitted to the Exchange Agent.

 

(vii) The Exchange Agent shall make all computations contemplated by this Section 2.2 and all such computations shall be conclusive and binding on the holders of Somerset Shares absent manifest error.

 

(c) Issuance of Fulton Stock Consideration .

 

(i) Immediately prior to the Effective Time, Fulton shall deliver to the Exchange Agent, in trust for the benefit of the holders of Somerset Shares, certificates representing an aggregate number of shares of Fulton Common Stock as nearly as practicable equal to the number of shares to be converted into Fulton Common Stock as determined in Section 2.2(b)

 

(ii) As soon as practicable on the day of the Closing (but after the Effective Time), each holder of Somerset Shares converted into Fulton Stock

 

- 8 -

Consideration pursuant to Article II, upon proper surrender to the Exchange Agent with a properly completed Letter of Transmittal (to the extent not previously surrendered with a Form of Election ) of one or more certificates for such Somerset Shares for cancellation, shall be entitled to receive (and the Exchange Agent shall deliver) certificates representing the number of shares of Fulton Common Stock into which such Somerset Shares shall have been converted in the Merger.

 

(iii) No dividends or distributions that have been declared, if any, will be paid to persons entitled to receive certificates for shares of Fulton Common Stock until such persons surrender their certificates at which time all such dividends and distributions shall be paid. In no event shall the persons entitled to receive such dividends be entitled to receive interest on such dividends. If any certificate for such Fulton Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the person requesting such exchange shall pay to the Exchange Agent any transfer taxes or other taxes required by reason of issuance in a name other than the registered holder of the certificate surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of Somerset Shares for any Fulton Common Stock or dividends thereon delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

(d) Payment of Cash Consideration . Immediately prior to the Effective Time, Fulton shall deposit with the Exchange Agent, in trust for the benefit of the holders of Somerset shares, an amount in cash equal to the Cash Consideration to be paid to holders of Somerset Shares to be converted into the right to receive the Cash Consideration as determined in Section 2.2(b). As soon as practicable on the day of the Closing (but after the Effective Time), the Exchange Agent shall distribute to holders of Somerset Shares converted into the right to receive the Cash Consideration and determined in accordance with Section 2.2(b), upon proper surrender to the Exchange Agent (to the extent not previously surrendered with a Form of Election) of one or more Certificates for such Somerset Shares for cancellation, a bank check for an amount equal to the Cash Consideration times the number of Somerset Shares to converted. In no event shall the holder of any such surrendered certificates be entitled to receive interest on any of the Cash Consideration to be received in the Merger. If such check is to be issued in the name of a person other than the person in whose name the certificates surrendered for exchange therefor are registered, it shall be a condition of the exchange that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of issuance of such check to a person other than the registered holder of the certificates surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of Somerset for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

- 9 -

(e) Letter of Transmittal . Fulton will instruct the Exchange Agent to mail to each holder of record of Certificates who has not previously surrendered such holder’s certificates with a validly executed Form of Election as soon as reasonably practical after the Effective Time, (i) a Letter of Transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such holder’s certificates shall pass, only upon proper delivery of the certificates to the Exchange Agent and shall be in such form and have such other provisions as shall be agreed upon by Somerset prior to the Effective Time) and (ii) instructions for use in effecting the surrender of certificates in exchange for the Merger Consideration (the “ Letter of Transmittal ”).

 

(f) Missing Certificates .

 

(i) If any holder of Somerset Shares convertible into the right to receive the Merger Consideration is unable to deliver the certificate which represents such shares, the Exchange Agent shall deliver to such holder the Merger Consideration to which the holder is entitled for such shares upon presentation of the following:

 

(A) evidence to the reasonable satisfaction of Fulton that any such certificate has been lost, wrongfully taken or destroyed;

 

(B) such security or indemnity as may be reasonably requested by Fulton to indemnify and hold harmless Fulton and the Exchange Agent; and

 

(C) evidence satisfactory to Fulton that such person is the owner of the shares theretofore represented by each certificate claimed to be lost, wrongfully taken or destroyed and that the holder is the person who would be entitled to present such certificate for payment pursuant to this Agreement

 

(ii) Fulton shall receive any remaining Cash Consideration and Fulton Stock Consideration on deposit with the Exchange Agent on the date which is one year after the Effective Date and any shareholder of Somerset who has not surrendered his certificate(s) to the Exchange Agent prior to such time shall be entitled to receive the Merger Consideration without interest upon the surrender of such certificate(s) to Fulton, subject to applicable escheat or abandoned property laws.

 

(iii) In the event that any Certificates have not been surrendered for exchange in accordance with this Section on or before the first anniversary of the Effective Time, Fulton may at any time thereafter, with or without notice to the holders of record of such Certificates, sell for the accounts of any or all of such holders any or all of the shares of Fulton Common Stock which such holders are entitled to receive under Article II hereof (the “ Unclaimed Shares ”). Any such sale may be made by public or private sale or sale at any broker’s board or on any securities exchange in such manner and at such times as Fulton shall determine. If, in the opinion of counsel for Fulton, it is necessary or desirable, any

 

- 10 -

Unclaimed Shares may be registered for sale under the Securities Act of 1933, as amended (the “ 1933 Act ”), and applicable state laws, Fulton shall not be obligated to make any sale of Unclaimed Shares if it shall determine not to do so, even if notice of the sale of the Unclaimed Shares has been given. The net proceeds of any such sale of Unclaimed Shares shall be held for holders of the unsurrendered Certificates whose Unclaimed Shares have been sold, to be paid to them upon surrender of the certificates for shares of Fulton Common Stock. From and after any such sale, the sole right of the holders of the unsurrendered Certificates whose Unclaimed Shares have been sold shall be the right to collect the net sale proceeds held by Fulton for their respective accounts, and such holders shall not be entitled to receive any interest on such net sale proceeds held by Fulton. If outstanding certificates are not surrendered or the payment for them is not claimed prior to the date on which such payments 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 laws, escheat laws and any other applicable law, become the property of Fulton (and to the extent not in its possession shall be paid over to it), free and clear of all claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, none of Fulton, Somerset, the Exchange Agent or any other person shall be liable to any former holder of shares of Somerset Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.

 

(g) Withholding Rights . Fulton shall be entitled to deduct and withhold, or cause the Exchange Agent to deduct and withhold, from funds provided by the holder or from the consideration otherwise payable pursuant to this Agreement to any holder of Somerset Shares, the minimum amounts (if any) that Fulton is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of tax law. To the extent that amounts are so withheld by Fulton, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Somerset Shares in respect of which such deduction and withholding was made by Fulton.

 

(h) Expenses . All costs and expenses associated with the foregoing surrender and exchange procedure shall be borne by Fulton.

 

Section 2.3 Treatment of Outstanding Somerset Options.

 

(a) At the Effective Time, each option (collectively, “ Somerset Options ”) to purchase shares of Somerset Common Stock that (i) is outstanding at the Effective Time, (ii) has been granted pursuant to Somerset’s 1997 Restated Incentive Stock Option Plan, 2000 Incentive Stock Option Plan, as amended, 2000 Directors Stock Option Plan and 2003 Directors Stock Option Plan (collectively, the “ Somerset Stock Option Plans ”); and (iii) would otherwise survive the Effective Time, in the absence of the transactions contemplated by this Agreement, shall, at the option of the holder of a Somerset Option exercised on or before the Election Deadline, either (A) be entitled to cash in the amount of the number of

 

- 11 -

shares of Somerset stock covered by such Somerset Option multiplied by excess, if any, of $21.00 over the exercise price per share of such Somerset Option or (B) be assumed by Fulton through the grant of an option to acquire shares of Fulton Common Stock on the terms set forth below (each Somerset Option, as assumed, a “ Fulton Stock Option ”). In the absence of an election by the holder of a Somerset Option and subject to the next sentence, Somerset Options held by such holder shall be converted to Fulton Stock Options; provided, however, that a minimum of twenty percent (20%) of the Somerset Shares covered by Somerset Options shall be converted into cash. In the event that holders of less than such percentage elect conversion into cash, Fulton and Somerset shall agree upon a proration procedure that achieves such a minimum percentage.

 

(b) A Fulton Stock Option shall be a stock option to acquire shares of Fulton Common Stock with the following terms: (i) the number of shares of Fulton Common Stock which may be acquired pursuant to such Fulton Stock Option shall be equal to the product of the number of shares of Somerset Common Stock covered by the Somerset Option multiplied by the Conversion Ratio, provided that any fractional share of Fulton Common Stock resulting from such multiplication shall be rounded to the nearest whole share; (ii) the exercise price per share of Fulton Common Stock shall be equal to the exercise price per share of Somerset Common Stock of such Somerset Option, divided by the Conversion Ratio, provided that such exercise price shall be rounded to the nearest whole cent; (iii) the duration and other terms of such Fulton Stock Option shall be identical to the duration and other terms of such Somerset Option (except to the extent that vesting thereof is to be accelerated under the terms of the Somerset Stock Option Plans or the Somerset Options) except that all references to Somerset shall be deemed to be references to Fulton and its affiliates, where the context so requires and shall remain exercisable until the stated expiration date of the corresponding Somerset Option; (iv) Fulton shall assume such Somerset stock option, whether vested or not vested, as contemplated by Section 424(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”); and (v) to the extent Somerset Options qualify as incentive stock options under Section 422 of the Code, the Fulton Stock Options exchanged therefor shall also so qualify. In connection with the foregoing, (i) the foregoing is intended to effect an assumption of a Somerset Option by Fulton under Section 424(a) of the Code and (ii) neither a Fulton Option nor the assumption of a Somerset Option shall give the holder of a Somerset Option additional benefits which he did not have under such Somerset Option within the meaning of Section 424(a)(1) of the Code. Subject to the Fulton Stock Options and the foregoing, the Somerset Stock Option Plans and all options or other rights to acquire Somerset Common Stock issued thereunder shall terminate at the Effective Time. Fulton shall not issue or pay for any fractional shares otherwise issuable upon exercise of a Fulton Stock Option.

 

(c) Prior to the Effective Time, Fulton shall take appropriate action to reserve for issuance and, if not previously registered pursuant to the Securities Act of 1933, as amended (the “ 1933 Act ”), register the number of shares of Fulton Common Stock necessary to satisfy Fulton’s obligations with respect to the issuance of Fulton Common Stock pursuant to the exercise of Fulton Stock Options and under Section 2.3.

 

- 12 -

(d) On or before the Election Deadline (to the extent required as determined by Fulton or Somerset under applicable law, the terms of the Somerset Stock Option Plans or otherwise), Fulton shall receive agreements from each holder of a Somerset Option that does not elect to exercise such Somerset Option immediately prior to the Effective Time and have the Somerset Common Stock acquired as a result of such exercise converted into cash or Fulton Common Stock pursuant to Section 2.1 of this Agreement, pursuant to which each such holder agrees to accept cash or a Fulton Stock Option in substitution for the Somerset Option, as of the Effective Time.

 

(e) Schedule 2.3 sets forth a listing of each Somerset Option as of the date of this Agreement (copies of which have been provided to Fulton), including the optionee, date of grant, shares of Somerset Common Stock subject to such Option, the exercise price of such Option, expiration date, and classification as an incentive stock option or a nonqualified stock option.

 

Section 2.4 Reservation of Shares. Fulton agrees that (i) prior to the Effective Time it will take appropriate action to reserve a sufficient number of authorized but unissued shares of Fulton Common Stock to be issued in accordance with this Agreement, and (ii) at the Effective Time, Fulton will issue shares of Fulton Common Stock to the extent set forth in, and in accordance with, this Agreement.

 

Section 2.5 Taking Necessary Action. Fulton and Somerset shall take all such actions as may be reasonably necessary or appropriate in order to effectuate the transactions contemplated hereby including, without limitation, providing information necessary for preparation of any filings needed to obtain the regulatory approvals required to consummate the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Fulton with full title to all properties, assets, rights, approvals, immunities and franchises of Somerset, the officers and directors of Somerset, at the expense of Fulton, shall use commercially reasonable efforts to take all such necessary action.

 

Section 2.6 Press Releases, Etc. Fulton and Somerset agree that all press releases or other public communications relating to this Agreement or the transactions contemplated hereby will require mutual approval by Fulton and Somerset, unless counsel has advised any such party that such release or other public communication must immediately be issued and the issuing party has not been able, despite its good faith efforts, to obtain such approval.

 

Section 2.7 Fulton Common Stock. Each share of Fulton Common Stock that is issued and outstanding immediately before the Effective Time shall, on and after the Effective Time, remain issued and outstanding as one (1) share of Fulton Common Stock, and each holder thereof shall retain his rights therein. The holders of the shares of Fulton Common Stock outstanding immediately prior to the Effective Time shall, immediately after the Effective Time, continue to hold a majority of the outstanding shares of Fulton Common Stock.

 

Section 2.8 Dissenters’ Rights. Pursuant to Section 14A:11-1(1)(a)(i)(B) of the BCA, the shareholders of Somserset shall not be entitled to exercise dissenters’ rights.

 

- 13 -

Section 2.9 Certain Actions. Prior to the Effective Time, Fulton and Somerset shall take all such steps as may be required to cause any dispositions of shares of Somerset Common Stock (including derivative securities with respect to such shares) resulting from the transactions contemplated by Article II of this Agreement by each individual who is subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), with respect to Somerset to be exempt under Rule 16b-3 promulgated under the 1934 Act, such steps to be taken in accordance with the No-Action Letter dated January 12, 1999 issued by the SEC to Skadden, Arps, Slate, Meagher & Flom LLP.

 

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SOMERSET

 

Somerset represents and warrants to Fulton, as of the date of this Agreement, as follows:

 

Section 3.1 Authority. The execution and delivery of this Agreement, the Warrant Agreement and the Warrant and the performance of the transactions contemplated herein and therein have been authorized by the Board of Directors of Somerset. At a meeting duly called and held, by a vote of at least a majority of the members of the Board of Directors, the Board of Directors (i) approved the Merger and this Agreement, and (ii) directed that this Agreement and Merger be submitted for approval by its shareholders with the recommendation of the Board of Directors that the shareholders of Somerset approve this Agreement, the Merger and the transactions contemplated thereby, and, except for the approval of this Agreement by its shareholders, Somerset has taken all corporate action necessary on its part to authorize this Agreement, the Warrant Agreement and the Warrant and the performance of the transactions contemplated herein and therein. This Agreement, the Warrant Agreement and the Warrant have been duly executed and delivered by Somerset and, assuming due authorization, execution and delivery by Fulton, constitute valid and binding obligations of Somerset, enforceable in accordance with their respective terms, except to the extent enforcement is limited by bankruptcy, insolvency and other similar laws affecting creditor’s rights and the laws, regulations and rules affecting financial institutions. The execution, delivery and performance of this Agreement, the Warrant Agreement and the Warrant will not constitute a violation or breach of or default under (i) the Certificate of Incorporation or Bylaws of Somerset, (ii) the Certificate of Incorporation or Bylaws of Somerset Bank, (iii) any statute, rule, regulation, order, decree or directive of any governmental authority or court applicable to Somerset or any Somerset Subsidiary, subject to the receipt of all required governmental approvals, or (iv) any agreement, contract, memorandum of understanding, indenture or other instrument to which Somerset or any Somerset Subsidiary is a party or by which Somerset or any Somerset Subsidiary or any of their properties are bound.

 

Section 3.2 Organization and Standing. Somerset is a corporation that is duly organized, validly existing and in good standing under the laws of the State of New Jersey. Somerset is a bank holding company under the BHC Act, and has full power and lawful authority to own and hold its properties and to carry on its business as presently conducted. Somerset Bank is a banking corporation that is duly organized, validly existing and in good standing under the laws of the State of New Jersey. Somerset Bank is an insured bank under the provisions of the Federal Deposit Insurance Act, as amended (the “ FDI Act ”), and is not a member of the Federal Reserve System. Somerset Bank has full power and lawful authority to

 

- 14 -

own and hold its properties and to carry on its business as presently conducted. Each of the Somerset Subsidiaries currently conducting operations other than Somerset Bank is an entity or business trust that is duly organized, validly existing and in good standing under the laws of its state of incorporation or formation. Each of the Somerset Subsidiaries currently conducting operations has full power and lawful authority to own and hold its properties and to carry on its business as presently conducted.

 

Section 3.3 Subsidiaries. Somerset Bank, SVB Bald Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II are wholly-owned subsidiaries of Somerset (except that Somerset owns 100% of the common securities of such trusts and third parties own the capital securities issued by such trusts). Somerset Valley Investment Company, Inc. is a wholly-owned subsidiary of Somerset Bank, and West End One Corp. is a wholly owned subsidiary of Somerset Valley Investment Company, Inc. Except for the Somerset Subsidiaries, Somerset owns no subsidiaries, directly or indirectly, other than as described on Schedule 3.3 .

 

Section 3.4 Capitalization. The authorized capital of Somerset consists exclusively of 20,000,000 shares of Somerset Common Stock. As of the date of this Agreement 4,060,445 shares of Somerset Common Stock are outstanding, all of which are validly issued, fully paid and non-assessable. In addition, 421,826 shares of Somerset Common Stock are subject to issuance upon the exercise of Somerset Options and 1,008,775 shares of Somerset Common Stock will be reserved for issuance upon exercise of the Warrant. Except for the Somerset Options and the Warrant, there are no outstanding obligations, options or rights of any kind entitling other persons to acquire shares of Somerset Common Stock and there are no outstanding securities or other instruments of any kind that are convertible into shares of Somerset Common Stock. The authorized capital of Somerset Bank consists exclusively of shares of common stock (the “ Somerset Bank Common Stock ”) and preferred stock (“ Somerset Bank Preferred Stock ”). All of the outstanding shares of Somerset Bank Common Stock and Somerset Bank Preferred Stock are owned beneficially and of record by Somerset and are validly issued, outstanding and fully-paid and non-assessable. There are no outstanding obligations, options or rights of any kind entitling other persons to acquire shares of Somerset Bank Common Stock, and there are no outstanding securities or instruments of any kind that are convertible into shares of Somerset Bank Common Stock. All outstanding shares of the capital stock or membership interests, as applicable, of the other Somerset Subsidiaries are owned beneficially and of record by Somerset or Somerset Bank, as appropriate, except that, in the case of SVB Bald Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II, Somerset owns 100% of the common securities and the purchasers thereof own the capital securities issued by each said trust. There are no outstanding obligations, options or rights of any kind entitling other persons to acquire shares of such Somerset Subsidiaries, and there are no outstanding securities or instruments of any kind that are convertible into shares of such Somerset Subsidiaries. The Common Stock of Somerset Bank and the common stock or membership interests of the other Somerset Subsidiaries are sometimes collectively referred to herein as the “ Somerset Subsidiaries Common Equity ”.

 

Section 3.5 Charter, Bylaws and Minute Books. The copies of the Certificate of Incorporation and Bylaws or Certificate of Organization and Operating Agreements (or, with respect to SVB Bald Eagle Statutory Trust I and SVB Bald Eagle Statutory Trust II, their trust

 

- 15 -

declarations) of Somerset and the Somerset Subsidiaries that have been made available to Fulton for inspection are true, correct and complete. Except as previously disclosed to Fulton in writing, the minute books of Somerset and the Somerset Subsidiaries that have been made available to Fulton for inspection are true, correct and complete in all material respects and accurately record the actions taken by the Boards of Directors and shareholders or members of Somerset and the Somerset Subsidiaries at the meetings documented in such minutes, excluding information related to the transactions contemplated by this Agreement and to any other merger, consolidation, share exchange or sale, exchange or other disposition of all, or substantially all, of Somerset’s property or assets.

 

Section 3.6 Financial Statements.

 

(a) Somerset has delivered to Fulton the following financial statements: Consolidated Balance Sheets of Somerset at December 31, 2003 and 2002 and Consolidated Statements of Income, Statements of Shareholders’ Equity, and Consolidated Statements of Cash Flows of Somerset for the years ended December 31, 2001, 2002 and 2003, audited by Grant Thornton LLP, and set forth in the 2003 Annual Report to Somerset’s shareholders and unaudited Consolidated Balance Sheets of Somerset at September 30, 2004 and unaudited Consolidated Statements of Income for the nine-month periods ended September 30, 2003 and 2004, unaudited Consolidated Statements of Stockholders’ Equity for the nine-month periods ended September 30, 2004 and 2003 and unaudited Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2004 and 2003, as filed with the SEC in a Quarterly Report on Form 10-Q (the aforementioned Balance Sheet as of September 30, 2003 being hereinafter referred to as the “ Somerset Balance Sheet ”). Each of the foregoing financial statements fairly present the consolidated financial position, and results of operations and cash flows of Somerset at their respective dates and for the respective periods then ended and has been prepared in accordance with United States generally accepted accounting principles consistently applied, except as otherwise noted in a footnote thereto and except for (i) the omission of the notes from the financial statements applicable to any interim period and (ii) with respect to any interim period, normal year-end adjustments.

 

(b) Except (A) as reflected in Somerset’s unaudited balance sheet at September 30, 2004 or liabilities described in any notes thereto (or liabilities for which neither accrual nor footnote disclosure is required pursuant to GAAP) or (B) for liabilities incurred in the ordinary course of business since September 30, 2004 consistent with past practices or in connection with this Agreement or the transactions contemplated hereby, neither Somerset nor any of its subsidiaries has any material liabilities or obligations of any nature. Schedule 3.6 lists and Somerset has delivered to Fulton copies of the documentation creating or governing, all securitization transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of Regulation S-K of the SEC) effected by Somerset or its subsidiaries since Grant Thornton LLP expressed its opinion with respect to the financial statements of Somerset and its subsidiaries included in Somerset’s SEC Documents (including the related notes).

 

- 16 -

(c) Grant Thorton LLP is and has been (x) since September 24, 2003, a registered public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act of 2002 (the “ SOX Act ”)), (y) throughout the periods covered by such financial statements, “independent” with respect to Somerset within the meaning of Regulation S-X, and (z) since May 6, 2003, in compliance with subsections (g) through (l) of Section 10A of the 1934 Act and the related Rules of the SEC and the Public Company Accounting Oversight Board. Schedule 3.6 lists all non-audit services performed by Grant Thornton LLP for Somerset and its subsidiaries since January 1, 2002.

 

(d) Each of Somerset and the Somerset Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal accounting controls which provide assurance that (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of Somerset and to maintain accountability for Somerset’s consolidated assets; (iii) access to Somerset’s assets is permitted only in accordance with management’s authorization; (iv) the reporting of Somerset’s assets is compared with existing assets at regular intervals; and (v) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.

 

(e) Somerset has, on a timely basis, filed all forms, reports and documents required to be filed by it with the SEC since January 1, 2002. Schedule 3.6 lists, and except to the extent available in full without redaction on the SEC’s website through the Electronic Data Gathering, Analysis and Retrieval System (“ EDGAR ”) has delivered to Fulton copies in the form filed with the SEC of (i) Somerset’s Annual Reports on Form 10-K for each fiscal year of Somerset from and after January 1, 2002, (ii) its Quarterly Reports on Form 10-Q for each of the first three fiscal quarters in each of the fiscal years of Somerset referred to in clause (i) above, (iii) all proxy statements relating to Somerset’s meetings of stockholders (whether annual or special) held, and all information statements relating to stockholder consents since the beginning of the first fiscal year referred to in clause (i) above, (iv) all certifications and statements required by (x) the SEC’s Order dated June 27, 2002 pursuant to Section 21(a)(1) of the 1934 Act (File No. 4-460), (y) 18 U.S.C. §1350 (Section 906 of the SOX Act) with respect to any report referred to in clause (i) or (iii) above, (y) all other forms, reports, registration statements and other documents (other than preliminary materials if the corresponding definitive materials have been provided to Fulton pursuant to this Section 3.6) filed by Somerset with the SEC since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements and other documents referred to in clauses (i), (ii), (iii), (iv) and (v) above are, collectively, the “ Somerset SEC Reports ” and, to the extent available in full without redaction on the SEC’s website through EDGAR two days prior to the date of this Agreement, are, collectively, the “ Filed Somerset SEC Reports ”), and (vi) all comment letters received by Somerset from the Staff of the SEC since January 1, 2002 and all responses to such comment letters by or on behalf of Somerset. The Somerset SEC Reports (x) were or will be prepared in accordance with the requirements of the 1933 Act and the 1934 Act, as the case may be, and the rules and

 

- 17 -

regulations thereunder and (y) did not at the time they were filed with the SEC, or will not at the time they are filed with the SEC, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. No Subsidiary of Somerset is or has been required to file any form, report, registration statement or other document with the SEC.

 

(f) Somerset maintains disclosure controls and procedures required by Rule 13a-15 or 15d-15 under the 1934 Act; such controls and procedures are effective to ensure that all material information concerning Somerset and its subsidiaries is made known on a timely basis to the individuals responsible for the preparation of Somerset’s filings with the SEC and other public disclosure documents. Schedule 3.6 lists, and Somerset has delivered to Fulton copies of, all written descriptions of, and all policies, manuals and other documents promulgating, such disclosure controls and procedures. To Somerset’s knowledge, each director and executive officer of Somerset has filed with the SEC on a timely basis all statements required by Section 16(a) of the 1934 Act and the rules and regulations thereunder since January 1, 2002. As used in this Section 3.6, the term “file” shall be broadly construed to include any manner in which a document or information is furnished, supplied or otherwise made available to the SEC. To the extent required, Somerset and Somerset Bank have in place “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15(d)-15(e) of the 1934 Act to allow Somerset’s management to make timely decisions regarding required disclosures and to make the certifications of the Chief Executive Officer and Chief Financial Officer of Somerset required under the 1934 Act. Since September 30, 2004, there has not been any material change in the internal controls utilized by the Somerset to assure that its consolidated financial statements conform with GAAP. Without limiting the generality of the foregoing, Somerset’s disclosures and controls are designed and maintained to ensure that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences, (v) all information (both financial and non-financial) required to be disclosed by Somerset in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and (vi) all such information is accumulated and communicated to Somerset’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the Chief Executive Officer and Chief Financial Officer of Somerset required under the 1934 Act with respect to such reports. None of Somerset’s or any Somerset Subsidiary’s records, systems, controls, data or information are recorded, stored, maintained, operated or otherwise wholly or partly dependent on or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Somerset or the Somerset Subsidiaries or their independent accountants.

 

- 18 -

(g) The Chief Executive Officer and the Chief Financial Officer of Somerset has signed, and Somerset has furnished to the SEC, all certifications required by Sections 302 and 906 of the SOX Act of 2002; such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn; and neither Somerset nor any of its officers has received notice from any Governmental Entity questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certifications.

 

(h) Somerset heretofore has provided to Fulton complete and correct copies of all certifications filed with the SEC pursuant to Sections 302 and 906 of the SOX Act and hereby reaffirms, represents and warrants to Fulton the matters and statements made in such certificates.

 

Section 3.7 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.7 , or as reflected, noted or adequately reserved against in the Somerset Balance Sheet, at September 30, 2004, Somerset had no material liabilities (whether accrued, absolute, contingent or otherwise) which were required to be reflected, noted or reserved against in the Somerset Balance Sheet under generally accepted accounting principles. Except as disclosed in Schedule 3.7 , Somerset and the Somerset Subsidiaries have not incurred, since September 30, 2004, any such liability, other than liabilities of the same nature as those set forth in the Somerset Balance Sheet, all of which have been incurred in the Ordinary Course of Business. For purposes of this Agreement, the term “ Ordinary Course of Business ” shall mean the ordinary course of business consistent with Somerset’s and the Somerset Subsidiaries’ customary business practices.

 

Section 3.8 Absence of Changes. Since September 30, 2004, Somerset and the Somerset Subsidiaries have each conducted their businesses in the Ordinary Course of Business and, except as disclosed in Schedule 3.8 , neither Somerset nor the Somerset Subsidiaries have undergone any changes in its condition (financial or otherwise), assets, liabilities, business, operations, or future prospects other than changes in the Ordinary Course of Business, which have not been, in the aggregate, materially adverse as to Somerset and the Somerset Subsidiaries on a consolidated basis.

 

Section 3.9 Dividends, Distributions and Stock Purchases. Since September 30, 2004, Somerset has not declared, set aside, made or paid any dividend or other distribution in respect of the Somerset Common Stock, or purchased, issued or sold any shares of Somerset Common Stock or the Somerset Subsidiaries Common Equity other than a stock dividend of 5% paid on October 28, 2004.

 

Section 3.10 Taxes. Somerset and Somerset Bank have filed all federal, state, county, municipal and foreign tax returns, reports and declarations which are required to be filed by them or either of them as of September 30, 2004. Except as disclosed in Schedule 3.10 : (i) Somerset and Somerset Bank have paid all taxes, penalties and interest which have become due pursuant thereto or which became due pursuant to federal, state, county, municipal or foreign tax laws applicable to the periods covered by the foregoing tax returns, (ii) neither Somerset nor the Somerset Subsidiaries have received any notice of deficiency or assessment of additional taxes, and no tax audits are in process; and (iii) the Internal Revenue Service (the “ IRS ”) has not

 

- 19 -

commenced or given notice of an intention to commence any examination or audit of the federal income tax returns of Somerset or Somerset Bank for any year through and including the year ended December 31, 2003. Except as disclosed in Schedule 3.10 , neither Somerset nor the Somerset Subsidiaries have granted any waiver of any statute of limitations or otherwise agreed to any extension of a period for the assessment of any federal, state, county, municipal or foreign income tax. Except as disclosed in Schedule 3.10 , the accruals and reserves reflected in the Somerset Balance Sheet are adequate to cover all taxes (including interest and penalties, if any, thereon) that are payable or accrued as a result of Somerset’s consolidated operations for all periods prior to the date of such Balance Sheet .

 

Section 3.11 Title to and Condition of Assets. Except as disclosed in Schedule 3.11 , Somerset and the Somerset Subsidiaries have good and marketable title to all material consolidated real and personal properties and assets reflected in the Somerset Balance Sheet or acquired subsequent to September 30, 2004, (other than property and assets disposed of in the Ordinary Course of Business), free and clear of all liens or encumbrances of any kind whatsoever; provided, however, that the representations and warranties contained in this sentence do not cover liens or encumbrances that: (i) are reflected in the Somerset Balance Sheet or in Schedule 3.11 ; (ii) represent liens of current taxes not yet due or which, if due, may be paid without penalty, or which are being contested in good faith by appropriate proceedings; and (iii) represent such imperfections of title, liens, encumbrances, zoning requirements and easements, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present use, of the properties and assets subject thereto. The material structures and other improvements to real estate, furniture, fixtures and equipment reflected in the Somerset Balance Sheet or acquired subsequent to September 30, 2004: (A) are in good operating condition and repair (ordinary wear and tear excepted), and (B) comply in all material respects with all applicable laws, ordinances and regulations, including without limitation all building codes, zoning ordinances and other similar laws, except where any noncompliance would not materially detract from the value, or interfere with the present use, of such structures, improvements, furniture, fixtures and equipment. Somerset and the Somerset Subsidiaries own or have the right to use all real and personal properties and assets that are material to the conduct of their respective businesses as presently conducted.

 

Section 3.12 Contracts.

 

(a) Each written or oral contract entered into by Somerset or the Somerset Subsidiaries (other than loan agreements, promissory notes, deeds of trust and other contracts with customers reasonably entered into by Somerset or the Somerset Subsidiaries in the Ordinary Course of Business) which involves aggregate payments or receipts in excess of $50,000 per year, including without limitation every employment contract, employee benefit plan, agreement, lease, license, indenture, mortgage and other commitment to which either Somerset or the Somerset Subsidiaries are a party or by which Somerset or the Somerset Subsidiaries or any of their properties may be bound (collectively referred to herein as “ Material Contracts ”) is identified in Schedule 3.12 . Except as disclosed in Schedule 3.12 , all Material Contracts are enforceable against Somerset or the Somerset Subsidiaries, as the case may be, and Somerset or the Somerset Subsidiaries have in all material respects performed all obligations required to be

 

- 20 -

performed by them to date and are not in default in any material respect and Somerset has no Knowledge (as defined in Section 3.13) of any default by a third party under a Material Contract. Schedule 3.12 identifies all Material Contracts which require the consent or approval of third parties to the execution and delivery of this Agreement or to the consummation of the transactions contemplated herein.

 

(b) Except for the Warrant Agreement and as set forth in Schedule 3.12 , as of the date of this Agreement, neither Somerset nor the Somerset Subsidiaries is a party to, or bound by, any oral or written:

 

(i) “material contract” as such term is defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC;

 

(ii) consulting agreement not terminable on thirty (30) days or less notice involving the payment of more than $20,000 per annum, in the case of any such agreement;

 

(iii) 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;

 

(iv) 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 $25,000;

 

(v) 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;

 

(vi) 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);

 

(vii) agreement, contract or understanding, other than this Agreement, and the Warrant Agreement, regarding the capital stock of Somerset and/or Somerset Bank or committing to dispose of some or all of the capital stock or substantially all of the assets of Somerset and/or Somerset Bank;

 

(viii) collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization;

 

(ix) deferred compensation plan or arrangement; or

 

(x) joint venture agreements.

 

- 21-

Section 3.13 Litigation and Governmental Directives. Except as disclosed in Schedule 3.13 , (i) there is no litigation, investigation or proceeding pending, or to the Knowledge (as that term is defined below) of Somerset or the Somerset Subsidiaries, threatened, that involves Somerset or the Somerset Subsidiaries or any of their properties and that, if determined adversely, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business or operations or future prospects of Somerset or the Somerset Subsidiaries taken as a whole; (ii) there are no outstanding orders, writs, injunctions, judgments, decrees, regulations, directives, consent agreements or memoranda of understanding issued by any federal, state or local court or governmental agency or authority or arbitration tribunal issued against or with the consent of Somerset or the Somerset Subsidiaries that materially and adversely affect the condition (financial or otherwise), assets, liabilities, business operations or future prospects of Somerset or the Somerset Subsidiaries taken as a whole or that in any material manner restrict the right of Somerset or the Somerset Subsidiaries to carry on their businesses as presently conducted taken as a whole; and (iii) neither Somerset nor the Somerset Subsidiaries have Knowledge of any fact or condition presently existing that might give rise to any litigation, investigation or proceeding which, if determined adversely to either Somerset or the Somerset Subsidiaries, would materially and adversely affect the consolidated condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Somerset or the Somerset Subsidiaries or would restrict in any material manner the right of Somerset or the Somerset Subsidiaries to carry on their businesses as presently conducted taken as a whole. All litigation (except for bankruptcy proceedings in which Somerset or the Somerset Subsidiaries have filed proofs of claim) in which Somerset or the Somerset Subsidiaries are involved as a plaintiff (other than routine collection and foreclosure suits initiated in the Ordinary Course of Business) in which the amount sought to be recovered is greater than $50,000 is identified in Schedule 3.13 . In this Agreement, the terms “ Knowledge of Somerset or Somerset Bank ” and “ Knowledge of Somerset and the Somerset Subsidiaries ” shall mean the actual knowledge of the Contract Employees (as defined in Section 3.17).

 

Section 3.14 Compliance with Laws; Governmental Authorizations. Except as disclosed in Schedule 3.14 or where noncompliance would not have a material and adverse effect upon the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Somerset or the Somerset Subsidiaries taken as a whole: (i) Somerset and the Somerset Subsidiaries are in compliance with all statutes, laws, ordinances, rules, regulations, judgments, orders, decrees, directives, consent agreements, memoranda of understanding, permits, concessions, grants, franchises, licenses, and other governmental authorizations or approvals applicable to Somerset or the Somerset Subsidiaries or to any of their properties; and (ii) all material permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals necessary for the conduct of the business of Somerset or the Somerset Subsidiaries as presently conducted have been duly obtained and are in full force and effect, and there are no proceedings pending or, to the Knowledge of Somerset threatened, which may result in the revocation, cancellation, suspension or materially adverse modification of any thereof.

 

- 22 -

Section 3.15 Insurance. All policies of insurance relating to Somerset’s and Somerset Subsidiaries’ operations (except for title insurance policies), including without limitation all financial institutions bonds, held by or on behalf of Somerset or the Somerset Subsidiaries are listed in Schedule 3.15 . All such policies of insurance are in full force and effect, and no notices of cancellation have been received in connection therewith.

 

Section 3.16 Financial Institutions Bonds. Since January 1, 2000, Somerset Bank has continuously maintained in full force and effect one or more financial institutions bonds listed in Schedule 3.16 insuring Somerset Bank against acts of dishonesty by each of its employees. No claim has been made under any such bond and Somerset Bank has no Knowledge of any fact or condition presently existing which might form the basis of a claim under any such bond. Somerset Bank has received no notice that its present financial institutions bond or bonds will not be renewed by its carrier on substantially the same terms as those now in effect.

 

Section 3.17 Labor Relations and Employment Agreements. Neither Somerset nor any of the Somerset Subsidiaries is a party to or bound by any collective bargaining agreement. To their Knowledge, Somerset and the Somerset Subsidiaries enjoy good working relationships with their employees, and there are no labor disputes pending, or to the Knowledge of Somerset or Somerset Bank threatened, that might materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or prospects of Somerset or the Somerset Subsidiaries. Except as disclosed in Schedule 3.17 , neither Somerset nor any of the Somerset Subsidiaries has any employment contract, change of control agreement or policy, severance agreement, deferred compensation agreement, consulting agreement or similar obligation (including the amendments referred to, an “ Employment Obligation ”) with any director, officer, employee, agent or consultant; provided however, that, (i) as of the date of this Agreement (and effective as of the Effective Time), each of Robert P. Corcoran and Arthur E. Brattlof has executed employment agreements (the “ Employment Agreements ”) with Fulton and Somerset Bank so as to, among other things, (A) consent to certain changes in their respective duties, powers and functions following the Merger, such agreements to be substantially in the form of Exhibit D attached hereto and (B) provide for the payment of the “change of control” payments due under the existing employment agreements of Messrs. Corcoran and Brattlof with Somerset and (ii) at the Closing, Keith B. McCarthy shall be paid the “change in control” payments provided for under his existing employment agreement and his existing deferred compensation agreement with Somerset as a result of the Merger. For the purposes of this Agreement, Messrs. Corcoran, McCarthy and Brattlof, shall be referred to herein as the “ Contract Employees ”. Except with respect to Mr. McCarthy and as disclosed in Schedule 3.17 , as of the Effective Time (as defined in Section 9.2 herein), neither Somerset nor the Somerset Subsidiaries will have any liability for employee termination rights arising out of any Employment Obligation and neither the execution of this Agreement nor the consummation of the Merger shall, by itself, entitle any employee of Somerset or the Somerset Subsidiaries to any “change of control” payments or benefits. Except as set forth on Schedule 3.17 , no payment that is owed or may become due to any director, officer, employee, or agent of Somerset or any Somerset Subsidiary as a result of the consummation of the Merger will be non-deductible to Somerset or any Somerset Subsidiary or subject to tax under IRC § 280G or § 4999; nor, except as set forth on Schedule 3.17, will Somerset or any Somerset Subsidiary be required to “gross up”

 

- 23-

or otherwise compensate any such person because of the imposition of any excise tax on a payment to such person as a result of the consummation of the Merger.

 

Section 3.18 Employee Benefit Plans. All employee benefit plans, contracts or arrangements to which Somerset or the Somerset Subsidiaries are a party or by which Somerset or the Somerset Subsidiaries are bound, including without limitation all pension, retirement, deferred compensation, savings, incentive, bonus, profit sharing, stock purchase, stock option, life insurance, death or survivor’s benefit, health insurance, sickness, disability, medical, surgical, hospital, severance, layoff or vacation plans, contracts or arrangements (collectively the “ Somerset Benefit Plans ”), but not including the Employment Obligations described in Section 3.17, are identified in Schedule 3.18 . Each of the Somerset Benefit Plans which is an “employee pension benefit plan” as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”; each such Plan being herein called a “ Somerset Pension Plan ”) is exempt from tax under Sections 401 and 501 of the Code and has been maintained and operated in material compliance with all applicable provisions of the Code and ERISA. No “prohibited transaction” (as such term is defined in Section 4975 of the Code or in ERISA) and not otherwise exempt under ERISA or the Code has occurred in respect of the Somerset Pension Plans. There have been no material breaches of fiduciary duty by any fiduciary under or with respect to the Somerset Pension Plans or any other Somerset Benefit Plan which is an employee welfare benefit plan as defined in ERISA, and no claim is pending or, to the Knowledge of Somerset, threatened with respect to any Somerset Benefit Plan other than claims for benefits made in the Ordinary Course of Business. Neither Somerset nor the Somerset Subsidiaries have incurred any material penalty imposed by the Code or by ERISA with respect to the Somerset Pension Plans or any other Somerset Benefit Plan. Within the past five years, there has not been any audit of any Somerset Benefit Plan by the U.S. Department of Labor or the IRS.

 

Section 3.19 Related Party Transactions.

 

(a) Except as disclosed in Schedule 3.19 , neither Somerset nor any of the Somerset Subsidiaries has any contract, extension of credit, or business arrangement of any kind with any of the following persons: (i) any executive officer or director (including any person who has served in such capacity since January 1, 2000) of Somerset or any of the Somerset Subsidiaries; (ii) any shareholder owning five percent (5%) or more of the outstanding Somerset Common Stock; and (iii) any “associate” (as defined in Rule 405 under the 1933 Act) of the foregoing persons or any business in which any of the foregoing persons is an officer, director, employee or five percent (5%) or greater equity owner. Each such contract or extension of credit disclosed in Schedule 3.19 , except as otherwise specifically described therein, has been made in the Ordinary Course of Business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms’ length transactions with other persons that do not involve more than a normal risk of collectability or present other unfavorable features.

 

(b) Somerset has not, since July 30, 2002, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of

 

- 24 -

Somerset. Schedule 3.19 identifies any loan or extension of credit maintained by Somerset to which the second sentence of Section 13(k)(l) of the 1934 Act applies.

 

Section 3.20 No Finder. Except as disclosed in Schedule 3.20 , neither Somerset nor any of the Somerset Subsidiaries have paid or become obligated to pay any fee or commission of any kind whatsoever to any investment banker, broker, finder, financial advisor or other intermediary for, on account of or in connection with the transactions contemplated in this Agreement.

 

Section 3.21 Complete and Accurate Disclosure. Neither this Agreement (insofar as it relates to Somerset, the Somerset Subsidiaries, the Somerset Common Stock, the Somerset Subsidiaries’ Common Equity, and the involvement of Somerset and the Somerset Subsidiaries in the transactions contemplated hereby) nor any Exhibits or Schedules to this Agreement nor the Financial Statements delivered by Somerset to Fulton pursuant to Section 3.6 contains any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omits to state any material fact necessary to make the statements contained herein or therein not false or misleading.

 

Section 3.22 Environmental Matters. Except as disclosed in Schedule 3.22 , neither Somerset nor any of the Somerset Subsidiaries has any material liability relating to any environmental contaminant, pollutant, toxic or hazardous waste or other similar substance that has been generated, used, stored, processed, disposed of or discharged onto any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor’s right) or leased by Somerset or any of the Somerset Subsidiaries and which is required to be reflected, noted or adequately reserved against in Somerset’s consolidated financial statements under United States generally accepted accounting principles. In particular, without limiting the generality of the foregoing sentence, but subject to the materiality standard therein, except as disclosed in Schedule 3.22 , neither Somerset nor any of the Somerset Subsidiaries have used or incorporated: (i) any