<PAGE>
As filed with the Securities and Exchange Commission on October 27, 1995
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________
Amendment No. 1 to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
________
COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania 6022 23-2251762
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification No.)
</TABLE>
150 Market Square
Millersburg, Pennsylvania 17061
(717) 692-4781
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
_________________
ERNEST L. LOWE
President and Chief Operating Officer
150 Market Street
Millersburg, Pennsylvania 17061
(717) 692-4781
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_____________
Copies to:
JAMES A. ULSH, ESQ. CHARLES L. O'BRIEN, ESQ.
Mette, Evans & Woodside Morgan, Lewis & Bockius LLP
3401 N. Front Street One Commerce Square
Harrisburg, PA 17110 417 Walnut Street
(717) 232-5000 Harrisburg, PA 17101
(717) 237-4030
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and upon
consummation of the merger of The Citizens' National Bank of Ashland with and
into a subsidiary of the Registrant described in the enclosed Proxy
Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box [X].
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________________
CALCULATION OF REGISTRATION FEE
==============================================================================================================================
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered per unit(1) offering price(1) fee
- ------------------------------------------------------------------------------------------------------------------------------
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Common Stock, par value $5.00 per share 624,120 shares $25.75 $16,071,090.00 $5,542.00
==============================================================================================================================
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(1) Based on the average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market on October 3, 1995, estimated solely
for the purpose of calculating the registration fee in accordance with Rule
457(f)(1) under the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
================================================================================
<PAGE>
COMMUNITY BANKS, INC.
Cross-Reference Sheet
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Item Number Location in Proxy
in Form S-4 Statement/Prospectus
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.................................... Facing Page; Cross-Reference Sheet;
Cover Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ................................................. Available Information; Incorporation of
Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings-to-Fixed Charges and
Other Information........................................... Cover Page of Proxy
Statement/Prospectus; Summary
4. Terms of the Transaction.................................... Notice of Special Meeting of Shareholders;
Summary; The Merger; Comparison of
Shareholder' Rights
5. Pro Forma Financial Information............................. Summary; Unaudited Pro Forma Financial
Information
6. Material Contracts with the Company Being Acquired.......... Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters............... *
8. Interests of Named Experts and Counsel...................... Legal Opinions; Experts
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.............................. *
10. Information with Respect to S-3 Registrants................. *
11. Incorporation of Certain Information by Reference........... *
12. Information with Respect to S-2 or S-3 Registrants.......... *
13. Incorporation of Certain Information by Reference........... *
14. Information with Respect to Registrants Other Than S-3
or S-2 Registrants.......................................... *
15. Information with Respect to S-3 Companies................... *
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16. Information with Respect to S-2 or S-3 Companies............. *
17. Information with Respect to Companies Other Than S-3
or S-2 Companies............................................. Summary; Business of Citizens; Citizens'
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Security Ownership of Certain
Beneficial Owners and Management of
Citizens
18. Information if Proxies, Consents or Authorizations are to
be Solicited................................................. Notice of Special Meeting of Shareholders;
Cover Page of Proxy
Statement/Prospectus; Summary; The
Meeting; The Merger; Incorporation of
Documents by Reference
</TABLE>
_____________________________
*Omitted because the item is inapplicable or the answer thereto is negative.
<PAGE>
[CITIZENS' LETTERHEAD]
Dear Shareholder: November 1, 1995
We invite you to attend a Special Meeting (the "Meeting") of
Shareholders of The Citizens' National Bank of Ashland ("Citizens"), to be held
at the Banking House, 735 Center Street, Ashland, Pennsylvania 17921 on
Thursday, November 30, 1995 at 10:30 a.m., local time.
At the Meeting, shareholders will be asked to consider and vote upon
the Agreement and Plan of Merger dated as of July 5, 1995 (the "Merger
Agreement") among Citizens, Community Banks, Inc. ("Community") and Community
Banks, National Association ("CBNA"), a national bank subsidiary of Community,
as well as the merger (the "Merger") of Citizens with and into CBNA as
contemplated therein. Community and CBNA are headquartered in Millersburg,
Pennsylvania. CBNA operates offices throughout Dauphin, Northumberland and
Schuylkill Counties, Pennsylvania.
In connection with the Merger and as more fully described in the
accompanying Proxy Statement, each share of Citizens common stock, par value
$20.00 per share (the "Citizens Common Stock"), issued and outstanding as of the
effective time of the Merger will be converted into and become a right to
receive shares of Community common stock, par value $5.00 per share (the
"Community Common Stock"), having a Market Value (as defined in the Merger
Agreement) of $770.00, provided that Citizens' shareholders shall not receive
more than 31.206 shares of Community Common Stock, or less than 27.673 shares of
Community Common Stock, for each Citizens' share.
Your attention is directed to the attached Proxy Statement/Prospectus
which contains a more complete description of the terms of the Merger and
provides detailed financial, business and other information concerning Citizens,
Community and CBNA.
After careful consideration of the terms of the Merger Agreement, the
Board of Directors of Citizens has determined that the Merger is in the best
interests of Citizens and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
It is very important that your shares be represented at the Meeting,
whether or not you plan to attend in person. The affirmative vote of the holders
of two-thirds of all outstanding shares of Citizens Common Stock is required to
approve the Merger and the Merger Agreement. WE URGE YOU TO EXECUTE, DATE AND
RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS
POSSIBLE TO ASSURE THAT YOUR SHARES WILL BE VOTED AT THE MEETING. On behalf of
the Board of Directors, we thank you for your support and urge you to vote "FOR"
approval of the Merger and the Merger Agreement.
Sincerely,
/s/ Harry Strouse
Harry Strouse
President
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
735 CENTER STREET
ASHLAND, PENNSYLVANIA 17921
(717) 875-3221
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 30, 1995
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Meeting") of The Citizens' National Bank of Ashland ("Citizens") will be held
at the Banking House, 735 Center Street, Ashland, Pennsylvania 17921 on
Thursday, November 30, 1995 at 10:30 a.m., local time. A Proxy Card and a Proxy
Statement/Prospectus for the Meeting are enclosed. The Meeting is for the
purpose of considering and acting upon:
1. Approval of the Agreement and Plan of Merger dated as of July 5,
1995 (the "Merger Agreement") among Citizens, Community Banks, Inc.
("Community"), Millersburg, Pennsylvania, and Community Banks, National
Association ("CBNA"), Millersburg, Pennsylvania, a national bank subsidiary of
Community, as well as the merger (the "Merger") of Citizens with and into CBNA
as contemplated therein. Pursuant to the Merger Agreement and as more fully
described in the accompanying Proxy Statement, each outstanding share of
Citizens common stock, par value $20.00 per share (the "Citizens Common Stock"),
will be converted into and become a right to receive shares of Community common
stock, par value $5.00 per share (the "Community Common Stock"), having a Market
Value (as defined in the Merger Agreement) of $770.00, provided that Citizens'
shareholders shall not receive more than 31.206 shares of Community Common
Stock, or less than 27.673 shares of Community Common Stock, for each Citizens'
share.
2. Postponement or adjournment of the Meeting to another time and/or
place for the purpose of soliciting additional proxies in the event that there
are not sufficient votes at the time of the Meeting to approve the Merger and
the Merger Agreement (the "Adjournment Proposal").
3. Such other matters as may properly come before the Meeting or any
adjournment thereof.
Any action may be taken on any one of the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which, by
original or later adjournment, the Meeting may be adjourned. Only shareholders
of record at the close of business on October 24, 1995, shall be entitled to
notice of and to vote at the Meeting or any adjournments or postponements
thereof.
You are requested to complete, sign and date the enclosed Proxy Card,
which is solicited by the Board of Directors, and to promptly mail it in the
enclosed envelope. The giving of such proxy does not affect your right to vote
in person in the event you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Dean N. Paul
Dean N. Paul
Cashier
Ashland, Pennsylvania
November 1, 1995
IMPORTANT: PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY. THE PROMPT
RETURN OF PROXIES WILL SAVE CITIZENS THE EXPENSE OF FURTHER REQUESTS FOR PROXIES
TO ENSURE A QUORUM. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
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PROXY STATEMENT/PROSPECTUS
THE CITIZENS' NATIONAL BANK OF ASHLAND
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 30, 1995
COMMUNITY BANKS, INC.
PROSPECTUS FOR UP TO 624,120 SHARES OF COMMON STOCK
PAR VALUE $5.00 PER SHARE
This Proxy Statement/Prospectus is being furnished to holders of
common stock, par value $20.00 per share (the "Citizens Common Stock"), of The
Citizens' National Bank of Ashland ("Citizens") in connection with the
solicitation of proxies by Citizens' Board of Directors for use at a Special
Meeting of Shareholders (the "Meeting") to be held at the Banking House, 735
Center Street, Ashland, Pennsylvania 17921 on Thursday, November 30, 1995 at
10:30 a.m., local time. The shareholders of Citizens will be asked to consider
and vote upon: (a) a proposal to approve the Agreement and Plan of Merger dated
as of July 5, 1995 (the "Merger Agreement") among Citizens, Community Banks,
Inc. ("Community") and Community Banks, National Association ("CBNA"), a
national bank subsidiary of Community, as well as the merger (the "Merger") of
Citizens with and into CBNA as contemplated therein; (b) a proposal (the
"Adjournment Proposal") to postpone or adjourn the Meeting to another time
and/or place for the purpose of soliciting additional proxies in the event that
there are not sufficient votes at the time of the Meeting to approve the Merger
and the Merger Agreement; and (c) such other business as may properly come
before the Meeting or any adjournment thereof.
In connection with the Merger, each share of Citizens Common Stock
issued and outstanding as of the effective time of the Merger will be converted
into and become a right to receive shares of Community common stock, par value
$5.00 per share (the "Community Common Stock"), having a Market Value (as
defined in the Merger Agreement) of $770.00, provided that Citizens'
shareholders shall not receive more than 31.206 shares of Community Common
Stock, or less than 27.673 shares of Community Common Stock, for each Citizens'
share.
Community Common Stock is traded, and the Community Common Stock to be
issued pursuant to the Merger Agreement will be traded, in the over-the-counter
market and authorized for quotation on the Nasdaq National Market. Citizens
Common Stock is not traded on any recognized national market. The last reported
sales price per share of Community Common Stock as reported on the Nasdaq
National Market as of October 3, 1995 was $25.75.
This Proxy Statement/Prospectus constitutes a prospectus of Community
appearing as a part of a registration statement filed with the Securities and
Exchange Commission (the "Commission") relating to the 624,120 shares of
Community Common Stock issuable pursuant to the Merger Agreement. All
information in this Proxy Statement/Prospectus relating to Community and CBNA
has been supplied by Community and all information relating to Citizens has been
supplied by Citizens.
This Proxy Statement/Prospectus and the accompanying Proxy Card and
Notice of Special Meeting are first being mailed to shareholders of Citizens on
or about November 1, 1995.
THE SHARES OF COMMUNITY COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMUNITY COMMON STOCK ISSUABLE IN THE MERGER ARE NOT
SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR DEPOSITORY
INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 1, 1995.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY CITIZENS OR COMMUNITY. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY TO OR FROM ANY PERSON IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION. THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION ABOUT CITIZENS
OR COMMUNITY CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Community is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission are available for inspection and copying at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549, and at the Commission's Regional Offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at Seven World Trade Center, New York, New York
10048. Copies of such documents may also be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates. Community Common Stock is authorized
for quotation on the Nasdaq National Market. Such materials and other
information concerning Community, therefore, can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, DC. Community has filed with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), a Registration
Statement on Form S-4 (including all amendments and exhibits thereto (the
"Registration Statement")) with respect to the Community Common Stock issuable
pursuant to the Merger Agreement. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement, including any amendments and exhibits
thereto, is available for inspection and copying as set forth above. Statements
contained in this Proxy Statement/Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO COMMUNITY WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS (NOT INCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE TO
ANY SHAREHOLDER OF CITIZENS, INCLUDING ANY BENEFICIAL OWNER TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST DIRECTED TO THE
SECRETARY, COMMUNITY BANKS, INC., 150 MARKET SQUARE, MILLERSBURG, PENNSYLVANIA
17061. IN ORDER TO INSURE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
MEETING TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES, ANY REQUEST SHOULD BE
MADE NO LATER THAN NOVEMBER 15, 1995.
2
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INCORPORATION BY DOCUMENTS BY REFERENCE
Certain documents previously filed by Community with the Commission
pursuant to the Exchange Act are hereby incorporated by reference in this Proxy
Statement/Prospectus as follows:
(1) the Annual Report on Form 10-K for the year ended December 31,
1994;
(2) the Quarterly Report on Form 10-Q for the quarter ended March 31,
1995; and
(3) the Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
All documents filed by Community pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date hereof and prior to the consummation
of the Merger shall be deemed to be incorporated by reference herein and to be a
part hereof from the date of filing thereof. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein, or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein, modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement/Prospectus. All
information appearing in this Proxy Statement/Prospectus should be read in
conjunction with, and is qualified in its entirety by, the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
3
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION........................................................... 2
INCORPORATION BY DOCUMENTS BY REFERENCE......................................... 3
SUMMARY......................................................................... 8
The Parties................................................................... 8
Citizens..................................................................... 8
Community................................................................... 8
CBNA........................................................................ 8
The Meeting.................................................................. 9
Date, Place and Time of the Meeting......................................... 9
Matters to be Considered at the Meeting..................................... 9
Record Date; Shares Outstanding; Quorum; Vote Required...................... 9
Terms of the Merger......................................................... 9
Exchange Procedure.......................................................... 10
Opinion of Financial Advisor................................................ 10
Recommendation of the Board of Directors.................................... 10
Conditions to the Merger.................................................... 10
Closing; Effective Date..................................................... 11
Termination; Waiver; Amendment.............................................. 11
Fees and Expenses........................................................... 11
Dissenters Rights........................................................... 11
Certain Federal Income Tax Consequences of the Merger....................... 12
Accounting Treatment........................................................ 12
Interests of Certain Persons in the Merger.................................. 12
Comparison of Shareholder Rights............................................ 13
Adjournment of the Meeting.................................................. 13
Market Price Data........................................................... 14
Selected Historical Financial Data.......................................... 15
Citizens.................................................................. 15
Community................................................................. 16
Unaudited Pro Forma Selected Financial Data................................. 17
Comparative Per Share Data.................................................. 18
THE MEETING.................................................................... 19
General..................................................................... 19
Date, Place and Time of the Meeting......................................... 19
Matters to be Considered at the Meeting..................................... 19
Record Date; Shares Outstanding; Quorum..................................... 19
Votes Required.............................................................. 19
Effect of Abstentions and Broker Nonvotes................................... 19
Voting, Revocation and Solicitation of Proxies.............................. 20
Recommendation of the Board of Directors.................................... 20
THE MERGER..................................................................... 20
Introduction; Background of the Merger...................................... 21
Citizens.................................................................. 21
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4
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TABLE OF CONTENTS
(continued)
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PAGE
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Community........................................................................ 21
CBNA............................................................................. 21
Reasons for the Merger; Recommendation of the Board of Directors................... 21
Opinion of Financial Advisor....................................................... 23
Terms of the Merger................................................................ 27
Effect of the Merger............................................................. 27
Merger Consideration; Conversion Factor.......................................... 27
Closing; Effective Date.......................................................... 28
Representations and Warranties................................................... 28
Conduct of Business Pending the Merger........................................... 28
Certain Other Agreements......................................................... 29
Conditions Precedent............................................................. 31
Waiver; Amendment................................................................ 31
Termination...................................................................... 31
Expenses........................................................................... 33
No Solicitation; Pursuit of Other Transactions..................................... 33
Termination Fee.................................................................... 33
Continued Employment of Citizens' Employees........................................ 34
Indemnification of Citizens' Officers and Directors; Insurance..................... 34
CBNA Shareholder Approval.......................................................... 34
Listing............................................................................ 34
Exchange Procedure................................................................. 35
Appointment of Exchange Agent.................................................... 35
Procedure........................................................................ 35
Regulatory Approvals............................................................... 35
Interests of Certain Persons in the Merger......................................... 36
Accounting Treatment............................................................... 37
Certain Federal Income Tax Consequences............................................ 37
Appraisal Rights of Dissenting Shareholders........................................ 38
REGULATORY MATTERS.................................................................... 39
General............................................................................ 39
Payment of Dividends............................................................... 39
Capital Limitations.............................................................. 40
Earnings Limitations............................................................. 40
Other Limitations................................................................ 40
Holding Company Structure.......................................................... 41
Capital Adequacy................................................................... 41
Federal Deposit Insurance Corporation Improvement Act of 1991...................... 43
Interstate Banking Legislation..................................................... 44
COMPARISON OF SHAREHOLDERS' RIGHTS.................................................... 44
Introduction....................................................................... 44
Dividends.......................................................................... 45
Citizens......................................................................... 45
Community........................................................................ 45
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5
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TABLE OF CONTENTS
(continued)
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Voting Rights Generally............................................................. 45
Citizens....................................................................... 45
Community...................................................................... 45
Classified Board of Directors....................................................... 46
Citizens....................................................................... 46
Community...................................................................... 46
Number of Directors; Term........................................................... 46
Citizens....................................................................... 46
Community...................................................................... 46
Removal of Directors................................................................ 46
Citizens....................................................................... 46
Community...................................................................... 46
Qualifications of Directors......................................................... 47
Citizens....................................................................... 47
Community...................................................................... 47
Filling Vacancies on the Board of Directors......................................... 47
Call of Special Shareholders' Meeting............................................... 47
Citizens....................................................................... 47
Community...................................................................... 47
Notice of Shareholders' Meetings.................................................... 48
Citizens....................................................................... 48
Community...................................................................... 48
Quorum Requirements and Adjournment of Meetings..................................... 48
Dissenters Rights................................................................... 48
Citizens....................................................................... 48
Community...................................................................... 48
Limitations on Directors' Liability................................................. 48
Indemnification..................................................................... 49
Citizens....................................................................... 49
Community...................................................................... 49
Anti-Takeover Law Provisions........................................................ 50
Citizens....................................................................... 50
Community...................................................................... 51
Amendment of Articles of Incorporation.............................................. 52
Citizens....................................................................... 52
Community...................................................................... 52
Amendment of Bylaws................................................................. 52
Citizens....................................................................... 52
Community...................................................................... 52
UNAUDITED PRO FORMA FINANCIAL INFORMATION............................................. 53
CITIZENS' MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 59
Results of Operations.............................................................. 59
Net Interest Income................................................................ 59
</TABLE>
6
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TABLE OF CONTENTS
(continued)
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Provision and Allowance for Loan Losses.............................................. 63
Other Income......................................................................... 65
Other Expense........................................................................ 65
Income Taxes......................................................................... 66
Financial Condition.................................................................. 66
Investment Securities................................................................ 66
Loans................................................................................ 67
Deposits............................................................................. 68
Asset/Liability Management........................................................... 69
Capital Adequacy..................................................................... 70
BUSINESS OF CITIZENS................................................................... 70
Description of Business.............................................................. 70
Properties........................................................................... 70
Legal Proceedings.................................................................... 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CITIZENS............................................................. 71
ADJOURNMENT OF THE MEETING ............................................................ 72
EXPERTS................................................................................ 72
Community.......................................................................... 72
Citizens........................................................................... 72
LEGAL OPINIONS......................................................................... 72
OTHER BUSINESS......................................................................... 73
INDEX TO CITIZENS' FINANCIAL STATEMENTS............................................... F-1
APPENDIX A - AGREEMENT AND PLAN OF MERGER OF THE CITIZENS'
NATIONAL BANK OF ASHLAND WITH AND INTO COMMUNITY BANKS,
NATIONAL ASSOCIATION, A WHOLLY OWNED SUBSIDIARY OF
COMMUNITY BANKS, INC.................................................................. A-1
APPENDIX B - OPINION OF THE BERWIND FINANCIAL GROUP, L.P.............................. B-1
APPENDIX C - DISSENTING SHAREHOLDERS' RIGHTS UNDER
12 UNITED STATES CODE SECTION 215(a)(b)............................................... C-1
APPENDIX D - OCC BANKING CIRCULAR ON STOCK APPRAISALS
(BC-259).............................................................................. D-1
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7
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________________________________________________________________________________
SUMMARY
The following is a summary of certain information relating to the
Merger contained elsewhere in this Proxy Statement/Prospectus. This summary is
not intended to be a summary of all information relating to the Merger and is
qualified in its entirety by reference to more detailed information contained
elsewhere in this Proxy Statement/Prospectus, including the Appendices hereto.
All shareholders are urged to review the entire Proxy Statement and Appendices
carefully.
THE PARTIES
CITIZENS
The Citizens' National Bank of Ashland ("Citizens") is a banking
corporation organized on June 24, 1875 under the national banking laws and
headquartered in Ashland, Pennsylvania. Citizens engages in commercial banking
authorized by the National Bank Act (the "NBA"). This involves accepting demand,
time and savings deposits and granting loans (consumer, commercial, real estate
and business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Citizens owns no subsidiaries.
As of June 30, 1995, Citizens had three banking offices and assets of
$63.0 million. Its principal executive office, which it owns, is located at 735
Center Street, Ashland, Pennsylvania 17921, and the telephone number at such
address is (717) 875-3221. Citizens is not dependent on any one customer, and
the loss of any customer or a few customers would not have a material adverse
effect upon it.
COMMUNITY
Community Banks, Inc. ("Community") is a bank holding company
organized as a Pennsylvania business corporation in 1982. Community is
registered as a bank holding company with the Board of Governors of the Federal
Reserve System. Community's assets and sole activity consist of the owning and
supervising of Community Banks, National Association ("CBNA"), a national
banking association, and two non-banking subsidiaries, Community Banks Life
Insurance Company and Community Bank Investments, Inc. Community's executive
offices are located at 150 Market Square, Millersburg, Pennsylvania 17061, and
the telephone number at such address is (717) 692-4781.
At June 30, 1995, Community had assets of $317.5 million.
CBNA
Community Banks, National Association ("CBNA") is a national banking
association headquartered in Millersburg, Pennsylvania. CBNA conducts business
through its main office in Millersburg and through 16 branch offices located in
Dauphin County, Northumberland County, Schuylkill County and Luzerne County,
Pennsylvania. CBNA is insured by the Federal Deposit Insurance Corporation
("FDIC") to the extent provided by law and engages in general commercial banking
and provides individuals, businesses and municipalities with financial services,
including trust and fiduciary services. See "AVAILABLE INFORMATION" and
"INCORPORATION OF DOCUMENTS BY REFERENCE."
________________________________________________________________________________
8
<PAGE>
________________________________________________________________________________
THE MEETING
DATE, PLACE AND TIME OF THE MEETING
The Special Meeting of the Shareholders of Citizens will be held at
the Banking House, 735 Center Street, Ashland, Pennsylvania 17921 on Thursday,
November 30, 1995 at 10:30 a.m., local time (the "Meeting").
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of Citizens common stock, par value $20.00 per
share (the "Citizens Common Stock"), will be asked to consider and vote upon:
(a) a proposal to approve the Agreement and Plan of Merger dated as of July 5,
1995 (the "Merger Agreement") among Citizens, Community and CBNA, as well as the
merger (the "Merger") of Citizens with and into CBNA as contemplated therein;
(b) a proposal (the "Adjournment Proposal") to postpone or adjourn the Meeting
to another time and/or place for the purpose of soliciting additional proxies in
the event that there are not sufficient votes at the time of the Meeting to
approve the Merger and the Merger Agreement; and (c) such other business as may
properly come before the Meeting or any adjournment thereof. See "THE MEETING-
Matters to be Considered at the Meeting."
RECORD DATE; SHARES OUTSTANDING; QUORUM; VOTE REQUIRED
Only holders of record of shares of Citizens Common Stock at the
close of business on October 24, 1995 (the "Record Date") will be entitled to
notice of, and to vote at, the Meeting. Each share of Citizens Common Stock
outstanding on the Record Date entitles its holder, as of that date, to one
vote. As of the Record Date, there were 20,000 shares of Citizens Common Stock
outstanding and entitled to be voted at the Meeting, held by approximately 300
shareholders of record. The presence in person or by proxy of shareholders
entitled to cast a majority of the votes at such meeting will constitute a
quorum at the Meeting. See "THE MEETING-Record Date; Shares Outstanding;
Quorum." Pursuant to the applicable provisions of the NBA, the affirmative vote
of the holders of two-thirds of all outstanding shares of Citizens Common Stock
is required to approve the Merger and the Merger Agreement. See "THE MEETING-
Votes Required."
As of the Record Date, directors and executive officers of Citizens
beneficially owned approximately 3,255 shares of Citizens Common Stock or
approximately 16.275% of the outstanding Citizens Common Stock entitled to vote
at the Meeting. The directors and executive officers of Citizens have indicated
that they intend to vote all of such shares of Citizens Common Stock in favor of
the Merger and the Merger Agreement. See "THE MEETING-Votes Required" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CITIZENS."
TERMS OF THE MERGER
Pursuant to the Merger Agreement, Citizens will be merged with and
into CBNA, with CBNA being the surviving corporation. Each share of Citizens
Common Stock outstanding as of the Effective Date (as defined below) of the
Merger will be converted into and become a right to receive shares (the
"Conversion Factor") of common stock of Community, par value $5.00 per share
(the "Community Common Stock"), having a Market Value of $770.00, calculated as
follows: if the Market Value Per Share (as defined below) of Community Common
Stock as of the close of business on the fifth trading date preceding the Merger
is (a) $26.25 per share, the Conversion Factor will be 29.333; (b) less than
$26.25 per share, then the Conversion Factor will be increased to the number
obtained by dividing $770.00 by the Market Value Per Share of Community Common
Stock; provided, however, that in no event shall the Conversion Factor be
-------- -------
greater than 31.206; or (c) is more than $26.25 per share, then the Conversion
Factor will be decreased to the number obtained by dividing
________________________________________________________________________________
9
<PAGE>
________________________________________________________________________________
$770.00 by the Market Value Per Share of Community Common Stock; provided,
--------
however, that in no event shall the Conversion Factor be less than 27.673. The
- -------
Conversion Factor will become fixed if the Market Value Per Share of Community
Common Stock is less than $24.67 or more than $27.82; if the Market Value of
Community Common Stock is outside this range, Citizens' shareholders will
receive Community Common Stock having a Market Value lower or higher than
$770.00. The Merger Agreement defines the term "Market Value Per Share" to mean
with respect to a calculation date the average of the closing sales price of
Community Common Stock as reported on the Nasdaq National Market for the 30
consecutive trading days ending on and including the date as of which the Market
Value Per Share is to be calculated. See "THE MERGER-Terms of the Merger-Merger
Consideration; Conversion Factor."
EXCHANGE PROCEDURE
As soon as practicable after the Effective Date, holders of shares of
Citizens Common Stock will be furnished a form letter of transmittal for the
tender of their shares to American Stock Transfer and Trust Company (the
"Exchange Agent") to be exchanged for certificates for the appropriate number of
shares of Community Common Stock. See "THE MERGER-Exchange Procedure."
CITIZENS' SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES FOR
SHARES OF COMMUNITY COMMON STOCK TO CITIZENS OR COMMUNITY UNTIL THEY HAVE
RECEIVED THE TRANSMITTAL LETTER. CITIZENS' SHAREHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
OPINION OF FINANCIAL ADVISOR
The Berwind Financial Group, L.P. ("Berwind") rendered its oral
opinion to the Board of Directors of Citizens on June 27, 1995, to the effect
that the consideration to be received by holders of shares of Citizens Common
Stock in the Merger is fair from a financial point of view. Berwind has
confirmed its opinion in writing and updated it through October 26, 1995. A copy
of the opinion, which is attached to this Proxy Statement/Prospectus as Appendix
B, should be read in its entirety with respect to the assumptions made and other
matters considered by Berwind in rendering such opinion. See "THE MERGER-Opinion
of Financial Advisor."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The consideration to be received by holders of shares of Citizens
Common Stock in the Merger was negotiated by the Board of Directors of Citizens
in light of various factors, including Citizens', Community's and CBNA's
respective current financial condition and perceived future prospects. THE BOARD
OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF CITIZENS'
SHAREHOLDERS, HAS BY UNANIMOUS VOTE APPROVED THE MERGER AND THE MERGER AGREEMENT
AND RECOMMENDS THAT CITIZENS' SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AND
THE MERGER AGREEMENT. See "THE MERGER-Reasons for the Merger; Recommendation of
the Board of Directors."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions, including
the approval of the Merger by the Office of the Comptroller of the Currency (the
"OCC") and the Pennsylvania Department of Banking (the "Department of Banking").
See "THE MERGER-Regulatory Approvals." The Merger is also subject to
satisfaction of various other conditions specified in the Merger Agreement,
including approval of the Merger and the Merger Agreement by the requisite vote
of shareholders of Citizens and qualification of the Merger as a
________________________________________________________________________________
10
<PAGE>
________________________________________________________________________________
pooling of interests for accounting purposes. See "THE MERGER-Terms of the
Merger-Conditions Precedent."
CLOSING; EFFECTIVE DATE
The Merger Agreement provides that the closing of the Merger (the
"Closing") will be held at the executive offices of Community at 10:00 a.m. on a
date to be designated by Community (the "Effective Date"), which date shall not
be later than ten business days following the date that conditions set forth in
the Merger Agreement are satisfied or waived. See "THE MERGER-Terms of the
Merger-Closing; Effective Date" and "THE MERGER-Terms of the Merger-Conditions
Precedent."
TERMINATION; WAIVER; AMENDMENT
The Merger Agreement may be terminated at any time prior to
consummation of the Merger in a number of circumstances, including, but not
limited to: (a) by mutual consent of the parties; (b) if either party becomes
aware of any material facts or circumstances regarding the other party that it
was not aware of on the date of execution of the Merger Agreement; (c) by either
party if there is a material adverse change in the business or financial
condition of the other party; (d) by either party if there has been a failure on
the part of the other party to comply with its obligations under the Merger
Agreement; (e) subject to certain conditions, by Citizens if the Market Value
Per Share of Community Common Stock on the fifth trading date preceding the
Effective Date of the Merger is less than $22.31 per share; and (f) subject to
certain conditions, by Community if the Market Value Per Share of Community
Common Stock on the fifth trading date preceding the Effective Date of the
Merger is more than $30.19 per share. See "THE MERGER-Terms of the Merger-
Termination."
Provisions of the Merger Agreement may be waived or amended under
certain circumstances, as set forth in the Merger Agreement. See "THE MERGER-
Terms of the Merger-Waiver; Amendment."
FEES AND EXPENSES
Except as described below, whether or not the Merger is consummated,
all costs and expenses incurred in connection with the Merger and the Merger
Agreement will be paid by the party incurring such costs, except that in the
event the Merger is not consummated for any reason other than in connection with
an Acquisition Proposal (as defined in the Merger Agreement), Community and
Citizens will each pay one-half of: (a) the aggregate costs theretofore incurred
in printing the Community Registration Statement and this Proxy
Statement/Prospectus; (b) the registration fee for the Community Registration
Statement; and (c) the fees for filing applications for any government approvals
required by the Merger Agreement. See "THE MERGER-Expenses."
In the event that the Merger fails to close due to a person other than
Community making an Acquisition Proposal, Citizens must pay Community a
termination fee in the amount of $200,000. See "THE MERGER-Termination Fee."
DISSENTERS RIGHTS
As required by the NBA, any shareholder who has voted against the
Merger and the Merger Agreement at the Meeting or has given notice to Citizens
in writing at or prior to the Meeting that such shareholder dissents from the
Merger, shall be entitled to receive the "fair value" of the shares held by that
shareholder at the time the Merger Agreement is approved by the OCC, upon
written request made to Community at any time within 30 days following the
Effective Date, accompanied by the surrender of such shareholder's stock
certificates. The relevant portions of the statutory dissenters procedures are
attached to this
_______________________________________________________________________________
11
<PAGE>
________________________________________________________________________________
Proxy Statement/Prospectus as Appendix C. Shareholders electing to exercise
their dissenters rights under the NBA may not vote for the Merger and the Merger
Agreement. If a shareholder returns a signed proxy but does not specify a vote
against the Merger and the Merger Agreement or does not give a direction to
abstain, the proxy will be voted for the Merger and the Merger Agreement, which
will have the effect of waiving that shareholder's dissenters rights. See "THE
MERGER-Appraisal Rights of Dissenting Shareholders."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is intended that the Merger will be treated, for federal income tax
purposes, as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that, accordingly,
for income tax purposes: (a) the Merger of Citizens with and into CBNA upon the
terms and conditions of the Merger Agreement will not result in any recognized
gain or loss to Community, CBNA or Citizens; (b) except for any cash received in
lieu of any fractional share, no gain or loss will be recognized by holders of
Citizens Common Stock who receive Community Common Stock in exchange for the
shares of Citizens Common Stock which they hold; (c) the holding period of
Community Common Stock received in exchange for Citizens Common Stock will
include the holding period of Citizens Common Stock for which it is exchanged,
assuming the shares of Citizens Common Stock are capital assets in the hands of
the holder thereof on the Effective Date; and (d) the basis of Community Common
Stock received in exchange for Citizens Common Stock will be the basis of
Citizens Common Stock for which it is exchanged, less any basis attributable to
fractional shares for which cash is received.
The obligations of the parties to consummate the Merger is conditioned
upon the receipt of a ruling from the Internal Revenue Service (the "IRS") or an
opinion from Mette, Evans & Woodside, counsel to Community, substantially to the
effect that the federal income tax consequences of the Merger are as summarized
above. See "THE MERGER-Certain Federal Income Tax Consequences."
EACH CITIZENS' SHAREHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX
ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE AS TO ANY
ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER
AND/OR ANY SALE THEREAFTER OF SHARES OF COMMUNITY COMMON STOCK RECEIVED IN THE
MERGER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a pooling of interests for
accounting and financial reporting purposes. See "THE MERGER-Accounting
Treatment."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and officers of Citizens have interests in the
Merger that are in addition to their interests as shareholders of Citizens
generally. These include Community's agreement to indemnify and to provide
insurance covering Citizens' officers and directors for a period of six years
following the consummation of the Merger. See "THE MERGER-Indemnification of
Citizens' Officers and Directors; Insurance" and "THE MERGER-Interests of
Certain Persons in the Merger." Additionally: (a) Dean N. Paul, the present
Cashier of Citizens, will be appointed to the Board of Directors of CBNA and
CBNA's Schuylkill Advisory Board, and will hold such office until the next
annual meeting of the shareholders of CBNA; and (b) two additional members of
the present Board of Directors of Citizens will be appointed by CBNA to the
Schuylkill Advisory Board. See "THE MERGER-Terms of the Merger-Effect of the
Merger" and "THE MERGER-Interests of Certain Persons in the Merger."
________________________________________________________________________________
12
<PAGE>
________________________________________________________________________________
COMPARISON OF SHAREHOLDER RIGHTS
Upon exchange of their shares of Citizens Common Stock in accordance
with the exchange procedures set forth in the Merger Agreement, holders of
Citizens Common Stock will become holders of Community Common Stock. The rights
of shareholders of Community are governed by the Pennsylvania Business
Corporation Law of 1988, as amended (the "PBCL"), and the articles of
incorporation and bylaws of Community. The rights of common shareholders of
Community differ from the rights of Citizens' shareholders with respect to
certain matters. See "COMPARISON OF SHAREHOLDERS' RIGHTS."
ADJOURNMENT OF THE MEETING
In the event that there is an insufficient number of votes cast in
person or by proxy at the Meeting to approve the Merger and the Merger
Agreement, the Board of Directors of Citizens intends to adjourn the Meeting to
a later date for the solicitation of additional votes in favor thereof. The
affirmative vote of a majority of the shares present, in person or by proxy, at
the Meeting, even if a quorum is not present, is required in order to approve
any such adjournment. CITIZENS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO ADJOURN THE MEETING IF NECESSARY TO
PERMIT FURTHER SOLICITATION OF PROXIES TO APPROVE THE MERGER AND THE MERGER
AGREEMENT. SEE "ADJOURNMENT OF THE MEETING."
________________________________________________________________________________
13
<PAGE>
- -------------------------------------------------------------------------------
MARKET PRICE DATA
There is no established public trading market for Citizens Common
Stock, and accordingly, there are no published market quotations for such stock.
Trading in Citizens Common Stock is limited and sporadic. In addition, Citizens
is not subject to the requirement of filing periodic reports with the
Commission. The absence of an established market and publicly available current
information regarding Citizens may affect the prices at which Citizens' shares
are traded. Subject to the foregoing, Citizens is aware of trading of Citizens
Common Stock at $580 per share in 1994 and $605 per share in 1995.
Shares of Community Common Stock are included for quotation on the
Nasdaq National Market. The following table sets forth the high and low bid
quotations for shares of Community Common Stock for the periods indicated below.
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1993
First Quarter...... $ 25.50 $ 23.75
Second Quarter..... 30.00 24.00
Third Quarter...... 32.00 27.75
Fourth Quarter..... 37.00 32.00
1994
First Quarter...... 37.25 35.25
Second Quarter..... 37.00 34.38
Third Quarter...... 35.75 32.00
Fourth Quarter..... 33.50 22.75
1995
First Quarter...... 26.00 23.75
Second Quarter..... 26.75 25.25
Third Quarter...... 26.75 25.25
Fourth Quarter(1).. 27.75 25.75
</TABLE>
- ------------------
(1) Through the close of business on October 20, 1995
On June 30, 1995, the last trading day before the announcement by
Community that the Merger Agreement had been signed, the last sale price of
Community Common Stock on the Nasdaq National Market was $26.50 per share.
On October 18, 1995, the last sale price of Community Common Stock on
the Nasdaq National Market was $26 per share.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical financial
information for Citizens and certain selected consolidated historical financial
information for Community. This data is derived from and should be read in
conjunction with, and is qualified in its entirety by, the financial statements
of Citizens and the consolidated financial statements of Community, including
the notes thereto, incorporated by reference or appearing elsewhere in this
Proxy Statement/Prospectus.
THE CITIZENS' NATIONAL BANK OF ASHLAND
<TABLE>
<CAPTION>
For the For the
Six Month Period Ended June 30, Year Ended December 31,
------------------------------- -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands except per share data)
Balance Sheet Data:
- ------------------
Total Assets $63,036 $62,632 $61,576 $61,237 $62,318 $61,472 $58,281
Loans (net of unearned income and
allowance for loan losses) 26,285 25,526 26,323 25,817 26,796 28,981 30,095
Deposits 53,081 53,073 51,861 51,975 53,363 52,958 49,795
Shareholders' Equity 9,354 9,022 9,131 8,709 8,272 7,827 7,728
Earnings Data:
- --------------
Net interest income $ 1,236 $ 1,339 $ 2,641 $ 2,715 $ 2,803 $ 2,397 $ 2,172
Provision for loan losses 25 50 230 175 470 25
Other income 91 76 142 134 129 142 139
Other expense 830 768 1,727 1,682 1,702 1,481 1,400
Net income 403 493 832 847 845 489 738
Per Share Data:
- ---------------
Net income $ 20.15 $ 24.65 $ 41.60 $ 42.35 $ 42.25 $ 24.45 $ 36.90
Cash dividends 9.00 9.00 20.50 20.50 20.00 19.50 19.50
Book value 468 451 457 435 414 391 386
Average shares outstanding 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Other Data: *
- -----------
Return on equity (net income divided by
average equity) 4.30% 5.50% 9.17% 9.73% 10.44% 6.24% 13.25%
Return on assets (net income divided by
average total assets) 0.64% 0.80% 1.34% 1.36% 1.36% 0.82% 1.26%
Equity-to-assets ratio (average equity
divided by average total assets) 14.96% 14.48% 14.62% 13.94% 13.26% 12.84% 12.84%
Dividend payout ratio (dividends declared
divided by net income) 44.68% 36.51% 49.28% 48.41% 47.34% 79.75% 52.84%
</TABLE>
* Average balances for the six-month periods ended June 30, 1995 and 1994, and
the years ended December 31, 1994 and 1993, are based on daily average account
balances. Average balances for the years ended December 31, 1992, 1991 and
1990 are based on quarterly average account balances.
- --------------------------------------------------------------------------------
15
<PAGE>
- -------------------------------------------------------------------------------
COMMUNITY BANKS, INC.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------- -------------------------
1995 1994 1994 1993
---- ----- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 11,946 $ 10,256 $ 21,399 $ 20,684
Interest expense 4,906 4,167 8,489 9,009
Net interest income 7,040 6,089 12,910 11,675
Provision for credit losses 290 234 462 702
Net interest income after provision for
credit losses 6,750 5,855 12,448 10,973
---------- ---------- ---------- ----------
Other operating income 1,064 1,268 2,282 2,688
Other operating expenses 4,996 4,518 9,280 8,456
Income (loss) before income taxes and
cumulative effect of accounting changes 2,818 2,605 5,450 5,205
Applicable income taxes 700 600 1,288 1,289
---------- ---------- ---------- ----------
Income (loss) before cumulative effect 2,118 2,005 4,162 3,916
of accounting changes ---------- ---------- ---------- ----------
Cumulative effect of accounting change
for post-retirement benefits -- -- -- --
Cumulative effect of accounting change -- -- -- --
for income taxes ---------- ---------- ---------- ----------
Net income (loss) $ 2,118 $ 2,005 $ 4,162 $ 3,916
========== ========== ========== ==========
PER SHARE DATA
Income (loss) before cumulative effect
of accounting changes $ 1.04 $ .99 $ 2.03 $ 1.92
Cumulative effect of accounting change
for post-retirement benefits -- -- -- --
Cumulative effect of accounting change
for income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ 1.04 $ .99 $ 2.03 $ 1.92
========== ========== ========== ==========
Dividends paid $ .40 $ .33 $ .70 $ .62
Book value 16.79 14.94 14.99 14.64
Shares outstanding 2,028,985 1,687,755 2,025,267 1,679,583
OTHER DATA
Total assets $ 317,536 $ 299,074 $ 307,121 $ 284,723
Total deposits 263,034 256,724 256,112 243,292
Total loans-net 194,451 166,341 180,201 158,195
Total equity 34,063 30,260 30,352 29,503
KEY RATIOS
Return (loss) on average shareholders'
equity 6.54% 6.73% 13.63% 13.85%
Return on average total assets .68 .69 1.40 1.41
Dividends declared to net income (loss) 38.46 33.33 34.24 32.10
Average shareholders' equity to average
total assets 10.46 10.35 10.23 10.16
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1992 1991 1990
---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 21,051 $ 22,145 $ 20,949
Interest expense 10,053 12,392 12,473
Net interest income 10,998 9,753 8,476
Provision for credit losses 683 737 662
Net interest income after provision for
credit losses 10,315 9,016 7,814
--------- ---------- ----------
Other operating income 2,158 1,468 1,353
Other operating expenses 7,803 7,281 6,301
Income (loss) before income taxes and
cumulative effect of accounting changes 4,670 3,203 2,866
Applicable income taxes 1,179 674 676
--------- ---------- ----------
Income (loss) before cumulative effect
of accounting changes 3,491 2,529 2,190
--------- ---------- ----------
Cumulative effect of accounting change
for post-retirement benefits -- -- --
Cumulative effect of accounting change -- -- --
for income taxes --------- ---------- ----------
Net income (loss) $ 3,491 $ 2,529 $ 2,190
========= ========== ==========
PER SHARE DATA
Income (loss) before cumulative effect
of accounting changes $ 1.73 $ 1.27 $ 1.09
Cumulative effect of accounting change
for post-retirement benefits -- -- --
Cumulative effect of accounting change
for income taxes -- -- --
--------- ---------- ----------
Net income (loss) $ 1.73 $ 1.27 $ 1.09
========= ========== ==========
Dividends paid $ .54 $ .44 $ .44
Book value 13.33 12.11 11.22
Shares outstanding 1,669,396 1,325,186 1,325,186
OTHER DATA
Total assets $ 272,297 $ 246,560 $ 233,578
Total deposits 235,597 218,157 205,869
Total loans-net 149,052 150,111 144,790
Total equity 26,703 24,261 22,472
KEY RATIOS
Return (loss) on average shareholders'
equity 13.61% 10.81% 9.90%
Return on average total assets 1.36 1.05 1.00
Dividends declared to net income (loss) 30.88 34.91 40.32
Average shareholders' equity to average
total assets 10.01 9.70 10.14
</TABLE>
- -------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA SELECTED FINANCIAL DATA
The following table sets forth unaudited pro forma selected financial
data for Citizens and Community which gives effect to the Merger, accounted for
as a pooling of interest, as if it had been consummated as of at the begining of
each period presented. The pro forma selected data is not necessarily indicative
of the results that would have been achieved had the transaction been
consummated on such date and should not be construed as representative of future
operations. This presentation is subject to the assumptions set forth in the
notes to the Unaudited Pro Forma Condensed Financial Information appearing
elsewhere in this Proxy Statement/Prospectus. The information presented should
be read in conjunction with such pro forma financial statements, and the notes
thereto, and the historical financial statements, including the notes thereto,
of Citizens and Community incorporated by reference in this Proxy
Statement/Prospectus or appearing elsewhere herein.
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30, December 31,
--------------------------------------------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Total interest income $ 14,065 $ 12,375 $ 25,630 $ 25,159 $ 26,098
Total interest expense 5,789 4,947 10,079 10,769 12,297
---------- ---------- ---------- ---------- ----------
Net interest income before
provision for loan losses 8,276 7,428 15,551 14,390 13,801
Provision for loan losses 290 259 512 932 858
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 7,986 7,169 15,039 13,458 12,943
Total non-interest income 1,155 1,344 2,424 2,822 2,287
Total non-interest expense 5,826 5,286 11,007 10,138 9,505
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,315 3,227 6,456 6,142 5,725
Provision for income taxes 794 729 1,462 1,454 1,389
---------- ---------- ---------- ---------- ----------
Income before effective
accounting change - 4,688 -
Cumulative Effect of Change
in accounting principal - 75 -
Net Income $ 2,521 $ 2,498 $ 4,994 $ 4,763 $ 4,336
========== ========== ========== ========== ==========
PER SHARE DATA
Earnings Per Share $ 0.96 $ 0.94 $ 1.89 $ 1.81 $ 1.66
========== ========== ========== ========== ==========
Weighted average number
of shares outstanding 2,639,602 2,647,709 2,636,910 2,626,240 2,604,560
========== ========== ========== ========== ==========
OTHER DATA
Total Assets $ 380,572
Total Deposits 316,115
Total Loans-net 220,737
Short-term borrowings 7,278
Total shareholders' equity 43,417
</TABLE>
- -------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Community and Citizens and unaudited pro forma combined per share data of
Community and Citizens, based on the assumption that the Merger was effective on
January 1, 1992. Such pro forma data is not necessarily indicative of results
that would have been achieved had the Merger been consummated on such date.
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
------------------------
June 30, 1995 1994 1993 1992
------------------ ------- -------- --------
<S> <C> <C> <C> <C>
COMMUNITY HISTORICAL
Income per common share $ 1.03 $ 2.03 $ 1.92 $ 1.73
Dividends declared per common share 0.40 0.70 0.62 0.54
Book value per common share 16.79 14.99 14.64 13.33
CITIZENS HISTORICAL
Income per common share $ 20.15 $ 41.60 $ 42.35 $ 42.25
Dividends declared per common share 9.00 20.50 20.50 20.00
Book value per common share 468.00 457.00 435.00 414.00
PRO FORMA PER COMMUNITY COMMON SHARE
Income per common share $ 0.96 $ 1.89 $ 1.81 $ 1.66
Dividends declared per common share 0.40 0.70 0.62 0.54
Book value per common share 16.44 -- -- --
PRO FORMA EQUIVALENT PER CITIZENS COMMON
SHARE (1)
Income per common share $ 28.16 $ 55.44 $ 53.09 $ 48.69
Dividends declared per common share 11.73 20.53 18.19 15.84
Book value per common share 482.23 -- -- --
</TABLE>
(1) Pro Forma Equivalent amounts per share were calculated by taking the
corresponding pro forma per share amounts for Community and
multiplying that by the Conversion Factor of 29.333 shares of
Community Common Stock for each 1 share of Citizens Common Stock. As
explained in more detail herein, this Conversion Factor may be subject
to adjustment.
- --------------------------------------------------------------------------------
18
<PAGE>
THE MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of
Citizens Common Stock in connection with the solicitation of proxies by the
Board of Directors of Citizens to be used at the Meeting or any adjournment
thereof.
DATE, PLACE AND TIME OF THE MEETING
The Meeting will be held at the Banking House, 735 Center Street,
Ashland, Pennsylvania 17921 on Thursday, November 30, 1995 at 10:30 a.m., local
time.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, shareholders of Citizens will consider and vote upon a
proposal to approve and adopt the Merger and the Merger Agreement. Additionally,
shareholders of Citizens may be asked to approve a proposal to postpone or
adjourn the Meeting to another time and/or place for the purpose of soliciting
additional proxies in the event that there are not sufficient votes at the time
of the Meeting to approve the Merger and the Merger Agreement.
RECORD DATE; SHARES OUTSTANDING; QUORUM
Only shareholders of record of Citizens at the close of business on
October 24, 1995 (the "Record Date") will be entitled to receive notice of the
Meeting, and only shareholders of record of Citizens Common Stock at that time
will be entitled to vote at the Meeting. On the Record Date, Citizens had
outstanding 20,000 shares of Citizens Common Stock. There is no other class of
stock authorized or outstanding. Each share of Citizens Common Stock entitles
the holder to one vote. The presence at the Meeting, in person or by proxy, of
shareholders entitled to cast a majority of the votes at such meeting will
constitute a quorum.
VOTES REQUIRED
Pursuant to the applicable provisions of the NBA, the affirmative vote
of the holders of two-thirds of all outstanding shares of Citizens Common Stock
is required to approve the Merger and the Merger Agreement.
The affirmative vote of a majority of the shares present, in person or
in proxy, at the Meeting, even if a quorum is not present, will be required to
adjourn the Meeting.
On the Record Date, the directors and executive officers of Citizens
owned approximately 3,255 shares or approximately 16.275% of the outstanding
shares of Citizens Common Stock that are entitled to vote at the Meeting. The
directors and executive officers of Citizens have indicated that they intend to
vote all of such shares of Citizens Common Stock in favor of the Merger and the
Merger Agreement.
EFFECT OF ABSTENTIONS AND BROKER NONVOTES
Abstentions may be specified on the Merger and the Merger Agreement
and the Adjournment Proposal. Such abstentions will be considered present and
entitled to vote at the Meeting, but will not be counted as votes cast in the
affirmative. ABSTENTIONS BY CITIZENS' SHAREHOLDERS WILL HAVE THE EFFECT OF A
VOTE AGAINST THE MERGER AND THE MERGER AGREEMENT AND AGAINST THE ADJOURNMENT
PROPOSAL.
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<PAGE>
Brokers that are member firms of the New York Stock Exchange ("NYSE")
and who hold shares in street name for customers have authority under the rules
of the NYSE to vote those shares with respect to certain matters if they do not
receive instructions from the beneficial owner. Brokers do not have the
authority to vote shares with respect to approval of the Merger and the Merger
Agreement. Assuming that sufficient shares are present at the Meeting (so that a
quorum may be obtained), a failure of brokers to vote shares because they have
not received instructions from beneficial owners (a "broker nonvote") will have
the effect of a vote against the Merger and the Merger Agreement. Broker
nonvotes will have no effect upon the approval of the Adjournment Proposal.
VOTING, REVOCATION AND SOLICITATION OF PROXIES
All shares represented by properly executed proxies received in time
for the Meeting will be voted at the Meeting in the manner specified by the
holders thereof, unless such proxies are revoked prior to the vote. Proxies
which do not contain voting instructions will be voted in favor of the Merger
and the Merger Agreement and the Adjournment Proposal.
It is not expected that any matter other than those referred to herein
will be brought before the Meeting. If, however, other matters are properly
presented, the persons named as proxies will vote in accordance with their
judgment with respect to such matters.
A shareholder who executes and returns a proxy on the enclosed form
has the power to revoke it at any time before it is voted. The giving of a proxy
does not affect the right of shareholders to attend the Meeting and vote in
person. A shareholder's presence at a meeting, however, will not in itself
revoke the shareholder's proxy. A shareholder may revoke a proxy at any time
prior to its exercise by filing with the Secretary of Citizens a duly executed
revocation or a proxy bearing a later date. Neither attendance at the Meeting
nor voting in person at the Meeting will of itself constitute revocation of a
proxy.
The cost of soliciting proxies from Citizens' shareholders will be
paid by Citizens. In addition to solicitation by mail, directors, officers and
employees of Citizens who will not be specifically compensated for such services
may solicit proxies from the shareholders of Citizens personally or by telephone
or telegram or other forms of communication. Citizens will bear its own expenses
in connection with the solicitation of proxies for the Meeting.
SHAREHOLDERS OF CITIZENS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR
PROXY CARDS. AS DESCRIBED BELOW UNDER THE HEADING "THE MERGER-EXCHANGE
PROCEDURE," EACH CITIZENS' SHAREHOLDER WILL BE PROVIDED WITH MATERIALS FOR
EXCHANGING SHARES OF CITIZENS COMMON STOCK AS PROMPTLY AS PRACTICABLE AFTER THE
EFFECTIVE DATE.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of Citizens recommends that the shareholders
vote FOR the approval of the Merger and the Merger Agreement identified in this
---
Proxy Statement/Prospectus.
THE MERGER
The following is a description of the Merger. Such description is not
intended to be a complete description of all facts regarding the Merger and is
qualified in all respects by reference to the Merger Agreement attached hereto
as Appendix A. Shareholders of Citizens are urged to read carefully the Merger
Agreement. For a summary of the Merger, see "SUMMARY--The Merger."
20
<PAGE>
INTRODUCTION; BACKGROUND OF THE MERGER
Citizens
Citizens is a banking corporation organized on June 24, 1875 under the
national banking laws and headquartered in Ashland, Pennsylvania. Citizens
engages in commercial banking authorized under the NBA. This involves accepting
demand, time and savings deposits and granting loans (consumer, commercial, real
estate and business) to individuals, corporations, partnerships, associations
and municipalities and other governmental bodies. Citizens owns no subsidiaries.
As of June 30, 1995, Citizens had three banking offices and total
assets of $63.0 million. Its principal executive office, which it owns, is
located at 735 Center Street, Ashland, Pennsylvania 17921, and the telephone
number at such address is (717) 875-3221. Citizens is not dependent on any one
customer, and loss of any customer or a few customers would not have a material
adverse effect upon it.
Citizens Common Stock is not listed on the Nasdaq National Market, the
Nasdaq Small-Cap Market or any stock exchange, and Citizens is not subject to
the reporting requirements of the Exchange Act. There is no market maker holding
an inventory position in Citizens Common Stock, and the trading market for
Citizens Common Stock is extremely thin, with approximately 148, 131 and 659
shares known to be traded in 1992, 1993 and 1994, respectively.
Community
Community is a Pennsylvania business corporation which was organized
in 1982 and became a bank holding company through the acquisition of all of the
outstanding stock of Community Banks (formerly Upper Dauphin National Bank) at
that time. Community currently has one wholly-owned banking subsidiary, CBNA,
and two non-banking subsidiaries, Community Banks Life Insurance Company and
Community Bank Investments, Inc. As of June 30, 1995, Community had total assets
of approximately $317.5 million. Community Banks Life Insurance Company was
incorporated on November 12, 1986 under the laws of the State of Arizona for the
purpose of re-insuring credit, life and accident insurance risks. Community Bank
Investments, Inc. is a Delaware corporation formed for the purpose of investing
in and holding securities. As a bank holding company, Community is registered
with the Federal Reserve Board in accordance with the requirements of the
Federal Bank Holding Company Act of 1956, as amended, and is subject to
regulation by the Federal Reserve Board. Community's common stock is listed for
quotation on the Nasdaq National Market under the symbol "CBKI."
CBNA
CBNA was established as a national banking institution in 1867 under
the name "The First National Bank of Millersburg." CBNA engages in full service
banking and trust business, including accepting time and demand deposits, making
secured and unsecured commercial and consumer loans, financing commercial
transactions, making construction and mortgage loans and performing corporate
and personal trust services. As of June 30, 1995, CBNA had total assets of
approximately $312.7 million. CBNA provides banking services at its main office
in Millersburg, Pennsylvania, and 16 branch offices in Dauphin, Northumberland,
Schuylkill and Luzerne Counties, Pennsylvania. Both Community's and CBNA's
principal executive offices are located at 150 Market Square, P.O. Box 350,
Millersburg, Pennsylvania 17061. CBNA's telephone number is (717) 692-4781.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
The terms of the Merger Agreement are the result of arms-length
negotiations between representatives of Citizens, Community and CBNA. The Board
of Directors of Citizens believes that the terms of the Merger and the Merger
Agreement are in the best interests of Citizens and its shareholders.
21
<PAGE>
In recent years, Citizens has experienced increasingly intense
competition from non-banking financial service firms as well as from other bank
holding companies and banks. While management of Citizens has succeeded in
competing in a market dominated by larger competitors, it is increasingly
difficult to keep abreast of new service offerings and to meet a major effort by
competitors for new loan customers in the market area. The situation is
exacerbated by a dramatic increase over the past several years in regulations
governing the operation of banks and bank holding companies. Accompanying this
increased regulatory burden are increased reporting requirements and a
heightened sensitivity to the serious penalties that might be imposed if
regulatory requirements are not met. As a result, the direct overhead cost
associated with compliance has increased significantly. Based on the foregoing,
the Board of Directors of Citizens concluded that, given the intense competition
in its market area, and the increased regulatory burden, affiliation with
another financial institution would best serve the interests of the shareholders
of Citizens and would enhance the ability of Citizens to continue to serve its
customers, both consumer and commercial, in an effective manner.
In reaching this conclusion, Citizens engaged Berwind to assist it in
evaluating its future prospects, including potential opportunities for the sale
of Citizens. Berwind was selected for this purpose because of its familiarity
with business combinations involving financial institutions in the region. There
is no material relationship between Berwind, Community or CBNA. Through the
efforts of Berwind, several opportunities were presented and considered by the
Board of Directors of Citizens. After a period of extensive negotiations with
several companies which had expressed an interest in acquiring Citizens, the
Board of Directors of Citizens determined that the most favorable terms were
available from Community, resulting in the execution of the Merger Agreement.
In reaching its determination that the Merger and the Merger Agreement
are fair to, and in the best interests of, Citizens and its shareholders, the
Board of Directors of Citizens consulted with its legal and financial advisors,
and considered a number of factors, including, without limitation, the
following:
. Citizens' Board of Directors' familiarity with and review of
Citizens' business, operations, earnings, prospects and financial
condition;
. the enhanced opportunities for operating efficiencies
(particularly in terms of integration of operations and support
functions) that could result from the Merger, the enhanced
opportunities for growth that the Merger would make possible and
the respective contributions the parties would bring to the
combined institution;
. the financial strength of CBNA and the composition of its
business;
. the geographical location of Citizens and CBNA;
. the financial advice of Berwind and the opinion of Berwind that
the consideration to be paid in the Merger to the Citizens'
shareholders is fair from a financial point of view;
. Citizens' Board of Directors' review of alternatives to the
Merger (including the alternatives of remaining independent and
growing internally, remaining independent for a period of time
and then selling the bank, and remaining independent and growing
through future acquisitions), the range of possible values to
Citizens' shareholders obtainable through implementation of such
alternatives and the timing and likelihood of actually receiving
such values;
. Citizens' Board of Directors' review of possible affiliation
partners for Citizens other than CBNA; and
. the current and prospective economic, regulatory and competitive
constraints facing financial institutions, including Citizens.
22
<PAGE>
Citizens' Board of Directors did not assign any specific or relative
weight to the factors in their consideration.
THE BOARD OF DIRECTORS OF CITIZENS HAS UNANIMOUSLY APPROVED THE MERGER
AND THE MERGER AGREEMENT AND BELIEVES THAT THE PROPOSED MERGER IS IN THE BEST
INTERESTS OF CITIZENS AND RECOMMENDS THAT CITIZENS' SHAREHOLDERS VOTE TO APPROVE
THE MERGER AND THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
Citizens retained Berwind to act as its financial advisor and to
render a fairness opinion in connection with the Merger. Berwind has rendered an
opinion to the Board of Directors of Citizens that, based upon and subject to
the various considerations set forth therein, as of June 27, 1995, and updated
as of October 26, 1995, the Merger is fair, from a financial point of view, to
the holders of Citizens Common Stock.
The full text of Berwind's opinion dated as of October 26,1995, which
sets forth the assumptions made, matters considered and limitations of the
review undertaken, is attached as Appendix B to this Proxy Statement/Prospectus,
is incorporated herein by reference, and should be read in its entirety in
connection with this Proxy Statement/Prospectus. This section of the Proxy
Statement/Prospectus sets forth the material terms of Berwind's opinion;
however, the summary of the opinion of Berwind set forth herein is qualified in
its entirety by reference to the full text of such opinion attached as Appendix
B to this Proxy Statement/Prospectus.
Citizens retained Berwind to act as Citizens' financial advisor in
connection with the Merger. Berwind was selected to act as Citizens' financial
advisor based upon its qualifications, expertise and experience. Berwind has
knowledge of, and experience with, Pennsylvania banking markets and banking
organizations operating in those markets and was selected by Citizens because of
its knowledge of, experience with, and reputation in the financial services
industry.
In such capacity, Berwind participated in the negotiations with
respect to the pricing and other terms of the Merger, but the decision with
respect to the Merger was determined by Citizens' Board of Directors following
negotiations with Community. On June 27, 1995, Citizens' Board of Directors
approved and executed the Merger Agreement. Berwind delivered an opinion (the
"June Opinion") to Citizens' Board stating that, as of such date, the Merger was
fair to the shareholders of Citizens from a financial point of view. Berwind
reached the same opinion as of the date of its opinion contained in this Proxy
Statement/Prospectus. The full text of the opinion of Berwind dated October 26,
1995 (the "Proxy Opinion"), which sets forth assumptions made, matters
considered and limits on the review undertaken, is attached as Appendix B to
this Proxy Statement/Prospectus. No limitations were imposed by Citizens' Board
of Directors upon Berwind with respect to the investigations made or procedures
followed by Berwind in rendering the June Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of
Citizens and Community; (ii) reviewed the Merger Agreement; (iii) reviewed and
analyzed the stock market performance of Community; (iv) studied and analyzed
the consolidated financial and operating data of Citizens and Community; (v)
considered the terms and conditions of the Merger between Citizens and Community
as compared with the terms and conditions of comparable bank mergers and
acquisitions; (vi) met and/or communicated with certain members of Citizens' and
Community's senior management to discuss their respective operations, historical
financial statements and future prospects; and (vii) conducted such other
financial analyses, studies and investigations as it deemed appropriate.
23
<PAGE>
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to Citizens'
financial forecasts reviewed by Berwind in rendering its opinion, Berwind
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Citizens as to the future financial performance of Citizens.
Berwind did not make an independent evaluation or appraisal of the assets
(including loans) or liabilities of Citizens or Community nor was it furnished
with any such appraisal. Berwind also did not independently verify and has
relied on and assumed that all allowances for loan and lease losses set forth in
the balance sheets of Citizens and Community were adequate and complied fully
with applicable law, regulatory policy and sound banking practice as of the date
of such financial statements.
The following is a summary of selected analyses prepared by Berwind
and presented to Citizens' Board in connection with the June Opinion and
analyzed by Berwind in connection with the June and Proxy Opinions.
Comparable Companies and Comparable Acquisition Transaction Analyses.
Berwind compared selected financial and operating data for Citizens with those
of a peer group of selected banks and bank holding companies with assets less
than $100 million, as of the most recent financial period publicly available,
located in Schuylkill and surrounding Pennsylvania counties. Financial data and
operating ratios compared in the analysis of the Citizens peer group included
but was not limited to: return on average assets, return on average equity, net
interest margin, capital ratios and certain asset quality ratios. The analysis
showed Citizens' return on average assets was 1.33% compared to the peer group
median of 0.97%, its return on average shareholders' equity was 9.01% compared
to the peer group median of 8.01%, its shareholders' equity as a percentage of
assets was 14.74% versus the peer group median of 10.98%, its nonperforming
assets as a percentage of loans and other real estate owned was 2.96% compared
to the peer group median of 1.89% and its loan loss reserve as a percentage of
nonperforming loans was 37.24% versus the median of 104.46% for the peer group.
Berwind also compared selected financial, operating and stock market
data for Community with those of a peer group of selected commercial banks with
assets between $250 million and $500 million, as of the most recent period
publicly available, located in Maryland, New Jersey and Pennsylvania. Financial,
operating and stock market data, ratios and multiples compared in the analysis
of the Community peer group included but were not limited to: return on average
assets, return on average equity, net interest margin, capital ratios, certain
asset quality ratios, price to book value, price to tangible book value, price
to earnings (latest twelve months) and dividend yield. The analysis showed
Community's return on average assets was 1.34% compared to the peer group median
of 0.95%, its return on average shareholders' equity was 12.61% compared to the
peer group median of 12.95%, its shareholders' equity as a percentage of assets
was 10.73% versus the peer group median of 8.24%, its nonperforming assets as a
percentage of loans and other real estate owned was 0.91% compared to the peer
group median of 1.94%, its nonperforming assets and loans past due 90 days or
more as a percentage of shareholders' equity and loan loss reserve was 4.89%
compared to the peer group median of 13.95% and its loan loss reserve as a
percentage of nonperforming assets and loans past due 90 days or more was
123.08% versus the median of 68.43% for the peer group.
In addition, the analysis showed that Community's common stock price
per share ($26.00 on the date of the Proxy Opinion) as a percentage of book
value and tangible book value per share was 154.9% and 162.0%, respectively,
compared to the peer group median of 159.3% and 164.4%, respectively, and its
common stock price per share as a multiple of latest twelve months' earnings per
share of 12.5 times compared to the peer group median of 13.3 times.
Berwind also compared the multiples of book value, tangible book value
and latest twelve months' earnings inherent to the Merger with the multiples
paid in recent acquisitions of banks and bank holding companies that Berwind
deemed reasonably comparable. The transactions deemed reasonably comparable by
Berwind included both interstate and intrastate acquisitions announced since
January 1, 1995, in which the selling
24
<PAGE>
institution's assets were between $25 million and $100 million. Berwind compared
transactions located throughout the country and analyzed those transactions
in three groups: a national group (77 banks), a regional group (5 banks) and
a performance group (15 banks). The national group included transactions
throughout the United States; the regional group included transactions involving
commercial banking institutions located in Delaware, Maryland and Pennsylvania;
and the performance group included transactions involving commercial banking
institutions with reported shareholders' equity to assets greater than 10.0% and
return on average assets greater than 1.25%. The median values calculated for
price as a percentage of book value were 167.6%, 150.0% and 162.6% for the
national, regional and performance group, respectively; the median of price as a
percentage of tangible book value was 167.6%, 150.0% and 162.6%, for the
national, regional and performance group, respectively; and the median of the
price as a multiple of latest twelve months' earnings per share was 15.1, 20.5
and 14.2 times for the national, regional and performance group, respectively.
These medians compare to the Merger price per share as a percentage of book
value, price per share as a percentage of tangible book value and price per
share as a multiple of the latest twelve months' earnings of 163.5%, 163.5% and
18.6 times, respectively.
No company or transaction used in this analysis is identical to
Citizens, Community or the Merger. Accordingly, an analysis of the result of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that would affect the public trading values of
the companies or company to which they are being compared.
Discounted Dividend Analyses. Using discounted dividend analyses,
Berwind estimated the present value of the future dividend streams that Citizens
could produce over a five year period under different assumptions as to dividend
pay out levels if Citizens performed in accordance with various earnings growth
forecasts. Berwind also estimated the terminal value for Citizens Common Stock
after the five year period by applying a range of earnings multiples to
Citizens' terminal year earnings. The range of multiples used reflected a
variety of scenarios regarding the growth and profitability prospects of
Citizens. The dividend streams and terminal values were then discounted to
present value using discount rates reflecting different assumptions regarding
the rates of return required by holders or prospective buyers of Citizens Common
Stock.
Pro Forma Contribution Analysis. Berwind analyzed the changes in the
amount of earnings, book value and dividends represented by 1.0 share of
Citizens Common Stock prior to the Merger and the shares of Community stock to
be received after the Merger based on application of the exchange ratio as
determined in conformity with the exchange ratio per the Merger Agreement. The
analysis considered, among other things, the changes that the Merger would cause
to Citizens' earnings per share, book value per share and indicated dividends.
On a per share equivalent basis, Citizens' earnings per share increases 42.0%
from $34.66 to $58.81, its book value per share increases 7.0% from $470.95 to
$503.82 and its dividend per share increases 15.6% from $20.50 to $23.69. In
reviewing the pro forma combined earnings, equity and assets of Community based
on the Merger with Citizens, Berwind analyzed the contribution that Citizens
would have made to the combined company's earnings, equity and assets as of and
for the latest twelve month period ended March 31, 1995. Berwind also reviewed
the percentage ownership that Citizens' shareholders would hold in the combined
company.
In connection with rendering its June Opinion and Proxy Opinion,
Berwind performed a variety of financial analyses. Although the evaluation of
the fairness, from a financial point of view, of the consideration to be paid in
the Merger was to some extent a subjective one based on the experience and
judgment of Berwind and not merely the result of mathematical analysis of
financial data, Berwind principally relied on the previously discussed financial
valuation methodologies in its determinations. Berwind believes its analyses
must be considered as a whole and that selecting portions of such analyses and
factors considered by Berwind without considering all such analyses and factors
could create an incomplete view of the process underlying Berwind's opinion. In
its analysis, Berwind made numerous assumptions with respect to business,
market, monetary and economic conditions, industry performance and other
matters, many of which are beyond Citizens' and
25
<PAGE>
Community's control. Any estimates contained in Berwind's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates.
In reaching its opinion as to fairness, none of the analyses performed
by Berwind was assigned a greater significance by Berwind than any other. As a
result of its consideration of the aggregate of all factors present and analyses
performed, Berwind reached the conclusion and opinion that the terms of the
Merger, as set forth in the Merger Agreement, are fair from a financial point of
view to Citizens and its shareholders.
In connection with delivering its Proxy Opinion, Berwind updated
certain analyses described above to reflect current market conditions and events
occurring since the date of the Merger Agreement. Such reviews and updates led
Berwind to determine that it was not necessary to change the conclusions it had
reached in connection with rendering the June Opinion.
Berwind, as part of its investment banking business, is regularly
engaged in the valuation of assets, securities and companies in connection with
various types of asset and security transactions, including mergers,
acquisitions, private placements and valuation for various other purposes and in
the determination of adequate consideration in such transactions.
Berwind's opinion was based solely upon the information available to
it and the economic, market and other circumstances as they existed as of the
date its Proxy Opinion was delivered; events occurring after the date of its
Proxy Opinion could materially affect the assumptions used in preparing its
Proxy Opinion. Berwind has not undertaken to reaffirm and revise its Proxy
Opinion or otherwise comment upon any events occurring after the date thereof.
In delivering its June Opinion and Proxy Opinion, Berwind assumed that
in the course of obtaining the necessary regulatory and governmental approvals
for the Merger, no restriction will be imposed on Community that would have a
material adverse effect on the contemplated benefits of the Merger. Berwind also
assumed that there would not occur any change in applicable law or regulation
that would cause a material adverse change in the prospects or operations of
Community after the Merger.
Pursuant to the terms of the engagement letter dated February 17,
1995, Citizens has paid Berwind $32,500 for acting as its financial advisor in
connection with the Merger, including delivering the June and Proxy Opinions. In
addition, Citizens also agreed to pay Berwind an aggregate fee (presently
estimated to be $154,000, including amounts already paid) equal to 1% of the
transaction value of the Merger upon the consummation of the Merger, and to
reimburse Berwind for its reasonable out-of-pocket expenses (up to $5,000).
Whether or not the Merger is consummated, Citizens has also agreed to indemnify
Berwind and certain related persons against certain liabilities relating to or
arising out of its engagement.
The full text of the Proxy Opinion of Berwind dated as of October 26,
1995, which sets forth the assumptions made and matters considered, is attached
as Appendix B to this Proxy Statement/Prospectus. Citizens' shareholders are
urged to read the Proxy Opinion in its entirety. Berwind's Proxy Opinion is
directed only to the consideration to be received by Citizens' shareholders in
the Merger and does not constitute a recommendation to any holder of Citizens
Common Stock as to how such holder should vote at the Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE OPINION OF BERWIND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH
IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT/PROSPECTUS.
THE OPINION OF BERWIND IS DIRECTED ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE PAID IN THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY CITIZENS' SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE MEETING.
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<PAGE>
TERMS OF THE MERGER
The description of the Merger Agreement set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and incorporated by reference herein. Shareholders of
Citizens are urged to read carefully the Merger Agreement.
Effect of the Merger
Pursuant to the Merger Agreement, Citizens will be merged with and
into CBNA, with CBNA as the surviving entity (sometimes referred to as the
"Surviving Corporation"). The shares of common stock of CBNA issued and
outstanding immediately prior to the Effective Date (as defined below) will
remain outstanding and unchanged after the Merger, and will thereafter
constitute all of the issued and outstanding capital stock of the Surviving
Corporation. The articles of association and bylaws of CBNA in effect
immediately prior to the Merger will remain in effect as the articles of
association and bylaws of the Surviving Corporation. The directors and officers
of CBNA immediately prior to the Merger will remain in office as the directors
and officers of the Surviving Corporation; provided, however, that Dean N. Paul,
-------- -------
the present Cashier of Citizens, will be appointed to the Board of Directors of
CBNA and CBNA's Schuylkill Advisory Board, and will hold such office until the
next annual meeting of the shareholders of CBNA. Additionally, CBNA will appoint
two additional members of Citizens' Board of Directors to CBNA's Schuylkill
Advisory Board.
Merger Consideration; Conversion Factor
In connection with the Merger, each share of Citizens Common Stock
issued and outstanding as of the Effective Date, other than shares of Citizens
Common Stock held by persons who have perfected dissenters rights and shares of
Citizens Common Stock held and beneficially owned by Community or any subsidiary
of Community which are not held in a fiduciary or similar capacity on behalf of
others, will be converted into and become a right to receive shares (the
"Conversion Factor") of Community Common Stock, par value $5.00 per share,
having a Market Value of $770.00, calculated as follows: if the Market Value Per
Share (as defined below) of Community Common Stock as of the close of business
on the fifth trading date preceding the Merger is (a) $26.25 per share, the
Conversion Factor will be 29.333; (b) less than $26.25 per share, then the
Conversion Factor will be increased to the number obtained by dividing $770.00
by the Market Value Per Share of Community Common Stock; provided, however, that
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in no event shall the Conversion Factor be greater than 31.206; or (c) is more
than $26.25 per share, then the Conversion Factor will be decreased to the
number obtained by dividing $770.00 by the Market Value Per Share of Community
Common Stock; provided, however, that in no event shall the Conversion Factor be
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less than 27.673. The Conversion Factor will become fixed if the Market Value
Per Share of Community Common Stock is less than $24.67 or more than $27.82; if
the Market Vale of Community Common Stock is outside this range, Citizens'
shareholders will receive Community Common Stock having a Market Value lower or
higher than $770.00. The Merger Agreement defines the term "Market Value Per
Share" to mean with respect to a calculation date the average of the closing
sales price of Community Common Stock as reported on the Nasdaq National Market
for the 30 consecutive trading days ending on and including the date as of which
the Market Value Per Share is to be calculated. Additionally, if the sum of the
total number of shares of Citizens Common Stock outstanding at the Effective
Date exceeds 20,000, then the Conversion Factor will be reduced to the number
obtained by multiplying the Conversion Factor times a fraction the numerator of
which shall be 20,000 and the denominator of which shall be the total number of
shares of Citizens Common Stock outstanding at the Effective Date.
In addition to the above adjustments, subsequent to the date of the
Merger Agreement but prior to the Effective Date, whenever: (a) a record date
occurs for the purpose of determining the holders of Community Common Stock
entitled to receive a dividend declared payable in shares of Community Common
Stock; (b) Community subdivides the outstanding shares of Community Common
Stock; (c) Community combines the outstanding shares of Community Common Stock
into a smaller number of shares; or (d) Community issues by
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reclassification of its shares of Community Common Stock any shares of stock of
Community, the Conversion Factor will also be adjusted so that each share of
Citizens Common Stock thereafter shall be convertible into and exchangeable for
the number of shares of Community Common Stock which the shares of Citizens
Common Stock would have represented had such shares of Citizens Common Stock
been converted into and exchanged for shares of Community Common Stock prior to
the happening of such event and such Community Common Stock had been entitled to
the benefit of the happening of such event.
Closing; Effective Date
The Merger Agreement provides that the Closing of the Merger will be
held at the executive offices of Community at 10:00 a.m. on the Effective Date
which date shall not be later than ten business days following the date on which
the conditions set forth in the Merger Agreement are satisfied or waived. See
"THE MERGER-Terms of the Merger-Conditions Precedent" below.
Representations and Warranties
Citizens and Community (with respect to itself, and where applicable,
CBNA and other Community subsidiaries) have made certain representations and
warranties as set forth in the Merger Agreement. The representations and
warranties relate to, among other things, proper organization; articles of
association, bylaws and minute books; powers and qualifications of each
corporation; subsidiaries; capital structures; leases; litigation; insurance;
compliance with environmental laws; material contracts and agreements;
classified loans; employee benefit plans; no material adverse change in
financial condition; title to real property and other assets; the adequacy of
the provision for current taxes payable and other tax matters; authorization of
the Merger Agreement; absence of conflict with other agreements and the consents
and approvals that will be required for the consummation of the Merger; adequacy
of financial statements; brokerage and other fees; the absence of false or
misleading statements in certain financial statements, proxy statements,
reports, documents or other written material; and the delivery and filing of
certain tax returns and reports. Citizens has made an additional representation
regarding certain of its investment securities.
Conduct of Business Pending the Merger
Citizens has agreed that prior to the Effective Date of the Merger, it
will conduct its business in the ordinary course as previously conducted and
that it will use its reasonable best efforts: (a) to preserve its respective
business and business organization; (b) to keep available to Community the
services of its present officers (provided, however, that it shall have the
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right to terminate the employment of any such officer for cause in accordance
with its established employee procedures); (c) to preserve the good will of its
customers and others having business relations with it; (d) to consult with
Community as to the making of any decisions or the taking of any actions in
matters other than in the ordinary course of business; (e) to maintain its
properties in customary repair, working order and condition (reasonable wear and
tear excepted); (f) to comply with all laws applicable to it and the conduct of
its business; (g) to keep in force, at not less than their present limits, all
policies of insurance (including Federal Deposit Insurance Corporation ("FDIC")
deposit insurance); (h) to make no material change in the general terms,
policies and conditions upon which it presently does business other than in the
ordinary course of business; (i) to file in a due and timely manner all reports,
tax returns and other documents required to be filed with federal, state, local
and other authorities; and (j) unless it is contesting the same in good faith
and has established reasonable reserves therefor, to pay when required to be
paid all taxes indicated by tax returns so filed or otherwise lawfully levied or
assessed upon it or any of its properties and to withhold or collect and pay to
the proper governmental authorities or hold in separate bank accounts for such
payment all taxes and other assessments which it believes in good faith to be
required by law to be so withheld or collected.
Community and CBNA have both agreed that prior to the Effective Date
of the Merger, Community and each of its subsidiaries will conduct its
respective business in the ordinary course as previously conducted
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and use its reasonable best efforts to: (i) to preserve its respective business
and business organization; (ii) to preserve the good will of its customers and
others having business relations with it; (iii) to maintain its properties in
customary repair, working order and condition (reasonable wear and tear
excepted); (iv) to comply with all laws applicable to it and the conduct of its
business; (v) to keep in force at not less than their present limits all
policies of insurance (including FDIC deposit insurance); (vi) to file in a due
and timely manner all reports, tax returns and other documents required to be
filed with federal, state, local and other authorities; and (vii) unless it is
contesting the same in good faith and has established reasonable reserves
therefor, to pay when required to be paid all taxes indicated by tax returns so
filed or otherwise lawfully levied or assessed upon it or any of its properties
and to withhold or collect and pay to the proper governmental authorities or
hold in separate bank accounts for such payment all taxes and other assessments
which it believes in good faith to be required by law to be so withheld or
collected.
Certain Other Agreements
Pursuant to the Merger Agreement, Citizens has also agreed (except as
expressly permitted by the Merger Agreement or to the extent that Community
otherwise consents in writing), that it will not: (a) amend its articles of
association or bylaws; enter into any shareholder agreement, understanding or
commitment relating to the right to vote its shares of capital stock; or
repurchase, redeem or retire or otherwise acquire any share of, or any security
convertible into shares of, its capital stock or other equity investment; (b)
issue, deliver or sell shares of capital stock or securities convertible into
any such shares, or issue or grant any right, option or other commitment for the
issuance, delivery or sale of any such shares or securities; (c) declare, set
aside, or pay any dividend or other distribution in respect of its capital stock
(including, without limitation, any stock dividend or distribution) other than
regular quarterly cash dividends payable in accordance with customary dividend
policy (which shall mean cash dividends payable with respect to Citizens Common
Stock at an annual rate on a calendar year not in excess of $20.50 per share);
(d) enter into or amend, or increase the contribution to or obligation under,
any employment contract or any bonus, stock option, profit sharing, pension,
retirement, savings, incentive, deferral or similar employee benefit program or
arrangement, or authorize the creation of any new or replacement job
classifications or staff positions, pay bonuses or other extraordinary
compensation, or grant any salary or wage increase except normal individual
increases in compensation to employees in accordance with established employee
procedures of Citizens; or (e) other than in the Ordinary Course of Business (as
defined below), authorize or make any material change in its business or
operations; incur any material direct or contingent liabilities or commitments;
sell or dispose of any shares of its capital stock, or lease, sell or dispose of
any other material part of its assets; establish any new branch banking offices,
loan production offices or other offices, or make any capital expenditures in
excess in the aggregate of $20,000 (except for ordinary repairs, renewals or
replacements); waive or release any right or cancel or compromise any of its
debts or claims; or otherwise enter into any material contract, transaction or
commitment. For purposes of the Merger Agreement, the "Ordinary Course of
Business" consists of the banking business as presently conducted by Citizens
and not prohibited by the NBA.
Citizens has also agreed that: (i) charge-offs and charge-downs of
loans will be taken against its allowance for loan losses in the Ordinary Course
of Business when a potential loss has been quantified by the executive officers
of Citizens; (ii) Community and its counsel, financial advisors and accountants
(all of whom shall be bound by the confidential nature of any of the following)
will be given full access, upon reasonable request, to Citizens' properties,
books, contracts and records, and that Citizens shall furnish all information
concerning its affairs as such persons may reasonably request; (iii) it shall
use its reasonable best efforts to cause the Merger and the Merger Agreement to
be submitted to its shareholders for their consideration and vote, and that the
Board of Directors of Citizens, consistent with their fiduciary duties in the
opinion of counsel, will recommend that the Merger and the Merger Agreement be
approved; (iv) it will deliver to Community a correct and complete list of
Citizens' shareholders; (v) it will, separately and jointly with Community, use
its reasonable best efforts in good faith to take or cause to be taken as
promptly as practicable all steps necessary to obtain requisite government
approvals of the Merger and to cause the Merger to be consummated; (vi) it will
give written notice to Community upon becoming aware of any impending or
threatened occurrence of any event
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which would cause or constitute a breach of any of the agreements,
representations or warranties of Citizens contained or referred to in the Merger
Agreement and that it will use its reasonable best efforts to promptly prevent
or remedy the same; (vii) it will not take any actions with respect to its
business or operations that in its or its accountants' judgment would cause the
Merger or any related transaction to fail to meet the relevant criteria for
pooling of interests accounting treatment; and (viii) from and after the date
the Merger is approved by the shareholders of Citizens until the Effective Date,
to consider the recommendations of Community and its accountants with respect to
adjustments in its balance sheet, statement of income, statement of
stockholders' equity and statement of cash flows at December 31, 1995 and for
the 12 months then ending. Citizens has also agreed that in co-operation with
Community, it would promptly prepare for inclusion in the Community Registration
Statement (as defined below) this proxy statement for the purpose of submitting
the Merger Agreement to the Citizens' shareholders.
Pursuant to the terms of the Merger Agreement, Community and CBNA have
agreed: (a) that Community and/or CBNA will use its reasonable best efforts in
good faith to take as promptly as practicable all steps necessary to cause the
Merger to be consummated as expeditiously as possible; (b) as the sole
shareholder of CBNA, Community shall by unanimous shareholder action ratify and
confirm the Merger and cause the Board of Directors of CBNA to approve the
Merger; (c) that Community will issue shares of Community Common Stock in
accordance with the Conversion Factor, and that such shares, when issued and
delivered, will be duly authorized and legally and validly issued, fully paid
and nonassessable; (d) that prior to the Effective Date, Community will appoint
American Stock Transfer and Trust Company as Exchange Agent for the purpose of
exchanging certificates in accordance with the terms of the Merger Agreement;
(e) that prior to the Effective Date, separately and jointly with Citizens,
Community will use its reasonable best efforts in good faith to take or cause to
be taken as promptly as possible all steps necessary to obtain (i) the prior
approval of the Merger by the OCC and the Department of Banking, and (ii) all
other consents and approvals of government agencies as are required by law or
otherwise; (f) that Community shall promptly give written notice to Citizens
upon becoming aware of any impending or threatened occurrence of any event which
would cause or constitute a breach of any of the agreements, representations or
warranties of Community contained or referred to in the Merger Agreement and
that it will use its reasonable best efforts to promptly prevent or remedy the
same; (g) that Community and each of its subsidiaries will give Citizens and its
counsel, financial advisors and accountants (all of whom shall be bound by the
confidential nature of any of the following) full access, upon reasonable
request, to its properties, books, contracts and records, and that they shall
furnish all information concerning their respective affairs as Citizens may
reasonably request; (h) that Community shall, in good faith, endeavor to place
as employees with CBNA or its other subsidiaries, persons who are employees of
Citizens immediately prior to the Effective Date on terms and conditions
(including salaries and benefits) comparable to those made available to
employees of Community, CBNA and its subsidiaries holding similar positions; and
(i) that Community will not take any actions or engage in any transaction
following the Merger that would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code or fail to qualify
for pooling of interests accounting treatment. Community has also agreed that it
will promptly prepare and file with the Commission a registration statement (the
"Community Registration Statement") under and pursuant to the provisions of the
Securities Act for the purpose of registering the Community Common Stock to be
issued in connection with the Merger.
Pursuant to the terms of the Merger Agreement, Citizens and Community
have both agreed that: (i) each party to the Merger Agreement shall, and shall
cause its directors, officers, attorneys and advisors, to maintain (unless
otherwise required by applicable law) the confidentiality of all information
obtained in connection with the Merger Agreement which is not otherwise publicly
disclosed by the other party or publicly available; and (ii) both Community and
Citizens shall agree with each other as to the form and substance of any press
release related to the Merger Agreement or the transactions contemplated
thereby, and shall consult with each other as to the form and substance of other
public disclosures related thereto. Citizens and Community have also agreed that
they shall use their reasonable best efforts to have the Community Registration
Statement declared effective under the Securities Act as soon as may be
practicable.
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Conditions Precedent
The obligations of Citizens and Community to consummate the Merger are
subject to, among other things, the satisfaction of the following conditions:
(a) the performance by Citizens and Community of each of their respective
obligations under the Merger Agreement and the accuracy of each of Citizens' and
Community's respective representations and warranties contained therein; (b) the
absence of any material adverse change in the financial condition of each of the
respective parties and their subsidiaries; (c) approval of the Merger Agreement
and the transactions contemplated therein by the shareholders of Citizens and
the sole shareholder of CBNA; (d) the receipt, by each of the respective
parties, of a certificate from the other party as to matters specifically
enumerated in the Merger Agreement and the opinion of counsel as required
therein; (e) the effectiveness of the Community Registration Statement and the
absence of stop orders suspending the effectiveness; (f) the receipt of all
governmental approvals required by the Merger Agreement; (g) receipt of a letter
from Coopers & Lybrand L.L.P., dated the effective date of the Community
Registration Statement, as required by the Merger Agreement, subject to
satisfaction of the requirements of Statement on Auditing Standards No. 72 of
the American Institute of Certified Public Accountants, if applicable; (h) the
receipt of a ruling from the IRS or an opinion from Mette, Evans & Woodside,
special counsel to Community, as to certain tax matters; and (i) the Merger is
accounted for under the pooling of interests method of accounting.
The obligations of Citizens to consummate the Merger are further
subject to: (i) the listing on the Nasdaq National Market of shares of Community
Common Stock to be issued in connection with the Merger; and (ii) the receipt of
the Proxy Opinion.
The obligations of Community to consummate the Merger are further
subject to: (a) the receipt of a letter from Citizens' litigation counsel on the
Effective Date setting forth pending litigation involving Citizens which was not
previously disclosed in writing to Community; (b) the aggregate number of shares
of Citizens Common Stock held by persons who have taken the steps required prior
to the Effective Date to perfect their right (if any) to be paid the fair value
of such shares under the NBA ("Dissenting Shares") are not enough to prevent
Community from meeting the continuity of business enterprise requirement of
Section 368(a)(1)(A) of the Code, and the number of Dissenting Shares, plus the
number of shares owned by Community or its affiliates, together with the
aggregate number of fractional shares with respect to which persons will receive
cash in lieu of Community Common Stock pursuant to the Merger Agreement, shall
be less than 10% of the number of outstanding shares of Citizens Common Stock or
such number, if less, which will allow Community to account for the Merger as a
pooling of interest; and (c) the receipt by Community of letters from Citizens'
affiliates for purposes of Rule 145 under the Securities Act.
Waiver; Amendment
Any provision of the Merger Agreement may be: (a) waived by the party
benefitted by the provision; or (b) amended or modified at any time by an
agreement in writing duly authorized and executed by each of the parties, except
that no amendment which would reduce the amount or change the form of
consideration to be delivered to the shareholders of Citizens or alter or change
any of the terms or conditions of the Merger Agreement so as to materially
adversely affect the shareholders of Citizens, may be made subsequent to
Citizens' shareholder approval without obtaining further shareholder approval.
Termination
The Merger Agreement provides that it may be terminated by the mutual
consent of both Citizens and Community at any time prior to the consummation of
the Merger.
The Merger Agreement further provides that it may be terminated by the
Board of Directors of Citizens: (a) if (i) Citizens becomes aware of any
material facts or circumstances existing on or after December 31, 1994 affecting
Community of which it was not aware as of the date of the Merger Agreement, (ii)
a material
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adverse change in the business or financial condition of Community has occurred,
or (iii) there has been a failure, or prospective failure, on the part of
Community to comply with its obligations or any conditions applicable to it
under the Merger Agreement; (b) on or after May 31, 1996, if (i) any of the
conditions to which the obligations of Citizens are subject under the Merger
Agreement have not been fulfilled (provided, however, that Citizens shall not
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have the right to terminate the Merger Agreement for a period of six months if
Community is engaged in litigation or an appeal procedure relating to an attempt
to obtain one or more of the government approvals required by the Merger
Agreement), or (ii) such conditions have been fulfilled or waived but Community
shall have failed to complete the Merger; (c) if the Merger and the Merger
Agreement are not approved by the affirmative vote of Citizens' shareholders
owning at least two-thirds of its capital stock outstanding at the Meeting,
including any adjournment thereof; provided, however, that Citizens and
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Community may mutually agree to keep the Merger Agreement in effect to call an
additional meeting of the Citizens' shareholders to obtain such shareholder
approval; or (d) if the Market Value Per Share of Community on the fifth trading
date preceding the Effective Date of the Merger (or, if such date is not a
trading day, on the immediately preceding trading day) is less than $22.31 per
share; provided, however, that in the event Citizens elects to terminate the
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Merger Agreement in accordance with (d) above, both parties have agreed to a 20
day standstill period from the date of such termination, during which period the
parties must attempt in good faith to renegotiate the Conversion Factor, and if
required by law, resubmit the Merger for approval by Citizens' shareholders at a
special meeting duly called for that purpose. During such 20 day period,
Citizens has also agreed it will not merge, consolidate, acquire the assets of
(except in the Ordinary Course of Business), or solicit any offers for any of
its capital stock or assets, or otherwise enter into any business combination or
discussions concerning the same.
The Merger Agreement further provides that it may be terminated by the
Board of Directors of Community: (a) if (i) any of the conditions to which the
obligations of Community are subject under the Merger Agreement have not been
fulfilled, or (ii) such conditions have been fulfilled or waived by Community
but Citizens shall have failed to complete the Merger; (b) if (i) Community
becomes aware of any material facts or circumstances existing on or after
December 31, 1994 affecting Citizens of which it was not aware as of the date of
the Merger Agreement, (ii) a material adverse change in the business or
financial condition of Citizens has occurred, or (iii) there has been a failure,
or prospective failure, on the part of Citizens to comply with its obligations
or any conditions applicable to it under the Merger Agreement; (c) if the Market
Value Per Share of Community on the fifth trading date preceding the Effective
Date of the Merger (or, if such date is not a trading day, on the immediately
preceding trading day) is more than $30.19 per share; provided, however, that in
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the event Community elects to terminate the Merger Agreement in accordance with
(c) above, both parties have agreed to a 20 day standstill period from the date
of such termination, during which period the parties must attempt in good faith
to renegotiate the Conversion Factor, and if required by law, resubmit the
Merger for approval by Citizens' shareholders at a special meeting duly called
for that purpose.
The Merger Agreement further provides that it may be terminated by the
Board of Directors of either Citizens or Community if any material action,
proceeding or investigation is pending or threatened before any court or
administrative agency by any governmental agency or other person challenging, or
seeking material damages in connection with, the Merger.
The Merger Agreement further provides that under the Merger Agreement,
the power of termination may only be exercised by written notice, signed on
behalf of the party by its Chairperson (or President) and Chief Executive
Officer, to the other party. Additionally, termination of the Merger Agreement
will not terminate or affect the obligations of Citizens and Community to pay
any expenses required by the Merger Agreement, or any other agreement reached
between the parties after such termination.
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EXPENSES
Except as discussed under "Termination Fee" below, whether or not the
Merger is consummated, all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated therein shall be paid by the
party incurring such costs, except that in the event the Merger is not
consummated for any reason other than an Acquisition Proposal, Community and
Citizens shall each pay one-half of: (a) the aggregate costs theretofore
incurred in printing the Community Registration Statement and this Proxy
Statement/Prospectus; (b) the registration fee for the Community Registration
Statement; and (c) the fees for filing applications for any government approvals
required by the Merger Agreement.
NO SOLICITATION; PURSUIT OF OTHER TRANSACTIONS
In the Merger Agreement, Citizens has agreed that neither it nor any
of its officers or directors shall (and Citizens has agreed to direct and use
its reasonable best efforts to cause its employees, agents and representatives,
including, without limitation, any investment banker, attorney or accountant
retained by it not to) initiate, solicit or encourage, directly or indirectly,
any inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to shareholders of Citizens, but excluding the
transactions contemplated by the Merger Agreement) with respect to a merger,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, Citizens (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or, except to the extent legally required for the discharge by
Citizens' Board of Directors of its fiduciary duties as advised in writing by
the Board's counsel, 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. Citizens has agreed to
promptly notify Community of any inquiries or proposals regarding an Acquisition
Proposal.
TERMINATION FEE
If Citizens fails to complete the transactions contemplated in the
Merger Agreement by reason of an Acquisition Proposal, the Merger Agreement
requires Citizens to reimburse Community for its expenses; provided, further,
that such expenses have been agreed by the parties to be $200,000. In connection
with such expenses, the Merger Agreement further defines an Acquisition Proposal
to mean: (a) the making, other than by Community or any of its subsidiaries or
affiliates, of a tender or exchange offer for at least 19.9% of the outstanding
shares of Citizens; (b) the acquisition, by any person or group of persons other
than Community or any of its subsidiaries or affiliates of beneficial ownership
or the right to acquire beneficial ownership of 19.9% or more of the outstanding
shares of Citizens (the term "group" and "beneficial ownership" having the
meanings assigned thereto in Section 13(d) of the Exchange Act and the
regulations promulgated thereunder); (c) the making by any person, other than
Community or any of its subsidiaries or affiliates, by public announcement or
communication to Citizens, of a firm proposal to (i) acquire Citizens, by
merger, consolidation, purchase of all or substantially all of its assets or
other similar transaction, or (ii) make any such tender or exchange offer as
described in (a) above; (d) the failure of Citizens' shareholders to approve the
Merger at a meeting called for such purposes if at the time of such meeting
there has been an announcement by a person to acquire 19.9% or more of the
outstanding shares of Citizens, or to acquire, merge or consolidate with
Citizens, or to purchase all or substantially all of Citizens' assets.
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CONTINUED EMPLOYMENT OF CITIZENS' EMPLOYEES
Pursuant to the terms of the Merger Agreement, Community has agreed,
in good faith, to endeavor to place as employees with CBNA or its other
subsidiaries, persons who are employees of Citizens immediately prior to the
Effective Date on terms and conditions (including salaries and benefits)
comparable to those made available to employees of Community, CBNA and its other
subsidiaries holding similar positions. Such persons as are so employed after
the Effective Date shall have such titles as are appropriate and consistent with
Community's then existing personnel structure. Community has also agreed to
continue the compensation of Citizens' employees at the same levels in effect on
the Effective Date through December 31, 1996, subject to Community's right to
terminate any employee of Citizens for cause after the Effective Date.
INDEMNIFICATION OF CITIZENS' OFFICERS AND DIRECTORS; INSURANCE
In the Merger Agreement, Community has agreed to indemnify and hold
harmless, for a period of six years following the Effective Date, each present
and former director and officer of Citizens determined as of the Effective Date
(the "Indemnified Parties") against any costs and expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, the "Costs") incurred in connection with any claim, action, suit,
proceedings or investigation, whether civil, criminal, administrative or
investigative, arising out of an Indemnified Matter. Pursuant to the Merger
Agreement, an "Indemnified Matter" includes any matter directly or indirectly
involving transactions contemplated by or required in connection with the Merger
Agreement, as well as any matter existing or occurring at or prior to the
Effective Date, whether asserted or claimed prior to, at or after the Effective
Date, to the fullest extent to which such persons were entitled to be
indemnified under Citizens' articles of association or bylaws in effect as of
the date of the Merger Agreement, but only to the extent permitted by applicable
law (and Community and CBNA shall also advance expenses as incurred to the
fullest extent to which such persons were entitled under Citizens' articles of
incorporation or articles of association and bylaws as in effect on the date of
the Merger Agreement (to the fullest extent permitted under applicable law),
provided the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification). An Indemnified Matter does not include any action
or omission by an Indemnified Party resulting from such person's gross
negligence or deliberate misconduct, or any action by the OCC resulting in civil
money penalties or other determination by the OCC of a breach of duties.
Community has also agreed, for a period of two years after the Effective Date,
to use its reasonable efforts to cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by Citizens;
provided, however, that Community or CBNA may substitute therefor policies of
comparable coverage; and provided further that in no event shall Community or
CBNA be obligated to expend any amount per annum in excess of 110% of the total
amount of annual premiums paid as of the date of the Merger Agreement by
Citizens for such insurance (the "Maximum Amount"). If the amount of the annual
premiums necessary to maintain or procure such insurance coverage exceeds the
Maximum Amount, Community has agreed to use its reasonable efforts to maintain
the most advantageous policies of directors' and officers' insurance obtainable
for an annual premium equal to the Maximum Amount.
CBNA SHAREHOLDER APPROVAL
The Merger is conditioned upon the approval by the sole shareholder of
CBNA (i.e., Community) of the Merger and the Merger Agreement. Under the Merger
Agreement, Community, as the sole shareholder of CBNA, has agreed, by unanimous
consent, to ratify and confirm the Merger and cause the Board of Directors to
approve the Merger and the Merger Agreement.
LISTING
The Merger Agreement provides that Community will file an application
to list, on the Nasdaq National Market, the shares of Community Common Stock to
be issued in the Merger.
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EXCHANGE PROCEDURE
Appointment of Exchange Agent
Prior to the Effective Date, Community will appoint American Stock
Transfer and Trust Company as Exchange Agent for the purpose of exchanging
certificates representing shares of Community Common Stock. Thereafter,
Community will issue and deliver to the Exchange Agent shares of Community
Common Stock, and will pay to the Exchange Agent such amounts of cash as shall
be required to be delivered to holders of shares of Citizens Common Stock
entitled to cash in lieu of fractional shares. Any Community Common Stock and
any amounts of cash delivered to the Exchange Agent and unclaimed at the end of
two years from the Effective Date will be repaid to Community, in which event
the persons entitled thereto shall only look to Community for payment thereof;
provided, however, that if Community shall, as required by law, pay to the
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Commonwealth of Pennsylvania any unclaimed Community Common Stock or monies so
repaid to Community, those persons may thereafter look only to the Commonwealth
of Pennsylvania for payment thereof.
Procedure
As soon as practicable after the Effective Date of the Merger, holders
of shares of Citizens Common Stock will be furnished a form letter of
transmittal for the tender of their shares to the Exchange Agent to be exchanged
for new certificates for the appropriate number of shares of Community Common
Stock. Community will be required to issue Community Common Stock only upon the
actual surrender of Citizens shares and will require an indemnity agreement or a
bond from any Citizens' shareholder who is unable to surrender his or her
certificate by reason of loss, theft or destruction of the certificate.
As of the Effective Date of the Merger, Community will issue and
deliver to the Exchange Agent certificates representing a sufficient number of
shares of Community Common Stock issuable in the Merger and a sufficient amount
of cash in lieu of fractional shares payable in the Merger. Upon surrender for
cancellation to the Exchange Agent of one or more certificates for shares of
Citizens Common Stock ("Old Certificates"), accompanied by a duly executed
letter of transmittal in proper form, the Exchange Agent shall, promptly after
the Effective Date of the Merger, deliver to each holder of such surrendered Old
Certificates new certificates representing the appropriate number of shares of
Community Common Stock ("New Certificates"), together with checks for payment of
cash in lieu of fractional interests to be issued in respect of the Old
Certificates.
Until Old Certificates have been surrendered and exchanged for New
Certificates, each outstanding Old Certificate shall be deemed, for all
corporate purposes of Community, to be the number of whole shares of Community
Common Stock into which the number of shares of Citizens Common Stock shown
thereon have been converted. At the option of Community, no dividends or other
distributions which are declared on Community Common Stock will be paid to
persons otherwise entitled to receive the same until the Old Certificates have
been surrendered in exchange for New Certificates in the manner described above,
but upon such surrender, such dividends or other distributions, from and after
the Effective Date of the Merger, will be paid to such persons in accordance
with the terms of such Community Common Stock. In no event shall the persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
REGULATORY APPROVALS
The Merger is subject to approval by the OCC under the federal Bank
Merger Act ("BMA"), which requires that the OCC take into consideration, among
other factors, the financial and managerial resources and future prospects of
the institutions and the convenience and needs of the communities to be served.
The BMA prohibits the OCC from approving the Merger: (a) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of the United
States; or (b) if its effect in any section of the country may be substantially
to lessen competition or to
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tend to create a monopoly, or if it would in any other manner be a restraint of
trade, unless the OCC finds that the anti-competitive effects of the Merger are
clearly outweighed by the public interest and the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served. The OCC has the authority to deny an application if it concludes that
the combined organization would have an inadequate capital position or if the
acquiring organization does not meet the requirements of the Community
Reinvestment Act of 1977. Under the BMA, the Merger may not be consummated until
the 30th day following the date of the OCC approval, during which time the
United States Department of Justice may challenge the Merger on antitrust
grounds. The commencement of an antitrust action would stay the effectiveness of
the OCC's approval unless a court specifically orders otherwise. An application
pursuant to the BMA was filed with the OCC on September 8, 1995. There can be no
assurance that the OCC will approve the Merger, and if the Merger is approved,
there can be no assurance as to the date of such approval. IF AND WHEN THE OCC
DOES GRANT ITS APPROVAL: (i) IT WILL ONLY REFLECT THE OCC's VIEW THAT THE
TRANSACTION DOES NOT CONTRAVENE APPLICABLE COMPETITIVE STANDARDS IMPOSED BY LAW,
AND THAT THE TRANSACTION IS CONSISTENT WITH REGULATORY POLICIES RELATING TO
SAFETY AND SOUNDNESS; (ii) IT WILL NOT BE AN OPINION BY THE OCC THAT THE
PROPOSED TRANSACTION IS FAVORABLE TO THE SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW OR THAT THE OCC HAS CONSIDERED THE ADEQUACY OF THE TERMS OF THE
TRANSACTION; AND (iii) IT WILL NOT BE AN ENDORSEMENT OR RECOMMENDATION BY THE
OCC OF THE MERGER.
The approval of the Pennsylvania Department of Banking must also be
obtained before the Merger can be consummated. On September 8, 1995, an
application was filed with the Department of Banking seeking approval of the
Merger. There can be no assurance that the Department of Banking will approve
the Merger, and if the Merger is approved, there can be no assurance as to the
date of such approval.
Citizens, Community and CBNA are not aware of any other governmental
approvals or actions that are required for consummation of the Merger, except as
described above. Should any such approval or action be required, it is presently
contemplated that such approval or action would be sought.
The Merger cannot proceed in the absence of the requisite regulatory
approvals. There can be no assurance that all such regulatory approvals will be
obtained, and, if the Merger is approved, there can be no assurance as to the
date of any such approval. There can also be no assurance that any such
approvals will not contain a condition or requirement which causes such
approvals to fail to satisfy the conditions set forth in the Merger Agreement.
There can likewise be no assurance that the U.S. Department of Justice or the
state Attorney General will not challenge the Merger, or if such a challenge is
made, as to the result thereof.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Record Date, the directors and executive officers of
Citizens may be deemed to be beneficial owners of 3,255 shares of Citizens
Common Stock, or 16.275% of the then outstanding shares of Citizens Common
Stock.
The Merger Agreement provides that from and after the Effective Date,
through the sixth anniversary of the Effective Date, Community will provide
indemnification to each person who is at the Effective Date, or has been at any
time prior to the Effective Date, an officer or director of Citizens against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Date, whether asserted or
claimed prior to, at or after the Effective Date, to the fullest extent to which
such persons were entitled under the articles of association or bylaws of
Citizens in effect on the date of the Merger Agreement, to the extent permitted
under applicable law, to indemnify such person (and Community shall also advance
expenses as incurred to the fullest extent to which such persons were entitled
under the articles of association and bylaws as in effect on the date of the
Merger Agreement (to the extent permitted under
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applicable law), provided the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to indemnification).
The Merger Agreement also provides that for a period of two years
after the Effective Date, Community shall use all reasonable efforts to cause to
be maintained in effect the current policies of directors' and officers'
liability insurance maintained by Citizens (provided that Community or CBNA may
substitute policies of comparable coverage); provided, however, that in no event
-------- -------
will Community be obligated to expend, in order to maintain such insurance
coverage, any amount per annum in excess of 110% of the total amount of the
annual premiums paid as of the date of the Merger Agreement by Citizens for such
insurance.
Additionally: (i) Dean N. Paul, the present Cashier of Citizens, will
be appointed to the Board of Directors of CBNA and CBNA's Schuylkill Advisory
Board, and will hold such office until the next annual meeting of the
shareholders of CBNA; and (ii) two additional members of the present Board of
Directors will be appointed by CBNA to CBNA's Schuylkill Advisory Board. See
"THE MERGER-Terms of the Merger-Effect of the Merger."
ACCOUNTING TREATMENT
Community intends to treat the Merger as a pooling of interests for
accounting purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income
tax consequences of the Merger. Each shareholder's individual circumstances may
affect the tax consequences of the Merger to that shareholder. In addition, no
information is provided herein with respect to the tax consequences of the
Merger under applicable foreign, state or local laws. Consequently, each
Citizens' shareholder is advised to consult with his or her own tax advisor as
to the specific tax consequences of the Merger.
It is intended that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and that, accordingly, for income tax purposes: (i) the Merger of Citizens with
and into CBNA upon the terms and conditions of the Merger Agreement will not
result in any recognized gain or loss to Community, CBNA or Citizens; (ii)
except for any cash received in lieu of any fractional share, no gain or loss
will be recognized by holders of Citizens Common Stock who receive Community
Common Stock in exchange for the shares of Citizens Common Stock which they
hold; (iii) the holding period of Community Common Stock received in exchange
for Citizens Common Stock will include the holding period of Citizens Common
Stock for which it is exchanged, assuming the shares of Citizens Common Stock
are capital assets in the hands of the holder thereof on the Effective Date; and
(iv) the basis of Community Common Stock received in exchange for Citizens
Common Stock will be the basis of Citizens Common Stock for which it is
exchanged, less any basis attributable to fractional shares for which cash is
received.
The obligations of the parties to consummate the Merger is conditioned
upon the receipt of a ruling from the IRS or an opinion from Mette, Evans &
Woodside, counsel to Community, substantially to the effect that the federal
income tax consequences of the Merger are as summarized above.
Assuming that the Merger satisfies all of the requirements of a
reorganization within the meaning of Section 368(a) of the Code, the Merger will
have the following tax consequences to a Citizens' shareholder: except for any
cash received in lieu of any fractional share, no gain or loss will be
recognized by a Citizens' shareholder who exchanges his or her shares for
Community Common Stock. The tax basis of the Community Common Shares received by
a shareholder will be equal to the tax basis of the Citizens Common Shares
exchanged therefor (less any basis attributable to fractional shares for which
cash is received), and, if the Citizens Common Shares surrendered were a capital
asset in the hands of the Citizens' shareholder, the holding periods
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of the Community Common Shares received by the shareholder will include the
holding periods for the Citizens Common Shares.
EACH CITIZENS' SHAREHOLDER IS ENCOURAGED TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE TO
SUCH SHAREHOLDER AND NOT COMMON TO SHAREHOLDERS AS A WHOLE AND ALSO AS TO ANY
ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER
AND/OR ANY SALE THEREAFTER OF SHARES OF COMMUNITY COMMON STOCK RECEIVED IN THE
MERGER.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Under Section 215a(b) of Title 12 of the United States Code ("Section
215a(b)"), any holder of shares of Citizens Common Stock who does not wish to
accept the consideration pursuant to the Merger has the right to seek an
appraisal and be paid the "value" in cash of such holder's Citizens Common Stock
on the Effective Date, provided that such holder complies with the provisions of
Section 215a(b).
The following is a summary of the material statutory procedures to be
followed by a holder of Citizens Common Stock in order to dissent from the
Merger and perfect appraisal rights under Section 215a(b). This summary
discusses all material provisions of Section 215a(b) but is not intended to be
complete and is qualified in its entirety by reference to Section 215a(b), the
text of which is set forth in Appendix C hereto. Any shareholder considering
demanding appraisal is advised to consult legal counsel because the failure to
precisely follow all the necessary legal requirements may result in the loss of
such appraisal rights.
Holders of record of Citizens Common Stock who desire to exercise
their appraisal rights must fully satisfy all of the following conditions. Each
holder must either: (a) vote against the Merger and the Merger Agreement at the
Meeting; or (b) give notice in writing at, or prior to, the Meeting that such
holder dissents from the Merger and the Merger Agreement to The Citizens'
National Bank of Ashland, 735 Center Street, Ashland, Pennsylvania 17921,
Attention: Dean N. Paul, Secretary.
Voting in favor of the ratification, confirmation and approval of the
Merger and the Merger Agreement, or abstaining from the vote on the
ratification, confirmation and approval of the Merger and the Merger Agreement
without providing the written notice referred to above, will constitute a waiver
of the shareholder's right of appraisal and will nullify any written demand for
appraisal submitted by the shareholder.
This right is further conditioned upon written request of appraisal
being made to Community, addressed to Community Banks, Inc., 150 Market Square,
Millersburg, Pennsylvania 17061, Attention: Patricia Hoch, Secretary, at any
time within 30 days after the date of consummation of the Merger. Such written
request must be accompanied by the surrender of the dissenting shareholder's
stock certificates.
Under Section 215a(b), the value of the shares of dissenting
shareholders who give the required notice is intended to be ascertained as of
the Effective Date by an appraisal made by a committee of three persons,
composed of: (i) one person selected by the vote of the holders of the majority
of the shares of Citizens Common Stock, the owners of which are entitled to
payment in cash; (ii) one person selected by the Board of Directors of
Community; and (iii) one person selected by the two so selected. The valuation
agreed upon by any two of the three appraisers will govern. If the value so
fixed is not satisfactory to any dissenting shareholder who has requested
payment, that shareholder may, within five days after being notified of the
appraised value of such holder's shares, appeal to the OCC, which will cause a
reappraisal to be made, and such reappraisal will be final and binding as to the
value of such shares.
If, within 90 days from the date of consummation of the Merger, one or
more of the appraisers is for any reason not selected as provided above, or the
appraisers fail to determine the value of such shares, the OCC
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is obligated, upon written request of any interested party, to cause an
appraisal to be made, and such appraisal will be final and binding on all
parties. The costs and expenses of any such appraisal are required to be
determined by the committee and shall be assessed against Community. Unless
Community or the dissenting shareholders seek judicial review of the appraisal,
the appraised value of the shares must be promptly paid to the dissenting
shareholders by Community out of the funds deposited in an escrow account
established therefor.
Attached to this Proxy Statement/Prospectus as Appendix D/1/ is a
bulletin issued by the OCC with respect to the methods and recent results of OCC
appraisals. HOLDERS OF CITIZENS COMMON STOCK SHOULD CAREFULLY CONSIDER APPENDIX
D AND SHOULD CONSULT WITH THEIR LEGAL COUNSEL REGARDING THEIR RIGHT TO DISSENT
FROM THE MERGER AND TO RECEIVE THE APPRAISED VALUE OF THEIR SHARES OF CITIZENS
COMMON STOCK. FAILURE TO FOLLOW PRECISELY ANY STEP REQUIRED BY SECTION 215a(b)
IN CONNECTION WITH THE EXERCISE OF APPRAISAL RIGHTS MAY RESULT IN TERMINATION OF
SUCH RIGHTS.
REGULATORY MATTERS
GENERAL
Community is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As a bank holding company,
Community is subject to the regulation and supervision of the Federal Reserve
Board. Under the BHCA, bank holding companies may not directly or indirectly
acquire ownership or control of more than 5% of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. Additionally, bank holding
companies are generally prohibited by the BHCA from engaging in nonbanking
activities, subject to certain exceptions.
Citizens and CBNA are both national banking associations subject to
the regulation and supervision of the OCC. Citizens and CBNA are also both
"insured depository institutions" as defined in the Federal Deposit Insurance
Act, as amended (the "FDIA"), and are members of the Federal Reserve System.
Citizens and CBNA are also subject to various requirements and restrictions
under federal law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon and limitations on the types of investments
that may be made and the types of services that may be offered. Various consumer
laws and regulations also affect the operations of Citizens and CBNA. In
addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the
economy.
PAYMENT OF DIVIDENDS
Community is a Pennsylvania business corporation, and as such, is
subject to the provisions of the PBCL. The PBCL provides that a corporation is
generally permitted to pay dividends unless, after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual
course of business or the total assets of the corporation would be less than the
sum of its total liabilities plus the amount that would be needed upon
dissolution to satisfy the preferential rights of shareholders whose
preferential rights on dissolution are superior to those receiving the
dividends.
___________________________
/1/ As indicated in Appendix D, with respect to the chart of appraisal results
of the OCC included therein, please be advised that: (i) the OCC did not rely on
all information set forth in the chart in performing each appraisal; and (ii)
the OCC's past appraisals are not necessarily determinative of its future
appraisals of a particular bank's shares.
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It is important to note that Community is also a legal entity separate
and distinct from its banking and other subsidiaries. The principal source of
cash flow of Community, including cash flow to pay dividends on Community Common
Stock, is dividends from CBNA and Community's other subsidiaries. As discussed
below, there are statutory and regulatory limitations on the payment of
dividends by CBNA.
Citizens and CBNA are both national banking associations. Federal law
imposes both capital and earning limitations on the payment of dividends by
national banking associations.
Capital Limitations
Generally, federal law prohibits national banks from withdrawing, or
permitting to be withdrawn, either in the form of dividends or otherwise, any
portion of its capital. Federal law also provides that if losses are sustained
at any time by a national bank equal to or exceeding its undivided profits then
on hand (as defined and interpreted by regulation), no dividend may be made.
Additionally, no dividend may be made by a national bank while it continues its
banking operations, in an amount greater than its net profits then on hand (as
defined and interpreted by regulation), less its losses and bad debts (as
defined and interpreted by regulation). These capital limitations do not apply
to a national bank's preferred stock dividends (if any); however, if the
undivided profits of a national bank are not sufficient to cover a proposed
dividend on its preferred stock, the proposed dividend will constitute a
reduction in capital under federal regulations.
Earnings Limitations
Federal law also provides that a national bank may declare a dividend
equal to a certain amount of its net profits (as defined and interpreted by
regulation) as it judges expedient, except that until its respective surplus
fund equals its common capital, no dividends may be declared unless not less
than one-tenth part of its net profits of the preceding half year (in the case
of quarterly or semiannual dividends) or not less than one-tenth part of its net
profits of the preceding two consecutive half years (in the case of annual
dividends) has been carried to the surplus fund.
Under federal laws, national banks are also required to receive the
approval of the OCC before declaring a dividend if the amount of all dividends
(common and preferred), including the proposed dividend, declared by it in any
calendar year exceeds the total of its net profits of that year to date,
combined with its retained net profits of the preceding two years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. National banks are also required to receive the prior approval of the OCC
for the payment of dividends if the total of all dividends declared by its board
of directors in any year will exceed the total of its net profits (as defined
and interpreted by regulation) of that year, combined with its retained net
profits (as defined and interpreted by regulation) of the preceding two years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. These earning limitations also apply to dividends on national
bank preferred stock (if any).
Other Limitations
Federal law also provides that if a national bank has preferred stock,
no dividends may be declared or paid on its common stock until all cumulative
dividends on its preferred stock have been paid in full.
Additionally, the OCC has indicated that paying dividends that deplete
a bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvements
Act of 1991 ("FDICIA"), an insured bank may not pay any dividend if payment
would cause it to become undercapitalized. In addition, no dividend payments are
permitted once an insured bank is undercapitalized. See "REGULATORY MATTERS-
Federal Deposit Insurance Corporation Improvement Act of 1991." Moreover, the
Federal Reserve Board, the OCC and the FDIC have issued policy statements which
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provided that bank holding companies and FDIC insured banks should generally
only pay dividends out of current operating earnings.
HOLDING COMPANY STRUCTURE
Under Federal Reserve Board policy, a bank holding company is expected
to act as a source of financial strength to its subsidiary banks and to make
capital injections into a troubled subsidiary bank, and the Federal Reserve
Board may charge the bank holding company with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank when required. A
required capital injection may be called for at a time when the holding company
does not have the resources to provide it. Any capital loans by a holding
company to its subsidiary bank would be subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank.
In addition, under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), depository institutions insured by the FDIC
can be held liable for any losses incurred by, or reasonably anticipated to be
incurred by, the FDIC after August 9, 1989 in connection with: (a) the default
of a commonly controlled FDIC-insured depository institution; or (b) any
assistance provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. "Default" is defined generally as the
appointment of a conservator or a receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a "default" is
likely to occur in the absence of regulatory assistance. Accordingly, in the
event that any insured depository institution of Community causes a loss to the
FDIC, other insured subsidiaries of Community could be required to compensate
the FDIC by reimbursing it for the estimated amount of such loss.
For a description of certain other requirements relating to capital
distributions between depository institutions and bank holding companies and the
potential obligation of a bank holding company to guarantee the capital
restoration plans of any of its undercapitalized depository institution
subsidiaries, see "REGULATORY MATTERS-Federal Deposit Insurance Corporation
Improvement Act of 1991."
CAPITAL ADEQUACY
Bank holding companies are required to comply with risk-based capital
guidelines established by the Federal Reserve Board. The guidelines, which were
fully phased in at the end of 1992, establish a framework that is intended to
make regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations and take off-balance sheet exposures into
explicit account in assessing capital adequacy. The risk-based ratios are
determined by allocating assets and specified off-balance sheet commitments into
four risk-weight categories, with higher levels of capital being required for
categories perceived as representing greater risk. As national banks, Citizens
and Community are subject to substantially similar capital requirements pursuant
to OCC regulations.
Generally, under applicable guidelines, a banking organization's
capital is divided into two tiers. "Tier 1", or core capital, includes common
equity, noncumulative perpetual preferred stock (excluding auction rate issues)
and minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2", or
supplementary capital, includes, among other things, cumulative perpetual
preferred stock (subject to certain exceptions), hybrid capital instruments,
qualifying subordinated debt, and the allowance for loan and lease losses,
subject to certain limitations and less required deductions. "Total capital" is
the sum of Tier 1 and Tier 2 capital. The Tier 1 component must comprise at
least 50% of the qualifying total capital.
Banking organizations that are subject to the guidelines are required
to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and
a ratio of total capital to risk-weighted assets of at least 8%. The appropriate
regulatory authority may set higher capital requirements when an organization's
particular
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circumstances warrant. For example, under the OCC's regulations, higher capital
ratios may be appropriate for a bank that: (a) is newly chartered; (b) is
receiving special supervisory attention; (c) has, or is expected to have, losses
resulting in capital inadequacy; (d) has significant exposure due to interest
rate risk, the risks from concentrations of credit and certain other risks; (e)
has exposure due to fiduciary or operational risk; (f) is exposed to a high
degree of asset depreciation or a low level of liquid assets in relation to
short term liabilities; (g) has exposure to a high volume of, or particularly
severe, loans; (h) is growing rapidly, either internally or through rapid
acquisitions; or (i) may be adversely affected by the activities or condition of
its holding company, affiliates or other persons or institutions with which it
has significant relationships.
The Federal Reserve Board, the FDIC and the OCC have also adopted
leverage capital guidelines to which Community, CBNA and Citizens are subject.
The guidelines provide for a minimum leverage ratio (Tier 1 capital to adjusted
total assets) of 3% for financial institutions that have the highest regulatory
examination ratings and are not experiencing or anticipating significant growth.
Financial institutions not meeting these criteria are required to maintain
leverage ratios of at least one to two percentage points higher.
On August 9, 1995, the federal banking agencies issued a Final Rule
and Policy Statement ("Final Rule") revising risk-based capital rules to take
account of interest rate risk. The Final Rule offers alternative approaches for
determining the additional amount of capital, if any, that a bank may be
required to have for interest rate risk. The first approach is to reduce a
bank's risk-based capital ratios by an amount based on its measured exposure to
interest rate risk in excess of a specified threshold. The second approach is to
assess the need for additional capital on a case-by-case basis, considering both
the level of measured exposure and qualitative risk factors. Citizens cannot
assess, at this point, the impact that the Final Rule will have on its capital
requirements.
On December 23, 1994, the federal banking agencies issued a Final Rule
on respective risk-based capital requirements that explicitly identifies
concentration of credit risk with certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an individual's overall capital adequacy. The Final Rule does not,
however, mandate any specific adjustments to the risk-based capital calculations
as a result of such factors.
On December 31, 1994, the Federal Reserve Board amended its risk-based
capital standards to increase the amount of capital required under such
standards for long-dated interest rate and exchange rate contracts and for
derivative contracts based on equity securities and indexes, precious metals
(other than gold) and other commodities. The amendment permits banking
institutions to recognize the effect of bilateral netting arrangements in
calculating their exposure to derivative contracts for risk-based capital
purposes. Community does not expect this amendment to have a material effect on
its financial condition or results of operations.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital, and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "REGULATORY MATTERS-Federal Deposit Insurance
Corporation Improvement Act of 1991" below, as applicable to undercapitalized
institutions.
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The following table sets forth, as of June 30, 1995, the capital
ratios of Citizens, Community and CBNA:
<TABLE>
<CAPTION>
Citizens Community CBNA Required
-------- --------- ---- --------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital ratio 38.30% 15.6% 14.2% 4%
Total risk-based capital ratio 39.55% 17.4% 15.3% 8%
Leverage Ratio 14.84% 19.2% 9.5% 3-5%
</TABLE>
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December, 1991, Congress enacted FDICIA which substantially revised
the bank regulatory and funding provisions of the FDIA and made significant
revisions to several other federal banking statutes. FDICIA provides for, among
other things: (a) a recapitalization of the Bank Insurance Fund of the FDIC (the
"BIF") by increasing the FDIC's borrowing authority and providing for
adjustments in its assessment rates; (b) annual on-site examinations of
federally-insured depository institutions by banking regulators; (c) publicly
available annual financial and management reports for financial institutions,
including audits by independent accountants; (d) the establishment of uniform
accounting standards by federal banking agencies; (e) the establishment of a
"prompt corrective action" system of regulatory supervision and intervention,
based on capitalization levels, with more scrutiny and restrictions placed on
depository institutions with lower levels of capital; (f) additional grounds for
the appointment of a conservator or receiver; (g) a requirement that the FDIC
use the lease-cost method of resolving cases of troubled institutions in order
to keep the costs to insurance funds at a minimum; (h) more comprehensive
regulation and examination of foreign banks; (i) consumer protection provisions
including a Truth-in-Savings Act; (j) a requirement that the FDIC establish a
risk-based deposit insurance assessment system; (k) restrictions or prohibitions
on accepting brokered deposits, except for institutions which significantly
exceed minimum capital requirements; and (l) certain additional limits on
deposit insurance coverage.
A central feature of FDICIA is the requirement that the federal
banking agencies take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. Pursuant to FDICIA,
the federal bank regulatory authorities have adopted regulations setting forth a
five-tiered system for measuring the capital adequacy of the depository
institutions that they supervise. Under these regulations, a depository
institution is classified in one of the following capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution is
"well capitalized" if it has: (i) total risk-based capital ratio or 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; (iii) a
leverage ratio of 5% or greater; and (iv) is not subject to any order,
regulatory agreement or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has: (a) a total risk-based capital ratio of 8% or
greater; (b) a Tier 1 capital ratio of 4% or greater; and (c) a leverage ratio
of 4% or greater (or 3% or greater in the case of a bank with a composite CAMEL
rating of 1). A depository institution is considered: (i) "under-capitalized" if
it has (a) a total risk-based capital ratio of less than 8%; (b) a Tier 1 risk-
based capital ratio of less than 4%; or (c) a leverage ratio of less than 4% (or
3% in the case of an institution with a CAMEL rating of 1); (ii) "significantly
undercapitalized" if it has: (a) a total risk-based capital ratio of less than
6%; (b) a Tier 1 risk-based capital ratio of less than 3%; or (c) a leverage
ratio of less than 3%; and (iii) "critically undercapitalized" if it has a ratio
of tangible equity to total assets equal to or less than 2%. An institution may
be deemed by regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution
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would thereafter be undercapitalized. Undercapitalized depository institutions
are subject to growth limitations and are required to submit capital restoration
plans. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company in respect of any capital restoration plan is limited to the
lesser of: (a) an amount equal to 5% of the depository institution's total
assets at the time it became under capitalized; and (b) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of other requirements and restrictions, including orders to sell
sufficient voting stock in order to become adequately capitalized, requirements
to reduce total assets and orders to stop accepting deposits from correspondent
banks. Critically undercapitalized institutions are subject to the appointment
of a receiver or conservator, generally within 90 days of the date such
institution is determined to be critically undercapitalized.
FDICIA also provides for increased funding of the FDIC insurance
funds. The FDIC has adopted final rules implementing, for assessment periods
commencing January 1, 1994, risk-based insurance premiums. Under the assessment
system, each depository institution is assigned to one of nine risk
classifications based upon certain capital and supervisory measures and,
depending upon its classification, will be assessed premiums ranging from .23%
to .31% of domestic deposits. In adopting the risk-based assessment system, the
FDIC indicated that, if future conditions so warrant, it may reconsider certain
aspects of the rate schedules and of the risk classification categories. In
addition, the FDIC has authority to impose special assessments from time to
time.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 was enacted into law on September 29, 1994. The law provides that, among
other things, substantially all state law barriers to the acquisition of banks
by out-of-state bank holding companies will be eliminated effective on September
29, 1995. The law will also permit interstate branching by banks effective as of
June 1, 1997, subject to the ability of states to opt-out completely or to set
an earlier effective date.
COMPARISON OF SHAREHOLDERS' RIGHTS
INTRODUCTION
Upon consummation of the Merger, holders of Citizens Common Stock,
whose rights presently are governed by the NBA and Citizens' articles of
association (the "Citizens Articles") and bylaws (the "Citizens Bylaws"), will
become shareholders of Community Common Stock. Accordingly, their rights will be
governed by the BHCA, the PBCL and Community's articles of incorporation (the
"Community Articles") and bylaws (the "Community Bylaws"). Certain differences
arise from differences between the Citizens and Community Articles and Bylaws,
as well as from differences in treatment under the NBA, the BHCA and the PBCL.
The following
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discussion is not intended to be a complete statement of all differences
affecting the rights of shareholders, but summarizes material differences and is
qualified in its entirety by reference to applicable national laws, Pennsylvania
corporate laws and the articles of incorporation and bylaws of Citizens and
Community.
DIVIDENDS
Citizens
The ability of Citizens to pay dividends is governed by the NBA and
the regulations of the OCC thereunder. See "REGULATORY MATTERS-Payment of
Dividends" for a general discussion.
Community
The ability of Community to pay dividends is governed by the PBCL and
certain other statutory and regulatory limitations applicable to bank holding
companies. See "REGULATORY MATTERS-Payment of Dividends" for a general
discussion.
VOTING RIGHTS GENERALLY
Citizens
With respect to all matters on which shareholders are entitled to
vote, shareholders of Citizens Common Stock are entitled to one vote per share.
Pursuant to the NBA, shareholders of national banks, such as Citizens, have
cumulative voting rights in the election of directors. Accordingly, in such
elections, each shareholder of Citizens is entitled to as many votes as shall
equal the number of shares owned, multiplied by the number of directors to be
elected, and may cast all such votes for a single nominee or may distribute them
among two or more nominees.
In accordance with Section 72 of the NBA, the Citizens Articles
provide that members of the Citizens' Board of Directors must consist of
Citizens shareholders. Except in cases where by law a larger vote is required
(i.e., the Merger), any action to be taken by vote of the Citizens shareholders
shall be authorized upon receipt of the affirmative vote of a majority of the
shares of Citizens Common Stock represented and entitled to vote at a
shareholders' meeting.
Community
With respect to all matters on which shareholders are entitled to
vote, holders of shares of Community Common Stock are entitled to one vote per
share. According to the PBCL, shareholders do not have a right to cumulate their
votes for directors unless the articles of incorporation so provide. The
Community Articles provide that no cumulative voting shall exist. Members of the
Community Board of Directors do not have to consist of Community shareholders.
The election of the Board may be accomplished by the affirmative vote of a
majority of the shares of Community Common Stock represented and entitled to
vote at a shareholders' meeting. The amendment of the Community Articles or the
authorization of any corporate action (defined by the Community Articles to
include the amendment of certain articles of the Community Articles, the removal
of one or more directors, or any Business Combination (as that term is defined
in the Community Articles)) may only be accomplished by the affirmative vote of
at least 75% of the votes which all shareholders are entitled to cast thereon;
provided, however, that if 66 2/3% of the entire Board of Directors of Community
- -------- -------
recommends approval of an amendment or the corporate action, the corporate
action will be authorized if there are cast in its favor at least 66 2/3% of the
votes which all shareholders are entitled to cast thereon.
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CLASSIFIED BOARD OF DIRECTORS
Citizens
The Citizens Board of Directors is not classified. Any shareholder
seeking to elect its designees to a majority of the seats on the Citizens Board
of Directors, therefore, could do so at any annual meeting.
Community
The PBCL permits a corporation's board of directors to be divided into
various classes serving staggered terms of office. The Community Bylaws provide
that the Board of Directors of Community be divided into four classes of
directors as nearly equal in number as possible. At each annual meeting of
shareholders, one class of directors is elected for a four-year term.
Classification of directors has the effect of making it more difficult for
shareholders to change the composition of the board of directors. At least three
annual meetings of shareholders, instead of one, will generally be required to
effect a change in the majority of the Board of Directors of Community. Such
classification provisions could also have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Community.
NUMBER OF DIRECTORS; TERM
Citizens
In accordance with Section 71 of the NBA, the Citizens Articles
establish the number of directors to be no less than five and no more than
twenty-five. The exact number of members of the Board of Directors of Citizens
is determined by the affirmative vote of a majority of the shareholders entitled
to vote. Currently, there are eight persons serving on Citizens' Board of
Directors. The term of office for each director is one year, and until their
successors are elected and have qualified.
Community
The Community Bylaws establish the number of directors to be no less
than five and no more than twenty-five. The exact number of members of the Board
of Directors of Community is determined by the Board of Directors of Community.
The term of office for each director is four years with the term of office of at
least one class expiring each year.
REMOVAL OF DIRECTORS
Citizens
Neither the NBA nor the regulations promulgated by the OCC thereunder
provide for the removal of a director from a national bank's board of directors
by the bank's shareholders. The Citizens Articles and Bylaws are also silent on
the issue. Accordingly, Citizens' shareholders do not have the right to remove a
director from office.
Community
The PBCL provides that shareholders may remove one or more directors,
with or without cause, unless the articles of incorporation provide that
directors may be removed only for cause. The Citizens Articles provide that one
or more directors may be removed (with no express requirement that such removal
be for cause only) by the shareholders of Community if at least 75% of the votes
which all shareholders are entitled to cast thereon are cast in favor of the
removal, or, alternatively, if 66 2/3% of the entire Board of Directors
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of Community recommend such removal, if at least 66 2/3% of the votes which all
shareholders are entitled to cast thereon are cast in favor of the removal.
QUALIFICATIONS OF DIRECTORS
Citizens
Section 72 of the NBA requires that every director of a national bank
be a citizen of the United States. It also requires that at least two-thirds of
the directors must have resided in the state, territory or district in which the
national bank is located, or at least within 100 miles of the location the
bank's office, for at least one year immediately preceding their election, and
must be residents of such state or within a 100 mile territory of the location
of the bank during their continuation in office (with certain exceptions for
subsidiaries or affiliates of foreign banks). Additionally, the NBA also
requires that every director must own in his or her own right either shares of
the capital stock of the bank or which he or she is a director in an aggregate
par value not less than $1,000 (or an equivalent interest, as determined by the
OCC, in any company which has control over such bank). A smaller aggregated par
value (i.e., $500) is required for banks with capital that does not exceed
$25,000. The Citizens Bylaws provide that a director must retire from such
position upon attaining the age of 70 years. The Citizens Articles and Bylaws do
not require any additional qualifications for Citizens' directors.
Community
The PBCL provides that a director of a business corporation must be a
natural person of full age. However, the PBCL does not require that a director
be a resident of Pennsylvania or a shareholder of the corporation, unless
otherwise provided in a corporation's articles or bylaws. The Community Bylaws
require that its directors be shareholders of the corporation. Additionally, the
Community Bylaws limit the age of the corporation's directors to 75.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Both the Citizens Bylaws and the Community Bylaws provide that
vacancies occurring on the board of directors, including vacancies resulting
from an increase in the number of directors, may be filled by the affirmative
vote of a majority of the remaining directors even if the number of remaining
directors constitutes less than a quorum. Any director so chosen shall have a
term of office continuing only until the next election of directors.
CALL OF SPECIAL SHAREHOLDERS' MEETING
Citizens
Special meetings of the shareholders of Citizens may be called by: (a)
the Board of Directors; or (b) any three or more shareholders owning, in the
aggregate, not less than 10% of the stock of Citizens.
Community
Special meetings of the shareholders of Community may be called by:
(a) the President; (b) the Chairperson of the Board of Directors; (c) a majority
of the Board of Directors; or (d) shareholders entitled to cast at least one-
third of the votes which all shareholders are entitled to cast at any particular
meeting. Such meeting shall be called by the Secretary no later than ten days
and no more than sixty days following the request for such meeting.
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NOTICE OF SHAREHOLDERS' MEETINGS
Citizens
Notice of a Citizens shareholders' meeting must be delivered at least
ten days in advance of the scheduled meeting. Such notice must contain the time,
place and purpose of the meeting. OCC regulations further require that in
certain instances, such notice must also be given by certified or registered
mail, by publication, or both.
Community
Notice of a Community shareholders' meeting must be delivered at least
five days in advance of the scheduled meeting. Such notice must contain the
time, place, day and purpose of the meeting.
QUORUM REQUIREMENTS AND ADJOURNMENT OF MEETINGS
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares entitled to vote at a meeting constitutes a quorum for
both a Citizens shareholders' meeting and a Community shareholders' meeting.
Shareholders present at a duly convened Citizens or Community meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum. In the case of a Community
meeting called for the election of directors, such meeting may be adjourned for
any period not exceeding fifteen days; in the case of a Citizens meeting called
for the election of directors, such meeting may be adjourned for any period up
to 60 days. In each case, those Citizens or Community shareholders who attend
the meeting which had previously been adjourned shall, even if they are less
than a quorum, constitute a quorum for the purpose of electing directors, but
for no other purpose.
If a quorum is not present at a Citizens or a Community shareholders
meeting, no business may be transacted except to adjourn to a future time.
DISSENTERS RIGHTS
Citizens
Under the NBA, a shareholder of a national bank is entitled to dissent
and obtain the value of his or her shares in cash in the event of: (a) the
consummation of a conversion into or a merger or consolidation with a state bank
in the same state; or (b) the approval by the OCC of the consolidation with or
merger into a national bank. See "THE MERGER-Appraisal Rights of Dissenting
Shareholders" for a general discussion.
Community
Under the PBCL, shareholders are generally entitled to dissent from,
and demand payment of the fair value of their shares in connection with, a plan
of merger, consolidation, share exchange, asset transfer or division.
Additionally, Subchapter 25E of the PBCL, which applies to Community, provides
shareholders of a registered corporation remedies similar to dissenters rights
where a person or group acquires 20% or more of the voting shares of the
registered corporation.
LIMITATIONS ON DIRECTORS' LIABILITY
Both the Citizens Bylaws and the Community Bylaws provide that
directors shall not be personally liable to the corporation or its shareholders
for monetary damages for any action taken, or any failure to take any action,
unless the director has breached or failed to perform the duties of his or her
office under applicable Pennsylvania law and the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
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These provisions, however, do not apply to the responsibility or liability of a
director for the payment of taxes pursuant to local, state or federal law.
INDEMNIFICATION
Citizens
OCC regulations promulgated under the NBA permit a national bank, in
certain circumstances, to provide in its articles of association for the
indemnification of directors, officers and employees for expenses reasonably
incurred in actions to which the directors, officers or employees are parties or
potential parties by reason of the performance of their official duties. The
Citizens Articles do not provide for such indemnification.
Community
Sections 1741 and 1742 of the PBCL generally provide that a
corporation may indemnify directors and officers against liabilities they may
incur as such, provided that the particular person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. In the case of
actions against a director or officer by or in the right of the corporation, the
power to indemnify extends only to expenses (not judgments and amounts paid in
settlement) and such power generally does not exist if the person otherwise
entitled to indemnification shall have been adjudged to be liable to the
corporation unless it is judicially determined that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnification for specified expenses. Section 1743
of the PBCL also requires a corporation to indemnify representatives of the
corporation against expenses they may incur in defending actions against them in
such capacities if they are successful on the merits or otherwise in the defense
of such actions.
Section 1746 of the PBCL also grants a corporation broad authority to
indemnify its directors, officers and other agents for liabilities and expenses
incurred in such capacity, except in circumstances where the act or failure to
act giving rise to the claim for indemnification is determined by a court to
have constituted willful misconduct or recklessness. Pursuant to the authority
of Section 1746 of the PBCL, the Community Bylaws provide for indemnification of
directors, officers and other agents of the corporation to the extent otherwise
permitted by Section 1741 of the PBCL and also in certain circumstances not
otherwise permitted by Sections 1741 and 1742 of the PBCL.
Specifically, the Community Bylaws provide that Community shall
indemnify any director, officer or employee, or any former director, officer or
employee, who was or is a party to, or is threatened to be made a party to, or
who is called as a witness in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of Community) by reason
of the fact that such person is or was a director, officer or employee of
Community, or is or was serving at the request of Community as a director,
officer, employee or agent of another bank, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in, or not opposed to, the
best interests of Community, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of Community, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his or her conduct
was unlawful.
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In addition, the Community Bylaws state that Community shall indemnify
any officer, director or employee, present or former, who was or is a party to,
or is threatened to be made a party to, or who is called as a witness in
connection with any threatened, pending or completed action, suit or proceeding,
by or in the right of Community to procure a judgment in its favor by reason of
the fact that such person is or was a director, officer or employee of
Community, or is or was serving at the request of Community as a director,
officer, employee or agent of another bank, partnership, joint venture, trust or
other enterprise, against amounts paid in settlement and expenses (including
attorney's fees), actually and reasonably incurred by him or her in connection
with the defense or settlement of, or serving as a witness in, such action or
suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of Community, and
except that no indemnification shall be made in respect of any such claim, issue
or matter as to which such person shall have been adjudged to be liable for
misconduct in the performance of his or her duty to Community.
Except as may be otherwise ordered by a court, there shall be a
presumption that any director, officer or employee of Community is entitled to
indemnification as provided by the Community Bylaws, unless either a majority of
the members of the Board who are not involved in such proceedings
("disinterested directors") or, if there are less than three disinterested
directors, then the holders of one-third of the outstanding shares of Community
determine that the person is not entitled to such presumption by certifying such
determination in writing to the Secretary of Community. In such event the
disinterested director(s) or, in the event of certification by shareholders, the
Secretary of Community, shall request of independent counsel, who may be the
outside general counsel of Community, a written opinion as to whether or not the
parties involved are entitled to indemnification under the Community Bylaws.
Also, expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by Community in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director, officer or employee to repay such amount unless it shall
ultimately be determined that he or she is entitled to be indemnified by
Community.
The indemnification provided by Community shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any agreement, vote of shareholders, or disinterested directors,
or otherwise, both as to action in his or her official capacity which serving as
a director, officer, or employee, or as to any action in another capacity while
holding such office. The Board of Directors may, by resolution, provide for
additional indemnification or advancement of expenses to or for any director,
officer, or employee of Community provided said indemnification is not
inconsistent with the provisions of the Community Bylaws, Articles, applicable
provisions of the PBCL or other applicable provisions of law. Indemnification
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of the heirs and personal
representatives of such person.
The Community Bylaws also provide that no director shall be personally
liable for monetary damages as such for any action taken, or any failure to take
any action, in the director's capacity as a director or Community or pursuant to
the request of Community unless: (a) the director has breached or failed to
perform the duties of his or her office as set forth in the PBCL; or (b) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
ANTI-TAKEOVER LAW PROVISIONS
Citizens
The NBA provides that a merger or sale of assets by a national bank,
such as Citizens, must be approved by the Board of Directors of Citizens and by
the vote of the holders of at least two-thirds of each class of its capital
stock.
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The Change in Bank Control Act prohibits a person or group from
acquiring "control" of a national bank unless the OCC has been given sixty days'
prior written notice of the proposed acquisition and within that time period the
OCC has not issued a disapproval or extended for up to another thirty days the
period during which such a disapproval may be issued.
Community
Article 10 of the Community Articles provides that the Community Board
of Directors may, in its sole discretion, oppose any offer, proposal or attempt
by any corporation or other business entity, person or group to: (a) make any
lender or other offer to acquire any of Community's securities; (b) merge or
consolidate Community with or into another entity; (c) purchase or otherwise
acquire all or substantially all of Community's assets; or (d) make any
transaction similar in purpose or effect to any of the above. In considering
whether to oppose, recommend or remain neutral with respect to any such offers,
proposals or plans, the Community Board of Directors must evaluate what is in
the best interests of Community, and may, but is not legally obligated to,
consider any pertinent factors, including, but not limited to: (i) whether the
offering price is adequate and acceptable based upon both the current market
price of Community's securities and the historical and present operating results
or financial condition of the corporation; (ii) whether a more affordable price
to the shareholders may be obtained now or in the future; (iii) the impact the
offer would have on the employers, depositors, clients and customers of
Community and its subsidiaries and the communities which they serve; (iv) the
present and historical financial position of the offeror, its reputation and
related factors; (v) an analysis of the value of securities (if any) offered in
exchange for Community's securities; and (vi) any anti-trust or other legal or
regulatory issues raised by the offer.
The Change in Bank Control Act and the BHCA prohibit a person or group
from acquiring "control" of a bank holding company unless the Federal Reserve
Board has been given sixty days' prior written notice of the proposed
acquisition and within that time period the Federal Reserve Board has not issued
a disapproval or extended for up to another thirty days the period during which
such a disapproval may be issued.
The PBCL contains certain "anti-takeover" provisions that are only
applicable to registered corporations. These provisions do not apply to
Citizens. Because Community is a registered corporation, however, certain of
these provisions are applicable to Community.
Subchapter 25E of the PBCL is a "cash-out" anti-takeover statute which
generally provides that if any person or group acquires 20% or more of the
voting shares of a corporation, the remaining shareholders may demand from such
person or group the fair value of their shares, including a proportionate amount
of any control premium.
Under Subchapter 25F of the PBCL, Community is prohibited from
engaging in specified business combination transactions with an interested
stockholder (defined in general as any beneficial owner of at least 20% of
Community's outstanding voting shares) during the five-year period following the
date such person became an interested stockholder unless: (a) the business
combination or share acquisition is approved by the Board of Directors of
Community prior to the date such person becomes an interested stockholder; (b)
the business combination is approved by unanimous vote of the holders of all
outstanding common stock; or (c) the interested shareholder owns at least 80% of
Community's outstanding voting shares, the business combination is approved by a
majority of the holders of Community voting shares (not including shares held by
the interested shareholder), and the interested shareholder complies with
specified procedural and minimum fair price criteria. After the five-year
period, a business combination may be effected if: (i) the transaction is
approved by a majority of the outstanding Community voting shares (not including
shares held by the interested shareholder); or (ii) the transaction is approved
by a majority of the outstanding Community voting shares (including shares held
by the interested shareholder) and the interested shareholder complies with
specified procedural and minimum fair price criteria. Community is also subject
to another somewhat similar Pennsylvania law provision,
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Section 2538 of the PBCL, which requires certain fundamental transactions with
an interested shareholder to be approved by a majority of the corporation's
directors who are unaffiliated with such shareholder.
Pennsylvania's control share acquisition statute (Subchapter 25G of
the PBCL) provides that: (i) the restoration of voting rights of control shares
requires the vote of both the majority of the disinterested shares and the
majority of all outstanding shares; and (ii) a Pennsylvania corporation may
redeem the control shares at the market price of the corporation's shares rather
than the "fair value".
Subchapter 25H of the PBCL requires persons who acquire 20% of the
voting power of a corporation, or who announce that they may acquire control of
the corporation and then sell shares within 18 months thereafter, to disgorge to
the corporation profits made from such transactions.
AMENDMENT OF ARTICLES OF INCORPORATION
Citizens
As required by Section 21a of the NBA, amendment of the Citizens
Articles requires the approval of shareholders of a majority of the voting
shares of stock obtained at a meeting of the shareholders called and held
pursuant to notice given by mail at least ten days prior to the meeting.
Community
Amendment of the Community Articles 5, 7-12 require shareholder
approval by the affirmative vote of 75% of the votes of all shareholders
entitled to vote; provided, however, that if 66 2/3% of the entire Board of
-------- -------
Directors recommends approval of the amendment of the Community Articles, such
action shall be authorized if shareholder approval by the affirmative vote of 66
2/3% of the votes which all shareholders entitled to cast is obtained. Pursuant
to Section 1714 of the PBCL, most of the remainder of the articles of the
Community Articles may be amended upon receipt of the affirmative vote of a
majority of the votes cast by all Community shareholders. Certain minor
amendments, such as a change in corporate name or providing for perpetual
corporate existence, for example, only require approval by the Board of
Directors and do not require shareholder approval.
AMENDMENT OF BYLAWS
Citizens
Amendments to the Citizens Bylaws may be made at any meeting of the
Board of Directors by an affirmative vote of the majority of the members of
Board of Directors of Citizens, provided ten days notice of the proposed
amendment has been given to each member of the Board of Directors.
Community
Amendments to the Community Bylaws may be made by the affirmative vote
of 75% of the outstanding shares of Community Common Stock at any regular or
special meeting duly convened after notice to the shareholders of that purpose,
or by a majority vote of the members of the Board of Directors at any regular or
special meeting thereof duly convened after notice to the directors of that
purpose, subject to the power of the shareholders to change such action of the
Board by the affirmative vote of the holders of 75% of the outstanding shares of
Community Common Stock.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial
statements assume a business combination between Community and Citizens that
qualifies as a pooling of interests for financial reporting purposes. Under this
method of accounting, the recorded assets and liabilities of Community and
Citizens will be carried forward to Community at their recorded amounts, income
of Community will include income of Community and Citizens for the entire fiscal
year in which the Merger occurs, and the reported income of Community and
Citizens for prior periods will be combined and restated as income of Community.
The pro forma combined condensed financial statements are based upon the
respective historical consolidated financial statements of Community and
Citizens and should be read in conjunction with such historical financial
statements and the notes thereto, which are incorporated by reference in this
Joint Proxy Statement/Prospectus. The unaudited pro forma combined condensed
balance sheet data are presented as if the Merger occurred on the date thereof.
The unaudited pro forma combined condensed statements of earnings data are
presented as if the Merger occurred at the beginning of the earliest period
presented.
The unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated at the beginning of the earliest period presented with respect to
the unaudited pro forma combined condensed statements of income or with respect
to the pro forma combined condensed balance sheets, nor is it necessarily
indicative of the future operating results or financial position of Community.
The pro forma information does not give effect to any synergies that may occur
due to the integration of Community's and Citizens' operations. Additionally,
the unaudited pro forma financial information excludes the transaction costs of
the Merger, and the nonrecurring costs and expenses associated with integrating
the operations of the businesses.
Certain material, nonrecurring adjustments will be recorded in
conjunction with the Merger, but the amounts of these adjustments cannot be
determined until Community reviews all facilities, operations and systems of
Citizens and finalizes its plans with respect to integrating the businesses. The
aggregate amount of these adjustments will include costs associated with
consolidating operations and systems, severance pay for involuntary termination,
early retirement and related employee benefits; conforming accounting practices;
and expenses incurred in connection with the Merger. Community has not yet
quantified any of these adjustments. The impact of these adjustments, except for
conforming accounting principles, are expected to be recorded in the first
quarter of 1996.
53
<PAGE>
Community and Citizens
Pro Forma Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995
----------------------------------------------------
Pro Forma Pro Forma
Community Citizens Adjustments Combined
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total interest income $11,946 $2,119 $14,065
Total interest expense 4,906 883 5,789
---------- -------- --------- ---------
Net interest income before provision for loan losses 7,040 1,236 0 8,276
Provision for loan losses 290 0 290
---------- -------- --------- ---------
Net interest income after provision for loan losses 6,750 1,236 0 7,986
Total non-interest income 1,064 91 1,155
Total non-interest expense 4,996 830 5,826
---------- -------- --------- ---------
Income before income taxes 2,818 497 0 3,315
Provision for income taxes 700 94 794
---------- -------- --------- ---------
Net Income $2,118 $403 $0 $2,521
========== ======== ========= =========
Earnings per share $1.03 $20.15 $0.96
========== ======== ========= =========
Weighted average number of shares outstanding 2,052,942 20,000 566,660 A 2,639,602
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1994
----------------------------------------------------
Pro Forma Pro Forma
Community Citizens Adjustments Combined
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total interest income $10,256 $2,119 $12,375
Total interest expense 4,167 780 4,947
---------- -------- --------- ---------
Net interest income before provision for loan losses 6,089 1,339 0 7,428
Provision for loan losses 234 25 259
---------- -------- --------- ---------
Net interest income after provision for loan losses 5,855 1,314 0 7,169
Total non-interest income 1,268 76 1,344
Total non-interest expense 4,518 768 5,286
---------- -------- --------- ---------
Income before income taxes 2,605 622 0 3,227
Provision for income taxes 600 129 729
---------- -------- --------- ---------
Net Income $2,005 $493 $0 $2,498
========== ======== ========= =========
Earnings per share $0.97 $24.65 $0.94
========== ======== ========= =========
Weighted average number of shares outstanding 2,061,049 20,000 566,660 A 2,647,709
========== ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
54
<PAGE>
Community and Citizens
Pro Forma Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------------------------------
Pro Forma Pro Forma
Community Citizens Adjustments Combined
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total interest income $21,399 $4,231 $25,630
Total interest expense 8,489 1,590 10,079
---------- -------- --------- ---------
Net interest income before provision for loan losses 12,910 2,641 0 15,551
Provision for loan losses 462 50 512
---------- -------- --------- ---------
Net interest income after provision for loan losses 12,448 2,591 0 15,039
Total non-interest income 2,282 142 2,424
Total non-interest expense 9,280 1,727 11,007
---------- -------- --------- ---------
Income before income taxes 5,450 1,006 0 6,456
Provision for income taxes 1,288 174 1,462
---------- -------- --------- ---------
Net Income $4,162 $832 $0 $4,994
========== ======== ========= =========
Earnings per share $2.03 $41.60 $1.89
========== ======== ========= =========
Weighted average number of shares outstanding 2,050,250 20,000 566,660 A 2,636,910
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1993
----------------------------------------------------
Pro Forma Pro Forma
Community Citizens Adjustments Combined
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total interest income $20,684 $4,475 $25,159
Total interest expense 9,009 1,760 10,769
---------- -------- --------- ---------
Net interest income before provision for loan losses 11,675 2,715 0 14,390
Provision for loan losses 702 230 932
---------- -------- --------- ---------
Net interest income after provision for loan losses 10,973 2,485 0 13,458
Total non-interest income 2,688 134 2,822
Total non-interest expense 8,456 1,682 10,138
---------- -------- --------- ---------
Income before income taxes 5,205 937 0 6,142
Provision for income taxes 1,289 165 1,454
---------- -------- --------- ---------
Income before effect of accounting change 3,916 772 0 4,688
Cumulative effect of change in accounting principle 75 75
---------- -------- --------- ---------
Net Income $3,916 $847 $0 $4,763
========== ======== ========= =========
Earnings per share $1.92 $42.35 $1.81
========== ======== ========= =========
Weighted average number of shares outstanding 2,039,580 20,000 566,660 A 2,626,240
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1992
----------------------------------------------------
Pro Forma Pro Forma
Community Citizens Adjustments Combined
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Total interest income $21,051 $5,047 $26,098
Total interest expense 10,053 2,244 12,297
---------- -------- --------- ---------
Net interest income before provision for loan losses 10,998 2,803 0 13,801
Provision for loan losses 683 175 858
---------- -------- --------- ---------
Net interest income after provision for loan losses 10,315 2,628 0 12,943
Total non-interest income 2,158 129 2,287
Total non-interest expense 7,803 1,702 9,505
---------- -------- --------- ---------
Income before income taxes 4,670 1,055 0 5,725
Provision for income taxes 1,179 210 1,389
---------- -------- --------- ---------
Net Income $3,491 $845 $0 $4,336
========== ======== ========= =========
Earnings per share $1.73 $42.25 $1.66
========== ======== ========= =========
Weighted average number of shares outstanding 2,017,900 20,000 566,660 A 2,604,560
========== ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
55
<PAGE>
Community and Citizens
Unaudited Pro Forma
Combined Condensed Balance Sheet
As of June 30, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Community Citizens Pro Forma Pro Forma
June 30, 1995 June 30, 1995 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $14,217 $2,279 $16,496
Investment securities, held to maturity 0 30,381 30,381
Investment securities, available for sale 92,949 0 92,949
Loans, net 194,451 26,286 220,737
Premises and equipment, net 6,658 401 7,059
Goodwill 1,509 0 1,509
Other real estate owned 422 0 422
Loans held for sale 1,398 0 1,398
Federal Funds Sold 0 2,810 2,810
Accrued interest receivable and other assets 5,932 879 6,811
--------- -------- -------- --------
TOTAL ASSETS $ 317,536 $ 63,036 $ 0 $380,572
--------- -------- -------- --------
LIABILITIES
Deposits 263,034 53,081 316,115
Short-term borrowings 7,278 0 7,278
Long-term debt and capital notes 11,000 0 11,000
Accrued interest payable and other liabilities 2,161 601 2,762
--------- -------- -------- --------
TOTAL LIABILITIES $ 283,473 $ 53,682 $ 0 $337,155
--------- -------- -------- --------
STOCKHOLDERS' EQUITY
Preferred stock no par value 0 0
Common stock 10,158 400 (400) B
2,933 B 13,091
Surplus 9,873 1,000 (1,000) B
(1,533) B 8,340
Retained Earnings 13,749 7,954 21,703
Net unrealized loss on investment securities available for sale 336 0 336
Less: Treasury stock at cost (53) 0 (53)
--------- -------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 34,063 $ 9,354 $ 0 $ 43,417
--------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 317,536 $ 63,036 $ 0 $380,572
========= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
56
<PAGE>
Community and Citizens
Unaudited
Pro Forma Capital Schedule
As of June 30, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Community Citizens Pro Forma Pro Forma
June 30, 1995 June 30, 1995 Adjustments Combined
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Short-term borrowings $7,278 $7,278
Long-term debt and capital notes 11,000 11,000
Preferred stock, no par value
Common stock 10,158 400 (400) B
2,933 B 13,091
Surplus 9,873 1,000 (1,000) B
(1,533) B 8,340
Retained Earnings 13,749 7,954 21,703
Net unrealized loss on investment securities available for sale 336 336
Less: Treasury stock at cost (53) (53)
--------- -------- -------- --------
Total stockholders' equity $ 34,063 $ 9,354 $ 0 $ 43,417
--------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited pro forma financial information.
57
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. BASIS OF PRESENTATION
Pursuant to the Merger, each share of Citizens Common Stock
outstanding at the effective time will be converted into shares of Community
Common Stock provided that Citizens' shareholders shall not receive more than
31.206 shares or less than 27.673 shares of Community Common Stock for each
Citizens' share. For purposes of presenting the pro forma financial information,
an exchange ratio of 29.333 shares of Community Common Stock for each Citizens'
share has been assumed. The Merger will be accounted for under the pooling of
interests method. Accordingly, recorded assets and liabilities are carried
forward to the combined company at their historical values.
The unaudited pro forma financial information does not give effect to
any synergies that are expected to occur due to the integration of Citizens and
Community operations. Additionally, the unaudited pro forma financial
information excludes the transaction costs of the Merger, and the nonrecurring
costs and expenses associated with integrating the operations of the businesses.
Certain material, nonrecurring adjustments may be recorded in
conjunction with the Merger, but the amounts of these adjustments cannot be
determined until Community reviews all facilities, operations and systems of
Citizens and finalizes its plans with respect to integrating the businesses. The
aggregate amount of these adjustments will include costs associated with
consolidating operations and systems; severance pay for involuntary termination,
early retirement and related employee benefits; conforming accounting practices;
and expenses incurred in connection with the Merger. Community has not yet
quantified any of these adjustments. The impact of these adjustments, if any, is
expected to be recorded in the first quarter of 1996.
For consistency of presentation, certain amounts in the historical
financial statements have been reclassified in the unaudited pro forma combined
condensed financial statements.
NOTE 2. PRO FORMA ADJUSTMENTS
A. Per Share Data
The average number of shares of Community Common Stock outstanding
during the periods presented and per common share and net earnings per common
share have been adjusted for each period presented by multiplying the applicable
number of shares of Citizens Common Stock by 29.333.
B. Stockholder's equity
The combined equity account of Community reflected the combination of
the equity accounts for Community and Citizens. Shares of Community Common Stock
have a par value of $5.00. Based on the exchange ratio discussed in Note 1
above, Community will exchange 586,660 shares of Community Common Stock for
20,000 of Citizens Common Stock.
58
<PAGE>
CITIZENS' MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages of this Proxy Statement/Prospectus present
management's discussion and analysis of the Citizens' National Bank of Ashland
for 1992, 1993 and 1994, as well as the six month periods ended June 30, 1994
and 1995.
RESULTS OF OPERATIONS
- ---------------------
NET INTEREST INCOME
The largest source of Citizens' operating revenue is net interest
income. For purposes of management's discussion and analysis, net interest
income is adjusted to a tax equivalent basis. For purposes of calculating yields
on tax exempt income, the taxable equivalent adjustment equates tax exempt
interest rates to taxable interest rates as noted in Table 1.
Net interest income is the income which remains after deducting from
total income generated by earning assets the interest income attributive to the
acquisition of funds required to support earning assets. Income from earning
assets includes income from loans, investment securities and income from short
term investments. The amount of interest income is dependent upon many factors
including the volume of earning assets, general level of interest rates, the
dynamics of the change of interest rates, and the volume of non-conforming
loans. The cost of funds varies with the amount of funds necessary to support
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.
59
<PAGE>
Table 1
- -------
Management's Discussion of Financial Condition And Results of Operations
Average Balances, Effective Interest Differential And Interest Yields
Income and Rates on a Tax Equivalent Basis for the Six-Month Periods
Ended June 30, 1995 and 1994 and for the Years Ended
December 31, 1994, 1993 and 1992
(dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
June 30, 1995 June 30, 1994
- --------------------------------------------------------------------------------------------------------
Interest Average Rates Interest Average Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
- -------
Federal funds sold 2,643 71 5.37% 3,032 52 3.43%
Investment securities:
Taxable 21,950 661 6.02% 21,019 599 5.70%
Non-taxable (1) 8,804 393 8.93% 9,349 280 5.99%
Loans 26,286 1,127 8.57% 26,269 1,188 9.04%
------- ------ ----- ------- ------ -----
Total earning assets $59,683 $2,252 7.55% $59,669 $2,119 7.10%
======= ====== ===== ======= ====== =====
Liabilities:
- ------------
Deposits:
Savings 22,556 270 2.39% 22,705 262 2.31%
Time 25,586 613 4.79% 25,031 518 4.14%
------- ---- ----- ------- ---- -----
Total interest bearing
liabilities $48,142 $883 3.67% $47,736 $780 3.27%
======= ==== ===== ======= ==== =====
Net interest income/average
earning assets $1,369 4.59% $1,339 4.49%
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Average Rates Interest Average Rates Interest Average Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
- -------
Federal funds sold 1,963 98 4.99% 4,101 120 2.93% 4,870 169 3.47%
Investment securities:
Taxable 21,747 1,249 5.74% 20,010 1,228 6.14% 18,800 1,391 7.40%
Non-taxable (1) 9,323 845 9.06% 8,786 830 9.45% 7,685 786 10.23%
Loans 26,017 2,325 8.94% 26,363 2,578 9.78% 29,177 2,967 10.17%
------- ------ ----- ------- ------ ----- ------- ------ ------
Total earning assets $59,050 $4,517 7.65% $59,260 $4,756 8.03% $60,532 $5,313 8.78%
======= ====== ===== ======= ====== ===== ======= ====== =====
Liabilities:
- ------------
Deposits:
Savings 22,786 532 2.33% 22,682 564 2.49% 22,406 723 3.23%
Time 25,017 1,058 4.23% 25,887 1,196 4.62% 26,812 1,520 5.67%
------- ----- ----- ------ ----- ----- ------ ----- -----
Total interest bearing
liabilities $47,803 $1,590 3.33% $48,569 $1,760 3.62% $49,217 $2,243 4.56%
======= ====== ===== ======= ====== ===== ======= ====== =====
Net interest income/average
earning assets $2,927 4.96% $2,996 5.06% $3,070 5.07%
====== ===== ====== ===== ====== =====
</TABLE>
(1) For purposes of calculating yields on non-taxable investments, interest
income has been adjusted to its taxable equivalent losses using a marginal
tax rate at 34%.
60
<PAGE>
Net interest income for the six month period ended June 30, 1995 was
$1,236,000 compared to $1,339,000 for the six month period ended June 30, 1994,
a decrease of 7.7%. Also, net interest income for the 1994 year decreased
approximately 2.7% as compared to the 1993 year, and the 1993 year decreased
approximately 3.1% from the 1992 year. As shown in Table 1, the net interest
margin has remained above 4.49% for the past three years and six months, having
decreased from 5.07% in 1992 to 4.59% for the six month period ended June 30,
1995. For the six months ended June 30, 1995, average earning assets rose to
$59,683,000, a 1.1% increase over December 31, 1994. This increase consisted of
increases in federal funds sold of 35.6% or $680,000 and net loans of 1.0% or
$269,000, offset by a decrease in investments of 1.0% or $316,000. For the year
1994 as compared to 1993, average earning assets decrease 0.4% or $210,000 to
$59,050,000. This decrease resulted from decreases in federal funds sold of
52.1% or $2,138,000 and net loans of 1.3% or $346,000, offset by a 7.9% or
$2,274,000 increase in investments. Average earning assets decreased from
$60,532,000 to $59,260,000 or 2.1% from 1992 to 1993. This decrease consisted of
a 9.6% or $2,814,000 decrease in net loans and a 15.8% or $769,000 decrease in
federal funds sold, offset by an increase in investments of a 8.73% or
$2,311,000. The decrease in net loans during 1993 was principally attributable
to the company's reduction of indirect paper from a local automobile dealer. The
yield on earning assets was 7.55% and 7.58% for the periods ended June 30, 1995
and 1994 respectively, and 7.65%, 8.03% and 8.78% for the years 1994, 1993 and
1992.
Interest bearing liabilities averaged $48,142,000 for the six month
period ended June 30, 1995 compared to $47,736,000 for the six month period
ended June 30, 1994 and $47,803,000, $48,569,000 and $49,217,000 for the years
1994, 1993 and 1992. The weighted average cost of funds for the six months ended
June 30, 1995 and 1994 and the years 1994, 1993 and 1992 was 3.67%, 3.27%,
3.33%, 3.62% and 4.56% respectively. The net interest margin was 4.59% for the
six month period ended June 30, 1995 compared to 4.49% for the six month period
ended June 30, 1994, and 4.96%, 5.06% and 5.07% for the years 1994, 1993 and
1992. The decline from 1992 to 1993 and 1993 to 1994 was principally
attributable to rate changes with rates on earning assets decreasing more than
rates on interest bearing liabilities. For the six month period ended June 30,
1995 as compared to the six month period ended June 30, 1994, effective rates on
interest earning assets increased to 7.55% from 7.10% while the cost of funds
increased from approximately 3.27% to approximately 3.67% resulting in an
increase in the net interest margin of .1%.
61
<PAGE>
Table 2
- -------
Management's Discussion of Financial Condition and Results of Operations
Rate/Volume Analysis
For the Six-Month Periods Ended June 30, 1995 and 1994 and For the Years Ended
December 31, 1994, 1993 and 1992
(dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
June 30, 1995 vs June 30, 1994 1994 vs 1993 1993 vs 1992
-----------------------------------------------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ---- ----- ------- ----- ------ ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans 2 (63) (61) (34) (219) (253) (286) (103) (389)
Investment securities
Taxable 28 34 62 106 (85) 21 90 (253) (163)
Non-Taxable (15) (5) (20) 50 (35) 15 104 (60) 44
Federal funds sold (10) 29 19 (63) 41 (22) (27) (22) (49)
----- ---- ---- ---- --- ---- ---- ---- -----
Total 5 (5) 0 59 (298) (239) (119) (438) (557)
----- ---- ---- ---- --- ---- ---- ---- -----
Increase (decrease) in interest expense:
Deposits
Savings and interest bearing deposits (2) 10 8 3 (35) (32) 9 (168) (159)
Time 12 82 95 (40) (98) (138) (52) (272) (324)
----- ---- ---- ---- --- ---- ---- ---- -----
Total deposits 10 92 103 (37) (133) (170) (43) (440) (483)
Increase (decrease) in effective interest differential (5) (97) (103) 96 (165) (69) (76) 2 (74)
===== ==== ===== === ===== ===== ===== ===== ======
</TABLE>
Table shows approximate effect on the effective interest differential
of volume and rate changes for the six month periods ended 6/95 and 6/94 and the
years 1994 and 1993. The effect of a change in average volume has been
determined by applying the average yield or rate in the earlier period to the
change in average volume during the period. The effect of a change in rate has
been determined by applying the change in rate during the period to the average
volume of the prior period.
62
<PAGE>
Table 2 illustrates the effect on the effective interest differential
from volume and rate changes. The table shows that the decrease in the interest
income for 1993 as compared to 1992 and 1994 as compared to 1993 was principally
due to lower interest rates while the six month period ended June 30, 1995 as
compared to June 30, 1994 was an offset between volume and rates. Non-taxable
investment securities have been adjusted to a tax equivalent basis using a tax
rate of 34%. The change in interest expense for 1993 as compared to 1992 and
1994 as compared to 1993 was also principally attributable to a change in rates
as was the six months ended June 30, 1995 compared to June 30, 1994.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Citizens' provision for loan losses is based on management's ongoing
review and analysis of the loan portfolio. The purpose of the review is to
assess loan quality, analyze delinquencies, ascertain loan growth, evaluate
potential charge-offs and recoveries, and assess general economic conditions in
its market. In addition, consideration is also given to examinations performed
by the regulatory authorities and outside third parties.
Table 3
- -------
RECONCILIATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31
---------------- ----------------------
June 30, 1995 1994 1993 1992
------------- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at Beginning of period $277 $283 $302 $268
---- ---- ---- ----
Charge-offs:
Real Estate loans 69 7 29
Commercial loans
Consumer loans
(installment loans) 28 97 356 249
Other 20
--- -- ---- ----
Total charge-offs $28 $186 $363 $278
Recoveries:
Real Estate loans 2
Commercial loans
Consumer loans
(installment loans) 58 130 112 137
---- ---- ---- ----
Total recoveries $58 $130 $114 $137
Net charge-offs ($30) $56 $249 $141
Provision for possible loan losses 0 50 230 175
---- ---- ---- ----
Balance at end of period $307 $227 $283 $302
==== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period -0.11% 0.22% 0.94% 0.48%
====== ===== ===== =====
</TABLE>
63
<PAGE>
The provision for loan losses was $50,000 in 1994 compared to $230,000
in 1993 and $175,000 in 1992. Also, net charge-offs increased from $140,000 in
1992 to $249,000 in 1993 and then decreased to $56,000 in 1994. The ratio of net
charge-offs in 1994, 1993 and 1992 to average loans outstanding approximated
.22%, .94% and .48% respectively. For the six month period ended June 30, 1995,
the provision for loan losses was $0 as compared to a $25,000 provision for the
six month period ended June 30, 1994. For the six months ended June 30, 1995,
recoveries had exceeded charge-offs by approximately $30,000 and the ratio of
net charge-offs to average loans outstanding was approximately (.11%). The
allowance for loan losses at June 30, 1995 and December 31, 1994, 1993 and 1992
was $307,000, $277,000, $283,000, and $302,000 respectively.
Table 4
- -------
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31
---------------- -----------------------
June 30, 1995 1994 1993 1992
------------- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
Past due 90 or more days as to interest
or principal:
Residential real estate $290 $388 $398 $392
Commercial real estate 22 25 37
Consumer
All other ---- ---- ---- ----
Total non-performing loans 312 413 435 392
Other real estate owned 15 22
---- ---- ---- ----
Total non-performing assets $312 $413 $450 $414
==== ==== ==== ====
Past due 90 days or more as to interest or
principal and still accruing interest $564 $493 $518 $948
==== ==== ==== ====
Non-performing assets and loans past due 90
days or more and still accruing interest $876 $906 $968 $1,362
==== ==== ==== ======
Non-performing assets as a percentage of
total assets 0.49% 0.67% 0.73% 0.66%
Non-performing loans as a percentage of total
loans 1.19% 1.57% 1.68% 1.45%
Allowance for possible loan losses as a
percentage of total non-performing loans 98.40% 67.07% 65.06% 72.19%
Allowance for possible loan losses as a
percentage of total loans 1.17% 1.05% 1.10% 1.11%
</TABLE>
Table 4 illustrates the level of non-performing assets along with
loans contractually past 90 days and still accruing interest as of June 30, 1995
and December 31, 1994 and 1993. The total non-performing assets at June 30, 1995
was $312,000 as compared to $413,000 and $450,000 as of December 31, 1994 and
1993,
64
<PAGE>
respectively. Non-performing loans as a percentage of total loans decreased to
1.19% as of June 30, 1995 and the allowance for loan losses as a percentage of
total loans approximated 1.17% as compared to 1.05% and 1.10% as of December 31,
1994 and 1993 respectively. Loans past due 90 days or more and still accruing
interest totaled $564,000 as of June 30, 1995, as compared to $493,000 and
$518,000 at December 31, 1994 and 1993 respectively.
Table 5
- -------
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31
---------------------- ------------------------------------------------------
June 30, 1995 1994 1993 1992
---------------------- ------------------------------------------------------
Amount % Amount % Amount % Amount %
-------- ---------- ------- ------- ------ ----- ------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential and real estate loans $155 50.49% $138 49.82% $147 51.94% $148 49.01%
Commercial real estate and
industrial loans 29 9.45% 24 8.66% 32 11.31% 31 10.26%
Consumer (installment) loans 123 40.07% 113 40.79% 92 32.51% 109 36.09%
Other loans 2 0.72% 12 4.24% 14 4.64%
---- ------ --- ------ --- ------ --- -------
$307 100.00% $277 100.00% $283 100.00% $302 100.00%
==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
Real estate acquired through foreclosure is carried at the lower of
the recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior to
foreclosure, the recorded amount of the loans is written down, if necessary, to
the appraised value of the real estate to be acquired by charging the allowance
for possible loan losses. Subsequent to foreclosure, gains and losses on the
sale of real estate acquired through foreclosure are reported in operating
income and any devaluation determined as a result of periodic evaluations is
charged to operating expense.
OTHER INCOME
Non-interest income, recorded as other income, consists principally of
service charges on deposit accounts, commissions, fees and other miscellaneous
income. Other income as a percentage of net interest income and other income was
6.9% and 5.4% for the six month periods ended June 30, 1995 and 1994, and 5.1%,
4.7% and 4.4% for the years 1994, 1993, and 1992, respectively. Service charges
on deposit accounts increased approximately 4.5% for the six months ended June
30, 1995 as compared to the six month period ended June 30, 1994 and 9.7% and
17.3% for the years 1994 compared to 1993 and 1993 as compared to 1992. Total
operating income increased by approximately 20.8% for the six months period
ended June 30, 1995 as compared to June 30, 1994 and 6.5% for the year 1994 as
compared to the year 1993 and 3.5% for the year 1993 as compared to year 1992.
Service charges rose as the result of increased volumes in non-interest bearing
and savings accounts. Other income increased $18,000 or for the six month period
ended June 30, 1995 compared to June 30, 1994 and decreased $12,000 from 1992 to
1993 due to the recognition of increases in cash surrender value of life
insurance.
OTHER EXPENSE
Non-interest expense is categorized into four groupings: salary and
employee benefits, occupancy expenses, furniture and equipment and other
expenses. Salary and employee benefits increased 13.8% during the six month
period ended June 30, 1995 as compared to the six month period ended June 30,
1994, 7.7% for the year ended December 31, 1994 as compared to year 1993, and
5.6% for the year ended December 31, 1993
65
<PAGE>
as compared to year 1992. The increases were principally attributable to annual
salary increases and increases in benefit costs along with the hiring of new
employees. Other expenses increased to $322,000 at June 30, 1995, or 8.1% over
the six month period ended June 30, 1994, and decreased by 7.5% from 1992 to
1993 and 2.8% from 1993 to 1994. The increase for the six months ended June 30,
1995 was principally attributable to expenses associated with the merger.
INCOME TAXES
Citizens' effective tax rate for the six month period ended June 30,
1995 was 18.9% as compared to 20.7% for the six month period ended 1994. For the
years ended December 31, 1994, 1993, and 1992, the effective tax rate was
approximately 17.3%, 17.6% and 19.9%, respectively. The change in the effective
tax rate reflects the level of tax-exempt interest income in relation to income
before income taxes.
In the first quarter of 1993 Citizens adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) and
recognized the effect as a change in accounting in the statement of income.
Under SFAS 109, Citizens recognizes deferred tax liabilities for
taxable temporary differences and deferred tax assets for deductible temporary
differences. Management believes that deferred tax assets recognized at June 30,
1995 will be realized in future tax returns. While the ultimate realization of
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 future reversals of deductible differences without
implementing any tax strategies or assuming future taxable income.
FINANCIAL CONDITION
- -------------------
INVESTMENT SECURITIES
Effective January 1, 1994, Citizens adopted statement of financial
accounting standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). This statement requires the segregation of
investment securities into three categories, each having distinct accounting
treatment; held to maturity, available for sale and held for sale. Citizens'
investment policy is to classify all investment securities as held to maturity.
Citizens does not engage in trading activities.
Citizens' investment policy is to purchase only high quality
securities. Strategies employed address liquidity, capital adequacy and net
interest margin consideration. Table 6 illustrates the maturities of these
securities and their weighted average yields based upon amortized costs as of
June 30, 1995. At June 30, 1995 Citizens held no securities of one issuer, other
than U.S. Government obligations, where the aggregate book value exceeded 10% of
stockholders' equity.
66
<PAGE>
Table 6
- -------
Citizens National Bank of Ashland
Maturity Distribution of Investments
as of June 30, 1995
<TABLE>
<CAPTION>
Within 1 1-5 years 5-10 years after 10 years Total
-------- --------- ---------- -------------- -----
year
----
<S> <C> <C> <C> <C> <C>
U.S. Treasury $2,500 $10,520 $13,020
U.S. Government Agencies 1,791 6,500 8,291
State and political subdivisions 348 2,007 5,868 366 8,589
Other 481 481
------ ------- ------ ------ -------
$4,639 $19,508 $5,868 $366 $30,381
====== ======= ====== ====== =======
Percentage of total 15.27% 64.21% 19.31% 1.20% 100.00%
Weighted average yield 5.13% 6.57% 5.73% 6.24% 6.18%
<CAPTION>
Weighted
Avg. Mat Avg. Yield
-------- ----------
<S> <C> <C>
U.S. Treasury 2 years 1 month 6.146%
U.S. Government Agencies 1 year 1 month 6.373%
State and political subdivisions 3 years 6 months 6.003%
Other 1 year 2 months 6.894%
</TABLE>
Investment securities decreased 2.2% or $679,000 from December
31, 1994 as compared to June 30, 1994, with increases in U.S. Treasury and
Agency securities totaling $190,000 being more than offset by a decrease in
investments in state and political subdivisions of $654,000. Investment
securities increased 4.8% or $1,415,000 and 8.6% or $2,347,000 for the
years 1994 as compared to 1993 and 1993 as compared to 1992, primarily in
U.S. Treasury and Agency securities. Management continued to purchase U.S.
Treasury and Agency securities from 1992 through 1994 with cash provided
from the pay-down of the installment loan portfolio.
LOANS
Table 7 presents the loans outstanding, by type of loan, as of
June 30, 1995 and December 31, 1994 and 1993. Loans receivable, net of
unearned income on installment loans, decreased $9,000 for the six months
ended June 30, 1995 and increased $501,000 or 1.9% for 1994. For 1993 as
compared to 1992, loans decreased $998,000 or 3.7%. Real estate mortgage
loans increased $171,000 or .8% for the six months ended June 30, 1995, and
$1,225,000 or 6.2%, and $1,538,000 or 8.4% for the years ended December 31,
1994 and 1993. The increases in real estate mortgages were offset by
decreases in installment loans from 1992 through 1994 as management
significantly reduced its acceptance of indirect paper from a local
automobile dealer. Commercial and industrial loans increased $15,000 or
3.5% for the six months ended June 30, 1995, and $152,000 or 54.3%, and
$37,000 or 15.2% for the years ended December 31, 1994 and 1993.
67
<PAGE>
Table 7
- -------
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
Six Month Period Ended Year Ended December 31,
----------------------- -------------------------------------------------
June 30, 1995 1994 1993
----------------------- -------------------------------------------------
Amount % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $21,144 80.44% $20,973 79.67% $19,748 76.49%
Commercial and industrial 447 1.70% 432 1.64% 280 1.08%
Installment 5,641 21.46% 5,611 21.32% 6,584 25.50%
Other 204 0.77% 221 0.86%
------- ------- -------
Total loans $27,232 $27,220 $26,833
Unearned income 640 -2.43% 619 -2.35% 733 -2.84%
Allowance for possible loan losses 307 -1.17% 277 -1.05% 283 -1.10%
------- ------ ------- ------ ------- ------
Net loan receivable $26,285 100.00% $26,324 100.00% $25,817 100.00%
======= ======= ======= ======= ======= =======
<CAPTION>
Year Ended December 31,
-----------------------
1992
-----------------------
Amount %
---------- ----------
(dollars in thousands)
<S> <C> <C>
Real estate loans $18,210 67.96%
Commercial and industrial 243 0.91%
Installment 9,287 34.66%
Other 342 1.28%
-------
Total loans $28,082
Unearned income 984 -3.67%
Allowance for possible loan losses 302 -1.13%
------- ------
Net loan receivable $26,796 100.00%
======= =======
</TABLE>
DEPOSITS
Table 8 presents a breakdown of the deposit portfolio composition
as of June 30, 1995 and December 31, 1994 and 1993. Citizens' deposit base
is consumer oriented, consisting of savings accounts, money market
accounts, time deposits, interest bearing demand accounts and non-interest
bearing demand deposits. Citizens' deposit composition has historically
consisted of time deposits, primarily certificates of deposits of various
terms, and savings accounts. Total deposits increased to $53,081,000 at
June 30, 1995, increasing 2.4% over December 31, 1994 balance, after
decreasing $114,000 or .2% during 1994 and $1,388,000 or 2.6% during 1993.
Time deposits have remained at approximately 48% of the total portfolio
while savings deposits have been at 22% to 23% of the portfolio.
Table 8
- -------
DEPOSIT PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
Six Month Period Ended Year Ended December 31
---------------------- -----------------------------------------------------------------
June 30, 1995 1994 1993 1992
---------------------- ------------------- ------------------- -------------------
% of % of % of % of
Balance Deposits Balance Deposits Balance Deposits Balance Deposits
------- -------- ------- -------- ------- -------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts $12,041 22.68% $12,301 23.72% $11,606 22.33% $11,703 21.93%
Money market 4,779 9.00% 4,803 9.26% 5,387 10.36% 5,599 10.49%
Regular checking 4,628 8.72% 4,313 8.32% 4,549 8.75% 4,475 8.39%
Checking with interest 5,927 11.17% 5,313 10.24% 5,289 10.18% 5,460 10.23%
Time 25,706 48.43% 25,131 48.46% 25,144 48.38% 26,126 48.96%
------- ------- ------- ------- ------- ------- ------- -------
Total deposits $53,081 100.00% $51,861 100.00% $51,975 100.00% $53,363 100.00%
</TABLE>
68
<PAGE>
ASSET/LIABILITY MANAGEMENT
--------------------------
Liquidity and interest rate sensitivity are the key aspects of
Citizens' asset/liability management strategy. The maintenance of adequate
liquidity, the ability to meet the cash requirements of their customers and
other financial commitments, is the fundamental aspect of Citizens'
strategy. Citizens' policy is to diversify its funding resources to allow
it to avoid undue concentration in any single financial market and also to
avoid heavy funding requirements within a short period of time.
Closely related to the management of liquidity is management of
rate sensitivity which focuses on maintaining stability in the net interest
margin. 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 of the timing
and rate changes for these assets and liabilities to preserve a
satisfactory net interest margin.
Table 9
- -------
GAP ANALYSIS AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
Less Than 3 Months- 1 - 5 Over 5
3 Months 1 year Years Years Total
--------- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets: (dollars in thousands)
Loans $3,816 $5,041 $4,303 $13,126 $26,286
Overnight deposits 2,810 2,810
Investments 600 4,038 19,441 6,302 30,381
-------- -------- -------- -------- -------
Total interest-earning assets 7,226 9,079 23,744 19,428 59,477
Non-interest-earning assets 3,559 3,559
-------- -------- -------- -------- -------
Total Assets $7,226 $9,079 $23,744 $22,987 $63,036
-------- -------- -------- -------- -------
Interest-bearing liabilities:
Deposits:
Savings and now $22,747 $22,747
Time 4,950 8,771 9,663 2,322 25,706
-------- -------- -------- -------- -------
Total deposits 27,697 8,771 9,663 2,322 48,453
Total interest-bearing liabilities 27,697 8,771 9,663 2,322 48,453
-------- -------- -------- -------- -------
Non-interest-bearing liabilities 5,229 5,229
Stockholders' equity 9,354 9,354
Total liabilities and
stockholders' equity $27,697 $8,771 $9,663 $16,905 $63,036
-------- -------- -------- -------- -------
Excess assets (liabilities) ($20,471) $308 $14,081 $15,436 $9,354
======== ======== ======== ======== =======
Total assets
Cumulative excess assets (liabilities) ($20,471) ($20,163) ($6,082) $9,354 $18,708
======== ======== ======== ======== =======
Total assets
Cumulative ratio of interest-earning
assets/interest-bearing liabilities 26.09% 103.51% 245.72% 836.69% 122.75%
</TABLE>
Table 9 illustrates Citizens' estimated interest rate sensitivity
and periodic and cumulative gap positions as calculated as of June 30,
1995. An institution with more assets repricing than liabilities over a
given timeframe is considered asset sensitive, and one with more
liabilities repricing is considered liability sensitive. An asset sensitive
institution will generally benefit from rising rates, and a liability
institution will generally benefit from declining rates. Although Citizens
has had and will continue in the foreseeable future to experience a
negative
69
<PAGE>
gap position (liability sensitive), the impact of rising interest rates, as
occurred in 1994, did not have a significant effect on the net interest margin.
CAPITAL ADEQUACY
At December 31, 1992, risk-adjusted capital requirements became fully
implemented. The risk capital ratios, based upon guidelines adopted by bank
regulators in 1989, focus on credit risk. Assets and certain off balance sheet
items are segmented into 1 of 4 broad risk categories weighted to 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 1 of the 4 risk-weighted categories.
Capital elements are segmented into 2 tiers. Tier 1 capital represents
shareholders equity reduced by excludable tangibles, while total capital
represents Tier 1 capital plus the allowable portion of the allowance for loan
losses. As of June 30, 1995, required Tier 1 capital, total capital and leverage
ratios were 4%, 8% and 4%, respectively. As of June 30, 1995 and December 31,
1994, 1993 and 1992, Citizens was in excess of these requirements.
BUSINESS OF CITIZENS
DESCRIPTION OF BUSINESS
Citizens is a banking corporation organized in 1875 under the national
banking laws and headquartered in Ashland, Pennsylvania. Citizens engages in
commercial banking authorized by the NBA. This involves accepting demand, time
and savings deposits and granting loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Citizens owns no subsidiaries.
Citizens is not dependent on any one customer, and the loss of any
customer or a few customers would not have a material adverse effect upon it.
PROPERTIES
As of June 30, 1995, Citizens had three banking offices. Its principal
executive office, which it owns, is located at 735 Center Street, Ashland,
Pennsylvania 17921, and the telephone number at such address is (717) 875-3221.
Its other two branch offices are located at Hobart Street, Gordon, Pennsylvania
17936, and Main Street, Lavelle, Pennsylvania 17943.
LEGAL PROCEEDINGS
There are no material proceedings to which Citizens or any of its
directors or officers are a party. All legal proceedings presently pending
against Citizens involve routine litigation incidental to the business of
Citizens and are either not material in respect to the amount in controversy or
are fully covered by insurance.
70
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CITIZENS
The following table sets forth as of September 29, 1995, certain
information regarding the beneficial ownership of Citizens Common Stock by (i)
each director and executive officer of Citizens; (ii) all directors and
executive officers of Citizens as a group; and (iii) each other person known by
Citizens to own beneficially more than 5% of the outstanding Citizens Common
Stock.
<TABLE>
<CAPTION>
Beneficial Ownership of
Citizens Common Stock (1)
-------------------------------------
Number of Percent of
DIRECTORS AND EXECUTIVE OFFICERS: Shares Total
----------- ----------
<S> <C> <C>
John P. Bane 50 .25%
Richard L. Berger 50 .25%
John I. Canfield, Jr. (2) 310 1.55%
A. James Gruber (3) 95 .475%
Raymond P. Laubenstein (4) 1,500 7.5%
Dean N. Paul (5) 200 1%
Daniel N. Snyder (6) 174 .87%
Harry Strouse 876 4.38%
------ -----
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (8 PERSONS) 3,255 16.275%
OTHER 5% SHAREHOLDERS:
Frank L. Scheuren (7) 1,500 7.5%
Anthony J. Urban and Susan I. Urban (8) 1,123 5.62%
</TABLE>
(1) Except as indicated in the footnotes to this table, the persons named
in this table have sole voting and investment power with respect to
all Citizens Common Shares indicated above.
(2) Includes 260 shares owned jointly with Mr. Canfield's wife.
(3) Includes 45 shares owned jointly with Mr. Gruber's wife.
(4) Includes 1,450 shares owned jointly with Mr. Laubenstein's wife. The
Laubensteins' address is Pocono Lake Reserve, Pocono Lake,
Pennsylvania 18347.
(5) Includes 150 shares owned jointly with Mr. Paul's wife.
(6) Includes 124 shares owned jointly with Mr. Snyder's wife.
(7) Mr. Scheuren's address is 1927 Mahantongo Street, Pottsville,
Pennsylvania 17901.
(8) Includes 341 shares owned by Mr. Urban alone; 50 shares owned by Mrs.
Urban alone; 532 shares owned jointly by the Urbans; 50 shares owned
by the Urban's son, Anthony James Urban; 50 shares owned by the
Urban's son, Brian Joseph Urban; 50 shares owned by the Urban's son,
Christopher Jonathan Urban; and 50 shares owned by the Urban's
daughter, Kathryn Suzanne Urban. The Urbans' address, including their
four children, is 7 Linden Court, R.D.#2, Ashland, Pennsylvania 17921.
71
<PAGE>
ADJOURNMENT OF THE MEETING
If there is an insufficient number of votes cast in person or by proxy
at the Meeting to approve the Merger and the Merger Agreement, the Board of
Directors of Citizens intends to adjourn the Meeting to a later date for the
solicitation of additional votes in favor of the Merger and the Merger
Agreement. The affirmative vote of a majority of the shares present, in person
or by proxy, at the Meeting, even if a quorum is not present, is required in
order to approve any such Adjournment Proposal. The place and date to which the
Meeting would be adjourned would be announced at the Meeting.
THE BOARD OF DIRECTORS OF CITIZENS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE ADJOURNMENT PROPOSAL IF NECESSARY TO PERMIT FURTHER SOLICITATION OF
PROXIES TO APPROVE THE MERGER AND THE MERGER AGREEMENT.
EXPERTS
COMMUNITY
The consolidated balance sheets of Community as of December 31, 1994
and 1993 and the related consolidated statements of operations, common
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1994, incorporated by reference in this Proxy
Statement/Prospectus, have been incorporated herein in reliance on the report of
Coopers & Lybrand, L.L.P., independent public accountants to Community, given
upon the authority of said firm as experts in auditing and accounting.
CITIZENS
The balance sheets of Citizens as of December 31, 1994 and 1993 and
the related statements of income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1994 included in
this Proxy Statement/Prospectus, have been included herein in reliance on the
report of Coopers & Lybrand, L.L.P., independent public accountants to Citizens,
given upon the authority of said firm as experts in auditing and accounting.
Representatives of Coopers & Lybrand, L.L.P., are expected to be present at the
Special Meeting with the opportunity to make a statement if they so desire and
are expected to be available to respond to appropriate questions.
LEGAL OPINIONS
The legality of the Community Common Stock to be issued in connection
with the Merger and the tax consequence of the Merger are being passed upon by
Mette, Evans & Woodside, Harrisburg, Pennsylvania, special counsel to Community.
Certain legal matters relating to Citizens will be passed upon at the effective
time of the Merger by Morgan, Lewis & Bockius LLP, Harrisburg, Pennsylvania,
special counsel to Citizens.
72
<PAGE>
OTHER BUSINESS
No other business is expected to be brought before the Special Meeting
for consideration by the shareholders.
By Order of the Board of Directors,
/s/ Dean N. Paul
----------------------------------
Dean N. Paul
Cashier
73
<PAGE>
INDEX TO CITIZENS' FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Balance Sheets as of June 30, 1995 (unaudited) and December 31, 1994,
1993 and 1992 F-3
Statements of Income for the six-month periods ended June 30, 1995
and 1994 (unaudited), and for the years ended December 31, 1994,
1993 and 1992 F-4
Statements of Changes in Shareholders' Equity for the six-month period
ended June 30, 1995 (unaudited), and for the years ended December 31,
1994, 1993 and 1992 F-5
Statements of Cash Flows for the six-month periods ended June 30, 1995
and 1994 (unaudited), and for the years ended December 31, 1994,
1993 and 1992 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Citizens' National Bank of Ashland
We have audited the accompanying balance sheets of The Citizens' National Bank
of Ashland (Bank) as of December 31, 1994 and 1993, and the related statements
of income, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Citizens' National Bank of
Ashland as of December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, the Bank changed its method
of accounting for income taxes in 1993.
/s/ COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
January 20, 1995, except for
Note 12, as to which the date
is July 5, 1995
F-2
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
BALANCE SHEETS
AS OF JUNE 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
(Unaudited)
ASSETS June 30, December 31
--------------------------------------------------
1995 1994 1993 1992
--------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 2,279,362 $ 2,138,498 $ 1,904,586 $ 2,196,280
Federal funds sold 2,810,000 815,000 2,715,000 4,850,000
Investment securities (market value of
$30,343,270, $30,389,492,
$30,509,165, and $27,931,300 at
June 30, 1995 and December 31,
1994, 1993, and 1992, respectively) 30,381,255 31,059,669 29,645,159 27,297,762
Loans 27,231,898 27,220,141 26,833,046 28,082,437
Less:
Unearned income (639,585) (619,265) (732,735) (984,001)
Allowance for loan losses (306,820) (277,408) (283,384) (302,290)
------------- ----------- ----------- -----------
Net loans 26,285,493 26,323,468 25,816,927 26,796,146
------------- ----------- ----------- -----------
Premises and equipment, net 400,681 407,949 395,897 388,465
Accrued interest receivable and other
assets 878,867 831,208 759,808 789,876
------------- ----------- ----------- -----------
Total assets $63,035,658 $61,575,792 $61,237,377 $62,318,529
============= =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Deposits:
Noninterest-bearing 4,628,235 4,313,280 4,549,344 4,476,142
Savings 22,746,669 22,416,162 22,281,540 22,761,774
Time 25,706,389 25,131,455 25,144,313 26,125,249
------------- ----------- ----------- -----------
Total deposits 53,081,293 51,860,897 51,975,197 53,363,165
Accrued interest payable 335,046 309,687 317,087 377,294
Accrued taxes and other liabilities 265,379 274,167 236,206 306,177
------------- ----------- ----------- -----------
Total liabilities 53,681,718 52,444,751 52,528,490 54,046,636
------------- ----------- ----------- -----------
Shareholders' equity:
Common stock, par value $20; 20,000
shares authorized, issued and
outstanding 400,000 400,000 400,000 400,000
Surplus 1,000,000 1,000,000 1,000,000 1,000,000
Retained earnings 7,953,940 7,731,041 7,308,887 6,871,893
------------- ----------- ----------- -----------
Total shareholders' equity 9,353,940 9,131,041 8,708,887 8,271,893
------------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $63,035,658 $61,575,792 $61,237,377 $62,318,529
============= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF INCOME
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
-------------------------------- ----------------------------------------
1995 1994 1994 1993 1992
------------ ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,127,109 $1,187,911 $2,325,328 $2,578,474 $2,967,374
Interest on investment securities:
Taxable 661,439 599,327 1,249,379 1,228,212 1,390,635
Tax-exempt 259,484 279,970 557,742 547,789 519,265
Interest on federal funds sold 70,610 51,919 98,356 120,498 169,286
---------- ---------- ---------- ----------- ----------
Total interest income 2,118,642 2,119,127 4,230,805 4,474,973 5,046,560
---------- ---------- ---------- ----------- ----------
Interest expense:
Savings deposits 270,115 261,503 532,060 563,578 722,578
Time deposits 612,820 518,416 1,058,188 1,196,398 1,520,765
---------- ---------- ---------- ----------- ----------
Total interest expense 882,935 779,919 1,590,248 1,759,976 2,243,343
---------- ---------- ---------- ----------- ----------
Net interest income before
provision for loan losses 1,235,707 1,339,208 2,640,557 2,714,997 2,803,217
Provision for loan losses 25,000 50,000 230,000 175,000
---------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses 1,235,707 1,314,208 2,590,557 2,484,997 2,628,217
---------- ---------- ---------- ----------- ----------
Other operating income:
Service charges on deposit accounts 38,114 36,465 74,259 67,665 57,664
Other service charges,
commissions and fees 30,919 35,007 61,406 56,884 50,644
Other income 22,341 4,189 6,413 8,880 20,666
--------- ---------- ---------- ----------- ----------
Total other operating income 91,374 75,661 142,078 133,429 128,974
--------- ---------- ---------- ----------- ----------
Other operating expenses:
Salaries and employee benefits 422,014 370,781 870,861 808,950 766,158
Net occupancy 41,036 45,894 93,865 86,432 87,416
Furniture and equipment 45,040 53,370 105,153 108,878 117,664
Other expenses 322,092 298,059 656,602 676,983 731,072
---------- ----------- ---------- ------------ -----------
Total other operating expenses 830,182 768,104 1,726,481 1,681,243 1,702,310
---------- ----------- ---------- ------------ -----------
Income before income taxes and accounting
change 496,899 621,765 1,006,154 937,183 1,054,881
Income tax provision 94,000 129,000 174,000 165,000 210,000
---------- ----------- ---------- ------------ -----------
Income before cumulative effect of
change in accounting principle 402,899 492,765 832,154 772,183 844,811
Cumulative effect of change of
accounting principle 74,811
--------- ----------- ---------- ----------- ----------
Net income $402,899 $492,765 $832,154 $846,994 $844,881
========= ========== ========== =========== ==========
Weighted average number of shares outstanding 20,000 20,000 20,000 20,000 20,000
========= ========== ========== =========== ==========
Per share amounts:
Income before cumulative effect of chang e
in accounting principle $20.14 $24.64 $41.61 $38.61 $42.24
========= ========== ========== =========== ==========
Cumulative effect of change in accounting
principle - - - $3.74 -
========= ========== ========== =========== ==========
Net income per share $20.14 $24.64 $41.61 $42.35 $42.24
========= ========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1995 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<S> <C>
Balance, December 31, 1995 $7,827,012
Net income 844,881
Cash dividends ($19.50 per share) (400,000)
-----------
Balance, December 31, 1992 8,271,893
Net income 846,994
Cash dividends ($20.50 per share) (410,000)
-----------
Balance, December 31, 1993 8,708,887
Net income 832,154
Cash dividends ($20.50 per share) (410,000)
-----------
Balance, December 31, 1994 9,131,041
Net income 402,899
Cash dividends ($9 per share) (180,000)
-----------
Balance, June 30, 1995 (Unaudited) $9,353,940
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
------------------------- ------------------------------------------
1995 1994 1994 1993 1992
------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income before cumulative effect of change in
accounting principles $402,899 $492,765 $832,154 $772,183 $844,881
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 22,548 28,178 55,695 67,004 78,858
Gain on sale of investments (1,500) (700) (700) (1,250) (2,900)
Effect of change in accounting principle 74,811
Amortization of bond premium, net 68,024 70,367 70,917
Provision for loan losses 25,000 50,000 230,000 175,000
Deferred tax provision (benefit) (29,393) (11,676) 7,905 (35,526) (28,084)
(Increase) decrease in accrued interest
receivable and other assets (18,266) (61,697) (79,305) 149,822 (73,529)
Increase (decrease) in accrued interest payable 25,359 (19,464) (7,400) (60,207) (156,394)
Increase (decrease) in accrued taxes and
other liabilities (8,788) 3,912 37,961 (70,497) 152,334
--------- --------- --------- --------- ----------
Net cash provided by operating activities 392,859 456,318 964,334 1,196,707 1,061,083
--------- --------- --------- --------- ----------
Cash flows from investing activities:
Proceeds from maturities of investment securities 6,399,939 2,957,000 6,705,761 7,930,000 9,057,413
Purchases of investment securities (5,720,025) (4,945,182) (8,187,595) (10,346,514) (12,953,911)
Net (increase) decrease in loans 37,957 315,974 (556,541) 665,517 2,009,878
Purchase of premises and equipment (15,280) (19,078) (67,747) (74,436) (3,696)
---------- ---------- ---------- ---------- -----------
Net cash provided by (used in) investing
activities 702,609 (1,691,286) (2,106,122) (1,825,433) (1,890,316)
--------- --------- --------- --------- ----------
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits 314,955 80,962 (236,064) 73,202 123,195
Net increase (decrease) in savings deposits 330,507 1,000,558 134,622 (480,234) 1,572,946
Net increase (decrease) in certificates of deposit 574,934 15,991 (12,858) (980,936) (1,290,845)
Cash dividends (180,000) (180,000) (410,000) (410,000) (400,000)
--------- --------- --------- --------- ----------
Net cash provided by (used in) financing 1,040,396 917,511 (524,300) (1,797,968) 5,296
activities ---------- --------- --------- --------- ----------
Increase (decrease) in cash and cash equivalents 2,135,864 (317,457) (1,666,088) (2,426,694) (823,937)
Cash and cash equivalents at beginning of period 2,953,498 4,619,586 4,619,586 7,046,280 7,870,217
---------- --------- --------- --------- ----------
Cash and cash equivalents at end of period $5,089,362 $4,302,129 $2,953,498 $4,619,586 $7,046,280
========== ========== ========== ========== ==========
Cash and cash equivalents at end of period consist of
the following:
Cash and due from banks 2,279,362 2,227,129 2,138,498 1,904,586 2,196,280
Federal funds sold 2,810,000 2,075,000 815,000 2,715,000 4,850,000
--------- --------- --------- ---------- ---------
$5,089,362 $4,302,129 $2,953,498 $4,619,586 $7,046,280
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies of The Citizens' National Bank of
Ashland (Bank) are as follows:
INVESTMENT SECURITIES:
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). Debt securities are
classified as held-to-maturity and carried at amortized cost in
accordance with the Bank's policy.
These debt securities are carried at cost adjusted for amortization
of premium and accretion of discount. Gains and losses realized on
the sales of investment securities are determined using the specific
identification method and are included in income for the period.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Gains or losses on
dispositions of premises and equipment are included in income in the
period of disposition.
PROVISION FOR LOAN LOSSES:
The loan loss provision is based on those factors which, in
management's judgment, deserve current recognition in estimating
possible loan losses, including past loan loss experience and changes
in:
. Economic conditions prevailing in the Bank's trading area;
. Character and size of the loan portfolio; and
. Overall credit-worthiness of borrowers as monitored through
delinquency analysis and loan reviews.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109) which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse (see Note 7).
INTEREST INCOME ON LOANS:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of
interest has ceased and where all previously accrued and unpaid interest is
reversed. Loans are placed on nonaccrual status when principal or interest
is past due 180 days or more and the collateral may be inadequate to recover
principal and interest, 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. Subsequent cash payments received are either applied to the
outstanding principal balance or recorded as interest income, depending upon
management's assessment of the ultimate collectibility of principal and
interest.
REAL ESTATE OWNED:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior
to foreclosure, the recorded amount of the loan is written down, if
necessary, to the appraised value of the real estate to be acquired by
charging the allowance for loan losses. For the six-month periods ended June
30, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992, non-
cash transactions related to real estate acquired through foreclosure
totaled $0 and $0, and $0, $83,702 and $47,271, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are
credited or charged to noninterest expense. Costs of maintaining and
operating foreclosed property are expensed as incurred. Expenditures to
improve foreclosed properties are capitalized only if expected to be
recovered; otherwise, they are expensed.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. During the periods ended
June 30, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992
the Bank paid income taxes of $102,000, $120,000, $158,529, $172,585 and
$118,000 and paid interest to depositors of $857,576, $799,383, $1,597,648,
$1,820,183 and $2,399,737, respectively.
ACCOUNTING FOR LOAN FEES:
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of
the related loans' yield. The Bank is amortizing these amounts over the
contractual life of the related loans.
NET INCOME PER SHARE:
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during each period presented.
RECLASSIFICATION:
The 1993 financial statements have been reclassified to conform with the
1994 presentation.
2. INVESTMENT SECURITIES:
The amortized cost and estimated market values of investments in debt
securities at June 30, 1995 and December 31, 1994, 1993 and 1992 are as
follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1995
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 13,020,617 $ 142,787 $ 36,216 $ 13,127,188
U.S. Government agencies 8,290,706 54,790 37,141 8,308,355
State and political subdivisions 8,588,712 115,815 211,394 8,493,133
Other securities 481,220 1,539 68,165 414,594
------------ ------------ ------------ -------------
$ 30,381,255 $ 314,931 $ 352,916 $ 30,343,270
============= ============= ============= ==============
</TABLE>
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT SECURITIES, CONTINUED:
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 13,985,190 $ 4,198 $ 394,701 $ 13,594,687
U.S. Government agencies 7,137,160 33,240 279,576 6,890,824
State and political subdivisions 9,242,532 133,820 154,477 9,221,875
Other securities 694,787 4,724 17,405 682,106
------------ ------------ ------------ ------------
$ 31,059,669 $ 175,982 $ 846,159 $ 30,389,492
============= ============= ============= =============
<CAPTION>
December 31, 1993
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 12,988,437 $ 272,715 $ 527 $ 13,260,625
U.S. Government agencies 6,669,553 82,010 16,345 6,735,218
State and political subdivisions 8,877,247 506,344 1,330 9,382,261
Other securities 1,109,922 23,975 2,836 1,131,061
---------- ----------- ----------- ------------
$ 29,645,159 $ 885,044 $ 21,038 $ 30,509,165
=============== ============== ============== ==============
<CAPTION>
December 31, 1992
---------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,991,787 $ 309,619 $ $ 10,301,406
U.S. Government agencies 7,116,334 122,797 17,334 7,221,797
State and political subdivisions 8,386,185 242,268 58,482 8,569,971
Other securities 1,803,456 34,670 1,838,126
----------- ------------ ---------- -----------
$ 27,297,762 $ 709,354 $ 75,816 $ 27,931,300
============ ============ ============ ============
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT SECURITIES, CONTINUED:
The amortized cost and estimated market value of debt securities at June
30, 1995 and December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1995 December 31, 1994 December 31, 1993
----------------------------- ----------------------------- -----------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Due within one year $ 4,639,000 $ 4,503,913 $ 4,839,307 $ 4,839,360 $ 4,597,482 $ 4,680,065
Due one year but
within five years 19,508,000 19,644,938 20,658,003 20,098,137 15,797,401 16,169,814
Due after five years
but within ten years 5,868,000 5,817,335 5,362,359 5,245,496 8,468,820 8,845,207
Due after ten years 366,255 377,084 200,000 206,499 781,456 814,079
------------ ------------ ------------ ------------ ------------ ------------
$ 30,381,255 $ 30,343,270 $ 31,059,669 $ 30,389,492 $ 29,645,159 $ 30,509,165
============ ============ ============ ============ ============ ============
</TABLE>
Proceeds from maturities of investments in debt securities, including sales
which resulted from the exercise of call options for the six-month periods
ended June 30, 1995 and 1994 and the years ended December 31, 1994, 1993
and 1992 were $6,399,939, $2,957,000, $6,705,761, $7,930,000 and
$9,057,413, respectively. Gross gains of $1,500, $700, $700, $1,250 and
$2,900 were realized for the six-month periods ended June 30, 1995 and 1994
and the years ended December 31, 1994, 1993 and 1992, respectively.
Investment securities aggregating $1,767,000, $1,767,000, $1,270,000 and
$1,270,000 at June 30, 1995 and December 31, 1994, 1993, and 1992 were
pledged to collateralize public deposits and other funds as provided by
law.
At June 30, 1995 and December 31, 1994, 1993 and 1992, the Bank had no
investments of any one issuer (other than the U.S. Government and its
agencies) with an aggregate book value in excess of ten percent of
shareholders' equity.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT SECURITIES, CONTINUED:
Interest earned on investment securities for the six-month periods ended
June 30, 1995 and 1994, and the years ended December 31, 1994, 1993 and
1992 consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------------ ----------------------------------------------
1995 1994 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Taxable:
U.S. Treasury $ 406,669 $ 369,529 $ 756,149 $ 735,651 $ 771,450
U.S. Government agencies 234,633 196,830 433,322 383,726 455,246
Other securities 20,137 32,968 59,908 108,835 163,939
---------- ---------- ---------- ---------- ----------
Total taxable $ 661,439 $ 599,327 $1,249,379 $1,228,212 $1,390,635
========== ========== ========== ========== ==========
Tax-exempt:
State and municipal $ 259,484 $ 279,970 $ 557,742 $ 547,789 $ 519,265
========== ========== ========== ========== ==========
</TABLE>
3. LOANS:
The composition of loans outstanding at June 30, 1995 and December 31,
1994, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
-------------- ------------------------------------------------
1995 1994 1993 1992
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 446,865 $ 431,827 $ 280,434 $ 242,772
Real estate - mortgage 21,143,803 20,973,144 19,748,225 18,209,747
Installment 5,641,230 5,611,383 6,583,568 9,287,321
Other 203,787 220,819 342,597
---------- ------------ ------------ ------------
$ 27,231,898 $ 27,220,141 $ 26,833,046 $ 28,082,437
============ ============ ============ ============
</TABLE>
During 1994, 1993 and 1992 the Bank significantly reduced its acceptance of
indirect paper from a local automobile dealer, resulting in a corresponding
reduction in installment loans and unearned income from those loans.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. ALLOWANCE FOR LOAN LOSSES:
A summary of the activity in the allowance for loan losses for the six-
month period ended June 30, 1995 and the years ended December 31, 1994,
1993 and 1992 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------------------------------
1995 1994 1993 1992
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, January 1 $ 277,408 $ 283,384 $ 302,290 $ 267,561
Provision - 50,000 230,000 175,000
Recoveries 57,326 129,622 113,520 137,030
Loans charged-off (27,914) (185,598) (362,426) (277,301)
---------- ---------- ---------- ----------
Balance, December 31 $ 306,820 $ 277,408 $ 283,384 $ 302,290
========== ========== ========== ==========
</TABLE>
5. BANK PREMISES AND EQUIPMENT:
Premises and equipment at the six-month period ended June 30, 1995 and
December 31, 1994, 1993 and 1992 are comprised of the following:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------------------------------
1995 1994 1993 1992
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Land $ 10,700 $ 10,700 $ 10,700 $ 10,700
Buildings and improvements 551,194 542,160 543,060 505,560
Furniture and equipment 795,146 788,900 786,157 749,221
----------- ----------- ----------- -----------
1,357,040 1,341,760 1,339,917 1,265,481
Less accumulated (1,022,263) (999,715) (944,020) (877,016)
----------- ----------- ----------- -----------
depreciation
334,777 342,045 395,897 388,465
Construction in process 65,904 65,904
----------- ----------- ----------- -----------
$ 400,681 $ 407,949 $ 395,897 $ 388,465
=========== =========== =========== ===========
</TABLE>
Depreciation expense charged to operations amounted to $22,548 and $28,178,
and $55,695, $67,004 and $78,858 for the six-month periods ended June 30,
1995 and 1994 and the years ended December 31, 1994, 1993 and 1992,
respectively.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. TIME CERTIFICATES OF DEPOSIT OVER $100,000:
The aggregate amounts of time certificates of deposit of $100,000 or more
included in time deposits at June 30, 1995, December 31, 1994, 1993 and
1992 were approximately $890,000, $976,000, $661,000, and $849,000,
respectively. Interest expense on these deposits was approximately $27,000
and $16,000 and $37,000, $40,000 and $47,000 for the six month periods
ended June 30, 1995 and 1994 and the years ended December 31, 1994, 1993
and 1992, respectively.
7. INCOME TAXES:
The provision (benefit) for income taxes for the six-month periods ended
June 30, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992
consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------------- ------------------------------------------------
1995 1994 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current $ 123,393 $ 140,676 $ 166,095 $ 200,526 $ 238,084
Deferred (29,393) (11,676) 7,905 (35,526) (28,084)
----------- ----------- ----------- ----------- -----------
$ 94,000 $ 129,000 $ 174,000 $ 165,000 $ 210,000
=========== =========== =========== =========== ===========
</TABLE>
As discussed in Note 1, the Company adopted the provisions of SFAS 109
effective January 1, 1993. The effect of this change is reflected in the
statement of income as an accounting change. The cumulative effect of this
change as of January 1, 1993 increased net income by $74,811.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
The components of the net deferred tax asset as of June 30, 1995 and
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
---------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Deferred tax assets:
Loan loss provision $ 56,955 $ 46,755 $ 48,787
Non-accrual loan interest income 19,818 19,449 17,466
Loan origination fees 39,225 32,146 55,896
Deferred compensation 74,698 68,069 57,735
Alternative minimum tax credit 43,366 46,374 39,811
---------- ---------- ----------
Total deferred tax assets 234,062 212,793 219,695
---------- ---------- ----------
Deferred tax liabilities:
Depreciation 37,721 40,781 44,181
Accretion of discount 5,116 5,116 4,371
Miscellaneous 18,979 24,043 20,385
---------- ---------- ----------
Total deferred tax liability 61,816 69,940 68,937
---------- ---------- ----------
Net deferred asset $ 172,246 $ 142,853 $ 150,758
========== ========== ==========
</TABLE>
The significant components of the deferred tax expense (benefit) for
the six-month periods ended June 30, 1995 and 1994 and the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
-------------------------------- ------------------------------------------------
1995 1994 1994 1993 1992
--------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Loan loss provision, net of charge-offs $ (10,200) $ 340 $ 2,032 $ 6,428 $ (11,808)
Accelerated depreciation (3,060) (3,060) (3,400) (3,195) (7,870)
Deferred compensation (6,629) (5,167) (10,333) (10,182) (9,802)
Deferred fee income (7,079) (4,488) 28,815 (26,520) (13,056)
Alternative minimum tax credit 3,008 811 (6,563) 18,980
Other net (5,433) (112) (2,646) (2,057) (4,528)
----------- ----------- ----------- ----------- -----------
$ (29,393) $ (11,676) $ 7,905 $ (35,526) $ (28,084)
=========== =========== =========== =========== ===========
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
The provision for income taxes differed from the amounts derived from
applying the statutory graduated federal tax rates as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
------------------------------ ----------------------------------------------
1995 1994 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Computed statutory tax provision $ 168,945 $ 211,400 $ 342,092 $ 344,078 $ 358,660
Effect of tax-exempt municipal bond and loan
interest, net of interest offset (80,316) (87,233) (173,793) (170,852) (158,365)
Alternative minimum tax (6,472)
Other 5,371 4,833 5,701 (8,226) 16,177
----------- ----------- ----------- ----------- -----------
$ 94,000 $ 129,000 $ 174,000 $ 165,000 $ 210,000
=========== =========== =========== =========== ===========
</TABLE>
8. PROFIT-SHARING AND DEFERRED COMPENSATION PLANS:
The Bank's noncontributory profit-sharing plan covers substantially all
employees. The plan provides that the Bank contribute an amount not to
exceed the amount deductible for federal income tax purposes, such amount
to be fixed by appropriate action of the Board of Directors. For the six-
month periods ended June 30, 1995 and 1994, and the years ended December
31, 1994, 1993 and 1992 the Bank provided $0 and $0, and $32,000, $32,000
and $30,000, respectively.
In addition to the noncontributory profit-sharing plan described
previously, the Bank also maintains a contributory, nonqualified deferred
compensation plan for members of the Board of Directors. Under the terms of
this plan, members may elect to defer 100% of their fees for the lesser of
five years from the inception of the plan or when their Board membership
terminates, after which the deferred income will be paid over a ten-year
period to the director or the director's beneficiary. For the six-month
periods ended June 30, 1995 and 1994, and the years ended December 31,
1994, 1993 and 1992 total expense for this plan was $24,792 and $20,490,
and $40,980, $40,536 and $28,830, respectively.
9. RELATED PARTY TRANSACTIONS:
Certain directors and their business affiliates, executive officers and
their families are indebted to the Bank. At June 30, 1995 and December 31,
1994, 1993 and 1992 loans to these persons and their business affiliates
amounted to approximately $97,000, $99,000, $88,000 and $48,000,
respectively. In the opinion of management, such loans are consistent with
sound banking practices and are within applicable regulatory bank lending
limitations.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. DIVIDEND RESTRICTIONS:
The Bank is subject to legal limitations as to the amount of dividends that
can be paid to its shareholders. The approval of certain banking regulatory
authorities is required if the total of all dividends declared by the Bank
exceeds limits as defined by the regulatory authorities. The Bank could
declare dividends in 1994 without regulatory approval of approximately
$882,000 plus an additional amount equal to the Bank's retained net profits
in 1994 up to the date of any dividend declaration.
11. CREDIT AND INTEREST RATE RISK:
The Bank grants commercial, consumer and residential loans to customers
primarily in Ashland, Pennsylvania. Although the Bank has a diversified
loan portfolio, its debtors' ability to honor their contracts is
substantially dependent upon the general economic conditions of the region.
The Bank's assets mature or reprice over a longer term than the liabilities
which fund the assets. Therefore, during times of rising interest rates,
net interest income will be reduced. During the six-month period ended June
30, 1995 and the years ended December 31, 1994 and 1993, the Bank had
average interest earning assets of $59.5 million, $59.5 million, and $61.1
million having a weighted average effective yield of 7.12%, 7.11% and
7.45%, respectively, and average interest-bearing liabilities of $48.7
million, $47.8 million and $48.5 million having a weighted average
effective interest rate of 3.35%, 3.33% and 3.62%, respectively. Net
interest income will fluctuate based on changes in interest rates and
changes in the levels of interest sensitive assets and liabilities.
12. PROPOSED MERGER:
On July 5, 1995 the Bank entered into an agreement and plan of merger with
Community Banks, Inc. whereby the Bank will be merged into Community Banks,
National Association, a wholly-owned subsidiary of Community Banks. The
agreement requires approval of the Bank's shareholders and various
regulatory bodies.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
OF
THE CITIZENS' NATIONAL BANK OF ASHLAND
WITH AND INTO
COMMUNITY BANKS, NATIONAL ASSOCIATION,
A WHOLLY OWNED SUBSIDIARY OF
COMMUNITY BANKS, INC.
THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), made and entered into
this 5th day of July, 1995, by and among THE CITIZENS' NATIONAL BANK OF ASHLAND
("Citizens"), a national banking association having its headquarters at 735
Center Street, Ashland, Pennsylvania 17921; COMMUNITY BANKS, NATIONAL
ASSOCIATION ("CBNA"), a national banking association having its headquarters at
150 Market Square, Millersburg, Pennsylvania 17061, and COMMUNITY BANKS, INC.
("Community"), a Pennsylvania business corporation having its corporate
headquarters at 150 Market Square, Millersburg, Pennsylvania 17061.
WHEREAS, the Boards of Directors of Citizens, CBNA, and Community deem
it advisable and in the reasonable best interest of their respective
shareholders that under and pursuant to the terms and conditions herein set
forth Citizens be merged with and into CBNA (the "Merger"); and
WHEREAS, this Agreement has been approved by the Board of Directors of
each party hereto; and
WHEREAS, the parties hereto desire to adopt this Agreement as a Plan
of Reorganization and to consummate the Merger in accordance with the provisions
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, acting pursuant to resolutions of their respective Boards of
Directors, and in accordance with the provisions of the National Bank Act and
the laws of the Commonwealth of Pennsylvania, Citizens, CBNA, and Community do
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 Citizens shall be merged into CBNA upon the terms and provisions
of this Agreement and under the Articles of Association and By-Laws of CBNA
(subject to future alteration, amendment or repeal). The Merger shall be
pursuant to the provisions of, and with the effect provided in, the National
Bank Act and shall be expressly conditioned upon receipt of all necessary
regulatory and corporate approvals.
1.2 The name of the surviving national association shall be COMMUNITY
BANKS, N.A. The Articles of Association and the Bylaws of the surviving national
association shall be the Articles of Association and the Bylaws of CBNA in
effect immediately prior to the Merger.
1.3 The business of the surviving national association after the
Effective Date of the Merger shall be a national banking association which shall
be conducted by CBNA at its main office as then located and at its legally
established branches including all branches and the main office of Citizens
immediately prior to the Merger.
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1.4 At the Effective Date of the Merger, the separate existence of
Citizens shall cease and CBNA, as the surviving entity, shall continue
unaffected and unimpaired by the Merger and shall be liable for all of the
liabilities of Citizens existing at the Effective Date.
1.5 All assets, rights, privileges, immunities, powers, franchises
and interests of Citizens in and to every type of property (real, personal and
mixed) and chooses in action, as they exist as of the Effective Date, shall pass
and be transferred to and vest in CBNA by virtue of the Merger on the Effective
Date without any deed, conveyance or other transfer; the separate existence of
Citizens shall cease and the existence of CBNA as the surviving national
association and as a national association organized under the National Bank Act
shall continue unaffected and unimpaired by the Merger; and CBNA shall be deemed
to be the same Association as Citizens and shall be subject to all of its duties
and liabilities of every kind and description.
CBNA, upon the Merger and without any order of other action on the
part of any court or otherwise, shall possess, hold and enjoy all rights,
privileges, immunities, franchises and interests, both as a public nature and as
a private nature, in the same manner and to the same extent as such rights,
privileges, immunities, franchises and interests were possessed, held or enjoyed
by Citizens as of the Effective Date. All property, real, personal and mixed,
and all debts due on whatever account, including subscriptions to shares and all
other chooses in action, and all and every other interest, of or belonging to or
due to Citizens, shall be taken and deemed to be transferred to and vested in
CBNA without further act or deed. The title to any real estate, or any interest
therein, vested in Citizens shall not revert or be in any way impaired by reason
of the Merger.
1.6 CBNA shall be responsible and liable for all the liabilities and
obligations of Citizens and any claim existing or action or proceeding pending
by or against Citizens may be prosecuted as if the Merger had not taken place,
or CBNA may be substituted in its place. Neither the rights of creditors nor any
liens upon the property of Citizens shall be impaired by reason of the Merger.
1.7 The shares of capital stock of CBNA issued and outstanding
immediately prior to the Effective Date shall at the Effective Date continue to
be issued and outstanding.
ARTICLE II
CONVERSION AND EXCHANGE OF CITIZENS COMMON STOCK
2.1 At the Effective Date of the Merger, by virtue of the Merger and
without any action on the part of any holder thereof:
(a) Each share of Citizens' Common Stock issued and outstanding
immediately prior to the Effective Date of the Merger, except for (i)
Perfected Dissenting Shares (as defined in Section 2.4) and (ii) shares of
Citizens' Common Stock held and beneficially owned by Community or any
Community subsidiary (other than shares of Citizens' Common Stock held in a
fiduciary or similar capacity on behalf of others) which shall be canceled
by virtue of the Merger, shall automatically be converted into 29.333
shares (the "Conversion Factor") of common stock, $5.00 par value, of
Community ("Community Common Stock"), subject to the following adjustments:
(1) If the Market Value Per Share of Community (as defined
below) as of the close of business on the fifth (5th) trading date
preceding the Effective Date of the Merger is less than $26.25 per
share, then the Conversion Factor shall be increased to the number
obtained by dividing $770.00 by the Market Value Per Share of
Community; provided, however, that in no event shall the Conversion
Factor be greater than 31.206.
(2) If the Market Value Per Share of Community (as defined
below) as of the close of business on the fifth (5th) trading date
preceding the Effective Date of the Merger is
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more than $26.25 per share, then the Conversion Factor shall be
decreased to the number obtained by dividing $770.00 by the Market
Value Per Share of Community; provided, however, that in no event
shall the Conversion Factor be less than 27.673.
For purposes of this Agreement, "Market Value Per Share" shall mean with
respect to a calculation date the average of the closing sales price of
Community Common Stock as reported by the NASDAQ NMS for the thirty (30)
consecutive trading days ending on and including the date as of which the
Market Value Per Share is to be calculated. In addition, if the sum of the
total number of shares of Citizens' Common Stock outstanding at the
Effective Date exceeds 20,000, then the Conversion Factor shall be reduced
to the number obtained by multiplying the Conversion Factor times a
fraction the numerator of which shall be 20,000 and the denominator of
which shall be the total number of shares of Citizens' Common Stock
outstanding at the Effective Date.
(b) Each share of Citizens Common Stock which, immediately prior to
the Effective Date of the Merger, was issued and held in the treasury of
Citizens, if any, will be canceled and retired.
(c) No Perfected Dissenting Shares will be converted into Community
Common Stock under this Section 2.1, but such Perfected Dissenting Shares
will be subject to the provisions of Section 2.4.
(d) Each authorized but unissued share of Citizens' Common Stock will
cease to exist.
(e) Each share of Community Common Stock issued and outstanding shall
remain issued and outstanding.
2.2 Neither certificates nor scrip for fractional interests in
Community Common Stock will be issued, but in lieu thereof each holder of shares
of Citizens Common Stock who would otherwise have been entitled to a fraction of
a share of Community Common Stock will be paid an amount in cash equal to such
fraction multiplied by the Market Value Per Share of Community as of the close
of business of the fifth (5th) trading date preceding the Effective Date of the
Merger.
2.3 As soon as practicable after the Effective Date of the Merger,
holders of shares of Citizens' Common Stock shall be furnished a form letter of
transmittal for the tender of their shares to an Exchange Agent appointed by
Community, to be exchanged for new certificates for the appropriate number of
shares of Community Common Stock. Community shall be required to issue
Community Common Stock only upon the actual surrender of Citizens shares and
will require an indemnity agreement or a bond from any Citizens' shareholder who
is unable to surrender his or her certificate by reason of loss, theft or
destruction of the certificate.
2.4 Each outstanding share of Citizens' Common Stock, the holder of
which has timely made a written request to CBNA accompanied by the surrender of
his stock certificates pursuant to Section 215a(b) of the National Bank Act (12
U.S.C. (S)215a(b)), is herein called a "Dissenting Share." Dissenting Shares,
the holders of which have not effectively withdrawn or lost (for failure to
timely file a demand for appraisal of their shares or otherwise) their
dissenters' rights under Section 215a of the National Bank Act ("Perfected
Dissenting Shares"), shall not be converted pursuant to Section 2.1 hereof, but
the holders thereof shall be entitled only to such rights as are granted by
Section 215a of the National Bank Act. Each holder of Dissenting Shares who
becomes entitled to payment for his Citizens Common Stock pursuant to the
provisions of Section 215a of the National Bank Act shall receive payment
therefor from Community but only after the amount thereof shall have been agreed
upon or finally determined pursuant to such provisions.
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2.5(a) As of the Effective Date of the Merger, Community will issue
and will deliver to the Exchange Agent certificates representing a sufficient
number of shares of Community Common Stock issuable in the Merger and a
sufficient amount of cash in lieu of fractional shares payable in the Merger.
(b) Upon surrender for cancellation to the Exchange Agent of one or
more certificates for shares of Citizens' Common Stock ("Old Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall, promptly after the Effective Date of the Merger, deliver
to each holder of such surrendered Old Certificates new certificates
representing the appropriate number of shares of Community Common Stock ("New
Certificates") together with checks for payment of cash in lieu of fractional
interests to be issued in respect of the Old Certificates.
(c) Until Old Certificates have been surrendered and exchanged as
herein provided for New Certificates, each outstanding Old Certificate shall be
deemed, for all corporate purposes of Community, to be the number of whole
shares of Community Common Stock into which the number of shares of Citizens'
Common Stock shown thereon have been converted. At the option of Community, no
dividends or other distributions which are declared on Community Common Stock
will be paid to persons otherwise entitled to receive the same until the Old
Certificates have been surrendered in exchange for New Certificates in the
manner herein provided, but upon such surrender, such dividends or other
distributions, from and after the Effective Date of the Merger, will be paid to
such persons in accordance with the terms of such Community Common Stock. In no
event shall the persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions.
2.6 The Conversion Factor shall be subject to adjustment (in addition
to any adjustment required by Section 2.1(a) hereof) from time to time as
follows:
(a) Whenever, subsequent to the date hereof but prior to the
Effective Date of the Merger, (i) a record date occurs for the purpose of
determining the holders of Community Common Stock entitled to receive a
dividend declared payable in shares of Community Common Stock, (ii)
Community subdivides the outstanding shares of Community Common Stock,
(iii) Community combines the outstanding shares of Community Common Stock
into a smaller number of shares, or (iv) Community issues by
reclassification of its shares of Community Common Stock any shares of
stock of Community (all shares so issued being included in the "Community
Common Stock" as used in this Section 2.6), the Conversion Factor shall be
adjusted so that each share of Citizens' Common Stock shall under Section
2.1(a) thereafter be convertible into and exchangeable for the number of
shares of Community Common Stock which the shares of Citizens' Common Stock
would have represented had such shares of Citizens' Common Stock been
converted into and exchanged for shares of Community Common Stock prior to
the happening of such event and such Community Common Stock had been
entitled to the benefit of the happening of such event.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS OF
COMMUNITY AND CBNA
3.1 From and after the Effective Date, the Board of Directors of
Community and CBNA shall consist of the persons who were then members of the
Board of Directors of Community and CBNA and Dean N. Paul, who will be appointed
to the Board of Directors of CBNA and the Schuylkill Advisory Board to hold
office until the next annual meeting of the shareholders of CBNA.
In addition thereto CBNA shall appoint two (2) additional members of
Citizens' Board of Directors to CBNA's Schuylkill Advisory Board.
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3.2 From and after the Effective Date, the officers of CBNA shall be
those persons who were then officers of Community and CBNA and such other
officers as the Community or CBNA Board of Directors may appoint. Such officers
shall hold office until such time as their successors have been elected or
appointed and have qualified, unless sooner removed, resigned, disqualified or
deceased.
ARTICLE IV
AMENDMENT AND WAIVER
4.1 This Agreement may be amended by the parties hereto, by action
taken by or on behalf of their respective Boards of Directors, at any time
before or after approval of the Merger by the shareholders of Citizens;
provided, however, that after such approval by the shareholders of Citizens no
such amendment, without further shareholder approval, shall reduce the amount or
change the form of the consideration to be delivered to the shareholders of
Citizens as contemplated by this Agreement or alter or change any of the terms
or conditions of this Agreement if such alteration or change would materially
adversely affect the shareholders of Citizens. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
4.2 Any of the terms or conditions of this Agreement may be waived at
any time by whichever of the parties is, or the shareholders of which are,
entitled to the benefit thereof, in the case of a party, by action taken by the
Board of Directors of such party. The failure of any party at any time or times
to require performance of any provision hereof shall in no manner affect such
party's right at a later time to enforce the same. No waiver by any party of
any condition, or of the breach of any term, covenant, representation or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or waiver of any other
condition or of the breach of any other term, covenant, representation or
warranty.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Citizens. Citizens represents
----------------------------------------------------------------
and warrants to Community that:
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(a) Citizens is a national banking association that is duly
organized, validly existing and in good standing under the laws of the
United States. Citizens is an "insured depository institution" as defined
in the Federal Deposit Insurance Act, as amended ("FDIA"), and is a member
of the Federal Reserve System.
(b) The copies of the Articles of Association and the Bylaws of
Citizens delivered to Community and which are included in Schedule I
attached hereto and made a part hereof by reference thereto are complete
and accurate copies thereof as in effect on the date hereof. The minute
books of Citizens which have been made available for inspection by
Community contain a complete and accurate record of all meetings of
Citizens.
(c) Citizens (i) has corporate power to own its properties and to
conduct its business as currently conducted, (ii) has substantially
complied with, and is not in default in any material respect under, any
laws, regulations, ordinances, orders or decrees applicable to the conduct
of its business and the ownership of its properties, including regulatory
minimum capital requirements, the non-compliance with which or the default
under which in the aggregate would materially adversely affect the business
of Citizens, (iii) has not failed to file with the proper federal, state,
local or other authorities any material report or other document required
to be so filed, and (iv) has all approvals, authorizations,
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consents, licenses, clearances and orders of, and has currently effective
all registrations with, all governmental and regulatory authorities, which
are necessary to the business or operations of Citizens, the non-receipt of
which would in the aggregate materially adversely affect the business of
Citizens.
(d) The authorized capital stock of Citizens consists of 20,000
shares of Citizens Common Stock, par value $20.00 per share, of which
20,000 shares are validly authorized, issued and outstanding, fully paid
and nonassessable as of the date of this Agreement. As of the date hereof
there are outstanding no subscriptions, options, warrants, calls or rights
or other agreements or commitments of any kind obligating Citizens to issue
or dispose of any securities of Citizens or securities of Citizens
convertible into any shares of Citizens' Common Stock. From December 31,
1994 to the date hereof, no dividends or other distributions (including,
without limitation, any stock dividend or distribution) have been declared,
set aside or paid to the holders of Citizens Common Stock except those
permitted under Section 6.2(a)(3) below.
(e) Except as disclosed in Schedule I, Citizens does not own,
directly or indirectly, any equity interest in any bank, corporation,
general partnership, limited partnership or other equity, except in a
fiduciary capacity.
(f) (1) Citizens has delivered to Community a copy of the following
financial statements, each of which (including any related notes and
schedules) is included in Schedule I and presents fairly the consolidated
financial condition and results of operations of Citizens, at the dates and
for the periods covered by such statements in accordance with generally
accepted accounting principles consistently applied throughout the periods
covered by such statements. (It being understood that Citizens' interim
financial statements are not audited and are not prepared with related
notes but reflect all adjustments which are, in the opinion of Citizens,
necessary for a fair presentation of such financial statements:
(A) Balance Sheet (the "Citizens' 1994 Balance Sheet"),
Statement of Income, Statement of Stockholders' Equity and Statement
of Cash Flows, together with notes thereto, at December 31, 1994, and
for the twelve months then ended, certified by Coopers & Lybrand;
(B) Balance Sheets, Statements of Income, Statements of
Stockholders' Equity and Statements of Cash Flows, together with notes
thereto, at December 31, 1993 and 1992, and for the years then ended,
certified by Coopers & Lybrand.
(2) Citizens has provided Community with copies of all financial
statements, proxy statements, reports and other documents issued to its
shareholders after December 31, 1994 which are included in Schedule I and
will provide Community with copies of such statements, reports, and
documents issued after the date hereof, but on or prior to the Effective
Date, and all reports and other documents filed by it with any federal and
or state authority during such period, and Citizens shall make available
for inspection by officials or representatives of Community all financial
statements prepared by Citizens and examined by Coopers & Lybrand.
(i) (1) Citizens has delivered to Community copies of:
(A) its Annual Report to Shareholders for the years ended
December 31, 1994 and 1993;
(B) all other periodic reports filed by Citizens with the
Federal Reserve Board, the FDIC, or the Comptroller of the Currency
since January 1, 1994; and
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(C) all proxy statements and other written materials furnished
to Citizens' shareholders since January 1, 1993;
true and correct copies of which are included in Schedule I.
(2) No statement contained in any of the documents referred to
in Section 5.1(h)(1), or to be contained in any financial statement, proxy
statement, report, document or other written materials provided or to be
provided to Community as required by Section 5.1(g), as of the date of such
document or other materials, contained, or as to documents or other
materials to be delivered after the date hereof will contain, any untrue
statement of material fact, or, at the date thereof, omitted or will omit
to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which such
statements are or will be made, not misleading; provided, however, that
information as of a later date shall be deemed to modify information as of
any earlier date.
(j) (1) Citizens has timely filed all federal, state, county and
local returns in respect of taxes, including, without limitation, estimated
tax returns, employer's withholding tax returns, other withholding tax
returns and Federal Unemployment Tax Act returns, and all other reports or
other information required or requested to be filed by it, and each such
return, report or other information is complete and accurate in all
material respects. Citizens has paid the amounts shown as owing on such
returns (collectively, "Taxes"). No waivers of statutes of limitations,
and no agreement relating to assessment or collection, are in effect in
respect of any Taxes. Except as disclosed in Schedule I, there are no
claims pending against Citizens for the alleged deficiency in the payment
of any Taxes, and Citizens does not know of any pending or threatened
audits, investigations or claims for unpaid Taxes or relating to any
liability in respect of Taxes.
(2) Citizens has heretofore delivered to Community copies of its
United States federal and Pennsylvania tax returns for the fiscal years
ended December 31, 1994 and 1993, true and correct copies of which are
included in Schedule I.
(3) To the extent required by generally accepted accounting
principles, the provision for current taxes payable reflected in "Other
Liabilities" in the Citizens' 1994 Balance Sheet, as of the date hereof and
as of the Effective Date, is and will be adequate to cover (A) all or
substantially all accrued and unpaid taxes of Citizens, whether or not
disputed, for the period ended December 31, 1994, and for all prior
periods, and (B) all or substantially all Taxes that may become due and
payable by Citizens in future periods (i) in respect of transactions, sales
or services occurring or performed on or prior to December 31, 1994, which
by virtue of tax or accounting treatment will not be included in income
until subsequent to such date, or (ii) in respect of deductions, costs or
other allowances taken for federal income tax purposes which Citizens'
auditors have reason to believe are likely to be disallowed by the Internal
Revenue Service if audited by such Service. The provision for applicable
taxes stated on the consolidated books of Citizens as of the date hereof
and as of the Effective Date, is and will be adequate to cover (A) all
accrued and unpaid federal, state, county and local taxes of Citizens,
whether or not disputed, for the period ended on the date hereof or on the
Effective Date, as the case may be, and for all prior periods, and (B) all
federal, state, county and local Taxes that may become due and payable by
Citizens in future periods (i) in respect of such transactions, sales or
services occurring or performed on or prior to the date hereof or the
Effective Date, as the case may be, which by virtue of tax or accounting
treatment will not be included in income until subsequent to such dates, or
(ii) in respect of deductions, costs or other allowances taken for federal
income tax purposes which Citizens' auditors have reason to believe are
likely to be disallowed by the Internal Revenue Service if audited by such
Service.
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(4) No consent has been filed relating to Citizens pursuant to
Section 341(f) of the Internal Revenue Code of 1986, as amended (the
"Code").
(k) Since December 31, 1994, (1) there has been no material adverse
change in the business or financial condition of Citizens, and (2) except
as set forth in Schedule I, no event described in Section 6.2(a) has
occurred.
(l) (1) Except as disclosed in Schedule I, Citizens has good and
marketable title, free and clear of all liens and encumbrances, and the
right of possession subject to existing leaseholds, to all real properties
and good title to all other property and assets, tangible and intangible,
reflected in Citizens' 1994 Balance Sheet or purported to have been
acquired by it since the date thereof (except property held as lessee under
leases and disclosed in writing prior to the date hereof and except real or
personal property sold or otherwise disposed of since December 31, 1994, in
the Ordinary Course of Business (as defined in Section 6.2(a)(5) hereof),
except liens for taxes or assessments not delinquent, pledges to secure
deposits, repurchase agreements in the Ordinary Course of Business and such
other liens and encumbrances and imperfections of title as do not
materially affect the value of such property or as reflected in Citizens'
1994 Balance Sheet or as currently shown on the books and records of it and
which do not interfere with or impair its present and continued use. All
real properties owned or leased by Citizens which are material to the
business, operations or financial condition of Citizens are in
substantially good operating condition and repair (ordinary wear and tear
expected).
(2) All properties held by Citizens under leases are held by it
under valid, binding and enforceable leases (subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of
equity), with such exceptions as are not material and do not interfere with
the conduct of its business, as the case may be, and it enjoys quiet and
peaceful possession of such leased properties. Citizens is not in default
in any material respect under any material lease, agreement or obligation
regarding its properties to which it is a party or by which it is bound.
(m) Except as specifically disclosed in Schedule I, and other than
loans in the Ordinary Course of Business, time deposits and leases of less
than two years duration on which less than $5,000 in annual rental is
payable, Citizens is not a party to or bound by any contract or other
agreement made in the Ordinary Course of Business which involves aggregate
future payments by it or more than $25,000 and which is made for a fixed
period expiring more than one year from the date hereof, and Citizens is
not a party to or bound by any agreement not made in the Ordinary Course of
Business which is to be performed at or after the date hereof. Each of the
contracts and agreements disclosed in Schedule I pursuant to this Section
5.1(m) are valid, binding and enforceable (subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of
equity) and no breach or default (and no condition which, with notice or
passage of time, could become a breach or default) exists with respect
thereto, except such as in the aggregate are not material to the business
or financial condition of Citizens.
(n) Except as specifically disclosed in Schedule I, as of December
31, 1994, there are no commercial, commercial real estate or residential
real estate loans of Citizens in excess of $25,000 that have been
classified by any financial institution examiner as "Other Loans Especially
Mentioned," "Special Mention," "Substandard," "Doubtful" or "Loss" or
internally classified in a similar or comparable category. Except as
specifically disclosed in Schedule I, as of December 31, 1994, there are no
consumer loans that are delinquent more than thirty (30) days as to payment
of principal and interest. Except as specifically disclosed in Schedule I,
as of December 31, 1994, the reserve for loan losses in Citizens' 1994
Balance Sheet is adequate under the requirements of generally accepted
accounting principles and standard banking practice to provide for possible
losses on outstanding loans, net of recoveries. Except as disclosed in the
notes to the Audited Consolidated Financial Statements for the year ended
December
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31, 1994, or as disclosed in Schedule I, there are no loans or loan
commitments outstanding to executive officers or directors of Citizens,
including their immediate families and entities with which they are
associated. All such loans and commitments to loan were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present
other unfavorable features and, except as disclosed in Schedule I, none of
such loans and commitments to related parties disclosed in said Audited
Financial Statements or in writing to Community are delinquent in payment
of principal or interest.
(o) Except for pledges to secure public and trust deposits,
repurchase agreements in the Ordinary Course of Business, and other pledges
required by laws, none of the investments reflected in Citizens' 1994
Balance Sheet under the heading "Investment Securities," and none of the
investments made since December 31, 1994, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability of
Citizens freely to dispose of such investment at any time.
(p) Except as otherwise identified and disclosed in Schedule I,
Citizens has no pension, retirement, stock purchase, stock bonus, savings,
or profit sharing plan, any deferred compensation, consultant, bonus, life
insurance, death or survivor benefit health insurance, sickness,
disability, medical, surgical, hospital, severance, layoff, or vacation
plan or group insurance contract, or any other incentive, welfare, or
employee benefit plan or arrangement ("Benefit Plans"). With respect to
each qualified retirement plan and other Benefit Plans, included in
Schedule I is an accurate and complete copy of (a) the most recent plan
documents, (b) the most recent annual report filed with the United States
Department of Labor and the Internal Revenue Service, (c) the most recent
financial and actuarial reports, (d) the most recently issued Internal
Revenue Service rulings or determination letters, and (e) all notices to
the Pension Benefit Guaranty Corporation of "Reportable Events" as defined
in the Employee Retirement Income Security Act of 1974 ("ERISA"). As of
January 1, 1995, all accrued contributions and other payments to be made
under each qualified retirement plan for such purpose have been set aside
therefor. Citizens has no contracts or other agreements with any member of
management or any management or consultation agreement not terminable at
will by it without liability, and no such contract or agreement has been
requested by or is under discussion by management with any group or
employees, any member of management or any other person.
(q) Except as specifically disclosed in Schedule I, there are no
actions, suits, investigations or proceedings instituted, pending or, to
the knowledge of Citizens, threatened against Citizens before any court,
any arbitrator of any kind or any government agency (including any bank
regulatory authority), and Citizens is not subject to any potential adverse
claim, the outcome of which could involve the payment by Citizens of an
amount in excess of $25,000 or, which could materially affect Citizens or
its business or property or the transactions contemplated hereby. Citizens
has no knowledge of any pending or threatened claims or charges under the
Community Reinvestment Act or before the Equal Employment Opportunity
Commission, the Office of Federal Contract Compliance, any Human Relations
Commission or any other federal, state or local government agency.
(r) (1) The execution and delivery of this Agreement has been duly
authorized by the Board of Directors of Citizens and, when the Merger has
been duly approved by the affirmative vote of the shareholders of Citizens
owning at least two-thirds (2/3) of its capital stock outstanding at a
meeting of shareholders duly called and held in accordance with the
provisions of Section 215(a) of the National Bank Act, this Agreement shall
be duly and validly authorized by all necessary action on the part of
Citizens.
(2) This Agreement has been duly executed and delivered by
Citizens and (assuming due execution and delivery by Community)
constitutes, and, upon its execution and delivery shall constitute, a
valid, binding and enforceable obligation of Citizens, subject to (i)
bankruptcy,
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insolvency, moratorium, reorganization, conservatorship, receivership or
other similar laws from time to time in effect relating to or affecting the
enforcement of creditors' rights generally or the rights of creditors of
National Banking Associations, (ii) laws relating to the safety and
soundness of depository institutions and their holding companies, and (iii)
general principles of equity, and except that the availability of equitable
remedies or injunctive relief is within the discretion of the appropriate
court.
(3) The execution and delivery by Citizens of this Agreement and
the consummation of the transactions herein contemplated do not violate any
provision of the Articles of Association or Bylaws of Citizens, any
provisions of federal or state law or any governmental rule or regulation
(assuming the receipt of the Government Approvals, the receipt of the
requisite Citizens shareholder approval referred to in Section 5.1(r)(1),
and the accuracy of the representations of Community set forth in Sections
5.2(f) and (g)), and do not require any consent of any person under,
conflict with or result in a breach of or accelerate the performance
required by any of the terms of, any material debt instrument, lease,
license, covenant, agreement or understanding to which Citizens is a party
or by which it is bound or any order, ruling, decree, judgment, arbitration
award or stipulation to which it is subject, or constitute a default
thereunder or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever upon any of its properties or assets.
(s) Except for Berwind Financial Group, L.P., which will be entitled
to a fee to be paid by Citizens for rendering a fairness opinion and for
other services related to the Merger, no broker, agent, finder, consultant
or other party (other than legal and accounting advisors) has been retained
by Citizens or is entitled to be paid based upon any agreements,
arrangements or understandings made by Citizens in connection with any of
the transactions contemplated by this Agreement.
(t) Citizens is, and continuously since at least January 1, 1992 has
been, insured with reputable insurers against all risks normally insured
against by financial institutions, and all of the insurance policies or
bonds maintained by it are in full force and effect. Citizens is not in
default thereunder and all material claims thereunder have been filed in
due and timely fashion.
(u) Citizens is not in violation of, and has not received notice of a
potential or actual violation of, any applicable federal, state or local
laws, statutes, rules, regulations or ordinances relating to public health,
safety or the environment, including, without limitation, relating to
releases, discharges, emissions or disposals to air, water, land or ground
water, to the withdrawal or use of ground water, to the use, handling or
disposal of polychlorinated biphenyls (PCB's), asbestos or urea
formaldehyde, to the treatment, storage, disposal or management of
hazardous substances (including, without limitation, petroleum, crude oil
or any fraction thereof, or other hydrocarbons), pollutants or
contaminants, to exposure to toxic, hazardous or other controlled,
prohibited or regulated substances which violation could have a material
adverse effect on the business, properties or financial condition of
Citizens.
Except as disclosed in Schedule I improvements on any real estate
owned or leased by Citizens do not contain friable asbestos or substances
containing asbestos and deemed hazardous by any federal, state or local laws,
regulations or orders respecting such materials. Citizens does not know of any
liability or class of liability of Citizens under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (42
U.S.C. Section 9601 et seq.), or the Resource Conservation and Recovery Act of
1976, as amended (42 U.S.C. Section 6901 et seq.).
(v) The information pertaining to Citizens, which has been or will be
furnished to Community by or on behalf of Citizens for inclusion in the
Community Registration Statement, the Prospectus or the Proxy Statement
(each as hereinafter defined in Section 7.1 hereof), or in the applications
to be filed to obtain the Government Approvals (the "Applications"), will
contain no untrue statement of any material fact required to be stated
therein or necessary to make the statements therein,
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in the light of the circumstances under which they are made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify the information as of an earlier date. All financial
statements of Citizens included in the Prospectus or the Proxy Statement
will present fairly the consolidated financial condition and results of
operations of Citizens at the dates and for the periods covered by such
statements in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such statements.
Citizens shall promptly advise Community in writing if prior to the
Effective Date it shall obtain knowledge of any facts that would make it
necessary to amend the Community Registration Statement, the Proxy
Statement or any Application, or to supplement the Prospectus, in order to
make the statements therein not misleading or to comply with applicable
law.
(w) No representation or warranty by Citizens and no statement by
Citizens in any certificate, agreement, schedule or other document
furnished in connection with the transactions contemplated by this
Agreement, shall contain any untrue statement of a material fact or omit to
state any material fact necessary to make such representation, warranty or
statement not misleading to Community; provided, however, that information
as of a later date shall be deemed to modify information as of an earlier
date.
5.2 Representations, Warranties and Covenants of Community.
------------------------------------------------------
Community, for itself and on behalf of each of its bank and non-bank
subsidiaries, represents and warrants to Citizens that:
(a) Community is a corporation duly incorporated, validly existing
and in good standing under the Pennsylvania Business Corporation Law (BCL),
and is a registered bank holding company under the Bank Holding Company Act
of 1956 as amended (the "BHC Act"). Community has corporate power to own
its properties and to conduct its business as currently conducted, and
Community has corporate power to enter into this Agreement and to carry out
all of the terms and provisions hereof to be carried out by it, subject to
receipt of Government Approvals. As of the date hereof, the authorized
capital stock of Community consists of 5,000,000 shares of Community Common
Stock, $5.00 par value, of which 2,028,985 shares are validly authorized,
issued and outstanding, fully paid and nonassessable, and 2,651 shares were
held as treasury shares, and 500,000 shares of preferred stock of which no
shares have been issued. The outstanding Community Common Stock has been
duly and validly registered pursuant to Section 12(g) of the 1934 Act,
which registration is in full force and effect. As of the date hereof,
there are outstanding no subscriptions, options, warrants, calls or rights
or other agreements or commitments of any kind obligating Community to
issue or dispose of any securities of Community or securities of Community
convertible into any shares of Community Common Stock or preferred stock,
other than options to purchase shares pursuant to the Community Long Term
Incentive Plan as amended and the Community Dividend Reinvestment Plan.
(b) Community Banks, Inc. owns 100% of the issued and outstanding
shares of the following corporations: Community Banks, N.A.; Community
Banks Life Insurance Company, Inc.; and Community Bank Investments, Inc.
UDNB Investments, Inc. is a direct subsidiary of Community Banks, N.A.
Community Banks, Inc. owns 100% of the issued and outstanding shares of
Community Banks, N.A., Community Banks Life Insurance Company, Inc., and
Community Bank Investment, Inc., and Community Banks, N.A. owns 100% of the
issued and outstanding shares of UDNB Investments, Inc. free and clear of
any liens, claims, security interests, encumbrances, charges, restrictions,
or rights of third parties of any kind whatsoever. Community Bank
Investments, Inc.; Community Banks, N.A.; UDNB Investments, Inc.; and
Community Banks Life Insurance Company, Inc. are collectively referred to
herein as the "Subsidiaries".
(c) CBNA is a national banking association that is duly organized,
validly existing, and in good standing under the laws of the United States.
Community Banks, N.A. is an "Insured Depository Institution" as defined in
the Federal Deposit Insurance Act, as amended ("FDIA"), and is a member
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of the Federal Reserve System. Community Banks Life Insurance Company,
Inc. is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Arizona. Community Bank
Investment, Inc., and UDNB Investments, Inc. are corporation duly
organized, validly existing, and in good standing under the laws of the
State of Delaware.
(d) The copies of the Articles of Incorporation, Articles of
Association, and By-Laws of Community and its subsidiaries heretofore
delivered to Citizens and which are included in Schedule II attached hereto
and made a part hereof and incorporated herein by reference thereto are
complete and accurate copies thereof as in effect on the date hereof. The
minute books of Community and its subsidiaries which have been made
available for inspection by Citizens contain a complete and accurate record
of all meetings of said corporations.
(e) Community and its subsidiaries (i) have corporate power to own
their respective properties and to conduct their respective businesses as
currently conducted, (ii) have substantially complied with, and are not in
default in any material respect under, any laws, regulations, ordinances,
orders or decrees applicable to the conduct of their businesses and the
ownership of their respective properties, the non-compliance with which or
the default under which in the aggregate would materially adversely affect
their businesses on a consolidated basis, (iii) have not failed to file
with the proper federal, state, local or other authorities any material
report or other document required to be so filed, and (iv) have all
approvals, authorizations, consents, licenses, clearances and orders of,
and have currently effective all registrations with, all governmental and
regulatory authorities, which are necessary to the business or operations
of Community and its subsidiaries as they are now being conducted.
(f) Except as disclosed in Schedule II and except for the
Subsidiaries, neither Community Banks, Inc. nor the Subsidiaries own,
directly or indirectly, any equity interest in any bank, corporation,
general partnership, limited partnership, or other equity, except in a
fiduciary capacity.
(g) (1) Community has delivered to Citizens a copy of the following
consolidated financial statements, each of which (including any related
notes and schedules) is included in Schedule II and presents fairly the
consolidated financial condition and results of operations of Community and
its consolidated subsidiaries at the dates and for the periods covered by
such statements in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such statements (it
being understood that Community's interim financial statements are not
audited and are not prepared with related notes but reflect all adjustments
which are, in the opinion of Community, necessary for a fair presentation
of such financial statements):
(A) Consolidated Balance Sheet (the "Community 1994 Balance
Sheet"), Consolidated Statement of Income, Consolidated Statement of
Stockholders' Equity and Consolidated Statement of Cash Flows,
together with the notes thereto, at December 31, 1994, and for the
twelve months then ended, certified by Coopers & Lybrand; and
(B) Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Stockholders' Equity, and
Consolidated Statements of Cash Flows, together with the notes
thereto, at December 31, 1993 and 1992 and for the years then ended,
certified by Coopers & Lybrand.
(2) Community has delivered to Citizens a copy of consolidating
balance sheets, consolidating statements of income, consolidating
statements of stockholders' equity, and consolidating statements of cash
flows (the "Consolidating Statements") for Community and the subsidiaries
as of December 31, 1994 and 1993 and for the 12-month periods ending
December 31, 1994 and 1993 as the case may be, which are included in
Schedule II, each of which presents fairly the separate financial
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condition and results of operations of Community and the subsidiaries at
the dates and for the periods covered by such statements.
(3) Community has provided Citizens with copies of all financial
statements, proxy statements, reports and other documents issued to its
shareholders after December 31, 1994, and will provide Citizens with copies
of such statements, reports, and documents issued after the date hereof and
on or prior to the Effective Date. Community has delivered to Citizens
copies of:
(a) its annual report to shareholders for the years ending
December 31, 1994 and 1993;
(b) its annual report to the Securities and Exchange
Commission (the "SEC") on Form 10-K for the years ending December 31,
1994 and 1993;
(c) Community Banks, N.A.'s annual report to the Comptroller
of the Currency for the years ending December 31, 1994 and 1993;
(d) all other periodic reports filed by Community or the
subsidiaries with the SEC (including all quarterly reports on Form
10-Q and all current reports on Forms 8-K, the Federal Reserve Board,
the Office of the Comptroller of the Currency since January 1, 1993;
(e) all proxy statements and other written materials
furnished to Community shareholders since January 1, 1993.
True and correct copies of which are included in Schedule II. No statement
contained in any of such documents, or to be contained in any financial
statement, proxy statement, report, document or other written materials to
be provided to Citizens as required above, as of the date of such document
or other materials, contained, or as to documents or other materials to be
delivered after the date hereof will contain, any untrue statement of
material fact, or, at the date thereof, omitted or will omit to state a
material fact necessary in order to make the statements contained therein,
in light of the circumstances under which such statements are or will be
made, not misleading; provided, however, that information as of a later
date shall be deemed to modify information as of any earlier date.
(h) Except as specifically disclosed in Schedule II and other than
loans by any of the Subsidiaries in the Ordinary course of Business, time
deposits and leases of less than two years' duration on which less than
$25,000 in annual rental is payable, neither Community nor any of the
Subsidiaries is a party to or bound by any contract or other agreement made
in the Ordinary Course of Business which involves aggregate future payments
by it of more than $100,000 and which is made for a fixed period expiring
more than one year from the date hereof, and neither Community nor any of
the Subsidiaries is a party to or bound by any agreement not made in the
Ordinary Course of Business which is to be performed at or after the date
hereof. Each of the contracts and agreements disclosed in Schedule II
pursuant to this Section 5.2(g) are valid, binding and enforceable (subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles
of equity) and no breach or default (and no condition which, with notice or
passage of time, could become a breach or default) exists with respect
thereto, except such as in the aggregate are not material to the business
or financial condition of Community and its Subsidiaries taken as a whole.
(i) Except as specifically disclosed in Schedule II, as of December
31, 1994, there are no commercial, commercial real estate or residential
real estate loans of Community or the Subsidiaries in excess of $25,000
that have been classified by any financial institution examiner as "Other
Loans Especially Mentioned," "Special Mention," "Substandard," "Doubtful"
or "loss" or internally classified in
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a similar or comparable category. Except as specifically disclosed in
Schedule II, as of December 31, 1994, there are no consumer loans that are
delinquent more than thirty (30) days as to payment of principal and
interest. Except as specifically disclosed in Schedule II, as of December
31, 1994, the reserve for loan losses in the Community 1994 Balance Sheet
is adequate under the requirements of generally accepted accounting
principles and standard banking practice to provide for possible losses on
outstanding loans, net of recoveries. Except as disclosed in the notes to
the Audited Consolidated Financial Statements for the year ended December
31, 1994, or as disclosed in Schedule II, there are no loans or loan
commitments outstanding to executive officers or directors of Community or
the Subsidiaries, including their immediate families and entities with
which they are associated. All such loans and commitments to loan were
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features and, except as
disclosed in Schedule II, none of such loans and commitments to related
parties disclosed in said Audited Consolidated Financial Statements or in
writing to Citizens are delinquent in payment of principal or interest.
(j) Except for (i) Community Defined Benefit Pension Plan which
covers eligible employees of Community and its Subsidiaries, (ii) Community
Long Term Incentive Plan, (iii) the Community Banks, N.A. Survivor Income
Agreement, and (iv) as otherwise identified and disclosed in Schedule II,
neither Community nor any of the Subsidiaries has any pension, retirement,
stock purchase, stock bonus, savings, or profit sharing plan, any deferred
compensation, consultant, bonus, life insurance, death or survivor benefit
health insurance, sickness, disability, medical, surgical, hospital,
severance, layoff, or vacation plan or group insurance contract, or any
other incentive, welfare, or employee benefit plan or arrangement ("Benefit
Plans"). With respect to each qualified retirement plan and other Benefit
Plans, including but not limited to the Defined Benefit Pension Plan,
included in Schedule II is an accurate and complete copy of (a) the most
recent plan documents, (b) the most recent annual report filed with the
United States Department of Labor and the Internal Revenue Service, (c) the
most recent financial and actuarial reports, (d) the most recently issued
Internal Revenue Service rulings or determination letters, and (e) all
notices to the Pension Benefit Guaranty Corporation of "Reportable Events"
as defined in the Employee Retirement Income Security Act of 1974
("ERISA"). As of January 1, 1995, all accrued contributions and other
payments to be made under the Defined Benefit Group Pension Plan have been
made or reserves adequate for such purpose have been set aside therefor. As
of the date hereof, there was no unfunded liability and no funding
deficiency existing with regard to the Defined Benefit Pension Plan.
Neither Community nor any of the Subsidiaries has any union or collective
bargaining agreements, any contracts or other agreements with any labor
organization or, except as specifically disclosed in Schedule II, any
contracts or other agreements with any member of management or any
management or consultation agreement not terminable at will by it without
liability, and no such contract or agreement has been requested by or is
under discussion by management with any group of employees, any member of
management or any other person.
(k) Except as disclosed in Schedule II, since December 31, 1994, (i)
Community has not incurred any material liability or obligation, accrued or
contingent and whether due or to become due, other than as a result of
operations in the ordinary course of business, and (ii) there has been no
material adverse change in the business or financial condition of Community
and its subsidiaries on a consolidated basis.
(l) Except as disclosed in Schedule II, neither Community nor any of
its subsidiaries is engaged in, or a party to, or threatened with, any
legal action or other proceeding before any court, any arbitrator of any
kind or any government agency (including any bank regulatory authority),
and neither Community nor any of its subsidiaries is subject to any
potential adverse claim, the outcome of which could involve the payment by
Community or any of its subsidiaries of an amount in excess of $50,000 or
which could materially affect Community and its subsidiaries on a
consolidated basis or its business
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or property or the transactions contemplated hereby. Community has no
knowledge of any pending or threatened claims or charges under the
Community Reinvestment Act or before the Equal Employment Opportunity
Commission, the Office of Federal Contract Compliance, any Human Relations
Commission or any other federal, state or local government agency. There
is no labor strike, dispute, slow-down or stoppage pending or, to the best
knowledge of Community, threatened against Community or any of its
subsidiaries. There are no outstanding orders, rulings, decrees,
judgements or stipulations, to which Community is a party or by which it is
bound, by or with any court, arbitrator, or government agency, involving an
amount in excess of $50,000.
(m) (1) The execution and delivery of this Agreement has been duly
and validly authorized by the Board of Directors of Community, and the
Merger and this Agreement have been duly and validly authorized by all
necessary corporate action on the part of Community.
(2) This Agreement has been duly executed and delivered by
Community and (assuming due execution and delivery by Citizens)
constitutes, and, upon its execution and delivery this Agreement shall
constitute a valid, binding and enforceable obligation of Community,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and subject, as to enforceability, to general
principles of equity.
(3) The execution and delivery of this Agreement by Community
and the consummation of the transactions herein contemplated (A) do not
violate any provisions of the Articles of Incorporation or Bylaws of
Community or the Articles of Association and Bylaws of CBNA, any provisions
of federal or state law or any governmental rule or regulation (assuming
(i) receipt of the Government Approvals, (ii) the due registration of the
offering of the Community Common Stock under the Securities Act of 1933, as
amended (the "1933 Act"), (iii) the receipt of appropriate permits or
approvals under the state securities or "blue sky" laws, (iv) the receipt
of the requisite CBNA shareholders' approval, (v) the accuracy of the
representations of Citizens set forth in Sections 5.1(v) and (w)), and (B)
do not require any consent of any person under, conflict with or result in
a breach of or accelerate the performance required by any of the terms of,
any material debt instrument, lease, license, covenant, agreement or
understanding to which Community, CBNA, or any of its other subsidiaries is
a party or by which it is bound or any order, ruling, decree, judgment,
arbitration award or stipulation to which Community or CBNA is subject, or
constitute a default thereunder or result in the creation of any lien,
claim, security interest, encumbrance, change, restriction, or right of any
third party of any kind whatsoever upon any of their properties or assets.
(n) Neither Community nor any Subsidiary is in violation of, or has
received notice of a potential or actual violation of, any applicable
federal, state, or local laws, statutes, rules, regulations, or ordinances
relating to public health, safety, or the environment, including, without
limitation, relating to releases, discharges, emissions, or disposals to
air, water, land, or ground water to the withdrawal or use of ground water,
to the use, handling, or disposal of polychlorinated biphenyls ("PCB's"),
asbestos, or urea formaldehyde, to the treatment, storage, disposal or
management of hazardous substances (including, without limitation,
petroleum, crude oil or any fraction thereof, or other hydrocarbons),
pollutants or contaminants, to exposure to toxic, hazardous or other
controlled, prohibited or regulated substances which violation could have a
material adverse effect on the business, properties or financial condition
of Community and the Subsidiaries on a consolidated basis. To the best
knowledge of Community, any improvements or other real estate owned or
leased by Community or any Subsidiary do not contain friable asbestos or
substances containing asbestos and deemed hazardous by any federal, state,
or local laws, regulations, or orders respecting such materials. Neither
Community nor any of the Subsidiaries knows of any liability or class of
liability of Community or any of the Subsidiaries under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(42 U.S.C. Section 9601 et seq) or the Resource Conservation and Recovery
Act of 1976, as amended (42 U.S.C. Section 6901 et seq).
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(o) The information pertaining to Community and its subsidiaries
which will appear in the Community Registration Statement, the Prospectus
or the Proxy Statement, in the form filed with the SEC, or in the
applications to be filed to obtain the Government Approvals, will contain
no untrue statement of any material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they are made, not
misleading; provided, however, that information as of a later date shall be
deemed to modify information as of an earlier date. All financial
statements of Community included in the Prospectus or the Proxy Statement
will present fairly the consolidated financial condition and results of
operations of Community and its consolidated subsidiaries at the dates and
for the periods covered by such statements in accordance with generally
accepted accounting principles consistently applied throughout the periods
covered by such statements (it being understood that Community's interim
financial statements are not audited and are not prepared with related
notes but reflect all adjustments which are, in the opinion of Community,
necessary for a fair presentation of such financial statements).
(p) (1) Community, CBNA, and each of its other subsidiaries has
timely filed all federal, state, county and local returns in respect of
taxes, including, without limitation, estimated tax returns, employer's
withholding tax returns, other withholding tax returns and Federal
Unemployment Tax Act returns, and all other reports or other information
required or requested to be filed by it, and each such return, report or
other information is complete and accurate in all material respects.
Community and each of its subsidiaries has paid the amounts shown as owing
on such returns (collectively, "Taxes"). No waivers of statutes of
limitations, and no agreement relating to assessment or collection, are in
effect in respect of any Taxes. Except as disclosed in Schedule II, there
are no claims pending against Community or its subsidiaries for the alleged
deficiency in the payment of any Taxes, and neither Community nor its
subsidiaries know of any pending or threatened audits, investigations or
claims for unpaid Taxes or relating to any liability in respect of Taxes.
(2) Community has heretofore delivered to Citizens copies of its
consolidated United States federal and Pennsylvania corporate tax returns
for the fiscal years ended December 31, 1994, 1993, 1992, 1991 and 1990,
true and correct copies of which are included in Schedule II.
(3) The consolidated provision for current taxes payable
reflected in "Other Liabilities" in the Community 1994 Balance Sheet, as of
the date hereof and as of the Effective Date, is and will be adequate to
cover (A) all or substantially all accrued and unpaid Taxes of Community
and its subsidiaries, whether or not disputed, for the period ended
December 31, 1994, and for all prior periods, and (B) all or substantially
all Taxes that may become due and payable by Community and its subsidiaries
in future periods (i) in respect of transactions, sales or services
occurring or performed on or prior to December 31, 1994, which by virtue of
tax or accounting treatment will not be included in income until subsequent
to such date, or (ii) in respect of deductions, costs or other allowances
taken for federal income tax purposes which Community's auditors have
reason to believe are likely to be disallowed by the Internal Revenue
Service if audited by such Service. The provision for applicable taxes
stated on the consolidated books of Community as of the date hereof and as
of the Effective Date, is and will be adequate to cover (A) all accrued and
unpaid federal, state, county, and local taxes of Community and its
subsidiaries, whether or not disputed, for the period ended on the date
hereof or on the Effective Date, as the case may be, and for all prior
periods, and (B) all federal, state, county and local Taxes that may become
due and payable by Community and its subsidiaries in future periods (i) in
respect of such transactions, sales or services occurring or performed on
or prior to the date hereof or the Effective Date, as the case may be,
which by virtue of tax or accounting treatment will not be included in
income until subsequent to such dates, or (ii) in respect of deductions,
costs or other allowances taken for federal income tax purposes which
Community's auditors have reason to believe are likely to be disallowed by
the Internal Revenue Service if audited by such Service.
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(4) No consent has been filed relating to Community or its
subsidiaries pursuant to Section 341(f) of the Code.
(q) (1) Each of Community and its subsidiaries has good and
marketable title, free and clear of all liens and encumbrances, and the
right of possession subject to existing leaseholds, to all real properties
and good title to all other property and assets, tangible and intangible,
reflected in the Community 1994 Balance Sheet or purported to have been
acquired by it since the date thereof (except property held as lessee under
leases and disclosed in writing prior to the date hereof and except real or
personal property sold or otherwise disposed of since December 31, 1994, in
the Ordinary Course of Business), except liens for taxes or assessments not
delinquent, pledges to secure deposits, repurchase agreements in the
Ordinary Course of Business and such other liens and encumbrances and
imperfections of title as do not materially affect the value of such
property or as reflected in the Community 1994 Balance Sheet or as
currently shown on the books and records of it and which do not interfere
with or impair its present and continued use. All real properties owned or
leased by Community which are material to the business, operations or
financial condition of Community are in substantially good operating
condition and repair (ordinary wear and tear expected).
(2) All properties held by Community or any of its subsidiaries
under leases are held by it under valid, binding and enforceable leases
(subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity), with such exceptions as are not material and do not
interfere with the conduct of its business, as the case may be, and it
enjoys quiet and peaceful possession of such leased properties. Neither
Community nor any of its subsidiaries is in default in any material respect
under any material lease, agreement, or obligation regarding its properties
to which it is a party or by which it is bound.
(r) Each of Community and its subsidiaries is, and continuously since
at least January 1, 1992 has been, insured with reputable insurers against
all risks normally insured against by companies of the same type and in the
same line of business, and all of the insurance policies or bonds
maintained by it are in full force and effect. Neither Community nor any
of its subsidiaries is in default thereunder and all material claims
thereunder have been filed in due and timely fashion.
(s) No representation or warranty by Community and no statement by
Community in any certificate, agreement, schedule or other document
furnished in connection with the transactions contemplated by this
Agreement, shall contain any untrue statement of a material fact or omit to
state any material fact necessary to make such representation, warranty or
statement not misleading to Citizens; provided, however, that information
as of a later date shall be deemed to modify information as of an earlier
date.
(t) No broker, agent, finder, consultant or other party (other than
legal accounting or financial advisors) has been retained by Community or
is entitled to be paid based upon any agreements, arrangements or
understandings made by Community in connection with any of the transactions
contemplated by this Agreement.
ARTICLE VI
AGREEMENTS OF COMMUNITY, CBNA, AND CITIZENS
6.1 Agreements of Community and CBNA.
(a) Community and/or CBNA has or will promptly following the
execution of this Agreement, use its reasonable best efforts in good faith
to take as promptly as practicable all such steps as shall be necessary in
order to cause the Merger to be consummated as expeditiously as possible.
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(b) As the sole shareholder of CBNA, Community shall be unanimous
shareholder action ratify and confirm the merger of Citizens into CBNA and
cause the Board of Directors of CBNA to approve the Merger.
(c) Community shall issue shares of Community Common Stock in
accordance with the Conversion Factor, as it may be adjusted in accordance
with this Agreement, which shares will, then issued and delivered pursuant
to this Agreement, be duly authorized and legally and validly issued, fully
paid and nonassessable.
(d) Prior to the Effective Date, Community shall appoint American
Stock Transfer and Trust Company as Exchange Agent for the purpose of
exchanging certificates representing shares of Community Common Stock for
certificates representing shares of Citizens Common Stock, and thereafter
Community shall issue and deliver to the Exchange Agent certificates
representing shares of Community Common Stock, and shall pay to the
Exchange Agent such amounts of cash as shall be required to be delivered to
holders of shares of Citizens Common Stock entitled to cash in lieu of a
fractional share pursuant to Article II of this Agreement. Any Community
Common Stock and any amounts of cash delivered to the Exchange Agent and
unclaimed at the end of two years from the Effective Date shall be repaid
to Community, in which event the persons entitled thereto shall look only
to Community for payment thereof; provided, however, that if Community
shall, as required by law, pay to the Commonwealth of Pennsylvania any
unclaimed Community Common Stock or monies so repaid to Community, said
persons shall thereafter look only to the Commonwealth of Pennsylvania for
payment thereof.
(e) Prior to the Effective Date, Community, separately and jointly
with Citizens, shall use its reasonable best efforts in good faith to take
or cause to be taken as promptly as practicable all such steps as shall be
necessary to obtain (i) the prior approval of the Merger by the Office of
the Comptroller of the Currency ("OCC") and the Pennsylvania Department of
Banking, and ((ii) all other consents and approvals of government agencies
as are required by law or otherwise (such approvals referred to in clauses
(i) and (ii) of this Section 6.1(e) herein referred to as the "Government
Approvals"), and shall do any and all acts and things deemed by Community
to be necessary or appropriate in order to cause the Merger of Citizens
with and into CBNA to be consummated on the terms provided in this
Agreement as promptly as practicable. Community shall provide Citizens and
its representatives with the right to review and approve in advance all
information relating to Citizens which will appear in any filing to be made
with, or written material to be submitted to, any third party or
governmental body in connection with the transactions contemplated by this
Agreement. Community shall provide Citizens and its counsel with a copy of
all applications and other written material filed with or provided to any
such third party or governmental body, together with a copy of all
correspondence to or from any such third party or governmental body, in
each case promptly following the filing, submission or receipt of such
materials.
(f) Community shall promptly give written notice to Citizens upon
becoming aware of the impending or threatened occurrence of any event which
would cause or constitute a breach of any of the agreements,
representations and warranties of Community contained or referred to in
this Agreement and shall use its reasonable best efforts to prevent the
same or remedy the same promptly.
(g) Prior to the Effective Date, Community and each of its
subsidiaries shall give Citizens and its counsel, financial advisor and
accountants full access, during normal business hours and upon reasonable
request, to its properties, books, contracts, commitments and records, and
shall furnish Citizens during such period with all such information
concerning its affairs as Citizens may reasonably request. The
availability or actual delivery of information about Community or its
subsidiaries to Citizens shall not affect the covenants, representations
and warranties of Community contained in this Agreement. Citizens shall
treat as confidential all such information in the same manner as Citizens
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treats similar confidential information of its own, and if this Agreement
is terminated, Citizens shall continue to treat all such information as
confidential and cause its employees and agents to keep all such
information confidential and shall return such documents theretofore
delivered by Community as Community shall request.
(h) Community shall, in good faith, endeavor to place as employees
with CBNA or its other subsidiaries, persons who are employees of Citizens
immediately prior to the Effective Date on terms and conditions, including
salaries and benefits, comparable to those made available to employees of
Community, CBNA, and its other subsidiaries holding similar positions.
Such persons as are so employed after the Effective Date shall have such
titles as are appropriate and consistent with Community's then existing
personnel structure. Community shall continue the compensation of
Citizens' employees at the same levels in effect on the Effective Date
through December 31, 1996 subject to Community's right to terminate any
employee of Citizens for cause after the Effective Date.
(i) Prior to the Effective Date, Community and each of its
Subsidiaries shall conduct its respective business in the ordinary course
as heretofore conducted and shall use its reasonable best efforts (i) to
preserve its respective business and business organization intact, (ii) to
preserve the good will of its customers and others having business
relations with it, (iii) to maintain its properties in customary repair,
working order and condition (reasonable wear and tear expected), (iv) to
comply with all laws applicable to it and the conduct of its business, (v)
to keep in force at not less than their present limits all policies of
insurance (including deposit insurance of the FDIC with respect to CBNA),
(vi) to file in a due and timely manner all reports, tax returns and other
documents required to be filed with federal, state, local and other
authorities, and (vii) unless it is contesting the same in good faith and
has established reasonable reserves therefor, to pay when required to be
paid all Taxes (as hereinafter defined) indicated by tax returns so filed
or otherwise lawfully levied or assessed upon it or any of its properties
and to withhold or collect and pay to the proper governmental authorities
or hold in separate bank accounts for such payment all Taxes and other
assessment which it believes in good faith to be required by law to be so
withheld or collected.
(j) Community will not take any actions or engage in any transaction
following the Merger that would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code or fail to
qualify for pooling of interests accounting treatment. Consummation of the
transactions contemplated by this Agreement shall be conditioned upon the
Merger being accounted for under the pooling of interests method of
accounting.
6.2 Agreement of Citizens.
(a) At or after the date hereof and on or prior to the Effective
Date, except with the prior written consent of Community, or as otherwise
provided in this Agreement, Citizens shall not:
(1) Amend its Articles of Association or Bylaws; enter into any
shareholder agreement, understanding or commitment relating to the
right to vote its shares of capital stock; purchase, redeem, retire or
otherwise acquire any share of, or any security convertible into
shares of, its capital stock or other equity security; or agree to do
any of the foregoing;
(2) Issue, deliver or sell shares of capital stock or securities
convertible into any such shares, or issue or grant any right, option
or other commitment for the issuance, delivery or sale of any such
shares or such securities;
(3) Declare, set aside or pay any dividend or other distribution
in respect of its capital stock (including, without limitation, any
stock dividend or distribution) other than regular quarterly cash
dividends payable in accordance with customary dividend policy, which
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shall mean cash dividends payable with respect to Citizens' Common
Stock at an annual rate on a calendar year basis not in excess of
$20.50 per share.
(4) Enter into or amend, or increase the contribution to or
obligation under, any employment contract or any bonus, stock option,
profit sharing, pension, retirement, savings, incentive, deferral or
similar employee benefit program or arrangement, or authorize the
creation of any new or replacement job classifications or staff
positions, pay bonuses or other extraordinary compensation, or grant
any salary or wage increase except normal individual increases in
compensation to employees in accordance with established employee
procedures of Citizens.
(5) Authorize or make any material change in its business or
operations, other than in the Ordinary Course of Business as
hereinafter defined; incur any material direct or contingent
liabilities or commitments other than in the Ordinary Course of
Business; sell or dispose of any shares of its capital stock, or
lease, sell or dispose of any other material part of its assets, in
each case except in the Ordinary Course of Business and for adequate
value; establish any new branch banking offices, loan production
offices, or other offices, or make any capital expenditures in excess
in the aggregate of $20,000 (except for ordinary repairs, renewals or
replacements); waive or release any right or cancel or compromise any
of its debts or claims except in the Ordinary Course of Business; or
otherwise enter into any material contract, transaction or commitment
on its behalf, except in the Ordinary Course of Business. For
purposes of this Agreement, the Ordinary Course of Business shall
consist of the banking business as presently conducted by Citizens and
not prohibited by the National Bank Act (herein referred to as the
"Ordinary Course of Business"); or
(6) Citizens agrees that neither it nor any of its officers and
directors shall (and Citizens shall direct and use its reasonable best
efforts to cause its employees, agents and representatives including,
without limitation, any investment banker, attorney or accountant
retained by it not to) initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer
(including, without limitation, any proposal or offer to stockholders
of Citizens but excluding the transactions contemplated by this
Agreement) with respect to a merger, consolidation or similar
transaction involving, or any purchase of all or any significant
portion of the assets or any equity securities of, Citizens (any such
proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or, except to the extent legally required for the discharge
by the Board of Directors of its fiduciary duties as advised in
writing by such board's counsel, 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. Citizens will immediately cease
and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
of the foregoing. Citizens will take the necessary steps to inform
the appropriate individuals or entities referred to in the first
sentence hereof of the obligations undertaken in this Section
6.2(a)(6). Citizens will notify Community 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 or on behalf of any corporation,
partnership, person or other entity or group other than Community with
respect to any Acquisition Proposal.
(b) Prior to the Effective Date, Citizens shall conduct its business
in the ordinary course as heretofore conducted and shall use its reasonable
best efforts (i) to preserve its respective business and business
organization intact, (ii) to keep available to Community the services of
its present officers (provided, however, that it shall have the right to
terminate the employment of any such officer for cause in accordance with
its established employee procedures), (iii) to preserve the good will of
its customers
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and others having business relations with it, (iv) to consult with
Community as to the making of any decisions or the taking of any actions in
matters other than in the Ordinary Course of Business, (v) to maintain its
properties in customary repair, working order and condition (reasonable
wear and tear expected), (vi) to comply with all laws applicable to it and
the conduct of its business, (vii) to keep in force at not less than their
present limits all policies of insurance (including deposit insurance of
the FDIC with respect to Citizens), (viii) to make no material change in
the general terms, policies and conditions upon which it presently does
business other than in the Ordinary Course of Business, (ix) to file in a
due and timely manner all reports, tax returns and other documents required
to be filed with federal, state, local and other authorities, and (x)
unless it is contesting the same in good faith and has established
reasonable reserves therefor, to pay when required to be paid all Taxes (as
hereinafter defined) indicated by tax returns so filed or otherwise
lawfully levied or assessed upon it or any of its properties and to
withhold or collect and pay to the proper governmental authorities or hold
in separate bank accounts for such payment all Taxes and other assessments
which it believes in good faith to be required by law to be so withheld or
collected.
(c) Charge-offs and charge-downs of loans will be taken against
Citizens' allowance for loan losses in the Ordinary Course of Business when
the potential loss has been quantified by the executive officers of
Citizens.
(d) Prior to the Effective Date, Citizens shall give Community and
its counsel, financial advisors, and accountants full access, during normal
business hours and upon reasonable request, to its properties, books,
contracts, commitments and records, and shall furnish Community during such
period with all such information concerning its affairs as Community may
reasonably request. The availability or actual delivery of information
about Citizens to Community shall not affect the covenants, representations
and warranties of Citizens contained in this Agreement. Community shall
treat as confidential all such information in the same manner as Community
treats similar confidential information of its own, and if this Agreement
is terminated, Community shall continue to treat all such information as
confidential and cause its employees and agents to keep all such
information confidential and shall return such documents theretofore
delivered by Citizens as Citizens shall request.
(e) Citizens shall use its reasonable best efforts to cause the
Merger and this Agreement to be submitted promptly for the approval of its
shareholders at a meeting to be called and held in accordance with the
National Bank Act. Except as required by applicable fiduciary duties, in
the opinion of counsel to Citizens, the Board of Directors of Citizens
agrees to recommend in Citizens' Proxy Statement that the Merger and this
Agreement be approved, which recommendation shall not be withdrawn.
(f) After execution hereof, Citizens shall deliver to Community a
correct and complete list of holders of the outstanding Citizens Common
Stock of record with addresses.
(g) Citizens, separately and jointly with Community, shall use its
reasonable best efforts in good faith to take or cause to be taken as
promptly as practicable all such steps as shall be necessary to obtain the
Government Approvals, and shall do any and all acts and things deemed by
Citizens or Community to be necessary or appropriate in order to cause the
Merger to be consummated on the terms provided in this Agreement.
(h) Citizens shall promptly give written notice to Community upon
becoming aware of the impending or threatened occurrence of any event which
would cause or constitute a breach of any of the arrangements,
representations and warranties of Citizens contained or referred to in this
Agreement, and shall use its reasonable best efforts to prevent the same or
remedy the same promptly.
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(i) From and after the date hereof until the Effective Date of the
Merger, Citizens shall not take any actions with respect to its business or
operations that in the reasonable judgment of Community or its accountants
would cause the Merger or any related transaction contemplated by this
Agreement to fail to meet the relevant criteria for pooling of interest
accounting treatment.
(j) From and after the date the Merger is approved by the
shareholders of Citizens until the Effective Date of the Merger, Citizens
will consider recommendations of Community and its accountants with respect
to adjustments to its balance sheet, statement of income, statement of
stockholders' equity, and statement of cash flows at December 31, 1995 and
for the 12 months then ending.
6.3 Agreements of Community and Citizens.
(a) Each party hereto shall, and shall cause its directors, officers,
attorneys and advisors, to maintain, unless otherwise required by
applicable law, the confidentiality of all information obtained in
connection with this Agreement, including the negotiation and performance
thereof, which is not otherwise publicly disclosed by the other party or
publicly available, said agreement with respect to confidentiality to
survive any termination of this Agreement pursuant to Section 11.1.
(b) Community and Citizens shall agree with each other as to the form
and substance of any press release related to this Agreement or the
transactions contemplated hereby, and shall consult each other as to form
and substance of other public disclosures related thereto.
ARTICLE VII
SECURITIES ACT OF 1933;
SECURITIES EXCHANGE ACT OF 1934
7.1 Community shall promptly prepare and file with the SEC a
registration statement on Form S-4 (the "Community Registration Statement")
under and pursuant to the provisions of the 1933 Act for the purpose of
registering the offering of Community Common Stock. Citizens in cooperation
with Community shall promptly prepare for inclusion in the Community
Registration Statement a proxy statement (the "Proxy Statement") for the purpose
of submitting this Agreement to the shareholders of Citizens for approval. The
Proxy Statement in definitive form will serve as a portion of the prospectus
(the "Prospectus") to be included in the Community Registration Statement.
Community and Citizens shall each provide promptly to the other such information
concerning its business and financial condition and affairs as may be required
or appropriate for inclusion in the Community Registration Statement, the
Prospectus or the Proxy Statement, and shall cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Community's Registration Statement, the Prospectus and the Proxy Statement.
7.2 Community and Citizens shall use their reasonable best efforts to
have the Community Registration Statement declared effective under the 1933 Act
as soon as may be practicable, and thereafter Citizens shall distribute the
Proxy Statement to its shareholders in accordance with applicable law and its
Articles of Association and Bylaws, not less than twenty (20) business days
prior to the date upon which the Merger and this Agreement are submitted to its
shareholders for approval. Citizens shall not mail or otherwise furnish the
Proxy Statement to its shareholders unless and until Community shall have
received a letter from Coopers & Lybrand dated the effective date of the
Community Registration Statement, to the effect set forth in Section 8.1(j).
7.3 Community shall not be required to maintain the effectiveness of
the Community Registration Statement for the purpose of sale or resale of
Community Common Stock by any person; provided, however, that Community shall
file all periodic reports which are required under the 1934 Act in order for
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Community to satisfy the current public information requirement of Rule 144(c),
as promulgated under the 1933 Act, as amended.
7.4 Securities representing shares of the Common Stock issued to
Affiliates (as hereinafter defined in Section 8.1(m) hereof) pursuant to this
Agreement may be subject to stop transfer orders and may bear a restrictive
legend in substantially the following form:
"The shares represented by this Certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Act"), applies and may be sold or otherwise transferred only in
compliance with the limitations of such Rule 145, or upon receipt by
Community of any opinion of counsel acceptable to it that some other
exemption from registration under the Act is available, or pursuant to a
registration statement under the Act."
Should an opinion of counsel indicate that the legend and any stop transfer
order then in effect with respect to the shares may be removed, Community will
upon request substitute unlegended securities and remove any stop transfer
orders.
7.5 Indemnification; Insurance. (a) From and after the Effective
Date through the sixth anniversary of the Effective Date, Community and CBNA
agree to indemnify and hold harmless each present and former director and
officer of Citizens determined as of the Effective Date (the "Indemnified
Parties"), against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities (collective, "Costs")
incurred in connection with any claim, action, suit, proceedings or
investigation whether civil, criminal, administrative or investigative, arising
out of an Indemnified Matter (as hereinafter defined). An Indemnified Matter
shall include any matter directly or indirectly involving transactions
contemplated by or required in connection with this Agreement as well as any
matter existing or occurring at or prior to the Effective Date, whether asserted
or claimed prior to, at or after the Effective Date, to the fullest extent to
which such persons were entitled to be indemnified under Citizens' Articles of
Association or Bylaws in effect on the date hereof, but only to the extent
permitted under applicable law, (and Community and CBNA shall also advance
expenses as incurred to the fullest extent to which such persons were entitled
under Citizens' Articles of Incorporation or Articles of Association and Bylaws
as in effect on the date hereof (to the extent permitted under applicable law),
provided the person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such person is not
entitled to indemnification). An Indemnified matter shall not include any
action or omission by an Indemnified Party resulting from such person's gross
negligence or deliberate misconduct, or any action by the OCC resulting in civil
money penalties or other determination by the OCC of a breach of duties.
(b) For a period of two years after the Effective Date, Community
shall use reasonable efforts to cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by Citizens
(provided that Community or CBNA may substitute therefor policies of comparable
coverage); provided, however, that in no event shall Community or CBNA be
obligated to expend, in order to maintain or provide insurance coverage pursuant
to this subsection, any amount per annum in excess of 110% of the total amount
of the annual premiums paid as of the date hereof by Citizens for such insurance
(the "Maximum Amount"). If the amount of the annual premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Amount,
Community shall use reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for an annual premium
equal to the Maximum Amount.
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ARTICLE VIII
CONDITIONS
8.1 Conditions to the Obligations of Community. The obligations of
Community under this Agreement are, at its option (subject to the provisions of
Section 11.1(a)), subject to fulfillment on or prior to the Effective Date of
each of the following conditions:
(a) Except as affected by the transactions contemplated by this
Agreement, the representations and warranties of Citizens in Section 5.1
shall be true and correct in all material respects on and as of the
Effective Date.
(b) Citizens shall have performed and complied in all material
respects with all terms of this Agreement required to be performed or
complied with by it on or prior to the Effective Date.
(c) No material adverse change shall have occurred since December 31,
1994 in the business or financial condition of Citizens, and Citizens shall
not be engaged in, or a party to or threatened with, any legal action or
other proceeding before any court, any arbitrator of any kind or any
government agency if, in the reasonable judgment of Community, such legal
action or proceeding could materially adversely affect the business or
financial condition of Citizens.
(d) This Agreement shall have been duly approved by the affirmative
vote of the shareholders of Citizens owning at least two-thirds (2/3) of
its capital stock outstanding at a meeting of shareholders duly called and
held after distributing the Proxy Statement to all shareholders entitled to
vote at such meeting as required by Section 6.2(e).
(e) Community shall have received a certificate, dated the Effective
Date, signed on behalf of Citizens by its President certifying the
fulfillment of the conditions stated in paragraphs (a), (b), (c) and (e) of
this Section 8.1 by Citizens.
(f) Citizens shall have delivered to Community such documents as may
reasonably be requested by Community to evidence compliance by Citizens
with the provisions of this Agreement including an opinion of its counsel
substantially in the form attached hereto as Exhibit "C". Citizens shall
-----------
also have delivered to Community on the Effective Date, a letter of its
litigation counsel setting forth pending litigation involving Citizens
which was not previously disclosed in writing to Community.
(g) The Community Registration Statement shall have become effective
under the 1933 Act, no stop order suspending the effectiveness of such
Registration Statement shall be in effect and no proceedings for such
purpose shall have been initiated or threatened by or before the SEC. All
state securities and "blue sky" permits or approvals required (in the
opinion of Community) to consummate the transactions contemplated by this
Agreement shall have been received.
(h) All Government Approvals shall be in effect, all conditions or
requirements prescribed by law or by any such Approval shall have been
satisfied, and all required waiting periods shall have expired; provided,
however, that no approval shall be deemed to have been received if it shall
require the divestiture or cessation of any of the present businesses or
operations conducted by either of the parties hereto or of a subsidiary of
or shall impose any other nonstandard condition or requirement, which
divestiture, cessation, condition or requirement Community reasonably and
in good faith determines would (i) have a material adverse effect on the
business or financial condition of Community and its subsidiaries on a
consolidated basis or (ii) otherwise materially impair the value of
Citizens to Community (in which case Community shall promptly notify
Citizens).
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(i) Community shall have received a ruling from the Internal Revenue
Service or an opinion of its counsel, Mette, Evans & Woodside,
substantially to the effect that, under the provisions of the Code:
(1) the Merger of Citizens with and into CBNA upon the terms and
conditions of this Agreement will not result in any recognized gain or
loss to Community, CBNA, or Citizens;
(2) except for any cash received in lieu of any fractional
share, no gain or loss will be recognized by holders of Citizens
Common Stock who receive Community Common Stock in exchange for the
shares of Citizens Common Stock which they hold;
(3) the holding period of Community Common Stock received in
exchange for Citizens Common Stock will include the holding period of
Citizens Common Stock for which it is exchanged, assuming the shares
of Citizens Common Stock are capital assets in the hands of the holder
thereof on the Effective Date; and
(4) the basis of Community Common Stock received in exchange for
Citizens Common Stock will be the basis of Citizens Common Stock for
which it is exchanged, less any basis attributable to fractional
shares for which cash is received.
Such opinion or ruling shall be given or received, subject to the receipt, and
the accuracy on the Effective Date of:
(1) representations by Community satisfactory to such counsel;
and
(2) representations by Citizens satisfactory to such counsel.
(j) Subject to satisfaction of the requirements of Statement on
Auditing Standards No. 72 of the American Institute of Certified Public
Accounts if applicable, Community and its directors and officers shall have
received a letter from Coopers & Lybrand dated the effective date of the
Community Registration Statement to be in form and substance satisfactory
to Community, to the effect that:
(1) In their opinion, the consolidated financial statements of
Citizens examined by them and included in the Community Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; and
(2) On the basis of limited procedures, not constituting an
audit, including a limited review of the unaudited financial
statements referred to below, a limited review of the latest available
unaudited consolidated interim financial statements of Citizens,
inspection of the minute book of Citizens since December 31, 1994,
inquiries of officials of Citizens responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused
them to believe that:
(A) any unaudited Balanced Sheets, Statements of Income,
Statements of Stockholders' Equity and Statements of Cash Flows of
Citizens included in the Community Registration Statement are not in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements covered by their report included in the Community
Registration Statement;
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(B) as of a specified date not more than five days prior to
the date of delivery of such letter, there have been any changes in
the capital stock, decreases in capital surplus or increases in debt
of Citizens as compared with amounts shown in the balance sheet as of
December 31, 1994 included in the Community Registration Statement,
except in each case for such changes, increases or decreases which the
Community Registration Statement discloses have occurred or may occur
and except for such changes, decreases or increases as aforesaid which
are immaterial; and
(C) for the period from January 1, 1995 to such specified
date, there were any decreases in the total or per share amounts of
income before securities gains or losses or net income of Citizens as
compared with the comparable period of the preceding year, except in
each case for decreases which the Community Registration Statement
discloses have occurred or may occur, and except for such decreases
which are immaterial.
(k) The aggregate number of shares of Citizens Common Stock held
by persons who have taken all of the steps required prior to the
Effective Date to perfect their right (if any) to be paid the fair
value of such shares under the National Bank Act ("Dissenting Shares")
shall not be more as to prevent Community from meeting the continuity
of business enterprise requirement of Section 368(a)(1)(A) of the Code
with respect to the Citizens acquisition, and the number of Dissenting
Shares, the number of shares owned by Community or its affiliates,
together with the aggregate number of fractional shares with respect
to which persons will receive cash in lieu of Community Common Stock
pursuant to this Agreement, shall be less than ten (10%) percent of
the number of outstanding shares of Citizens Common Stock or such
number, if less, which will allow Community to account for the Merger
as a "pooling of interest".
(m) Community shall have received from each of the persons who,
in the opinion of counsel, might be deemed to be affiliates of
Citizens under Rule 145 of the Rules and Regulations under the 1933
Act (the "Affiliates"), a signed undertaking satisfactory to Counsel
for Community, acknowledging and agreeing to abide by the limitations
imposed by law in respect of the sale or other disposition of the
Community Common Stock received by such person pursuant to the Merger.
Citizens agrees to use its reasonable best efforts to have each
Affiliate enter into the undertakings referred to in this Section
8.1(m) on or prior to the Effective Date.
8.2 Conditions to the Obligations of Citizens. The obligations of
Citizens under this Agreement are, at its option (subject to the provisions of
Section 11.1(a)), subject to the fulfillment on or prior to the Effective Date
of each of the following conditions:
(a) Except as affected by the transactions contemplated by this
Agreement and as affected by events occurring or arising after the
date first above written in the ordinary course of the business of
Community which do not materially adversely affect the business of
Community, the representations and warranties of Community in Section
5.2 shall be true and correct in all material respects on and as of
the Effective Date, except as to any representation or warranty which
specifically relates to an earlier date.
(b) Community shall have performed and complied in all material
respects with all terms of this Agreement required to be performed or
complied with by it on or prior to the Effective Date. Community as
the sole shareholder of CBNA shall have approved the merger of
Citizens into CBNA.
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<PAGE>
(c) No material adverse change shall have occurred since
December 31, 1994 in the business or financial condition of Community
and its subsidiaries on a consolidated basis, and neither Community
nor any of its subsidiaries shall be engaged in, or a party to or
threatened with, any legal action or other proceeding before any
court, any arbitrator of any kind or any government agency if, in the
reasonable judgment of Citizens, such legal action or proceeding could
materially adversely affect the business or financial condition of
Community and its subsidiaries, considered as a whole. For purposes of
this section, any change in the business or financial condition of
Community on a consolidated basis which results from any changes
occurring after the date hereof in any federal or state law, rule or
regulation, in generally accepted accounting principles or in market
rates of interest, which change affects banks or their holding
companies generally, shall not be deemed to be a material adverse
change.
(d) This Agreement shall have been duly approved by the
affirmative vote of Citizens' shareholders owning at least two-thirds
(2/3) of its capital stock outstanding.
(e) Citizens shall have received a certificate, dated the
Effective Date, signed on behalf of Community by its Chairman and
Chief Executive Officer or President, certifying the fulfillment of
the conditions stated in paragraphs (a), (b), (c), (d) and (h) of this
Section 8.2.
(f) Community shall have delivered to Citizens such documents as
may reasonably be requested by Citizens to evidence compliance by
Community with the provisions of this Agreement including an opinion
of its counsel substantially in the form attached hereto as Exhibit
-------
"D".
---
(g) The Community Registration Statement shall have become
effective under the 1933 Act, no stop order suspending the
effectiveness of the Community Registration Statement shall be in
effect and no proceedings for such purpose shall have been initiated
or threatened by or before the SEC. All state securities and "blue
sky" permits or approvals required (in the opinion of Community) to
consummate the transactions contemplated by this Agreement shall have
been received.
(h) Community shall have listed the stock to be issued in
connection with the Merger with NASDAQ.
(i) All Government Approvals shall have been received and shall
be in effect, all conditions or requirements prescribed by law or by
any such Approval shall have been satisfied, and all required waiting
periods shall have expired.
(j) Citizens shall have received the opinion of Community's
counsel referred to in Section 8.1(j).
(k) Citizens shall have received an opinion from Berwind
Financial Group L.P. dated as of a date within five business days of
the date of the Citizens' Proxy Statement, to the effect that the
consideration to be received by the holders of Citizens' common stock
pursuant to the Merger is fair, from a financial point of view, to
such shareholders.
A-27
<PAGE>
ARTICLE IX
CLOSING
9.1 The transactions contemplated by this Agreement and the Bank
Merger Agreement shall be consummated at a closing (the "Closing") to be held at
the executive offices of Community at 10:00 a.m. on a date to be designated by
Community, which date shall not be later than ten (10) business days following
the date on which all conditions precedent to such Closing contained in Article
VIII hereof have been satisfied or duly waived or such later date within thirty
(30) days thereafter as may be specified by Community, with the Merger to be
consummated in such order and after such intermediate steps as the parties
hereto may agree. The Closing Date shall (unless otherwise provided) be the
Effective Date.
9.2 At the Closing, the opinions, certificates and other documents
required to be delivered by this Agreement shall be delivered.
9.3 At the Closing, Community and Citizens shall instruct their
respective representatives to make or confirm such filings as shall be required
in the opinion of counsel to Community to give effect to the Merger.
ARTICLE X
EXPENSES
10.1 Except to the extent provided in Section 10.2 each of the
parties hereto agrees to pay, without right of reimbursement from the other
party and whether or not the transactions contemplated by this Agreement shall
be consummated, the costs incurred by it incident to the performance of its
obligations under this Agreement, including, without limitation, costs incident
to the preparation of this Agreement, the Community Registration Statement, the
Prospectus and the Proxy Statement (including the audited financial statements
of the parties contained therein) and to the consummation of the Merger and of
the other transactions contemplated herein, including the fees and disbursements
of counsel, accountants and consultants employed by such party in connection
therewith; except that in the event that the transactions contemplated in this
Agreement are not consummated for any reason (other than as provided in Section
10.2), Community and Citizens shall each pay one-half of (a) the aggregate costs
theretofore incurred in printing the Community Registration Statement, the
Prospectus and the Proxy Statement, (b) the registration fee for the Community
Registration Statement, and (c) the fees for filing applications for Government
Approvals.
10.2 If Citizens fails to complete the transactions contemplated
herein by reason of an Acquisition Proposal, Citizens shall reimburse Community
for its Expenses; provided, further, that such Expenses shall be for purposes
hereof agreed to be $200,000. An Acquisition Proposal shall mean:
(i) the making, other than by Community of any of its
subsidiaries or affiliates, of a tender of exchange offer for at least
19.9% of the outstanding Shares of Citizens.
(ii) the acquisition, by any person or group of persons other
than Community or any of its subsidiaries or affiliates of beneficiary
ownership or the right to acquire beneficial ownership of 19.9% or
more of the outstanding Shares of Citizens (the terms "group" and
"beneficial ownership" having the meanings assigned thereto in Section
13(d) of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder).
(iii) the making by any person, other than Community or any of
its subsidiaries or affiliates, by public announcement or
communication to Citizens, of a firm proposal to: (a) acquire
Citizens, by merger, consolidation, purchase of all or substantially
all of its assets or
A-28
<PAGE>
other similar transactions; or (b) to make any such tender or exchange
offer as is described in (i) above.
(iv) the failure of Citizens shareholders to approve the Merger
at a meeting called for such purpose if at the time of such meeting
there has been an announcement by a person (other than Community) of
an offer or proposal to acquire 19.9% or more of the outstanding
shares of Citizens, or to acquire, merge, or consolidate with
Citizens, or to purchase all or substantially all of Citizens assets.
10.3 The payment of Expenses by any party is not an exclusive remedy
of any other party, but is in addition to any rights or remedies available to
the parties hereto at law or in equity and notwithstanding anything to the
contrary contained herein, no party shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provisions of
this Agreement.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated as follows:
(a) By the mutual consent of the Board of Directors of both Community
and Citizens at any time prior to the consummation of the Merger;
(b) By the Board of Directors of Community on or after May 31, 1996,
if (i) any of the conditions in Section 8.1 to which the obligations of
Community are subject have not been fulfilled, or (ii) such conditions have
been fulfilled or waived by Community but Citizens shall have failed to
complete the Merger.
(c) By the Board of Directors of Community if, in its reasonable
opinion, (i) it has become aware of any material facts or circumstances
existing on or after December 31, 1994 affecting Citizens of which it was
not aware as of the date hereof, (ii) a material adverse change shall have
occurred since December 31, 1994, in the business or financial condition of
Citizens, or (iii) there has been failure or prospective failure on the
part of Citizens to comply with its obligations under this Agreement, or
any failure or prospective failure to comply with any condition set forth
in Section 8.1.
(d) By the Board of Directors of Citizens if, in its reasonable
opinion, (i) it has become aware of any material facts or circumstances
existing on or after December 31, 1994 affecting Community of which it was
not aware as of the date hereof, (ii) a material adverse change shall have
occurred since December 31, 1994, in the business or financial condition of
Community, or (iii) there has been failure or prospective failure on the
part of Community to comply with its obligations under this Agreement, or
any failure or prospective failure to comply with any condition set forth
in Section 8.2.
(e) By the Board of Directors of either party if there shall be
pending or threatened any material action, proceeding or investigation
before any court or administrative agency by any governmental agency or any
other person challenging, or seeking material damages in connection with,
the Merger.
(f) By the Board of Directors of Citizens on or after May 31, 1996,
if (i) any of the conditions contained in Section 8.2 to which the
obligations of Citizens are subject have not been fulfilled (provided,
however, that if Community is engaged at the time in litigation or an
appeal procedure relating to an attempt to obtain one or more of the
Government Approvals, such non-
A-29
<PAGE>
fulfillment shall not give Citizens the right to terminate this Agreement
for an additional period of six months); or (ii) such conditions have been
fulfilled or waived but Community shall have failed to complete the Merger.
(g) By the Board of Directors of Citizens if the Merger and this
Agreement are not approved by the affirmative vote of Citizens shareholders
owning at least two-thirds (2/3rds) of its capital stock outstanding at the
shareholders meeting, including any adjournment thereof, called pursuant to
Section 6.2(e) of this Agreement; provided, that Community and Citizens may
mutually agree to keep this Agreement in effect and to call an additional
meeting of the shareholders of Citizens to obtain such shareholder
approval.
(h) By the Board of Directors of Citizens if the Market Value Per
Share (as defined in Section 2.1(a) hereof) of Community on the fifth
trading date preceding the Effective Date of the Merger (or, if such date
is not a trading day, on the immediately preceding trading day) is less
than $22.31 per share; provided, however, that in the event Citizens elects
to terminate under this Section 11.1(f) both parties hereto agree to a
twenty (20) day standstill period from the date of such termination, during
which period the parties hereto shall attempt in good faith to renegotiate
the Conversion Factor and, if required by law, resubmit the Merger for
approval by Citizens' shareholders at a special meeting duly called for
such purpose. Citizens also agrees that during such twenty (20) day
period, it shall not merge or consolidate with any other bank, corporation
or other entity, acquire any stock (except in a fiduciary capacity),
solicit any offers for any of its capital stock or substantially all of its
assets, effect any reorganization or recapitalization, or, except in the
Ordinary Course of Business, acquire any assets of any other person,
corporation or business organization, or enter into discussions with any
person concerning, or agree to do, any of the foregoing and all other terms
of this Agreement shall remain in effect.
(i) By the Board of Directors of Community if the Market Value Per
Share (as defined in Section 2.1(a) hereof) of Community on the fifth (5th)
trading date preceding the Effective Date of the Merger (or, if such date
is not a trading day, on the immediately preceding trading day) is more
than $30.19; provided, however, that in the event Community elects to
terminate under this Section 11.1(g), both parties agree to a twenty (20)
day standstill period from the date of such termination, during which
period the parties hereto shall attempt in good faith to renegotiate the
Conversion Factor and, if required by law, resubmit the Merger for approval
by Citizens' shareholders at a special meeting duly called for such
purpose. Citizens also agrees that during such twenty (20) day period, it
shall not merge or consolidate with any other bank, corporation or other
entity, acquire any stock (except in a fiduciary capacity), solicit any
offers for any of its capital stock or substantially all of its assets,
effect any reorganization or recapitalization, or, except in the Ordinary
Course of Business, acquire any assets of any other person, corporation, or
business organization, or enter into discussions with any person
concerning, or agree to do, any of the foregoing and all other terms of
this Agreement shall remain in effect.
The power of termination hereunder may be exercised by Community and
Citizens, as the case may be, only by giving written notice, signed on behalf of
such party by its Chairman (or President) and Chief Executive Officer, to the
other party.
11.2 Termination of this Agreement shall not terminate or affect the
obligations of the parties to pay expenses as provided in Section 10 and shall
not affect any agreement after such termination.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
12.1 Any notice or other communication required or permitted under
this Agreement or the Bank Merger Agreement shall be effective only if it is in
writing and delivered personally or sent by registered or certified mail,
postage prepaid, or by recognized overnight delivery service guaranteeing next
day delivery, addressed as follows:
If to Community:
Community Banks, N.A.
150 Market Square
Millersburg, PA 17061
Attention: Thomas L. Miller, CEO
With a copy to:
James A. Ulsh, Esquire
Mette, Evans & Woodside
3401 North Front Street
P.O. Box 5950
Harrisburg, PA 17110-0950
If to Citizens:
The Citizens' National Bank of Ashland
735 Center Street
Ashland, PA 17921
Attention: Dean N. Paul, CEO
With a copy to:
Charles L. O'Brien, Esquire
Morgan, Lewis & Bockius LLP
417 Walnut Street
Harrisburg, PA 17101
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
12.2 Community and any of its wholly-owned banking subsidiaries may,
prior to the Effective Date of the Merger, consolidate with or merge with or
into one or more other banks or bank holding companies so long as Community and
its wholly-owned banking subsidiaries are the surviving corporations. The terms
and conditions of this Agreement shall not be affected by such merger or
consolidation, and the shareholders of Citizens shall receive the common stock
of the surviving bank holding company, unless the provisions of Section 8.2(c)
hereof should apply.
12.3 This Agreement is binding upon and is for the benefit of
Community and Citizens and their respective successors and permitted assigns.
This Agreement is not made for the benefit of any person,
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<PAGE>
firm, corporation or association not a party hereof and no other person, firm,
corporation or association shall acquire or have any right under or by virtue of
this Agreement.
12.4 Except for the agreements of Community set forth herein, the
representations, warranties and agreements of Community and Citizens contained
in this Agreement shall not survive the consummation of the Merger; provided,
however, that in the event of the consummation of the Merger, no such
representations, warranties or agreements shall be deemed to be terminated so as
to deprive Community and Citizens (or any director, officer or controlling
person of Community and Citizens) of any defense in law or in equity which
otherwise would be available against the claims of any persons, including
shareholders.
12.5 This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
12.6 This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, Community and Citizens have each caused this
Agreement to be signed by its Chief Executive Officer and its corporate seal to
be hereunto affixed and attested by the signature of its Secretary, assistant
Secretary, a Vice President or its Clerk, all as of the day and year first above
written.
ATTEST: COMMUNITY BANKS, N.A.
/s/ Patricia E. Hoch By: /s/ Thomas Miller
- ------------------------------- ------------------------------
Secretary Chairman of the Board and
Chief Executive Officer
(SEAL)
ATTEST: COMMUNITY BANKS, INC.
/s/ Patricia E. Hoch By: /s/ Thomas Miller
- ------------------------------- -----------------------------
Secretary Chairman of the Board and
Chief Executive Officer
(SEAL)
ATTEST: THE CITIZENS' NATIONAL BANK OF
ASHLAND
/s/ Dean N. Paul By: /s/ Harry Strouse
- ------------------------------- ------------------------------
Secretary President
(SEAL)
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<PAGE>
APPENDIX B - OPINION OF THE BERWIND FINANCIAL GROUP, L.P.
October 26, 1995
Board of Directors
Citizens National Bank of Ashland
735 Center Street
Ashland, Pennsylvania 17921
Directors:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Citizens National Bank of Ashland
("Citizens") of the financial terms of the proposed merger whereby Citizens will
be merged with and into Community Bank, National Association ("CNBA"), a wholly-
owned subsidiary of Community Banks, Inc. ("Community"). The terms of the
proposed merger (the "Proposed Merger") between Citizens and Community are set
forth in the Agreement and Plan of Merger (the "Agreement") dated July 5, 1995,
and provides that each outstanding share of Citizens common stock will be
converted into the right to receive shares of Common Stock par value $5.00 per
share of Community determined in conformity with the exchange ratio set forth in
Section 2.1 (a) of the Agreement, with cash to be paid in lieu of any fractional
shares.
Berwind Financial Group, L.P., as part of its investment banking
business, regularly is engaged in the valuation of assets, securities and
companies in connection with various types of asset and security transactions,
including mergers, acquisitions, private placements and valuations for various
other purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed
the historical financial performances, current financial positions and general
prospects of Community and Citizens, (ii) reviewed the Agreement, (iii) reviewed
and analyzed the stock market performance of Community, (iv) studied and
analyzed the consolidated financial and operating data of Community and
Citizens, (v) considered the terms and conditions of the Proposed Merger between
Community and Citizens as compared with the terms and conditions of comparable
bank and bank holding company mergers and acquisitions, (vi) met and/or
communicated with certain members of Community's and Citizens' senior management
to discuss their respective operations, historical financial statements, and
future prospects, (vii) reviewed the Proxy Statement/Prospectus, and (viii)
conducted such other financial analyses, studies and investigations as we deemed
appropriate.
Our opinion is given in reliance on information and representations
made or given by Community and Citizens, and their respective officers,
directors, auditors, counsel and other agents, and on filings, releases and
other information issued by Community and Citizens including financial
statements, financial projections, and stock price data as well as certain
information from recognized independent sources. We have not independently
verified the information concerning Community and Citizens nor other data which
we have considered in our review and, for purposes of the opinion set forth
below, we have assumed and relied upon the accuracy and
B-1
<PAGE>
Board of Directors
October 26, 1995
Page 2
completeness of all such information and data. Additionally, we assume that the
Proposed Merger is, in all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Community and Citizens, we have assumed that such information has
been reasonably prepared and reflects the best currently available estimates and
judgments of the managements of Community and Citizens as to Community's and
Citizens' most likely future performance. In rendering our opinion, we have
assumed that in the course of obtaining the necessary regulatory approvals for
the Proposed Merger, and in preparation of the final proxy statement, no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Proposed Merger to Citizens.
Our opinion is based upon information provided to us by the
managements of Community and Citizens, as well as market, economic, financial,
and other conditions as they exist and can be evaluated only as of the date
hereof and speaks to no other period. Our opinion pertains only to the financial
consideration of the Proposed Merger and does not constitute a recommendation
to the Board of Citizens and does not constitute a recommendation to
Citizens' shareholders as to how such shareholders should vote on the Agreement.
Based on the foregoing, it is our opinion that, as of the date hereof,
the Proposed Merger between Citizens and Community is fair, from a financial
point of view, to the shareholders of Citizens.
Sincerely,
/s/ BERWIND FINANCIAL GROUP, L.P.
B-2
<PAGE>
APPENDIX C - DISSENTING SHAREHOLDERS' RIGHTS UNDER
12 UNITED STATES CODE SECTION 215(A)(B)
(B) DISSENTING SHAREHOLDERS
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(C) VALUATION OF SHARES
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash; (2) one selected by the directors of the receiving association;
and (3) one selected by the two so selected. The valuation agreed upon by any
two of the three appraisers shall govern. If the value so fixed shall not be
satisfactory to any dissenting shareholder who has requested payment, that
shareholder may, within five days after being notified of the appraised value of
his shares, appeal to the Comptroller, who shall cause a reappraisal to be made
which shall be final and binding as to the value of the shares of the appellant.
(D) APPLICATION TO SHAREHOLDERS OF MERGING ASSOCIATIONS: APPRAISAL BY
COMPTROLLER; EXPENSES OF RECEIVING ASSOCIATION; SALE AND RESALE OF SHARES;
STATE APPRAISAL AND MERGER LAW
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be
promptly paid to the dissenting shareholders by the receiving association. The
shares of stock of the receiving association which would have been delivered to
such dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State
bank shall be determined in the manner prescribed by the law of the State in
such cases, rather than as provided in this section, if such provision is made
in the State law; and no such merger shall be in contravention of the law of the
State under which such bank is incorporated. The provisions of the subsection
shall apply only to shareholders of (and stock owned by them in) a bank or
association being merged into the receiving association.
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<PAGE>
APPENDIX D - OCC BANKING CIRCULAR ON
STOCK APPRAISALS (BC-259)
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
To: Chief Executive Officers of National Banks, Deputy Comptrollers (District),
Department and Division Heads, and Examining Personnel
PURPOSE
- -------
This Banking Circular informs all national banks of the valuation methods used
by the Office of the Comptroller of the Currency (OCC) to estimate the value of
a bank's shares when requested to do so by a shareholder dissenting to the
conversion, merger, or consolidation of its bank. The results of appraisals
performed by the OCC between January 1, 1985, and September 30, 1991 are
summarized.
References: 12 U.S.C. 214a, 215 and 215a; 12 CFR 11.590 (Item 2)
BACKGROUND
- ----------
Under 12 U.S.C. Section 214a, a shareholder dissenting from a conversion,
consolidation, or merger involving a national bank is entitled to receive the
value of his or her shares from the resulting bank. A valuation of the shares
shall be made by a committee of three appraisers (a representative of the
dissenting shareholder, a representative of the resulting bank, and a third
appraiser selected by the other two). If the committee is formed and renders an
appraisal that is acceptable to the dissenting shareholder, the process is
complete and the appraised value of the shares is paid to the dissenting
shareholder by the resulting bank. If, for any reason, the committee is not
formed or if it renders an appraisal that is not acceptable to the dissenting
shareholder, an interested party may request an appraisal by the OCC. 12 U.S.C.
Section 215 provides these appraisal rights to any shareholder dissenting to a
consolidation. Any dissenting shareholder of a target bank in a merger is also
entitled to these appraisal rights pursuant to 12 U.S.C. Section 215a. The
above provides only a general overview of the appraisal process. The specific
requirements of the process are set forth in the statutes themselves.
METHODS OF VALUATION USED
- -------------------------
Through its appraisal process, the OCC attempts to arrive at a fair estimate of
the value of a bank's shares. After reviewing the particular facts in each case
and the available information on a bank's shares, the OCC selects an appropriate
valuation method, or combination of methods, to determine a reasonable estimate
of the shares' value.
________________________________________________________________________________
Date: March 10, 1992
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<PAGE>
APPENDIX D - OCC BANKING CIRCULAR ON
STOCK APPRAISALS (BC-259)
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
MARKET VALUE
- ------------
The OCC uses various methods to establish the market value of shares being
appraised. If sufficient trading in the shares exists and the prices are
available from direct quotes from the Wall Street Journal or a market-maker,
---- ------ -------
those quotes are considered in determining the market value. If no market value
is readily available, or if the market value available is not well established,
the OCC may use other methods of estimating market value, such as the investment
value and adjusted book value methods.
INVESTMENT VALUE
- ----------------
Investment value requires an assessment of the value to investors of a share in
the future earnings of the target bank. Investment value is estimated by
applying an average price/earnings ratio of banks with similar earnings
potential to the earnings capacity of the target bank.
The peer group selection is based on location, size, and earnings patterns. If
the state in which the subject bank is located provides a sufficient number of
comparable banks using location, size and earnings patterns as the criteria for
selection, the price/earnings ratios assigned to the banks are applied to the
earnings per share estimated for the subject bank. In order to select a
reasonable peer group when there are too few comparable independent banks in a
location that is comparable to that of the subject bank, the pool of banks from
which a peer group is selected is broadened by including one-bank holding
company banks in a comparable location, and/or by selecting banks in less
comparable locations, including adjacent states, that have earnings patterns
similar to the subject bank.
ADJUSTED BOOK VALUE
- -------------------
The OCC also uses an "adjusted book value" method for estimating value.
Historically, the OCC has not placed any weight on the bank's "unadjusted book
value", since that value is based on historical acquisition costs of the bank's
assets, and does not reflect investors' perceptions of the value of the bank as
an ongoing concern. Adjusted book value is calculated by multiplying the book
value of the target bank's assets per share times the average market price to
book value ratio of comparable banking organizations. The average market price
to book value ratio measures the premium or discount to book value, which
investors attribute to shares of similarly situated banking organizations.
Both the investment value method and the adjusted book value method present
appraised values which are based on the target bank's value as a going concern.
These techniques provide estimates of the market value of the shares of the
subject bank.
________________________________________________________________________________
Date: March 10, 1992
D-2
<PAGE>
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
OVERALL VALUATION
- -----------------
The OCC may use more than one of the above-described methods in deriving the
value of shares of stock. If more than one method is used, varying weights may
be applied in reaching an overall valuation. The weight given to the value by a
particular valuation method is based on how accurately the given method is
believed to represent market value. For example, the OCC may give more weight
to a market value representing infrequent trading by shareholders than to the
value derived from the investment value method when the subject bank's earnings
trend is so irregular that it is considered to be a poor predictor of future
earnings.
PURCHASE PREMIUMS
- -----------------
For mergers and consolidations, the OCC recognizes that purchase premiums do
exist and may, in some instances, be paid in the purchase of small blocks of
shares. However, the payment of purchase premiums depends entirely on the
acquisition or control plans of the purchasers, and such payments are not
regular or predictable elements of market value. Consequently, the OCC's
valuation methods do not include consideration of purchase premiums in arriving
at the value of shares.
STATISTICAL DATA
- ----------------
The chart below lists the results of appraisals the OCC performed between
January 1, 1985 and September 30, 1991. The OCC provides statistical data on
book value and price/earnings ratios for comparative purposes, but does not
necessarily rely on such data in determining the value of the banks' shares.
Dissenting shareholders should not view these statistics as determinative for
future appraisals.
In connection with disclosures given to shareholders under 12 CFR 11.590 (Item
2), banks may provide shareholders a copy of this Banking Circular or disclose
the information in the Banking Circular, including the past results of OCC
appraisals. If the bank discloses the past results of the OCC appraisals, it
should advise shareholders that: (1) the OCC did not rely on all the
information set forth in the chart in performing each appraisal; and (2) the
OCC's past appraisals are not necessarily determinative of its future appraisals
of a particular bank's shares.
________________________________________________________________________________
Date: March 10, 1992
D-3
<PAGE>
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
APPRAISAL RESULTS
- -----------------
<TABLE>
<CAPTION>
OCC Average Price/
Appraisal Appraisal Price Book Earnings Ratio
Date * Value Offered Value of Peer Group
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1/1/85 107.05 110.00 178.29 5.3
1/2/85 73.16 NA 66.35 6.8
1/15/85 53.41 60.00 83.95 4.8
1/31/85 22.72 20.00 38.49 5.4
2/1/85 30.63 24.00 34.08 5.7
2/25/85 27.74 27.55 41.62 5.9
4/30/85 25.98 35.00 42.21 4.5
7/30/85 3,153.10 2,640.00 6,063.66 NC
9/1/85 17.23 21.00 21.84 4.7
11/22/85 316.74 338.75 519.89 5.0
11/22/85 30.28 NA 34.42 5.9
12/16/85 66.29 77.00 89.64 5.6
12/27/85 60.85 57.00 119.36 5.3
12/31/85 61.77 NA 73.56 5.9
12/31/85 75.79 40.00 58.74 12.1
1/12/86 19.93 NA 26.37 7.0
3/14/86 59.02 200.00 132.20 3.1
4/21/86 40.44 35.00 43.54 6.4
5/2/86 15.50 16.50 23.69 5.0
7/3/86 405.74 NA 612.82 3.9
7/31/86 297.34 600.00 650.63 4.4
__________________________________________________________________________________________________
</TABLE>
* - The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA - Not Available NC - Not Computed
_______________________________________________________________________________
Date: March 10, 1992
D-4
<PAGE>
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
APPRAISAL RESULTS
- -----------------
<TABLE>
<CAPTION>
OCC Average Price/
Appraisal Appraisal Price Book Earnings Ratio
Date * Value Offered Value of Peer Group
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/22/86 103.53 106.67 136.23 NC
12/26/86 16.66 NA 43.57 4.0
12/31/86 53.39 95.58 69.66 7.1
5/1/87 186.42 na 360.05 5.1
6/11/87 50.46 70.00 92.35 4.5
6/11/87 38.53 55.00 77.75 4.5
7/31/87 13.10 NA 20.04 6.7
8/26/87 55.92 57.52 70.88 NC
8/31/87 19.55 23.75 30.64 5.0
8/31/87 10.98 NA 17.01 4.2
10/6/87 56.48 60.00 73.11 5.6
3/15/88 297.63 NA 414.95 6.1
6/2/88 27.26 NA 28.45 5.4
06/30/88 137.78 NA 215.36 6.0
8/30/88 768.62 677.00 1,090.55 10.7
3/31/89 773.62 NA 557.30 7.9
5/26/89 136.47 180.00 250.42 4.5
5/29/90 9.87 NA 11.04 9.9
___________________________________________________________________________________________________
</TABLE>
* - The "Appraisal Date" is the consummation date for the conversion,
consolidation, or merger.
NA - Not Available NC - Not Computed
________________________________________________________________________________
Date: March 10, 1992
D-5
<PAGE>
BANKING ISSUANCE
- --------------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- --------------------------------------------------------------------------------
Type: Banking Circular Subject: Stock Appraisals
- --------------------------------------------------------------------------------
For more information regarding the OCC's stock appraisal process, contact the
Office of the Comptroller of the Currency, Bank Organization and Structure.
/s/ Frank Maguire
- ----------------------------------
Frank Maguire
Acting Senior Deputy Comptroller
Corporate Policy and Economic Analysis
________________________________________________________________________________
Date: March 10, 1992
D-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of
1988, as amended (the "PBCL"), provide that a business corporation may indemnify
directors and officers against liabilities they may incur as such provided that
the particular person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. In the case of actions against a director or
officer by or in the right of the corporation, the power to indemnify extends
only to expenses (not judgments and amounts paid in settlement) and such power
generally does not exist if the person otherwise entitled to indemnification
shall have been adjudged to be liable to the corporation unless it is judicially
determined that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnification for specified expenses. Under Section 1743 of the PBCL, the
corporation is required to indemnify directors and officers against expenses
they may incur in defending actions against them in such capacities if they are
successful on the merits or otherwise in the defense of such actions. Under
Section 1745 of the PBCL, a corporation may pay the expenses of a director or
officer incurred in defending an action or proceeding in advance of the final
disposition thereof upon receipt of an undertaking from such person to repay the
amounts advanced unless it is ultimately determined that such person is entitled
to indemnification from the corporation. Article 12 of Community's Articles of
Incorporation and Article 20 of Community's Bylaws provide indemnification of
directors, officers and other agents of Community and advancement of expenses to
the extent otherwise permitted by Sections 1741, 1742 and 1745 of the PBCL.
Section 1746 of the PBCL grants a corporation broad authority to
indemnify its directors, officers and other agents for liabilities and expenses
incurred in such capacity, except in circumstances where the act or failure to
act giving rise to the claim for indemnification is determined by a court to
have constituted willful misconduct or recklessness. Article 12 of Community's
Articles of Incorporation provides that the corporation indemnify any and all
persons whom it shall have the power to indemnify for and against any and all
expenses, liabilities or other matters for which indemnification is permitted by
applicable laws.
Article 20 of Community's Bylaws conditions any indemnification or
advancement of expenses upon a determination, made in accordance with the
procedures specified in Section 1744 of the PBCL, by Community's directors or
shareholders that indemnification or advancement of expenses is proper because
the director or officer met the standard of conduct set forth in Section 1741 or
1742 of the PBCL, as applicable.
As authorized by Section 1747 of the PBCL and Article XIV, Community
maintains, on behalf of its directors and officers, insurance protection against
certain liabilities arising out of the discharge of their duties, as well as
insurance covering Community for indemnification payments made to its directors
and officers for certain liabilities. The premiums for such insurance are paid
by Community.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated July 5, 1995 among CBNA,
Community and Citizens is Appendix A to the Proxy
Statement/Prospectus included in Part I and is incorporated herein
by reference.
3.1 Articles of Incorporation of Community. (1)
3.2 By-laws of Community. (1)
5.1* Opinion of Mette, Evans & Woodside regarding legality of the
Community Common Shares being registered.
23.1* Consent of Mette, Evans & Woodside (included in its opinion filed
as Exhibit 5.1 hereto).
23.2* Consent of Coopers & Lybrand L.L.P. regarding Community.
23.3* Consent of Coopers & Lybrand L.L.P. regarding Citizens.
23.6* Consent of Berwind Financial Group, Inc.
24.6* Powers of Attorney (included on the signature page).
99.1* Form of Citizen Proxy.
</TABLE>
__________________
(1) Incorporated by reference to Exhibit 3(a) and 3(b) filed as exhibits in
the Registrant's Form S-2 (Amendment 2) dated May 13, 1987 (Registration
No. 2-0-8732).
* Filed herewith.
(b) Financial Statement Schedules:
None.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which,
II-2
<PAGE>
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(3) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-3
<PAGE>
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Amendment No. 1 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Millersburg, Pennsylvania on October 26, 1995.
COMMUNITY BANKS, INC.
By: /s/Thomas L. Miller
-------------------------
Thomas L. Miller
Chairman and Chief
Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas L. Miller Chairman and Chief Executive October 26, 1995
- -----------------------------------------------
Thomas L. Miller Officer and a Director
/s/ Ernest L. Lowe President and Chief Operations October 26, 1995
- -----------------------------------------------
Ernest L. Lowe Officer and a Director
/s/ Terry L. Burrows Executive Vice President and Chief October 26, 1995
- -----------------------------------------------
Terry L. Burrows Financial Officer
* Director October 26, 1995
- -----------------------------------------------
Ronald E. Boyer
Director
- -----------------------------------------------
Samuel E. Cooper
Director
- -----------------------------------------------
Kenneth L. Deibler
* Director October 26, 1995
- -----------------------------------------------
Peter DeSoto
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C> <C>
* Director October 26, 1995
- -----------------------------------------------
Leon E. Kocher
- -----------------------------------------------
Ray N. Leidich
* Director October 26, 1995
- -----------------------------------------------
Thomas L. Long
* Director October 26, 1995
- -----------------------------------------------
Donald L. Miller
* Director October 26, 1995
- -----------------------------------------------
Robert W. Rissinger
* Director October 26, 1995
- -----------------------------------------------
Allen Shaffer
* Director October 26, 1995
- -----------------------------------------------
William C. Troutman
* Director October 26, 1995
- -----------------------------------------------
James A. Ulsh
* By: /s/ Thomas L. Miller October 26, 1995
- -----------------------------------------------
Thomas L. Miller
Attorney-in-fact
/s/ Ernest L. Lowe
- ----------------------------------------------- October 26, 1995
Ernst L. Lowe
Attorney-in-fact
</TABLE>
S-2
<PAGE>
Exhibit 5.1
METTE, EVANS & WOODSIDE
3401 NORTH FRONT STREET
P.O. BOX 5950
HARRISBURG, PA 17110-0950
September 28, 1995
Community Banks, Inc.
150 Market Square
P.O. Box 350
Millersburg, PA 17061
Re: Community Banks, Inc.
Registration Statement on Form S-4
----------------------------------
Gentlemen:
We have acted as counsel to Community Banks, Inc., a Pennsylvania
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-4 No. 33-63239, as amended (the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), relating to the public offering
of up to 624,120 shares of the Company's common stock, par value $5.00 per share
(the "Common Stock"). The Company will offer such shares in connection with the
merger (the "Merger") provided for in that Agreement and Plan of Merger dated
July 5, 1995 among the Company, Community Banks, N.A., and The Citizens National
Bank of Ashland (the "Agreement"). In this connection we have reviewed (a) the
Registration Statement, (b) the Company's Articles of Incorporation and By-laws,
(c) a copy of the Agreement, and (d) certain records of the Company's corporate
proceedings. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original of all documents submitted to us as copies
thereof.
Our opinion set forth below is limited to the Pennsylvania Business
Corporation Law of 1988, as amended.
In our opinion, the shares of Common Stock to be issued by the Company
in connection with the Merger, when issued by the
<PAGE>
Community Banks, Inc.
September 28, 1995
Page 2
Company in connection with the Merger pursuant to the Agreement, will be legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement. In giving such opinion, we do not thereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Act or the rules or regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ James A. Ulsh
JAU:mk
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Community Banks, Inc. on Form S-4 of our report dated January 13, 1995, on our
audits of the consolidated financial statements of Community Banks, Inc. as of
December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993 and
1992. We also consent to the reference to our Firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, PA 17101-9916
October 5, 1995
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 of
Community Banks, Inc., of our report dated January 20, 1995, except for note 12,
as to which the date is July 5, 1995, on our audits of the financial statements
of The Citizens' National Bank of Ashland as of December 31, 1994 and 1993, and
for the years ended December 31, 1994, 1993 and 1992. We also consent to the
reference to our Firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, PA 17101-9916
October 5, 1995
<PAGE>
Exhibit 23.6
BERWIND FINANCIAL GROUP, INC.
3000 CENTRE SQUARE WEST
1500 MARKET STREET
PHILADELPHIA, PA 19102
215) 575-2395
October 27, 1995
Board of Directors
The Citizens' National Bank of Ashland
735 Center Street
Ashland, PA 17921
Gentlemen:
We consent to the inclusion of our Fairness Opinion as an exhibit to
the Community Banks, Inc. Registration Statement on Form S-4.
Very truly yours,
/s/ Berwind Financial Group, L.P.
<PAGE>
Exhibit 99.1
REVOCABLE PROXY
THE CITIZENS' NATIONAL BANK OF ASHLAND
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 30, 1995
The undersigned hereby appoints Ralph F. Buchspics, Frank L. Scheuren
and George J. Schilling, with full powers of substitution, to act as attorneys
and proxies for the undersigned, to vote all shares of the common stock of The
Citizens' National Bank of Ashland which the undersigned is entitled to vote at
the special meeting of Shareholders (the "Meeting"), to be held at the Banking
House, 735 Center Street, Ashland, Pennsylvania 17921 on Thursday, November 30,
1995 at 10:30 a.m., local time, and at any and all adjournments thereof, as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
1. The approval of the Agreement and Plan of Merger (the [_] [_] [_]
"Merger Agreement") among The Citizens' National Bank of
Ashland, Community Banks, Inc. and Community Banks,
National Association, and the Merger of The Citizens'
National Bank of Ashland with and into Community Banks,
National Association, as contemplated therein (the "Merger").
2. Postponement or adjournment of the Meeting to a later date, [_] [_] [_]
if necessary to solicit additional proxies in the event
insufficient shares are cast in person or by proxy at the
Meeting to approve the Merger and the Merger Agreement.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED
PROPOSITIONS.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT SUCH MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF THE
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST
JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS
TO BE PRESENTED AT THE MEETING.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned may revoke this proxy prior to its exercise by filing
a subsequent proxy or a duly executed revocation with the Secretary.
The undersigned acknowledges receipt from The Citizens' National Bank
of Ashland prior to the execution of this proxy of notice of the Meeting and a
Proxy Statement/Prospectus dated November 1, 1995.
Date: ________________, 1995
------------------------ ------------------------
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
------------------------- -------------------------
PRINT NAME OF SHAREHOLDER PRINT NAME OF SHAREHOLDER
Please sign exactly as your name appears on the enclosed card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
