Rule 424(b)(3)
Registration No. 333-65821
[LETTERHEAD OF THE FIRST NATIONAL BANK OF SPRING MILLS]
November 11, 1998
Dear Shareholder:
You are cordially invited to attend the special meeting of
shareholders (the "Special Meeting") of The First National Bank
of Spring Mills ("FNBSM") to be held on Friday, December 18,
1998, at 10:00 a.m., local time, at FNBSM's main office, Route 45
and Ross Hill Road, Spring Mills, Pennsylvania.
At the Special Meeting, shareholders will consider and vote
upon the Agreement of Merger dated as of July 22, 1998 (the
"Merger Agreement"), between FNBSM and Penns Woods Bancorp, Inc.
("Penns Woods) providing for the merger of FNBSM with and into
Jersey Shore State Bank, a wholly-owned subsidiary of Penns Woods
(the "Merger"), and the conversion of each outstanding share of
common stock of FNBSM (other than dissenting shares) into 3.5
shares of common stock, $10.00 par value per share, of Penns
Woods ("Penns Woods Common Stock") all as more fully described in
the accompanying Proxy Statement/Prospectus. Penns Woods will
pay cash to FNBSM shareholders in lieu of issuing fractional
shares of Penns Woods Common Stock. Completion of the Merger is
subject to certain conditions, including the approval of the
Merger Agreement by the shareholders of FNBSM and the approval of
the Merger by various regulatory agencies.
The attached Proxy Statement/Prospectus contains important
information concerning the Merger. We urge you to give it your
careful attention.
The Board of Directors of FNBSM has carefully considered and
approved the Merger Agreement and believes that the Merger is in
the best interests of FNBSM and its shareholders. ACCORDINGLY,
YOUR BOARD OF DIRECTORS UNANIMOUSLY HAS APPROVED AND RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
Your vote is important regardless of the number of shares
you own. Whether or not you plan to attend the Special Meeting,
the Board of Directors of FNBSM urges you to complete, sign, date
and return the enclosed Proxy Card promptly in the enclosed
postage-paid envelope. This will not prevent you from voting in
person at the Special Meeting but will ensure that your vote is
counted if you are unable to attend. If you are a shareholder
whose shares are not registered in your own name (i.e., shares
are held in a brokerage account), you will need additional
documentation from your record holder in order to vote in person
at the Special Meeting.
On behalf of the Board of Directors and our employees, I
wish to thank you for your continued support. We appreciate your
interest.
Sincerely yours,
William H. Rockey
President
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
Route 45 & Ross Hill Road
Spring Mills, Pennsylvania 16875
____________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on December 18, 1998
____________________
NOTICE IS HEREBY GIVEN that a Special Meeting of
Shareholders (including any adjournment or postponement, the
"Special Meeting") of The First National Bank of Spring Mills
("FNBSM"), a national banking association, will be held on
Friday, December 18, 1998, at 10:00 a.m., local time, at FNBSM's
main office, located at Route 45 and Ross Hill Road, Spring
Mills, Pennsylvania, to consider and vote upon the following
matters, all as more fully described in the accompanying Proxy
Statement/Prospectus:
1. The approval and adoption of the Agreement of
Merger dated as of July 22, 1998 (the "Merger Agreement"),
between Penns Woods Bancorp, Inc. ("Penns Woods ") and
FNBSM, which provides, among other things, for (i) the
merger of FNBSM with and into Jersey Shore State Bank, a
Pennsylvania banking institution and wholly-owned subsidiary
of Penns Woods, (the "Merger") and (ii) the conversion of
each share of common stock of FNBSM outstanding immediately
prior to the Merger (other than any dissenting shares or
shares owned by Penns Woods or FNBSM) into the right to
receive 3.5 shares of common stock, $10.00 par value per
share, of Penns Woods, plus cash in lieu of any fractional
share interest.
2. The adjournment of the Special Meeting, if
necessary, to permit further solicitation of proxies in the
event there are not sufficient votes at the time of the
Special Meeting to constitute a quorum or to approve the
Merger Agreement.
3. The transaction of such other business as may
properly be brought before the Special Meeting.
The Board of Directors of FNBSM has determined that an
affirmative vote on each proposal to be considered at the Special
Meeting is in the best interests of FNBSM and its shareholders
and unanimously recommends a vote "FOR" each proposal.
The Board of Directors of FNBSM has fixed the close of
business on November 1, 1998 as the record date for determining
shareholders entitled to notice of, and to vote at, the Special
Meeting.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF
SHARES YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, THE BOARD OF DIRECTORS OF FNBSM URGES YOU TO COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE
IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL NOT PREVENT YOU
FROM VOTING IN PERSON AT THE SPECIAL MEETING BUT WILL ASSURE THAT
YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND. IF YOU ARE A
SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME
(E.G., SHARES HELD IN A BROKERAGE ACCOUNT), YOU WILL NEED
ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER IN ORDER TO VOTE
PERSONALLY AT THE SPECIAL MEETING.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES
AT THIS TIME.
BY ORDER OF THE BOARD OF DIRECTORS
Kenneth Z. Eungard, Secretary
Spring Mills, Pennsylvania
November 11, 1998
<PAGE>
________________________________________________________________
THE FIRST NATIONAL BANK OF SPRING MILLS
PROXY STATEMENT
____________________
PENNS WOODS BANCORP, INC.
PROSPECTUS
262,500 Shares
Common Stock
$10.00 Par Value Per Share
________________________________________________________________
This Proxy Statement/Prospectus ("Proxy Statement/
Prospectus") is being furnished to shareholders of The First
National Bank of Spring Mills ("FNBSM"), a national banking
association, in connection with the solicitation of proxies by
the Board of Directors of FNBSM for use at the Special Meeting of
Shareholders of FNBSM (including any adjournments or
postponements thereof, the "Special Meeting") to be held on
December 18, 1998.
This Proxy Statement/Prospectus also relates to up to
262,500 shares of common stock, $10.00 par value, of Penns Woods
Bancorp, Inc. ("Penns Woods")("Penns Woods Common Stock") which
may be issued upon the merger of FNBSM with and into Jersey Shore
State Bank ("JSSB"), a wholly-owned subsidiary of Penns Woods
(the "Merger"), pursuant to an Agreement of Merger between Penns
Woods and FNBSM and a Plan of Merger between JSSB and FNBSM, each
dated as of July 22, 1998 (the Agreement of Merger and the Plan
of Merger being referred to collectively as the "Merger
Agreement"). In the Merger, each outstanding share of common
stock, $2.00 par value per share, of FNBSM ("FNBSM Common Stock")
(other than any dissenting shares under the National Bank Act
("Dissenting Shares") and shares, if any, then owned directly or
indirectly by Penns Woods or FNBSM ("Excluded Shares")), will be
converted into and become the right to receive 3.5 shares of
Penns Woods Common Stock.
The number of shares of Penns Woods Common Stock into
which each share of FNBSM Common Stock (other than Dissenting
Shares or Excluded Shares) will be converted in the Merger will
be adjusted to prevent dilution in the event of stock splits,
reclassifications or other similar events, if any. Penns Woods
will pay cash to FNBSM shareholders in lieu of issuing fractional
shares of Penns Woods Common Stock.
This Proxy Statement/Prospectus constitutes both
(i) the proxy statement of FNBSM relating to the solicitation of
proxies by the Board of Directors of FNBSM for use at the Special
Meeting to be held for the purpose of considering and voting upon
a proposal to approve the Merger Agreement and (ii) the
prospectus of Penns Woods with respect to the Penns Woods Common
Stock to be issued in the Merger.
This Proxy Statement/Prospectus and the accompanying
form of proxy are first being mailed on or about November 12,
1998.
Holders of FNBSM Common Stock are entitled to
dissenters' rights of appraisal in connection with the Merger.
See "THE MERGER -- Dissenters' Rights of Appraisal."
THE SHARES OF PENNS WOODS COMMON STOCK OFFERED HEREBY
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF PENNS WOODS COMMON STOCK OFFERED HEREBY
ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK
OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
________________
The date of this Proxy Statement/Prospectus is
November 11, 1998.
<PAGE>
Table of Contents
Page
AVAILABLE INFORMATION....................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION. 3
SUMMARY..................................................... 4
The Companies.......................................... 4
The Special Meeting.................................... 5
The Merger............................................. 6
Certain Related Transactions........................... 12
Interests of Certain Persons in the Merger............. 12
Comparative Per Common Share Data...................... 13
SELECTED FINANCIAL DATA..................................... 17
PRO FORMA COMBINED FINANCIAL INFORMATION ................... 20
Pro Forma Combined Condensed Consolidated Balance
Sheet As of June 30, 1998............................ 20
Pro Forma Unaudited Combined Condensed Statements
of Income for the Six Months Ended June 30, 1998
and the Years Ended December 31, 1997, 1996 and
1995................................................. 22
THE SPECIAL MEETING......................................... 28
Date, Time and Place................................... 28
Matters To Be Considered at the Special Meeting........ 28
Votes Required......................................... 28
Voting of Proxies...................................... 29
Revocability of Proxies................................ 29
Record Date; Stock Entitled to Vote; Quorum............ 30
Solicitation of Proxies................................ 30
THE MERGER.................................................. 31
Background of and Reasons for the Merger;
Recommendations of the Board of Directors............ 31
Terms of the Merger.................................... 34
Opinion of FNBSM's Financial Advisor................... 34
Effective Date of the Merger........................... 39
Exchange of FNBSM Stock Certificates................... 39
Conditions to the Merger............................... 40
Regulatory Approvals................................... 42
Representations and Warranties......................... 43
Business Pending the Merger............................ 44
Dividends.............................................. 45
No Solicitation of Transactions........................ 46
Amendment; Waivers..................................... 46
Termination; Effect of Termination..................... 47
Management and Operations after the Merger............. 48
Employee Benefits and Severance........................ 48
<PAGE 1>
Accounting Treatment................................... 50
Certain Federal Income Tax Consequences................ 50
Expenses............................................... 51
Resale of Penns Woods Common Stock..................... 52
Dissenters' Rights of Appraisal........................ 52
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 54
Shares Owned by Management and the Board............... 54
Indemnification; Directors and Officers Insurance...... 54
Employment Agreements.................................. 55
INFORMATION WITH RESPECT TO PENNS WOODS..................... 56
General................................................ 56
Market Price of and Dividends on Penns Woods Common
Stock and Related Shareholder Matters................ 56
INFORMATION WITH RESPECT TO FNBSM........................... 57
Description of Business................................ 57
Supervision and Regulation............................. 58
Legal Proceedings...................................... 59
Management's Discussion and Analysis of Financial
Condition and Results of Operations - 1997 and 1996.. 59
Market Price of and Dividends on FNBSM Common Stock
and Related Shareholder Matters...................... 81
DESCRIPTION OF PENNS WOODS CAPITAL SECURITIES............... 82
Common Stock........................................... 82
Special Charter and Pennsylvania Corporate Law
Provisions........................................... 83
COMPARISON OF SHAREHOLDER RIGHTS............................ 85
Directors.............................................. 85
Shareholder Meetings................................... 87
Inspection Rights...................................... 87
Antitakeover Provisions................................ 87
Required Shareholder Vote.............................. 89
Amendment of Bylaws.................................... 90
Dissenters' Rights..................................... 90
Dividends.............................................. 91
Preemptive Rights...................................... 91
ADJOURNMENT................................................. 91
EXPERTS..................................................... 93
LEGAL MATTERS............................................... 93
OTHER MATTERS............................................... 93
<PAGE 2>
THE FIRST NATIONAL BANK OF SPRING MILLS
FINANCIAL STATEMENTS...................................... F-1
BACKGROUND.................................................. A-2
AGREEMENT....................................................A-2
PAGE 3
<PAGE>
No persons have been authorized to give any information
or to make any representations other than those contained in this
Proxy Statement/Prospectus in connection with the solicitation of
proxies or the offering of securities made hereby and, if given
or made, such information or representation must not be relied
upon as having been authorized by Penns Woods or FNBSM. This
Proxy Statement/Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any
person to whom it is not lawful to make any such offer or
solicitation in such jurisdiction. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities
made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of Penns
Woods or FNBSM since the date hereof or that the information
herein is correct as of any time subsequent to its date.
All information concerning Penns Woods and its
subsidiaries contained herein, incorporated herein by reference
or supplied herewith, has been furnished by Penns Woods, and all
information concerning FNBSM contained herein, incorporated
herein by reference or supplied herewith, has been furnished by
FNBSM.
AVAILABLE INFORMATION
Penns Woods is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The
reports, proxy statements and other information filed by Penns
Woods with the Commission can be inspected and copied at the
offices of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, New York, New York
10048, and Citicorp Center, 500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material also can
be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and from the web site that the Commission maintains at
http://www.sec.gov.
Penns Woods has filed with the Commission a
Registration Statement on Form S-4 (together with any amendments
thereto, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the
Penns Woods Common Stock to be issued pursuant to the Merger
Agreement. This Proxy Statement/Prospectus does not contain all
the information set forth in the Registration Statement and the
exhibits thereto. Such additional information may be obtained
from the Commission's principal office in Washington, D.C.
Statements contained in this Proxy Statement/Prospectus or in any
document incorporated in this Proxy Statement/Prospectus by
<PAGE 1> reference or supplied herewith as to the contents of any
contract or other document referred to herein or therein are not
necessarily complete, and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit
to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by
Penns Woods (File No. 0-17077) pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement/Prospectus:
1. Penns Woods' Annual Report on Form 10-K for the
year ended December 31, 1997.
2. Penns Woods' Quarterly Report on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 1998.
In addition, all documents filed by Penns Woods
pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange
Act subsequent to the date of this Proxy Statement/Prospectus and
prior to the date of the Special Meeting shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and
to be a part hereof from the dates of filing of such documents or
reports. Any statement contained herein or in a document all or
a portion of which is incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent
that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except
as modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS
BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST. DOCUMENTS RELATING TO
PENNS WOODS MAY BE REQUESTED FROM PENNS WOODS BANCORP, INC.,
115 SOUTH MAIN STREET, JERSEY SHORE, PENNSYLVANIA 17440
(TELEPHONE NUMBER (717) 398-2213), ATTENTION: SONYA E.
HARTRANFT, SECRETARY. REQUESTS SHOULD BE RECEIVED BY DECEMBER 1,
1998.
Copies of Penns Woods' 1997 Annual Report to
Shareholders (including its Annual Report on Form 10-K for the
year ended December 31, 1997) and Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 are delivered together with
this Proxy Statement/Prospectus.
<PAGE 2>
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Except for historical information, this Proxy
Statement/Prospectus may be deemed to contain "forward looking"
information. Examples of forward looking information include,
but are not limited to (a) projections of or statements regarding
future earnings, interest income, other income, earnings or loss
per share, asset mix and quality, growth prospects, capital
structure and other financial terms, (b) statements of plans and
objectives of management or the Board of Directors,
(c) statements of future economic performance, and (d) statements
of assumptions, such as economic conditions in the market areas
served by Penns Woods and FNBSM, underlying other statements and
statements about Penns Woods and FNBSM or their respective
businesses. Such forward looking information can be identified
by the use of forward looking terminology such as "believes,"
"expects," "may," "intends," "will," "should," "anticipates," or
the negative of any of the foregoing or other variations thereon
or comparable terminology, or by discussion of strategy. No
assurance can be given that the future results covered by the
forward-looking information will be achieved. Such statements
are subject to risks, uncertainties, and other factors which
could cause actual results to differ materially from future
results expressed or implied by such forward looking information.
Important factors that could impact operating results include,
but are not limited to, (i) the effects of changing economic
conditions in both the market areas served by Penns Woods and
FNBSM and nationally, (ii) credit risks of commercial, real
estate, consumer and other lending activities, (iii) significant
changes in interest rates, (iv) changes in federal and state
banking laws and regulations which could affect operations,
(v) funding costs, and (vi) other external developments which
could materially affect business and operations.
PAGE 3
<PAGE>
SUMMARY
The following is a summary of certain information
contained elsewhere in this Proxy Statement/Prospectus.
Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained or
incorporated by reference in this Proxy Statement/Prospectus and
the Annexes hereto. A copy of the Merger Agreement is set forth
in Annex A to this Proxy Statement/Prospectus and reference is
made thereto for a complete description of the terms of the
Merger. Shareholders of FNBSM are urged to read carefully this
entire Proxy Statement/Prospectus, including the Annexes hereto.
All ratios and share data relating to Penns Woods have
been adjusted to reflect all stock dividends and stock splits
declared or effected through the date of this Proxy Statement/
Prospectus, including the stock split effected by means of a 100%
stock dividend paid on January 15, 1998.
The Companies
Penns Woods
Penns Woods, a Pennsylvania business corporation, is
the holding company for JSSB, a Pennsylvania banking institution.
At June 30, 1998, Penns Woods and its subsidiaries had total
consolidated assets, deposits and shareholders' equity of
approximately $307.3 million, $222.5 million and $45.3 million,
respectively. The primary operating entity of Penns Woods is
JSSB. JSSB's primary business consists of attracting deposits
from its seven full-service banking offices in Northcentral
Pennsylvania, and originating commercial, consumer and
residential mortgage loans in the communities served by those
offices. JSSB also operates a mortgage/loan center in State
College, Pennsylvania.
The principal executive offices of Penns Woods are
located at 115 South Main Street, Jersey Shore,Pennsylvania
17740, and its telephone number is (717) 398-2213. For further
information concerning Penns Woods and its subsidiaries, see
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE," "PENNS WOODS SELECTED FINANCIAL DATA," "INFORMATION
WITH RESPECT TO PENNS WOODS" and "DESCRIPTION OF PENNS WOODS
CAPITAL SECURITIES."
FNBSM
FNBSM is a national banking association. At June 30,
1998, FNBSM had total consolidated assets, deposits and
shareholders' equity of approximately $31.934 million,
$24.286 million and $4.536 million, respectively. FNBSM has two
branches located in Centre Hall and Spring Mills, Centre County,
Pennsylvania. FNBSM's principal business consists of attracting
deposits from the general public through its offices and
<PAGE 4> originating commercial, consumer and mortgage loans in
the communities served by those offices.
The principal executive offices of FNBSM are located at
Route 45 & Ross Hill Road, Spring Mills, Pennsylvania 16875 and
its telephone number is (814) 422-8836. For additional
information concerning FNBSM, see "FNBSM SELECTED FINANCIAL
DATA," "INFORMATION WITH RESPECT TO FNBSM" and "INDEX TO FNBSM
FINANCIAL STATEMENTS."
The Special Meeting
General
The Special Meeting will be held at the main office of
FNBSM, located at Route 45 and Ross Hill Road, Spring Mills,
Pennsylvania at 10:00 a.m., local time, on Friday, December 18,
1998.
Record Date
The record date for the Special Meeting is November 1,
1998 (the "Record Date"). Only shareholders of record at the
close of business on the Record Date will be entitled to receive
notice of, and to vote at, the Special Meeting.
Matters to be Considered at the Special Meeting
At the Special Meeting, holders of FNBSM Common Stock
will consider and vote upon a proposal to approve and adopt the
Merger Agreement attached as Annex A to this Proxy Statement/
Prospectus and incorporated herein by reference. In addition,
shareholders of FNBSM are being asked to approve a proposal to
adjourn the Special Meeting, if necessary, to permit further
solicitation of proxies in the event a quorum is not present or
there are not sufficient votes at the Special Meeting to approve
the Merger Agreement (the "Adjournment Proposal"). Shareholders
will also consider and vote upon any other matter that may
properly come before the Special Meeting.
See "THE SPECIAL MEETING -- Matters to be considered at
the Special Meeting."
Votes Required
Shareholders entitled to cast at least a majority of
the votes which all shareholders are entitled to cast on the
Record Date must be represented in person or by proxy at the
Special Meeting for a quorum to be present for purposes of voting
on the Merger Agreement and on the Adjournment Proposal. The
approval and adoption of the Merger Agreement will require the
affirmative vote of holders of two-thirds of the issued and
outstanding shares of FNBSM Common Stock as of the Record Date,
in person or by proxy, at the Special Meeting. The approval of
the Adjournment Proposal will require the affirmative vote of a
<PAGE 5> majority of the votes cast, in person or by proxy, by
all FNBSM shareholders entitled to vote thereon at the Special
Meeting, whether or not a quorum is present. Each holder of
shares of FNBSM Common Stock outstanding on the Record Date will
be entitled to one vote for each share held of record on each
matter to be considered at the Special Meeting.
The directors and executive officers of FNBSM have
agreed to vote all shares of FNBSM Common Stock that they own on
the Record Date in favor of the approval and adoption of the
Merger Agreement. On the Record Date, directors, executive
officers of FNBSM and those shareholders under agreement owned
approximately 14,540 shares of FNBSM Common Stock, or
approximately 19.4% of the then outstanding shares of FNBSM
Common Stock. Management of FNBSM is not aware of any person or
entity owning 5% or more of the outstanding shares of FNBSM
Common Stock as of the Record Date, except for 5,866 shares of
FNBSM Common Stock (approximately 7.82% of the outstanding
shares) held of record by William H. Rockey, President of FNBSM.
See "THE SPECIAL MEETING -- Votes Required."
The Merger
Terms of the Merger
At the Effective Date of the Merger, each outstanding
share of FNBSM Common Stock (other than Dissenting Shares and
Excluded Shares) will be automatically converted into, and become
a right to receive 3.5 shares of Penns Woods Common Stock (the
"Exchange Ratio"). The "Exchange Ratio will be adjusted to
prevent dilution in the event of stock splits, reclassifications
or other similar events.
Penns Woods will in all events pay cash to FNBSM
shareholders in lieu of issuing fractional shares of Penns Woods
Common Stock.
The Effective Date, which shall be the same date as the
Closing Date, will be the date specified by Penns Woods and FNBSM
within five (5) business days after all conditions precedent are
fulfilled or waived or such other date as Penns Woods and FNBSM
shall agree. See "THE MERGER -- Effective Date."
The Merger Agreement permits FNBSM to pay its regular
semi-annual cash dividend on or before December 31, 1998 in an
amount not to exceed $1.25 per share. See "THE MERGER --
Dividends."
<PAGE 6>
Dissenters' Rights of Appraisal
Any FNBSM shareholder who objects to the Merger is
entitled to the rights and remedies of a dissenting shareholder
as provided in Section 214a of Title 12 of the United States
Code, as amended (the "U.S. Code"), but only on the condition
that the dissenting shareholder takes the necessary steps to
perfect his rights. The Merger Agreement provides that one of
the conditions to Penns Woods' obligation to consummate the
Merger is that shareholders holding 9% or more of the outstanding
shares of FNBSM Common Stock will not have asserted and duly
perfected their dissenters' rights.
If the Merger is consummated, any FNBSM shareholder who
follows the procedures set forth in the U.S. Code will be
entitled to receive from JSSB a cash payment equal to the value
of his shares of FNBSM Common Stock determined as of the date of
the Special Meeting; provided that (1) such shareholder has voted
against the Merger at the Special Meeting, or (2) has given
notice to FNBSM in writing at or prior to the Special Meeting
that such shareholder dissents from the Merger and does not
thereafter vote in favor of the Merger. A description of the
appraisal process is provided in "THE MERGER -- Dissenters'
Rights Appraisal."
The foregoing summary does not purport to be a complete
statement of the appraisal rights of dissenting shareholders, and
such summary is qualified in its entirety by reference to the
applicable provisions of the U.S. Code, which are reproduced in
full in Annex C to this Proxy Statement/Prospectus.
Accounting Treatment and Certain Federal Income Tax
Consequences
The Merger is intended to qualify as a pooling of
interests for financial accounting purposes and is expected to
constitute a tax-free reorganization for federal income tax
purposes. It is a condition to completion of the Merger that
Penns Woods receive an opinion from its independent auditors that
the Merger will be treated as a pooling of interests for
financial accounting purposes and that both parties receive an
opinion from Penns Woods' counsel that the Merger will constitute
a tax-free reorganization for federal income tax purposes. Penns
Woods' counsel has advised the parties that, in its opinion, as
of the date of this Proxy Statement/Prospectus, the Merger will
be treated as a tax-free reorganization for federal income tax
purposes. As of the date of this Proxy Statement/Prospectus,
Penns Woods has no reason to believe that its independent
auditors or its counsel will be unable to deliver such opinions
as of the Effective Date. See "THE MERGER -- Certain Federal
Income Tax Consequences," "--Accounting Treatment" and
"-- Conditions to the Merger."
<PAGE 7>
Recommendation of Board of Directors and Reasons for
the Merger
The Board of Directors of FNBSM believes that the terms
of the Merger are fair and in the best interests of the
shareholders of FNBSM and has unanimously approved the Merger
Agreement. The Board of Directors of FNBSM unanimously
recommends that the shareholders of FNBSM approve the Merger
Agreement.
Opinion of Financial Advisor
Berwind Financial, L.P. ("Berwind") has rendered its
written opinion, dated July 22, 1998, and updated as of the date
of this Proxy Statement/Prospectus, to the Board of Directors of
FNBSM that, as of the respective dates of such opinions, and
subject to the assumptions and considerations set forth therein,
the financial terms of the Merger are fair from a financial point
of view to the holders of FNBSM Common Stock. A copy of the
opinion of Berwind dated the date of this Proxy Statement/
Prospectus, is attached hereto as Annex B.
FNBSM has agreed to pay fees in the amount of $250,000
to Berwind for its services in connection with the Merger, all of
which is contingent upon completion of the Merger.
For information on the assumptions made, matters
considered and limits of the review by Berwind, see "THE MERGER -
- - Opinion of FNBSM's Financial Advisor."
Conditions to the Merger; Regulatory Approvals
The obligations of Penns Woods and FNBSM to complete
the Merger are subject to various conditions usual and customary
in transactions similar to the Merger, including, without
limitation, obtaining requisite regulatory approvals and
obtaining approval of the shareholders of FNBSM. Application has
been made to obtain required regulatory approvals. No assurance
can be given that all required approvals will be received or as
to the timing or conditions of such approvals. See "THE
MERGER -- Regulatory Approvals." The obligation of Penns Woods
to complete the Merger is also subject to certain other
conditions, including, among other things, receipt of an opinion
from Penns Woods' independent auditors to the effect that the
Merger will be treated as a pooling of interests for financial
accounting purposes and that the transaction will qualify as a
tax-free reorganization. No assurances can be given that all
such conditions will be met. See "THE MERGER -- Conditions to
the Merger."
<PAGE 8>
Termination; Effect of Termination
The Merger Agreement may be terminated at any time
prior to the Effective Date by the mutual consent of Penns Woods
and FNBSM or by either party if (i) the other party breaches any
representation or warranty contained in the Merger Agreement
which results in a Material Adverse Effect (as defined in the
Merger Agreement; see "THE MERGER -- Termination; Effect of
Termination") with respect to the breaching party, and such
breach has not been or cannot be cured within 30 days after the
date written notice of such breach was given to such party
committing the breach, (ii) the other party breaches any material
covenant or obligation, and such breach has not or cannot be
cured within thirty days from the date written notice of such
breach was given to the party committing the breach, (iii) the
closing date (the "Closing Date," which, under the terms of the
Merger Agreement is the same date as the Effective Date) of the
Merger has not occurred by May 30, 1999, or (iv) either party
receives a written notice from a regulatory authority that the
necessary approval or consent is unlikely to be granted unless
the failure of such occurrence in either (iii) or (iv) shall be
due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe any agreements required to be
performed by such party by the Closing Date.
In the event of termination of the Merger Agreement by
either Penns Woods or FNBSM, there will be no liability or
obligation on the part of Penns Woods or FNBSM other than the
obligation dealing with confidentiality and other than any
liabilities or damages incurred as a result of the willful breach
by a party of any of its representations, warranties, covenants,
or agreements set forth in the Merger Agreement; provided,
however, that if, within 9 months following the date of
termination of the Merger Agreement, a person, group or entity
other than Penns Woods or an affiliate of Penns Woods, enters
into an agreement with FNBSM pursuant to which such person, group
or entity would (i) merge or consolidate, or enter into any
similar transaction, with FNBSM, (ii) acquire all or
substantially all of the assets of FNBSM, or (iii) acquire
beneficial ownership of securities representing, or the right to
acquire beneficial ownership or to vote securities representing,
20% or more of the then outstanding shares of Common Stock, then
FNBSM shall immediately pay to Penns Woods a termination fee
("Termination Fee") of $1.0 million. No Termination Fee will be
payable in the event of termination of the Merger Agreement
following (i) an unremedied breach of a representation or
warranty by Penns Woods which results in a Material Adverse
Effect, (ii) an unremedied breach of any material covenant or
other obligation by Penns Woods, (iii) the failure to complete
the Merger by May 30, 1999, unless the failure of such occurrence
is due to the failure of FNBSM to perform or observe its
agreements set forth in the Merger Agreement required to be
performed or observed prior to the Effective Date, or (iv) the
notification of either party by a regulatory authority that a
necessary approval is unlikely to be granted, unless the failure
<PAGE 9> of such occurrence shall be due to the failure of FNBSM
to perform or observe any agreements set forth in the Merger
Agreement required to be performed or observed by it prior to the
Effective Date. See "THE MERGER -- Termination; Effect of
Termination."
Comparison of Shareholder Rights
Penns Woods is a Pennsylvania corporation subject to
the provisions of the Pennsylvania Business Corporation Law of
1988, as amended (the "Pennsylvania BCL"). FNBSM is a national
banking association subject to the provisions of the National
Bank Act (the "NBA"). Upon completion of the Merger,
shareholders of FNBSM will become shareholders of Penns Woods,
and their rights as such will be governed by Penns Woods'
Articles of Incorporation and Bylaws and by the Pennsylvania BCL.
The rights of shareholders of Penns Woods are different in
certain respects from the rights of shareholders of NBA. The
most significant of these differences include the following: the
absence of the ability of shareholders of Penns Woods to call a
special meeting of shareholders; broader indemnification rights
generally available to directors, officers and employees of Penns
Woods as a Pennsylvania business corporation; and certain
statutory provisions of Pennsylvania law and of Penns Woods'
Articles of Incorporation designed to deter a nonnegotiated
attempt to obtain control of Penns Woods. See "COMPARISON OF
SHAREHOLDER RIGHTS."
Management and Operations after the Merger
The Boards of Directors of Penns Woods and JSSB in
office immediately prior to completion of the Merger will remain
as the Boards of Directors of Penns Woods and JSSB upon
completion of the Merger, except as follows. On the Effective
Date, William H. Rockey, President and Chief Executive Officer of
FNBSM, will be elected as a Class 1 director of Penns Woods to
serve until 2001. Penns Woods has agreed to renominate
Mr. Rockey for election as a Class I director at the annual
meeting of Penns Woods to be held in 2001. Mr. Rockey will also
serve as a director of JSSB during the time that he is serving as
a director of Penns Woods. For a period of two years after the
Effective Date, Penns Woods will establish an advisory board (the
"FNBSM Advisory Board") initially consisting of all of the
members of the FNBSM Board of Directors immediately prior to the
Effective Date. During the second year following the Effective
Date, the FNBSM Advisory Board will consist of former members of
the FNBSM Board of Directors who have not attained the mandatory
retirement age of 70 prior to the commencement of such year.
After the second year following the Effective Date, the FNBSM
Advisory Board may be maintained at the discretion of Penns
Woods. FNBSM Advisory Board members will receive $150 for each
monthly meeting of the FNBSM Advisory Board actually attended.
On the Effective Date, the executive officers of Penns
Woods and JSSB in office immediately prior to the Effective Date
<PAGE 10> will remain as such except that (i) William H. Rockey,
President and Chief Executive Officer of FNBSM, will be elected a
Senior Vice President of Penns Woods and JSSB and (ii) Rickey B.
Brooks, Vice President and Cashier of FNBSM, will be elected a
Vice President of Penns Woods and JSSB. Messrs. Rockey and
Brooks will each enter into an employment agreement with Penns
Woods and JSSB effective as of the Closing Date.
See "THE MERGER -- Management and Operations After the
Merger" and "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
No Solicitation
The Merger Agreement provides that FNBSM will not, nor
will it permit any of its directors, officers, employees or
agents to directly or indirectly (i) respond to, solicit,
initiate or encourage any inquiries relating to, or the making of
any proposal which relates to, an Acquisition Transaction (as
defined below), (ii) recommend or endorse an Acquisition
Transaction, (iii) participate in any discussions or negotiations
regarding an Acquisition Transaction, (iv) provide any third
party (other than Penns Woods or an affiliate of Penns Woods)
with any nonpublic information in connection with any inquiry or
proposal relating to an Acquisition Transaction, or (v) enter
into an agreement with any other party with respect to an
Acquisition Transaction. Notwithstanding the foregoing, the
Board of Directors of FNBSM may respond to unsolicited inquiries
relating to an Acquisition Transaction or the Board of Directors
of FNBSM may recommend or endorse an Acquisition Transaction, in
each case, if it receives an unqualified written opinion of
outside counsel that the failure to do so would constitute a
breach of their fiduciary duty. In the event of any response by
FNBSM to a proposal for an Acquisition Transaction, Penns Woods
shall have the right, but not the obligation, to terminate this
Agreement at any time thereafter without penalty or further
liability to Penns Woods. For purposes of these provisions,
"Acquisition Transaction" means any of the following
transactions: (i) a merger or consolidation, or any similar
transaction, involving FNBSM, (ii) a purchase, lease or other
acquisition of all or a substantial portion of the assets or
liabilities of FNBSM hereto, or (iii) a purchase or other
acquisition (including by way of share exchange, tender offer,
exchange offer or otherwise) of 20% or more of the outstanding
shares of FNBSM Common Stock. FNBSM is required to notify Penns
Woods immediately if (i) any such discussions or negotiations are
sought to be initiated with it by any other person or (ii) if any
such requests for information, inquiries, proposals or
communications are received from any other person, except
analysts, regulatory authorities and holders of FNBSM Common
Stock in the ordinary course of business. See "THE MERGER -- No
Solicitation of Transactions."
<PAGE 11>
Exchange of Certificates
After the Effective Date, Penns Woods will send to
FNBSM shareholders transmittal materials for use in effecting the
exchange of their certificates representing whole shares of FNBSM
Common Stock for certificates representing shares of Penns Woods
Common Stock. Penns Woods will pay holders of FNBSM Common Stock
cash in lieu of issuing fractional shares of Penns Woods Common
Stock. See "THE MERGER -- Exchange of FNBSM Stock Certificates."
Certain Related Transactions
The directors, executive officers and certain
Shareholders of FNBSM have agreed to vote their shares of FNBSM
Common Stock in favor of the Merger Agreement. See "THE
MERGER -- Matters to be Considered at the Meeting."
The agreements of FNBSM's directors and executive
officers and certain shareholders to vote in favor of the Merger
may have the effect of precluding or discouraging persons who
might now or prior to the Effective Date be interested in
acquiring all of or a significant interest in FNBSM from
considering or proposing such an acquisition, even if such
persons were prepared to pay a higher price per share for FNBSM
Common Stock than the price per share being paid by Penns Woods
under the Merger Agreement, or might result in a potential
acquiror proposing to pay a lower price per share to acquire
FNBSM than it might otherwise have proposed to pay. See "CERTAIN
RELATED TRANSACTIONS."
Interests of Certain Persons in the Merger
On or prior to the Effective Date, Penns Woods and
Jersey Shore will enter into employment agreements with William
H. Rockey and Rickey B. Brooks, to be effective as of the
Effective Date, on terms mutually satisfactory to Penns Woods and
to such individuals. Such agreements will, among other things,
(i) provide for a term of three (3) years from the Effective Date
and automatic annual renewals thereafter absent notice of
nonrenewal by either party, (ii) provide for a minimum base
salary equal to the base salary of the executive immediately
prior to the Effective Date ($96,700 in the case of Mr. Rockey
and $71,300 in the case of Mr. Brooks), (iii) provide for a
severance payment equivalent to the greater of 24 months' base
salary or base salary payable over the remaining term of the
agreement in the event the executive's employment is terminated
involuntarily or the executive terminates employment for "good
reason" following a "change in control" of Penns Woods, and (iv)
provide that the executive shall be eligible for consideration to
receive stock option grants under Penns Woods' stock option plans
then in effect in the same manner as other executive officers of
Penns Woods. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER --
Employment Agreements."
<PAGE 12>
On the Effective Date, Penns Woods has agreed to
establish for a period of two years the FNBSM Advisory Board.
Each member of the FNBSM Advisory Board will be paid $150 for
each monthly meeting of the FNBSM Advisory Board actually
attended.
Penns Woods has also agreed to indemnify, after the
Effective Date, persons who served as directors and officers of
FNBSM and to maintain FNBSM's existing directors' and officers'
liability insurance policy (or policy equivalent thereto)
covering persons who are currently covered by such insurance for
a period of five years after the Effective Date. See "THE
MERGER -- Management and Operations After the Merger" and
"INTERESTS OF CERTAIN PERSONS IN THE MERGER."
Comparative Per Common Share Data
The following table sets forth certain unaudited
comparative per share data relating to book value per common
share, cash dividends declared per common share and income from
continuing operations per common share (i) on an historical basis
for Penns Woods and FNBSM, (ii) on a pro forma basis per share of
Penns Woods Common Stock to reflect completion of the Merger, and
(iii) on an equivalent pro forma basis per share of FNBSM Common
Stock to reflect completion of the Merger, assuming the Merger
was effective for the periods presented. The pro forma
information has been prepared giving effect to the Merger using
the pooling of interests accounting method. For a description of
the effect of pooling of interests accounting, see "THE MERGER --
Accounting Treatment." The following equivalent per share data
assume an Exchange Ratio of 3.50 shares of Penns Woods Common
Stock for each share of FNBSM Common Stock. See "THE MERGER --
Terms of the Merger." This information should be read in
conjunction with the consolidated financial statements of Penns
Woods and FNBSM, including the notes thereto, incorporated by
reference or appearing elsewhere in this Proxy Statement/
Prospectus, and the other financial data appearing elsewhere in
this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "AVAILABLE INFORMATION," "SELECTED
FINANCIAL DATA," "PRO FORMA COMBINED FINANCIAL STATEMENTS," and
"INDEX TO FNBSM FINANCIAL STATEMENTS."
PAGE 13
<PAGE>
<TABLE>
<CAPTION>
Book Value Per Common Share(1)(2): At June 30, 1998 At December 31, 1997
<S> <C> <C>
Historical:
Penns Woods $17.64 $16.75
FNBSM 60.48 58.89
Pro Forma:
Pro forma per share of
Penns Woods Common Stock 17.60 16.76
Equivalent pro forma
per share of FNBSM
Common Stock 61.60 58.66
<CAPTION>
For the Six Months Ended For the years ended December 31,
June 30, 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Cash Dividends Paid Per Common Share:
Historical(3):
Penns Woods $ .36 $ .85 $ .60 $ .50
FNBSM 1.15 2.25 2.05 1.85
Pro Forma:
Pro forma per share of Penns Woods
Common Stock .36 .85 .60 .50
Equivalent pro forma per share
of FNBSM Common Stock 1.26 2.98 2.10 1.75
<CAPTION>
Income from Continuing Operations Per
Common Share(2)(4):
For the Six Months Ended For the years ended December 31,
June 30, 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Basic Earnings per Share:
Historical:
Penns Woods $1.23 $ 3.03 $2.10 $1.52
FNBSM 3.15 5.15 5.51 4.93
Pro Forma:
Pro forma per share of Penns Woods
Common Stock 1.20 2.89 2.05 1.51
Equivalent pro forma per share of
FNBSM Common Stock 4.20 10.12 7.18 5.29
Diluted Earnings per Share:
Historical:
Penns Woods 1.23 3.01 2.09 1.52
FNBSM 3.15 5.15 5.51 4.93
Pro Forma:
Pro forma per share of Penns Woods
Common Stock 1.20 2.86 2.04 1.51
Equivalent pro forma per share of
FNBSM Common Stock 4.20 10.01 7.14 5.29
__________________
</TABLE>
(1) Pro forma book value per share of Penns Woods Common Stock
was calculated by dividing total pro forma combined
shareholders' equity amounts as of the applicable date by
the sum of (i) the total shares of Penns Woods Common Stock
<PAGE 14> outstanding as of the applicable date (2,569,558
shares at June 30, 1998 and 2,565,558 shares at December 31,
1997), and (ii) the total number of shares of FNBSM Common
Stock outstanding at such date (75,000 shares at June 30,
1998 and 75,000 shares at December 31, 1997) multiplied by
the Exchange Ratio of 3.5 shares of Penns Woods Common Stock
for each share of FNBSM Common Stock. Equivalent pro forma
book value per share of FNBSM Common Stock represents the
pro forma book value per share of Penns Woods Common Stock
multiplied by the Exchange Ratio of 3.5 shares of Penns
Woods Common Stock for each share of FNBSM Common Stock.
See "THE MERGER -- Terms of the Merger."
(2) The pro forma information does not reflect any anticipated
operating cost savings or one-time charges associated with
the Merger. See "THE MERGER -- Management and Operations
After the Merger."
(3) Penns Woods pro forma dividends per share represent
historical dividends paid by Penns Woods. FNBSM pro forma
equivalent dividends per share represent such amounts
multiplied by the Exchange Ratio of 3.5 shares of Penns
Woods Common Stock for each share of FNBSM Common Stock.
See "THE MERGER -- Terms of the Merger."
(4) Penns Woods pro forma income from continuing operations per
basic common share represents historical net income from
continuing operations for Penns Woods and FNBSM combined on
the assumption that Penns Woods and FNBSM had been combined
for the periods presented on a pooling of interests basis,
divided by the number of shares of Penns Woods Common Stock
which will be issued and outstanding following completion of
the Merger based on the Exchange Ratio of 3.5 shares of
Penns Woods Common Stock for each share of FNBSM Common
Stock. FNBSM equivalent pro forma income from continuing
operations per basic common share represents such amounts
multiplied by an Exchange Ratio of 3.5 shares of Penns Woods
Common Stock for each share of FNBSM Common Stock. Penns
Woods' pro forma income from continuing operations per
diluted common share and FNBSM's equivalent pro forma income
from continuing operations per diluted common share includes
the effects of presently exercisable Penns Woods stock
options (12,222 shares at June 30, 1998 and 22,499 shares at
December 31, 1997). See "THE MERGER -- Terms of the
Merger."
PAGE 15
<PAGE>
Market Value of Securities
The following table sets forth the market value per
share of Penns Woods Common Stock, the market value per share of
FNBSM Common Stock and the equivalent market value per share of
FNBSM Common Stock on July 22, 1998 (the last business day
preceding public announcement of the Merger) and November 5, 1998
(the latest practicable trading day before the printing of this
Proxy Statement/Prospectus). The equivalent market values per
share of FNBSM Common Stock indicated in the table are based on
the Exchange Ratio of 3.5 shares of Penns Woods Common Stock for
each share of FNBSM Common Stock.
Penns Woods FNBSM
Equivalent
Market Value
Historical Historical Per Share
July 22, 1998 $55.50 $87.00 $194.25
November 5, 1998 56.50 87.00* 197.75
_________________________
* To the knowledge of management of FNBSM, there have been no
transactions in FNBSM Common Stock since public announcement
of the Merger.
For information concerning cash dividends paid by Penns
Woods, see "INFORMATION WITH RESPECT TO PENNS WOODS -- Market
Price of and Dividends on Penns Woods Common Stock and Related
Shareholder Matters."
PAGE 16
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth (i) certain historical
consolidated summary financial data for Penns Woods and
(ii) certain historical summary financial data for FNBSM. Data
relating to Penns Woods are derived from, and should be read in
conjunction with, among other things, the consolidated financial
statements of Penns Woods, including the notes thereto,
incorporated by reference in this Proxy Statement/Prospectus, and
the pro forma combined financial information, including the notes
thereto, appearing elsewhere in this Proxy Statement/Prospectus.
Data relating to FNBSM are derived from, and should be read in
conjunction with, the consolidated financial statements of FNBSM,
including the notes thereto, and the pro forma combined financial
information, including the notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "AVAILABLE INFORMATION," "PRO FORMA
COMBINED FINANCIAL INFORMATION," "INFORMATION RELATING TO FNBSM,"
and "INDEX TO FNBSM FINANCIAL STATEMENTS."
PAGE 17
<PAGE>
<TABLE>
<CAPTION>
PENNS WOODS SELECTED FINANCIAL DATA*
For the Six Month
Period Ended June 30, Year Ended December 31,
1998 1997 1997 1996 1995 1994 1993
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Interest income . . . . . . .$ 10,957 10,145 $ 20,823 $ 19,997 $ 18,695 $ 16,882 $ 15,967
Interest expense. . . . . . . 4,452 4,151 8,317 8,079 7,793 6,902 6,546
Net interest income . . . . . 6,505 5,994 12,506 11,918 10,902 9,980 9,421
Provision for loan losses . . 150 120 220 105 300 577 791
Net interest income after
provision for loan losses . 6,355 5,874 12,286 11,813 10,602 9,403 8,630
Other income. . . . . . . . . 1,468 2,892 5,840 2,461 2,215 2,137 2,942
Other expense . . . . . . . . 3,633 3,525 7,384 6,967 7,534 6,997 6,097
Income before income taxes. . 4,190 5,241 10,742 7,307 5,283 4,543 5,475
Applicable income taxes . . . 1,028 1,402 2,991 1,965 1,421 1,174 1,497
Net income. . . . . . . . . . $ 3,162 3,839 $ 7,751 $ 5,342 $ 3,862 $ 3,369 $ 3,978
Consolidated Balance Sheet
at End of Period:
Total assets. . . . . . . . .$ 307,254 261,878 $ 283,988 $ 259,724 $ 242,629 $ 235,638 $ 223,672
Loans . . . . . . . . . . . . 194,883 168,259 187,657 162,627 153,640 151,492 134,571
Allowance for loan losses . . (2,436) (2,509) (2,414) (2,413) (2,353) (2,127) (1,956)
Deposits. . . . . . . . . . . 222,459 211,809 220,536 203,016 202,258 190,839 180,587
Long-term debt - other. . . . 20,000 0 0 0 0 7,000 5,825
Stockholders' equity. . . . . 45,322 37,313 42,974 33,557 29,685 23,839 21,894
Per Share Data:
Net income. . . . . . . . . .$ 1.23 1.50 $ 1.52 $ 1.05 $ .76 $ .67 $ .79
Cash dividends declared . . . .36 .275 .425 .30 .25 .1975 0.2225
Book value. . . . . . . . . . 17.64 14.59 16.75 13.14 11.67 9.42 8.70
Number of share outstanding,
at end of period. . . . . . 2,569,558 2,557,448 2,565,558 2,554,596 2,542,678 2,531,194 2,517,138
Average number of shares
outstanding . . . . . . . . 2,566,381 2,554,999 2,556,804 2,544,561 2,535,076 2,533,756 2,533,756
Selected financial ratios:
Return on average
stockholders' equity. . . . 14.65% 22.43% 20.07% 17.25% 14.07% 13.89% 19.12%
Return on average total
assets. . . . . . . . . . . 2.21% 2.95% 2.88% 2.12% 1.64% 1.45% 1.89%
Net interest income to
average interest earning
assets. . . . . . . . . . . 5.22% 5.21% 5.25% 5.08% 5.04% 4.71% 4.80%
Dividend payout ratio . . . . 29.27% 18.33% 28.05% 28.57% 32.79% 29.70% 28.34%
Average stockholders' equity
to average total assets . . 15.10% 13.17% 14.46% 12.31% 11.64% 10.42% 9.88%
Loans to deposits, at end
of period . . . . . . . . . 87.60% 79.43% 83.96% 78.74% 74.80% 78.27% 73.44%
________________
</TABLE>
* All per share data have been adjusted to reflect all stock
dividends and stock splits declared or effected through the
date of this Proxy Statement/Prospectus, including the Stock
Split.
PAGE 18
<PAGE>
<TABLE>
<CAPTION>
FNBSM SELECTED FINANCIAL DATA*
(Dollars in thousands, except per share data)
For the Six Month
Period Ended June 30, Year Ended December 31,
1998 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total interest income $ 1,247 $ 1,133 $ 2,323 $ 2,077 $ 1,853 $ 1,707 $ 1,705
Total interest expense 528 493 1,007 906 755 594 615
Net interest income 719 640 1,316 1,171 1,098 1,113 1,090
Provision for loan losses 5 11 54 32 - 1 6
Other income 48 43 81 150 49 31 55
Other expenses 464 386 835 759 685 655 611
Income before income tax provision 298 286 508 530 462 488 528
Income tax provision 62 71 122 117 92 96 120
Cumulative effect of change in
accounting for income taxes - - - - - - 25
Net income $ 236 $ 215 $ 386 $ 413 $ 370 $ 392 $ 433
Per Share Data:
Earnings per share - basic and
diluted $ 3.15 $ 2.87 $ 5.15 $ 5.51 $ 4.93 $ 5.23 $ 5.77
Cash dividends declared 1.20 1.10 2.25 2.05 1.85 1.75 1.65
Shareholders' equity 60.48 57.51 58.89 55.69 52.49 46.31 43.95
Balance Sheet:
Average Assets $30,660 $28,439 $29,098 $26,258 $22,879 $21,532 $20,276
Average Shareholders' Equity 4,535 4,273 4,346 4,067 3,801 3,521 3,181
Selected Financial Ratios:
Return on average assets 1.52% 1.49% 1.33% 1.57% 1.62% 1.82% 2.14%
Return on average shareholders'
equity 10.39% 10.06% 8.88% 10.15% 9.73% 11.13% 13.61%
Cash dividend payout ratio 38.10% 38.33% 43.78% 37.29% 37.57% 33.42% 30.25%
Average shareholders' equity to
average assets 14.35% 15.03% 14.94% 15.49% 16.61% 16.35% 15.69%
_______________
</TABLE>
* All per share data is based on 75,000 shares of common stock
outstanding.
PAGE 19
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following tables set forth selected unaudited pro
forma financial data reflecting the Merger (accounted for using
the pooling of interests method of accounting).
The pro forma information has been prepared based upon
the Exchange Ratio of 3.5 shares of Penns Woods Common Stock for
each share of FNBSM Common Stock outstanding. See "THE MERGER -
Terms of the Merger." The pro forma financial information does
not necessarily reflect what the actual results of Penns Woods
would be following completion of the transactions included in the
following pro forma financial information.
The following pro forma information does not give
effect to any potential cost savings or any merger-related
expenses which may be realized or incurred as a result of the
Merger. See "THE MERGER - Management and Operations After the
Merger."
Pro Forma Combined Condensed Consolidated Balance Sheet As of
June 30, 1998
The following unaudited pro forma combined condensed
consolidated balance sheet information combines the historical
consolidated balance sheets of Penns Woods and FNBSM as of
June 30, 1998. The Merger has been reflected as a pooling of
interests. This pro forma information should be read in
conjunction with the historical consolidated financial statements
of Penns Woods, including the notes thereto, incorporated by
reference in this Proxy Statement/Prospectus and the historical
financial statements of FNBSM, including the notes thereto,
appearing elsewhere in this Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "SELECTED
FINANCIAL DATA," and "INDEX TO FNBSM FINANCIAL STATEMENTS."
PAGE 20
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Balance Sheet
As of June 30, 1998
(Dollars In thousands)
Penns Woods
and
Pro Forma FNBSM
Penns Woods FNBSM Adjustments Combined
<S> <C> <C> <C> <C>
Cash and amounts due
from depository
institutions ...... $ 8,546 $ 1,298 $ $ 9,844
Investment
securities ........ 96,507 10,157 106,664
Loans ............... 194,883 19,552 214,435
Allowance for possible
loan losses ....... (2,436) (180) (2,616)
Other assets ........ 9,754 1,107 10,861
Total assets ...... $307,254 $31,934 $ $339,188
Deposits ............ $222,459 $24,286 $ $246,745
Borrowings .......... 33,564 2,778 36,342
Other liabilities ... 5,909 334 6,243
Total liabilities . 261,932 27,398 289,330
Common Stock......... 25,696 150 2,475(1) 28,321
Additional paid-in
capital............ 4,707 150 (2,475)(1) 2,382
Retained earnings.... 8,859 4,110 12,969
Net unrealized gain
on securities
available-for-sale. 6,060 126 6,186
Total shareholders'
equity ............ 45,322 4,536 49,858
Total liabilities and
shareholders'
equity ............ $307,254 $31,934 $ 0 $339,188
</TABLE>
____________________________
(1) Represents adjustment to common stock and additional paid-in
capital accounts to reflect the pro forma number of shares
to be issued and outstanding following completion of the
Merger multiplied by the par value of Penns Woods Common
Stock of $10.00 per share.
PAGE 21
<PAGE>
Pro Forma Unaudited Combined Condensed Statements of Income for
the Six Months Ended June 30, 1998 and the Years Ended
December 31, 1997, 1996 and 1995
The following unaudited pro forma combined condensed
consolidated statements of income reflect the historical
consolidated statements of income for Penns Woods and FNBSM, as
indicated below, for the six months ended June 30, 1998 and the
years ended December 31, 1997, 1996, and 1995 giving effect to
the Merger. The pro forma combined condensed statements of
income for the six months ended June 30, 1998 and the years ended
December 31, 1997, 1996, and 1995 were prepared on the assumption
that the Merger had been effected as of the beginning of the
applicable six-month or annual period, as the case may be. See
"THE MERGER -- Accounting Treatment." This pro forma information
should be read in conjunction with the historical consolidated
financial statements of Penns Woods and FNBSM, including the
notes thereto, incorporated by reference or appearing elsewhere
in this Proxy Statement/Prospectus. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," "AVAILABLE INFORMATION,"
"SELECTED FINANCIAL DATA," and "INDEX TO FNBSM FINANCIAL
STATEMENTS."
PAGE 22
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED COMBINED CONDENSED
INCOME STATEMENT FOR THE SIX MONTHS
ENDED June 30, 1998
(in thousands, except per share data)
Penns Woods
and
FNBSM
Penns Woods FNBSM Combined
<S> <C> <C> <C>
Interest income $10,957 $1,247 $12,204
Interest Expense 4,452 528 4,980
Net interest income 6,505 719 7,224
Provision for
possible loan
losses 150 5 155
Net interest
income after
provision for
possible loan
losses 6,355 714 7,069
Other non-
interest income 1,468 48 1,516
Non-interest
expense 3,633 464 4,097
Income before
taxes 4,190 298 4,488
Income taxes 1,028 62 1,090
Net income $ 3,162 $ 236 $ 3,398
Basic earnings
per share(1) $ 1.23 $ 3.15 $ 1.20
Diluted
earnings per $ 1.23 $ 3.15 $ 1.20
share(2)
__________________
</TABLE>
(1) Combined basic earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of shares of Penns Woods Common Stock
outstanding during the first six months of 1998 of 2,566,381
shares plus (ii) the weighted average number of shares of
FNBSM Common Stock outstanding during the first six months
of 1998 of 75,000 shares, multiplied by the Exchange Ratio.
(2) Combined diluted earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of diluted shares of Penns Woods Common Stock
outstanding during the first six months of 1998 of 2,578,603
shares plus (ii) the weighted average number of shares of
FNBSM Common Stock outstanding during the first six months
of 1998 of 75,000 shares, multiplied by the Exchange Ratio.
<PAGE 23>
(3) This pro forma unaudited combined condensed income statement
does not consider charges or credits which will result
directly from the transaction and which will be included in
the income of the combined entity within the twelve months
succeeding the transaction. It is anticipated that, as a
result of the acquisition, the combined entity will incur
approximately $450,000 in merger-related expenses for items
such as legal, investment advisory, accounting, severance
pay, and fixed asset write-offs.
PAGE 24
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED December 31, 1997
(In thousands, except per share data)
Penns Woods
and
FNBSM
Penns Woods FNBSM Combined
<S> <C> <C> <C>
Interest income ............ $20,823 $2,323 $23,146
Interest expense ........... 8,317 1,007 9,324
Net interest income ........ 12,506 1,316 13,822
Provision for possible
loan losses .............. 220 54 274
Net interest income after
provision for possible
loan losses .............. 12,286 1,262 13,548
Other non-interest income... 5,840 81 5,921
Non-interest expense ....... 7,384 835 8,219
Income before taxes ........ 10,742 508 11,250
Income taxes ............... 2,991 122 3,113
Net income ................. $ 7,751 $ 386 $ 8,137
Basic earnings per share(1) $ 3.03 $ 5.15 $ 2.89
Diluted earnings per share(2) $ 3.01 $ 5.15 $ 2.86
__________________________
</TABLE>
(1) Combined basic earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of shares of Penns Woods Common Stock
outstanding during 1997 of 2,556,804 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1997 of 75,000 shares, multiplied by the
Exchange Ratio.
(2) Combined diluted earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of diluted shares of Penns Woods Common Stock
outstanding during 1997 of 2,579,303 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1997 of 75,000 shares, multiplied by the
Exchange Ratio.
PAGE 25
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED December 31, 1996
(In thousands, except per share data)
Penns Woods
and
FNBSM
Penns Woods FNBSM Combined
<S> <C> <C> <C>
Interest income ............ $19,997 $2,077 $22,074
Interest expense ........... 8,079 906 8,985
Net interest income ........ 11,918 1,171 13,089
Provision for possible
loan losses .............. 105 32 137
Net interest income after
provision for possible
loan losses .............. 11,813 1,139 12,952
Other non-interest income... 2,461 150 2,611
Non-interest expense ....... 6,967 759 7,726
Income before taxes ........ 7,307 530 7,837
Income taxes ............... 1,965 117 2,082
Net income ................. $ 5,342 $ 413 $ 5,755
Basic earnings per share(1) $ 2.10 $ 5.51 $ 2.05
Diluted earnings per share(2) $ 2.09 $ 5.51 $ 2.04
__________________________
</TABLE>
(1) Combined basic earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of shares of Penns Woods Common Stock
outstanding during 1996 of 2,544,561 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1996 of 75,000 shares, multiplied by the
Exchange Ratio.
(2) Combined diluted earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of diluted shares of Penns Woods Common Stock
outstanding during 1996 of 2,559,502 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1996 of 75,000 shares, multiplied by the
Exchange Ratio.
PAGE 26
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED December 31, 1995
(In thousands, except per share data)
Penns Woods
and
FNBSM
Penns Woods FNBSM Combined
<S> <C> <C> <C>
Interest income ............ $18,695 $1,853 $20,548
Interest expense ........... 7,793 755 8,548
Net interest income ........ 10,902 1,098 12,000
Provision for possible
loan losses .............. 300 0 300
Net interest income after
provision for possible
loan losses .............. 10,602 1,098 11,700
Other non-interest income... 2,215 49 2,264
Non-interest expense ....... 7,534 685 8,219
Income before taxes ........ 5,283 462 5,745
Income taxes ............... 1,421 92 1,513
Net income ................. $ 3,862 $ 370 $ 4,232
Basic earnings per share(1). $ 1.52 $ 4.93 $ 1.51
Diluted earnings per share(2) $ 1.52 $ 4.93 $ 1.51
__________________________
</TABLE>
(1) Combined basic earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of shares of Penns Woods Common Stock
outstanding during 1995 of 2,535,076 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1995 of 75,000 shares, multiplied by the
Exchange Ratio.
(2) Combined diluted earnings per share are calculated based on
combined net income divided by the sum of (i) the weighted
average number of diluted shares of Penns Woods Common Stock
outstanding during 1995 of 2,545,857 shares plus (ii) the
weighted average number of shares of FNBSM Common Stock
outstanding during 1995 of 75,000 shares, multiplied by the
Exchange Ratio.
PAGE 27
<PAGE>
THE SPECIAL MEETING
Date, Time and Place
The Special Meeting will be held at the main office of
FNBSM located at Route 45 and Ross Hill Road, Spring Mills,
Pennsylvania, at 10:00 a.m. local time, on Friday, December 18,
1998.
Matters To Be Considered at the Special Meeting
At the Special Meeting, holders of FNBSM Common Stock
will be asked to consider and vote upon the approval and adoption
of the Merger Agreement and the approval of the Adjournment
Proposal. Shareholders may also consider such other matters as
may properly be brought before the Special Meeting.
The Board of Directors of FNBSM has unanimously
approved the Merger Agreement and recommends a vote FOR approval
and adoption of the Merger Agreement and FOR approval of the
Adjournment Proposal.
Votes Required
The approval and adoption of the Merger Agreement will
require the affirmative vote of two-thirds of the issued and
outstanding shares of FNBSM Common Stock as of the Record Date,
in person or by proxy, at the Special Meeting. The approval of
the Adjournment Proposal will require the affirmative vote of a
majority of the votes cast, in person or by proxy, by all FNBSM
shareholders entitled to vote thereon at the Special Meeting,
whether or not a quorum is present.
Each holder of shares of FNBSM Common Stock outstanding
on the Record Date will be entitled to one vote for each share
held of record on each matter to be considered at the Special
Meeting.
The directors and executive officers of FNBSM have
agreed to vote all shares of FNBSM Common Stock that they own on
the Record Date for approval and adoption of the Merger
Agreement. As of the Record Date, directors and executive
officers of FNBSM and their affiliates and those shareholders
under agreement beneficially owned and were entitled to vote
14,540 shares of FNBSM Common Stock, which represented
approximately 19.4% of the shares of FNBSM Common Stock
outstanding on the Record Date. Management of FNBSM is not aware
of any person or entity owning 5% or more of the outstanding
shares of FNBSM Common Stock as of the Record Date, except for
5,866 shares of FNBSM Common Stock (approximately 7.82% of
outstanding shares) held of record by William H. Rockey,
President of FNBSM.
<PAGE 28>
Voting of Proxies
Shares represented by all properly executed proxies
received in time for the Special Meeting will be voted at the
Special Meeting in the manner specified therein by the holders
thereof. Properly executed proxies that do not contain voting
instructions will be voted in favor of the Merger Agreement and
in favor of the Adjournment Proposal.
FNBSM intends to count shares of FNBSM Common Stock
present in person at the Special Meeting but not voting, and
shares of FNBSM Common Stock for which it had received proxies
but with respect to which holders of shares have abstained on any
matter, as present at the Special Meeting for purposes of
determining the presence or absence of a quorum for the
transaction of business.
Under the National Bank Act, the affirmative vote of
holders of at least two-thirds of the FNBSM Common Stock
outstanding as of the Record Date, in person or by proxy, at the
Special Meeting is required to approve the Merger Agreement. The
approval of the FNBSM Adjournment Proposal will require the
affirmative vote of a majority of the votes cast, in person or by
proxy, by all FNBSM shareholders entitled to vote thereon at the
FNBSM Special Meeting, whether or not a quorum is then present.
Abstentions and broker non-votes relating to shares of FNBSM
Common Stock will not constitute or be counted as votes "cast"
for purposes of the Special Meeting.
It is not expected that any matter other than those
referred to herein will be brought before the Special Meeting.
If, however, other matters are properly presented for a vote, the
persons named as proxies will vote in accordance with their
judgment with respect to such matters.
Revocability of Proxies
The grant of a proxy on the enclosed FNBSM form does
not preclude a FNBSM shareholder from voting in person. A FNBSM
shareholder may revoke a proxy at any time prior to its exercise
by filing with the Secretary of FNBSM a duly executed revocation
of proxy, by submitting a duly executed proxy bearing a later
date or by appearing at the Special Meeting and voting in person
at the Special Meeting. Attendance at the Special Meeting will
not, in and of itself, constitute revocation of a proxy. If you
are a shareholder whose shares are not registered in your name
(i.e., shares held in a brokerage account), you will need
additional documentation from your record holder in order to vote
in person at the Special Meeting.
<PAGE 29>
Record Date; Stock Entitled to Vote; Quorum
Only holders of record of FNBSM Common Stock on the
Record Date will be entitled to notice of, and to vote at, the
Special Meeting. On the Record Date, 75,000 shares of FNBSM
Common Stock were issued and outstanding and held by
approximately 155 holders of record.
Shareholders of FNBSM entitled to cast at least a
majority of the issued and outstanding shares of FNBSM Common
Stock on the FNBSM Record Date must be represented in person or
by proxy at the FNBSM Special Meeting in order for a quorum to be
present for purposes of voting on approval of the Merger
Agreement. A vote may be held on the Adjournment Proposal,
however, whether or not a quorum is then present at the Special
Meeting.
Solicitation of Proxies
FNBSM will bear the cost of the solicitation of proxies
from its shareholders. Penns Woods and FNBSM will share equally
the cost of printing this Proxy Statement/Prospectus. In
addition to solicitation by mail, the directors, officers and
employees of FNBSM and its subsidiaries may solicit proxies from
shareholders by telephone or telegram or in person. Arrangements
will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of stock held of record by such
persons, and FNBSM will reimburse such custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in
connection therewith.
FNBSM SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS. AS DESCRIBED BELOW UNDER THE CAPTION
"THE MERGER -- EXCHANGE OF FNBSM STOCK CERTIFICATES," EACH FNBSM
SHAREHOLDER WILL BE PROVIDED WITH MATERIALS FOR EXCHANGING SHARES
OF FNBSM COMMON STOCK AS PROMPTLY AS PRACTICABLE AFTER THE
EFFECTIVE DATE.
PAGE 30
<PAGE>
THE MERGER
Background of and Reasons for the Merger; Recommendations of the
Board of Directors
Background of the Merger
In late April, 1998, William H. Rockey, President and
Chief Executive Officer of FNBSM, received an unsolicited inquiry
from another banking institution regarding FNBSM's interest in a
possible business combination between them. Mr. Rockey reported
receipt of the inquiry to the FNBSM Board of Directors (the
"FNBSM Board") at its May 12, 1998 meeting. At the May 12, 1998
meeting, Berwind Financial Group ("Berwind"), the financial
advisor to FNBSM, reviewed with the FNBSM Board information
regarding the Pennsylvania banking market, merger and acquisition
activity in the banking industry and financial information
regarding the institution that had inquired as to a possible
business combination.
On May 20, 1998, FNBSM engaged Berwind to inquire as to
potential interest from other banking institutions as to a
possible business combination with FNBSM. At the June 10, 1998
FNBSM Board meeting, Berwind reviewed with the FNBSM Board the
reactions of the institutions contacted as to a possible business
combination with FNBSM. Berwind identified four institutions,
including the institution that made the initial inquiry, as being
the most likely parties to enter into a business combination with
FNBSM. The FNBSM Board then directed Berwind to request
proposals from those four institutions.
FNBSM entered into confidentiality agreements and began
to exchange information with each of the four institutions
identified by Berwind during the week of June 15, 1998.
Proposals were received from all four institutions and were
reviewed with the FNBSM Board at its July 8, 1998 meeting.
Based upon its review of the pricing terms and forms of
consideration proposed by each of the four interested
institutions, its assessment of the future prospects of each such
institution, and the anticipated impact on FNBSM's customers,
employees and the communities it serves as a result of a business
combination with each of the interested institutions, the FNBSM
Board authorized and directed Mr. Rockey and FNBSM's financial
advisor and legal counsel to pursue negotiations with Penns Woods
towards a merger of FNBSM with JSSB.
Following the July 8, 1998 Board Meeting, negotiations
and due diligence investigations occurred between FNBSM and Penns
Woods that resulted in the Merger Agreement, attached hereto as
Annex A, providing for the merger of FNBSM into JSSB and for
FNBSM shareholders to receive 3.5 shares of Penns Woods Common
Stock for each share of FNBSM Common Stock held.
<PAGE 31>
On July 22, 1998, the FNBSM Board met and unanimously
approved the Merger Agreement. At the meeting, Berwind presented
its written opinion as to the fairness of the consideration to be
provided to FNBSM shareholders in connection with a merger of
FNBSM into JSSB.
Reasons for the Merger
Penns Woods' Reasons for the Merger
In determining the terms of its offer for FNBSM and
whether to enter into the Merger Agreement, Penns Woods' Board of
Directors considered a number of factors, including the
following: (i) the financial condition, operating results and
future prospects of Penns Woods and FNBSM, (ii) a comparison of
the price being paid in this Merger to other comparable financial
institution mergers, based, among other things, on multiples of
book value and earnings, and (iii) the historical trading prices
for FNBSM Common Stock and Penns Woods Common Stock, (iv) the
willingness of the two senior executives of FNBSM to continue
their relationship with Penns Woods and JSSB following completion
of the Merger, and (v) the fact that Penns Woods receives a
letter from its independent auditors that the transaction will be
accounted for as a pooling of interests is a condition to
completing the Merger.
In the view of Penns Woods' Board of Directors, the
Merger is a strategic acquisition for Penns Woods that provides a
natural extension of its existing Pennsylvania community bank
franchise by establishing a strong presence in Centre County,
Pennsylvania.
In approving the transaction, the Penns Woods Board did
not specifically identify any one factor or group of factors as
being more significant than any other factor in the decision
making process, although individual directors may have given one
or more factors more weight than other factors.
FNBSM's Reasons for the Merger
At its meeting on July 22, 1998, the Board of Directors
of FNBSM unanimously determined that the terms of the Merger
Agreement were in the best interests of FNBSM and the
shareholders of FNBSM, and unanimously approved the Merger
Agreement. In making its determination, the Board concluded,
among other things, that the Merger Agreement was superior to the
other alternatives available to FNBSM shareholders and to the
prospects of continuing to operate FNBSM as an independent
entity.
In the course of reaching its decision to approve the
Merger Agreement, the FNBSM Board of Directors consulted with its
legal and financial advisors, as well as FNBSM's management, and
considered, among other things, the factors described above and
the following: <PAGE 32>
(i) the opinion of FNBSM's financial advisors
that the consideration to be received by FNBSM shareholders was
fair from a financial point of view;
(ii) the Board's familiarity with and review of
FNBSM's business, prospects and financial condition, including
its capital position and future prospects were it to remain
independent;
(iii) the increasing level of competition in the
markets served by FNBSM from institutions with substantially
greater resources than FNBSM;
(iv) a determination by FNBSM's management that a
business combination with Penns Woods would expand FNBSM's
lending capabilities and significantly increase the range of
financial products and services available to FNBSM's customers;
(v) the historical prices at which shares of
FNBSM Common Stock have traded, and the historical, current and
projected price to earnings and price to book value multiples at
which shares of FNBSM Common Stock have traded and may trade in
the future;
(vi) the prices, multiples of earnings per share
and premiums over book value and market value paid in recent
acquisitions of banks;
(vii) the earnings and financial condition of
Penns Woods;
(viii) the historical market prices for shares of
Penns Woods Common Stock, and historical price to earnings and
price to book value trading multiples for such shares;
(ix) the relatively greater liquidity of Penns
Woods Common Stock, which is publicly-traded, compared to the
relatively illiquid market for FNBSM Common Stock;
(x) Penns Woods' agreement that the directors of
FNBSM in office immediately prior to the Merger would become
members of an advisory board of Penns Woods and, in addition,
William H. Rockey would be elected to the Board of Directors of
Penns Woods; and
(xi) Penns Woods' agreement that William H.
Rockey, President and Chief Executive Officer of FNBSM, and
Rickey B. Brooks, Vice President and Cashier of FNBSM, would be
appointed Senior Vice President and Vice President, respectively,
of Penns Woods and JSSB.
<PAGE 33>
Recommendation of the FNBSM Board of Directors
The Board of Directors of FNBSM believes that the terms
of the Merger are in the best interests of FNBSM and its
shareholders and has unanimously approved the Merger Agreement.
The Board of Directors of FNBSM unanimously recommends that the
shareholders of FNBSM approve the Merger Agreement.
Terms of the Merger
Upon completion of the Merger, the separate legal
existence of FNBSM will cease. All property, rights, powers,
duties, obligations, debts and liabilities of FNBSM will
automatically be taken and deemed to be transferred to and vested
in JSSB, in accordance with the requirements of the Pennsylvania
Banking Code of 1965, as amended, and the NBA. JSSB, as the
surviving corporation, will be governed by the Articles of
Incorporation and Bylaws of JSSB in effect immediately prior to
completion of the Merger.
Upon completion of the Merger, each outstanding share
of FNBSM Common Stock (other than Dissenting Shares and Excluded
Shares) will be automatically converted into, and become a right
to receive 3.5 shares of Penns Woods Common Stock (the "Exchange
Ratio").
The Exchange Ratio will be adjusted to prevent dilution
in the event of stock splits, reclassifications or other similar
events.
Shareholders of FNBSM will receive cash in lieu of
fractional shares of Penns Woods Common Stock. See " -- Exchange
of FNBSM Stock Certificates" herein.
The Penns Woods Common Stock and cash to be received by
the holders of FNBSM Common Stock in exchange for each share
(other than the Dissenting Shares and Excluded Shares) of FNBSM
Common Stock (including shares subject to options) are referred
to herein as the "Merger Consideration."
Opinion of FNBSM's Financial Advisor
FNBSM retained Berwind Financial Group, Inc.
("Berwind") to act as its financial advisor and to render a
fairness opinion in connection with the Merger. Berwind rendered
its opinion to the Board of Directors of FNBSM that, based upon
and subject to the various considerations set forth therein, as
of, July 22, 1998 (the "July Opinion"), and as of November 11,
1998 (the "Proxy Opinion"), the consideration to be received in
the Merger is fair, from a financial point of view, to the
holders of FNBSM Common Stock.
The full text of Berwind's Proxy Opinion, which sets
forth the assumptions made, matters considered and limitations of
the review undertaken, is attached as Exhibit B to this Proxy
<PAGE 34> Statement/Prospectus, is incorporated herein by
reference, and should be read in its entirety in connection with
this Proxy Statement/Prospectus. 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 Exhibit B
to this Proxy Statement/Prospectus.
Berwind was selected to act as FNBSM's financial
advisor in connection with the Merger based upon its
qualifications, expertise and experience. Berwind has knowledge
of, and experience with, Pennsylvania and surrounding banking
markets as well as banking organizations operating in those
markets and was selected by FNBSM because of its knowledge of,
experience with, and reputation in the financial services
industry. Berwind, as part of its investment banking business,
is engaged regularly in the valuations of assets, securities and
companies in connection with various types of asset and
securities transactions, including mergers, acquisitions, private
placements, and valuations for various other purposes and in the
determination of adequate consideration in such transactions.
On July 22, 1998, FNBSM's Board of Directors approved
and executed the Merger Agreement. Prior to such approval,
Berwind delivered its July Opinion to FNBSM's Board stating that,
as of such date, the consideration to be received in the Merger
was fair to the shareholders of FNBSM from a financial point of
view. Berwind reached the same opinion as of the date of its
Proxy Opinion. The full text of the Proxy Opinion which sets
forth assumptions made, matters considered and limits on the
review undertaken is attached as Exhibit B to this Proxy
Statement/Prospectus. No limitations were imposed by FNBSM's
Board of Directors upon Berwind with respect to the
investigations made or procedures followed by Berwind in
rendering the July Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed
the historical financial and general prospects of FNBSM and Penns
Woods; (ii) reviewed the Merger Agreement; (iii) reviewed and
analyzed the stock market performance of Penns Woods;
(iv) studied and analyzed the consolidated financial and
operating data of FNBSM and Penns Woods; (v) considered the terms
and conditions of the proposed Merger 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 FNBSM's and Penns Woods' senior management to
discuss their respective operations) historical financial
statements, and future prospects; (vii) reviewed this Proxy
Statement/Prospectus, and (viii) conducted such other financial
analyses, studies and investigations as Berwind deemed
appropriate.
In delivering its July 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 Penns Woods or FNBSM that would
<PAGE 35> have a material adverse effect on the contemplated
benefits of the Merger. Berwind also assumed that there will not
occur any change in applicable law or regulation that would cause
a material adverse change in the prospects or operations of Penns
Woods after the Merger.
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
opinions. With respect to FNBSM's financial forecasts reviewed
by Berwind in rendering its opinions, Berwind assumed that such
financial forecasts were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the
management of FNBSM as to the future financial performance of
FNBSM. Berwind did not make an independent evaluation or
appraisal of the assets (including loans) or liabilities of FNBSM
or Penns Woods 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 FNBSM and Penns Woods 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 FNBSM's Board in connection
with the July Opinion and analyzed by Berwind in connection with
the July and Proxy Opinions. 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 July Opinion. Such reviews and updates led
Berwind to conclude that it was not necessary to change the
conclusions it had reached in connection with rendering the July
Opinion.
Comparable Companies and Comparable Acquisition
Transaction Analyses. Berwind compared selected financial and
operating data for FNBSM with those of a peer group of selected
banks and bank holding companies with assets between $15 million
and $45 million, as of the most recent financial period publicly
available, headquartered in Pennsylvania. Financial data and
operating ratios compared in the analysis of the FNBSM peer group
included but were not limited to: return on average assets,
return on average shareholders' equity, shareholders' equity to
assets ratio and certain asset quality ratios.
Berwind also compared selected financial, operating and
stock market data for Penns Woods with those of a peer group of
selected bank holding companies with assets between $250 million
and $350 million, as of the most recent period publicly
available, headquartered in Pennsylvania. Financial, operating
and stock market data, ratios and multiples compared in the
analysis of the Penns Woods peer group included but were not
limited to: return on average assets, return on average
shareholders' equity, shareholders' equity to asset ratios,
certain asset quality ratios, price to book value, price to
<PAGE 36> tangible book value, price to earnings (latest twelve
months) and dividend yield.
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 comparable.
The transactions deemed comparable by Berwind included both
interstate and intrastate acquisitions announced during the six
month period ended as of the date of its Proxy Opinion, in which
the selling institution's assets were less than $60 million as of
the most recent period publicly available prior to announcement.
Berwind analyzed this data in two groups: a national group and a
performance group. No company or transaction, however, used in
this analysis is identical to FNBSM, Penns Woods 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 FNBSM's
Common Stock after a five year period by applying a range of
earnings multiples to FNBSM's terminal year earnings under
various growth assumptions. The range of multiples used
reflected a variety of scenarios regarding the growth and
profitability prospects of FNBSM. The 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 FNBSM's Common Stock.
Pro Forma Contribution Analysis. Berwind analyzed the
changes in the amount of earnings, book value and dividends
represented by one share of FNBSM stock prior to the Merger and
the number of shares of Penns Woods stock after the Merger
resulting from the Exchange Ratio. The analysis considered,
among other things, the changes that the Merger would cause to
FNBSM's earnings per share, book value per share and indicated
dividends. In reviewing the pro forma combined earnings, equity
and assets of Penns Woods based on the Merger with FNBSM, Berwind
analyzed the contribution that FNBSM would have made to the
combined company's earnings, equity and assets as of and for the
most recent quarterly period ended as of the date of the Proxy
Opinion. Berwind also reviewed the percentage ownership that
FNBSM shareholders would hold in the combined company.
In connection with rendering its July 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
<PAGE 37> 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 opinions. 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 FNBSM's and Penns Woods
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 or lesser
weighting by Berwind than any other analysis. As a result of its
consideration of the aggregate of all factors present and
analyses performed, Berwind reached the conclusion, and opined,
that the consideration to be received in the Merger as set forth
in the Agreement, is fair from a financial point of view to FNBSM
and its shareholders.
Berwind's Proxy 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.
Pursuant to the terms of the engagement letter dated
May 18, 1998, FNBSM has agreed to pay Berwind $250,000 upon the
consummation of the Merger for acting as financial advisor in
connection with the Merger including delivering its July Opinion
and its Proxy Opinion. Whether or not the Merger is consummated,
FNBSM 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 the date of this Proxy Statement/Prospectus, which sets forth
assumptions made and matters considered, is attached hereto as
Exhibit B. FNBSM's shareholders are urged to read the Proxy
Opinion in its entirety. Berwind's Proxy Opinion is directed
only to the financial consideration to be received by FNBSM's
shareholders in the Merger and does not constitute a
recommendation to any holder of FNBSM's Common Stock as to how
such holder should vote at the FNBSM Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY
OPINION OF BERWIND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THAT OPINION, WHICH IS SET FORTH IN EXHIBIT B
TO THIS PROXY STATEMENT/PROSPECTUS.
<PAGE 38>
Effective Date of the Merger
Under the Merger Agreement, the Effective Date, which
under the Merger Agreement is the same date as the Closing Date,
will be the date specified by Penns Woods and FNBSM within five
business days after (i) all required regulatory approvals for the
Merger have been obtained and (ii) all actions required to be
taken by FNBSM and Penns Woods to authorize the Merger shall have
been duly and validly taken, or such other date as Penns Woods
and FNBSM may agree. The parties presently expect that the
Effective Date will occur on or about January 11, 1999. See
" -- Conditions to the Merger" herein.
On or prior to the Effective Date, Articles of Merger
between JSSB and FNBSM will be filed with the Pennsylvania
Department of Banking (which, upon receipt of approval of any
applicable federal agency, shall forward such Articles of Merger
to the Pennsylvania Department of State) and such document will
set forth the Effective Date. The Merger Agreement may be
terminated by either party if, among other reasons the Closing
Date shall not have occurred by May 30, 1999 and the terminating
party is not in breach of or has not failed to perform or observe
any agreements to be performed or observed by it. See
" -- Termination; Effect of Termination."
Exchange of FNBSM Stock Certificates
The conversion of FNBSM Common Stock into Penns Woods
Common Stock will occur automatically at the Effective Date. As
soon as practicable after the Effective Date, Penns Woods, or a
bank or trust company designated by Penns Woods, in the capacity
of exchange agent (the "Exchange Agent"), will send a transmittal
form to each FNBSM shareholder of record. The transmittal form
will contain instructions with respect to the surrender of
certificates representing shares of FNBSM Common Stock to be
exchanged for shares of Penns Woods Common Stock. Under the
Merger Agreement, certificates representing shares of Penns Woods
Common Stock and checks for cash in lieu of fractional shares
must be mailed to former shareholders of FNBSM as soon as
reasonably possible but in no event later than 20 business days
following the receipt of certificates representing former shares
of FNBSM Common Stock duly endorsed.
FNBSM SHAREHOLDERS SHOULD NOT FORWARD FNBSM STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS. FNBSM SHAREHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Until the certificates representing shares of FNBSM
Common Stock are surrendered for exchange after completion of the
Merger, holders of such certificates will not receive, and will
not be paid dividends on, the Penns Woods Common Stock into which
such shares have been converted. When such certificates are
surrendered, any unpaid dividends will be paid without interest.
For all other purposes, however, each certificate which
<PAGE 39> represents shares of FNBSM Common Stock outstanding at
the Effective Date (other than Dissenting Shares and Excluded
Shares) will be deemed to evidence ownership of and the right to
receive the shares of Penns Woods Common Stock (and cash in lieu
of fractional shares) into which those shares have been converted
by virtue of the Merger. Neither Penns Woods nor FNBSM will be
liable to any holder of shares of FNBSM Common Stock for any
amount paid in good faith to a public official pursuant to any
applicable abandoned property, escheat or similar law.
All shares of Penns Woods Common Stock issued upon
conversion of shares of FNBSM Common Stock shall be deemed to
have been issued in full satisfaction of all rights pertaining to
such shares of FNBSM Common Stock, subject, however, to Penns
Woods' obligation to pay any dividends or make any other
distributions with a record date on or prior to the Effective
Date, which may have been declared or made by FNBSM on such
shares of FNBSM Common Stock in accordance with the Merger
Agreement and which remain unpaid at the Effective Date.
No fractional shares of Penns Woods Common Stock will
be issued to any shareholder of FNBSM upon completion of the
Merger. For each fractional share that would otherwise be
issued, Penns Woods will pay by check an amount equal to the
product obtained by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Penns Woods
Market Price (defined as the average of the closing sales prices
(or, if unavailable for any day, the mean between the high bid
and low asked prices for such day) of a share of Penns Woods
Common Stock, as reported by the OTC Bulletin Board or, if not so
reported, by an independent source in the over-the-counter
market, for each of the twenty consecutive trading days preceding
the Closing Date).
Conditions to the Merger
The obligations of Penns Woods and FNBSM to effect the
Merger are subject to various conditions, which include, among
other customary provisions for transactions of this type, the
following:
(a) the receipt of all necessary governmental
approvals for the Merger, and the expiration of all waiting
periods required by law or imposed by any governmental authority
with respect to the Merger (see " -- Regulatory Approvals"
herein);
(b) the accuracy, as of the Effective Date, of
all representations and warranties made by Penns Woods and FNBSM
in the Merger Agreement, except where the representation or
warranty specifically relates to an earlier date or where the
breach of the representation or warranty would not, either
individually or in the aggregate, constitute a Material Adverse
Effect with respect to Penns Woods or FNBSM, as the case may be
(see " -- Representations and Warranties" herein); <PAGE 40>
(c) the performance of and compliance by each of
Penns Woods and FNBSM with all obligations and covenants required
of FNBSM and Penns Woods in the Merger Agreement in all respects
(see " -- Business Pending the Merger" herein);
(d) the absence of any order, decree, or
injunction in effect preventing the completion of the
transactions contemplated by the Merger Agreement;
(e) the delivery to each of Penns Woods and FNBSM
of an opinion of counsel that, among other things, the Merger
will be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") (see
" -- Certain Federal Income Tax Consequences");
(f) the absence of any adverse effect on the
assets, financial condition or operations of either Penns Woods
or FNBSM since December 31, 1997 which is material to its assets,
financial condition or results of operations on a consolidated
basis, except for any material adverse effect caused by (i) any
change in the value of the respective investment portfolios of
Penns Woods or FNBSM resulting from a change in interest rates
generally or (ii) any change occurring after the date of the
Merger Agreement in any federal or state law, rule or regulation
or in GAAP, which change affects banking institutions generally,
including any change affecting the Bank Insurance Fund (the
"BIF") or the Savings Association Insurance Fund (the "SAIF") of
the Federal Deposit Insurance Corporation;
(g) approval by the holders of FNBSM Common Stock
of the Merger Agreement by such vote as is required under FNBSM's
Articles of Association and Bylaws and by applicable law; and
(h) the failure by FNBSM shareholders owning 9%
or more of the issued and outstanding shares of FNBSM Common
Stock to assert and duly perfect dissenters' rights with respect
to FNBSM Common Stock pursuant to the NBA.
In addition, Penns Woods' obligation to effect the
Merger is subject to, among others, the additional condition that
Penns Woods shall have received an opinion from its independent
auditors that the Merger will be treated as a "pooling of
interests" for financial accounting purposes (see " -- Accounting
Treatment" herein).
Except for the requirements of shareholder approval,
regulatory approvals and the absence of any order, decree, or
injunction preventing the transactions contemplated by the Merger
Agreement, each of the conditions described above may be waived
in the manner and to the extent described in " -- Amendment;
Waivers" herein. Penns Woods does not, however, anticipate
waiving the condition that it receive an opinion from its
independent auditors that the Merger will be treated as a pooling
of interests for financial accounting purposes. As of the date
<PAGE 41> of this Proxy Statement/Prospectus, Penns Woods has no
reason to believe that it will not receive such an opinion from
its independent auditors.
Regulatory Approvals
The Merger is subject to the prior approval of the
Federal Deposit Insurance Corporation ("FDIC") and the Department
of Banking of the Commonwealth of Pennsylvania ("PDB"). An
application for approval of the Merger was filed with the FDIC
and the PDB on September 16, 1998. Under applicable FDIC
regulations, the FDIC will review the financial, managerial,
competitive, legal, disclosure, accounting and tax aspects of the
transaction, as well as the insurance risk to the BIF and the
SAIF and the convenience and needs of the community to be served.
In addition, the FDIC may not approve any proposed acquisition
(i) which would result in a monopoly or which would be in
furtherance of any combination or conspiracy to monopolize or to
attempt to monopolize the banking business in any part of the
United States or (ii) which in any section of the country may
have the effect of substantially lessening competition or tending
to create a monopoly or which in any other manner would be in
restraint of trade, unless the FDIC finds that the
anticompetitive effects of the proposed acquisition are clearly
outweighed in the public interest by the probable effect of the
proposed acquisition in meeting the convenience and needs of the
community to be served. The staff of the FDIC is in the process
of reviewing the application.
In addition, the FDIC has the responsibility by statute
and regulation to review the performance of all involved
institutions in meeting their responsibilities under the
Community Reinvestment Act ("CRA"), which includes the record of
performance of the existing institutions in meeting the credit
needs of the entire community including low- and moderate-income
neighborhoods. FNBSM and JSSB received ratings of "satisfactory"
and "outstanding," respectively, in their last CRA examinations.
No protest of the Merger has been filed with the FDIC under the
CRA as of the date of this Proxy Statement/Prospectus.
There can be no assurance that the regulatory
authorities described above will approve the Merger, and, if
approved, there can be no assurance as to the date of such
approvals. The Merger may not be consummated until 30 days (15
days if the Attorney General does not object) after the date of
the FDIC approval, during which time the Department of Justice
has the opportunity to challenge the Merger on antitrust grounds.
The commencement of an antitrust action by the Department of
Justice would stay the effectiveness of FDIC approval unless a
court specifically orders otherwise. In reviewing the Merger,
the Department of Justice could analyze the Merger's effect on
competition differently than the FDIC, and thus it is possible
that the Department of Justice could reach a different conclusion
than the FDIC regarding the Merger's competitive effects.
<PAGE 42> Failure of the Department of Justice to object to the
Merger does not prevent the filing of antitrust actions by
private persons.
Representations and Warranties
The Merger Agreement contains customary representations
and warranties relating to, among other things, (a) the corporate
organization of Penns Woods, JSSB, and FNBSM; (b) the capital
structures of Penns Woods, JSSB, and FNBSM; (c) the due
authorization, execution, delivery, performance and
enforceability of the Merger Agreement and the Plan of Merger;
(d) consents or approvals of regulatory authorities or third
parties necessary to complete the Merger; (e) the consistency of
financial statements with generally accepted accounting
principles and, where appropriate, applicable regulatory
accounting principles; (f) the absence of material adverse
changes, since December 31, 1997, in the consolidated assets,
business, financial condition or results of operations of Penns
Woods or FNBSM; (g) the filing of tax returns and payment of
taxes; (h) the absence of undisclosed material pending or
threatened litigation; (i) compliance with applicable laws and
regulations; (j) the validity and binding nature of loans
reflected as assets in the financial statements of Penns Woods
and FNBSM; (k) the quality of title to assets and properties;
(l) the maintenance of adequate insurance; (m) the absence of
undisclosed brokers' or finders' fees; (n) the absence of
material environmental violations, actions or liabilities;
(o) the consistency of the allowance for loan losses with
generally accepted accounting principles and all applicable
regulatory criteria; (p) the accuracy of information supplied by
Penns Woods and FNBSM in connection with the Registration
Statement, this Proxy Statement/Prospectus and all applications
filed with regulatory authorities for approval of the Merger; and
(q) the engagement of no brokers, finders or financial advisors
for a fee except for Berwind Financial, L.P. by FNBSM.
The Merger Agreement also contains other
representations and warranties by FNBSM relating to, among other
things, (a) certain contracts relating to employment, consulting
and benefits matters; (b) retirement and other employee plans and
matters relating to the Employee Retirement Income Security Act
of 1974; and (c) transactions with affiliates.
Business Pending the Merger
Pursuant to the Merger Agreement, FNBSM has agreed to
use its best efforts to preserve its business organizations
intact, to maintain good relationships with employees, and to
preserve the goodwill of customers and others with whom business
relationships exist. FNBSM has also agreed to conduct its
business and to engage in transactions only in the ordinary
course of business, consistent with past practice, except as
otherwise required by the Merger Agreement or with the written
consent of Penns Woods. <PAGE 43>
In addition, FNBSM has agreed in the Merger Agreement
that it may not, without the written consent of Penns Woods,
among other things, (i) change its articles of association or
bylaws; (ii) change the number of authorized or issued shares of
its capital stock; (iii) grant options or similar rights with
respect to its capital stock or any securities convertible into
its capital stock; (iv) split, combine or reclassify any shares
of its capital stock; (v) declare, set aside or pay any dividend
or other distribution in respect of its capital stock, except as
otherwise specifically set forth in the Merger Agreement (see
"Dividends" herein); (vi) grant any severance pay, except in
accordance with written policies or written agreements in effect
on the date of the Merger Agreement (see " -- Employee Benefits
and Severance" herein), or enter into or amend any employment
agreement; (vii) grant any pay increase except for routine
periodic increases in accordance with past practice and within
limits set forth in the Merger Agreement; (viii) hire or agree to
hire any additional employees except to the extent necessary to
replace any present employee whose employment terminates;
(ix) engage in any merger, acquisition or similar transaction;
(x) sell or lease substantially all of its assets; (xi) sell or
otherwise dispose of any assets other than in the ordinary course
of business; (xii) change any accounting practices, except as may
be required by generally accepted accounting principles (without
regard to any optional early adoption date); (xiii) implement any
new employee benefit or welfare plan, or amend any such plan,
unless such amendment does not result in an increase in cost
except as expressly permitted by the Merger Agreement;
(xiv) purchase any security for its investment portfolio not
rated "A" or higher by either Standard & Poor's Corporation or
Moody's Investor Services, Inc. except in the ordinary course of
business consistent with past practice; (xv) make, enter into,
renew, extend, modify or compromise any transaction (including
loans and commitments to lend) with any affiliate of FNBSM
[except as disclosed to Penns Woods in the Merger Agreement];
(xvi) enter into any interest rate swap or similar arrangement;
(xvii) take any action which would give rise to a right of
payment to any individual under any employment agreement;
(xviii) intentionally and knowingly take any action that would
preclude the treatment of the Merger as a pooling of interests
for financial accounting purposes; (xix) make any loan or other
credit facility commitment to any borrower in excess of $425,000,
or compromise, extend, renew or modify any such loan or
commitment outstanding in excess of $425,000 as disclosed to
Penns Woods in the Merger Agreement; (xx) waive, release, grant
or transfer any rights of value, or modify or change in any
material respect any existing material agreement to which FNBSM
is a party, other than in the ordinary course of business,
consistent with past practice; (xxi) take any action which would
cause any of the representations and warranties of FNBSM set
forth in the Merger Agreement to be untrue or the conditions set
forth in the Merger Agreement to be unsatisfied; or (xxii) agree
to do any of the foregoing.
<PAGE 44>
FNBSM has also agreed in the Merger Agreement, among
other things, (i) to permit Penns Woods, if Penns Woods elects to
do so at its own expense, to cause a "phase I environmental
audit" to be performed at any physical site owned or occupied by
FNBSM; (ii) to permit a representative of Penns Woods to attend
meetings of the Board of Directors of FNBSM and committee
meetings of the Board of FNBSM; (iii) to submit the Merger
Agreement to its shareholders for approval at a meeting to be
held as soon as practicable, and use its best efforts to cause
its Board of Directors to unanimously recommend approval of the
Merger Agreement to FNBSM's shareholders; and (iv) to provide to
Penns Woods copies of the minutes of all meetings of the Board of
Directors of FNBSM, and of any of their respective committees or
of any senior management committee.
Penns Woods and FNBSM have jointly agreed, among other
things, (i) to prepare all applications for, and use their best
efforts to obtain, all required regulatory consents; (ii) to take
all actions necessary to complete the transactions contemplated
by the Merger Agreement; (iii) to maintain adequate insurance;
(iv) to maintain accurate books and records; (v) to file all tax
returns and pay all taxes when due; (vi) if the other party so
requests, to cause its independent certified public accountants
to perform a review of its unaudited consolidated financial
statements as of the end of any calendar quarter, in accordance
with Statement of Auditing Standards No. 71 and to issue their
report on such financial statements; (vii) to agree upon the form
and substance of any press release or public disclosure related
to the Merger Agreement and the Merger; and (viii), in the case
of Penns Woods, to deliver to FNBSM copies of all securities
documents when filed.
Dividends
The Merger Agreement permits FNBSM to pay its regular
semi-annual cash dividend not to exceed $1.25 per share of FNBSM
Common Stock outstanding on or before December 31, 1998. Penns
Woods and FNBSM agreed in the Merger Agreement to consult with
and coordinate with the other the payment of dividends with
respect to Penns Woods Common Stock and FNBSM Common stock and
the record dates and payment dates relating thereto so that
shareholders of FNBSM will not receive two dividends either from
FNBSM or Penns Woods in any quarter or fail to receive one
dividend in any quarter. No other dividends may be paid by FNBSM
without the prior written consent of Penns Woods.
No Solicitation of Transactions
While the Merger Agreement remains in effect, FNBSM has
agreed not to authorize or permit any of its directors, officers,
employees or agents, to directly or indirectly (i) respond to,
solicit, initiate or encourage any inquiries relating to, or to
make any proposal which relates to, an Acquisition Transaction
(as defined below), (ii) recommend or endorse an Acquisition
Transaction, (iii) participate in any discussions or negotiations
<PAGE 45> regarding an Acquisition Transaction, (iv) provide any
third party (other than Penns Woods or an affiliate of Penns
Woods) with any nonpublic information in connection with any
inquiry or proposal relating to an Acquisition Transaction, or
(v) enter into an agreement with any other party with respect to
an Acquisition Transaction. Notwithstanding the foregoing,
pursuant to the Merger Agreement the Board of Directors of FNBSM
may respond to unsolicited inquiries relating to an Acquisition
Transaction or the Board of Directors of FNBSM may recommend or
endorse an Acquisition Transaction, in each case, if it receives
an unqualified written opinion of outside counsel that the
failure to do so would constitute a breach of their fiduciary
duty. In the event of any response by FNBSM to a proposal for an
Acquisition Transaction, Penns Woods has the right, but not the
obligation, to terminate the Merger Agreement at any time
thereafter without penalty or liability. For purposes of these
provisions, the term "Acquisition Transaction" means any of the
following transactions: (i) a merger or consolidation, or any
similar transaction, involving FNBSM, (ii) a purchase, lease or
other acquisition of all or a substantial portion of the assets
or liabilities of FNBSM, or (iii) a purchase or other acquisition
(including by way of share exchange, tender offer, exchange offer
or otherwise) of 20% or more of the outstanding shares of FNBSM
Common Stock. FNBSM is required to notify Penns Woods
immediately if (i) any such discussions or negotiations are
sought to be initiated with it by any other person or (ii) if any
such requests for information, inquiries, proposals or
communications are received from any other person, except
analysts, regulatory authorities and holders of FNBSM Common
Stock in the ordinary course of business.
Amendment; Waivers
Subject to applicable law, at any time prior to the
consummation of the transactions contemplated by the Merger
Agreement, Penns Woods and FNBSM may (a) amend the Merger
Agreement, (b) extend the time for the performance of any of the
obligations or other acts of Penns Woods and FNBSM required in
the Merger Agreement, (c) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement,
or (d) waive compliance with any of the agreements or conditions
contained in the Merger Agreement.
Termination; Effect of Termination
The Merger Agreement may be terminated on or at any
time prior to the Effective Date, which Penns Woods and FNBSM
presently anticipate to occur on or about January 11, 1999,
(a) by the mutual written consent of Penns Woods and FNBSM; or
(b) by Penns Woods or FNBSM (i) if the other party breaches any
representation or warranty which results in a Material Adverse
Effect with respect to the breaching party, and such breach has
not been or cannot be cured within 30 days after the date written
notice of such breach is given to the party committing such
breach; (ii) the other party breaches any material covenant or
<PAGE 46> obligation, and such breach has not been or cannot be
cured within thirty days from the date written notice of such
breach was given to the party committing the breach; (iii) if the
Closing Date has not occurred on or before May 30, 1999, unless
the failure of such occurrence shall be due to the failure of the
party seeking to terminate the Merger Agreement to perform or
observe its agreements set forth in the Merger Agreement required
to be performed or observed by such party on or before the
Effective Date; or (iv) if either party is notified in writing by
a regulatory authority that the necessary approval or consent is
unlikely to be granted unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate the
Merger Agreement to perform or observe any agreements required to
be performed by such party by the Closing Date.
In the event of termination of the Merger Agreement by
either Penns Woods or FNBSM, there will be no liability or
obligation on the part of Penns Woods or FNBSM other than the
obligation dealing with confidentiality and other than any
liabilities or damages incurred as a result of the willful breach
by a party of any of its representations, warranties, covenants,
or agreements set forth in the Merger Agreement; provided,
however, that if, within 9 months following the date of
termination of the Merger Agreement, a person, group or entity
other than Penns Woods or an affiliate of Penns Woods, enters
into an agreement with FNBSM pursuant to which such person, group
or entity would (i) merge or consolidate, or enter into any
similar transaction, with FNBSM, (ii) acquire all or
substantially all of the assets of FNBSM, or (iii) acquire
beneficial ownership of securities representing, or the right to
acquire beneficial ownership or to vote securities representing,
20% or more of the then outstanding shares of Common Stock, the
FNBSM shall immediately pay to Penns Woods a termination fee
("Termination Fee") of $1.0 million. No Termination Fee will be
payable in the event of termination of the Merger Agreement
following (i) an unremedied breach of a representation or
warranty by Penns Woods which results in a Material Adverse
Effect, (ii) an unremedied breach of any material covenant or
other obligation by Penns Woods, (iii) the failure to complete
the Merger by May 30, 1999, unless the failure of such occurrence
is due to the failure of FNBSM to perform or observe its
agreements set forth in the Merger Agreement required to be
performed or observed prior to the Effective Date, or (iv) the
notification of either party by a regulatory authority that a
necessary approval is unlikely to be granted, unless the failure
of such occurrence shall be due to the failure of FNBSM to
perform or observe any agreements set forth in the Merger
Agreement required to be performed or observed by it prior to the
Effective Date. See "THE MERGER -- Termination; Effect of
Termination."
<PAGE 47>
Management and Operations after the Merger
The Boards of Directors of Penns Woods and JSSB in
office immediately prior to the Effective Date of the Merger will
constitute the Boards of Directors of Penns Woods and JSSB after
completion of the Merger. In addition William H. Rockey will be
elected as a Class 1 director of Penns Woods to serve until the
year 2001. Penns Woods has agreed to cause Mr. Rockey to be
nominated for re-election to the Board of Directors of Penns
Woods at the annual meeting of shareholders of Penns Woods to be
held in 2001. Mr. Rockey will also serve as a director of JSSB
during the time that he is serving as a director of Penns Woods.
On the Effective Date, the executive officers of Penns
Woods and JSSB in office immediately prior to the Effective Date
will remain as such except that (i) William H. Rockey, President
and Chief Executive Officer of FNBSM, will be elected a Senior
Vice President of Penns Woods and JSSB and (ii) Rickey B. Brooks,
Vice President and Cashier of FNBSM, will be elected a Vice
President of Penns Woods and JSSB. Messrs. Rockey and Brooks
will each enter into an employment agreement with Penns Woods and
JSSB effective as of the Closing Date.
See "THE MERGER -- Management and Operations After the
Merger" and "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
Employee Benefits and Severance
As of the Effective Date, Penns Woods has agreed to
become plan sponsor to the FNBSM Pension Plan and to continue to
maintain such plan through the plan year ending October 14, 1999
for the benefit of employees of FNBSM who become employees of
Penns Woods or any Penns Woods subsidiary. Penns Woods has
agreed to permit FNBSM to make a contribution to the FNBSM
Pension Plan upon the earlier of the last business day
immediately preceding the Closing Date or December 31, 1998. As
of the close of the FNBSM Pension Plan year ending October 14,
1999, Penns Woods may, at its election, freeze, merge,
consolidate or terminate the FNBSM Pension Plan.
Except as set forth above with respect to the FNBSM
Pension Plan, on and after the Effective Date, the employee
pension and welfare benefit plans of Penns Woods and FNBSM may,
at Penns Woods' election and subject to the requirements of the
Code, continue to be maintained separately or consolidated into
plans of Penns Woods, provided that FNBSM employees will, except
as provided below, be entitled to participate in the employee
pension and welfare plans of Penns Woods as follows: FNBSM
employees will be eligible to participate in the defined
contribution pension plan of Penns Woods (i.e., 401(k) plan) on
the first quarterly entry date for new participants under the
terms of such plan concurrent with or immediately following the
Effective Date and FNBSM employees will be eligible to
participate in the defined benefit pension plan of Penns Woods
effective October 1, 1999. FNBSM employees shall receive credit
<PAGE 48> for service with FNBSM under any Penns Woods benefit
plan, or new Penns Woods benefit plan, for purposes of
eligibility and vesting determination, but not for purposes of
benefit accrual.
In the Merger Agreement, Penns Woods agreed to cause
JSSB to provide employees of FNBSM whose employment is
involuntarily terminated other than for "cause" within one year
after the Effective Date or who, within such one-year period, is
offered but declines to accept employment at a location more than
35 miles from such employee's work location with FNBSM (provided
such employees execute such documentation as Penns Woods may
reasonably require): (i) one week of base salary for each year
of service with FNBSM with a minimum of two weeks and a maximum
of twenty weeks; (ii) continued medical insurance coverage during
the time period set forth in the preceding clause (i) to the
extent permitted under Penns Woods' health insurance programs or,
to the extent impermissible, reimbursement for the cost of
continuation coverage provided under Section 4980B(f) of the Code
during the time period set forth in the preceding clause (i), and
(iii) a cash payment for any vacation days accrued but unused in
the year in which employment terminates.
Penns Woods has also agreed that FNBSM will be
permitted to pay customary year-end bonuses to employees for the
year ending December 31, 1998 in an amount not to exceed $1,200
per employee and will be permitted to make cash payments to its
eligible employees in lieu of accumulated sick leave pursuant to
FNBSM's existing policies.
Pursuant to the Merger Agreement, Penns Woods agreed to
continue to pay, or cause the continuation and payment of, the
premiums relating to the current split-dollar life insurance
arrangements for William H. Rockey, President and Chief Executive
Officer of FNBSM, and Rickey B. Brooks, Vice President and
Cashier of FNBSM, until the respective retirements of Mr. Rockey
and Mr. Brooks, provided that FNBSM and each of such individuals
executes a customary form of written agreement applicable to such
arrangements which is reasonably satisfactory to Penns Woods and
which provides, among other things, for the reimbursement of all
premiums paid on behalf of such individual upon death,
retirement, or other termination of employment.
Accounting Treatment
The Merger is expected to qualify as a pooling of
interests for accounting and financial reporting purposes. Under
this method of accounting, the recorded assets and liabilities of
Penns Woods and FNBSM will be carried forward to the combined
corporation at their recorded amounts; income of the combined
corporation will include income of both Penns Woods and FNBSM for
the entire fiscal year of Penns Woods in which the Merger occurs;
and the reported income of the separate corporations for prior
periods will be combined and restated as income of the combined
corporation. Expenses incurred in connection with the Merger
<PAGE 49> will constitute expenses for the accounting periods to
which such expenses relate. The receipt of a letter from Penns
Woods' independent auditors confirming that the Merger will
qualify for pooling of interests accounting is a condition to
Penns Woods' obligation to complete the Merger.
Certain Federal Income Tax Consequences
Completion of the Merger is conditioned upon there
being delivered to Penns Woods and FNBSM an opinion of Stevens &
Lee, P.C., counsel to Penns Woods, that for federal income tax
purposes, under current law, assuming that the Merger and related
transactions will take place as described in the Merger
Agreement, among other things, the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code,
and Penns Woods and FNBSM will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
As of the date of this Proxy Statement/Prospectus,
Stevens & Lee, P.C. has advised Penns Woods and FNBSM,
respectively, that, in its opinion:
(i) no gain or loss will be recognized by Penns
Woods or FNBSM in the Merger;
(ii) no gain or loss will be recognized by
holders of shares of FNBSM Common Stock upon their receipt of
Penns Woods Common Stock in exchange for their FNBSM Common
Stock, except that shareholders who receive cash proceeds for
fractional interests in Penns Woods Common Stock will recognize
gain or loss equal to the difference between such proceeds and
the tax basis allocated to their fractional share interests, and
such gain or loss will constitute capital gain or loss if their
FNBSM Common Stock is held as a capital asset at the Effective
Date;
(iii) the tax basis of the shares of Penns Woods
Common Stock (including fractional share interests) received by
the shareholders of FNBSM will be the same as the tax basis of
their FNBSM Common Stock exchanged therefor; and
(iv) the holding period of the Penns Woods Common
Stock in the hands of the FNBSM shareholders will include the
holding period of their FNBSM Common Stock exchanged therefor,
provided such FNBSM Common Stock is held as a capital asset at
the Effective Date.
In addition, completion of the Merger is conditioned
upon there being delivered to Penns Woods and to FNBSM an opinion
of Stevens & Lee, P.C., counsel to Penns Woods, dated as of the
Effective Date, similar in effect to the opinion described above.
Under the Merger Agreement, the condition that Stevens & Lee,
P.C. deliver the opinion described above can be waived by Penns
Woods and FNBSM. However, in the event that the delivery of such
opinion of counsel is waived, or such opinion would otherwise set
<PAGE 50> forth tax consequences materially different to a
shareholder than those described above, FNBSM intends to
resolicit proxies in accordance with the rules and regulations of
the Commission.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED ON CURRENTLY EXISTING PROVISIONS OF
THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER,
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF
THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD
AFFECT THE CONTINUING VALIDITY OF THE DISCUSSION. THE DISCUSSION
IS NOT A COMPLETE DESCRIPTION OF ALL THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND, IN PARTICULAR, DOES NOT ADDRESS
TAX CONSIDERATIONS THAT MAY AFFECT THE TREATMENT OF SHAREHOLDERS
WHO ACQUIRED THEIR FNBSM COMMON STOCK PURSUANT TO THE EXERCISE OF
EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, OR
SHAREHOLDERS WHICH ARE EXEMPT ORGANIZATIONS OR WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. EACH SHAREHOLDER'S
INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX CONSEQUENCES OF THE
MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE
MERGER UNDER APPLICABLE STATE, LOCAL, OR FOREIGN LAWS.
ACCORDINGLY, EACH FNBSM SHAREHOLDER IS ADVISED TO CONSULT A TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
SHAREHOLDER.
Expenses
Penns Woods and FNBSM will each pay all costs and
expenses incurred by it in connection with the transactions
contemplated by the Merger Agreement, including fees and expenses
of financial consultants, accountants and legal counsel, except
that the cost of printing and mailing this Proxy Statement/
Prospectus will be shared equally by Penns Woods and FNBSM.
Resale of Penns Woods Common Stock
The Penns Woods Common Stock issued pursuant to the
Merger will be freely transferable under the Securities Act
except for shares issued to any FNBSM shareholder who may be
deemed to be an "affiliate" of FNBSM or Penns Woods for purposes
of Rule 145 under the Securities Act. Each director, executive
officer and affiliate of FNBSM has entered into an agreement with
Penns Woods providing that, as an affiliate, he or she will not
transfer any Penns Woods Common Stock received in the Merger
except in compliance with the Securities Act and will make no
dispositions of any Penns Woods Common Stock or FNBSM Common
Stock (or any interest therein) during the period commencing 30
days prior to the Effective Date through the date on which
financial results covering at least 30 days of combined
operations of Penns Woods and FNBSM after the Merger have been
made public. This Proxy Statement/Prospectus does not cover
resales of Penns Woods Common Stock received by any person who
may be deemed an affiliate of FNBSM or Penns Woods.
<PAGE 51>
Dissenters' Rights of Appraisal
Pursuant to the provisions of Section 214a of Title 12
of the United States Code, as amended (the "U.S. Code"), any
shareholder of FNBSM has the right to dissent from the Merger and
to obtain payment of the "value" (as defined therein) of his
FNBSM Common Stock if the Merger is consummated.
Any shareholder of FNBSM who contemplates exercising
the right to dissent is urged to read carefully the provisions of
Section 214a of Title 12 of the U.S. Code. The following summary
of the steps to be taken if the right to dissent is to be
exercised is qualified in its entirety by the full text of
Section 214a of Title 12 of the U.S. Code, which is attached as
Annex C to this Proxy Statement/Prospectus.
Each step must be taken in the indicated order and in
strict compliance with the applicable provisions of the statute
in order to perfect dissenters rights. The failure of a
shareholder to strictly comply with the aforesaid steps will
result in the shareholder receiving the consideration
contemplated by the Merger Agreement. See "THE MERGER - Terms of
the Merger."
If the Merger is consummated, any FNBSM shareholder who
follows the procedures set forth in the U.S. Code will be
entitled to receive from JSSB a cash payment equal to the "value"
of his FNBSM shares determined as described below, as of the date
of the Special Meeting. The U.S. Code provides that any
shareholder of FNBSM who has voted against the Merger at the
Special Meeting, or who has given notice in writing to FNBSM at
or prior to the Special Meeting to FNBSM that such shareholder
dissents from the Merger and does not thereafter vote in favor of
the Merger, will be entitled to receive the "value" of the shares
of FNBSM Common Stock held by him if and when the Merger becomes
effective; provided, however, that such shareholder makes a
written request to JSSB at any time within thirty (30) days after
the Effective Date, accompanied by the surrender of such
shareholder's share certificate.
The number of shares represented by proxies that are
returned signed but unmarked as to voting instructions will be
voted in favor of the Merger, and therefore will have waived
their rights to dissent.
Any shareholder of FNBSM who votes against the Merger
at the Special Meeting, or who gives a notice in writing to FNBSM
at or prior to the Special Meeting that he dissents and does not
thereafter vote in favor of the Merger, will be notified in
writing of the Effective Date of the Merger. The Merger
Agreement provides that one of the conditions to Penns Woods'
obligation to consummate the Merger is that shareholders holding
9% or more of the outstanding shares of common stock of FNBSM
shall not have asserted and duly perfected their dissenters'
rights. <PAGE 52>
In accordance with the U.S. Code, the "value" of the
shares of any dissenting shareholder shall be determined, as of
the date of the Special Meeting was held, by an appraisal made by
a committee of three persons composed of (i) one person selected
by the vote of the dissenting shareholders entitled to receive
the value of their shares, (ii) one person selected by the Board
of Directors of JSSB, 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 (5) days after being
notified of the appraised value of his shares, appeal to the
Comptroller of the Currency, who is required to cause a
reappraisal to be made. The Comptroller's appraisal will be
final and binding as to the value of such dissenter's shares.
If, within ninety (90) days after the Effective Date of the
Merger, for any reason one or more of the appraisers fail to
determine the value of such shares, the Comptroller is required,
upon written request of any interested party, to 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, will be paid by
JSSB.
The value of the shares determined pursuant to the
foregoing procedures is required to be paid promptly by JSSB to
dissenting shareholders.
The foregoing summary does not purport to be a complete
statement of the appraisal rights of dissenting stockholders, and
such summary is qualified in its entirety by reference to the
applicable provisions of the U.S. Code, which are reproduced in
full in Annex C to this Proxy Statement/Prospectus.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management and the Board of
Directors of FNBSM may be deemed to have interests in the Merger
in addition to their interests, if any, in FNBSM Common Stock.
The FNBSM Board of Directors was aware of these factors and
considered them, among other matters, in approving the Merger
Agreement.
Shares Owned by Management and the Board
As of the Record Date, the directors and executive
officers of FNBSM beneficially own approximately 14,540 shares of
FNBSM Common Stock.
<PAGE 53>
Indemnification; Directors and Officers Insurance
Penns Woods has agreed in the Merger Agreement that, on
or after the Effective Date, Penns Woods will indemnify, defend
and hold harmless all prior and then-existing directors and
officers of FNBSM against (i) all losses, claims, damages, costs,
expenses, liabilities or judgments or amounts that are paid in
settlement (with the approval of Penns Woods, which approval
shall not be unreasonably withheld) of or in connection with any
claim, action, suit, proceeding or investigation based in whole
or in part on or arising in whole or in part out of the fact that
such person is or was a director, officer or employee of FNBSM,
whether pertaining to any matter existing or occurring at or
prior to the Effective Date and whether asserted or claimed prior
to, or at or after, the Effective Date ("Indemnified
Liabilities") and (ii) all Indemnified Liabilities based in whole
or in part on, or arising in whole or in part out of, or
pertaining to the Merger Agreement or the transactions
contemplated by the Merger Agreement, to the same extent as such
officer, director or employee would be indemnified by FNBSM as of
July 22, 1998, including the right to advancement of expenses,
provided, however, that any such officer, director or employee of
FNBSM may not be indemnified by Penns Woods or JSSB if such
indemnification is prohibited by applicable law.
Penns Woods has agreed to maintain FNBSM's existing
directors' and officers' liability insurance policy, or a policy
providing comparable coverage amounts on terms no less favorable,
including Penns Woods' existing policy if it meets that standard,
covering persons currently covered by such insurance for a period
of five (5) years after the Effective Date.
Employment Agreements
In the Merger Agreement, Penns Woods has agreed that,
on or prior to the Effective Date, Penns Woods and JSSB will
enter into employment agreements with William H. Rockey,
President and Chief Executive Officer of FNBSM, and Rickey B.
Brooks, Vice President and Cashier of FNBSM, to be effective as
of the Effective Date, on terms mutually satisfactory to Penns
Woods and to such individuals. Such agreements will, among other
things, (i) provide for a term of three (3) years from the
Effective Date and automatic annual renewals thereafter absent
notice of nonrenewal by either party, (ii) provide for a minimum
base salary equal to the base salary of the executive immediately
prior to the Effective Date ($96,700 in the case of Mr. Rockey
and $71,300 in the case of Mr. Brooks), (iii) provide for a
severance payment equivalent to the greater of 24 months' base
salary or base salary payable over the remaining term of the
agreement in the event the executive's employment is terminated
involuntarily or the executive terminates employment for "good
reason" following a "change in control" of Penns Woods, and (iv)
provide that the executive will be eligible for consideration to
receive stock option grants under Penns Woods' stock option plans
<PAGE 54> then in effect in the same manner as other executive
officers of Penns Woods.
FNBSM Advisory Board
On the Effective Date, Penns Woods has agreed to
establish for a period of two (2) years the FNBSM Advisory Board,
which during the first year following the Effective Date will
consist of all the members of the FNBSM of the Board of Directors
immediately prior to the Effective Date and which during the
second year following the Effective Date will consist of any of
such former members of the FNBSM Board of Directors who have not
attained the mandatory retirement age of 70 prior to the
commencement of such year. The members of the FNBSM Advisory
Board will be paid $150 for each monthly meeting of the Advisory
Board actually attended. After the second year following the
Effective Date, the FNBSM Advisory Board may be maintained at the
discretion of Penns Woods.
PAGE 55
<PAGE>
INFORMATION WITH RESPECT TO PENNS WOODS
General
Financial and other information relating to Penns
Woods, including information relating to Penns Woods' directors
and executive officers, is incorporated herein by reference. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE
INFORMATION."
Market Price of and Dividends on Penns Woods Common Stock and
Related Shareholder Matters
Penns Woods Common Stock is not listed on any exchange
or quoted on NASDAQ. Shares of Penns Woods Common Stock are
traded locally in the over-the-counter market. As of
September 30, 1998, Penns Woods had approximately 852
shareholders of record. The table below sets forth for the
periods indicated the amount of dividends paid per share and the
quarterly ranges of high and low prices for Penns Woods Common
Stock. The following price quotations do not include retail
mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions. All information has been adjusted
to reflect stock dividends and stock splits paid or effected
through the date of this Proxy Statement/Prospectus, including
the stock split effected in the form of a 100% stock dividend on
January 15, 1998.
Dividends
High Low Declared
1996:
First Quarter $18 $18 $0.110
Second Quarter 19 3/4 18 1/4 0.110
Third Quarter 21 19 1/2 0.125
Fourth Quarter 21 1/4 19 7/8 0.255
1997:
First Quarter $25 $21 $0.125
Second Quarter 28 2/3 26 9/16 0.150
Third Quarter 30 1/2 28 3/4 0.400
Fourth Quarter 31 3/4 30 0.175
1998:
First Quarter 48 32 3/8 0.180
Second Quarter 53 47 0.180
Third Quarter 55 1/2 54 0.180
Fourth Quarter(1) 57 53 1/2 --
___________________________
(1) Through November 5, 1998.
<PAGE 56>
On July 22, 1998, the last business day preceding
public announcement of the Merger, the last sales price for Penns
Woods Common Stock was $55.00 per share. On November 5, 1998,
the last previous sale price for Penns Woods Common Stock was
$56.50 per share. The average weekly trading volume for the
Penns Woods Common Stock during the quarter ended September 30,
1998 was 2,450 shares.
For certain limitations on the ability of Jersey Shore
to pay dividends to Penns Woods, see Penns Woods' Annual Report
on Form 10-K for the year ended December 31, 1997, a copy of
which is being delivered with this Proxy Statement/Prospectus and
incorporated herein by reference. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
INFORMATION WITH RESPECT TO FNBSM
Description of Business
FNBSM was formed as a national bank on July 3, 1918.
FNBSM has two offices located in Centre Hall and Spring Mills,
Centre County, Pennsylvania. At December 31, 1997, FNBSM had
total assets, deposits and shareholders' equity of approximately
$30.5 million, $22.3 million and $4.4 million, respectively.
Except for trust services, for which it lacks
authorization, FNBSM is engaged in general commercial and retail
banking business. It offers commercial, consumer and mortgage
loans in the communities served by its offices, as well as safe
deposit boxes and night depository.
FNBSM, as a national bank, is a member of the Federal
Reserve System and its deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC").
Its deposit services include business and individual demand and
time deposit accounts, N.O.W. accounts, money market accounts,
Individual Retirement Accounts and Christmas Clubs.
The local banking environment in the area served by
FNBSM is competitive, with active involvement by "Regional" and
"Super Regional" banks. Competitors include Omega Bank, N.A.,
Northwest Savings Bank, PNC Bank, N.A., Mellon Bank and Mid-State
Bank and Trust Company, as well as other financial institutions,
finance companies, mortgage banking companies and brokerage
companies operating in the area.
The principal executive offices of FNBSM are located at
Route 45 and Ross Hill Road, Spring Mills, Pennsylvania 16875,
and its telephone number is (814) 422-8836.
<PAGE 57>
Supervision and Regulation
FNBSM, as a national bank, is subject to the
supervision of, and is regularly examined by, the Comptroller of
the Currency (the "Comptroller") and is required to furnish
quarterly reports to the Comptroller. The approval of the
Comptroller is required for the establishment of additional
branch offices by any national bank, subject to applicable state
law restrictions.
FNBSM's deposits are insured by the FDIC to the extent
permitted by law and it is a member of the Federal Reserve
System. Consequently, FNBSM is subject to additional regulation
by these agencies. Some of the aspects of the lending and
deposit business of FNBSM which are regulated by these agencies
include personal lending, mortgage lending, interest rates both
as they relate to lending and interest paid on deposits, and
reserve requirements. In addition, the NBA and regulations of
the Comptroller impose restrictions on the payment of dividends
to FNBSM's shareholders. See "COMPARISON OF SHAREHOLDER RIGHTS
- -- Dividends."
The operations of FNBSM are also subject to numerous
federal, state and local laws and regulations which set forth
specific restrictions and procedural requirements with respect to
the extension of credit, credit practices, the disclosure of
credit terms and discrimination in credit transactions.
As a consequence of the extensive regulation of
commercial banking activities in the United States, FNBSM's
business is particularly susceptible to being affected by Federal
and state legislation and regulations which may have the effect
of increasing the costs of doing business.
The Community Reinvestment Act of 1977 ("CRA") mandates
that the Comptroller review the extent to which each national
bank serves all neighborhoods in the community in which it is
located, FNBSM's has received a satisfactory rating under the CRA
by the Comptroller.
As with other types of companies, FNBSM is subject to
additional regulation of federal, state and local authorities in
the areas of workplace safety, discrimination in employment
practices and public accommodation (whether by race, sex,
religion or disability) and environmental protection, among other
areas. FNBSM believes that it is in compliance with such
regulation in all material respects.
In addition to being affected by general economic
conditions, the earnings and growth of FNBSM is and will be
affected by the policies of regulatory authorities, including
the Comptroller, the Federal Reserve Board and the FDIC. An
important function of the Federal Reserve Board is to regulate
the money supply, credit conditions and interest rates. Among
the instruments used to implement these objectives are open
<PAGE 58> market operations in United States Government
securities, changes in reserve requirements against bank deposits
and limitations on interest rates that member banks may pay on
time and savings deposits. These instruments are used in varying
combination to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may
also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal
Reserve Board have had a significant effect on the operating
results of commercial banks in the past and are expected to
continue to do so in the future.
Legal Proceedings
Other than routine litigation incidental to its
business, neither FNBSM nor any of its properties is subject to
any material legal proceedings, nor are any such proceedings
known to be contemplated by any governmental authorities.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - 1997 and 1996
This discussion details the financial condition and
results of operations of FNBSM. This discussion should be read
in conjunction with the annual financial statements appearing
elsewhere in this Proxy Statement/Prospectus. See "SELECTED
FINANCIAL DATA" and "INDEX TO FNBSM FINANCIAL STATEMENTS."
Financial Summary
FNBSM earned net income of $386,000 in 1997 and
$413,000 in 1996. Net income per share was $5.15 in 1997 and
$5.51 in 1996. The primary reason for the decline in earnings in
1997 was that results for 1996 included a gain of $86,000 from
the sale of a banking facility. The significant factors that
affected earnings results in 1997 and 1996 are discussed in
detail in the "Results of Operations" section of Management's
Discussion and Analysis.
Total assets amounted to $30,482,000 as of December 31,
1997, and total shareholders' equity was $4,417,000 as of the
same date. FNBSM's capital position as of December 31, 1997 was
well in excess of minimum regulatory requirements to be
categorized as "well capitalized."
Results of Operations
Net Interest Income. As indicated in FNBSM's statement
of income, net interest income for 1997 increased 12.4%, or
$145,000, over 1996. The increase in net interest income
reflects significant increases in both interest income and
interest expense, due primarily to increases in the volume of
interest-earning assets (most significantly, an increase in
outstanding loans) and of interest-bearing liabilities <PAGE 59>
(primarily, an increase in borrowed funds). A detail of average
balances of interest-earning assets and interest-bearing
liabilities, along with the corresponding amounts of interest
earned or incurred and the average interest rate for each
category, is provided in the table which follows, titled "Average
Balances and Interest Rates." The "Effective Interest
Differential," as described at the bottom of the table, of 5.11%
in 1997 , is very comparable to the corresponding ratio of 5.12%
for 1996. This differential is the excess of the average rate of
return on interest-bearing assets over the average rate of
interest incurred on interest-bearing deposits and borrowed
funds. Also, the table which follows titled "Summary of Changes
in Interest Earned and Interest Costs Incurred," presents a
breakdown of the change in interest income and expense between
years attributable to changes in volumes versus changes in
interest rates. It should be noted that interest income amounts
included in these tables vary from the annual financial statement
amounts because income from tax-exempt securities and loans, as
presented in the tables, has been adjusted to a taxable
equivalent basis.
Management's explanations for the changes in the
average balances of loans, borrowed funds and other assets and
liabilities, are discussed in the "Financial Condition" section
of Management's Discussion and Analysis.
Provision for Loan Losses. The provision for loan
losses was $54,000 in 1997 and $32,000 in 1996. The increase in
1997 is attributable to substantial loan growth and a rise in
consumer loan losses. Management determines the provision for
loan losses through a detailed, quarterly review of loan
portfolio quality, supplemented by a periodic (approximately
every 18-months) review by an independent consulting firm.
The allowance for loan losses is discussed in detail in
the Financial Condition section.
Other Income. Other income in 1997 decreased $69,000
compared to 1996. The principal reason for the decrease is that
other income for 1996 included a gain of $86,000 from the sale of
a prior banking facility. This sale was made possible because
FNBSM constructed a new facility which opened in 1995.
Other Expenses. Overall, other expenses increased
$76,000 in 1997 over 1996, an increase of 10.0%. While occupancy
and furniture and equipment expenses remained relatively
consistent between years, FNBSM experienced significant increases
in salaries and employee benefits expense and in other operating
expenses.
The amount of salaries and employee benefits expense
increased $47,000, or 11.9%, in 1997 compared to 1996. This
increase was primarily related to salaries and wages, as benefit
costs per employee remained fairly constant between periods. In
addition to merit increases to employees, the number of full-time
<PAGE 60> equivalent employees increased by approximately 1.5 in
1997, as staff was added to handle the growth in the number of
loan and deposit accounts that has occurred in 1997 and 1996 (see
Financial Condition section).
Other operating expenses increased $26,000, or 13.3%,
in 1997 over 1996. The major components of this increase were as
follows: charitable contributions, which increased approximately
$10,000 due to a special contribution to the Spring Mills,
Pennsylvania community for the construction of a playground;
advertising costs, which increased approximately $7,000 because
of increased activity related to marketing newsletters and
newspaper advertising; directors' fees, which increased
approximately $5,000 because of a raise in the rate paid to each
director for attendance at, and participation in, Board and
committee meetings; and postage, which increased approximately
$4,000 due primarily to increased direct mail advertising and
growth in the number of loan and deposit accounts.
Income Tax Provision. The income tax provision, as a
percentage of income before taxes, increased from 22.1% in 1996
to 24.0% in 1997. The principal reason for the increase in the
effective tax rate is that tax-exempt income, net of
nondeductible interest expense (calculated based on the average
amount of tax-free securities and loans held by the Bank), along
with other permanent difference items, reduced the Bank's current
tax liability to a slightly greater extent in 1996 than in 1997.
PAGE 61
<PAGE>
AVERAGE BALANCES AND INTEREST RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING ASSETS:
Securities available-for-sale:
U.S. Government Agencies $ 5,310 $ 377 7.10% $ 4,812 $ 336 6.98%
State and political subdivisions 2,877 247 8.59% 2,815 250 8.88%
Other 2,227 152 6.83% 2,328 157 6.74%
Unrealized gain or loss 185 154
Total securities available-for-sale 10,599 776 10,109 743
Loans:
Tax-exempt loans 132 17 12.88% 167 20 11.98%
All other loans 16,100 1,582 9.83% 13,795 1,370 9.93%
Total loans 16,232 1,599 13,962 1,390
Interest-bearing deposits and
cash equivalents 683 38 5.56% 591 35 5.92%
TOTAL INTEREST-EARNING ASSETS 27,514 2,413 24,662 2,168
Other assets 1,584 1,596
TOTAL ASSETS $29,098 $ 2,413 $26,258 $ 2,168
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing checking $ 3,055 $ 59 1.93% $ 3,059 $ 68 2.22%
Money markets 975 29 2.97% 789 26 3.30%
Savings 2,249 53 2.36% 2,193 57 2.60%
Certificates of deposit 10,023 547 5.46% 9,841 541 5.50%
Other time deposits 2,555 139 5.44% 2,308 127 5.50%
Total interest-bearing deposits 18,857 827 18,190 819
Borrowed funds 2,972 180 6.06% 1,386 87 6.28%
TOTAL INTEREST-BEARING LIABILITIES 21,829 1,007 19,576 906
Noninterest-bearing checking 2,656 2,351
Other liabilities 267 264
Shareholders' equity 4,346 4,067
TOTAL LIABILITIES AND SHARE-
HOLDERS' EQUITY $29,098 $ 1,007 $26,258 $ 906
Interest Income/Earning Assets $27,514 $ 2,413 8.77% $24,662 $ 2,168 8.79%
Interest Expense/Earning Assets $27,514 $ 1,007 3.66% $24,662 $ 906 3.67%
Effective Differential $ 1,406 5.11% $ 1,262 5.12%
_______________
</TABLE> <PAGE 62>
Notes to Schedule of Average Balances and Interest Rates:
(1) Fees on loans of $35,000 are included with interest on loans
for 1997 and 1996.
(2) Average balances have been determined using average daily
balances.
(3) Income and rates on a fully tax-equivalent basis include an
adjustment for the difference between annual income from
tax-exempt obligations and the taxable equivalent of such
income at a tax rate of 34% (calculated by dividing tax-
exempt interest by .66).
PAGE 63
<PAGE>
SUMMARY OF CHANGES IN INTEREST EARNED
AND INTEREST COSTS INCURRED
1997 COMPARED TO 1996
(Dollars in Thousands)
Change Change
in in Total
Volume Rate Change
ASSETS
INTEREST-EARNING ASSETS:
Securities available-for-sale:
Taxable $ 28 $ 8 $ 36
Tax-exempt 5 (8) (3)
Loans 223 (14) 209
Interest-bearing deposits and cash
equivalents 5 (2) 3
TOTAL INTEREST INCOME 261 (16) 245
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing checking $ (1) $ (8) $ (9)
Money markets 6 (3) 3
Savings 1 (5) (4)
Certificates of deposit 10 (4) 6
Other time deposits 14 (2) 12
Total interest-bearing deposits 30 (22) 8
Borrowed funds 98 (5) 93
TOTAL INTEREST EXPENSE 128 (27) 101
NET INTEREST INCOME $133 $ 11 $144
_______________
Notes to Summary of Changes in Interest Earned and Interest Costs
Incurred:
(1) The change in interest income/expense due to both volume and
rates has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar
amounts of the change in each.
(2) Income on a fully tax-equivalent basis includes an
adjustment for the difference between annual income from
tax-exempt obligations and the taxable equivalent of such
income at a tax rate of 34% (calculated by dividing tax-
exempt interest by .66).
PAGE 64
<PAGE>
Financial Condition
Securities Available-for-Sale. FNBSM classifies all of
its investment securities as "available-for-sale." Accordingly,
as required by Statement of Financial Accounting Standards
("SFAS") No. 115, these assets are valued at fair value on the
balance sheet, with fluctuations in the differences between cost
and fair value, net of hypothetical deferred income tax, recorded
as a direct increase or decrease in shareholders' equity with no
effect on earnings. The other possible accounting
classifications permitted by SFAS No. 115 are "trading," and
"held-to-maturity." Securities bought for the purpose of selling
them in the near term are classified as trading securities and
reported at fair value, with the unrealized gains and losses
included in earnings. Held-to-maturity investments, which are
debt securities that an enterprise has the intent and ability to
hold until maturity, are reported at amortized cost. Clearly, as
evidenced by the very limited amount of investment sales
reflected in the financial statements, FNBSM has not engaged in
"trading activity" in 1997 or 1996. Classification as available-
for-sale (as opposed to held-to-maturity) is consistent with
FNBSM's asset-liability management policy which permits the sale
of any security for liquidity purposes or if deemed appropriate
to maximize long-term return on investments held. In 1997 and
1996, management determined that long-term and short-term
borrowing from the Federal Home Loan Bank of Pittsburgh was more
effective than selling securities as a method of meeting
liquidity and asset-liability management requirements.
The carrying amounts of available-for-sale securities
are summarized as follows (in thousands):
DECEMBER 31,
1997 1996
Debt securities:
U.S. Government agencies $ 6,016 $ 5,537
State and political
subdivisions (tax-exempt) 3,551 2,891
Other bonds, notes and debentures 2,059 2,024
Total debt securities 11,626 10,452
Restricted equity securities 213 127
Total $11,839 $10,579
"Other bonds, notes and debentures" in the table above
consist principally of collateralized mortgage obligations
("CMO's"). CMO's are bonds secured by, and repaid from, the cash
flows from a pool of mortgages or mortgage-backed securities that
also serve as collateral for the CMO. FNBSM considers its CMO
holdings to be of a high credit quality, with minimal risk of
default. <PAGE 65>
PAGE 66
<PAGE>
The following table shows the maturities and repricing
of debt securities available-for-sale as of December 31, 1997,
and the weighted average yields of such securities (dollars in
thousands) (yields for tax-exempt securities presented on a tax
equivalent basis using a 34% rate):
WITHIN 1-5 5-10 AFTER
1 YEAR YEARS YEARS 10 YEARS TOTAL
U.S. government
agencies:
Amount $1,781 $115 $2,451 $1,584 $ 5,931
Yield 6.90% 8.02% 7.24% 7.24% 7.15%
State and political
subdivisions:
Amount 100 505 1,054 1,800 3,459
Yield 7.79% 9.00% 8.23% 11.08% 9.81%
Other bonds, notes
and debentures:
Amount - 80 617 1,308 2,005
Yield - 6.70% 7.45% 5.84% 6.37%
Total amount $1,881 $ 700 $4,122 $4,692 $11,395
Total yield 6.95% 8.58% 7.52% 8.32% 7.82%
Loans. Gross loans outstanding as of December 31, 1997
and 1996 are summarized as follows (in thousands):
DECEMBER 31,
1997 1996
Domestic:
Real estate - mortgage and construction $14,261 $12,575
Commercial and industrial 1,044 932
Consumer and other 2,011 2,244
Total gross loans $17,316 $15,751
PAGE 67
<PAGE>
As indicated in the schedule above, gross loans
increased 9.9% as of December 31, 1997 compared to the end of
1996. The majority of the increase was in real estate loans,
which increased $1,686,000, or 13.4%. Economic growth in the
greater State College area was one of the principal factors
causing the increase in real estate loans. Also, a favorable
real estate lending interest rate environment for borrowers has
spurred significant refinancing activity, including a movement
out of borrowings under traditional consumer loan instruments and
into greater mortgage-based and home equity line of credit
borrowings. (This is also evidenced in the $229,000, or 10.9%,
decrease in consumer loans in 1997.) Finally, FNBSM's real
estate and commercial lending activities have benefitted from
branch closings and acquisitions of competing financial
institutions in its market area. The increase in FNBSM's
commercial loans, of $112,000, or 12.0% as of December 31, 1997
compared to 1996, was impacted by the acquisition of one of its
competitors, with the new financial institution no longer
offering certain commercial lending services. Management
believes that the lending philosophy of Penns Woods is very
consistent with that of FNBSM, and no significant changes in the
types of loans made, or credit quality, are expected after
completion of the Merger.
The table below presents domestic loans outstanding as
of December 31, 1997, by category and maturity. Scheduled
repayments are reported in the maturity categories in which the
payment is due. This maturity information is based upon original
loan terms and has not been adjusted for "rollovers." In the
ordinary course of business, loans maturing within one year may
be renewed, in whole or in part, as to principal amount at
interest rates prevailing at the date of renewal. This
information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
COMMERCIAL CONSUMER
REAL AND AND
ESTATE INDUSTRIAL OTHER TOTAL
<S> <C> <C> <C> <C>
Loans with variable
interest rates:
1 year or less $ - $ 714 $ 2 $ 716
1-5 years 4 - - 4
After 5 years - - - -
Sub-total 4 714 2 720
Loans with fixed
interest rates:
1 year or less 146 - 1,278 1,424
1-5 years 303 121 731 1,155
After 5 years 13,808 209 - 14,017
Subtotal 14,257 330 2,009 16,596
<PAGE 68>
Total $14,261 $ 1,044 $ 2,011 $17,316
</TABLE>
PAGE 69
<PAGE>
FNBSM does not make loans that provide for negative
amortization or which contain conversion features. As of
December 31, 1997, adjustable rate mortgages were not offered on
residential properties; however, in 1998, FNBSM began to offer
mortgages with a fixed rate for a period of seven years,
converting to an adjustable rate for the remainder of the term,
up to a maximum of thirty years.
FNBSM has no foreign loans outstanding as of
December 31, 1997.
Allowance for Loan Losses. The allowance for loan
losses as of December 31, 1997 was $165,000, or approximately 1%
of gross loans outstanding. This was an increase of $25,000 over
the amount at December 31, 1996. Management evaluates the
adequacy of the allowance for loan losses quarterly, giving
consideration to specific problem loans (if any), economic
conditions within the region, growth performance and other
factors felt to impact upon credit quality. Also, FNBSM utilizes
an independent consulting firm for periodic independent reviews
of credit quality, documentation and adequacy of the allowance
for loan losses. The most recent independent examination prior
to December 31, 1997 was performed as of October 31, 1996.
Subsequent to 1997, another independent loan review was completed
as of June 30, 1998. In addition, federal banking regulators
from the Office of the Comptroller of the Currency, as part of
their periodic examinations, review the determination of the
allowance for loan losses. In light of these ongoing reviews and
FNBSM's historically low levels of nonperforming loans (discussed
in more detail later in this section), management does not
anticipate an adjustment to the allowance for loan losses in the
near term that would have a significant, adverse impact on
earnings or shareholders' equity.
Transactions in the allowance for loan losses for 1997
and 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $140 $120 $120 $120 $115
Charge-offs - domestic
consumer loans 32 14 - 1 1
Recoveries - domestic
consumer loans 3 2 - - -
Net charge-offs 29 12 - 1 1
Additions charged to operations 54 32 - 1 6
Balance at end of period $165 $140 $120 $120 $120
<PAGE 70>
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.18% 0.09% 0.00% 0.01% 0.01%
</TABLE>
PAGE 71
<PAGE>
As mentioned previously, FNBSM's historical levels of
nonperforming loans have been quite low. Most of FNBSM's loans
are well secured residential real estate and consumer loans to
which the "nonaccrual" accounting rules which are described
herein do not apply. For the remainder of the loan portfolio,
the accrual of interest income is discontinued when payment is
deemed to be questionable, but in any event, when principal or
interest is in default for 90 days or more. The reversal of
previously accrued but uncollected interest related to a loan
placed in nonaccrual status and the treatment of subsequent
receipts of principal or interest is accounted for in accordance
with generally accepted accounting principles, which do not
require the write-off of such previously accrued interest if
collection is ultimately protected by sound collateral. A
nonperforming loan may be restored to accrual status when
principal and interest is no longer due and unpaid, the loan
becomes well secured and in the process of collection or when
prospects for future collections of contractual payments are no
longer in doubt.
SFAS No. 114 requires disclosure in financial
statements of information related to "impaired' loans. These
disclosure requirements are not applicable to the majority of
FNBSM's loan portfolio, as SFAS No. 114 does not apply to large
groups of smaller-balance homogeneous loans that may be
collectively evaluated for impairment, including residential
mortgage and consumer installment loans. In 1997 and 1996,
FNBSM had no impaired loans, as defined in the pronouncement.
Information related to nonperforming loans as of the
end of 1993 through 1997 is presented as follows (in thousands):
90 DAYS
NONACCRUAL PAST DUE RESTRUCTURED
1997 $ - $21 $ -
1996 - 22 -
1995 - 7 -
1994 - - -
1993 69 25 -
The allocation of the allowance for loan losses by
category of loan as of the end of 1993 through 1997 is presented
in the following table (dollars in thousands):
<PAGE 72>
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
December 31, 1997:
Balance at end of period applicable to:
Domestic:
Real estate $136 82%
Commercial and industrial 10 6%
Consumer and all other loans 19 12%
Total $165 100%
December 31, 1996:
Balance at end of period applicable to:
Domestic:
Real estate $112 80%
Commercial and industrial 8 6%
Consumer and all other loans 20 14%
Total $140 100%
December 31, 1995:
Balance at end of period applicable to:
Domestic:
Real estate $ 95 79%
Commercial and industrial 7 6%
Consumer and all other loans 18 15%
Total $120 100%
December 31, 1994:
Balance at end of period applicable to:
Domestic:
Real estate $ 96 80%
Commercial and industrial 6 5%
Consumer and all other loans 18 15%
Total $120 100%
December 31, 1993:
Balance at end of period applicable to:
Domestic:
Real estate $ 92 80%
Commercial and industrial 6 5%
Consumer and all other loans 17 15%
Total $115 100%
<PAGE 73>
Deposits. In total, average deposits increased
$972,000 in 1997 over 1996, a rate of growth of 4.7%. The types
of deposits with the most significant increases were time
deposits and demand deposits. The competitive factors discussed
in the loans section had a corresponding, positive impact in the
area of deposit growth. Also, management believes that the new
banking facility constructed in 1995, at a highly visible
location on State Route 45, has contributed to the increase in
deposits. There were significant increases in IRA deposits in
1997, primarily from rollovers by retiring individuals from
401(k) and other qualified pension plans. Checking account
balances increased in 1997, in part because of a special 1-2%
discount on loan payments offered to loan customers who would
agree to make their loan payments by automatic transfer of funds
from checking accounts held with FNBSM.
The average amount and average interest rate incurred
on deposits are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Deposits in Domestic Bank Offices:
Demand deposits:
Noninterest-bearing $ 2,656 0.00% $ 2,351 0.00%
Interest-bearing 4,030 2.18% 3,848 2.44%
Savings deposits 2,249 2.36% 2,193 2.60%
Time deposits 12,578 5.45% 12,149 5.50%
Total average deposits $21,513 $20,541
</TABLE>
As of December 31, 1997, the maturities of time
deposits in excess of $100,000 is summarized as follows (in
thousands):
0-3 Months $608
3-6 Months 334
6-12 Months 105
Beyond 12 Months 500
Total $1,547
Borrowed Funds. Average borrowed funds increased
significantly, to $2,972,000 in 1997 over $1,386,000 in 1996.
The increase was primarily attributable to long-term borrowings
from the Federal Home Loan Bank of Pittsburgh ("FHLB"). The
increased long-term borrowings were used as a strategic tool in
FNBSM's asset-liability management mix, as the funds were
utilized primarily to fund loans and security purchases that
carry higher yields than the interest cost related to the
<PAGE 74> borrowings. In 1996 and previous years, long-term
borrowings from the FHLB were used for other long-term purposes,
including the funding of housing loans under the Community
Investment Program and the costs of constructing the new facility
in 1995.
Shareholders' Equity. As described in detail in Note L
to the annual financial statements included elsewhere in this
Proxy Statement/Prospectus, FNBSM's capital levels are well in
excess of regulatory thresholds to be considered "well
capitalized." The primary source of capital growth for FNBSM is
from the retention of a portion of earnings. In 1997, FNBSM
declared dividends totaling $169,000, or approximately 44% of net
income. In 1996, dividends declared amounted to approximately
37% of net income. Restrictions on the amount of dividends that
FNBSM may pay, without approval from banking regulatory agencies,
are also described in Note L. Unrealized gains and losses on
securities available-for-sale are not considered in determining
capital ratios for regulatory purposes.
Liquidity and Interest Rate Sensitivity. FNBSM has an
asset/liability management policy that, among other things,
defines certain objectives and procedures designed to minimize
interest rate risk while maintaining an acceptable interest rate
spread and insuring adequate liquidity. One of the key aspects
of this policy is that it provides specific financial objectives
in the form of financial ratios that must be met in order to be
in compliance with the policy. These specific objectives include
ratios which address current and forecasted profitability,
capital, short-term and long-term liquidity and the relationship
between rate sensitive assets and rate sensitive liabilities.
Liquidity is measured by FNBSM's ability to raise cash
on a short-term basis at a reasonable cost or at a minimal loss.
The maintenance of adequate liquidity is necessary so that FNBSM
is capable of meeting all of its financial obligations to
customers, suppliers, employees and shareholders at all times.
Sources of liquidity include ongoing returns of principal and
interest from securities and loans and borrowings from the FHLB.
For short-term borrowing needs, FNBSM occasionally borrows from
the FHLB through its "Repo Plus" program (see Note G to the
annual financial statements included elsewhere in this Proxy
Statement/Prospectus). These sources of liquidity are sufficient
to meet FNBSM's needs.
Interest rate risk is the exposure to potential
reductions in earnings and value arising from changes in interest
rates. The interest rate sensitivity of an asset or liability is
determined by the time period within which it can be repriced to
the market interest rate. On a monthly basis, management
prepares a "gap" report, which compares the amounts of assets and
liabilities that are expected to reprice in various intervals, up
to one year. FNBSM's goal is to have approximately the same
amount of assets and liabilities repricing in each period.
Also, the gap report is sometimes extended to a longer timeframe
<PAGE 75> in order to monitor the rate sensitivity of long-term
rate sensitive positions. In addition, FNBSM engages a
consulting firm on an ongoing basis to perform interest rate risk
and portfolio performance analyses, and to make recommendations
regarding courses of action to enhance short-term or long-term
earnings performance.
The table which follows presents the "Cumulative
Repricing Gap" of FNBSM's assets and liabilities as of
December 31, 1997. The table estimates the amounts of assets and
liabilities that would be expected to reprice for each time
period presented, based on interest rates as of that point in
time and based on certain key assumptions related to the rates of
prepayments on loans, calls of securities, run-off of deposits
and various reinvestment and funding assumptions.
PAGE 76
<PAGE>
<TABLE>
<CAPTION>
GAP ANALYSIS
DECEMBER 31, 1997
(Dollars in Thousands)
0-3 3-6 6-12 1-2 2-5 BEYOND
MONTHS MONTHS MONTHS YEARS YEARS 6 YEARS TOTAL
___________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Cash due from banks $ 20 $ $ $ $ $ 448 $ 468
Interest-bearing deposits with
banks 10 30 59 99
Securities available-for-sale 2,419 1,218 2,387 1,391 2,899 1,525 11,839
Loans 2,244 1,209 2,172 3,285 5,342 2,772 17,024
Other assets 1,052 1,052
Total assets $4,693 $2,457 $4,618 $4,676 $8,241 $5,797 $30,482
Noninterest-bearing deposits $ $ $ 678 $ 678 $1,357 $ $ 2,713
Interest-bearing deposits 2,972 2,402 4,989 2,378 5,260 1,556 19,557
Other liabilities 188 188 375 250 2,500 294 3,795
Equity 153 4,264 4,417
Total liabilities and
equity $3,313 $2,590 $6,042 $3,306 $9,117 $6,114 $30,482
Cumulative gap $1,380 $1,247 $ (177) $1,193 $ 317 $ -
Cumulative rate sensitive
assets/rate sensitive
liabilities 1.42 1.21 0.99 1.08 1.01 1.00
</TABLE>
Year 2000 Compliance/Computer System Requirements. The
Year 2000 problem has been well-publicized recently. Many
computer systems store dates utilizing two digits, instead of
four. This could cause computer systems to create erroneous
results or to fail completely unless corrective measures are
taken.
Management expects the proposed merger with Penns Woods
to be approved and completed by early 1999. In the course of its
negotiations with Penns Woods, management has inquired as to the
status of Penns Woods' efforts to ensure that it will not be
adversely affected by Year 2000 computing issues. Based on the
results of its inquiries, management is confident that Penns
Woods' systems, into which FNBSM's data will be integrated, will
be Year 2000 compliant on a timely basis.
In the unlikely event that the merger with Penns Woods
would not be completed, management has established a contingency
plan to address the Year 2000 issue. The contingency plan
provides for the replacement of existing proof equipment
(although the current system is believed to be Year 2000-
compliant, there will be no company available to provide
servicing on an ongoing basis) and the possible replacement of
two automatic teller machines. The cost of these items is
estimated to range from $125,000 to $250,000, depending on
certain optional purchases and various circumstances.
<PAGE 77>
Also, FNBSM is in the process of communicating with its
loan customers and key suppliers regarding the status of their
Year 2000 compliance efforts. Presently, management expects that
FNBSM will not be significantly impacted by Year 2000 issues
related to its lending or other activities.
Inflation. The asset and liability structure of a
financial institution is primarily monetary in nature, and
therefore, interest rates rather than inflation have a more
significant impact on FNBSM's performance. Interest rates are
not always affected in the same direction or magnitude as prices
of goods and services, but are reflective of fiscal policy
initiatives or economic factors which are not measured by a price
index.
New Financial Accounting Standard - Reporting
Comprehensive Income. In June 1997, the FASB issued Statement
No. 130, "Reporting Comprehensive Income." This statement
established standards for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Statement No. 130 requires that
all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement does not require a specific format for that
financial statement. Statement No. 130 is effective for fiscal
years beginning after December 15, 1997. The impact of this
statement on FNBSM will result in additional disclosures in
FNBSM's financial statements.
Management's Discussion and Analysis of financial Condition and
Results of Operations - June 30, 1998 and 1997
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in its accompanying financial
statements for FNBSM. Current performance does not guarantee or
assure similar performance in the future, and may not be
indicative of future results.
Financial Summary
FNBSM earned net income of $236,000 for the six months ended
June 30, 1998 and $215,000 for the comparable period in 1997.
FNBSM achieved a return on average assets of 1.52% and a return
on average equity of 10.39% for the six months ended June 30,
1998 compared to ratios of 1.49% and 10.06% in the comparable
period of 1997. The primary reasons for the increase are
discussed in detail in the "Results of Operations" section of
Management's Discussion and Analysis.
Total assets amounted to $31,934,000 as of June 30, 1998,
and total shareholders' equity was $4,536,000 as of that same
date. FNBSM's capital position as of June 30, 1998 was well in
<PAGE 78> excess of the minimum regulatory requirements to be
categorized as "well capitalized."
Results of Operation for the Six Months Ended June 30, 1998
and 1997
Net interest income increased $79,000 or 12.34%, during the
first six months of 1998 over the same period of 1997. This
increase is due primarily to increased volume as a result of
strong loan demand. Taxable investment interest decreased as a
result of a large number of taxable investments maturing or being
called during this time period. Nontaxable investment interest
income increased as a result of the purchase of nontaxable
investments due to favorable interest rates. Interest expense on
deposits increased $42,000, or 10.42%, primarily because of
increases in volume of outstanding deposits, as discussed in the
"Balance Sheet" section below. Other income increased $5,000
primarily as a result of increased credit life insurance
commission and service charge income. Operating expenses
increased $78,000 primarily as a result of the opening of a new
office in May 1998. Expenses were incurred in order to get the
new office ready to open. Six additional employees were hired
and trained during this period. Expenses for office supplies,
equipment and insurance were incurred. FNBSM's effective income
tax rate decreased as a result of increased tax exempt income.
Balance Sheet - June 30, 1998 and December 31, 1997
Cash and due from banks increased by $830,000 as the result
of a significant number of debt securities maturing or being
called. Funds were not immediately reinvested because of the low
interest rate environment during this time period.
Securities available for sale decreased $1,682,000 during
this time period as a result of the large number of debt
securities that either matured or were called during this time
period with the proceeds not reinvested, as noted above. During
this time period loans increased 14% as a result of strong loan
demand, primarily in the area of residential mortgages, and the
availability of funds resulting from matured and called debt
securities and an increase in deposits.
FNBSM premises and equipment increased as a result of the
opening of a branch office in May 1998.
Deposits increased approximately $2,016,000, or 9% during
the six months ended June 30, 1998. One of the reasons for the
increase in deposits is incentives offered to new loan customers
in the form of lower interest rates for utilizing automatic loan
payments from checking accounts. Also, several customers
transferred their individual retirement accounts from other
institutions to FNBSM. Finally, one of the other banks in the
area closed an office near Spring Mills and FNBSM utilized an
aggressive marketing campaign to attract these customers.
<PAGE 79>
Borrowed funds decreased as FNBSM utilized available funds,
as noted above, to pay down on its debt.
Year 2000 Compliance/Computer System Requirements
The Year 2000 problem has been well-publicized recently.
Many computer systems store dates utilizing two digits, instead
of four. This could cause computer systems to create erroneous
results or to fail completely unless corrective measures are
taken.
Management expects the proposed merger with Penns Woods to
be approved and completed by early 1999. In the course of its
negotiations with Penns Woods, management has inquired as to the
status of Penns Woods' efforts to ensure that it will not be
adversely affected by Year 2000 computing issues. Based on the
results of its inquiries, management is confident that Penns
Woods' systems, into which FNBSM's data will be integrated, will
be Year 2000 compliance on a timely basis.
In the unlikely event that the merger with Penns Woods would
not be completed, management has established a contingency plan
to address the Year 2000 issue. The contingency plan provides
for the replacement of existing proof equipment (although the
current system is believed to be Year 2000-compliant, there will
be no company available to provide servicing on an ongoing basis)
and the possible replacement of two automatic teller machines.
The cost of these items is estimated to range from $125,000 to
$250,000, depending on certain optional purchases and various
circumstances.
Also, FNBSM is in the process of communicating with its loan
customers and key suppliers regarding the status of their Year
2000 compliance efforts. Presently, management expects that
FNBSM will not be significantly impacted by Year 2000 issues
related to its lending or other activities.
PAGE 80
<PAGE>
Market Price of and Dividends on FNBSM Common Stock and Related
Shareholder Matters
FNBSM Common Stock is not listed on any exchange or
quoted on NASDAQ. There is not an active trading market for
shares of FNBSM Common Stock, which are traded locally in the
over-the-counter market. The table below sets forth for the
periods indicated the amount of dividends paid per share and the
quarterly ranges of high and low sales prices. The following
price information is based on transactions known to management of
FNBSM, do not include retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Quarterly
Quarter Ended Dividend(1) High Low
December 31, 1998(2) $ -- $87.00 $85.00
September 30, 1998 1.20 87.00 85.00
June 30, 1998 -- 87.00 85.00
March 31, 1998 1.15 87.00 85.00
December 31, 1997 -- 87.00 85.00
September 30, 1997 1.10 87.00 85.00
June 30, 1997 -- 87.00 85.00
March 31, 1997 1.05 87.00 85.00
__________________
(1) FNBSM has historically paid dividends semi-annually.
(2) Through November 5, 1998.
On July 22, 1998, the last business day preceding
public announcement of the Merger, the last previous known sale
price for FNBSM Common Stock was $87.00 per share. On
November 5, 1998, the last previous known sale price for FNBSM
Common Stock was $87.00 per share. To the knowledge of
management of FNBSM, there have been no transactions in FNBSM
Common Stock since public announcement of the Merger.
The Merger Agreement permits FNBSM to pay a regular
semi-annual cash dividend not to exceed $1.25 per share of FNBSM
Common Stock outstanding on or before December 31, 1998. For
restrictions on FNBSM's ability to pay additional dividends, See
"THE MERGER -- Dividends."
PAGE 81
<PAGE>
DESCRIPTION OF PENNS WOODS CAPITAL SECURITIES
The authorized capital stock of Penns Woods consists of
10,000,000 shares of common stock, $10.00 par value ("Penns Woods
Common Stock"). As of October 1, 1998, there were
2,571,302 shares of Penns Woods Common Stock issued and
outstanding, and no shares held by Penns Woods as treasury stock.
There are no other shares of capital stock of Penns Woods
authorized, issued or outstanding. Penns Woods has no options,
warrants, or other rights authorized, issued or outstanding,
other than options granted under Penns Woods' stock option plans.
Common Stock
The holders of Penns Woods Common Stock are entitled to
share ratably in dividends when and if declared by the Penns
Woods Board of Directors from funds legally available therefor.
Declaration and payment of cash dividends by Penns Woods depends
upon dividend payments by Jersey Shore, which are Penns Woods'
primary source of revenue and cash flow. Penns Woods is a legal
entity separate and distinct from its subsidiaries. Accordingly,
the right of Penns Woods, and consequently the right of creditors
and shareholders of Penns Woods, to participate in any
distribution of the assets or earnings of any subsidiary is
necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of Penns Woods in
its capacity as a creditor may be recognized.
JSSB will not be permitted to pay dividends on its
capital stock or repurchase shares of its stock if its
shareholders' equity would be reduced below the amount required
by applicable regulatory capital requirements. Current FDIC
regulations require a holding company's insured institutions to
give the FDIC 30 days advance notice of any proposed declaration
of dividends to the holding company, and the FDIC has the
authority under its supervisory powers to prohibit the payment of
dividends to the holding company.
For certain limitations on the ability of JSSB to pay
dividends to Penns Woods, see Penns Woods' Annual Report on
Form 10-K for the year ended December 31, 1997, a copy of which
is being delivered with this Proxy Statement/Prospectus and
incorporated herein by reference. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
Each holder of shares of Penns Woods Common Stock will
be entitled to one vote for each share held on matters upon which
shareholders have the right to vote. Penns Woods shareholders
are not entitled to cumulate votes in the election of directors.
The holders of Penns Woods Common Stock have no
preemptive rights to acquire any additional shares of Penns
Woods. In addition, the Penns Woods Common Stock is not subject
to redemption. <PAGE 82>
Penns Woods' Articles of Incorporation authorize the
Penns Woods Board of Directors to issue authorized shares of
Penns Woods Common Stock without shareholder approval.
In the event of liquidation, dissolution or winding-up
of Penns Woods, whether voluntary or involuntary, holders of
Penns Woods Common Stock will be entitled to share ratably in any
of its assets or funds that are available for distribution to its
shareholders after the satisfaction of its liabilities (or after
adequate provision is made therefor).
Special Charter and Pennsylvania Corporate Law Provisions
Penns Woods' Articles of Incorporation contain certain
provisions regarding opposition of a tender offer which may have
the effect of deterring or discouraging, among other things, a
nonnegotiated tender or exchange offer for Penns Woods stock, a
proxy contest for control of Penns Woods, the assumption of
control of Penns Woods by a holder of a large block of Penns
Woods stock and the removal of Penns Woods' management. These
provisions: (1) divide the Penns Woods Board of Directors into
three classes serving staggered three-year terms; (2) require
that shareholders owning at least 66-2/3% of the outstanding
shares of Penns Woods Common Stock approve mergers and other
similar transactions involving a sale or other disposition of
substantially all of the assets of Penns Woods; (3) eliminate
cumulative voting in elections of directors; and (4) require
advance notice of nominations for the election of directors and
the presentation of shareholder proposals at meetings of
shareholders.
The Pennsylvania BCL also contains certain provisions
applicable to Penns Woods which may have the effect of impeding a
change in control of Penns Woods. These provisions, among other
things: (1) require that, following any acquisition by any
person or group of 20% of a public corporation's voting power,
the remaining shareholders have the right to receive payment for
their shares, in cash, from such person or group in an amount
equal to the "fair value" of the shares, including an increment
representing a proportion of any value payable for control of the
corporation and (2) prohibit for five years, subject to certain
exceptions, a "business combination" (which includes a merger or
consolidation of the corporation or a sale, lease or exchange of
assets) with a shareholder or group of shareholders beneficially
owning 20% or more of a public corporation's voting power.
In 1990, Pennsylvania adopted legislation further
amending the Pennsylvania BCL. To the extent applicable to Penns
Woods at the present time, this legislation generally:
(1) expands the factors and groups (including shareholders) which
the Penns Woods Board of Directors can consider in determining
whether a certain action is in the best interests of the
corporation; (2) provides that the Penns Woods Board of Directors
need not consider the interests of any particular group as
dominant or controlling; (3) provides that Penns Woods'
<PAGE 83> directors, in order to satisfy the presumption that
they have acted in the best interests of the corporation, need
not satisfy any greater obligation or higher burden of proof with
respect to actions relating to an acquisition or potential
acquisition of control; (4) provides that actions relating to
acquisitions of control that are approved by a majority of
"disinterested directors" are presumed to satisfy the directors'
standard, unless it is proven by clear and convincing evidence
that the directors did not assent to such action in good faith
after reasonable investigation; and (5) provides that the
fiduciary duty of Penns Woods' directors is solely to the
corporation and may be enforced by the corporation or by a
shareholder in a derivative action, but not by a shareholder
directly.
The 1990 amendments to the Pennsylvania BCL explicitly
provide that the fiduciary duty of directors shall not be deemed
to require directors (1) to render inapplicable, or make
determinations under, provisions of the Pennsylvania BCL relating
to control transactions, business combinations, control-share
acquisitions or disgorgement by certain controlling shareholders
following attempts to acquire control; or (2) to act as the board
of directors, a committee of the board or an individual director
solely because of the effect such action might have on an
acquisition or potential or proposed acquisition of control of
the corporation or the consideration that might be offered or
paid to shareholders in such an acquisition. One of the effects
of the 1990 fiduciary duty statutory provisions may be to make it
more difficult for a shareholder to successfully challenge the
actions of the Penns Woods Board of Directors in a potential
change in control context. Pennsylvania case law appears to
provide that the fiduciary duty standard under the 1990
amendments to the Pennsylvania BCL grants directors the statutory
authority to reject or refuse to consider any potential or
proposed acquisition of a Pennsylvania corporation.
Penns Woods is also subject to the "disgorgement" and
"control-share acquisition" statutes included in the 1990
legislation. The "disgorgement" statute generally requires
disgorgement by any person or group who or which has acquired or
publicly disclosed an intent to acquire 20% or more of a
corporation's voting power of any profit realized from the sale
of any shares acquired within specified time periods of such
acquisition or disclosure if the shares are sold within eighteen
months thereafter. The "control share acquisition" statute
generally prohibits a person or group who or which exceeds
certain stock ownership thresholds (20%, 33-1/3% and 50%) for the
first time from voting the "control shares" (i.e., the shares
owned in excess of the applicable threshold) unless voting rights
are restored by a vote of disinterested shareholders.
PAGE 84
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS
Directors
Removal
Pursuant to the Pennsylvania BCL, any individual
director, class of directors or the entire board of directors of
Penns Woods may be removed from office without assigning any
cause by the vote of the shareholders of Penns Woods. There is
no such provision contained in the NBA or in the Articles of
Association or Bylaws of FNBSM that would permit the shareholders
of FNBSM to remove one or more directors from office. Directors
of FNBSM, however, are to be elected annually by the shareholders
for one-year terms. See "Election of Directors."
Nomination
Candidates nominated for the Board of Directors of
Penns Woods must be shareholders of Penns Woods and must be
nominated by a Penns Woods' shareholder at least 20 business day
prior to the meeting in which such election shall occur.
Nominations for election to the Board of Directors of FNBSM may
be made by the Board of Directors or any shareholder of FNBSM.
The nomination shall be made not less than 14 days nor more than
50 days prior to any meeting of shareholders called for such
purpose. Pursuant to the NBA, every director of FNBSM must be a
citizen of the United States, satisfy certain specified residency
requirements and own in his or her own right shares of FNBSM
Common Stock having an aggregate par value of not less then
$1,000.
Election of Directors
Penns Woods' Articles of Incorporation and Bylaws
provide that its Board of Directors shall be composed of not less
than five nor more than 25 directors, the number of which may be
determined by the Board of Directors. Presently, the Board of
Directors of Penns Woods is composed of nine members. The Penns
Woods Board of Directors is divided into three classes, each
serving three-year terms, so that approximately one-third of the
directors are elected at each annual meeting of shareholders.
Classification of the Board of Directors has the effect of
decreasing the number of directors that could be elected in a
single year by any person who seeks to elect its designees to a
majority of the seats on the Penns Woods Board of Directors and
thereby could impede a change in control of Penns Woods.
Pursuant to FNBSM's articles of association and the
NBA, the Board of Directors must consist of not less than five
(5) nor more than 25 directors. The number of directors to be
elected, subject to the foregoing limits, is determined from time
to time by a majority of the full Board of Directors or by
resolution of the shareholders. The Board of Directors has
<PAGE 85> presently fixed the number at nine. The NBA and the
Articles of Association of FNBSM require that directors of FNBSM
be elected annually for one-year terms.
Cumulative Voting
Penns Woods' shareholders are not permitted to cumulate
votes in the election of directors. Under the NBA, shareholders
of FNBSM are entitled to cumulative voting rights in elections of
directors. Cumulative voting entitles each shareholder to as
many votes in the election of directors as equal the number of
shares held multiplied by the number of directors to be elected.
A shareholder may cast all of these votes for one candidate or
distribute them among any two or more candidates. Penns Woods'
Articles of Incorporation do not provide for cumulative voting
because it is believed that each director should represent and
act in the interest of all shareholders and not any special group
of shareholders. Absent cumulative voting, a majority of the
outstanding shares can elect all of the members of the Board of
Directors.
Limited Liability
As permitted by the Pennsylvania BCL, Penns Woods'
Bylaws provide that directors of Penns Woods are not personally
liable to Penns Woods, its shareholders or others for any action
taken or any failure to take any action unless the director
breached or failed to perform the duties of his or her office as
set forth under Pennsylvania law and such breach or failure
constitutes self-dealing, willful misconduct or recklessness;
provided, however, that there is no such elimination of liability
arising under any criminal statute or with respect to the payment
of taxes pursuant to local, state or federal law.
The Articles of Association and Bylaws of FNBSM contain
no similar provisions.
Indemnification
The Bylaws of Penns Woods and FNBSM each provide for
indemnification of directors, officers, employees and agents for
certain litigation-related liabilities and expenses to the
maximum extent provided by Pennsylvania law. Directors,
officers, employees and agents of Penns Woods are entitled to
indemnification in both third party actions and derivative
actions unless there is a court finding that the act or failure
to act giving rise to the claim for indemnification constitutes
willful misconduct or recklessness. There is no requirement of a
case-by-case determination that the applicable standard of
conduct has been met for a person to be entitled to
indemnification.
The Bylaws of FNBSM provide that FNBSM is required to
indemnify directors, officers and employees of FNBSM to the full
extent permitted by Pennsylvania law and, in such situations
<PAGE 86> where such indemnification is not required by
Pennsylvania law, may indemnify such persons to the full extent
otherwise permitted.
Shareholder Meetings
Special meetings of Penns Woods shareholders may be
called at any time by the Board of Directors, by the Chairman of
the Board or the President. Penns Woods shareholders holding at
least one-fifth (1/5) of the votes which all shareholders are
entitled to cast are entitled to call a special meeting of
shareholders.
FNBSM's Articles of Association and Bylaws provide
that, except as otherwise specifically provided by statute,
special meetings of shareholders may be called by the Board of
Directors or by any three (3) or more shareholders owning, in the
aggregate, not less than 10% of the stock of FNBSM.
Inspection Rights
The Pennsylvania BCL provides that every shareholder of
Penns Woods and FNBSM, upon written demand under oath stating the
purpose thereof, shall have the right, for any proper purpose, to
examine during usual business hours the share register, books or
records of account and records of the proceedings of the
shareholders and directors, and make copies or extracts
therefrom. In addition, pursuant to FNBSM's Bylaws and the NBA,
FNBSM shareholders each have the right to inspect the bylaws of
FNBSM during regular business hours and the shareholder list,
respectively.
Antitakeover Provisions
Penns Woods
Penns Woods is subject to various provisions of the
Pennsylvania BCL which are triggered, in general, if any person
or group acquires, or discloses an intent to acquire, 20% or more
of the voting power of a covered corporation, other than pursuant
to a registered firm commitment underwriting or, in certain
cases, pursuant to the approving vote of the Board of Directors.
The relevant provisions are contained in Subchapters 25E-H of the
Pennsylvania BCL.
Subchapter 25E of the Pennsylvania BCL (relating to
control transactions) provides that if any person or group
acquires 20% or more of the voting power of a covered
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.
Subchapter 25F of the Pennsylvania BCL (relating to
business combinations) delays for five years and imposes
<PAGE 87> conditions upon "business combinations" between an
"interested shareholder" and the corporation. The term "business
combination" is defined broadly to include various transactions
utilizing a corporation's assets for purchase price amortization
or refinancing purposes. For this purpose, an "interested
shareholder" is defined generally as the beneficial owner of at
least 20% of a corporation's voting shares.
Subchapter 25G of the Pennsylvania BCL (relating to
control share acquisitions) prevents a person who has acquired
20% or more of the voting power of a covered corporation from
voting such shares unless the "disinterested" shareholders
approve such voting rights. Failure to obtain such approval
exposes the owner to the risk of a forced sale of the shares to
the issuer. Even if shareholder approval is obtained, the
corporation is also subject to Subchapters 25I and J of the
Pennsylvania BCL. Subchapter 25I provides for a minimum
severance payment to certain employees terminated within two
years of the approval. Subchapter 25J prohibits the abrogation
of certain labor contracts prior to their stated date of
expiration.
Subchapter 25H of the Pennsylvania BCL (relating to
disgorgement) applies in the event that (i) any person or group
publicly discloses that the person or group may acquire control
of the corporation or (ii) a person or group acquires (or
publicly discloses an offer or intent to acquire) 20% or more of
the voting power of the corporation and, in either case, sells
shares within 18 months thereafter. Any profits from sales of
equity securities of the corporation by the person or group
during the 18-month period belong to the corporation if the
securities that were sold were acquired during the 18-month
period or within 24 months prior thereto.
Subchapters 25E-H of the Pennsylvania BCL contain a
wide variety of transactional and status exemptions, exclusions
and safe harbors.
In addition, the fiduciary duty standards applicable to
the Board of Directors of Penns Woods under the Pennsylvania BCL
and certain provisions of Penns Woods' Articles of Incorporation
and Bylaws may have the effect of deterring or discouraging,
among other things, a nonnegotiated tender or exchange offer for
Penns Woods stock, a proxy contest for control of Penns Woods,
the assumption of control of Penns Woods by a holder of a large
block of Penns Woods' stock and the removal of Penns Woods'
management. See "DESCRIPTION OF PENNS WOODS CAPITAL
SECURITIES -- Special Charter and Pennsylvania Corporate Law
Provisions."
<PAGE 88>
FNBSM
The NBA does not contain provisions similar to
Subchapters 25E-H of the Pennsylvania BCL described above.
Required Shareholder Vote
General
The holders of Penns Woods Common Stock possess
exclusive voting rights of Penns Woods. Each holder of Penns
Woods Common Stock is entitled to one vote for each share owned
of record. For general corporate action of the shareholders of
Penns Woods, the affirmative vote of a majority of the votes cast
at a meeting of shareholders is required for approval
(abstentions with respect to any matter are not considered votes
"cast" under Pennsylvania law).
The holders of FNBSM Common Stock possess exclusive
voting rights of FNBSM. Each holder of FNBSM Common Stock is
entitled to one vote for each share owned of record. For general
corporate action of the shareholders of FNBSM, the affirmative
vote of a majority of the votes cast at a shareholders' meeting
is required for approval unless otherwise provided by law or
FNBSM's Articles of Association.
Fundamental Changes
Penns Woods' Articles of Incorporation require that a
plan of merger, consolidation, liquidation, dissolution or any
other action that would result in the sale or other disposition
of all, or substantially all of the assets of Penns Woods must be
approved by the affirmative vote of shareholders entitled to cast
at least two-thirds of the votes which all shareholders are
entitled to cast.
FNBSM is subject to the provisions of the NBA which
require the affirmative vote of shareholders entitled to cast at
least two-thirds of the issued and outstanding shares of FNBSM
Common Stock in order to approve certain mergers, conversions and
consolidations.
Amendment of Articles of Incorporation or Association
Except for the provision of Penns Woods' Articles of
Incorporation relating to the transfer of all or substantially
all of the Penns Woods' assets which requires the affirmative
vote of holders of two-thirds of Penns Woods Common Shares, the
Articles of Incorporation may be amended by the affirmative vote
of a majority of votes cast on the matter. Subject to the NBA,
the Articles of Association of FNBSM may be amended by the
affirmative vote of holders of the majority of FNBSM Common
Shares.
<PAGE 89>
Amendment of Bylaws
The authority to amend or repeal Penns Woods' Bylaws is
vested in Penns Woods' Board of Directors, subject always to the
power of the shareholders of Penns Woods to change such action by
the affirmative vote of shareholders holding at least a majority
of Penns Woods' total voting power (except that any amendment to
the indemnification and limitation of liability provisions set
forth in the Bylaws shall require the approval of each affected
director, officer and employee with respect to such individual.
FNBSM's Bylaws may be amended or repealed by a vote of
a majority of the total number of directors.
Dissenters' Rights
Under the Pennsylvania BCL, a shareholder of a
corporation is generally entitled to receive payment of the fair
value of such shareholder's shares if such shareholder duly
exercises its dissenters' rights with respect to a plan of merger
or consolidation, share exchange, asset transfer, division or
conversion to which such corporation is a party, unless the
shares are (i) listed on a national securities exchange or
(ii) held of record by more than 2,000 shareholders. The
foregoing market exceptions do not apply,and dissenters' rights
generally are available in respect of, (i) shares that are not
converted solely into shares of the acquiring, surviving, new or
other corporation or solely into such shares and money in lieu of
fractional shares, (ii) shares of any preferred or special class
unless the shareholders of the class are entitled to vote on the
plan and such class vote is required for the adoption of the plan
or to effectuate the transaction and (iii) shares which under the
plan are treated differently from shares of the same class or
series and which are not entitled to vote as a special class
under Pennsylvania BCL Section 1906(c). The Pennsylvania BCL
allows a corporation to provide dissenters' rights
notwithstanding the statutory exceptions, but Penns Woods'
Articles of Incorporation and Bylaws do not require such optional
dissenters' rights. Under the Pennsylvania BCL, if a plan of
merger or consolidation, share exchange, asset transfer, division
or conversion is adopted by the directors only, without any
shareholder approvals required, the shareholders have no
statutory dissenters' rights in respect of the plan other than
optional dissenters' rights, if any. Penns Woods' shareholders
have no dissenters' rights with respect to the Merger.
The NBA provides for dissenters' rights in connection
with any merger. Any shareholder who perfects dissenters' rights
under the NBA is entitled to receive "the value of the shares
held by him" determined, as of the date of the meeting of
shareholders to consider the transaction, by an appraisal made by
a committee of three persons, composed of (1) one selected by the
vote of the dissenting shareholders entitled to receive the fair
value of their shares; (2) one selected by the directors of the
receiving association; and (3) one selected by the two so
<PAGE 90> 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 (5) 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 such
dissenting shareholder. See "THE MERGER --Dissenters' Rights of
Appraisal" and "ANNEX C -- Excerpts from National Bank Act
relating to Dissenters' Rights."
Dividends
Under the Pennsylvania BCL, a corporation may pay
dividends unless, after giving effect thereto, (i) the
corporation would be unable to pay its debts as they become due
in the usual course of its business or (ii) the total assets of
the corporation would be less than the sum of its total
liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time as of which the
distribution is measured, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are
superior to those receiving the distribution.
Under the NBA, a national bank may pay dividends out of
the undivided profits of the bank in such amounts as the board of
directors shall determine, provided that the approval of the
Comptroller is required if the total of all dividends declared by
the bank in any calendar year shall exceed the total of its net
income of that year combined with its retained net income of the
preceding two years.
Preemptive Rights
Holders of Penns Woods Common Stock are not entitled to
preemptive rights. Holders of FNBSM Common Stock are entitled to
preemptive rights.
ADJOURNMENT
In the event that there are not sufficient votes to
constitute a quorum or approve the adoption of the Merger
Agreement at the time of the Special Meeting, such proposal could
not be approved unless the Special Meeting is adjourned in order
to permit further solicitation of proxies. In order to allow
proxies which have been received by FNBSM, at the time of the
applicable Meeting to be voted for such adjournment, if
necessary, FNBSM has submitted the question of adjournment under
such circumstances to its shareholders as a separate matter for
their consideration.
The Board of Directors of FNBSM recommends that
shareholders vote their proxies in favor of the Adjournment
Proposal so that their proxies may be used for such purposes in
the event it becomes necessary. Properly executed proxies will
<PAGE 91> be voted in favor of the Adjournment Proposal unless
otherwise indicated thereon. If it is necessary to adjourn the
Special Meeting, no notice of the time and place of the adjourned
meeting is required to be given to shareholders other than an
announcement of such time and place at the Special Meeting.
PAGE 92
<PAGE>
EXPERTS
The consolidated financial statements of Penns Woods at
December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, included in Penns Woods'
Annual Report on Form 10-K for the year ended December 31, 1997,
have been audited by Parente, Randolph, Orlando, Carey &
Associates, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference.
The financial statements referred to above are included in
reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of FNBSM as of December 31,
1997 and for the year ended December 31, 1997 included in this
Proxy Statement/Prospectus have been audited by Parente,
Randolph, Orlando, Carey & Associates, independent public
accountants, as indicated in their report with respect thereto
appearing elsewhere herein, and are included in reliance upon the
authority of said firm as experts in accounting and auditing in
giving said report.
LEGAL MATTERS
The validity of the Penns Woods Common Stock to be
issued in the Merger, certain federal income tax consequences of
the Merger, and certain other legal matters relating to the
Merger are being passed upon for Penns Woods by the law firm of
Stevens & Lee, P.C., counsel to Penns Woods.
Certain legal matters in connection with the Merger
will be passed upon for FNBSM by Rhoads & Sinon LLP.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the
Board of Directors of FNBSM knows of no matters which will be
presented for consideration at the Special Meeting other than as
set forth in this Proxy Statement/Prospectus. However, if any
other matters shall properly come before the Special Meeting or
any adjournments or postponements thereof and be voted upon, any
proxy given pursuant to this solicitation will be voted in
accordance with the judgment of the persons named in such proxy.
PAGE 93
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND
SIX MONTHS ENDED JUNE 30, 1998
Page
Independent Auditors' Report .............................. F-2
Balance Sheets as of December 31, 1997 .................... F-3
Statements of Income For the Years Ended December 31,
1997 and December 31, 1996 ................................ F-4
Statements of Changes in Shareholders' Equity For the
Years Ended December 31, 1997 and December 31, 1996 ....... F-5
Statements of Cash Flows For the Years Ended
December 31, 1997 and December 31, 1996 ................... F-6
Notes to Financial Statements For the Years Ended
December 31, 1997 and December 31, 1996 ................... F-8
Balance Sheet as of June 30, 1998 and December 31, 1997.... F-18
Statements of Income For the Six Months Ended
June 30, 1998 and June 30, 1997 ........................... F-19
Statements of Cash Flows For the Six Months Ended
June 30, 1998 and June 30, 1997 ........................... F-20
Notes to Financial Statements For the Six Months Ended
June 30, 1998 and June 30, 1997 ........................... F-22
PAGE F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
The First National Bank of Spring Mills
Spring Mills, Pennsylvania:
We have audited the accompanying balance sheet of The
First National Bank of Spring Mills ("FNBSM") as of December 31,
1997 and the related statements of income, changes in
shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of FNBSM's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 misstate-
ment. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 FNBSM as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Parente, Randolph, Orlando,
Carey and Associates
Williamsport, Pennsylvania
September 24, 1998
PAGE F-2
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
_____________________________________________________________________________________
December 31
1997
_____________________________________________________________________________________
<S> <C>
ASSETS:
Cash and due from banks $ 468
Interest-bearing deposits with banks 99
Securities available-for-sale 11,839
Loans, net 17,024
Bank premises and equipment, net 755
Accrued interest receivable 232
Other assets 65
TOTAL $30,482
LIABILITIES:
Interest-bearing deposits $19,557
Noninterest-bearing deposits 2,713
Total deposits 22,270
Dividend payable 86
Borrowed funds 3,500
Accrued interest payable 161
Other liabilities 48
Total liabilities 26,065
SHAREHOLDERS' EQUITY:
Common stock, par value $2;
100,000 shares authorized;
75,000 shares issued and outstanding 150
Additional paid-in capital 150
Retained earnings 3,964
Net unrealized gains on
securities available-for-sale 153
Total shareholders' equity 4,417
TOTAL $30,482
</TABLE>
See Notes to Financial Statements
PAGE F-3
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 (AUDITED)
AND 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
______________________________________________________________________________
1997 1996
______________________________________________________________________________
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,593 $1,384
Interest and dividends on investments:
Taxable interest 522 485
Tax-exempt interest 163 165
Dividends 7 8
Interest on deposits with banks 38 35
Total interest income 2,323 2,077
INTEREST EXPENSE:
Interest on deposits 827 819
Interest on borrowed funds 180 87
Total interest expense 1,007 906
NET INTEREST INCOME 1,316 1,171
PROVISION FOR LOAN LOSSES 54 32
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,262 1,139
OTHER INCOME:
Service charges 45 36
Securities gains (losses), net 2 (4)
Gain on sale of bank premises - 86
Other operating income 34 32
Total other income 81 150
OTHER EXPENSES:
Salaries and employee benefits 441 394
Occupancy expense 43 46
Furniture and equipment expense 129 123
Other operating expenses 222 196
Total other expenses 835 759
INCOME BEFORE INCOME TAX PROVISION 508 530
INCOME TAX PROVISION 122 117
NET INCOME $ 386 $ 413
</TABLE>
See Notes to Financial Statements
PAGE F-4
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 (AUDITED)
AND 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
______________________________________________________________________________________
Unrealized
Appreciation
(Depreciation)
on Total
Additional Securities Share-
Common Stock Paid-in Retained Available- holders'
Shares Amount Capital Earnings For-Sale Equity
______________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 75,000 $ 150 $ 150 $3,488 $149 $3,937
Net income 413 413
Dividends declared (154) (154)
Net change in unrealized
appreciation (depreciation) ______ ______ ______ ______ (19) (19)
Balance, December 31, 1996 75,000 150 150 3,747 130 4,177
Net income 386 386
Dividends declared (169) (169)
Net change in unrealized
appreciation (depreciation) ______ ______ ______ ______ 23 23
Balance, December 31, 1997 75,000 $ 150 $ 150 $3,964 $153 $4,417
</TABLE>
See Notes to Financial Statements
PAGE F-5
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 (AUDITED)
AND 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
_______________________________________________________________________________
1997 1996
_______________________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 386 $ 413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 77 84
Provision for loan losses 54 32
Deferred income taxes (2) 1
Amortization of investment security premiums 12 15
Accretion of investment security discounts (7) (5)
Securities (gains) losses, net (2) 4
Gain on sale of bank premises - (86)
Increase in all other assets (8) (37)
(Decrease) increase in all other liabilities (17) 42
Net cash provided by operating activities 493 463
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with banks - 190
Purchase of securities available-for-sale (3,800) (3,183)
Proceeds from sale of securities available-for-sale 219 517
Proceeds from maturities of securities available-for-sale 2,352 1,338
Net increase in loans (1,575) (2,608)
Proceeds from sale of bank premises - 132
Acquisition of bank premises and equipment (37) (35)
Net cash used in investing activities (2,841) (3,649)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 930 2,274
Net increase in short-term borrowings 750 -
Proceeds from long-term borrowings 1,500 1,000
Repayment of long-term borrowings (1,000) -
Dividends paid (162) (146)
Net cash provided by financing activities 2,018 3,128
NET DECREASE IN CASH AND CASH EQUIVALENTS (330) (58)
CASH AND CASH EQUIVALENTS, BEGINNING 798 856
CASH AND CASH EQUIVALENTS, ENDING $ 468 $ 798
</TABLE>
PAGE F-6
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Bank paid approximately $988,000 and $896,000 in
interest on deposits and other borrowings during 1997 and
1996, respectively.
The Bank made income tax payments of approximately $162,000
and $83,000 during 1997 and 1996, respectively.
See Notes to Financial Statements
PAGE F-7
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
NOTES TO FINANCIAL STATEMENTS FOR YEARS
ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
_________________________________________________________________
NOTE A Nature of operations and summary of significant
accounting policies
Nature of Business
The First National Bank of Spring Mills ("FNBSM") provides a
full range of banking services to individual and business
customers through its office located in Spring Mills,
Pennsylvania. FNBSM is subject to competition from other
financial institutions. It is also subject to regulations
by certain federal agencies and undergoes periodic
examination by those regulatory authorities.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.
Securities Available-for-Sale
Securities available-for-sale include bonds, notes,
debentures, and certain equity securities. Unrealized
holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a
separate component of shareholders' equity until realized.
Also included in securities available-for-sale are
restricted equity securities, primarily stock of the Federal
Home Loan Bank of Pittsburgh, which are carried at cost and
evaluated for impairment.
Declines in the fair value of individual securities below
their cost that are other than temporary result in write-
downs of the individual securities to their fair value and
are included in earnings as realized losses.
Gains and losses on the sale of all securities are
determined using the specific-identification method.
Premiums and discounts are recognized in interest income
using the interest method over the estimated life of each
security.
<PAGE F-8>
The fair value of investments, except certain state and
municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state
and municipal securities is not readily available through
market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Loans
Loans are stated at the principal amount outstanding, net of
unamortized loan fees and costs, and the allowance for loan
losses. Loans are placed on a nonaccrual basis when there
are serious doubts about the collectibility of principal or
interest.
FNBSM recognizes nonrefundable loan origination fees and
certain direct loan origination costs over the life of the
related loans as an adjustment of loan yield using the
interest method.
The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the
allowance is based on FNBSM's past loan loss experience,
known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current
economic conditions.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the estimated
useful lives of the related assets. Costs incurred for
routine maintenance and repairs are expensed currently.
Income Taxes
Deferred tax assets and liabilities result from temporary
differences in financial and income tax methods of
accounting, and are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes.
<PAGE F-9>
Cash Flows
FNBSM utilizes the net reporting of cash receipts and cash
payments for deposit and lending activities. FNBSM
considers amounts due from banks, if purchased with a
maturity of three months or less, and federal funds sold, to
be cash equivalents.
NOTE B Cash and Due From Banks
Banks are required to maintain reserves consisting of vault
cash and deposit balances with the Federal Reserve Bank in
their district. The reserves are based on deposit levels
during the year and account activity and other services
provided by the Federal Reserve Bank. Average daily
currency, coin and cash balances with the Federal Reserve
Bank needed to cover reserves against deposits for 1997
ranged from $14,000 to $45,000. For 1996, these balances
ranged from $23,000 to $44,000. Average daily cash balances
with the Federal Reserve Bank required to cover services
provided to FNBSM amounted to $75,000 throughout 1997 and
1996. Total balances restricted at December 31, 1997 were
$120,000.
NOTE C Securities Available-For-Sale
The amortized cost of securities available-for-sale and
their approximate fair values at December 31, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and
agency securities $ 5,931 $ 86 $ 1 $ 6,016
State and municipal securities 3,459 92 - 3,551
Other debt securities 2,005 65 11 2,059
Restricted equity securities 213 - - 213
$ 11,608 $ 243 $ 12 $ 11,839
</TABLE>
The amortized cost and fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below
(in thousands). 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.
<PAGE F-10>
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 1,881 $ 1,922
Due from one year to five years 700 730
Due from five to ten years 4,122 4,226
Due after ten years 4,692 4,748
$ 11,395 $ 11,626
</TABLE>
Gross realized gains on sales of securities available-for-
sale amounted to approximately $2,000 in 1997. Gross
realized gains on sales of securities available-for-sale
amounted to approximately $1,000, and gross realized losses
totaled approximately $5,000, in 1996.
Investment securities with a carrying value of $100,000 at
December 31, 1997 were pledged to secure certain deposits.
There is no concentration of investments that exceeds 10% of
shareholders' equity for any individual issuer, excluding
those guaranteed by the U.S. government, as of December 31,
1997.
NOTE D Loans
Major loan classifications are summarized as of December 31,
1997 as follows (in thousands):
<TABLE>
<CAPTION>
Past Due Past Due
30 to 90 90 Days Non-
Current Days or More Accrual Total
<S> <C> <C> <C> <C> <C>
Real estate loans - $ 14,042 $ - $ - $ - $ 14,042
mortgage
Real estate loans - 219 - - - 219
construction
Commercial and
industrial loans 1,020 13 11 1,044
Consumer and all
other loans 1,967 34 10 - 2,011
Gross loans $ 17,248 $ 47 $ 21 $ - 17,316
Less:
Unamortized loan fees/costs 127
Allowance for loan losses 165
Loans, net $ 17,024
</TABLE>
The amount of FNBSM's impaired loans was insignificant in
1997 and 1996.
<PAGE F-11>
Transactions in the allowance for loan losses are summarized
as follows (in thousands):
Year Ended
December 31,
1997 1996
Balance, beginning of year $ 140 $ 120
Provision charged to operations 54 32
Loans charged off (32) (14)
Recoveries 3 2
Balance, end of year $ 165 $ 140
FNBSM has no concentration of loans to borrowers engaged in
similar businesses or activities which exceed 5% of total
assets at December 31, 1997.
FNBSM grants residential, consumer, commercial and
industrial loans to customers in or near Spring
Mills,Pennsylvania. A substantial portion of its debtors'
ability to honor their contracts is dependent on the
economic conditions within this region.
NOTE E Bank premises and equipment
Bank premises and equipment as of December 31, 1997 are
summarized as follows (in thousands):
Land $ 55
Bank premises 650
Furniture and equipment 612
Total 1,317
Less accumulated depreciation 562
Net $ 755
NOTE F Deposits
Time deposits of $100,000 or more totaled approximately
$1,547,000 on December 31, 1997. Interest expense related
to such deposits was approximately $71,000 in 1997 and
$51,000 in 1996. Time deposits at December 31, 1997 mature
as follows: 1998 - $7,393,000, 1999 - $1,984,000, 2000 -
$1,112,000, 2001 - $1,092,000, 2002 - $1,016,000, thereafter
- $201,000.
<PAGE F-12>
NOTE G Borrowed funds
At December 31, 1997, borrowed funds consisted of the
following (in thousands):
Advances from Federal Home Loan Bank of
Pittsburgh under the "Repo-Plus" overnight
credit program $ 750
Other loans from Federal Home Loan Bank of
Pittsburgh:
Fixed rate at 5.21%, maturity
October 30, 2000 500
Variable rate at 5.96% maturity
February 14, 2002, putable quarterly 500
Variable rate at 5.48%, maturity
February 14, 2002, putable quarterly 500
Fixed rate at 6.92%, maturity
October 17, 2011 500
Fixed rate at 6.92%, maturity May 26, 2015 750
Total $ 3,500
Borrowed funds are secured by Federal Home Loan Bank stock,
mortgage-backed securities issued by U.S. Government
agencies and first mortgage loans under a blanket floating-
lien agreement.
The maximum amount of advances outstanding under the Repo
Plus program in 1997 and 1996 amounted to $750,000 and
$250,000, respectively. The weighted average interest rate
on such borrowings was 5.73% in 1997 and 5.31% in 1996.
NOTE H Income taxes
The following temporary differences gave rise to the net
deferred tax liability at December 31, 1997 (in thousands):
Deferred tax asset:
Allowance for loan losses $ 34
Loan fees and costs 1
Total 35
Deferred tax liability:
Bond accretion (12)
Unrealized gains on
available-for-sale securities (79)
Total (91)
Deferred tax liability, net $ (56)
The provision for income taxes is comprised of the following
(in thousands): <PAGE F-13>
1997 1996
Currently payable $ 124 $ 116
Deferred (benefit) provision (2) 1
Total provision $ 122 $ 117
A reconciliation between the expected income tax and rate
and the effective income tax and rate on income before
income tax provision follows (in thousands):
1997 1996
AMOUNT % AMOUNT %
Provision at expected rate $ 173 34.0% $ 180 34.0%
Increase (decrease) in tax
resulting from:
Tax-exempt income (52) (10.0) (54) (10.2)
Other, net 1 - (9) (1.7)
Effective income tax
and rates $ 122 24.0% $ 117 22.1%
NOTE I Employee Benefit Plan
FNBSM provides a noncontributory, defined contribution plan
that covers all employees meeting certain age and length of
service requirements. FNBSM's contributions to the plan are
determined based on participants' compensation. Pension
expense in 1997 and 1996 amounted to approximately $48,000
and $50,000, respectively.
NOTE J Related Party Transactions
Certain directors and executive officers of FNBSM, including
their immediate families and companies in which they are
principal owners (more than 10%), are indebted to FNBSM.
Such indebtedness was incurred in the ordinary course of
business on the same terms and at those rates prevailing at
the time for comparable transactions with others.
A summary of loan activity with executive officers,
directors, stockholders and associates of such persons is
listed below (in thousands):
<PAGE F-14>
<TABLE>
<CAPTION>
Beginning Other Ending
Year Balance Additions Payments Charge-Offs Changes Balance
<S> <C> <C> <C> <C> <C> <C>
1997 $ 392 $ 13 $ 163 $ - $ - $ 242
1996 $ 398 $ 47 $ 53 $ - $ - $ 392
</TABLE>
NOTE K Off-Balance-Sheet Risk
FNBSM is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying
degrees, elements of credit, interest rate or liquidity risk
in excess of the amount recognized in the balance sheet.
The contract amounts of these instruments express the extent
of involvement FNBSM has in particular classes of financial
instruments.
FNBSM's exposure to credit loss from nonperformance by the
other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented
by the contractual amount of these instruments. FNBSM uses
the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
FNBSM may require collateral or other security to support
financial instruments with off-balance-sheet credit risk.
As of December 31, 1997, financial instruments whose
contract amounts represent credit risk are as follows (in
thousands):
Commitments to extend credit $ 1,123
Standby letters of credit $ 10
Commitments to extend credit are legally binding agreements
to lend to customers. Commitments generally have fixed
expiration dates or other termination clauses and may
require payment of fees. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future
liquidity requirements. FNBSM evaluates each customer's
credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by FNBSM, on
extension of credit is based on management's credit
assessment of the counterparty.
Standby letters of credit are conditional commitments issued
by FNBSM guaranteeing performance by a customer to a third
<PAGE F-15> party. Those guarantees are issued primarily to
support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers.
NOTE L Regulatory Matters
FNBSM is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct
material effect on FNBSM's financial statements. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, FNBSM must meet specific capital
guidelines that involve quantitative measures of FNBSM's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. FNBSM's
capital amounts and classification are also subject to
qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require FNBSM to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier
I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of December 31, 1997,
that FNBSM meets all capital adequacy requirements to which
it is subject.
To be categorized as adequately capitalized a bank must
maintain minimum total risk-based, Tier I risk-based and
Tier I leverage ratios as set forth in the table.
FNBSM's actual capital amounts and ratios as of December 31,
1997 are also presented in the following table (in
thousands).
<PAGE F-16>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 4,429 24.8% $ 1,430 8.0% $ 1,788 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 4,264 23.9% $ 715 4.0% $ 1,073 6.0%
Tier I Capital
(to Average Assets) $ 4,264 14.2% $ 1,200 4.0% $ 1,500 5.0%
</TABLE>
Banking regulations limit the amount of dividends that may
be paid by FNBSM without regulatory approval. Retained
earnings against which dividends may be paid in 1998 without
prior approval of the banking regulators amounts to
approximately $476,000, plus 1998 net income, subject to
minimum capital ratio requirements noted above.
NOTE M Subsequent events
On July 22, 1998, FNBSM entered into an agreement to merge
with Penns Woods Bancorp, Inc. ("Penns Woods"), subject to
stockholder and regulatory approval. The agreement calls
for Penns Woods to exchange approximately 262,500 shares of
its common stock for all of FNBSM's outstanding common
stock.
In 1998, FNBSM purchased and renovated a facility in Centre
Hall, Pennsylvania, at a total cost of approximately
$83,000. Branch operations began at this location in May
1998.
PAGE F-17
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
__________________________________________________________________________________
June 30, December 31,
1998 1997
(Unaudited) (See Note)
__________________________________________________________________________________
<S> <C> <C>
ASSETS:
Cash and due from banks $ 1,298 $ 468
Interest-bearing deposits with banks - 99
Securities available-for-sale 10,157 11,839
Loans, net 19,372 17,024
Bank premises and equipment, net 824 755
Other assets 283 297
TOTAL $31,934 $30,482
LIABILITIES:
Interest-bearing deposits $20,940 $19,557
Noninterest-bearing deposits 3,346 2,713
Total deposits 24,286 22,270
Borrowed funds 2,778 3,500
Other liabilities 334 295
Total liabilities 27,398 26,065
SHAREHOLDERS' EQUITY:
Common stock, par value $2;
100,000 shares authorized;
75,000 shares issued and outstanding 150 150
Additional paid-in capital 150 150
Retained earnings 4,110 3,964
Accumulated other comprehensive income,
Net unrealized gains on
securities available-for-sale 126 153
Total shareholders' equity 4,536 4,417
TOTAL $31,934 $30,482
</TABLE>
NOTE 1: The balance sheet at December 31, 1997 has been derived
from the audited financial statements at that date but
does not include all of the information and notes
required by generally accepted accounting principles
for complete financial statements.
See Notes to Financial Statements
PAGE F-18
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
______________________________________________________________________________
June 30, June 30,
1998 1997
______________________________________________________________________________
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 898 $ 773
Interest and dividends on investments:
Taxable interest 242 262
Tax-exempt interest 87 77
Dividends 6 5
Interest on deposits with banks 14 16
Total interest income 1,247 1,133
INTEREST EXPENSE:
Interest on deposits 445 403
Interest on borrowed funds 83 90
Total interest expense 528 493
NET INTEREST INCOME 719 640
PROVISION FOR LOAN LOSSES 5 11
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 714 629
OTHER INCOME:
Service charges 25 23
Other operating income 23 20
Total other income 48 43
OTHER EXPENSES:
Salaries and employee benefits 253 212
Occupancy expense 31 22
Furniture and equipment expense 74 55
Other operating expenses 106 97
Total other expenses 464 386
INCOME BEFORE INCOME TAX PROVISION 298 286
INCOME TAX PROVISION 62 71
NET INCOME $ 236 $ 215
</TABLE>
See Notes to Financial Statements
PAGE F-19
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
_______________________________________________________________________________
June 30, June 30,
1998 1997
_______________________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 236 $ 215
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 35 37
Provision for loan losses 5 11
Amortization of investment security premiums 9 5
Accretion of investment security discounts (5) (3)
Decrease (increase) in all other assets 14 (6)
Increase in all other liabilities 49 27
Net cash provided by operating activities 343 286
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits with banks 99 -
Purchase of securities available-for-sale (1,010) (546)
Proceeds from maturities of
securities available-for-sale 2,647 854
Net increase in loans (2,353) (814)
Acquisition of bank premises and equipment (104) -
Net cash used in investing activities (721) (506)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,016 10
Net decrease in short-term borrowings (750) -
Proceeds from long-term borrowings 1,028 1,004
Repayment of long-term borrowings (1,000) (500)
Dividends paid (86) (83)
Net cash provided by financing activities 1,208 431
NET INCREASE IN CASH AND CASH EQUIVALENTS 830 211
CASH AND CASH EQUIVALENTS, BEGINNING 468 798
CASH AND CASH EQUIVALENTS, ENDING $ 1,298 $1,009
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
FNBSM paid approximately $509,000 and $490,000 in interest on
deposits and other borrowings during the six-month periods ended
June 30, 1998 and 1997, respectively.
<PAGE F-20>
FNBSM made income tax payments of approximately $51,000 and
$99,000 during the six-month period ends June 30, 1998 and 1997,
respectively.
See Notes to Financial Statements
PAGE F-21
<PAGE>
THE FIRST NATIONAL BANK OF SPRING MILLS
NOTES TO FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
_________________________________________________________________
NOTE A BASIS OF PRESENTATION
The accompanying unaudited financial statements for the
interim periods do not include all of the information and
footnotes required by generally accepted accounting principles
for annual financial statements. However, in the opinion of
management, all of the adjustments necessary for a fair
presentation of the financial results of the interim periods have
been included. Operating results for the six-month period ended
June 30, 1998, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For
further information, refer to the annual financial statements and
footnotes thereto for the year ended December 31, 1997, which are
located elsewhere in this report.
NOTE B COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting
Standards No. 130, in 1998, FNBSM is required to report
"Comprehensive Income." The purpose of reporting comprehensive
income is to report a measure of all of the changes in FNBSM's
equity other than changes resulting from transactions with
shareholders in their capacity as shareholders. For FNBSM,
comprehensive income includes traditional income statement
amounts as well as unrealized gains and losses on securities
available-for-sale. Comprehensive income for the six-month
periods ended June 30, 1998 and 1997 is determined as follow (in
thousands):
1998 1997
Net income $236 $215
Other comprehensive income (loss):
Unrealized holding gains (losses)
arising during the period (41) 5
Income tax (provision) benefit
related to other comprehensive
income (loss) 14 (2)
Other comprehensive income (loss) (27) 3
Comprehensive income $209 $218
<PAGE F-22>
NOTE B SUBSEQUENT EVENT
On July 22, 1998, FNBSM entered into an agreement to merge
with Penns Woods Bancorp, Inc., subject to stockholder and
regulatory approval. The agreement calls for Penns Woods to
exchange approximately 262,500 shares of its common stock for all
of FNBSM's outstanding common stock.
PAGE F-23
<PAGE>
ANNEX A
AGREEMENT OF MERGER
between
PENNS WOODS BANCORP, INC.
and
THE FIRST NATIONAL BANK OF SPRING MILLS
July 22, 1998
PAGE A-1
<PAGE>
AGREEMENT
THIS AGREEMENT OF MERGER, dated as of July 22, 1998, is
made by and between PENNS WOODS BANCORP, INC. ("Penns Woods"), a
Pennsylvania corporation, having its principal place of business
in Jersey Shore, Pennsylvania, and FIRST NATIONAL BANK OF SPRING
MILLS ("FNBSM"), a national banking association, having its
principal place of business in Spring Mills, Pennsylvania.
BACKGROUND
1. Penns Woods and FNBSM desire for FNBSM to merge
with and into JERSEY SHORE STATE BANK, a Pennsylvania banking
institution and a wholly owned subsidiary of Penns Woods
("JSSB"), with JSSB surviving such merger, in accordance with the
applicable laws of the Commonwealth of Pennsylvania and the
United States of America, and in accordance with the plan of
merger attached hereto as Exhibit 1.
2. At or prior to the execution and delivery of this
Agreement, certain directors, officers, and affiliates of FNBSM
have executed in favor of Penns Woods, a Letter Agreement dated
July 22, 1998, in the form attached hereto as Exhibit 2.
3. Penns Woods and FNBSM desire to provide the terms
and conditions governing the transactions contemplated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of
the mutual covenants, agreements, representations and warranties
herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:
ARTICLE I
THE MERGERS
Section 1.01 Definitions. As used in this Agreement,
the following terms shall have the indicated meanings (such
meanings to be equally applicable to both the singular and plural
forms of the terms defined):
Affiliate means, with respect to any Person, any
Person who directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under
common control with, such Person and, without limiting the
generality of the foregoing, includes any executive officer
or director of such Person and any Affiliate of such
executive officer or director.
Agreement means this agreement, and any amendment
or supplement hereto.
<PAGE A-2>
Applications means the applications for regulatory
approval which are required by the transactions contemplated
hereby.
Articles of Merger means the articles of merger to
be executed by JSSB and FNBSM and to be filed in the PDB, in
accordance with the laws of the Commonwealth of
Pennsylvania.
Plan of Merger means the plan of merger between
JSSB and FNBSM attached hereto as Exhibit 1.
BCL means the Pennsylvania Business Corporation
Law of 1988, as amended.
BHC Act means the Bank Holding Company Act of
1956, as amended.
Closing Date means the date specified by the
parties within five (5) business days after satisfaction or
waiver (subject to applicable law) of the conditions
(excluding conditions that, by their terms cannot be
satisfied until the Closing Date) set forth in Article V, or
such other date as Penns Woods and FNBSM shall agree.
Dissenting FNBSM Shares has the meaning given to
that term in Section 1.02(e)(iii).
Effective Date means the date upon which the
Articles of Merger shall be filed in the PDB and the PDS,
and shall be the same as the Closing Date.
Employee Benefit Plans has the meaning given to
that term in Section 2.12 of this Agreement.
Environmental Law means any federal, state, local
or foreign law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface
soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material
containing any such substance as a component.
ERISA means the Employee Retirement Income
Security Act of 1974, as amended.
<PAGE A-3>
Exchange Act means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated
from time to time thereunder.
Exchange Ratio has the meaning given to that term
in Section 1.02(e)(ii) of this Agreement.
FDIA means the Federal Deposit Insurance Act, as
amended.
FDIC means the Federal Deposit Insurance
Corporation.
FNBSM Benefits Schedule has the meaning given to
that term in Section 2.18 of this Agreement.
FNBSM Common Stock means the common stock of FNBSM
described in Section 2.02(a).
FNBSM Disclosure Schedule means a disclosure
schedule delivered by FNBSM to Penns Woods pursuant to
Article II of this Agreement.
FNBSM Financials means (i) the audited
consolidated financial statements of FNBSM as of
December 31, 1997 and for the three years ended December 31,
1997, including the notes thereto, (ii) the unaudited
interim consolidated financial statements of FNBSM as of and
for each calendar quarter thereafter.
FNBSM Regulatory Reports means the Reports of
Condition and Income of FNBSM and accompanying schedules for
each calendar quarter, beginning with the quarter ended
December 31, 1996 through the Closing Date.
FNBSM Subsidiaries means any corporation, 50% or
more of the capital stock of which is owned, either directly
or indirectly, by FNBSM, except any corporation the stock of
which is held in the ordinary course of the lending
activities of FNBSM.
FRB means the Federal Reserve Board.
GAAP means generally accepted accounting
principles as in effect at the relevant date.
IRC means the Internal Revenue Code of 1986, as
amended.
IRS means the Internal Revenue Service.
Material Adverse Effect shall mean, with respect
to Penns Woods or FNBSM, any adverse effect on its assets,
financial condition or operations which is material to its
assets, financial condition or results of operations on a
<PAGE A-4> consolidated basis, except for any material
adverse effect caused by (i) any change in the value of the
respective investment portfolios of Penns Woods or FNBSM
resulting from a change in interest rates generally or
(ii) any change occurring after the date hereof in any
federal or state law, rule or regulation or in GAAP, which
change affects banking institutions generally, including any
changes affecting the Bank Insurance Fund or the Savings
Association Insurance Fund.
Merger means the merger of FNBSM with and into
JSSB, with JSSB surviving such merger, contemplated by this
Agreement and the Plan of Merger.
NBA means the National Bank Act.
OCC means the Office of the Comptroller of the
Currency.
PDB means the Department of Banking of the
Commonwealth of Pennsylvania.
PDS means the Department of State of the
Commonwealth of Pennsylvania.
Penns Woods Benefits Schedule has the meaning
given to that term in Section 3.19 of this Agreement.
Penns Woods Common Stock has the meaning given to
that term in Section 3.02(a) of this Agreement.
Penns Woods Disclosure Schedule means a disclosure
schedule delivered by Penns Woods to FNBSM pursuant to
Article III of this Agreement.
Penns Woods Financials means (i) the audited
consolidated financial statements of Penns Woods as of
December 31, 1997 and for the three years ended December 31,
1997, including the notes thereto, and (ii) the unaudited
interim consolidated financial statements of Penns Woods as
of each calendar quarter thereafter included in Securities
Documents filed by Penns Woods.
Penns Woods Market Price means, as of any date,
the average of the closing sale prices (or if unavailable
for any day, the mean between the high bid and low asked
prices for such day) of a share of Penns Woods Common Stock,
as reported by the OTC Bulletin Board or, if not so
reported, by an independent source in the over-the-counter
market, for each of the twenty (20) consecutive trading days
commencing twenty-one (21) trading days prior to the date of
determination.
Penns Woods Regulatory Reports means the Annual
Reports of Penns Woods on Form FRY-6 and any Current Report
<PAGE A-5> of Penns Woods on Form FRY-6A filed with the FRB
from December 31, 1996 through the Closing Date and the
Reports of Condition and Income of JSSB and accompanying
schedules for each calendar quarter, beginning with the
quarter ended December 31, 1996 through the Closing Date.
Penns Woods Subsidiaries means any corporation,
50% or more of the capital stock of which is owned, either
directly or indirectly, by Penns Woods, except any
corporation the stock of which is held in the ordinary
course of the lending activities of JSSB.
Person means any individual, corporation,
partnership, joint venture, association, trust or "group"
(as that term is defined under the Exchange Act).
Plan of Merger means the plan of merger between
JSSB and FNBSM attached hereto as Exhibit 1.
Prospectus/Proxy Statement means the
prospectus/proxy statement, together with any supplements
thereto, to be transmitted to holders of FNBSM Common Stock
in connection with the transactions contemplated by this
Agreement.
Registration Statement means the registration
statement on Form S-4, including any pre-effective or
post-effective amendments or supplements thereto, as filed
with the SEC under the Securities Act with respect to the
Penns Woods Common Stock to be issued in connection with the
transactions contemplated by this Agreement.
Regulatory Agreement has the meaning given to that
term in Section 2.11 of this Agreement.
Regulatory Authority means any banking agency or
department of any federal or state government, including
without limitation, the FDIC, the OCC, the FRB, the PDB, or
the respective staffs thereof.
Rights means warrants, options, rights,
convertible securities and other capital stock equivalents
which obligate an entity to issue its securities.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933,
as amended, and the rules and regulations promulgated from
time to time thereunder.
Securities Documents means all registration
statements, schedules, statements, forms, reports, proxy
material, and other documents required to be filed under the
Securities Laws.
<PAGE A-6>
Securities Laws means the Securities Act and the
Exchange Act and the rules and regulations promulgated from
time to time thereunder.
Subsidiary means any corporation or other entity,
50% or more of the capital stock or ownership interests of
which are owned, either directly or indirectly, by another
entity, except any corporation or other entity the capital
stock or ownership interests of which are held in the
ordinary course of the lending activities of a bank.
Section 1.02 The Merger.
(a) Closing. The closing will take place at
10:00 a.m. on the Closing Date at the offices of Stevens & Lee,
111 North Sixth Street, Reading, Pennsylvania, unless another
time and place are agreed to by the parties hereto; provided, in
any case, that all conditions to closing set forth in Article V
have been satisfied or waived at or prior to the Closing Date.
On the Closing Date, Penns Woods and FNBSM shall cause the
Articles of Merger to be duly executed and to be filed in the PDB
and the PDS.
(b) The Merger. Subject to the terms and
conditions of this Agreement, on the Effective Date: FNBSM shall
merge with and into JSSB; the separate existence of FNBSM shall
cease; JSSB shall be the surviving corporation in the Merger; and
all of the property (real, personal and mixed), rights, powers
and duties and obligations of FNBSM shall be taken and deemed to
be transferred to and vested in JSSB, as the surviving
corporation in the Merger, without further act or deed; all
debts, liabilities and duties of each of FNBSM and JSSB shall
thereafter be the responsibility of JSSB as the surviving
corporation; all in accordance with the applicable laws of the
Commonwealth of Pennsylvania and the United States of America.
(c) JSSB's Articles of Incorporation and Bylaws.
On and after the Effective Date, the articles of incorporation
and the bylaws of JSSB, as the surviving corporation in the
Merger, shall continue to be the articles of incorporation and
bylaws of JSSB, until thereafter altered, amended or repealed.
(d) Board of Directors and Officers of Penns
Woods and JSSB.
(i) On the Effective Date, the Board of
Directors of Penns Woods shall take such actions as may be
necessary to cause the Board of Directors of Penns Woods to
consist of (i) those persons holding such office immediately
prior to the Effective Date and (ii) William H. Rockey (to be
elected as a Class 1 director to serve until 2001). Penns Woods
agrees to cause William H. Rockey to be nominated for re-election
to the Board of Directors of Penns Woods at the annual meeting of
shareholders of Penns Woods to be held in 2001.
<PAGE A-7>
(ii) On the Effective Date, the officers of
Penns Woods duly elected and holding office immediately prior to
the Effective Date shall continue to be the officers of Penns
Woods. On the Effective Date, William H. Rockey shall be elected
as a Senior Vice President of Penns Woods, and Rickey B. Brooks
shall be elected as a Vice President of Penns Woods.
(iii) On the Effective Date, the directors
of JSSB as the surviving institution in the Merger shall consist
of (i) those persons holding such office immediately prior to the
Effective Date and (ii) Penns Woods agrees to cause William H.
Rockey to be elected to the Board of Directors of JSSB at any
annual or special meeting of the sole shareholder of JSSB held
during the time that he is serving as director of Penns Woods.
(iv) On the Effective Date, the officers of
JSSB duly elected and holding office immediately prior to such
effective date shall be the officers of JSSB, as the surviving
corporation in the Merger, and Penns Woods shall cause William H.
Rockey to be elected as a Senior Vice President of JSSB and
Rickey B. Brooks to be elected as a Vice President of JSSB.
(v) On the Effective Date, Penns Woods shall
establish, and shall maintain for a period of two years after the
Effective Date, the FNBSM Advisory Board (the "Advisory Board").
During the first year following the Effective Date, the Advisory
Board shall consist of all members of the FNBSM Board of
Directors immediately prior to the Effective Date. During the
second year following the Effective Date, the Advisory Board
shall consist of any of such former members of the FNBSM Board of
Directors who have not attained the mandatory retirement age of
70 prior to the commencement of such year. Each member of the
Advisory Board shall be paid $150 for each monthly meeting of the
Advisory Board actually attended. After the second year
following the Effective Date, the Advisory Board may be
maintained at the discretion of Penns Woods.
(e) Conversion of Shares.
(i) Penns Woods Common Stock.
DMS Each share of Penns Woods Common
Stock issued and outstanding immediately prior to the
Effective Date shall, on and after the Effective Date,
continue to be issued and outstanding as an identical share
of Penns Woods Common Stock. Shares of Penns Woods Common
Stock owned by FNBSM (other than shares held in trust,
managed, custodial or nominee accounts and the like that in
any such case are beneficially owned by third parties (any
such shares, "trust account shares") and shares acquired in
respect of debts previously contracted (any such shares,
"DPC shares")) shall become treasury stock of Penns Woods.
(B) Each share of Penns Woods Common
Stock issued and held in the treasury of Penns Woods as of
<PAGE A-8> the Effective Date, if any, shall, on and after
the Effective Date, continue to be issued and held in the
treasury of Penns Woods.
(ii) FNBSM Common Stock.
(A) Subject to the provisions of
Section 1.02(e)(iii) hereof with respect to dissenting
shares, each share of FNBSM Common Stock issued and
outstanding immediately prior to the Effective Date (other
than shares then owned by Penns Woods, if any) shall, on the
Effective Date, by reason of the Merger and without any
action on the part of the holder thereof, be converted into
and become 3.5 shares of Penns Woods Common Stock (subject
to possible adjustment as set forth in Section 1.02(g), the
"Exchange Ratio").
(B) Each share of FNBSM Common Stock
(other than trust account shares or DPC shares) owned by
Penns Woods or a Penns Woods Subsidiary on the Effective
Date, if any, shall be cancelled.
(C) Each share of FNBSM Common Stock
issued and held in the treasury of FNBSM or owned by FNBSM
or any FNBSM Subsidiary (other than trust account shares or
DPC shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be
delivered in exchange therefor.
(D) No fraction of a whole share of
Penns Woods Common Stock and no scrip or certificates
therefor shall be issued in connection with the Merger. Any
former holder of FNBSM Common Stock who would otherwise be
entitled to receive a fraction of a share of Penns Woods
Common Stock shall receive, in lieu thereof, cash in an
amount equal to such fraction of a share multiplied by the
Penns Woods Market Price determined as of the Effective
Date.
(iii) Dissenting Shareholders of FNBSM. If
there are holders of FNBSM Common Stock who dissent from the
Merger and exercise and perfect the right to obtain
valuation of and payment for their shares ("Dissenting FNBSM
Shares") pursuant to the NBA, the following provisions will
govern payments to be made in respect of Dissenting FNBSM
Shares:
(A) all payments in respect of
Dissenting FNBSM Shares, if any, will be made directly by
Penns Woods or by JSSB, as the surviving corporation in the
Merger; and
(B) Dissenting FNBSM Shares, if any,
will be deemed to have been retired and cancelled
immediately prior to the Merger, with the effect that no
<PAGE A-9> conversion thereof will occur pursuant to Section
1.02(e)(ii) hereof.
DMS Surrender and Exchange of FNBSM Stock
Certificates.
(i) Exchange of Certificates. Each holder
of shares of FNBSM Common Stock, other than holders of
Dissenting FNBSM Shares, who surrenders to Penns Woods (or
its agent) the certificate or certificates representing such
shares will be entitled to receive, as soon as practicable
after the Effective Date, in exchange therefor a certificate
or certificates for the number of whole shares of Penns
Woods Common Stock into which such holder's shares of FNBSM
Common Stock have been converted pursuant to the Merger,
together with a check for cash in lieu of any fractional
share in accordance with Section 1.02(e)(ii)(D) hereof.
(ii) Rights Evidenced by Certificates. Each
certificate for shares of Penns Woods Common Stock issued in
exchange for certificates for FNBSM Common Stock pursuant to
Section 1.02(f)(i) hereof will be dated the Effective Date
and be entitled to dividends and all other rights and
privileges pertaining to such shares of stock from and after
the Effective Date. Until surrendered, each certificate
theretofore evidencing shares of FNBSM Common Stock will,
from and after the Effective Date, evidence solely the right
to receive certificates for shares of Penns Woods Common
Stock pursuant to Section 1.02(f)(i) hereof and a check for
cash in lieu of any fractional share in accordance with
Section 1.02(e)(ii)(D) hereof. If certificates for shares
of FNBSM Common Stock are exchanged for Penns Woods Common
Stock at a date following one or more record dates for the
payment of dividends or of any other distribution on the
shares of Penns Woods Common Stock, Penns Woods will pay
cash in an amount equal to dividends theretofore payable on
such Penns Woods Common Stock and pay or deliver any other
distribution to which holders of shares of Penns Woods
Common Stock have theretofore become entitled. No interest
will accrue or be payable in respect of dividends or cash
otherwise payable under this Section 1.02(f) upon surrender
of certificates for shares of Penns Woods Common Stock.
Notwithstanding the foregoing, no party hereto will be
liable to any holder of Penns Woods Common Stock for any
amount paid upon advice of legal counsel and in good faith
to a public official or agency pursuant to any applicable
abandoned property, escheat or similar law. Until such time
as certificates for shares of FNBSM Common Stock are
surrendered by a FNBSM shareholder to Penns Woods for
exchange, Penns Woods shall have the right to withhold
dividends or any other distributions on the shares of Penns
Woods Common Stock issuable to such shareholder.
(iii) Exchange Procedures. Each certificate
for shares of FNBSM Common Stock delivered for exchange
<PAGE A-10> under this Section 1.02(f) must be endorsed in
blank by the registered holder thereof or be accompanied by
a power of attorney to transfer such shares endorsed in
blank by such holder. If more than one certificate is
surrendered at one time and in one transmittal package for
the same shareholder account, the number of whole shares of
Penns Woods Common Stock for which certificates will be
issued pursuant to this Section 1.02(f) will be computed on
the basis of the aggregate number of shares represented by
the certificates so surrendered. If shares of Penns Woods
Common Stock or payments of cash are to be issued or made to
a person other than the one in whose name the surrendered
certificate is registered, the certificate so surrendered
must be properly endorsed in blank, with signature(s)
guaranteed, or otherwise in proper form for transfer, and
the person to whom certificates for shares of Penns Woods
Common Stock is to be issued or to whom cash is to be paid
shall pay any transfer or other taxes required by reason of
such issuance or payment to a person other than the
registered holder of the certificate for shares of FNBSM
Common Stock which are surrendered. As promptly as
practicable after the Effective Date, Penns Woods shall send
or cause to be sent to each shareholder of record of FNBSM
Common Stock transmittal materials for use in exchanging
certificates representing FNBSM Common Stock for
certificates representing Penns Woods Common Stock into
which the former have been converted in the Merger.
Certificates representing shares of Penns Woods Common Stock
and checks for cash in lieu of fractional shares shall be
mailed to former shareholders of FNBSM as soon as reasonably
possible but in no event later than twenty (20) business
days following the receipt of certificates representing
former shares of FNBSM Common Stock duly endorsed or
accompanied by the materials referenced herein and delivered
by certified mail, return receipt requested (but in no event
earlier than the second business day following the Effective
Date).
(iv) Closing of Stock Transfer Books;
Cancellation of FNBSM Certificates. Upon the Effective
Date, the stock transfer books for FNBSM Common Stock will
be closed and no further transfers of shares of FNBSM Common
Stock will thereafter be made or recognized. All
certificates for shares of FNBSM Common Stock surrendered
pursuant to this Section 1.02(g) will be cancelled by Penns
Woods.
(g) Anti-Dilution Provisions. If Penns Woods
shall, at any time before the Effective Date, (A) issue a
dividend in shares of Penns Woods Common Stock, (B) combine the
outstanding shares of Penns Woods Common Stock into a smaller
number of shares, (C) subdivide the outstanding shares of Penns
Woods Common Stock, or (D) reclassify the shares of Penns Woods
Common Stock, or set a record date prior to the Effective Date
with respect to any of the foregoing, then, in any such event,
<PAGE A-11> the number of shares of Penns Woods Common Stock to
be delivered to FNBSM shareholders who are entitled to receive
shares of Penns Woods Common Stock in exchange for shares of
FNBSM Common Stock shall be adjusted so that each FNBSM
shareholder shall be entitled to receive in the Merger such
number of shares of Penns Woods Common Stock as such shareholder
would have been entitled to receive if the Effective Date had
occurred immediately prior to such event or the record date for
such event. (By way of illustration, if Penns Woods shall
declare a stock dividend of 10% payable with respect to a record
date on or prior to the Effective Date, the Exchange Ratio
determined pursuant to Sections 1.02(e)(ii) hereof shall be
adjusted so that former shareholders of FNBSM would receive
3.85 shares of Penns Woods Common Stock in the Merger.)
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FNBSM
FNBSM hereby represents and warrants to Penns Woods
that, except as specifically set forth in the FNBSM Disclosure
Schedule (which FNBSM Disclosure Schedule qualifies and
represents exceptions to all of the representations and
warranties of FNBSM contained in this Agreement taken as a whole
and does not relate to particular representations and warranties)
delivered to Penns Woods by FNBSM on the date hereof:
Section 2.01 Organization.
(a) FNBSM is a national banking association duly
organized and validly existing under the laws of the United
States of America. FNBSM has the corporate power and authority
to carry on its business and operations as now being conducted
and to own and operate the properties and assets now owned and
being operated by it. FNBSM is not qualified or licensed to do
business as a foreign corporation in any other jurisdiction and
is not required to be so qualified or licensed as the result of
the ownership or leasing of property or the conduct of its
business, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect with respect to FNBSM.
(b) There are no FNBSM Subsidiaries.
(c) The deposits of FNBSM are insured by the FDIC
to the extent provided in the Federal Deposit Insurance Act.
(d) The minute books of FNBSM accurately record,
in all material respects, all material corporate actions of their
respective shareholders and boards of directors (including
committees) through the date of this Agreement.
(e) Prior to the date of this Agreement, FNBSM
has delivered to Penns Woods true and correct copies of the
articles of association and bylaws of FNBSM as in effect on the
date hereof.
<PAGE A-12>
Section 2.02 Capitalization.
(a) The authorized capital stock of FNBSM
consists of 100,000 shares of common stock, par value $2.00 per
share, 75,000 shares of which are outstanding, validly issued,
fully paid, and nonassessable (except pursuant to 12 U.S.C.A.
Section 55). FNBSM is not bound by any subscription, option,
warrant, call, commitment, agreement or other Right of any
character relating to the purchase, sale or issuance or voting
of, or right to receive dividends or other distributions on any
shares of the capital stock of FNBSM or any other security of
FNBSM or any securities representing the right to vote, purchase
or otherwise receive any shares of the capital stock or any other
security of FNBSM.
(b) FNBSM does not own any equity interest,
directly or indirectly, in any other company or controls any
other company, except for equity interests held in the investment
portfolio of FNBSM, equity interests held by FNBSM in a fiduciary
capacity, and equity interests held in connection with the
commercial loan activities of FNBSM. There are no subscriptions,
options, warrants, calls, commitments, agreements or other Rights
outstanding and held by FNBSM with respect to any other company's
capital stock or the equity of any other person.
(c) To FNBSM's knowledge, without any independent
investigation, no person or "group" (as that term is used in
Section 13(d)(3) of the Exchange Act), is the beneficial owner
(as defined in Section 13(d) of the Exchange Act) of 5% or more
of the outstanding shares of FNBSM Common Stock, except as
disclosed in reasonable detail (using the principles described in
Item 403 of the SEC's Regulation S-K) in the FNBSM Disclosure
Schedule.
Section 2.03 Authority; No Violation.
(a) FNBSM has full corporate power and authority
to execute and deliver this Agreement and the Plan of Merger and
to consummate the transactions contemplated thereby. The
execution and delivery of this Agreement by FNBSM and the
consummation by FNBSM of the transactions contemplated hereby
have been duly and validly approved by the Board of Directors of
FNBSM and, except for approval by the shareholders of FNBSM, no
other corporate proceedings on the part of FNBSM are necessary to
complete the transactions contemplated hereby and by the Plan of
Merger. This Agreement has been duly and validly executed and
delivered by FNBSM and, subject to approval of the shareholders
of FNBSM and receipt of the required approvals from Regulatory
Authorities described in Section 3.04 hereof, constitutes the
valid and binding obligation of FNBSM, enforceable against FNBSM
in accordance with its terms, subject to applicable
conservatorship or receivership provisions of the FDIA
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity. The Plan of Merger, upon its execution and
<PAGE A-13> delivery by FNBSM concurrently with the execution and
delivery of this Agreement, and subject to approval of the
shareholders of FNBSM and receipt of the required approvals from
Regulatory Authorities described in Section 3.04 hereof, will
constitute the valid and binding obligation of FNBSM, enforceable
against FNBSM in accordance with its terms, subject to applicable
conservatorship or receivership provisions of the FDIA, or
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity.
(b) (A) The execution and delivery of this
Agreement and the Plan of Merger by FNBSM, (B) subject to receipt
of approvals from the Regulatory Authorities referred to in
Section 3.04 hereof and FNBSM's and Penns Woods' compliance with
any conditions contained therein, the consummation of the
transactions contemplated hereby, and (C) compliance by FNBSM
with any of the terms or provisions hereof or of the Plan of
Merger, will not (i) conflict with or result in a breach of any
provision of the articles of association or bylaws of FNBSM;
(ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to FNBSM
or any of its properties or assets; or (iii) violate, conflict
with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the
termination of, accelerate the performance required by, or result
in a right of termination or acceleration or the creation of any
lien, security interest, charge or other encumbrance upon any of
the properties or assets of FNBSM under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement, commitment or other
instrument or obligation to which FNBSM is a party, or by which
they or any of their respective properties or assets may be bound
or affected, except for such violations, conflicts, breaches or
defaults under clause (ii) or (iii) hereof which, either
individually or in the aggregate, will not have a Material
Adverse Effect with respect to FNBSM.
Section 2.04 Consents. Except for the consents,
approvals, filings and registrations from or with the Regulatory
Authorities referred to in Section 3.04 hereof and compliance
with any conditions contained therein, and the approval of this
Agreement and the Plan of Merger by the shareholders of FNBSM, no
consents or approvals of, or filings or registrations with, any
public body or authority are necessary, and no consents or
approvals of any third parties are necessary, or will be, in
connection with (a) the execution and delivery of this Agreement
or the Plan of Merger by FNBSM and (b) the completion by FNBSM of
the transactions contemplated hereby. FNBSM has no reason to
believe that any required consents or approvals will not be
received or will be received with conditions, limitations or
restrictions unacceptable to it or which would adversely impact
FNBSM's ability to complete the transactions contemplated by this
Agreement. <PAGE A-14>
Section 2.05 Financial Statements.
(a) FNBSM has previously delivered, or will
deliver, to Penns Woods the FNBSM Regulatory Reports. The FNBSM
Regulatory Reports have been, or will be, prepared in all
material respects in accordance with applicable regulatory
accounting principles and practices throughout the periods
covered by such statements, and fairly present, or will fairly
present in all material respects, the financial position, results
of operations and changes in shareholders' equity of FNBSM as of
and for the periods ended on the dates thereof, in accordance
with applicable regulatory accounting principles applied on a
consistent basis.
(b) FNBSM has previously delivered to Penns Woods
the FNBSM Financials. The FNBSM Financials have been, or will
be, prepared in accordance with generally accepted accounting
principles and practices applied on a consistent basis throughout
the periods covered by such statements, and fairly present, or
will fairly present, the consolidated financial position, results
of operations and cash flows of FNBSM as of and for the periods
ending on the dates thereof, in accordance with generally
accepted accounting principles applied on a consistent basis,
except where changes in accounting principles from one year to
the next have been disclosed therein.
(c) At the date of each balance sheet included in
the FNBSM Financials or the FNBSM Regulatory Reports, FNBSM did
not have, and will not have, any liabilities, obligations or loss
contingencies of any nature (whether absolute, accrued,
contingent or otherwise) of a type required to be reflected in
such FNBSM Financials or FNBSM Regulatory Reports or in the
footnotes thereto which are not fully reflected or reserved
against therein or fully disclosed in a footnote thereto, except
for liabilities, obligations and loss contingencies which are not
material in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice, and subject,
in the case of any unaudited statements, to normal, recurring
audit adjustments and the absence of footnotes.
Section 2.06 Taxes.
(a) FNBSM has duly filed, and will file, all
federal, state and local tax returns required to be filed by or
with respect to FNBSM on or prior to the Closing Date (all such
returns being accurate and correct in all material respects) and
has duly paid or will pay, or made or will make, provisions for
the payment of all federal, state and local taxes which have been
incurred by or are due or claimed to be due from FNBSM by any
taxing authority or pursuant to any tax sharing agreement or
arrangement (written or oral) on or prior to the Closing Date
other than taxes which (i) are not delinquent or (ii) are being
contested in good faith.
<PAGE A-15>
(b) No consent pursuant to IRC Section 341(f) has
been filed (or will be filed prior to the Closing Date) by or
with respect to FNBSM.
Section 2.07 No Material Adverse Effect. FNBSM has
not suffered any Material Adverse Effect since December 31, 1997.
Section 2.08 Contracts.
(a) Except as described in footnotes to the FNBSM
Financials, FNBSM is not a party to or subject to: (i) any
employment, consulting or severance contract or arrangement with
any past or present officer, director or employee of FNBSM,
except for "at will" arrangements; (ii) any plan, arrangement or
contract providing for bonuses, pensions, options, deferred
compensation, retirement payments, profit sharing or similar
arrangements for or with any past or present officers, directors
or employees of FNBSM; (iii) any collective bargaining agreement
with any labor union relating to employees of FNBSM; (iv) any
agreement which by its terms limits the payment of dividends by
FNBSM; (v) any instrument evidencing or related to indebtedness
for borrowed money whether directly or indirectly, by way of
purchase money obligation, conditional sale, lease purchase,
guaranty or otherwise, in respect of which FNBSM is an obligor to
any person, which instrument evidences or relates to indebtedness
other than deposits, repurchase agreements, bankers acceptances
and "treasury tax and loan" accounts established in the ordinary
course of business and transactions in "federal funds" or which
contains financial covenants or other restrictions (other than
those relating to the payment of principal and interest when due)
which would be applicable on or after the Closing Date to Penns
Woods or any Penns Woods Subsidiary; (vi) any contract (other
than this Agreement) limiting the freedom of FNBSM to engage in
any type of banking or bank-related business permissible under
law or (vii) any other material contract.
(b) True and correct copies of agreements, plans,
arrangements and instruments referred to in Section 2.08(a) have
been provided to Penns Woods on or before the date hereof, are
listed on the FNBSM Disclosure Schedule and are in full force and
effect on the date hereof. Neither FNBSM nor, to the knowledge
of FNBSM, any other party to any such contract, plan, arrangement
or instrument) has breached any provision of, or is in default in
any respect under any term of, any such contract, plan,
arrangement or instrument which breach has resulted in or will
result in a Material Adverse Effect with respect to FNBSM. No
party to any material contract, plan, arrangement or instrument
will have the right to terminate any or all of the provisions of
any such contract, plan, arrangement or instrument as a result of
the transactions contemplated by this Agreement. None of the
employees (including officers) of FNBSM, possess the right to
terminate their employment as a result of the execution of this
Agreement. No plan, employment agreement, termination agreement,
or similar agreement or arrangement to which FNBSM is a party or
under which FNBSM may be liable contains provisions which permit
<PAGE A-16> an employee or independent contractor to terminate it
without cause and continue to accrue future benefits thereunder.
No such agreement, plan or arrangement (x) provides for
acceleration in the vesting of benefits or payments due
thereunder upon the occurrence of a change in ownership or
control of FNBSM absent the occurrence of a subsequent event;
(y) provides for benefits which may cause the disallowance of a
federal income tax deduction under IRC Section 280G; or
(z) requires FNBSM to provide a benefit in the form of FNBSM
Common Stock or determined by reference to the value of FNBSM
Common Stock.
Section 2.09 Ownership of Property; Insurance
Coverage.
(a) FNBSM has, or will have as to property
acquired after the date hereof, good and, as to real property,
marketable title to all assets and properties owned by FNBSM in
the conduct of its business, whether such assets and properties
are real or personal, tangible or intangible, including assets
and property reflected in the balance sheets contained in the
FNBSM Regulatory Reports and in the FNBSM Financials or acquired
subsequent thereto (except to the extent that such assets and
properties have been disposed of for fair value, in the ordinary
course of business, since the date of such balance sheets),
subject to no encumbrances, liens, mortgages, security interests
or pledges, except (i) those items that secure liabilities for
borrowed money and that are described in the FNBSM Disclosure
Schedule or permitted under Article IV hereof and (ii) statutory
liens for amounts not yet delinquent or which are being contested
in good faith. FNBSM, as lessee, has the right under valid and
subsisting leases of real and personal properties used by FNBSM
in the conduct of its business to occupy or use all such
properties as presently occupied and used by it.
(b) With respect to all agreements pursuant to
which FNBSM has purchased securities subject to an agreement to
resell, if any, FNBSM, has a valid, perfected first lien or
security interest in the securities or other collateral securing
the repurchase agreement, and the value of such collateral equals
or exceeds the amount of the debt secured thereby.
(c) FNBSM currently maintains insurance in
amounts considered by FNBSM to be reasonable for its operations
and similar in scope and coverage to that maintained by other
businesses similarly engaged. FNBSM has not received notice from
any insurance carrier that (i) such insurance will be cancelled
or that coverage thereunder will be reduced or eliminated or
(ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no material
claims pending under such policies of insurance and no notices
have been given by FNBSM under such policies. All such insurance
is valid and enforceable and in full force and effect, and within
the last three years FNBSM has received each type of insurance
coverage for which it has applied and during such periods has not
<PAGE A-17> been denied indemnification for any material claims
submitted under any of its insurance policies.
Section 2.10 Legal Proceedings. FNBSM is not a party
to any, and there are no pending or, to the best of FNBSM's
knowledge, threatened legal, administrative, arbitration or other
proceedings, claims (whether asserted or unasserted), actions or
governmental investigations or inquiries of any nature
(i) against FNBSM, (ii) to which FNBSM's assets are or may be
subject, (iii) challenging the validity or propriety of any of
the transactions contemplated by this Agreement, or (iv) which
could adversely affect the ability of FNBSM to perform under this
Agreement or the Plan of Merger, except for any proceedings,
claims, actions, investigations or inquiries referred to in
clauses (i) or (ii) which, if adversely determined, individually
or in the aggregate, could not be reasonably expected to have a
Material Adverse Effect with respect to FNBSM.
Section 2.11 Compliance With Applicable Law.
(a) FNBSM holds all licenses, franchises, permits
and authorizations necessary for the lawful conduct of its
businesses under, and have complied in all material respects
with, applicable laws, statutes, orders, rules or regulations of
any federal, state or local governmental authority relating to
them, other than where such failure to hold or such noncompliance
will neither result in a limitation in any material respect on
the conduct of its businesses or otherwise have a Material
Adverse Effect with respect to FNBSM.
(b) FNBSM has not received any notification or
communication from any Regulatory Authority (i) asserting that
FNBSM is not in compliance with any of the statutes, regulations
or ordinances which such Regulatory Authority enforces;
(ii) threatening to revoke any license, franchise, permit or
governmental authorization which is material to FNBSM;
(iii) requiring or threatening to require FNBSM, or indicating
that FNBSM may be required, to enter into a cease and desist
order, agreement or memorandum of understanding or any other
agreement restricting or limiting, or purporting to restrict or
limit, in any manner the operations of FNBSM, including without
limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct,
restrict or limit, in any manner the operations of FNBSM,
including without limitation any restriction on the payment of
dividends (any such notice, communication, memorandum, agreement
or order described in this sentence is hereinafter referred to as
a "Regulatory Agreement"). FNBSM has not consented to or entered
into any Regulatory Agreement, except as heretofore disclosed to
Penns Woods.
Section 2.12 ERISA. FNBSM has previously delivered to
Penns Woods true and complete copies of all employee pension
benefit plans within the meaning of ERISA Section 3(2), profit
sharing plans, stock purchase plans, deferred compensation and
<PAGE A-18> supplemental income plans, supplemental executive
retirement plans, employment agreements, annual or long term
incentive plans, settlement plans, policies and agreements, group
insurance plans, and all other employee welfare benefit plans
within the meaning of ERISA Section 3(1) (including vacation pay,
sick leave, short-term disability, long-term disability, and
medical plans) and all other employee benefit plans, policies,
agreements and arrangements ("Employee Benefit Plans"), all of
which are set forth in the FNBSM Disclosure Schedule, maintained
or contributed to for the benefit of the employees or former
employees (including retired employees) and any beneficiaries
thereof or directors or former directors of FNBSM, together with
(i) the most recent actuarial (if any) and financial reports
relating to those plans which constitute "qualified plans" under
IRC Section 401(a), (ii) the most recent annual reports relating
to such plans filed by them, respectively, with any government
agency, and (iii) all rulings and determination letters which
pertain to any FNBSM Employee Benefit Plans. To the best of
FNBSM's knowledge, neither FNBSM nor any pension plan maintained
by FNBSM, has incurred, directly or indirectly, within the past
six (6) years any liability under Title IV of ERISA (including to
the Pension Benefit Guaranty Corporation) or to the IRS with
respect to any pension plan qualified under IRC Section 401(a)
except liabilities to the Pension Benefit Guaranty Corporation
pursuant to ERISA Section 4007, all of which have been fully
paid, nor has any reportable event under ERISA Section 4043(b)
occurred with respect to any such pension plan. With respect to
each FNBSM Employee Benefit Plan that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan,
based upon the actuarial assumptions used for funding purposes in
the plan's most recent actuarial report did not, as of its latest
valuation date, exceed the then current value of the assets of
such plan allocable to such accrued benefits. With respect to
each FNBSM Employee Benefit Plan, FNBSM will have made on or
prior to the Closing Date, all payments required to be made by it
prior to the Closing Date and will have at least accrued as of
the Closing Date all payments due but not yet payable so that
there will not have been nor will there be any accumulated
funding deficiencies (as defined in ERISA or the Code) or waivers
of such deficiencies. FNBSM has not incurred or is subject to
any liability under ERISA Section 4201 for a complete or partial
withdrawal from a multi-employer plan. To the best of FNBSM's
knowledge, all "employee benefit plans," as defined in ERISA
Section 3(3), comply, and within the past six (6) years have
complied, in all material respects with (i) relevant provisions
of ERISA and (ii), in the case of plans intended to qualify for
favorable income tax treatment, provisions of the IRC relevant to
such treatment. To the best of FNBSM's knowledge, no prohibited
transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408 or any
transaction prohibited under IRC Section 4975) has occurred
within the past six (6) years with respect to any employee
benefit plan maintained by FNBSM that would result in the
imposition, directly or indirectly, of an excise tax under
IRC 4975 or other penalty under ERISA or the IRC, which,
<PAGE A-19> individually or in the aggregate, has resulted in or
will result in a Material Adverse Effect with respect to FNBSM.
FNBSM provides continuation coverage under group health plans for
separating employees and "qualified beneficiaries" in accordance
with the provisions of IRC Section 4980B(f). Such group health
plans are in compliance with Section 1862(b)(1) of the Social
Security Act. There are no pending actions, claims or lawsuits
which have been asserted or instituted against any of FNBSM's
Employee Benefit Plans, the assets of any of the trusts under
such Plans, the plan sponsor, the plan administrator or against
any fiduciary of any of FNBSM's Employee Benefit Plans (other
than routine benefit claims) nor does FNBSM have knowledge of
facts which could form the basis of any such action, claim or
lawsuit. There are no investigations or audits of any of FNBSM's
Employee Benefit Plans, any trusts under such plans, the plan
sponsor, the plan administrator or any fiduciary of any of
FNBSM's Employee Benefit Plans which have been threatened or
instituted nor does FNBSM have knowledge of facts which could
form the basis for any such investigation or audit. No event has
occurred or will occur which will result in liability to FNBSM in
connection with any Employee Benefit Plan established,
maintained, or contributed to (currently or previously) by FNBSM
or by any other entity which, together with FNBSM, constitute
elements of either (i) a controlled group of corporations (within
the meaning of IRC Section 414(b)), (ii) a group of trades or
businesses under common control (within the meaning of IRC
Sections 414(c) or 4001), (iii) an affiliated service group
(within the meaning of IRC Section 414(m)), or (iv) another
arrangement covered by IRC Section 414(o).
Section 2.13 Brokers, Finders and Financial Advisors.
Neither FNBSM nor any of their respective officers, directors,
employees or agents, has employed any broker, finder or financial
advisor in connection with the transactions contemplated by this
Agreement or in connection with any other transaction or, except
for its commitments disclosed in the FNBSM Disclosure Schedule,
incurred any liability or commitment for any fees or commissions
to any such person in connection with the transactions
contemplated by this Agreement or in connection with any other
transaction, which has not been reflected in the FNBSM
Financials.
Section 2.14 Environmental Matters. To the knowledge
of FNBSM, neither FNBSM, nor any properties owned or operated by
FNBSM has been or is in violation of or liable under any
Environmental Law which violation or liability, individually or
in the aggregate, resulted in, or will result, in a Material
Adverse Effect with respect to FNBSM. There are no actions,
suits or proceedings, or demands, claims, notices or
investigations (including without limitation notices, demand
letters or requests for information from any environmental
agency) instituted or pending, or to the knowledge of FNBSM,
threatened, relating to the liability of any property owned or
operated by FNBSM under any Environmental Law.
<PAGE A-20>
Section 2.15 Loan Portfolio. The allowance for loan
losses reflected, and to be reflected, in the FNBSM Regulatory
Reports, and shown, and to be shown, on the balance sheets
contained in the FNBSM Financials have been, and will be,
established in accordance with the requirements of generally
accepted accounting principles and all applicable regulatory
criteria.
Section 2.16 Information to be Supplied. The
information to be supplied by FNBSM for inclusion in the
Registration Statement (including the Prospectus/Proxy Statement)
will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein not misleading.
The information supplied, or to be supplied, by FNBSM for
inclusion in the Applications will, at the time such documents
are filed with any Regulatory Authority, be accurate in all
material aspects.
Section 2.17 Related Party Transactions. Except as
disclosed in the footnotes to the FNBSM Financials, FNBSM is not
a party to any transaction (including any loan or other credit
accommodation) with any Affiliate of FNBSM. Any such transaction
(a) was made in the ordinary course of business, (b) was made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other Persons, and (c) did not involve more
than the normal risk of collectability or present other
unfavorable features. No loan or credit accommodation to any
Affiliate of FNBSM is presently in default or, during the three
year period prior to the date of this Agreement, has been in
default or has been restructured, modified or extended. FNBSM
has not been notified that principal and interest with respect to
any such loan or other credit accommodation will not be paid when
due or that the loan grade classification accorded such loan or
credit accommodation by FNBSM is inappropriate.
Section 2.18 Loans. Each loan reflected as an asset
in the FNBSM Financial Statements (i) is evidenced by notes,
agreements or other evidences of indebtedness which are true,
genuine and correct (ii) to the extent secured, has been secured
by valid liens and security interests which have been perfected,
and (iii) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FNBSM.
Section 2.19 Quality of Representations. The
representations made by FNBSM in this Agreement are true, correct
and complete in all material respects, and do not omit statements
<PAGE A-21> necessary to make them not misleading under all facts
and circumstances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PENNS WOODS
Penns Woods hereby represents and warrants to FNBSM
that, except as set forth in the Penns Woods Disclosure Schedule
(which Penns Woods Disclosure Schedule qualifies and represents
exceptions to all of the representations and warranties of Penns
Woods contained in this Agreement taken as a whole and does not
relate solely to particular representations and warranties)
delivered by Penns Woods to FNBSM on or prior to the date hereof:
Section 3.01 Organization.
(a) Penns Woods is a corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Penns Woods is a bank holding
company duly registered under the BHC Act. Penns Woods has the
corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the
properties and assets now owned and being operated by it Penns
Woods is not qualified or licensed to do business as a foreign
corporation in any other jurisdiction and is not required to be
so qualified or licensed as the result of the ownership or
leasing of property or the conduct of its business, except where
the failure to be so qualified or licensed would not have a
Material Adverse Effect with respect to Penns Woods.
(b) JSSB is a banking institution duly organized
and validly existing under the laws of the Commonwealth of
Pennsylvania. JSSB has the corporate power and authority to
carry on its business and operations as now being conducted and
to own and operate the properties and assets now owned and being
operated by it. Neither JSSB nor any other Penns Woods
Subsidiary is qualified or licensed to do business as a foreign
corporation in any other jurisdiction and neither is required to
be so qualified or licensed as the result of the ownership or
leasing of property or the conduct of its business, except where
the failure to be so qualified or licensed would not have a
Material Adverse Effect with respect to Penns Woods.
(c) There are no Penns Woods Subsidiaries other
than JSSB or as disclosed in Penns Woods' Annual Report on
Form 10-K for the year ended December 31, 1997. There are no
JSSB Subsidiaries.
(d) The deposits of JSSB are insured by the FDIC
to the extent provided in the Federal Deposit Insurance Act.
(e) The respective minute books of Penns Woods
and JSSB accurately record, in all material respects, all
material corporate actions of their respective shareholders and
<PAGE A-22> boards of directors (including committees) through
the date of this Agreement.
(f) Prior to the execution of this Agreement,
Penns Woods has delivered to FNBSM true and correct copies of the
articles of incorporation and the bylaws of Penns Woods and the
articles of incorporation and bylaws of JSSB as in effect on the
date hereof.
Section 3.02 Capital Structure.
(a) The authorized capital stock of Penns Woods
consists of (a) 10,000,000 shares of common stock, $10.00 par
value ("Penns Woods Common Stock"), of which, at the date of this
Agreement, 2,569,558 shares are outstanding, validly issued,
fully paid and nonassessable and free of preemptive rights.
Except as disclosed in Penn's Woods' Securities Documents,
neither Penns Woods nor JSSB nor any other Penns Woods Subsidiary
has or is bound by any subscription, option, warrant, call,
commitment, agreement, plan or other Right of any character
relating to the purchase, sale or issuance or voting of, or right
to receive dividends or other distributions on any shares of
Penns Woods Common Stock or any other security of Penns Woods or
any securities representing the right to vote, purchase or
otherwise receive any shares of Penns Woods Common Stock or any
other security of Penns Woods.
(b) The authorized capital stock of JSSB consists
of 120,000 shares of common stock, par value $10.00 per share,
102,000 of which shares are outstanding, validly issued, fully
paid, nonassessable, free of preemptive rights and owned by Penns
Woods. Neither Penns Woods nor any Penns Woods Subsidiary has or
is bound by any subscription, option, warrant, call, commitment,
agreement or other Right of any character relating to the
purchase, sale or issuance or voting of, or right to receive
dividends or other distributions on any shares of the capital
stock of any Penns Woods Subsidiary or any other security of any
Penns Woods Subsidiary or any securities representing the right
to vote, purchase or otherwise receive any shares of the capital
stock or any other security of any Penns Woods Subsidiary.
Either Penns Woods or JSSB owns all of the outstanding shares of
capital stock of each Penns Woods Subsidiary free and clear of
all liens, security interests, pledges, charges, encumbrances,
agreements and restrictions of any kind or nature.
(c) Neither (i) Penns Woods, (ii) JSSB nor
(iii) any other Penns Woods Subsidiary, owns any equity interest,
directly or indirectly, treasury stock, in any other company or
controls any other company, except for equity interests held in
the investment portfolios of Penns Woods Subsidiaries, equity
interests held by Penns Woods Subsidiaries in a fiduciary
capacity, equity interests held in connection with the commercial
loan activities of Penns Woods Subsidiaries, and equity interests
disclosed in Penns Woods' Annual Report on Form 10-K for the year
ended December 31, 1997. There are no subscriptions, options,
<PAGE A-23> warrants, calls, commitments, agreements or other
Rights outstanding and held by Penns Woods or JSSB with respect
to any other company's capital stock or the equity of any other
person.
(d) To Penns Woods' knowledge, without any
independent investigation, except as disclosed in Penns Woods'
proxy statement dated March 26, 1998, no person or "group" (as
that term is used in Section 13(d)(3) of the Exchange Act) is the
beneficial owner (as defined in Section 13(d) of the Exchange
Act) of 5% or more of the outstanding shares of Penns Woods
Common Stock.
Section 3.03 Authority; No Violation.
(a) Penns Woods has full corporate power and
authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. JSSB has full corporate
power and authority to execute and deliver the Plan of Merger and
to consummate the Merger. The execution and delivery of this
Agreement by Penns Woods and the consummation by Penns Woods of
the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Penns Woods and no other
corporate proceedings on the part of Penns Woods are necessary to
complete the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Penns Woods
and, subject to receipt of the required approvals of Regulatory
Authorities described in Section 3.04 hereof, constitutes the
valid and binding obligation of Penns Woods, enforceable against
Penns Woods in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity. The Plan of Merger, upon its execution and
delivery by JSSB concurrently with the execution and delivery of
this Agreement, will constitute the valid and binding obligation
of JSSB, enforceable against JSSB in accordance with its terms,
subject to applicable conservatorship and receivership provisions
of the FDIA, or insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general
principles of equity.
(b) (A) The execution and delivery of this
Agreement by Penns Woods, (B) the execution and delivery of the
Plan of Merger by JSSB, (C) subject to receipt of approvals from
the Regulatory Authorities referred to in Section 3.04 hereof and
FNBSM's and Penns Woods' and JSSB's compliance with any
conditions contained therein, the consummation of the
transactions contemplated hereby, and (D) compliance by Penns
Woods or JSSB with any of the terms or provisions hereof or of
the Bank Plan of Merger will not (i) conflict with or result in a
breach of any provision of the articles of incorporation or
bylaws of Penns Woods or any Penns Woods Subsidiary; (ii) violate
any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to Penns Woods or any Penns
Woods Subsidiary or any of their respective properties or assets;
<PAGE A-24> or (iii) violate, conflict with, result in a breach
of any provisions of, constitute a default (or an event which,
with notice or lapse of time, or both, would constitute a
default), under, result in the termination of, accelerate the
performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets
of Penns Woods or any Penns Woods Subsidiary under, any of the
terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Penns Woods or JSSB is a party,
or by which they or any of their respective properties or assets
may be bound or affected, except for such violations, conflicts,
breaches or defaults under clause (ii) or (iii) hereof which,
either individually or in the aggregate, will not have a Material
Adverse Effect with respect to Penns Woods.
Section 3.04 Consents. Except for any required
consents, approvals, filings and registrations from or with the
FRB, the FDIC, the OCC, the PDB, the SEC, and state "blue sky"
authorities, and compliance with any conditions contained
therein, and the approval of the Plan of Merger by Penns Woods as
sole shareholder of JSSB, and by the JSSB Board of Directors, no
consents or approvals of, or filings or registrations with, any
public body or authority are necessary, and no consents or
approvals of any third parties are necessary, or will be, in
connection with (a) the execution and delivery of this Agreement
by Penns Woods or the Plan of Merger by JSSB, and (b) the
completion by Penns Woods of the transactions contemplated hereby
or by JSSB of the Merger. Penns Woods has no reason to believe
that any required consents or approvals will not be received or
will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact Penns Woods'
ability to complete the transactions contemplated by this
Agreement.
Section 3.05 Financial Statements.
(a) Penns Woods has previously delivered, or will
deliver, to FNBSM the Penns Woods Regulatory Reports. The Penns
Woods Regulatory Reports have been, or will be, prepared in all
material respects in accordance with applicable regulatory
accounting principles and practices throughout the periods
covered by such statements, and fairly present, or will fairly
present in all material respects, the financial position, results
of operations and changes in shareholders' equity of Penns Woods
as of and for the periods ended on the dates thereof, in
accordance with applicable regulatory accounting principles
applied on a consistent basis.
(b) Penns Woods has previously delivered, or will
deliver, to FNBSM the Penns Woods Financials. The Penns Woods
Financials have been, or will be, prepared in accordance with
generally accepted accounting principles and practices applied on
a consistent basis throughout the periods covered by such
<PAGE A-25> statements, and fairly present, or will fairly
present, the consolidated financial position, results of
operations and cash flows of Penns Woods as of and for the
periods ending on the dates thereof, in accordance with generally
accepted accounting principles, except where changes in
accounting principles from one year to the next have been
disclosed therein.
(c) At the date of each balance sheet included in
the Penns Woods Financials or the Penns Woods Regulatory Reports,
neither Penns Woods nor JSSB (as the case may be) had or will
have any liabilities, obligations or loss contingencies of any
nature (whether absolute, accrued, contingent or otherwise) of a
type required to be reflected in such Penns Woods Financials or
the Penns Woods Regulatory Reports or in the footnotes thereto
which are not fully reflected or reserved against therein or
disclosed in a footnote thereto, except for liabilities,
obligations or loss contingencies which are not material in the
aggregate and which are incurred in the ordinary course of
business, consistent with past practice, and subject, in the case
of any unaudited statements, to normal, recurring audit
adjustments and the absence of footnotes.
Section 3.06 Taxes. (a) Penns Woods and the Penns
Woods Subsidiaries are members of the same affiliated group
within the meaning of IRC Section 1504(a). Penns Woods has duly
filed, and will file, all federal, state and local tax returns
required to be filed by or with respect to Penns Woods and all
Penns Woods Subsidiaries on or prior to the Closing Date (all
such returns being accurate and correct in all material respects)
and has duly paid or will pay, or made or will make, provisions
for the payment of all federal, state and local taxes which have
been incurred by or are due or claimed to be due from Penns Woods
and any Penns Woods Subsidiary by any taxing authority or
pursuant to any tax sharing agreement or arrangement (written or
oral) on or prior to the Closing Date other than taxes which
(i) are not delinquent or (ii) are being contested in good faith.
\DM No consent pursuant to IRC Section 341(f) has
been filed (or will be filed prior to the Closing Date) by or
with respect to Penns Woods or any Penns Woods Subsidiary.
Section 3.07 No Material Adverse Effect. Penns Woods
has not suffered any Material Adverse Effect since December 31,
1997.
Section 3.08 Ownership of Property; Insurance
Coverage.
(a) Penns Woods and the Penns Woods Subsidiaries
have, or will have as to property acquired after the date hereof,
good and, as to real property, marketable title to all assets and
properties owned by Penns Woods or any Penns Woods Subsidiary in
the conduct of its business, whether such assets and properties
are real or personal, tangible or intangible, including assets
<PAGE A-26> and property reflected in the balance sheets
contained in the Penns Woods Regulatory Reports and in the Penns
Woods Financials or acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for
fair value, in the ordinary course of business, since the date of
such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items
that secure liabilities for borrowed money and that are described
in the Penns Woods Disclosure Schedule or permitted under
Article IV hereof and (ii) statutory liens for amounts not yet
delinquent or which are being contested in good faith. Penns
Woods and the Penns Woods Subsidiaries, as lessee, have the right
under valid and subsisting leases of real and personal properties
used by Penns Woods and its Subsidiaries in the conduct of their
businesses to occupy and use all such properties as presently
occupied and used by each of them.
(b) With respect to all agreements pursuant to
which Penns Woods or any Penns Woods Subsidiary has purchased
securities subject to an agreement to resell, if any, Penns Woods
or such Penns Woods Subsidiary, as the case may be, has a valid,
perfected first lien or security interest in the securities or
other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt
secured thereby.
(c) Penns Woods and the Penns Woods Subsidiaries
currently maintain insurance in amounts considered by Penns Woods
to be reasonable for their respective operations and similar in
scope and coverage to that maintained by other businesses
similarly engaged. Neither Penns Woods nor any Penns Woods
Subsidiary has received notice from any insurance carrier that
(i) such insurance will be cancelled or that coverage thereunder
will be reduced or eliminated or (ii) premium costs with respect
to such insurance will be substantially increased. There are
presently no material claims pending under such policies of
insurance and no notices have been given by Penns Woods or JSSB
under such policies. All such insurance is valid and enforceable
and in full force and effect, and within the last three years
Penns Woods has received each type of insurance coverage for
which it has applied and during such periods has not been denied
indemnification for any material claims submitted under any of
its insurance policies.
Section 3.9 Legal Proceedings. Neither Penns Woods
nor any Penns Woods Subsidiary is a party to any, and there are
no pending or, to the best of Penns Woods' knowledge, threatened
legal, administrative, arbitration or other proceedings, claims
(whether asserted or unasserted), actions or governmental
investigations or inquiries of any nature (i) against Penns Woods
or any Penns Woods Subsidiary, (ii) to which Penns Woods' or any
Penns Woods Subsidiary's assets are or may be subject,
(iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of Penns Woods to perform under this
<PAGE A-27> Agreement, except for any proceedings, claims,
actions, investigations or inquiries referred to in clauses (i)
or (ii) which, individually or in the aggregate, could not be
reasonably expected to have a Material Adverse Effect with
respect to Penns Woods.
Section 3.10 Compliance With Applicable Law.
(a) Penns Woods and the Penns Woods Subsidiaries
hold all licenses, franchises, permits and authorizations
necessary for the lawful conduct of their businesses under, and
have complied in all material respects with, applicable laws,
statutes, orders, rules or regulations of any federal, state or
local governmental authority relating to them, other than where
such failure to hold or such noncompliance will neither result in
a limitation in any material respect on the conduct of their
businesses nor otherwise have a Material Adverse Effect with
respect to Penns Woods.
(b) Neither Penns Woods nor any Penns Woods
Subsidiary has received any notification or communication from
any Regulatory Authority (i) asserting that Penns Woods or any
Penns Woods Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Regulatory
Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material
to Penns Woods or any Penns Woods Subsidiary; (iii) requiring or
threatening to require Penns Woods or any Penns Woods Subsidiary,
or indicating that Penns Woods or any Penns Woods Subsidiary may
be required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of Penns Woods or any Penns Woods Subsidiary,
including without limitation any restriction on the payment of
dividends; or (iv) directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the
operations of Penns Woods or any Penns Woods Subsidiary,
including without limitation any restriction on the payment of
dividends (any such notice, communication, memorandum, agreement
or order described in this sentence is hereinafter referred to as
a "Regulatory Agreement"). Neither Penns Woods nor any Penns
Woods Subsidiary has consented to or entered into any Regulatory
Agreement, except as heretofore disclosed to FNBSM.
Section 3.11 Securities Documents. Penns Woods has
delivered, or will deliver, to FNBSM copies of its (i) annual
reports on SEC Form 10-K for the years ended December 31, 1997,
1996, and 1995, (ii) quarterly reports on SEC Form 10-Q for the
quarters ended March 31, 1998, September 30, 1997, June 30, 1997,
and March 31, 1997, and (iii) proxy statement dated March 26,
1998 used in connection with its annual meeting of shareholders
held in April 1998. Such reports and such proxy materials
complied, at the time filed with the SEC, in all material
respects, with the Exchange Act and the applicable rules and
regulations of the SEC. <PAGE A-28>
Section 3.12 Brokers and Finders. Neither Penns Woods
nor any Penns Woods Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any
broker, finder or financial advisor, or incurred any liability
for any fees or commissions to any such person, in connection
with the transactions contemplated by this Agreement or in
connection with any transaction other than the Merger, or, except
for its commitments disclosed in the Penns Woods Disclosure
Schedule, incurred any liability or commitment for any fees or
commissions to any such person in connection with the
transactions contemplated by this Agreement or in connection with
any transaction other than the Merger, which has not been
reflected in the Penns Woods Financials.
Section 3.13 Environmental Matters. To the knowledge
of Penns Woods, neither Penns Woods nor any Penns Woods
Subsidiary, nor any properties owned or operated by Penns Woods
or any Penns Woods Subsidiary has been or is in violation of or
liable under any Environmental Law which violation or liability,
individually or in the aggregate, resulted in or will result in a
Material Adverse Effect with respect to Penns Woods. There are
no actions, suits or proceedings, or demands, claims, notices or
investigations (including without limitation notices, demand
letters or requests for information from any environmental
agency) instituted or pending, or to the knowledge of Penns
Woods, threatened, relating to the liability of any property
owned or operated by Penns Woods or any Penns Woods Subsidiary
under any Environmental Law.
Section 3.14 Loan Portfolio. The allowance for loan
losses reflected, and to be reflected, in the Penns Woods
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the Penns Woods Financials have been, and
will be, established in accordance with the requirements of
generally accepted accounting principles and all applicable
regulatory criteria.
Section 3.15 Information to be Supplied. The
information to be supplied by Penns Woods and JSSB for inclusion
in the Registration Statement (including the Prospectus/Proxy
Statement) will not, at the time the Registration Statement is
declared effective pursuant to the Securities Act, contain any
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein not
misleading. The information supplied, or to be supplied, by
Penns Woods for inclusion in the Applications will, at the time
such documents are filed with any Regulatory Authority, be
accurate in all material aspects.
Section 3.16 Loans. Each loan reflected as an asset
in the Penns Woods Financial Statements (i) is evidenced by
notes, agreements or other evidences of indebtedness which are
true, genuine and correct (ii) to the extent secured, has been
secured by valid liens and security interests which have been
perfected, and (iii) is the legal, valid and binding obligation
<PAGE A-29> of the obligor named therein, enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles, in each case other than loans as to which the failure
to satisfy the foregoing standards would not have a Material
Adverse Effect with respect to Penns Woods.
Section 3.17 Quality of Representations. The
representations made by Penns Woods in this Agreement are true,
correct and complete in all material respects and do not omit
statements necessary to make the representations not misleading
under the circumstances.
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of Business. From the date of
this Agreement to the Closing Date, FNBSM will conduct its
business and engage in transactions, including extensions of
credit, only in the ordinary course and consistent with past
practice and policies, except as otherwise required by this
Agreement or with the written consent of Penns Woods. FNBSM will
use its reasonable good faith efforts, to (i) preserve its
business organizations intact, (ii) maintain good relationships
with employees, and (iii) preserve for itself the good will of
customers of FNBSM and others with whom business relationships
exist. From the date hereof to the Closing Date, except as
otherwise consented to or approved by Penns Woods in writing or
as permitted or required by this Agreement, FNBSM will not:
(i) amend or change any provision of its
articles of association or bylaws;
(ii) change the number of authorized or
issued shares of its capital stock or issue or grant any
option, warrant, call, commitment, subscription, Right or
agreement of any character relating to its authorized or
issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any
shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock,
or redeem or otherwise acquire any shares of capital stock,
except that FNBSM may pay on or before December 31, 1998 a
regular semi-annual cash dividend, not to exceed $1.25 per
share of FNBSM Common Stock outstanding; after the date of
this Agreement, Penns Woods and FNBSM shall consult with and
coordinate with the other the payment of dividends with
respect to Penns Woods Common Stock and FNBSM Common Stock
and the record and payment dates relating thereto, it being
the intention of Penns Woods and FNBSM that holders of FNBSM
Common Stock shall not receive two dividends, or fail to
receive one dividend, for any single calendar quarter with
respect to their shares of FNBSM Common Stock;
<PAGE A-30>
(iii) grant any severance or termination pay
(other than pursuant to written policies or written
agreements of FNBSM in effect on the date hereof and
provided to Penns Woods prior to the date hereof) to, or
enter into any new or amend any existing employment
agreement with, or increase the compensation of, any
employee, officer or director of FNBSM, except for routine
periodic increases, individually and in the aggregate, in
accordance with past practice, or hire or agree to hire any
additional employees except to the extent necessary to
replace any present employee whose employment terminates;
(iv) merge or consolidate FNBSM or with any
other corporation; sell or lease all or any substantial
portion of the assets or business of FNBSM; make any
acquisition of all or any substantial portion of the
business or assets of any other person, firm, association,
corporation or business organization other than in
connection with the collection of any loan or credit
arrangement between FNBSM and any other person; enter into a
purchase and assumption transaction with respect to deposits
and liabilities; permit the revocation or surrender by FNBSM
of its certificate of authority to maintain, or file an
application for the relocation of, any existing branch
office, or file an application for a certificate of
authority to establish a new branch office;
(v) sell or otherwise dispose of any asset
of FNBSM other than in the ordinary course of business
consistent with past practice; subject any asset of FNBSM to
a lien, pledge, security interest or other encumbrance
(other than in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan"
accounts established in the ordinary course of business and
transactions in "federal funds" and the satisfaction of
legal requirements in the exercise of trust powers) other
than in the ordinary course of business consistent with past
practice; incur any indebtedness for borrowed money (or
guarantee any indebtedness for borrowed money), except in
the ordinary course of business consistent with past
practice;
(vi) take any action which would result in
any of the representations and warranties of FNBSM set forth
in this Agreement becoming untrue as of any date after the
date hereof or in any of the conditions set forth in
Article V hereof not being satisfied;
(vii) change any method, practice or
principle of accounting, except as may be required from time
to time by GAAP (without regard to any optional early
adoption date) or any Regulatory Authority responsible for
regulating FNBSM;
<PAGE A-31>
(viii) waive, release, grant or transfer any
rights of value or modify or change in any material respect
any existing material agreement to which FNBSM is a party,
other than in the ordinary course of business, consistent
with past practice;
(ix) implement any pension, retirement,
profit sharing, bonus, welfare benefit or similar plan or
arrangement that was not in effect on the date of this
Agreement, or materially amend any existing plan or
arrangement except to the extent such amendments do not
result in an increase in cost; provided, however, that FNBSM
may contribute to the FNBSM defined contribution pension
plan an amount as provided in Section 4.10(a)(i) of this
Agreement;
(x) purchase any security for its investment
portfolio not rated "A" or higher by either Standard &
Poor's Corporation or Moody's Investor Services, Inc.,
except in the ordinary course of business consistent with
past practice;
(xi) make any new loan or other credit
facility commitment (including without limitation, lines of
credit and letters of credit) to any borrower or group of
affiliated borrowers in excess of $425,000 in the aggregate,
or increase, compromise, extend, renew or modify any
existing loan or commitment outstanding in excess of
$425,000, except for any commitment disclosed on the FNBSM
Disclosure Schedule;
(xii) except as set forth on the FNBSM
Disclosure Schedule, enter into, renew, extend or modify any
other transaction with any Affiliate;
(xiii) enter into any interest rate swap or
similar commitment, agreement or arrangement;
(xiv) except for the execution of this
Agreement, take any action that would give rise to a right
of payment to any individual under any employment agreement;
(xv) intentionally and knowingly take any
action that would preclude satisfaction of the condition to
closing contained in Section 5.02(k) relating to financial
accounting treatment of the Merger; or
(xvi) agree to do any of the foregoing.
For purposes of this Section 4.01, it shall not be
considered in the ordinary course of business for FNBSM to do any
of the following: (i) make any capital expenditure of $25,000 or
more not disclosed on FNBSM Disclosure Schedule 4.01, without the
prior written consent of Penns Woods; (ii) make any sale,
assignment, transfer, pledge, hypothecation or other disposition
<PAGE A-32> of any assets having a book or market value,
whichever is greater, in the aggregate in excess of $25,000,
other than pledges of assets to secure government deposits, to
exercise trust powers, sales of assets received in satisfaction
of debts previously contracted in the normal course of business,
issuance of loans, or transactions in the investment securities
portfolio by FNBSM or repurchase agreements made, in each case,
in the ordinary course of business; or (iii) undertake or enter
any lease, contract or other commitment for its account, other
than in the normal course of providing credit to customers as
part of its banking business, involving a payment by FNBSM of
more than $25,000 annually, or containing a material financial
commitment and extending beyond 12 months from the date hereof.
Section 4.02 Access; Confidentiality.
(a) From the date of this Agreement through the
Closing Date, FNBSM or Penns Woods, as the case may be, shall
afford to, and Penns Woods shall cause each Subsidiary to afford
to, the other party and its authorized agents and
representatives, complete access to their respective properties,
assets, books and records and personnel, at reasonable hours and
after reasonable notice for the purpose of undertaking a
comprehensive due diligence investigation; and the officers of
FNBSM and Penns Woods will furnish any person making such
investigation on behalf of the other party with such financial
and operating data and other information with respect to the
businesses, properties, assets, books and records and personnel
as the person making such investigation shall from time to time
reasonably request.
(b) FNBSM and Penns Woods each agree to conduct
such investigation and discussions hereunder in a manner so as
not to interfere unreasonably with normal operations and customer
and employee relationships of the other party.
(c) In addition to the access permitted by
subparagraph (a) above, from the date of this Agreement through
the Closing Date, FNBSM shall permit employees of JSSB reasonable
access to and participation in matters relating to problem loans,
loan restructurings and loan work-outs, provided that nothing
contained in this subparagraph shall be construed to grant JSSB
or any of its employees any final decision-making authority with
respect to such matters.
(d) If the transactions contemplated by this
Agreement shall not be consummated, FNBSM and Penns Woods will
each destroy or return all documents and records obtained from
the other party or its representatives, during the course of its
investigation and will cause all information with respect to the
other party obtained pursuant to this Agreement or preliminarily
thereto to be kept confidential, except to the extent such
information becomes public through no fault of the party to whom
the information was provided or any of its representatives or
agents and except to the extent disclosure of any such <PAGE A-
33> information is legally required. FNBSM and Penns Woods shall
each give prompt notice to the other party of any contemplated
disclosure where such disclosure is so legally required.
Section 4.03 Regulatory Matters and Consents.
(a) Penns Woods and FNBSM will prepare all
Applications and make all filings for, and use their best efforts
to obtain as promptly as practicable after the date hereof, all
necessary permits, consents, approvals, waivers and
authorizations of all Regulatory Authorities necessary or
advisable to consummate the transactions contemplated by this
Agreement.
(b) FNBSM will furnish Penns Woods with all
information concerning FNBSM as may be necessary or advisable in
connection with any Application or filing made by or on behalf of
Penns Woods to any Regulatory Authority in connection with the
transactions contemplated by this Agreement.
(c) Penns Woods will promptly furnish FNBSM with
copies of all material written communications to, or received by
Penns Woods or any Penns Woods Subsidiary from, any Regulatory
Authority in respect of the transactions contemplated hereby.
(d) Penns Woods will furnish FNBSM with
(i) copies of all Applications prior to filing with any
Regulatory Authority and provide FNBSM a reasonable opportunity
to suggest changes to such Applications, which suggested changes
Penns Woods may, in its reasonable discretion accept or reject,
(ii) copies of all Applications filed by Penns Woods and
(iii) copies of all documents filed by Penns Woods under the
Exchange Act.
(e) FNBSM will cooperate with Penns Woods in the
foregoing matters and will furnish Penns Woods with all
information concerning FNBSM as may be necessary or advisable in
connection with any Application or filing (including the
Registration Statement and any report filed with the SEC) made by
or on behalf of Penns Woods to any Regulatory Authority in
connection with the transactions contemplated by this Agreement,
and such information will be accurate and complete in all
material respects. In connection therewith, FNBSM will provide
certificates and other documents reasonably requested by Penns
Woods.
Section 4.04 Taking of Necessary Action.
(a) Penns Woods and FNBSM shall each use its best
efforts in good faith, and each of them shall cause any
Subsidiaries to use their best efforts in good faith, to
(i) furnish such information as may be required in connection
with the preparation of the documents referred to in Section 4.03
of this Agreement, and (ii) take or cause to be taken all action
necessary or desirable on its part using its best efforts so as
<PAGE A-34> to permit completion of the Merger including, without
limitation, (A) obtaining the consent or approval of each
individual, partnership, corporation, association or other
business or professional entity whose consent or approval is
required or desirable for consummation of the transactions
contemplated hereby (including assignment of leases without any
change in terms), provided that shall not agree to make any
payments or modifications to agreements in connection therewith
without the prior written consent of Penns Woods, and
(B) requesting the delivery of appropriate opinions, consents and
letters from its counsel and independent auditors. No party
hereto shall take, or cause, or to the best of its ability permit
to be taken, any action that would substantially impair the
prospects of completing the Merger; provided that nothing herein
contained shall preclude Penns Woods or FNBSM from exercising its
rights under this Agreement.
(b) Penns Woods and FNBSM shall promptly prepare
a Prospectus/Proxy Statement to be mailed to shareholders of
FNBSM in connection with the meeting of FNBSM shareholders and
transactions contemplated hereby, and to be filed by Penns Woods
with the SEC in the Registration Statement, which
Prospectus/Proxy statement shall conform in all material respects
to all applicable legal requirements. Penns Woods shall, as
promptly as practicable following the preparation thereof, file
the Registration Statement with the SEC and FNBSM and Penns Woods
shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly
as practicable after such filing. Penns Woods will advise FNBSM,
promptly after Penns Woods receives notice thereof, of the time
when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the shares
of capital stock issuable pursuant to the Registration Statement,
or the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or
supplement of the Registration Statement or for additional
information. Penns Woods shall use its best efforts to obtain,
prior to the effective date of the Registration Statement, all
necessary state securities laws or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by
this Agreement. Penns Woods shall provide FNBSM with as many
copies of such Registration Statement and all amendments thereto
promptly upon the filing thereof as FNBSM may reasonably request.
Section 4.05 Certain Agreements.
(a) In the event of any threatened or actual
claim, action, suit, proceeding or investigation, whether civil,
criminal or administrative, whether or not brought by or in the
name of FNBSM, in which any person who is now, or has been at any
time prior to the date of this Agreement, or who becomes prior to
the Effective Date, a director or officer or employee of FNBSM
(the "Indemnified Parties") is, or is threatened to be, made a
party to a suit based in whole or in part on, or arising in whole
<PAGE A-35> or in part out of, or pertaining to (i) the fact that
he is or was a director, officer or employee of FNBSM or any of
its respective predecessors or (ii) this Agreement or any of the
transactions contemplated hereby, whether in any case asserted or
arising before or after the Effective Date, the parties hereto
agree to cooperate and use their best efforts to defend against
and respond thereto to the maximum extent permitted by the BCL,
the NBA and the Articles of Association and Bylaws of FNBSM. On
or after the Effective Date, Penns Woods shall indemnify, defend
and hold harmless all prior and then-existing directors and
officers of FNBSM, against (i) all losses, claims, damages,
costs, expenses, liabilities or judgments or amounts that are
paid in settlement (with the approval of Penns Woods which
approval shall not be unreasonably withheld) of or in connection
with any claim, action, suit, proceeding or investigation,
whether or not brought by or in the name of FNBSM, based in whole
or in part on or arising in whole or in part out of the fact that
such person is or was a director, officer or employee of FNBSM or
any FNBSM Subsidiary, whether pertaining to any matter existing
or occurring at or prior to or after the Effective Date and
whether asserted or claimed prior to, or at or after, the
Effective Date ("Indemnified Liabilities") and (ii) all
Indemnified Liabilities based in whole or in part on, or arising
in whole or in part out of, or pertaining to this Agreement or
the transactions contemplated hereby, to the same extent as such
officer, director or employee may be indemnified by FNBSM as of
the date hereof including the right to advancement of expenses,
provided, however, that any such officer, director or employee of
FNBSM may not be indemnified by Penns Woods and/or JSSB if such
indemnification is prohibited by applicable law.
(b) Penns Woods shall maintain FNBSM's existing
directors' and officers' liability insurance policy (or a policy
providing comparable coverage amounts on terms generally no less
favorable, including Penns Woods' existing policy if it meets the
foregoing standard) covering persons who are currently covered by
such insurance for a period of five years after the Effective
Date.
(c) On or prior to the Effective Date, Penns
Woods and JSSB shall enter into employment agreements with
William H. Rockey and Rickey H. Brooks, to be effective as of the
Effective Date, on terms mutually satisfactory to Penns Woods and
such individuals. Such agreements shall, among other things,
(i) provide for a term of three years from the Effective Date and
automatic annual renewals thereafter absent notice of nonrenewal
by either party, (ii) provide for a minimum base salary equal to
the base salary of the executive immediately prior to the
Effective Date, (iii) provide for a severance payment equivalent
to the greater of 24 months' base salary or base salary payable
over the remaining term of the agreement in the event the
executive's employment is terminated involuntarily or the
executive terminates employment for "good reason" following a
"change in control" of Penns Woods, and (iv) provide that the
executive shall be eligible for consideration to receive stock
<PAGE A-36> option grants under Penns Woods' stock option plans
then in effect in the same manner as other executive officers of
Penns Woods.
Section 4.06 No Other Bids and Related Matters. So
long as this Agreement remains in effect, FNBSM shall not and
shall not authorize or permit any of its directors, officers,
employees or agents, to directly or indirectly (i) respond to,
solicit, initiate or encourage any inquiries relating to, or the
making of any proposal which relates to, an Acquisition
Transaction (as defined below), (ii) recommend or endorse an
Acquisition Transaction, (iii) participate in any discussions or
negotiations regarding an Acquisition Transaction, (iv) provide
any third party (other than Penns Woods or an affiliate of Penns
Woods) with any nonpublic information in connection with any
inquiry or proposal relating to an Acquisition Transaction, or
(v) enter into an agreement with any other party with resect to
an Acquisition Transaction. Notwithstanding the foregoing, the
Board of Directors of FNBSM may respond to unsolicited inquiries
relating to an Acquisition Transaction or the Board of Directors
of FNBSM may recommend or endorse an Acquisition Transaction, in
each case, if it receives an unqualified written opinion of
outside counsel that the failure to do so would constitute a
breach of their fiduciary duty. In the event of any such
response by FNBSM, Penns Woods shall have the right, but not the
obligation, to terminate this Agreement at any time thereafter
without penalty or further liability. As used in this Agreement,
"Acquisition Transaction" shall mean any of the following
transactions: (i) a merger or consolidation, or any similar
transaction, involving FNBSM, (ii) a purchase, lease or other
acquisition of all or a substantial portion of the assets or
liabilities of FNBSM hereto, or (iii) a purchase or other
acquisition (including by way of share exchange, tender offer,
exchange offer or otherwise) of 20% or more of the outstanding
shares of FNBSM Common Stock. FNBSM shall notify Penns Woods
immediately if (i) any such discussions or negotiations are
sought to be initiated with it by any other person, or (ii) if
any such requests for information, inquiries, proposals or
communications are received from any other person, except
analysts, Regulatory Authorities and holders of FNBSM Common
Stock in the ordinary course of business.
Section 4.07 Duty to Advise; Duty to Update FNBSM's
Disclosure Schedule. FNBSM shall promptly advise Penns Woods of
any change or event having a Material Adverse Effect on it or
which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations,
warranties or covenants set forth herein. FNBSM shall update
FNBSM's Disclosure Schedule as promptly as practicable after the
occurrence of an event or fact which, if such event or fact had
occurred prior to the date of this Agreement, would have been
disclosed in the FNBSM Disclosure Schedule. The delivery of such
updated Disclosure Schedule shall not relieve FNBSM from any
breach or violation of this Agreement and shall not have any
<PAGE A-37> effect for the purposes of determining the
satisfaction of the condition set forth in Sections 5.02(c)
hereof.
Section 4.08 Board and Committee Minutes. FNBSM shall
provide Penns Woods, within 30 days after any meeting of the
Board of Directors of FNBSM, or any committee thereof, or any
senior management committee, a copy of the minutes of such
meeting, except that with respect to any meeting held within 30
days of the Closing Date, such minutes shall be provided prior to
the Closing Date.
Section 4.09 Additional Undertakings by FNBSM and
Penns Woods.
(a) From and after the date of this Agreement,
FNBSM shall:
(i) Shareholders Meeting. Submit this
Agreement to its shareholders for approval at a meeting to
be held as soon as practicable, and use its best efforts to
cause its Boards of Director to unanimously recommend
approval of this Agreement to FNBSM shareholders; and
(ii) Committee Meetings. Permit a
representative of Penns Woods, who is reasonably acceptable
to FNBSM, to attend all meetings of FNBSM's Board of
Directors, and all committee meetings of FNBSM's management,
including, without limitation, any loan or asset/liability
committee.
(b) From and after the date of this Agreement,
Penns Woods shall:
(i) Approval of Bank Plan of Merger.
Approve the Plan of Merger as sole shareholder of JSSB and
obtain the approval of, and cause the execution and delivery
of, the Plan of Merger; and
(ii) Delivery of Securities Documents.
Deliver to FNBSM, copies of all Securities Documents
simultaneously with the filing thereof.
(c) From and after the date of this Agreement,
Penns Woods and FNBSM shall each:
(i) Filings and Approvals. Cooperate with
the other in the preparation and filing, as soon as
practicable, of (A) the Applications, (B) the Registration
Statement and related filings under state securities laws
covering the Penns Woods Common Stock to be issued pursuant
to the Merger, (C) all other documents necessary to obtain
any other approvals and consents required to effect the
completion of the Merger, and (D) all other documents
contemplated by this Agreement; <PAGE A-38>
(ii) Public Announcements. Cooperate and
cause their respective officers, directors, employees and
agents to cooperate in good faith, consistent with their
respective legal obligations, in the preparation and
distribution of, and agree upon the form and substance of,
any press release related to this Agreement and the
transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation
communications to their respective shareholders, internal
announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any
disclosure which its counsel deems legally necessary;
(iii) Maintenance of Insurance. Maintain,
and cause their respective Subsidiaries to maintain,
insurance in such amounts as are reasonable to cover such
risks as are customary in relation to the character and
location of its properties and the nature of its business;
(iv) Maintenance of Books and Records.
Maintain, and cause their respective Subsidiaries to
maintain, books of account and records in accordance with
generally accepted accounting principles applied on a basis
consistent with those principles used in preparing the
financial statements heretofore delivered;
(v) Taxes. File all federal, state, and
local tax returns required to be filed by them or their
respective Subsidiaries on or before the date such returns
are due (including any extensions) and pay all taxes shown
to be due on such returns on or before the date such payment
is due; and
(vi) Timely Review. If requested by the
other at the requesting party's sole expense, cause its
independent certified public accountants to perform a review
of its unaudited consolidated financial statements as of the
end of any calendar quarter, in accordance with Statement of
Auditing Standards No. 71, and to issue their report on such
financial statements as soon as is practicable thereafter.
Section 4.10 Employee Benefits and Termination
Benefits.
(a) FNBSM Pension and Other Plans.
(i) As of the Closing Date, Penns Woods
shall become plan sponsor to the FNBSM Pension Plan and
shall continue to maintain the FNBSM Pension Plan after the
Closing Date and up through the end of the FNBSM Pension
Plan's October 14, 1999 Plan year for the benefit of
employees of FNBSM who become employees of Penns woods or
any Penns Woods subsidiary. Upon the earlier of the last
business day immediately preceding the Closing Date or
December 31, 1998 (the "Pre-Fund Contribution Date"), FNBSM
<PAGE A-39> shall make a contribution to the FNBSM Pension
Plan in an amount equal to the "Contribution Amount." For
purposes of this Section 4.10(a)(1), the Contribution Amount
shall be determined by multiplying (A) times (B) as follows:
(A) The required contribution formula
amount in effect under the FNBSM Pension Plan as of the
execution of this Agreement, multiplied by
(B) The compensation of FNBSM Pension
Plan "Eligible Participants" from October 15, 1998
through the Pre-Fund Contribution Date hereof, plus the
projected compensation of FNBSM Pension Plan Eligible
Participants from the Pre-Fund Contribution Date up
through October 14, 1999.
For purposes of this Section 4.10(a)(i), Eligible
Participants shall mean those FNBSM employees who are
eligible to participate in the FNBSM Pension Plan as of
October 15, 1998 and those FNBSM employees who will be
eligible to participate in the FNBSM Pension Plan by
October 14, 1999. For purposes of this Section 4.10(a)(i)
and calculating the Contribution Amount an Eligible
Participant shall receive a full year of service credit for
compensation determination purposes for the FNBSM Pension
Plan's October 15, 1998 through October 14, 1999 plan year.
Penns Woods agrees that from the Closing Date and up through
the close of the FNBSM Pension Plan's year ending
October 14, 1999, Penns Woods will not amend the FNBSM
Pension Plan, except as required by law or to clarify
participation of FNBSM employees who become employees of
Penns Woods or of any Penns Woods Subsidiary and will not
freeze or reduce the FNBSM Pension Plan contribution
formula. As of the close of the FNBSM Pension Plan year
ending October 14, 1999, Penns Woods, at its election, may
freeze, merge, consolidate or terminate the FNBSM Pension
Plan.
(ii) Except as set forth in
Section 4.10(a)(i) as to the FNBSM Pension Plan, on and
after the Effective Date, the employee pension and welfare
benefit plans of Penns Woods and FNBSM may, at Penns Woods'
election and subject to the requirements of the IRC,
continue to be maintained separately or consolidated,
provided that FNBSM employees shall, except as provided
below, be entitled to participate in the employee pension
and welfare plans of Penns Woods as follows: FNBSM
employees will be eligible to participate in the defined
contribution pension plan of Penns Woods (with a cash or
deferred feature) on the first quarterly entry date for new
participants under the terms of such plan concurrent with or
immediately following the Effective Date and FNBSM employees
will be eligible to participate in the defined benefit
pension plan of Penns Woods effective October 1, 1999.
FNBSM employees shall receive credit for service with FNBSM
<PAGE A-40> under any Penns Woods benefit plan, or new Penns
Woods benefit plan, for purposes of eligibility and vesting
determination but not for purposes of benefit accrual.
(b) Split Dollar Agreements. Penns Woods agrees
to continue to pay, or cause the continuation and payment of, the
premiums relating to the current split-dollar life insurance
arrangements for William H. Rockey and Rickey B. Brooks, as
described in Section 2.12 of the FNBSM Disclosure Schedule, until
the respective retirements of William H. Rockey and Rickey B.
Brooks provided that FNBSM and each of such individuals executes
a customary form of written agreement applicable to such
arrangements which is reasonably satisfactory to Penns Woods and
which provides, among other things, for the reimbursement of all
premiums paid on behalf of such individual upon death,
retirement, or other termination of employment.
(c) Severance Policy. Penns Woods agrees to
cause JSSB to provide any employee of FNBSM whose employment is
involuntarily terminated other than for Cause (as defined below)
within one year after the Effective Date or who within such one-
year period is offered but declines to accept employment at a
location more than 35 miles from such employee's work location
with FNBSM provided such employees execute such documentation as
Penns Woods may reasonably require: (i) one week of base salary
for each year of service with FNBSM with a minimum of two weeks
and a maximum of twenty weeks; (ii) continued medical insurance
coverage during the time period set forth in the preceding
clause (i) to the extent permitted under Penns Woods' health
insurance programs or, to the extent impermissible, reimbursement
for the cost of continuation coverage provided under IRC Section
4980B(f) during the time period set forth in the preceding
clause (i), and (iii) a cash payment for any vacation days
accrued but unused in the year in which employment terminates.
For purposes of this Section 4.10(c), "Cause" shall mean
termination because of the employee's personal dishonesty,
willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties or willful
violation of any law, rule or regulation (other than traffic
violations or similar offenses). The benefits provided to
terminated FNBSM employees under this subsection are the only
severance benefits payable by FNBSM under any plan or policy.
The benefits payable to FNBSM employees under this subsection or
otherwise shall in any event be in lieu of any termination
benefits to which such employees would otherwise be entitled
under Penns Woods' or JSSB's severance policies or programs then
in effect. The benefits payable under this subsection shall not
apply to any FNBSM employee who enters into a written employment
agreement with Penns Woods or JSSB.
(d) Other Benefits. Notwithstanding anything
contained in this Agreement to the contrary, FNBSM shall be
permitted to pay customary year-end bonuses to employees for the
year ending December 31, 1998 in an amount not to exceed $1,200
per employee and shall be permitted to make cash payments to its
<PAGE A-41> eligible employees in lieu of accumulated sick leave
pursuant to the program set forth in Section 4.01 of the FNBSM
Disclosure Schedule.
Section 4.11 Duty to Advise; Duty to Update Penns
Woods' Disclosure Schedule. Penns Woods shall promptly advise
FNBSM of any change or event having a Material Adverse Effect on
it or on any Penns Woods Subsidiary or which it believes would or
would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants set
forth herein. Penns Woods shall update Penns Woods' Disclosure
Schedule as promptly as practicable after the occurrence of an
event or fact which, if such event or fact had occurred prior to
the date of this Agreement, would have been disclosed in the
Penns Woods Disclosure Schedule. The delivery of such updated
Disclosure Schedule shall not relieve Penns Woods from any breach
or violation of this Agreement and shall not have any effect for
the purposes of determining the satisfaction of the condition set
forth in Sections 5.01(c) hereof.
ARTICLE V
CONDITIONS
Section 5.01 Conditions to FNBSM's Obligations under
this Agreement. The obligations of FNBSM hereunder shall be
subject to satisfaction at or prior to the Closing Date of each
of the following conditions, unless waived by FNBSM pursuant to
Section 7.03 hereof:
:\D Corporate Proceedings. All action required
to be taken by, or on the part of, Penns Woods and JSSB to
authorize the execution, delivery and performance of this
Agreement and the Plan of Merger, respectively, and the
consummation of the transactions contemplated by this Agreement
and the Plan of Merger, shall have been duly and validly taken by
Penns Woods and JSSB; and FNBSM shall have received certified
copies of the resolutions evidencing such authorizations;
(b) Covenants. The obligations and covenants of
Penns Woods required by this Agreement to be performed by Penns
Woods at or prior to the Closing Date shall have been duly
performed and complied with in all material respects;
(c) Representations and Warranties. The
representations and warranties of Penns Woods set forth in this
Agreement shall be true and correct, as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
individually or in the aggregate, constitute a Material Adverse
Effect with respect to Penns Woods;
(d) Approvals of Regulatory Authorities. Penns
Woods shall have received all required approvals of Regulatory
<PAGE A-42> Authorities of the Merger, and delivered copies
thereof to FNBSM; and all notice and waiting periods required
thereunder shall have expired or been terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) No Material Adverse Effect. Since
December 31, 1997, there shall not have occurred any Material
Adverse Effect with respect to Penns Woods;
(g) Officer's Certificate. Penns Woods shall
have delivered to FNBSM a certificate, dated the Closing Date and
signed, without personal liability, by its chairman or president,
to the effect that the conditions set forth in subsections (a)
through (f) of this Section 5.01 have been satisfied, to the best
knowledge of the officer executing the same;
(h) Opinion of Penns Woods' Counsel. FNBSM shall
have received an opinion of Stevens & Lee, P.C., counsel to Penns
Woods, dated the Closing Date, in form and substance reasonably
satisfactory to FNBSM and its counsel to the effect set forth on
Exhibit 3 attached hereto;
(i) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained;
(j) Tax Opinion. FNBSM shall have received an
opinion of Stevens & Lee, P.C., in form and substance reasonably
satisfactory to FNBSM and its counsel to the effect set forth on
Exhibit 4 attached hereto;
(k) Approval of FNBSM's Shareholders. This
Agreement shall have been approved by the shareholders of FNBSM
by such vote as is required under FNBSM's articles of association
and bylaws and by applicable law;
(l) Investment Banking Opinion. FNBSM shall have
received an oral opinion from Berwind Financial, L.P. on or
before the date of this Agreement, and updated in writing as of a
date within five (5) days of mailing the Prospectus/Proxy
Statement, to the effect that the consideration to be received by
shareholders of FNBSM pursuant to this Agreement is fair, from a
financial point of view, to such shareholders; and
(m) FNBSM's Dissenting Shareholders. FNBSM
shareholders owning 9% or more of the issued and outstanding
shares of FNBSM Common Stock shall not have asserted and duly
<PAGE A-43> perfected dissenters' rights with respect to FNBSM
Common Stock pursuant to the NBA;
Section 5.02 Conditions to Penns Woods' Obligations
under this Agreement. The obligations of Penns Woods hereunder
shall be subject to satisfaction at or prior to the Closing Date
of each of the following conditions, unless waived by Penns Woods
pursuant to Section 7.03 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, FNBSM to authorize the
execution, delivery and performance of this Agreement and the
Plan of Merger, respectively, and the consummation of the
transactions contemplated by this Agreement and the Plan of
Merger, shall have been duly and validly taken by FNBSM; and
Penns Woods shall have received certified copies of the
resolutions evidencing such authorizations;
(b) Covenants. The obligations and covenants of
FNBSM, required by this Agreement to be performed by it at or
prior to the Closing Date shall have been duly performed and
complied with in all material respects;
(c) Representations and Warranties. The
representations and warranties of FNBSM set forth in this
Agreement shall be true and correct as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
individually or in the aggregate, result in a Material Adverse
Effect with respect to FNBSM;
(d) Approvals of Regulatory Authorities. Penns
Woods shall have received all required approvals of Regulatory
Authorities for the Merger, without the imposition of any term or
condition that would have a Material Adverse Effect on Penns
Woods upon completion of the Merger; and all notice and waiting
periods required thereunder shall have expired or been
terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) No Material Adverse Effect. Since
December 31, 1997, there shall not have occurred any Material
Adverse Effect with respect to FNBSM;
(g) Officer's Certificate. FNBSM shall have
delivered to Penns Woods a certificate, dated the Closing Date
and signed, without personal liability, by its chairman of the
board or president, to the effect that the conditions set forth
in subsections (a) through (c), (e) and (f) of this Section 5.02
<PAGE A-44> have been satisfied, to the best knowledge of the
officer executing the same;
(h) Opinions of FNBSM's Counsel. Penns Woods
shall have received an opinion of Rhoads & Sinon, LLP, counsel to
FNBSM, dated the Closing Date, in form and substance reasonably
satisfactory to Penns Woods and its counsel to the effect set
forth on Exhibit 5 attached hereto;
(i) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; and all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained;
(j) Tax Opinion. Penns Woods shall have received
an opinion of Stevens & Lee, P.C., its counsel, substantially to
the effect set forth on Exhibit 5 attached hereto;
(k) Approval of FNBSM's Shareholders. This
Agreement shall have been approved by the shareholders of FNBSM
by such vote as is required by the articles of association of
FNBSM and by law;
(l) Pooling Letter. Penns Woods shall have
received an opinion from its independent auditors to the effect
that the Merger will be treated as a "pooling of interests" for
financial accounting purposes; and
(m) FNBSM's Dissenting Shareholders. FNBSM
shareholders owning 9% or more of the issued and outstanding
shares of FNBSM Common Stock shall not have asserted and duly
perfected dissenters rights with respect to FNBSM Common Stock
pursuant to the NBA.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. This Agreement may be
terminated on or at any time prior to the Closing Date:
(a) By the mutual written consent of the parties
hereto; or
(b) By Penns Woods or FNBSM:
(i) if, in the case of termination by FNBSM,
there shall have been any breach of any representation or
warranty of Penns Woods which results in a Material Adverse
Effect with respect to Penns Woods, on the one hand, or, in
the case of termination by Penns Woods, there shall have
been any breach of any representation or warranty of FNBSM
which results in a Material Adverse Effect with respect to
<PAGE A-45> FNBSM, on the other hand, and such breach cannot
be, or shall not have been, remedied within 30 days after
receipt by such other party of notice in writing specifying
the nature of such breach and requesting that it be
remedied;
(ii) if, in the case of termination by
FNBSM, there shall have been any breach of any material
covenant or other obligation of Penns Woods, on the one
hand, or, in the case of termination by Penns Woods, there
shall have been any breach of any material covenant or other
obligation of FNBSM, on the other hand, and such breach
cannot be, or shall not have been, remedied within 30 days
after receipt by such other party of notice in writing
specifying the nature of such breach and requesting that it
be remedied;
(iii) if the Closing Date shall not have
occurred on or before May 30, 1999, unless the failure of
such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe
its agreements set forth in this Agreement required to be
performed or observed by such party on or before the Closing
Date; or
(iv) if either party has been informed in
writing by a Regulatory Authority whose approval or consent
has been requested that such approval or consent is unlikely
to be granted, unless the failure of such occurrence shall
be due to the failure of the party seeking to terminate this
Agreement to perform or observe its agreements set forth
herein required to be performed or observed by such party on
or before the Closing Date.
Section 6.02 Effect of Termination.
(a) If this Agreement is terminated pursuant to
Section 6.01 hereof, this Agreement shall forthwith become void
(other than Section 4.02(d), Section 6.02(b) and Section 7.01
hereof, which shall remain in full force and effect), and there
shall be no further liability on the part of Penns Woods or FNBSM
to the other, except for any liability arising out of any breach
of any covenant or other agreement contained in this Agreement.
(b) If, within nine months following the date of
termination of this Agreement, other than any termination by
FNBSM pursuant to Section 6.01(b)(i) or (ii) on account of an
unremedied material breach by Penns Woods, Section 6.01(b)(iii),
or Section 6.01(b)(iv), a Person other than Penns Woods or an
affiliate of Penns Woods, enters into an agreement with FNBSM
pursuant to which such Person or Affiliate would (i) merge or
consolidate, or enter into any similar transaction, with FNBSM,
(ii) acquire all or substantially all of the assets of FNBSM, or
(iii) acquire beneficial ownership of securities representing, or
the right to acquire beneficial ownership or to vote securities
<PAGE A-46> representing, 20% or more of the then outstanding
shares of FNBSM Common Stock, then FNBSM shall immediately pay to
Penns Woods a fee of $1 million, which fee shall include
reimbursement to Penns Woods for its costs and expenses,
including legal fees and expenses, incurred in connection with
this Agreement and the transactions contemplated hereby. Nothing
in this Section 6.02(b) shall constitute a waiver of limitation,
in whole or in part, of any legal or equitable rights which Penns
Woods may possess against any Person or Affiliate relating to
this Agreement, or relating to Penns Woods' relationship with
FNBSM or for any act or omission of such Person, including any
tortious interference with this Agreement or otherwise wrongfully
inducing or causing any breach of any such agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses. Except for the cost of
printing and mailing the Proxy Statement/Prospectus which shall
be shared equally, each party hereto shall bear and pay all costs
and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.
Section 7.02 Non-Survival of Representations and
Warranties. All representations, warranties, agreements and
covenants set forth in this Agreement, shall terminate on the
Closing Date, except for covenants to be performed after the
Closing Date, which will continue until performed.
Section 7.03 Amendment, Extension and Waiver. Subject
to applicable law, at any time prior to the consummation of the
transactions contemplated by this Agreement, the parties may
(a) amend this Agreement, (b) extend the time for the performance
of any of the obligations or other acts of either party hereto,
(c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or
(d) waive compliance with any of the agreements or conditions
contained in Articles IV and V hereof or otherwise. This
Agreement may not be amended except by an instrument in writing
authorized by the respective Boards of Directors and signed, by
duly authorized officers, on behalf of the parties hereto. Any
agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in
writing signed by a duly authorized officer on behalf of such
party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
Section 7.04 Entire Agreement. This Agreement,
including the documents and other writings referred to herein or
delivered pursuant hereto, contains the entire agreement and
understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior arrangements and <PAGE A-47>
understandings between the parties, both written or oral with
respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities
other than pursuant to Sections 1.02(d)(i) and (iii), 1.02(f),
4.05, and 4.10(a), (b) and (c) with respect to indemnification,
employee benefits and certain other matters.
Section 7.0: No Assignment. Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.
Section 7.06 Notices. All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:
(a) If to Penns Woods, to:
Penns Woods Bancorp., Inc.
115 South Main Street
P.O. Box 5098
Jersey Shore, Pennsylvania 17740
Attention: Theodore H. Reich, President and
Chief Executive Officer
Telecopy No.: (717) 322-9947
with a copy to:
Stevens & Lee
111 North Sixth Street
Reading, Pennsylvania 19601
Attention: Joseph M. Harenza, Esquire and
David W. Swartz, Esquire
Telecopy No.: (610) 376-5610
(b) If to FNBSM, to:
First National Bank of Spring Mills
P.O. Box 66
Spring Mills, Pennsylvania 16875
Attention: William H. Rockey,
President
Telecopy No.: (814) 422-0335
<PAGE A-48>
with copies to:
Rhoads & Sinon, LLP
One South Market Square
12th Floor
P.O. Box 1146
Harrisburg, Pennsylvania 17108-1146
Attention: Dean H. Dusinberre, Esquire
Telecopy No.: (717) 232-1459
Section 7.07 Captions. The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.
Section 7.08 Counterparts. This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 7.09 Severability. If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.
Section 7.10 Governing Law. This Agreement shall be
governed by and construed in accordance with the domestic
internal law (without regard to the law of conflicts of law) of
the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.
PENNS WOODS BANCORP, INC.
By/s/ Theodore H. Reich
THE FIRST NATIONAL BANK OF SPRING
MILLS
By/s/ William H. Rockey
PAGE A-49
<PAGE>
Exhibit 1
PLAN OF MERGER
THIS PLAN OF MERGER ("Plan of Merger") dated as of
July 22, 1998, is by and between JERSEY SHORE STATE BANK, a
Pennsylvania banking institution ("JSSB"), and FIRST NATIONAL
BANK OF SPRING MILLS, a national banking association ("FNBSM").
BACKGROUND
1. JSSB is a Pennsylvania banking institution and a
wholly-owned subsidiary of Penns Woods Bancorp, Inc., a
Pennsylvania corporation ("Penns Woods"). The authorized capital
stock of JSSB consists of 120,000 shares of common stock, par
value $10.00 per share ("JSSB Common Stock"), 102,000 of which at
the date hereof are issued and outstanding.
2. FNBSM is a national banking association. The
authorized capital stock of FNBSM consists of 100,000 shares of
common stock, par value $2.00 per share ("FNBSM Common Stock"),
of which at the date hereof 75,000 shares are issued and
outstanding.
3. The respective Boards of Directors of JSSB and
FNBSM deem the merger of FNBSM with and into JSSB, pursuant to
the terms and conditions set forth or referred to herein, to be
desirable and in the best interests of the respective
corporations and their respective shareholders.
4. The respective Boards of Directors of JSSB and
FNBSM have adopted resolutions approving this Plan of Merger.
The respective Boards of Directors of Penns Woods and FNBSM have
adopted resolutions approving an Agreement dated as of July 22,
1998 (the "Agreement") between Penns Woods and FNBSM, pursuant to
which this Plan of Merger is being executed by JSSB and FNBSM.
AGREEMENT
In consideration of the premises and of the mutual
covenants and agreements herein contained, and in accordance with
the applicable laws and regulations of the Commonwealth of
Pennsylvania and the United States of America, JSSB and FNBSM,
intending to be legally bound hereby, agree:
ARTICLE I
MERGER; BUSINESS
1.1 Merger. Subject to the terms and conditions of
this Plan of Merger and in accordance with the applicable laws
and regulations of the Commonwealth of Pennsylvania and the
United States of America, on the Effective Date (as that term is
defined in Article V hereof): FNBSM shall merge with and into
JSSB; the separate existence of FNBSM shall cease; and JSSB shall
<PAGE A-50> be the surviving corporation (such transaction
referred to herein as the "Merger" and JSSB, as the surviving
corporation in the Merger, referred to herein as the "Surviving
Bank").
1.2 Business. The business of the Surviving Bank
shall be conducted at its main office, which shall be located at
115 South Main Street, P.O. Box 5098, Jersey Shore, Pennsylvania
17740, and at its legally established branches, which shall
include all of the branch office of JSSB and FNBSM, and the main
office of FNBSM prior to the Effective Date.
ARTICLE II
CHARTER AND BYLAWS
On and after the Effective Date, the Articles of
Incorporation and Bylaws of JSSB, as in effect immediately prior
to the Effective Date, shall automatically be and remain the
Articles of Incorporation and Bylaws of the Surviving Bank, until
altered, amended or repealed.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
3.1 Board of Directors. On and after the Effective
Date, the directors of the Surviving Bank shall consist of
(i) those persons serving in such capacity immediately prior to
the Effective Date and (ii) William H. Rockey, who shall serve as
such until their successors have been elected and qualified.
3.2 Officers. On and after the Effective Date, the
officers of the Surviving Bank shall consist of (i) the officers
of JSSB duly elected and holding office immediately prior to the
Effective Date and (ii) William H. Rockey as a Senior Vice
President and Rickey B. Brooks as a Vice President.
3.3 Advisory Board. The Surviving Bank shall
establish an Advisory Board on the terms and in the manner set
forth in the Agreement.
ARTICLE IV
CONVERSION OF SHARES
4.1 Stock of JSSB. Each share of JSSB Common Stock
issued and outstanding immediately prior to the Effective Date
shall, on and after the Effective Date, continue to be issued and
outstanding as a share of common stock of the Surviving Bank.
4.2 Stock of FNBSM. Each share of FNBSM Common Stock
issued and outstanding immediately prior to the Effective Date,
and each share of FNBSM Common Stock issued and held in the
treasury of FNBSM as of the Effective Date, if any, shall, on the
Effective Date, be converted into and become shares of common
stock, $10.00 par value per share, of Penns Woods or cancelled,
as set forth in the Agreement. <PAGE A-51>
ARTICLE V
EFFECTIVE DATE OF THE MERGER
The Merger shall be effective on the date and at the
time specified in the certificate to be issued by the
Pennsylvania Department of Banking approving this Merger (the
"Effective Date").
ARTICLE VI
EFFECT OF THE MERGER
On the Effective Date: the separate existence of FNBSM
shall cease; and all of the property (real, personal and mixed),
rights, powers, duties and obligations of FNBSM shall be taken
and deemed to be transferred to and vested in the Surviving Bank,
without further act or deed, as provided by applicable laws and
regulations.
ARTICLE VII
CONDITIONS PRECEDENT
The obligations of JSSB and FNBSM to effect the Merger
shall be subject to satisfaction, unless duly waived by the party
permitted to do so, of the conditions precedent set forth in the
Agreement.
ARTICLE VIII
TERMINATION
This Plan of Merger shall terminate upon any
termination of the Agreement in accordance with its terms;
provided, however, that any such termination of this Plan of
Merger shall not relieve any party hereto from liability on
account of a breach by such party of any of the terms hereof or
thereof.
ARTICLE IX
AMENDMENT
Subject to applicable law, this Plan of Merger may be
amended, by action of the respective Boards of Directors of the
parties hereto, at any time prior to consummation of the Merger,
but only by an instrument in writing signed by duly authorized
officers on behalf of the parties hereto.
ARTICLE X
MISCELLANEOUS
10.1 Extensions; Waivers. Each party, by a written
instrument signed by a duly authorized officer, may extend the
time for the performance of any of the obligations or other acts
of the other party hereto and may waive compliance with any of
the covenants, or performance of any of the obligations, of the
other party contained in this Plan of Merger.
<PAGE A-52>
10.2 Notices. Any notice or other communication
required or permitted under this Plan of Merger shall be given,
and shall be effective, in accordance with the provisions of
Section 7.06 of the Agreement.
10.3 Captions. The headings of the several Articles
and Sections herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning
or interpretation of, this Plan of Merger.
10.4 Counterparts. For the convenience of the parties
hereto, this Plan of Merger may be executed in several
counterparts, each of which shall be deemed the original, but all
of which together shall constitute one and the same instrument.
10.5 Governing Law. This Plan of Merger shall be
governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, JSSB and FNBSM have caused this
Bank Plan of Merger to be executed by their duly authorized
officers and their corporate seals to be hereunto affixed on the
date first written above.
JERSEY SHORE STATE BANK
By________________________________
FIRST NATIONAL BANK OF SPRING MILLS
By________________________________
PAGE A-53
<PAGE>
Exhibit 2
July 22, 1998
Penns Woods Bancorp, Inc.
115 South Main Street
P.O. Box 5098
Jersey Shore, Pennsylvania 17440
Ladies and Gentlemen:
Penns Woods Bancorp, Inc. ("Penns Woods") and First National
Bank of Spring Mills ("FNBSM") desire to enter into an agreement
dated as of July 22, 1998 ("Agreement"), pursuant to which,
subject to the terms and conditions set forth therein and in the
plan of merger related thereto, (a) FNBSM will merge with and
into Jersey Shore State Bank, the wholly owned subsidiary of
Penns Woods ("JSSB"), with JSSB surviving the merger, and
(b) shareholders of FNBSM will receive common stock of Penns
Woods in exchange for common stock of FNBSM outstanding on the
closing date (the foregoing, collectively, referred to herein as
the "Merger").
Penns Woods has required, as an inducement to its execution
and delivery to FNBSM of the Agreement, that the undersigned,
being directors, executive officers and major shareholders of
FNBSM, execute and deliver to Penns Woods this Letter Agreement.
Each of the undersigned, in order to induce Penns Woods to
execute and deliver to FNBSM the Agreement, hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at
all meetings of shareholders of FNBSM called to vote for approval
of the Merger so that all shares of common stock of FNBSM then
owned by the undersigned will be counted for the purpose of
determining the presence of a quorum at such meetings and to vote
all such shares in favor of approval and adoption of the
Agreement and the transactions contemplated thereby (including
any amendments or modifications of the terms thereof approved by
the Board of Directors of FNBSM);
(b) Agrees not to vote or execute any written consent
to rescind or amend in any manner any prior vote or written
consent, as a shareholder of FNBSM, to approve or adopt the
Agreement;
(c) Agrees not to take any actions with the intent to
prevent or hinder the Merger from being consummated;
(d) Agrees not to solicit or initiate any negotiations
or discussions with any party other than Penns Woods with respect
<PAGE A-54> to any offer, sale, transfer or other disposition of,
any shares of common stock of FNBSM now or hereafter owned by the
undersigned;
(e) Agrees not to offer, sell, transfer or otherwise
dispose of any shares of common stock of Penns Woods received in
the Merger, except (i) at such time as a registration statement
under the Securities Act of 1933, as amended ("Securities Act")
covering sales of such Penns Woods common stock is effective and
a prospectus is made available under the Securities Act,
(ii) within the limits, and in accordance with the applicable
provisions of, Rule 145(d) under the Securities Act, or (iii) in
a transaction which, in the opinion of counsel satisfactory to
Penns Woods or as described in a "no-action" or interpretive
letter from the staff of the Securities and Exchange Commission
("SEC"), is not required to be registered under the Securities
Act; and acknowledges and agrees that Penns Woods is under no
obligation to register the sale, transfer or other disposition of
Penns Woods common stock by the undersigned or on behalf of the
undersigned, or to take any other action necessary to make an
exemption from registration available;
(f) Notwithstanding the foregoing, agrees not to sell,
or in any other way reduce the risk of the undersigned relative
to, any shares of common stock of FNBSM or of common stock of
Penns Woods, during the period commencing thirty days prior to
the effective date of the Merger and ending on the date on which
financial results covering at least thirty days of post-Merger
combined operations of Penns Woods and FNBSM have been published
within the meaning of Section 201.01 of the SEC's Codification of
Financial Reporting Policies;
(g) Agrees that Penns Woods shall not be bound by any
attempted sale of any shares of Penns Woods common stock, and
Penns Woods' transfer agent shall be given an appropriate stop
transfer order and shall not be required to register any such
attempted sale, unless the sale has been effected in compliance
with the terms of this Letter Agreement; and further agrees that
the certificate representing shares of Penns Woods common stock
owned by the undersigned may be endorsed with a restrictive
legend consistent with the terms of this Letter Agreement;
(h) Acknowledges and agrees that the provisions of
subparagraphs (e), (f) and (g) hereof, to the extent the
undersigned can control any of the following persons or entities,
also apply to shares of Penns Woods common stock received in the
Merger (or any shares of FNBSM common stock or of Penns Woods
common stock, whether or not received in the Merger, for the
period referred to in subparagraph (g) above) owned by (i) his or
her spouse, (ii) any of his or her relatives or relatives of his
or her spouse occupying his or her home, (iii) any trust or
estate in which he or she, his or her spouse, or any such
relative owns at least a 10% beneficial interest or of which any
of them serves as trustee, executor or in any similar capacity,
and (iv) any corporation or other organization in which the
<PAGE A-55> undersigned, any affiliate of the undersigned, his or
her spouse, or any such relative owns at least 10% of any class
of equity securities or of the equity interest;
(i) Represents that the undersigned has no plan or
intention to sell, exchange, or otherwise dispose of any shares
of common stock of Penns Woods to be received in the Merger prior
to expiration of the time period referred to in subparagraph (f)
hereof; and
(j) Represents that the undersigned has the capacity
to enter into this Letter Agreement and that it is a valid and
binding obligation enforceable against the undersigned in
accordance with its terms, subject to bankruptcy, insolvency and
other laws affecting creditors' rights and general equitable
principles.
________________________
It is understood and agreed that the provisions of
subparagraphs (a) through (d) of this Letter Agreement relate
solely to the capacity of the undersigned as a shareholder or
other beneficial owner of shares of FNBSM Common Stock and is not
in any way intended to affect the exercise by the undersigned of
the undersigned's responsibilities as a director or officer of
FNBSM. It is further understood and agreed that such
subparagraphs of this Letter Agreement are not in any way
intended to affect the exercise by the undersigned of any
fiduciary responsibility which the undersigned may have in
respect of any shares of FNBSM Common Stock held by the
undersigned as of the date hereof.
________________________
The obligations set forth herein shall terminate
concurrently with any termination of the Agreement.
________________________
This Letter Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an
original, but all of which together shall constitute one and the
same Letter Agreement.
________________________
This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
________________________
The undersigned intend to be legally bound hereby.
Sincerely,
PAGE A-56
<PAGE>
Exhibit 3
FORM OF OPINION OF COUNSEL TO PENNS WOODS
FNBSM shall have received from counsel to Penns Woods,
an opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:
(a) Penns Woods and JSSB have full corporate power to
carry out the transactions contemplated in the Agreement and the
Plan of Merger, respectively. The execution and delivery of the
Agreement and the Plan of Merger and the consummation of the
transactions contemplated thereunder have been duly and validly
authorized by all necessary corporate action on the part of Penns
Woods and JSSB, and the Agreement and the Plan constitute valid
and legally binding obligations of Penns Woods and JSSB,
respectively, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium, receivership, conservatorship, and
other laws affecting creditors' rights generally and institutions
the deposits of which are insured by the FDIC, and as may be
limited by the exercise of judicial discretion in applying
principles of equity. Subject to satisfaction of the conditions
set forth in the Agreement, neither the transactions contemplated
in the Agreement or the Plan, nor compliance by Penns Woods and
JSSB with any of the respective provisions thereof, will
(i) conflict with or result in a breach or default under (A) the
articles of incorporation or bylaws of Penns Woods or JSSB, or,
(B) based solely on certificates of officers and without
independent verification, to the knowledge of such counsel, any
note, bond, mortgage, indenture, license, agreement or other
material instrument or obligation to which Penns Woods or JSSB is
a party; or (ii) based solely on certificates of officers and
without independent verification, to the knowledge of such
counsel, result in the creation or imposition of any material
lien or encumbrance upon the property of Penns Woods or JSSB,
except such material lien, instrument or obligation that has been
disclosed pursuant to the Agreement or the Plan; or (iii) violate
in any material respect any order, writ, injunction or decree
known to such counsel, or any federal or Pennsylvania statute,
rule or regulation applicable to Penns Woods or JSSB.
(b) JSSB is a validly existing state-chartered bank
organized and in good standing under the laws of the Commonwealth
of Pennsylvania. The deposits of JSSB are insured to the maximum
extent provided by law by the Federal Deposit Insurance
Corporation.
(c) There is, to the knowledge of such counsel, no
legal, administrative, arbitration or governmental proceeding or
investigation pending or threatened to which Penns Woods or JSSB
is a party which would, if determined adversely to Penns Woods or
JSSB, have a material adverse effect on the financial condition
or results of operation of Penns Woods and JSSB taken as a whole,
or which presents a claim to restrain or prohibit the <PAGE A-
57> transactions contemplated by the Agreement and the Plan,
respectively.
(d) To the knowledge of such counsel, no consent,
approval, authorization or order of any federal or state court or
federal or state governmental agency or body is required for the
consummation by Penns Woods or JSSB of the transactions
contemplated by the Agreement and the Plan, except for such
consents, approvals, authorizations or orders as have been
obtained.
(e) Upon the filing and effectiveness of the Articles
of Merger with the PDB and the PDS with respect to the Merger,
the mergers of JSSB and FNBSM contemplated by the Agreement and
the Plan, respectively, will have been effected in compliance
with all applicable federal and Pennsylvania laws and regulations
in all material respects.
(f) The shares of Penns Woods Common Stock to be
issued in connection with the merger of FNBSM and JSSB
contemplated by the Agreement have been duly authorized and will,
when issued in accordance with the terms of the Agreement, be
validly issued, fully paid and nonassessable, free and clear of
any mortgage, pledge, lien, encumbrance or claim (legal or
equitable).
PAGE A-58
<PAGE>
Exhibit 4
FORM OF TAX OPINION OF COUNSEL TO PENNS WOODS
Penns Woods and FNBSM shall have received an opinion of
Stevens & Lee substantially to the effect that, under the
provisions of the IRC:
1. The Merger will constitute a reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the IRC.
2. Penns Woods, FNBSM and JSSB will each be "a party to a
reorganization" within the meaning of Section 368(b) of the IRC.
3. Neither FNBSM nor JSSB will recognize any gain or loss
by reason of the Merger upon the transfer of FNBSM's assets to
JSSB and the assumption by JSSB of the liabilities of FNBSM.
4. The basis of the FNBSM assets in the hands of JSSB will
be the same as the basis of such assets in the hands of FNBSM
immediately prior to the Merger.
5. The holding period of the FNBSM assets in the hands of
JSSB will include the period during which such assets were held
by FNBSM prior to the Merger.
6. No gain or loss will be recognized by the shareholders
of FNBSM on the receipt of Penns Woods Common Stock (including
fractional share interests) solely in exchange for their shares
of FNBSM Common Stock.
7. The basis of the Penns Woods Common Stock (including
fractional share interests) to be received by the FNBSM
shareholders in the Merger will be the same as the basis of the
FNBSM Common Stock surrendered in exchange therefor.
8. The holding period of the Penns Woods Common Stock
(including fractional share interests) to be received by the
FNBSM shareholders in the Merger will include the period during
which the FNBSM shareholders held their FNBSM Common Stock,
provided the shares of FNBSM Common Stock are held as a capital
asset on the Effective Date.
9. The payment of cash in lieu of fractional share
interests of Penns Woods Common Stock will be treated as if the
fractional share interests were distributed as part of the Merger
and then redeemed by Penns Woods. Such cash payments will be
treated as having been received as distributions in full payment
in exchange for the fractional share interests redeemed, as
provided in Section 302(a) of the IRC.
10. As provided in Section 381(c)(2) of the IRC and related
Treasury regulations, JSSB will succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of
<PAGE A-59> FNBSM as of the effective date of the Merger. Any
deficit in the earnings and profits of JSSB or FNBSM will be used
only to offset the earnings and profits accumulated after the
Merger.
11. Pursuant to Section 381(a) of the IRC and related
Treasury regulations, JSSB will succeed to and take into account
the items of FNBSM described in Section 381(c) of the IRC. Such
items will be taken into account by JSSB subject to the
conditions and limitations of Sections 381, 382, 383, and 384 of
the IRC and the Treasury regulations thereunder.
PAGE A-60
<PAGE>
Exhibit 5
FORM OF OPINION OF COUNSEL TO
FIRST NATIONAL BANK OF SPRING MILLS
Penns Woods shall have received from counsel to FNBSM
an opinion, dated as of the Closing Date, substantially to the
effect that, subject to customary exceptions and qualifications:
(a) FNBSM has full corporate power to carry out the
transactions contemplated in the Agreement and the Plan of
Merger, respectively. The execution and delivery of the
Agreement and the Plan of Merger and the consummation of the
transactions contemplated thereunder have been duly and validly
authorized by all necessary corporate action on the part of
FNBSM, and the Agreement and the Plan constitute valid and
legally binding obligations, in accordance with their respective
terms, of FNBSM, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium, receivership,
conservatorship, and other laws affecting creditors' rights
generally and institutions the deposits of which are insured by
the FDIC, and as may be limited by the exercise of judicial
discretion in applying principles of equity. Subject to
satisfaction of the conditions set forth in the Agreement,
neither the transactions contemplated in the Agreement and the
Plan, nor compliance by FNBSM with any of the respective
provisions thereof, will (i) conflict with or result in a breach
or default under (A) the articles of association or bylaws of
FNBSM, or (B) based solely on certificates of officers and
without independent verification, to the knowledge of such
counsel, any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation to which FNBSM is a party; or
(ii) based solely on certificates of officers, to the knowledge
of such counsel, result in the creation or imposition of any
material lien, instrument or encumbrance upon the property of
FNBSM, except such material lien, instrument or obligation that
has been disclosed to Penns Woods pursuant to the Agreement and
the Plan, or (iii) violate in any material respect any order,
writ, injunction, or decree known to such counsel, or any
statute, rule or regulation applicable to FNBSM.
(b) FNBSM is a validly existing national bank
organized and in good standing under the laws of the United
States of America. The deposits of FNBSM are insured to the
maximum extent provided by law by the Federal Deposit Insurance
Corporation.
(c) There is, to the knowledge of such counsel, no
legal, administrative, arbitration or governmental proceeding or
investigation pending or threatened to which FNBSM is a party
which would, if determined adversely to FNBSM, have a material
adverse effect on the business, properties, results of
operations, or condition, financial or otherwise, of FNBSM taken
as a whole or which presents a claim to restrain or prohibit the
<PAGE A-61> transactions contemplated by the Agreement and the
Plan, respectively.
(d) To the knowledge of such counsel, no consent,
approval, authorization, or order of any federal or state court
or federal or state governmental agency or body, or of any third
party, is required for the consummation by FNBSM of the
transactions contemplated by the Agreement and the Plan, except
for such consents, approvals, authorizations or orders as have
been obtained.
PAGE A-62
<PAGE>
ANNEX B
FORM OF FAIRNESS OPINION
November 11, 1998
Board of Directors
First National Bank of Spring Mills
P.O. Box 66
Spring Mills, PA 16875
Members of the Board:
You have requested our opinion as to the fairness, from a
financial point of view, to the shareholders of the First
National Bank of Spring Mills ("Spring Mills") of the financial
terms of the proposed merger by and between Spring Mills and
Penns Woods Bancorp, Inc. ("Penns Woods"). The terms of the
proposed merger (the "Proposed Merger") by and between Spring
Mills and Penns Woods are set forth in the Agreement and Plan of
Merger dated July 22, 1998 (the "Merger Agreement") and provide
that each outstanding share of Spring Mills common stock will be
converted into the right to receive 3.5 shares of Penns Woods
common stock as defined in the Merger Agreement.
Berwind Financial, 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 Spring Mills and
Penns Woods, (ii) reviewed the Merger Agreement, (iii) reviewed
and analyzed the stock market performance of Spring Mills and
Penns Woods, (iv) studied and analyzed the consolidated financial
and operating data of Spring Mills and Penns Woods,
(v) considered the terms and conditions of the Proposed Merger
between Spring Mills and Penns Woods 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 Spring Mills' and Penns Woods' senior
management to discuss their respective operations, historical
financial statements and future prospects, (vii) reviewed this
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 Spring Mills and Penns Woods,
<PAGE B-1> and their respective officers, directors, auditors,
counsel and other agents, and on filings, releases and other
information issued by Spring Mills and Penns Woods 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 Spring Mills and Penns Woods 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
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 Spring Mills, we have assumed that such
information has been reasonably prepared and reflects the best
currently available estimates and judgment of the management of
Penns Woods as to its most likely future performance. For Spring
Mills and Penns Woods, we have assumed the allowance for loan
losses indicated on the balance sheets of each entity is adequate
to cover such losses; we have not reviewed credit files of
either Spring Mills or Penns Woods. Also, in rendering our
opinion, we have assumed that in the course of obtaining the
necessary regulatory approvals for the Proposed Merger no
conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the Proposed Merger to
Spring Mills.
Our opinion is based upon information provided to us by the
managements of Spring Mills and Penns Woods, 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 Spring Mills and does not constitute a
recommendation to Spring Mills shareholders as to how such
shareholders should vote on the Proposed Merger.
Based on the foregoing, it is our opinion that, as of the
date hereof, the financial terms of the Proposed Merger by and
between Spring Mills and Penns Woods are fair, from a financial
point of view, to the shareholders of Spring Mills.
Sincerely,
BERWIND FINANCIAL, L.P.
PAGE B-2
<PAGE>
ANNEX C
Excerpts from National Bank Act
re: Dissenters' Rights
12 U.S.C. Sec. 214a, Procedure for conversion, merger, or
consolidation; vote of stockholders
SEC. 214a. A national banking association may, by vote of
the holders of at least two-thirds of each class of its capital
stock, convert into, or merge or consolidate with, a State bank
in the same State in which the national banking association is
located, under a State Charter, in the following manner:
Approval of board of directors; publication of notice of
stockholders' meeting; waiver of publication; notice by
registered or certified mail
(a) The plan of conversion, merger, or consolidation must
be approved by a majority of the entire board of directors of the
national banking association. The bank shall publish notice of
the time, place, and object of the shareholders' meeting to act
upon the plan, in some newspapers with general circulation in the
place where the principal office of the national banking
association is located, at least once a week for four consecutive
weeks: Provided, That newspaper publication may be dispensed
with entirely if waived by all the shareholders and in the case
of a merger or consolidation one publication at least ten days
before the meeting shall be sufficient if publication for four
weeks is waived by holders of at least two-thirds of each class
of capital stock and prior written consent of the Comptroller of
the Currency is obtained. The national banking association shall
send such notice to each shareholder of record by registered mail
or by certified mail at least ten days prior to the meeting,
which notice may be waived specifically by any shareholder.
Rights of dissenting shareholders
(b) A shareholder of a national banking association who
votes against the conversion, merger, or consolidation, or who
has given notice in writing to the bank at or prior to such
meeting that he dissents from the plan, shall be entitled top
receive in cash the value of the shares held by him, if and when
the conversion, merger, or consolidation is consummated, upon
written request made to the resulting State bank at any time
before thirty days after the date of consummation of such
conversion, merger, or consolidation, accompanied by the
surrender of his stock certificates. The value of such shares
shall be determined as of the date on which the shareholders'
meeting was held authorizing the conversion, merger, or
consolidation, by a committee of three persons, one to be
selected by majority vote of the dissenting shareholders entitled
to receive the value of their shares, one by the directors of the
resulting State bank, and the third by the two so chosen. The
<PAGE C-1> valuation agreed upon by any two or three appraisers
thus chosen shall govern; but, if the value so fixed shall not be
satisfactory to any dissenting shareholder who has requested
payment as provided herein, such shareholder may within five days
after being notified of the appraised value of his shares appeal
to the Comptroller of the Currency, who shall cause a reappraisal
to be made, which shall be final and binding as to the value of
the shares of the appellant. If, within ninety days from the
date of consummation of the conversion, merger, or consolidation,
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 resulting State bank not taken
by the dissenting shareholders of the national banking
association. <PAGE C-2>
