1AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2003
REGISTRATION STATEMENT NO. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST COMMUNITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)(Exact name of Registrant as specified in its charter)
NEVADA 67126035 55-0694814
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL(State or other jurisdiction (Primary Standard Industrial (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)Employer
of incorporation or organization) Classification Code No.) Identification No.)
---------------------
ONE COMMUNITY PLACE
P.O. BOX 989
BLUEFIELD, VIRGINIA 24605
(540)(276) 326-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
JOHN M. MENDEZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST COMMUNITY BANCSHARES, INC.
ONE COMMUNITY PLACE
P.O. BOX 989
BLUEFIELD, VIRGINIA 24605
(540) 326-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH A COPY TO:
EUGENE E. DERRYBERRY, ESQUIRE,NORMAN B. ANTIN, ESQ. GEORGE P. WHITLEY, ESQ.
JEFFREY D. HAAS, ESQ. SCOTT H. RICHTER, ESQ.
KELLEY DRYE & WARREN LLP CHARLES D. DUNBAR, ESQUIRE
GENTRY, LOCKE, RAKES & MOORE ELIZABETH OSENTON LORD, ESQUIRE
10 FRANKLIN ROAD S.E., P.O. BOX 40013 JACKSON & KELLY PLLC
ROANOKE,LECLAIR RYAN, A PROFESSIONAL CORPORATION
8000 TOWERS CRESCENT DRIVE, SUITE 1200 707 EAST MAIN STREET, 11TH FLOOR
VIENNA, VIRGINIA 24022-0013 1600 LAIDLEY TOWER (ZIP 25301)
CHARLESTON, WEST22182 RICHMOND, VIRGINIA 2532223219
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective---------------------
Approximate date of this Registration
Statement.commencement of proposed sale to the public: Upon
consummation of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box:box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering:offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PERREGISTERED(1) SHARE OR UNIT (1) PRICE (1)PRICE(2) REGISTRATION FEE
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Common Stock, par value $1.00 per share.... 435,000 20.59 8,956,650 2,364.56share 497,871 shares $29.50 $14,687,187 $1,188
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(1) Computed in accordance with Rule 457(f)(2) basedBased upon the book value as of
July 31, 2000an estimate of the maximum number of shares of common stock to be cancelled in the transaction.
(2) The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), may determine.
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2
CITIZENS SOUTHERN BANK, INC.
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSAL - YOUR VOTE IS VERY IMPORTANT
The board of directors of Citizens Southern Bank, Inc., has unanimously
approved the merger combining Citizens Southern Bank, Inc., and First Community
Bank, N.A. ("FCB"). FCB is a wholly owned subsidiary of
First Community Bancshares, Inc. ("Bancshares"First Community"). If to be issued pursuant
to the proposedagreement and plan of merger, is accomplished, you
will receive 1.74dated as of January 27, 2003, and
amended as of February 25, 2003, among First Community, First Community
Bank, National Association, and The CommonWealth Bank ("CommonWealth"),
based on (i) 720,299 shares of BancsharesCommonWealth common stock outstanding, (ii)
an exchange ratio of 1.152 shares of First Community common stock for each
share of CitizensCommonWealth common stock that you own. You generally will not recognize gain or lossand (iii) the exchange and cancellation
of 60% of such outstanding shares of CommonWealth common stock for federal income tax purposesFirst
Community common stock at such exchange ratio.
(2) Pursuant to Rules 457(f) and 457(c) under the Securities Act of 1933, and
solely for the purpose of calculating the registration fee, the proposed
maximum aggregate offering price is equal to the aggregate market value of
the estimated number of shares of CitizensCommonWealth common stock you exchange
for shares of Bancsharesto be converted
into the right to receive First Community common stock.
We cannot completestock in the merger
unless(calculated as set forth in note 1), based upon a majoritymarket value of $29.50 per
share of CommonWealth common stock, the average of the sharesbid and asked prices
of Citizensa share of CommonWealth common stock approveson the merger agreement and related plan of merger.
Therefore, there will beOTC Bulletin Board on March
24, 2003.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE COMMONWEALTH BANK
900 N. PARHAM ROAD
RICHMOND, VIRGINIA 23229
(804) 741-4600
, 2003
Dear fellow shareholders:
You are cordially invited to attend a special meeting of Citizens' shareholders of
The CommonWealth Bank ("CommonWealth") to be held at : .m., local
time, on , 2003 at the . At the special meeting, you will be
asked to consider and vote onupon a proposal to approve an agreement and plan of
merger pursuant to which CommonWealth will be merged with and into First
Community Bank, National Association ("First Community Bank").
If the merger agreement is approved and related planthe merger is subsequently
completed, each outstanding share of merger.
THE CITIZENS SPECIAL MEETING WILL BE HELD AT 10:00 A.M. ON OCTOBER ,
2000, AT 111 CITIZENS DRIVE, IN BECKLEY, WEST VIRGINIA.
We are mailing the enclosed document to you because it is Citizens' proxy
statement thatCommonWealth common stock will be usedconverted
into the right to solicit proxiesreceive:
- $30.50 in cash or
- a number of whole shares of common stock of First Community Bancshares,
Inc. ("First Community"), the holding company of First Community Bank,
determined by dividing $30.50 by the average closing price of First
Community common stock during a specified period preceding the merger,
plus cash in lieu of any fractional share interest.
You will have the opportunity to elect the form of consideration to be
received for your shares, subject to allocation procedures set forth in the
merger agreement which are intended to ensure that at least 50% and not more
than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock and the
remaining outstanding shares of CommonWealth common stock will be converted into
the right to receive cash.
The First Community common stock currently is traded on the Nasdaq SmallCap
Market under the symbol "FCBC." First Community's common stock is expected to
commence trading on the Nasdaq National Market under the same symbol on April 1,
2003. On , 2003, the closing sale price of a share of First
Community common stock was $ .
The merger cannot be completed unless the holders of more than two-thirds
of the outstanding shares of CommonWealth common stock, voting in person or by
proxy, vote in favor of approval of the merger agreement at the special meeting.
This
document also serves as Bancshares' prospectusBased on our reasons for the merger described herein, including the
fairness opinion issued by our financial advisor, Baxter, Fentriss & Co., our
board of directors believes that the merger is fair to you and in connection with the offer and
sale of its common stock to be issued in the merger. Thisyour best
interests. ACCORDINGLY OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
The accompanying document gives you detailed information about the proposed merger.
Pleasespecial
meeting, the merger and related matters. We urge you to read this entire
document carefully. In addition tocarefully, including the information in this
documentconsiderations discussed under "Risk Factors,"
beginning on page , and the annexes thereto, which we refer to as a proxy statement/prospectus, there is also
important information aboutinclude the financial and business aspects of Bancshares
that we incorporate into this document by reference. Bancshares will provide
these documents to you, free of charge, if you request them in writing or by
telephone at any time prior to September , 2000, from Bancshares, at the
following address and phone number: First Community Bancshares, Inc., Attention:
John M. Mendez, P. O. Box 989, Bluefield, Virginia 24605, Phone (540) 326-9000.merger
agreement.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you fail to return
your proxy card and failcard. Failure to vote in person, thatyour shares at the special meeting will behave the
same effect as a vote against the merger. You can revokemerger agreement.
We deeply appreciate your proxycontinuing loyalty and support, and we look
forward to seeing you at any time before its exercise by
filing written revocation with, or by delivering a later dated proxy to,
Citizens' corporate secretary before the meeting, or by attending the meeting,
withdrawing your proxy and voting in person.
On behalf of Citizens' board of directors, I urge you to vote for approval
and adoption of the merger agreement and related plan of merger.
Samuel L. Elmorespecial meeting.
Sincerely,
J.E. Causey Davis
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of the Bancshares' common stock to be
issued in the merger or determined if this NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE FIRST COMMUNITY COMMON STOCK TO BE
ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF FIRST
COMMUNITY COMMON STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS
OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY ANY FEDERAL OR STATE
GOVERNMENTAL AGENCY.
This prospectus/proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
3
The shares of Bancshares' stock to be issued in the merger are not savings
or deposit accounts or other obligations of any bank or savings association and
are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
This proxy statement/prospectusstatement is dated August 31, 2000, 2003 and is expected to
bewas first mailed
to shareholders of CitizensCommonWealth on or about September , 2000.2003
4
CITIZENS SOUTHERNTHE COMMONWEALTH BANK
INC.
------------------------900 N. PARHAM ROAD
RICHMOND, VIRGINIA 23229
(804) 741-4600
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBERON , 2000
------------------------
A2003
---------------------
To the shareholders of The CommonWealth Bank:
We will hold a special meeting of shareholders of Citizens SouthernThe CommonWealth Bank
Inc.
("Citizens"CommonWealth") will be held on , October , 2000, at Citizens' offices at 111 Citizens Drive, in Beckley, West Virginia, at 10:00
a.m.: .m., local time, on , , 2003,
at , for the following purpose:
Topurposes:
1. to consider and vote on the following resolution:
RESOLVED, that the Agreementupon a proposal to approve an agreement and Planplan of
Reorganization,merger, dated as of JuneJanuary 27, 2000 (the "Merger Agreement"), between Citizens2003 and First Community
Bank, N.A., a national association ("FCB"), and related Planamended as of Merger (the
"Plan"), whereby (a) Citizens will merge into FCB (the "Merger"), and (b)
each share of Citizens common stock outstanding will be converted into the
right to receive 1.74 shares of common stock ofFebruary 25,
2003, among First Community Bancshares, Inc., plus cashFirst Community Bank,
National Association and CommonWealth, as described in lieuthe attached
document;
2. to consider and vote upon a proposal to adjourn the special meeting to a
later date or dates, if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of the special
meeting to approve the merger agreement; and
3. to transact such other business as may properly come before the special
meeting or any fractional share, is hereby authorizedadjournment or postponement of the special meeting.
We have fixed the close of business on , 2003 as the record date
for the determination of shareholders entitled to notice of and approved.
At this meeting,to vote at the
special meeting. Only holders of record ofCommonWealth common stock of Citizensrecord at the
close of business on August 18, 2000,that date will be entitled to vote. A majoritynotice of and to vote at the
special meeting or any adjournment or postponement of the issued and outstanding shares of Citizens must vote in favor of the above
resolution in order to approve the Merger and the Plan.
Citizens' shareholders are entitled to assert dissenters' rights under
Sections 31-1-122 and 31-1-123 of the West Virginia Corporation Act. A copy of
those sections is attached to the following proxy statement/prospectus as
Appendix C.
THEspecial meeting.
OUR BOARD OF DIRECTORS OF CITIZENS BELIEVESHAS DETERMINED THAT THE PROPOSED MERGER AND
PLAN AREAGREEMENT IS IN THE
BEST INTERESTS OF CITIZENSCOMMONWEALTH AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF CITIZENS VOTE "FOR" APPROVAL OF THE MERGER AND THE PLAN.AGREEMENT.
Holders of CommonWealth common stock have the right to dissent from the
merger and assert dissenters' rights, provided the proper procedures of Article
15 of the Virginia Stock Corporation Act are followed. A copy of Article 15 is
attached as Annex III to the proxy statement/prospectus that accompanies this
notice.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please promptly complete, sign, date and return your proxy card in the
enclosed envelope. Failure to vote your shares by mail or in person at the
special meeting, will have the same effect as a vote against the merger
agreement.
By Order of the Board of Directors
/s/ Samuel L. Elmore
Samuel L. ElmoreJ.E. Causey Davis
President and Chief Executive Officer
August 31, 2000
Beckley, WestRichmond, Virginia
, 2003
5REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about First Community Bancshares, Inc. ("First Community") from documents that
are not included in or delivered with this document. You can obtain documents
incorporated by reference in this document but not otherwise accompanying this
document by requesting them in writing or by telephone from First Community as
follows:
FIRST COMMUNITY BANCSHARES, INC.
ONE COMMUNITY PLACE
BLUEFIELD, VIRGINIA 24605
ATTENTION: ROBERT L. SCHUMACHER
(276) 326-9000
You will not be charged for any of these documents that you request. If you
would like to request documents, please do so by , 2003 in order to
receive them before the special meeting.
For additional information regarding where you can find information about
First Community, please see "Where You Can Find More Information" beginning on
page .
i
TABLE OF CONTENTS
PAGE
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REFERENCES TO ADDITIONAL INFORMATION........................ i
QUESTIONS AND ANSWERS ABOUT VOTING PROCEDURES FOR THE
SPECIAL MEETING........................................... 1
SUMMARY..................................................... 2
RISK FACTORS................................................ 12
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 13
GENERAL INFORMATION......................................... 14
THE SPECIAL MEETING......................................... 15
Time, Date and Place...................................... 15
Matters to be Considered.................................. 15
Shares Outstanding and Entitled to Vote; Record Date...... 15
How to Vote Your Shares................................... 15
Vote Required............................................. 16
Solicitation of Proxies................................... 16
Recommendations of the CommonWealth Board of Directors.... 17
THE MERGER (PROPOSAL ONE)................................... 17
General................................................... 17
Background of the Merger.................................. 17
CommonWealth's Reasons for the Merger..................... 19
First Community's Reasons for the Merger.................. 19
Opinion of CommonWealth's Financial Advisor............... 20
Merger Consideration and Election and Exchange
Procedures............................................. 24
Procedures for Exchanging of CommonWealth Common Stock
Certificates........................................... 27
Assumption of CommonWealth Stock Options.................. 28
Conditions to the Merger.................................. 28
Regulatory Approvals...................................... 30
Business Pending the Merger............................... 31
Board of Directors' Covenant to Recommend the Merger
Agreement.............................................. 32
No Solicitation........................................... 32
Representations and Warranties of the Parties............. 33
Effective Time of the Merger.............................. 33
Amendment of the Merger Agreement......................... 33
Termination of the Merger Agreement....................... 34
Interests of Certain Persons in the Merger................ 36
Certain Employee Matters.................................. 38
Resale of First Community Common Stock.................... 38
Federal Income Tax Consequences........................... 39
Accounting Treatment of the Merger........................ 41
Expenses of the Merger.................................... 42
Listing of the First Community Common Stock............... 42
Termination Fee........................................... 42
Shareholder Agreements.................................... 43
Dissenters' Rights........................................ 43
Operations of First Community After the Merger............ 45
MARKET FOR COMMON STOCK AND DIVIDENDS....................... 45
ii
PAGE
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INFORMATION ABOUT FIRST COMMUNITY........................... 47
General................................................... 47
Management and Additional Information..................... 47
INFORMATION ABOUT COMMONWEALTH.............................. 47
General................................................... 47
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 48
Properties................................................ 58
Executive Officers and Directors of CommonWealth.......... 58
Executive Compensation.................................... 59
Certain Beneficial Owners of CommonWealth Common Stock.... 60
Related Party Transactions................................ 61
Regulation................................................ 61
DESCRIPTION OF FIRST COMMUNITY CAPITAL STOCK................ 63
First Community Common Stock.............................. 64
First Community Preferred Stock........................... 64
Transfer Agent............................................ 64
COMPARISON OF THE RIGHTS OF SHAREHOLDERS.................... 64
Authorized Capital Stock.................................. 65
Issuance of Capital Stock................................. 65
Voting Rights............................................. 65
Number and Election of Directors.......................... 65
Removal of Directors...................................... 66
Vacancies of Directors.................................... 66
Discharge of Duties, Exculpation and Indemnification...... 67
Dividends and Other Distributions......................... 68
Amendments to Articles of Incorporation and Bylaws........ 68
Notice of Shareholder Meetings............................ 68
Special Meetings of Shareholders.......................... 69
Shareholder Nomination and Shareholder Proposals.......... 69
Shareholder Action Without a Meeting...................... 69
Mergers, Share Exchanges and Sales of Assets.............. 70
Interested Shareholder Statutes........................... 70
Control Share Statutes.................................... 70
Shareholders' Right of Dissent and Appraisal.............. 71
Liquidation Rights........................................ 71
Constituency Provisions................................... 71
ADJOURNMENT OF THE SPECIAL MEETING (PROPOSAL TWO)........... 72
LEGAL OPINION............................................... 72
EXPERTS..................................................... 72
PROPOSALS FOR THE 2003 ANNUAL MEETING....................... 73
WHERE YOU CAN FIND MORE INFORMATION......................... 73
INDEX TO COMMONWEALTH FINANCIAL STATEMENTS.................. F-1
Annexes:
Annex I Agreement and Plan of Merger, dated as of January 27, 2003
and amended as of February 25, 2003, among First Community
Bancshares, Inc., First Community Bank, National Association
and The CommonWealth Bank................................... Annex I-1
Annex II Opinion of Baxter, Fentriss & Co. .......................... Annex II-1
Annex III Sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act............................................. Annex III-1
iii
QUESTIONS AND ANSWERS
ABOUT VOTING PROCEDURES FOR THE MERGER AND RELATED TRANSACTIONS
Q: WHAT IS THE PURPOSE OF THIS DOCUMENT?
A: This document serves as both a proxy statement of Citizens and a
prospectus of Bancshares. As a proxy statement, Citizens is providing it
to you because Citizens' board of directors is soliciting your proxy for
use at the special meeting of shareholders called to consider and vote
on the proposed sale of Citizens to Bancshares. As a prospectus, it's
being provided to you because Bancshares is offering to exchange shares
of its common stock for your shares of Citizens' common stock if the
merger is completed.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: For each outstanding share of Citizens' common stock you own, you will
receive 1.74 shares of Bancshares' common stock. This is called the
"exchange ratio."
Bancshares will not issue fractional shares in the merger. Instead, you
will receive a cash payment, without interest, for the value of any
fraction of a share of Bancshares common stock that you would otherwise
be entitled to receive based upon the market value (as determined in the
merger agreement) of a share of Bancshares' common stock at the time of
the merger.
Q: WHAT HAPPENS AS THE MARKET PRICE OF FIRST COMMUNITY BANCSHARES, INC.
COMMON STOCK FLUCTUATES?
A: Because the market value of Bancshares' common stock will fluctuate
before and after the closing of the merger, the value of Bancshares'
common stock that you will receive in the merger will fluctuate as well.
That value could increase or decrease. We urge you to obtain current
market prices for shares of Bancshares' common stock. If the average of
the bid and ask share prices of Bancshares' common stock is less than
$15.00 per share, the Board of Directors of Citizens have the right to
terminate the proposed merger.SPECIAL MEETING
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this proxy statement/prospectus, justdocument, indicate on your proxy card
how you want the proxiesyour shares to vote your
shares.be voted. Then sign, date and mail your proxy
card in the enclosed postage-paid
envelope. In addition, you may attend Citizens' meeting in personprepaid return envelope as soon as possible. This will
enable your shares to be represented and vote, whether or not you have signed and mailed your proxy card. If you
sign, date and return your proxy but do not indicate how you want to
vote, we will count your proxy as a vote in favorvoted at the special meeting.
Q: WHY IS MY VOTE IMPORTANT?
A: The merger agreement must be approved by holders of more than two-thirds of
the merger
agreement and the merger.outstanding shares of CommonWealth common stock. If you do not vote or you abstain from voting,
it
will have the same effect ofas a vote against the merger agreement and the
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. There are three ways for you to revoke your proxy and change your
vote. First, you may send a later-dated, signed proxy card prior to the
special meeting of Citizens. Second, you may attend the meeting in
person and vote. Third, you may revoke any proxy by written notice to
the Corporate secretary of Citizens prior to the Citizens' meeting. If
you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote.
6agreement.
Q: IF A BROKER HOLDS MY SHARES ARE HELD IN "STREETSTREET NAME" BY MY BROKER OR BANK, WILL MY BROKER
OR BANK AUTOMATICALLY VOTE MY SHARES FOR ME?
A: No. Your broker, bank or other nominee will not be able to vote shares held
by it in "street name" on your shares on the merger only if you providebehalf without instructions on how to vote.from you. You
should instruct your broker, howbank or other nominee to vote your shares,
following the directions your broker, bank or other nominee provides.
Q: WHAT IF I FAIL TO INSTRUCT MY BROKER OR BANK?
A: If you do
not provide instructionsfail to instruct your broker, bank or other nominee to vote your
shares, will not be voted
and thisit will have the same effect of votingas a vote against the merger.merger
agreement.
Q: WHEN DO YOU EXPECT TO MERGE?CAN I ATTEND THE MEETING AND VOTE MY SHARES IN PERSON?
A: WeYes. All shareholders are working towards completinginvited to attend the merger as quickly as possible. We
expectspecial meeting. However,
if you hold your shares in street name, you will need proof of ownership
(by means of a recent brokerage statement, letter from a bank or broker or
other means) to be admitted to the meeting. Shareholders of record can vote
in person at the special meeting. If your shares are held in street name,
then you are not the shareholder of record and you must ask your broker,
bank or other nominee how you can vote at the special meeting.
Q: CAN I CHANGE MY VOTE?
A: Yes. If you have not voted through your broker, bank or other nominee,
there are three ways you can change your vote after you have sent in your
proxy card.
- First, you may send a written notice to the secretary of CommonWealth
stating that you would like to revoke your proxy before the special
meeting.
- Second, you may complete and submit a new proxy card. Any earlier proxies
will be revoked automatically.
- Third, you may attend the merger earlyspecial meeting and vote in person. Any earlier
proxy will be revoked. However, simply attending the fourth quarter of 2000.special meeting
without voting will not revoke your proxy.
If you have instructed a broker, bank or other nominee to vote your shares,
you must follow directions you receive from your broker, bank or other nominee
to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. Following the effective date ofYou should not send in your stock certificates at this time.
Instructions for surrendering your CommonWealth common stock certificates
in exchange for the merger Bancsharesconsideration will mail
instructionsbe sent to you which explain how to exchange your certificates.after we
complete the merger.
Q: IS THERE OTHER INFORMATION I SHOULD CONSIDER?
A: Yes. Much of the business and financial information about Bancshares
that may be important to you is not included in this document. Instead,
this information is incorporated by reference to documents separately
filed by Bancshares with the Securities and Exchange Commission. This
means that Bancshares may satisfy its disclosure obligations to you by
referring you to one or more documents separately filed by it with the
SEC. See "Where You Can Find More Information" on page 48 for a list of
documents that Bancshares incorporates by reference into this proxy
statement/prospectus and for instructions on how to obtain copies of
these documents. The documents are available to you without charge.
Q: WHAT IF THERE IS A CONFLICT BETWEEN DOCUMENTS?
A: You should rely on the later filed document. Information in this proxy
statement/prospectus may update information contained in one or more of
the Bancshares' documents incorporated by reference. Similarly,
information in documents that Bancshares may file after the date of this
proxy statement/prospectus may update information contained in this
proxy statement/prospectus or information contained in previously filed
documents.
Q: WHOMWHO SHOULD I CALL WITH QUESTIONS OR TO OBTAIN ADDITIONAL COPIES OF THIS
PROXY STATEMENT/PROSPECTUS?
A: Samuel L. Elmore, CEO Citizens Southern Bank, 111 Citizens Drive
Beckley, WV 25801 Phone Number: (304) 252-9400
Q: WHAT ARE THE INCOME TAX CONSEQUENCES OF THE MERGER TO ME?QUESTIONS?
A: You generally will not recognize any gain or loss when you exchange your
Citizens common stock for Bancshares common stock. However, any cash
received in lieu of fractional shares or upon exercising dissenters'
rights will be subject to federalshould call William W. Ranson, Executive Vice President, Treasurer and
state income tax.Chief Financial Officer, at CommonWealth at (804) 741-4600.
1
7
TABLE OF CONTENTS
PAGE
----
A WARNING ABOUT FORWARD-LOOKING INFORMATION................. iii
SUMMARY..................................................... 1
MEETING OF SHAREHOLDERS..................................... 9
General................................................... 9
Record Date, Voting Rights and Vote Required.............. 9
Voting and Revocation of Proxies.......................... 10
Solicitation of Proxies................................... 10
Recommendation of the Citizens' Board..................... 10
THE MERGER.................................................. 11
Background of and Reasons for the Merger.................. 11
Opinion of Financial Advisor to Citizens.................. 14
Exchange Ratio............................................ 19
Exchange of Citizens' Stock Certificates.................. 19
The Merger Agreement...................................... 21
Indemnification of Directors and Officers................. 26
Rights of Dissenting Shareholders......................... 27
Regulatory Considerations................................. 29
The Subsidiary Bank Merger................................ 29
Material Federal Income Tax Consequences of the Merger.... 30
Cash Received in Lieu of a Fractional Share of Bancshares
Common Stock........................................... 31
Dissenters' Rights........................................ 32
Backup Withholding and Information Reporting.............. 32
Accounting Treatment...................................... 32
Effect on Employees and Employee Benefit Plans............ 32
Restrictions on Resales by Affiliates..................... 33
Management................................................ 33
INFORMATION ABOUT BANCSHARES................................ 34
General................................................... 34
Acquisitions.............................................. 34
Capital................................................... 35
Deposit Insurance Assessments............................. 36
INFORMATION ABOUT CITIZENS.................................. 36
Description of Citizens' Business......................... 36
Business of Citizens...................................... 36
Employees................................................. 37
Competition............................................... 37
Ownership of Certain Beneficial Owners and Management of
Citizens............................................... 38
DESCRIPTION OF BANCSHARES' CAPITAL STOCK.................... 39
General................................................... 39
Bancshares' Common Stock.................................. 39
Bancshares' Preferred Stock............................... 39
Provisions Regarding Bancshares' Board.................... 39
Meetings of Shareholders; Shareholders' Nominations and
Proposals.............................................. 40
-i-
8
PAGE
----
COMPARISON OF THE RIGHTS OF BANCSHARES' SHAREHOLDERS AND
CITIZENS' SHAREHOLDERS.................................... 40
Authorized Capital Stock.................................. 40
Special Meetings of Shareholders.......................... 41
Directors................................................. 41
Dividends and Other Distributions......................... 41
Shareholder Nominations and Shareholder Proposals......... 42
Discharge of Duties; Exculpation and Indemnification...... 43
Mergers, Share Exchanges and Sales of Assets.............. 43
Anti-takeover Statutes.................................... 44
Amendments to Articles of Incorporation and Bylaws........ 44
Shareholders' Rights of Dissent and Appraisal............. 45
Liquidation Rights........................................ 45
SHAREHOLDER PROPOSALS....................................... 46
OTHER BUSINESS.............................................. 46
LEGAL MATTERS............................................... 46
EXPERTS..................................................... 46
WHERE YOU CAN FIND MORE INFORMATION......................... 47
CITIZENS' FINANCIAL STATEMENTS.............................. F-1
APPENDIX A -- Agreement and Plan of Reorganization and Plan
of Merger
APPENDIX B -- Opinion of Baxter Fentriss and Company
APPENDIX C -- Sections 31-1-122 and 31-1-123 of the West
Virginia Corporation Act
-ii-
9
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Bancshares and Citizens have each made forward-looking statements in this
document and in other documents to which this document refers. These statements
are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of the management of Bancshares and Citizens and on
information currently available to them or, in the case of information that
appears under the heading "The Merger -- Background of and Reasons for the
Merger" on page 11, information that was available to management of Bancshares
and Citizens as of the date of the merger agreement. You should read these
statements in connection with the notices about forward-looking statements
Bancshares makes in its reports filed under the Securities Exchange Act of 1934.
Forward-looking statements include, but are not limited to, the information
concerning possible or assumed future results of operations of Bancshares or
Citizens described under "Summary," "The Merger -- Background of and Reasons for
the Merger," "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and statements preceded by, followed by or that include
the words "believes," "expects," "assumes," "anticipates," "intends," "plans,"
"estimates" or other similar expressions.
Bancshares and Citizens have made statements in this document regarding
estimated earnings per share of Bancshares and Citizens on a stand-alone basis
and expected cost savings from the merger, maintenance of Citizens' net interest
margin, the anticipated accretive effect of the merger and Bancshares'
anticipated performance in future periods. The realization of cost savings and
the amount of restructuring charges are subject to the risk that the foregoing
assumptions prove to be incorrect, and actual results may be materially
different from those expressed or implied by the forward-looking statements.
Any statements in this document about the anticipated accretive effect of
the merger and Bancshares' anticipated performance in future periods are subject
to risks relating to, among other things, the following:
1. expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
2. the loss of deposits, customers or revenues following the merger may be
greater than expected;
3. competitive pressures among depository and other financial institutions
may increase significantly;
4. costs or difficulties related to the integration of the businesses of
Bancshares and Citizens may be greater than expected;
5. changes in the interest rate environment may reduce margins or the
volumes or values of loans made or held;
6. general economic or business conditions, either nationally or in the
states or regions in which Bancshares and Citizens do business, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit;
7. legislative or regulatory changes, including changes in accounting
standards, may adversely affect the business in which Bancshares and
Citizens are engaged;
8. adverse changes may occur in the securities markets; and
-iii-
10
9. competitors of Bancshares and Citizens may develop products that enable
those competitors to compete more successfully than Bancshares and
Citizens.
Both Bancshares and Citizens believe the forward-looking statements about
the merged company are reasonable. However, Citizens' shareholders should not
place undue reliance on them. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. The future
results and shareholder values of Bancshares following completion of the merger
may differ materially from those expressed or implied in these forward-looking
statements. Many of the factors that will determine these results and values are
beyond Bancshares' and Citizens' ability to control or predict.
We expressly qualify all subsequent written and oral forward-looking
statements concerning the merger or other matters addressed in this document and
attributable to Bancshares or Citizens or any person acting on their behalf by
the foregoing cautionary statements referred to in this section. Neither
Bancshares nor Citizens undertakes any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of unanticipated
events.
-iv-
11
SUMMARY
This summary highlights selected information from this proxy
statement/prospectusdocument and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document, including the merger
agreement and the other documents to which we referhave referred you. See "Where You
Can Find More Information" beginning on page 46.
YOU. Page references are included
in this summary to direct you to a more complete description of the topics.
Throughout this document, "CommonWealth," "we" and "our" refers to The
CommonWealth Bank, "First Community" refers to First Community Bancshares, Inc.
and "First Community Bank" refers to First Community Bank, National Association,
First Community's banking subsidiary. Also, we refer to the merger between
CommonWealth and First Community Bank as the "merger," and the agreement and
plan of merger, dated as of January 27, 2003 and as amended as of February 25,
2003, among CommonWealth, First Community Bank and First Community as the
"merger agreement."
PARTIES TO THE PROPOSED MERGER (PAGES AND )
First Community. First Community is a registered bank holding company
incorporated under the laws of the State of Nevada and the parent company of
First Community Bank, a national bank that conducts commercial banking
operations within the states of Virginia, West Virginia and North Carolina.
United First Mortgage, Inc. ("UFM") is a wholly-owned subsidiary of First
Community Bank and serves as a wholesale and retail distribution channel for
First Community Bank's mortgage banking business segment. Stone Capital
Management, Inc., an asset management company, is also a wholly-owned subsidiary
of First Community Bank. First Community and its wholly-owned subsidiaries have
total assets of approximately $1.5 billion at December 31, 2002 and conduct
business through the 41 branches of First Community Bank and 11 mortgage
brokerage offices of UFM. Regulatory oversight of First Community is conducted
by the Board of Governors of the Federal Reserve System. First Community's
principal executive offices are located at One Community Place, Bluefield,
Virginia 24605 and its telephone number is (276) 326-9000.
First Community Bank. First Community Bank engages in a general commercial
and retail banking business through its branch facilities. It provides safe
deposit services and makes all types of loans, including commercial, mortgage
and personal loans. First Community Bank also provides trust services and its
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").
First Community Bank is a member of the Federal Reserve System and is a member
of the Federal Home Loan Bank of Atlanta. Regulatory oversight of the Bank is
conducted by the Office of the Comptroller of the Currency.
CommonWealth. CommonWealth is a Virginia-chartered commercial bank which
conducts business from its headquarters in Richmond, Virginia and its four
full-service offices within the Richmond metropolitan area. CommonWealth
provides a wide range of banking services to individuals and businesses located
in the Richmond metropolitan area. CommonWealth had total assets of $134.1
million, total deposits of $107.3 million and total stockholders' equity of $8.3
million as of December 31, 2002. CommonWealth's executives offices are located
at 900 N. Parham Road, Richmond, Virginia 23229 and its telephone number is
(804) 741-4600.
THE MERGER (PAGE )
We have attached the merger agreement to this document as Annex I. Please
read the entire merger agreement. It is the legal document that governs the
merger. We propose a merger whereby CommonWealth will merge with and into First
Community Bank. We expect to complete the merger in the second quarter of 2003.
COMMONWEALTH SHAREHOLDERS WILL RECEIVE 1.74WHOLE SHARES OF BANCSHARESFIRST COMMUNITY COMMON
STOCK AND/OR CASH FOR EACH SHARE OF CITIZENS'COMMONWEALTH COMMON STOCK YOU OWN.EXCHANGED PURSUANT
TO THE MERGER (PAGE 19))
If the merger of CommonWealth with and into First Community Bank is
completed, youeach outstanding share of CommonWealth common stock (subject to
certain exceptions) will be converted into the right to receive
1.742
$30.50 in cash, without interest, or a number of whole shares of Bancshares'First Community
common stock for each sharedetermined by dividing $30.50 by the average of Citizens' common stock you own, plus cash instead
of any fractional share. On August 18, 2000, the closing price
of Bancshares'the First Community common stock was $15.31, makingduring the 20 trading day period ending on
the fifth business day prior to the effective time of the merger, plus cash in
lieu of any fractional share interest. You will have the opportunity to elect
one or the other form of consideration to be received for all shares of
CommonWealth common stock held by you, subject to allocation procedures set
forth in the merger agreement which are intended to ensure that at least 50% and
not more than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock, with the
remaining outstanding shares of CommonWealth common stock to be converted into
the right to receive cash.
WHEN AND HOW TO CHOOSE THE METHOD OF PAYMENT FOR YOUR SHARES (PAGE )
Shares of CommonWealth common stock will be exchanged for either First
Community common stock or cash as chosen by you, subject to the election and
allocation procedures discussed herein and described in detail in the merger
agreement. After the closing of the merger, you will be sent an election form on
which you may specify whether you wish to receive cash in exchange for all
shares of CommonWealth common stock held by you or First Community common stock
in exchange for all shares of CommonWealth common stock held by you, or that you
make "no election" as to whether you receive cash or First Community common
stock in payment for your CommonWealth shares.
Your choice will be honored to the extent possible, but because of the
overall limitation on the amount of cash and shares of First Community common
stock available, whether you receive the amount of cash or stock you request
will depend in part on how many other CommonWealth shareholders submit elections
and how many choose to receive cash and how many choose to receive stock.
Because at least 50% and not more than 60% of the outstanding shares of
CommonWealth common stock will be converted into the right to receive First
Community common stock and the remaining outstanding shares of CommonWealth
common stock will be converted into the right to receive cash, CommonWealth
shareholders may not receive exactly the form of consideration that they elect
and may receive a pro rata amount of cash and First Community common stock.
First Community will not issue fractional shares. Instead, CommonWealth
shareholders who receive First Community common stock will receive the value of
1.74 sharesany fractional share interest in cash, based on the average closing sales prices
of Bancshares'a share of First Community common stock equalduring a specified period preceding
consummation of the merger.
An election form and detailed instructions on how to $26.64. Because the market pricechoose your preferred
method of Bancshares' stock fluctuates,
you will not know when you vote precisely what the sharespayment will be worth when
issued insent to you approximately five business days after the
effective time of the merger. THIS TRANSACTION WILL BE GENERALLY TAX-FREE TO SHAREHOLDERS.
Neither company is requiredYou will then have 20 days in which to complete
the election form and return it as instructed with your stock certificates.
After the forms have been received and processed, you will be sent the cash
and/or First Community common stock to which you are entitled.
You will need to surrender your CommonWealth common stock certificates to
receive the appropriate merger unless it receivesconsideration, but you should not send us any
certificates now. You will receive detailed instructions on how to exchange your
shares along with your election form.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE )
Shares of First Community common stock currently trade on the Nasdaq
SmallCap Market under the symbol "FCBC." First Community's common stock is
expected to commence trading on the Nasdaq National Market under the same symbol
on April 1, 2003. Shares of Commonwealth common stock trade on the OTC Bulletin
Board under the symbol "CWBV.OB." On January 27, 2003, the last trading day
preceding public announcement of the proposed merger, the First Community common
stock closed at $28.31 per share and the CommonWealth common stock closed at
$18.75 per share. On , 2003, the First Community common stock closed
at $ per share and the CommonWealth common stock closed at $ per share.
3
First Community cannot assure you that its stock price will continue to
trade at or above the prices shown above. You should obtain current stock price
quotations for the First Community common stock from a legalnewspaper, via the
Internet or by calling your broker.
First Community currently pays a quarterly cash dividend to its
shareholders. During the first quarter of 2003, First Community paid a cash
dividend of $0.26 per share of First Community common stock. First Community
intends to continue to pay a quarterly cash dividend to its shareholders.
CommonWealth has never paid a cash dividend to its shareholders.
THE TAX CONSEQUENCES OF THE MERGER FOR COMMONWEALTH SHAREHOLDERS WILL BE
DEPENDENT ON THE MERGER CONSIDERATION RECEIVED (PAGE )
First Community and CommonWealth have received an opinion from itsof counsel to the
effect that, based on certain facts, representations and assumptions, the merger
will be treated as a "reorganization" for federal income tax purposes.
Therefore, we expect that, for
federal income tax purposes,Accordingly, you generally will not recognize any gain or loss on the conversion
of shares of CitizensCommonWealth common stock solely into shares of Bancshares'First Community
common stock. Bancshares' attorneys have issued a legal opinion to this effect
and we have included that opinion as an exhibit to the registration statement
Bancshares filed with the SECHowever, you generally will recognize gains if you receive cash in
exchange for theyour shares it will issue in the merger. You
will be taxed, however, on any cash that you receiveof CommonWealth common stock or instead of any
fractional share of Bancshares'First Community common stock and, ifthat you properly exercise your rightwould otherwise be
entitled to dissentreceive. The parties' obligation to complete the merger you will generally be taxedis
conditioned on their receipt of the cash that you receive
in excesssame opinion, dated as of your basis.the effective date
of the merger, regarding the federal income tax treatment of the merger.
Tax matters are complicated, and the tax resultsconsequences of the merger to you
will depend upon the facts of your particular situation. In addition, you may vary
among shareholders. Webe
subject to state, local or foreign tax laws that are not discussed herein.
Accordingly, we strongly urge you to contactconsult your own tax advisor to understand
fully how the merger will affect you.
BANCSHARES EXPECTS TO CONTINUE PAYING QUARTERLY DIVIDENDS.
Bancshares currently pays regular quarterly dividends on its common stock
and, over the past five years, has hadfor a dividend payout ratio in the range of
approximately 42.5 percent to 56.4 percent of recurring earnings. Bancshares
expects that it will continue to pay a quarterly dividend, but may change that
policy based on business conditions, its financial condition and earnings or
other factors.
CITIZENS' BOARD UNANIMOUSLY RECOMMENDS SHAREHOLDER APPROVAL. (PAGE 10)
Citizens' Board of Directors believes that the merger is in the best
interests of Citizens and Citizens' shareholders and unanimously recommends that
you vote "FOR" approvalfull
understanding of the merger agreement and the related plan of merger.
The Citizens' Board believes that, as a resulttax consequences to you of the merger, you will be able
to achieve greater value than you would if Citizens remained independent.
ACCORDING TO CITIZENS'merger.
COMMONWEALTH'S FINANCIAL ADVISOR BELIEVES THAT THE EXCHANGE RATIOMERGER CONSIDERATION IS FAIR.FAIR
TO COMMONWEALTH SHAREHOLDERS (PAGE 14))
Among other factors considered in deciding to approve the merger, Citizens'
Board hasthe
CommonWealth board of directors received the opinion of its financial advisor,
Baxter, Fentriss and
Company. According to& Co., that, opinion, as of June 27, 2000January 24, 2003 (the date on which the
CommonWealth board of Citizens'
board voted ondirectors approved the merger) and updated through, August 31, 2000,merger agreement), the date of
this proxy statement/prospectus, the exchange ratiomerger
consideration was fair to the holders of Citizens'CommonWealth common stock from a
financial point of view. We have attachedThis opinion was subsequently confirmed in writing as
of the date of this document. The opinion todated as of the date of this proxy statement/prospectusdocument
is included as Appendix B.Annex II. You should read this opinion completely to understand
the assumptions made, matters considered and limitations of the review
undertaken by Baxter, Fentriss & Co. in providing its 1
12
opinion. Citizens hasBaxter, Fentriss
& Co.'s opinion is directed to the CommonWealth board of directors and does not
constitute a recommendation to any shareholder as to any matters relating to the
merger. CommonWealth agreed to pay to Baxter, Fentriss & Co. a transaction fee
basedequal to 1.50% of the aggregate purchase price. Based on the value$30.50 per share
cash acquisition purchase price and the $ closing sale price of a share of
First Community common stock on the Nasdaq SmallCap Market on , 2003,
the transaction fee would amount to approximately $ million, $50,000 of
which has been paid as of the consideration paid in the merger. We expectdate of mailing of this fee to be approximately
$84,700, of which $7,500 was payable as an advisory fee and the difference up to
1.25 percent of the transaction value is payable upon the closing and
consummation of the merger.
CITIZENS' SHAREHOLDERS HAVE DISSENTERS' RIGHTS.prospectus/proxy
statement.
OUR BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE MERGER (PAGE 27)
Under West Virginia law, if you do not vote)
Based on CommonWealth's reasons for the merger and you properly
exercise rights to dissent fromdescribed herein, including
the fairness opinion of Baxter, Fentriss & Co., the CommonWealth board of
directors believes that the merger is fair to you and to demand the "fair value" ofin your shares of Citizens' common stock,best interests and
unanimously recommends that you will have the right to obtain a cash
payment for the "fair value" of your shares as determined by statutory appraisal
proceedings. To exercise these rights, you must comply with the procedural
requirementsvote "FOR" approval of the West Virginia Corporation Act. We have attachedmerger agreement.
DATE, TIME AND LOCATION OF THE SPECIAL MEETING (PAGE )
The special meeting will be held at : .m., local time, on
, , 2003, at . At the relevant
sectionsspecial meeting, CommonWealth
shareholders will be asked to approve the merger agreement, to approve a
proposal to adjourn the special meeting if necessary to permit further
solicitation of that act to this proxy statement/prospectus as Appendix C. We cannot
predict whatproxies if there are not sufficient votes at the "fair value" of Citizens common stock resulting from the
statutory appraisal proceedings would be. Failure to timely and properly take
anytime of the
steps required under that act may result in a loss of dissenters'
rights.
THE COMPANIES (PAGES 34 AND 36)
First Community Bancshares, Inc.
One Community Place
P.O. Box 989
Bluefield, VA 24605
(540) 326-9000
Bancshares is a bank holding company with one banking subsidiary, FCB, and
more than $1.1 billion in assets. It is the third largest bank holding company
headquartered in Virginia and, through its banking subsidiary, operates 31
branch offices in Virginia, West Virginia, and North Carolina. Additionally,
Bancshares generates and sells mortgages through its mortgage subsidiary, United
First Mortgage, Inc., a wholly owned subsidiary of FCB.
Citizens Southern Bank, Inc.
111 Citizens Drive
Beckley, West Virginia, 25801
(304) 252-9400
Citizens, with $65.4 million in assets and $52.3 million in deposits at
June 30, 2000, maintains two full service bank offices in Beckley, West Virginia
that serve the city of Beckley and surrounding counties. At June 30, 1999,
Citizens maintained 3.89 percent in deposit market share within the Beckley,
West Virginia Rand McNally Atlas (RMA) market as defined by the Federal Reserve
which includes all of the RMA and non-RMA portions of Raleigh, Fayette, Summers
and Boone Counties in Southern West Virginia, excluding the towns of Montgomery
and Smithers in Fayette County but including the town of Whitesville in Boone
County, West Virginia.
IN THE MERGER, CITIZENS WILL MERGE INTO FCB. (PAGE 27)
In the merger, Citizens will merge with and into FCB, which will remain a
wholly owned subsidiary of Bancshares. If Citizens shareholdersspecial meeting to approve the merger agreement and related planto act on any other matters
that may properly come before the special meeting.
4
RECORD DATE AND VOTING RIGHTS FOR THE SPECIAL MEETING (PAGE )
You are entitled to vote at the special meeting we currently expect to
completeif you owned shares of
CommonWealth common stock as of the merger early in the fourth quarterclose of 2000.
Webusiness on , 2003.
You will have attached the merger agreement and plan of merger (Appendix A)one vote at the backspecial meeting for each share of thisCommonWealth
common stock that you owned on that date.
Shareholders of record may vote by mail or by attending the special meeting
and voting in person. Each proxy statement/prospectus. We encourage youreturned to readCommonWealth (and not revoked) by a
holder of CommonWealth common stock will be voted in accordance with the
merger
agreement, as it isinstructions indicated thereon. If no instructions are indicated, the legal document that governs the merger.
A MAJORITY VOTE OF THE OUTSTANDING SHARES MUST APPROVE THE MERGER. (PAGE 9)
Approvalproxy will
be voted "FOR" approval of the merger agreement and plan"FOR" the proposal to
adjourn the special meeting if necessary to permit further solicitation of
proxies on the proposal to approve the merger requires theagreement.
APPROVAL OF THE MERGER AGREEMENT REQUIRES A MORE THAN TWO-THIRDS VOTE BY
COMMONWEALTH SHAREHOLDERS (PAGE )
The affirmative vote of the holders of at least a majoritymore than two-thirds of the
outstanding shares of Citizens'CommonWealth common stock. If you failstock is necessary to approve the
merger agreement on behalf of CommonWealth. Not voting, or failing to instruct a
broker, bank or other nominee how to vote itshares held in their name for you,
will have the same effect of a
voteas voting against the merger agreement and the merger. At the record date, theagreement.
MANAGEMENT OF COMMONWEALTH OWNS SHARES WHICH MAY BE VOTED AT THE SPECIAL MEETING
(PAGES
AND )
The directors and executive officers of Citizens and their affiliates together owned
about 38 percentCommonWealth, who collectively own
approximately % of the outstanding shares entitledof CommonWealth common stock as
of the record date for the special meeting, have entered into shareholder
agreements with First Community pursuant to which they have agreed to vote at the
2
13
meeting, and we expect them to voteall
of their shares in favor of the merger agreement and the merger.
Brokers who hold sharesagreement.
FIRST COMMUNITY AND COMMONWEALTH MUST MEET SEVERAL CONDITIONS TO COMPLETE THE
MERGER (PAGE )
Completion of Citizens' common stock as nominees will not have
authority to vote them with respect to the merger unless the beneficial owners
of those shares provide voting instructions.
The merger does not require the approval of Bancshares' shareholders.
YOU WILL HAVE ONE VOTE FOR EACH SHARE OF CITIZENS COMMON STOCK. (PAGE 9)
If you owned shares of Citizens' common stock at the close of businessdepends on August 18, 2000, the record date, you are entitled to vote on the merger
agreement and plan of merger and any other matters that may be properly
considered at the meeting. On the record date, there were 250,000 shares of
Citizens' common stock outstanding. You will have one vote at the meeting for
each share of Citizens' common stock that you owned on the record date.
SEVERAL CONDITIONS MUST OCCUR BEFORE WE CAN COMPLETE THE MERGER. (PAGE 21)
Aa number of conditions,
including the following:
- shareholders of CommonWealth must approve the merger agreement;
- First Community and CommonWealth must receive all required regulatory
approvals for the merger of CommonWealth into First Community Bank, and
any waiting periods required by law must have passed;
- there must be met for us to complete the merger,
including:
- - approval of the merger and related plan by the Citizens' shareholders;
- - receipt of legal opinions concerning the tax consequencesno law, injunction or order enacted or issued preventing
completion of the merger;
- - receiptFirst Community and CommonWealth must receive a legal opinion confirming
the tax-free nature of legal opinions concerning the completion of all corporate, legal
and operational responsibility in regard to and what would otherwise prohibit the merger;
- - the continuing accuracy of the parties' representations in the merger
agreement; and
- - the continuing effectiveness of the registration statement filed with the SEC
covering the shares of Bancshares'First Community common stock to be issued in the merger;
WEmerger must have
been approved for trading on the Nasdaq SmallCap Market (or on any
securities exchange on which the First Community common stock may then be
listed);
- the representations and warranties of each of First Community and
CommonWealth in the merger agreement must be accurate, subject to
exceptions that would not have a material adverse effect on First
Community or CommonWealth, respectively;
- First Community and CommonWealth must have complied in all material
respects with their respective covenants in the merger agreement;
- dissenting shares shall not represent 10% or more of the outstanding
CommonWealth common stock; and
- each director and executive officer of CommonWealth shall have entered
into a shareholder agreement with First Community.
5
Unless prohibited by law, either First Community or CommonWealth could
elect to waive a condition that has not been satisfied and complete the merger
anyway. The parties cannot be certain whether or when any of the conditions to
the merger will be satisfied, or waived where permissible, or that the merger
will be completed.
FIRST COMMUNITY AND COMMONWEALTH MUST OBTAIN REGULATORY APPROVAL FORAPPROVALS TO COMPLETE
THE MERGER TO OCCUR. (PAGE 29)
We cannot)
To complete the merger, unlessthe parties need the prior approval is receivedof or waiver
from the Office of the Comptroller of the Currency as well as the West Virginia Division of
Banking and various state and other regulatory authorities. We anticipate that
the Comptroller of the CurrencyUnited States and the
WestBureau of Financial Institutions of the Virginia DivisionState Corporation Commission.
The U.S. Department of Banking will
act upon applications for approval by September 2000. In addition, the mergerJustice is subjectable to provide input into the approval
process of or noticefederal banking agencies and will have between 15 and 30 days
following any approval of a federal banking agency to certain statechallenge the approval on
antitrust grounds. First Community and CommonWealth have filed all necessary
applications and notices with the applicable regulatory authorities,agencies. First
Community and we have madeCommonWealth cannot predict, however, whether the necessary filings with those authorities. The merger cannot
proceed in the absence of these regulatory approvals. We do not know if theserequired
regulatory approvals will be obtained when we will obtain them, or whether thereany such approvals will have
conditions which would be any litigation challenging them. It is possible thatdetrimental to First Community following completion of
the United
States Department of Justice or any relevant state attorney general could
attempt to challenge the merger on antitrust grounds.
WE CANmerger.
FIRST COMMUNITY AND COMMONWEALTH MAY TERMINATE OR AMEND THE MERGER AGREEMENT.AGREEMENT (PAGE 25)
We)
First Community and CommonWealth can jointlymutually agree at any time prior to the effective time of the merger to
terminate the merger agreement withoutbefore completing the merger.merger, even if
shareholders of CommonWealth have already voted to approve it.
Either company can also unilaterallycan terminate the merger agreement if:agreement:
- - we do not completeif any required regulatory approvals for consummation of the merger by December 31, 2000; oris
not obtained;
- - any of the conditions that must be satisfied to completeif the merger areis not met on or beforecompleted by September 30, 2003;
- if the Closing date unless we agree to extend the closing date;
or
- - the Comptrollershareholders of the Currency or the West Virginia Division of Banking doesCommonWealth do not approve the merger and the time period for all appeals or requests for
consideration has expired;agreement;
or
- - eitherif the other company violates, in a material way,breaches any of its representations, warranties or
obligations under the merger agreement in a manner which would be
reasonably expected to have a material adverse effect on it and the
breach cannot be or has not been cured within 30 days of notice of the
breach.
In addition, First Community may terminate the merger agreement at any time
prior to the special meeting if the board of directors of CommonWealth withdraws
or modifies its recommendation to the CommonWealth shareholders that the merger
agreement be approved in any way which is adverse to First Community, or
breaches its covenants requiring the calling and holding of a meeting of
shareholders to consider the merger agreement and prohibiting the solicitation
of other offers. First Community also may terminate the merger agreement if a
third party commences a tender offer or exchange offer for 20% or more of the
outstanding CommonWealth common stock and the board of directors of CommonWealth
recommends that CommonWealth shareholders tender their shares in the offer or
otherwise fails to recommend that they reject the offer within a specified
period.
CommonWealth also may terminate the merger agreement at any time prior to
the special meeting in order to concurrently enter into an acquisition agreement
or similar agreement with respect to an unsolicited "superior proposal," as
defined in the merger agreement, which has been received and considered by
CommonWealth in compliance with the applicable terms of the merger agreement,
provided that CommonWealth has notified First Community at least five business
days in advance of any such action and given First Community the opportunity
during such period, if First Community elects, in its sole discretion, to make
an offer to CommonWealth that CommonWealth determines in good faith, after
consultation with its financial and legal advisors, is at least as favorable as
the superior proposal. A $1.0 million termination fee would be payable by
CommonWealth under these and certain other circumstances. See "The Merger -
Termination Fee," beginning on page .
In addition, CommonWealth may terminate the merger agreement if the average
closing price of the First Community common stock during a specified 20 trading
day period increases by more than 15% from $31.14 (i.e., to $35.81 per share).
If this occurs, First Community could voluntarily elect to increase the exchange
ratio, and thus issue more shares of First Community common stock, pursuant to a
formula set forth in the merger agreement. Generally,First Community is not required to
increase the company seekingexchange ratio, however, and it is possible under
6
these circumstances that the CommonWealth board of directors could conclude that
proceeding with the merger at the lower price, rather than exercising
CommonWealth's right to terminate the merger agreement, cannot
itselfwould still be in viola-
3
14
tionthe
best interests of CommonWealth shareholders. Moreover, First Community may
terminate the merger agreement if the average closing price of the First
Community common stock during a specified 20 trading day period decreases by
more than 15% from $31.14 (i.e., to $26.47 per share). If this occurs,
CommonWealth shall have the option of either accepting a decrease in the
exchange ratio, and thus accepting less shares of First Community common stock,
pursuant to a formula set forth in the merger agreement, or agreeing to a
termination of the merger agreement in a way that would allowagreement. As of , 2003, the other party to
terminate.
In addition,closing price
of the First Community common stock was $ .
FIRST COMMUNITY AND COMMONWEALTH MAY AMEND AND EXTEND THE MERGER AGREEMENT (PAGE
)
The parties may amend the merger agreement can be terminated by Bancshares or
Citizens as follows:
- - By Citizens' Board, ifat any time before the share price of Bancshares' common stock is less
than $15.00 per share based onmerger
actually takes place, and may agree to extend the average bid and ask prices quoted on the
Nasdaq at the close of business on the business day prior to the closing date;
or
- - By Bancshares if material adverse information is revealedtime within 10 days of
the delivery by Citizens of certain schedules aswhich any action
required by the Agreement;merger agreement is to take place. No amendment may be made
after the special meeting without obtaining further approval by the shareholders
of CommonWealth.
COMMONWEALTH'S DIRECTORS AND EXECUTIVE OFFICERS HAVE SOME INTERESTS IN THE
MERGER THAT DIFFER FROM YOUR INTERESTS (PAGE )
CommonWealth's directors and executive officers have interests in the
merger as individuals which are in addition to, or different from, their
interests as shareholders of CommonWealth. These interests include, among other
things:
- an employment agreement which First Community Bank has proposed to enter
into with J.E. Causey Davis, president and chief executive officer of
CommonWealth, in connection with the closing of the merger, pursuant to
which Mr. Davis will be appointed Executive Vice President of First
Community Bank and Chief Executive Officer of the Eastern Virginia
Division of First Community Bank for a two-year period (that may be
extended) following the merger for an annual salary of not less than
$150,000;
- By Citizens ifseverance agreements which CommonWealth has entered into with two of its
Board authorizes Citizens' managementexecutive officers which provide for the payment of current salary and
benefits for a period of 24 months following a "change in control" of
CommonWealth and a "termination of employment," each as defined in the
severance agreements;
- the appointment of one non-employee director of CommonWealth as a
director of First Community and the appointment of two non-employee
directors of Commonwealth as directors of First Community Bank; and
- First Community's agreement to accepthonor indemnification obligations of
CommonWealth for a superior
offer. We describeperiod of six years as well as to purchase liability
insurance for CommonWealth's directors and officers for three years
following the types of offers that constitute superior offers under
the heading "Conduct of Citizens and Bancshares' Businesses Priormerger, subject to the Effective Timeterms of the Merger" on page 23; or
- - By Citizens if its Board withdraws, modifies, conditions or refuses to make
its recommendation tomerger agreement.
The board of directors of CommonWealth was aware of the Citizens' shareholders that they vote to approveforegoing interests
and considered them, among other matters, in approving the merger agreement and
plan ofthe merger.
COMMONWEALTH IS PROHIBITED FROM SOLICITING OTHER OFFERS (PAGE )
CommonWealth has agreed that, while the merger is pending, it will not
initiate or, subject to some limited exceptions, engage in discussions with any
third party other than First Community regarding extraordinary transactions such
as a resultmerger, business combination or sale of circumstances relatinga material amount of assets or
capital stock.
THE MERGER WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING (PAGE
)
First Community will use the purchase method of accounting to account for
the merger. The total purchase price will be allocated to the assets acquired
and liabilities assumed, based on their fair values. To the extent that this
purchase price exceeds the fair value of the net tangible assets acquired at the
effective time of the merger,
7
First Community will allocate the excess purchase price to intangible assets,
including goodwill. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," issued in July 2001,
the goodwill resulting from the merger will not be amortized to expense;
however, core deposit and other intangibles with definite useful lives recorded
by First Community in connection with the merger will be amortized to expense in
accordance with the new rules.
SHAREHOLDERS OF FIRST COMMUNITY AND COMMONWEALTH HAVE DIFFERENT RIGHTS (PAGE
)
First Community is a superior offer orNevada corporation subject to Baxter Fentriss' fairness opinion.
We can agreethe provisions of the
General Corporation Law of Nevada, and CommonWealth is a Virginia-chartered
commercial bank subject to amend or supplementthe provisions of the Virginia Stock Corporation Act.
Upon consummation of the merger, shareholders of CommonWealth who receive shares
of First Community common stock in exchange for their shares of CommonWealth
common stock will become shareholders of First Community and their rights as
shareholders of First Community will be governed by First Community's articles
of incorporation and bylaws and the General Corporation Law of Nevada. The
rights of shareholders of First Community differ in certain respects from the
rights of shareholders of CommonWealth.
TERMINATION FEE (PAGE )
CommonWealth must pay First Community a termination fee of $1.0 million if
the merger agreement in any way.
However, we cannot alter the exchange ratio of 1.74 shares of Bancshares' common
stock for each share of Citizens' common stock. Either company can waive any of
the requirements of the other company contained inis terminated under specified circumstances. In addition,
if the merger agreement except
that neither company can waive any required regulatory approvalis terminated by either First Community or CommonWealth
due to a breach of a representation, warranty, covenant or undertaking, the
satisfactionparty committing such breach shall be liable for $350,000 to the other party.
COMMONWEALTH'S SHAREHOLDERS HAVE DISSENTERS' RIGHTS (PAGE )
Under Virginia law, holders of any condition imposedCommonWealth common stock have the right to
dissent from the merger and, if the merger is consummated and all requirements
of Virginia law are satisfied by holders seeking to exercise dissenters' rights,
to receive payment equal to the fair value of their shares of CommonWealth
common stock, determined in the manner set forth in Virginia law. Neither company intendsThe procedures
which must be followed in connection with the exercise of dissenters' rights by
dissenting shareholders are described herein under "-- Dissenters' Rights" and
in Sections 13.1-729 through 13.1-741 of the Virginia Stock Corporation Act, a
copy of which is attached as Annex III to waivethis document. A shareholder seeking
to exercise dissenters' rights must deliver to CommonWealth, before the
condition that it receive a tax opinion. If a tax opinion from its counsel
is not available and Citizens determines to waive this condition, Citizens will
inform you and ask you toshareholder vote again on the merger agreement and plan of merger.
BANCSHARES WILL USE PURCHASE ACCOUNTING TREATMENT. (PAGE 32)
Bancshares expectsat the special meeting, a written
objection to account for the merger usingstating that he or she intends to demand payment for his
or her shares through the purchase methodexercise of accounting. Thishis or her statutory appraisal rights and
must not vote his or her shares in favor of approval of the merger agreement.
Failure to take any required step in connection with the exercise of such rights
may result in termination or waiver thereof.
THE SHARES OF FIRST COMMUNITY COMMON STOCK TO BE ISSUED IN THE MERGER WILL BE
LISTED ON NASDAQ (PAGE )
Pursuant to the merger agreement, the shares of First Community common
stock issued in connection with the merger will be listed on the Nasdaq SmallCap
Market or on any securities exchange on which the First Community common stock
may then be listed. First Community's common stock is expected to commence
trading on the Nasdaq National Market under the same symbol on April 1, 2003.
UNAUDITED COMPARATIVE PER SHARE AND SELECTED FINANCIAL DATA
The following tables show per share financial information reflecting the
merger of First Community and CommonWealth (which is referred to as "pro forma"
information) and summary historical data for each of First Community and
CommonWealth. The pro forma information assumes that the acquisition of
CommonWealth had been completed on the dates and at the beginning of the
earliest periods indicated.
First Community expects that the merger will result in the creation of goodwill relating tocertain one-time
reorganization and restructuring expenses. The pro forma income and dividends
data do not reflect any anticipated reorganization and restructuring expenses
resulting from the merger. This will create charges against future earningsIt is also anticipated that will result from
amortizing goodwill. This accounting method also means that, after the merger Bancshares will provide
the combined company with certain financial benefits that include reduced
operating expenses and opportunities to earn more
8
revenue. The pro forma information does not reflect any of these anticipated
cost savings or benefits. Therefore, the pro forma information, while helpful in
illustrating the financial resultscharacteristics of Citizens,the merger under one set of
assumptions, does not attempt to predict or suggest future results. The pro
forma information also does not attempt to show how the combined company
actually would have performed had First Community and CommonWealth been combined
throughout the indicated periods.
The summary historical financial data of CommonWealth has been derived from
its financial statements which are included herein. The summary historical
financial data of First Community has been derived from historical financial
information that First Community has included in prior filings with the
Securities and Exchange Commission. Historical financial information for First
Community can be found in its reports, from
the date of combination forward.
BANCSHARES COMMON STOCK TRADES ON NASDAQ. (PAGE 5)
Bancshares' common stock tradesAnnual Report on the NASDAQ Level III billboard (under
the symbol "FCBC") where daily bid and ask quotations are available. On June 27,
2000, the last full trading day before public announcement of the proposed
merger, Bancshares' common stock closed at $15.50.
4
15
MARKET PRICE OF BANCSHARES CAPITAL STOCK AND DIVIDENDS.
Bancshares' common stock is traded on the Nasdaq level III billboard under
the symbol "FCBC". The table below shows the high and low bid prices of
Bancshares' common stock and cash dividends paid per shareForm 10-K for the last two
fiscal years plusyear ended
December 31, 2002. See "Where You Can Find More Information," beginning on page
.
When you read the interim period. For Bancshares, amounts reflect a 5-for-4
stock split on March 31, 1998 and 1999.
BANCSHARES
--------------------------------
CASH
HIGH LOW DIVIDEND
------ ------ ------------
Quarter Ended
March 31, 1998............................. $23.68 $19.58 $0.20
June 30, 1998.............................. 34.40 28.80 0.20
September 30, 1998......................... 34.20 24.80 0.20
December 31, 1998.......................... 27.00 21.20 0.24
For year 1998.............................. 34.40 19.58 0.84
Quarter Ended
March 31, 1999............................. 23.20 20.70 0.20
June 30, 1999.............................. 22.90 18.50 0.21
September 30, 1999......................... 23.50 18.88 0.22
December 31, 1999.......................... 21.38 18.00 0.25
For year 1999.............................. 23.50 18.00 0.88
Quarter Ended
March 31, 2000............................. 21.00 17.25 0.22
June 30, 2000.............................. 19.00 15.13 0.23
5
16
MARKET PRICE OF CITIZENS SOUTHERN'S CAPITAL STOCK AND DIVIDENDS
Citizens' stock is not traded on an established exchange and there are no
market makers. We use the prices listed below uponsummary financial information available to us
through discussions with the bank's shareholders. We have not attempted to
determine the prices for every sale made during these periods. As of August 31,
2000, Citizens' common stock was held of record by 348 persons. Historically,
Citizens has never paid dividends.
QUARTER
HIGH LOW END
------- ------- -------
Year Ended December 31, 1998:
First Quarter................................. $25 $25 $25
Second Quarter................................ 30 23 25
Third Quarter................................. 28 25 28
Fourth Quarter................................ -- -- --
Year Ended December 31, 1999:
First Quarter................................. $30 $30 $30
Second Quarter................................ 28 26 28
Third Quarter................................. 30 30 30
Fourth Quarter................................ -- -- --
Six Months Ended June 30, 2000:
First Quarter................................. -- -- --
Second Quarter................................ $32 $32 $32
The table below shows the closing price of Bancshares' common stock on June
27, 2000, the last full trading day before public announcement of the proposed
merger.
Bancshares' historical...................................... $15.50
Citizens pro forma equivalent*.............................. $26.97
*calculated by multiplying Bancshares' per share closing price by the exchange
ratio of 1.74
6
17
SELECTED CONSOLIDATED FINANCIAL DATA
We are providingprovided in the following
information to helptables, you analyze the
financial aspects of the merger. We derived this information from audited
financial statements for 1995 through 1999 and unaudited financial statements
for the six months ended June 30, 2000 and June 30, 1999. This information is
only a summary, and youalso should read itthe more detailed financial information included in
conjunction with ourthe historical financial statements (and related notes) containedinformation for CommonWealth which are set forth herein
and for First Community which are included in the annual and quarterly
reports and other documents that Bancshares has filed with the SEC along with
other information in this document.of First
Community to which we refer. See "Where You Can Find More Information" beginning
on page .
You should not rely on the six-month information as being indicative of
results expected for the entire year or for any future interim period.
FIRST COMMUNITY BANCSHARES, INC. -- HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FORUNAUDITED COMPARATIVE PER SHARE AMOUNTS)DATA FOR THE YEAR ENDED DECEMBER 31, 2002
AS OF / FOR THE SIX
MONTHS ENDED JUNE 30, AS OF / FOR THE YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995FIRST COMMUNITY COMMONWEALTH
COMMON STOCK COMMON STOCK
------------------------ --------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED(1) HISTORICAL EQUIVALENT(2)
---------- ----------- ---------- ---------- ---------- ---------- ------- --------------------
Net interest
income.............income per basic share............... $2.49 $ 23,177$1.28 $
21,302 $ 44,242 $ 43,085 $ 42,944 $38,008 $35,472
Net income........... 8,007 7,952 16,852 13,101 15,094 13,917 12,789
Basic earningsincome per share.............. 0.92 0.91 1.92 1.49 1.71 1.58 1.46
Diluted earningsdiluted share............. 2.48 1.19
Dividends declared per share.............. 0.92 0.91 1.91 1.49 1.71 1.58 1.46
Cash dividends per
share.............. 0.45 0.41 0.88 0.84 0.83 0.73 0.62share............. 1.00 (3) --
Book value per share.............. 12.25 11.60 11.86 11.60 11.08 10.11 9.20
Total assets......... 1,114,953 1,025,270 1,088,162 1,053,988 1,042,304 837,597 780,235
Long-term debt....... 10,207 10,197 10,218 18,176 24,330 15,000 15,000
CITIZENS SOUTHERN BANK, INC. -- HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
AS OF / FOR THE SIX
MONTHS ENDED
JUNE 30, AS OF / FOR THE YEARS ENDED DECEMBER 31,
------------------- ---------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- ------ ------ ------- ------- -------
Net interest income.............. $ 997 $ 724 $1,683 $1,114 $ 889 $ 711 $ 350
Net income(loss)................. 171 52 150 104 215 26 (148)
Basic earnings per share......... 0.68 0.21 0.60 0.42 0.86 0.11 (0.60)
Diluted earnings (loss) per
share.......................... 0.68 0.21 0.60 0.42 0.86 0.11 (0.60)
Cash dividends per share......... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Bookshare..................... 15.42 11.50
Tangible book value per share............. 20.16 19.78 19.77 20.44 20.02 19.17 19.06
Total assets................. 65,396 56,599 64,550 48,313 30,606 21,952 12,604
Long-term debt................... 0 0 0 0 0 0 0share............ 12.63 11.50
Note: Citizens was incorporated on June 12, 1995 and, therefore, the information
the information presented for 1995 is not indicative of a full year of
operations.
7
18
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for our companies on a
historical, pro- ---------------
(1) Pro forma combined and equivalent basis. You should read this
information in conjunction with the historical financial statements (and related
notes) contained in the annual and quarterly reports and other documents
Bancshares has filed with the SEC and the historical financial statements (and
related notes) Citizens provides in this document. See "Where You Can Find More
Information" on page 47.
The pro forma combined information givesamounts give effect to the merger accounted for
as a purchase business combination, assuming that 1.74acquisition of 100% of the
outstanding shares of Bancshares'CommonWealth as though the acquisition had occurred at
the beginning of 2002. Under the terms of the agreement, CommonWealth
shareholders have the right to receive $30.50 in cash or a number of whole
shares of First Community common stock determined by dividing $30.50 by the
average closing price of First Community stock as set forth in the merger
agreement. At least 50%, but no more than 60%, of the CommonWealth stock
will be exchanged for First Community stock. The number of shares used in
the calculations assumes that 60% of the CommonWealth shares outstanding
during the respective period are issued for eachconverted into First Community shares at an
assumed exchange ratio of . The number used in the calculations also takes
into account the dilutive effect of outstanding share of Citizens' common stock.CommonWealth stock options.
Under purchase accounting, CommonWealth's assets and liabilities are
required to be adjusted to their estimated fair values. The estimated fair
values adjustments utilized herein have been estimated by First Community
based upon available information set forth in CommonWealth's notes to its
financial statements included elsewhere herein. First Community cannot be
sure that such estimated fair values represent the fair values that will
ultimately be determined at the acquisition date.
(2) Pro forma equivalentamounts assume funding of Citizens' common share40% of the purchase price at First
Community's current incremental borrowing cost of 1.10%, net of tax.
(3) Pro forma equivalent amounts are calculated by multiplying the pro forma
combined amounts by 1.74. You should not relyan assumed exchange ratio of . This information is
presented to reflect that CommonWealth shareholders who receive shares of
First Community common stock in the merger will, based on the assumed
exchange ratio, receive more or less than one share of First Community
common stock for each share of CommonWealth common stock they own before the
merger.
(4) It is anticipated that the initial dividend rate will be equal to the
current dividend rate of First Community. Accordingly, pro forma information as being indicativecombined
dividends per share of First Community common stock represent the historical
results that we
would have had if we had been combined or the future results that we will
experience after the merger, nor should you rely on the six-month information as
being indicative of results expected for the entire year or for any future
interim period.dividends per common share paid by First Community.
9
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST COMMUNITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF / FOR THE AS OF /AT OR FOR THE YEAR SIX MONTHS ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
--------------- ----- ----- --------------- ---------- ---------- ---------- ----------
Earnings
BALANCE SHEET SUMMARY (AT END OF
PERIOD):
Loans, net of unearned income.... $ 927,621 $ 904,496 $ 811,256 $ 704,096 $ 611,493
Loans held for sale.............. 66,364 65,532 11,570 -- --
Allowance for loan losses........ 14,410 13,952 12,303 11,900 11,404
Securities....................... 341,899 395,891 283,298 290,873 277,210
Total assets..................... 1,524,363 1,478,235 1,218,017 1,088,162 1,053,988
Deposits......................... 1,139,727 1,078,260 899,903 833,258 875,996
Other indebtedness............... 124,357 145,320 138,015 10,218 18,176
Stockholders' equity............. 152,462 133,041 120,682 103,488 101,719
SUMMARY OF EARNINGS:
Total interest income............ $ 96,204 $ 92,829 $ 85,958 $ 76,492 $ 81,213
Total interest expense........... 35,008 42,409 39,379 32,250 38,128
Provision for loan losses........ 4,208 5,134 3,986 2,893 6,250
Non-interest income.............. 20,049 20,275 12,492 10,732 11,182
Non-interest expense............. 42,269 38,025 30,968 27,457 28,752
Income tax expense............... 10,049 8,402 7,054 7,722 6,164
Net income....................... 24,719 19,134 17,063 16,852 13,101
PER SHARE DATA:
Basic earnings per common
share
Basic
Bancshares' historical................ $0.92 $1.92 $1.49 $1.71
Citizens' historical.................. 0.68 0.60 0.42 0.86
Pro forma combined.................... 0.89 1.84 1.42 1.64
Pro forma equivalent of one Citizens'
common share........................ 1.55 3.19 2.47 2.85share.......................... $ 2.49 $ 1.92 $ 1.78 $ 1.75 $ 1.35
Diluted Bancshares' historical................ 0.92 1.91 1.49 1.71
Citizens' historical.................. 0.68 0.60 0.42 0.86
Pro forma combined.................... 0.88 1.82 1.42 1.64
Pro forma equivalent of one Citizens'
common share........................ 1.53 3.17 2.47 2.85
Cash dividends declaredearnings per common
share
Bancshares' historical................ 0.45 0.88 0.84 0.83
Citizens' historical.................. 0.00 0.00 0.00 0.00
Pro forma combined.................... 0.45 0.88 0.84 0.83
Pro forma equivalentshare.......................... 2.48 1.92 1.78 1.75 1.35
Cash dividends................... 1.00 0.89 0.86 0.80 0.76
Book value at year-end........... 15.42 13.39 12.14 10.78 10.55
SELECTED RATIOS:
Return on average assets......... 1.68% 1.49% 1.51% 1.62% 1.24%
Return on average equity......... 17.16 14.80 15.70 16.23 13.02
Dividend payout.................. 40.16 46.35 48.31 45.71 56.30
Average equity to average
assets......................... 9.79 10.05 9.64 9.96 9.50
Risk based capital to risk
adjusted assets................ 13.33 12.10 12.93 13.22 13.25
Leverage ratio................... 8.10 7.93 8.37 8.25 7.37
10
SELECTED FINANCIAL DATA OF COMMONWEALTH
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
BALANCE SHEET SUMMARY (AT END OF PERIOD):
Loans, net of one Citizens'
common share........................ 0.78 1.53 1.46 1.44
Shareholders' equityunearned income............... $107,265 $71,261 $54,156 $34,541 $27,021
Loans held for sale......................... -- -- -- -- --
Allowance for loan losses................... 1,089 710 617 296 374
Securities.................................. 1,142 473 1,302 936 234
Total assets................................ 134,137 87,548 63,906 42,922 38,817
Deposits.................................... 107,292 75,462 56,528 36,085 32,247
Other indebtedness.......................... 17,541 4,300 -- -- --
Stockholders' equity........................ 8,278 7,348 6,789 6,505 6,036
SUMMARY OF EARNINGS:
Total interest income....................... $ 6,532 $ 5,609 $ 4,668 $ 3,105 $ 2,546
Total interest expense...................... 2,060 2,365 1,793 1,036 805
Provision for loan losses................... 487 288 372 130 146
Non-interest income......................... 581 491 366 424 441
Non-interest expense........................ 3,164 2,666 2,486 2,261 1,609
Income tax expense.......................... 480 221 131 -- 1
Net income.................................. 922 560 251 103 425
PER SHARE DATA:
Basic earnings per common share
Bancshares historical................. 12.25 11.86 11.60 11.08
Citizens historical................... 20.16 19.77 20.44 20.02
Pro forma combined.................... 12.37 11.98 11.75 11.29
Pro forma equivalent of one Citizensshare............. $ 1.28 $ 0.78 $ 0.35 $ 0.14 $ 0.73
Diluted earnings per common share........................ 21.53 20.85 20.44 19.65share........... 1.19 0.77 0.35 0.14 0.68
Cash dividends.............................. -- -- -- -- --
Book value at year-end...................... 11.50 10.22 9.44 9.09 9.02
SELECTED RATIOS:
Return on average assets.................... 0.85% 0.74% 0.46% 0.25% 1.12%
Return on average equity.................... 11.82 7.93 3.79 1.61 8.47
Dividend payout............................. -- -- -- -- --
Average equity to average assets............ 7.17 9.34 12.08 15.24 15.56
Risk based capital to risk adjusted
assets.................................... 10.12 12.12 13.36 18.81 20.66
Leverage ratio.............................. 6.45 8.14 12.29 15.32 15.64
811
19
MEETINGRISK FACTORS
Upon completion of the merger, you will receive shares of First Community
common stock and/or cash in exchange for your shares of CommonWealth common
stock. Prior to deciding whether or not to approve the transaction and which
type of consideration to elect, you should be aware of and consider the
following risks and uncertainties that are applicable to the merger and First
Community, in addition to the other information contained in or incorporated by
reference into this document, including the matters addressed under the caption
"Cautionary Statement Concerning Forward-Looking Statements" beginning on page
.
COMMONWEALTH SHAREHOLDERS MAY NOT RECEIVE THE FORM OF CONSIDERATION THEY ELECT
If the merger is completed, each outstanding share of CommonWealth common
stock (subject to certain exceptions) will be converted into the right to
receive $30.50 in cash, without interest, or a number of whole shares of First
Community common stock determined by dividing $30.50 by the average of the
closing price of the First Community common stock during the 20 trading day
period ending on the fifth business day prior to the effective time of the
merger, plus cash in lieu of any fractional share interest. CommonWealth
shareholders will have the opportunity to elect one or the other form of
consideration to be received for all shares of CommonWealth common stock held by
them; however, the right of a CommonWealth shareholder to receive all stock or
all cash for his, her or its shares is limited because the allocation procedures
set forth in the merger agreement are intended to ensure that at least 50% and
not more than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock, with the
remaining outstanding shares of CommonWealth common stock to be converted into
the right to receive cash. If holders of more than 60% or less than 50% of the
outstanding shares of CommonWealth common stock elect to receive First Community
common stock, the elections will be reallocated so that not more than 60% and
not less than 50% of the outstanding shares of CommonWealth common stock are
converted into shares of First Community common stock. Therefore, CommonWealth
shareholders may not receive exactly the form of consideration that they elect
and may receive a pro rata amount of cash and First Community common stock. A
detailed discussion of the consideration provisions of the merger agreement is
set forth under "The Merger -- Merger Consideration and Election and Exchange
Procedures," beginning on page . We recommend that shareholders carefully
read this discussion and the merger agreement attached hereto as Annex I.
THE VALUE OF THE STOCK CONSIDERATION WILL VARY WITH FLUCTUATIONS IN FIRST
COMMUNITY'S STOCK PRICE
Each share of CommonWealth common stock owned by CommonWealth shareholders
will be converted into the right to receive either cash, shares of First
Community common stock, or a mixture of cash and shares of First Community
common stock. The market price of the First Community common stock at the time
former shareholders of CommonWealth receive certificates evidencing shares of
First Community common stock following the election period to be conducted after
the merger is completed may be higher or lower than the market price at the date
of this document, on the date of the special meeting or on the date of the
merger. Changes in the price of the First Community common stock may result from
a variety of factors, including general market and economic conditions, changes
in the business, operations or prospects of First Community and regulatory
considerations. Accordingly, at the time of the special meeting, you will not
know the exact value of the stock consideration to be received or the exchange
ratio used to determine the number of any shares of First Community common stock
to be received when the merger is completed. In addition, there will be a time
period between the completion of the merger and the time at which former
CommonWealth shareholders receiving stock consideration actually receive
certificates evidencing First Community common stock, which will include the 20
day period during which CommonWealth shareholders will be able to make
cash/stock elections. Until stock certificates are received, CommonWealth
shareholders will not be able to sell their First Community shares in the open
market and, thus, will not be able to avoid losses resulting from any decline in
the trading price of the First Community common stock during this period.
12
THE TAX CONSEQUENCES OF THE MERGER FOR COMMONWEALTH SHAREHOLDERS WILL BE
DEPENDENT ON THE MERGER CONSIDERATION RECEIVED
The tax consequences of the merger to you will depend on the merger
consideration received by you. You generally will not recognize any gain or loss
on the conversion of shares of CommonWealth common stock solely into shares of
First Community common stock; however, you generally will be taxed if you
receive cash in exchange for your shares of CommonWealth common stock or instead
of any fractional share of First Community common stock that you would otherwise
be entitled to receive. For a detailed discussion of the tax consequences to you
of the merger, see "The Merger -- Federal Income Tax Consequences" beginning on
page .
DIRECTORS AND OFFICERS OF COMMONWEALTH HAVE INTERESTS IN THE MERGER THAT DIFFER
FROM THE INTERESTS OF SHAREHOLDERS
GENERAL
WeWhen considering the recommendation of CommonWealth's board of directors,
you should be aware that some executive officers and directors of CommonWealth
have interests in the merger that are providingsomewhat different from your interests.
For example, certain executive officers and directors may continue to serve as
executives and directors of First Community and First Community Bank after the
merger. These arrangements may create potential conflicts of interest. These and
certain other additional interests of CommonWealth's directors and executive
officers may cause some of these persons to view the proposed transaction
differently than you view it, as a shareholder. See "The Merger -- Interests of
Certain Persons in the Merger" beginning on page .
FIRST COMMUNITY MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER
The success of the merger will depend on, among other things, First
Community's ability to realize anticipated cost savings and to combine the
businesses of First Community Bank and CommonWealth in a manner that does not
materially disrupt the existing customer relationships of CommonWealth or result
in decreased revenues resulting from any loss of customers and that permits
growth opportunities to occur. If First Community is not able to successfully
achieve these objectives, the anticipated benefits of the merger may not be
realized fully or at all or may take longer to realize than expected.
THE MARKET PRICE OF SHARES OF FIRST COMMUNITY COMMON STOCK MAY BE AFFECTED BY
FACTORS WHICH ARE DIFFERENT FROM THOSE AFFECTING SHARES OF COMMONWEALTH COMMON
STOCK
You may acquire shares of First Community common stock in connection with
the merger. Some of First Community's current businesses and markets differ from
those of CommonWealth and, accordingly, the results of operations of First
Community after the merger may be affected by factors different from those
currently affecting the results of operations of CommonWealth. For a discussion
of the businesses of First Community and CommonWealth and of certain factors to
consider in connection with those businesses, see "Information About
CommonWealth," beginning on page , "Information About First Community,"
beginning on page
and the documents incorporated by reference into this proxy statement/prospectusdocument and referred to
Citizens' shareholdersunder "Where You Can Find More Information" beginning on page .
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document and the documents incorporated herein by reference contain
forward-looking statements by First Community, First Community Bank and
CommonWealth within the meaning of record asthe federal securities laws. These
forward-looking statements include information about the financial condition,
results of August 18, 2000, alongoperations and businesses of First Community and CommonWealth,
including statements relating to the estimated cost savings that will be
realized from the merger, the estimated impact on First Community's earnings per
share of the merger and the restructuring charges expected to be incurred in
connection with the merger. This document also includes forward-looking
statements about the consummation and anticipated timing of the merger, the
exchange ratio and the tax-free nature of the merger. In addition, any of the
words "believes," "expects," "anticipates," "estimates," "plans," "projects,"
"predicts" and similar expressions indicate forward-looking statements.
13
These forward-looking statements involve certain risks and uncertainties. Actual
results may differ materially from those contemplated by the forward-looking
statements due to, among others, the following factors:
- estimated cost savings from the merger or other proposed mergers may not
be fully realized within the expected time frame;
- deposit attrition, customer loss or revenue loss following the merger or
other proposed mergers may be greater than expected;
- competitive pressure among depository and other financial institutions
may increase significantly;
- costs or difficulties related to the integration of the businesses of
First Community and CommonWealth may be greater than expected;
- changes in the interest rate environment may reduce interest margins;
- general economic or business conditions, either nationally or in the
states or regions in which First Community does business, may be less
favorable than expected, resulting in, among other things, a
formdeterioration in credit quality or a reduced demand for credit;
- legislation or changes in regulatory requirements, including changes in
accounting standards, may adversely affect the businesses in which First
Community is engaged;
- adverse changes may occur in the securities markets; and
- competitors of proxyFirst Community may have greater financial resources and
develop products and technology that enable those competitors to compete
more successfully than First Community.
Management of First Community and CommonWealth each believes that the
Citizens'
Boardforward-looking statements about their respective company are reasonable;
however, you should not place undue reliance on them. Forward-looking statements
are not guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of First Community
following completion of the merger may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results and values are beyond First Community's and CommonWealth's ability to
control or predict.
GENERAL INFORMATION
This document constitutes a proxy statement and is soliciting for usebeing furnished to all
record holders of CommonWealth common stock in connection with the solicitation
of proxies by the board of directors of CommonWealth to be used at a special
meeting of shareholders of Citizens. We
have scheduledCommonWealth to be held on , , 2003
and any adjournment or postponement of the special meeting. The purposes of the
special meeting for October , 2000 at 10:00 a.m., Eastern Time, at
111 Citizens Drive in Beckley, West Virginia. At the meeting, Citizens
shareholders willare to consider and vote upon a proposal to approve the merger
agreement among First Community, First Community Bank and related plan
where Citizens would mergeCommonWealth, which
provides, among other things, for the merger of CommonWealth with and into FCB. Proxies mayFirst
Community Bank, and a proposal to adjourn the special meeting to the extent
necessary to solicit additional votes on the merger agreement.
This document also constitutes a prospectus of First Community relating to
the First Community common stock to be votedissued to holders of CommonWealth common
stock upon completion of the merger. Based on (i) the number of shares of
CommonWealth common stock outstanding on the record date for the special
meeting, (ii) the number of shares of CommonWealth common stock issuable upon
the exercise of employee stock options outstanding on such date, (iii) an
assumed exchange ratio of (which assumes an average share price of
$ for First Community common stock) and (iv) the conversion of 60% of the
outstanding shares of CommonWealth common stock into shares of First Community
common stock, a maximum of approximately shares of First Community common
stock will be issuable upon completion of the merger. The actual total number of
shares of First Community common stock to be issued as well as the actual amount
of cash to be paid in the merger will depend on the number of shares of
CommonWealth common stock outstanding at the time of the merger and the actual
exchange ratio.
14
First Community has supplied all information contained or incorporated by
reference herein relating to First Community, and CommonWealth has supplied all
such information relating to CommonWealth.
THE SPECIAL MEETING
TIME, DATE AND PLACE
A special meeting of shareholders of CommonWealth will be held at
: .m., local time, on , , 2003 at , ,
Richmond, Virginia.
MATTERS TO BE CONSIDERED
The purposes of the special meeting are to consider and approve the merger
agreement, to consider and approve a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies if there are not sufficient
votes at the time of the special meeting to approve the merger agreement and to
consider any other matters that may be properly come before the meeting, if any,submitted for a vote at the
discretionspecial meeting. At this time, the CommonWealth board of the proxy holders. The Citizens' Board knowsdirectors is unaware of
noany matters, other matters except those
incidental to the conduct of the meeting. The agreement and plan of
reorganization is attachedthan as Appendix A.
Whether or not you expect to attend the meeting, your vote is important.
Please complete, date and sign the accompanying proxy and return it to Citizensset forth in the enclosed postage prepaid envelope.preceding sentence, that may be
presented for action at the special meeting.
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE
VOTING RIGHTS AND VOTE REQUIRED
Only the holdersThe close of Citizens' common stockbusiness on , 2003 has been fixed by CommonWealth as
the record date will receivefor the determination of holders of CommonWealth common stock
entitled to notice of and mayto vote at the special meeting and any adjournment or
postponement of the special meeting. OnAt the close of business on the record
date, there were 250,000
shares of Citizens'CommonWealth common stock outstanding held by approximately 322 holders
of record (representing approximately 348 beneficial holders).and
entitled to vote. Each share of Citizens'CommonWealth common stock is entitledentitles the holder to
one vote on each matter submitted at the meeting.
Approval of the merger agreement and related plan requires the affirmative
vote of the holders of at least a majority of the outstanding shares of
Citizens' common stock. If you do not vote your shares, it will have the same
effect as a vote "against" the merger agreement and related plan of merger.
The proposal to adopt the merger agreement and related plan is a
"nondiscretionary" item, meaning that brokerage firms may not vote shares in
their discretionspecial meeting on behalf of a client if the client has not given voting
instructions. Accordingly, shares held in street name that have been designated
by brokers on proxy cards as not voted with respect to that proposal ("broker
non-vote shares") will not be counted as votes cast on that proposal. Shares
with respect to which proxies have been marked as abstentions also will not be
counted as votes cast on that proposal. In either case the result will be
equivalent to a "NO" vote by the beneficial owners of those shares.
Action on otherall matters if any, that are properly presented at the
meeting
for consideration will be approved if a quorum is present andmeeting.
HOW TO VOTE YOUR SHARES
Shareholders of record may vote by mail or by attending the votes in favor
of the matter constitute a majority of the shares represented at thespecial meeting
and entitled to vote. A quorum will be present if a majority of the outstanding
shares of Citizens' common stock entitledvoting in person. If you choose to vote is represented atby mail, simply mark the meeting
in person or by proxy. Shares with respect to which proxies have been marked as
abstentions and broker non-vote shares will be treated as shares present for
purposes of determining whether a quorum is present. The Citizens' Board is not
aware of any other business to be presented at the meeting other than matters
incidental to the conduct of the meeting.
Because approval of the merger agreement and related plan requires the
affirmative vote of the holders of at least a majority of the outstanding shares
of Citizens' common stock, abstentions and broker non-vote shares will have the
same effect as votes against the merger. Accordingly, the Citizens' Board urges
you to complete,enclosed
proxy card, date and sign the accompanying proxyit, and return it in the enclosed postage prepaid envelope.
9
20
You should not sendpaid envelope
provided.
If your shares are held in the name of a bank, broker or other holder of
record, you will receive instructions from the holder of record that you must
follow in order for your stock certificates with your proxy cards. See
"The Merger -- Exchangeshares to be voted. Also, please note that if the
holder of Citizens' Stock Certificates" on page 19.
If you do not vote for the merger and you properly exercise rights to
dissent to the merger and to demand the "fair value"record of your shares is a broker, bank or other nominee and you wish
to vote at the special meeting, you must bring a letter from the broker, bank or
other nominee confirming that you are the beneficial owner of Citizens'the shares.
Any shareholder executing a proxy may revoke it at any time before it is
voted by:
- delivering to CommonWealth prior to the special meeting a written notice
of revocation addressed to William W. Ranson, Executive Vice President,
Treasurer and Chief Financial Officer, The CommonWealth Bank, 900 North
Parham Road, Richmond, Virginia 23229;
- delivering to CommonWealth prior to the special meeting a properly
executed proxy with a later date; or
- attending the special meeting and voting in person.
Attendance at the special meeting will not, in and of itself, constitute
revocation of a proxy.
Each proxy returned to CommonWealth (and not revoked) by a holder of
CommonWealth common stock you will havebe voted in accordance with the right to obtain a cash payment equal to the
"fair value" of your shares. See "The Merger -- Rights of Dissenting
Shareholders" on page 27.
As of the record date, the directors and executive officers of Citizens and
their affiliates beneficially owned a total of 93,785 shares, or 37.51 percent,
of the issued and outstanding shares of Citizens' common stock. We expect these
individuals to vote their shares in favor of the merger, absent a change in
circumstances, including receipt of a "superior offer." The directors and
executive officers of Bancshares and its affiliates and subsidiaries do not
beneficially own any shares of Citizens' common stock.
VOTING AND REVOCATION OF PROXIES
The proxies will vote the shares of Citizens' common stock represented by
properly completed proxies received at or before the time for the meeting (or
any adjournment) as directed by the respective shareholders unless the proxies
are revoked as described below.instructions
indicated thereon. If no instructions are given, executed proxiesindicated, the proxy will be voted
"FOR" approval of the merger agreement and related plan of merger.
Proxies marked "FOR" approval of the merger agreement and plan of merger and
executed but unmarked proxies will be voted at the discretion of the proxy
holders named therein as to any proposed adjournment of the meeting. Proxies,
which are voted "AGAINST" approval of the Plan, will not be voted in favor of
any motionproposal to adjourn the
special meeting if necessary to solicit more votes in favorpermit further solicitation of proxies on the
merger.proposal to approve the merger agreement.
15
At this time, the CommonWealth board of directors is unaware of any
matters, other than set forth above, that may be presented for action at the
special meeting. If any other matters are properly presented, however, the persons
named as proxies will vote in accordance with their judgment with respect to
such matters.
VOTE REQUIRED
A quorum, consisting of the holders of a majority of the issued and
outstanding shares of CommonWealth common stock, must be present in person or by
proxy before any action may be taken at the meeting and voted upon, the
proxies solicited herebyspecial meeting. Abstentions will be
votedtreated as shares that are present for purposes of determining the presence of a
quorum but will not be counted in the voting on those mattersa proposal.
The affirmative vote of the holders of more than two-thirds of the
outstanding shares of CommonWealth common stock, voting in person or by proxy,
is necessary to approve the merger agreement on behalf of CommonWealth. The
affirmative vote of a majority of the votes cast on the matter at the discretionspecial
meeting is required to approve the proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies on the proxy holders named therein.
Your attendanceproposal to approve
the merger agreement and any other matter properly submitted to shareholders for
their consideration at the special meeting.
Any "broker non-votes" submitted by brokers or nominees in connection with
the special meeting will not automatically revoke your proxy.
Yoube counted for purposes of determining the number
of votes cast on a proposal but will be treated as present for quorum purposes.
"Broker non-votes" are shares held by brokers or nominees as to which voting
instructions have not been received from the beneficial owners or the persons
entitled to vote those shares and the broker or nominee does not have
discretionary voting power under the applicable New York Stock Exchange rules.
Under these rules, the proposals to approve the merger agreement and to adjourn
the special meeting are not items on which brokerage firms may however, revokevote in their
discretion on behalf of their clients if such clients have not furnished voting
instructions within ten days of the special meeting. Because the proposal to
approve the merger agreement is required to be approved by the holders of more
than two-thirds of the outstanding shares of CommonWealth common stock,
abstentions and broker "non-votes" will have the same effect as a proxy any time before its exercise by: notifyingvote against
the Corporate secretaryproposal to approve the merger agreement at the special meeting. And for the
same reason, the failure of Citizens in writinga CommonWealth shareholder to vote by proxy or in
person at Citizens principalthe special meeting will have the effect of a vote against this
proposal. Because of the vote required for the proposal to adjourn the special
meeting, abstentions and broker "non-votes" will have no effect on this
proposal.
The directors and executive offices; submitting a later-dated proxyofficers of CommonWealth, who collectively own
approximately % of the outstanding shares of CommonWealth common stock as
of the record date for the special meeting, have entered into shareholder
agreements with First Community pursuant to which they have agreed to vote all
of their shares in favor of the Corporate secretarymerger agreement. See "Certain Beneficial Owners
of Citizens at Citizens principal executive offices;CommonWealth Common Stock" beginning on page and "The Merger --
Shareholder Agreements" on page .
As of the close of business on the record date for the special meeting,
First Community beneficially owned 3,500 shares or attending0.5% of the meeting and
withdrawingoutstanding
shares of CommonWealth common stock. First Community intends to vote such shares
in favor of the proxy before it is voted.merger agreement.
SOLICITATION OF PROXIES
BancsharesCommonWealth will pay for the costs of mailing this document to its
shareholders, as well as all other costs incurred by it in connection with the
solicitation of proxies from its shareholders on behalf of its board of
directors, except that First Community and CommonWealth will share equally the
cost of printing this proxy
statement/prospectus, and will pay all other costs of soliciting proxies.
Directors,document. In addition to solicitation by mail, the
directors, officers and other employees of Citizens orCommonWealth and its subsidiaries may
solicit proxies personally,from shareholders of CommonWealth in person or by telephone,
ortelegram, facsimile or otherwise. None of
these peopleother electronic methods without compensation other than
reimbursement for their actual expenses.
Arrangements also will receive any special compensation for solicitation activities.
Citizens will arrangebe made with brokerage firms and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such brokerage firmspersons, and otherCommonWealth will
reimburse such custodians, nominees and fiduciaries and Citizens will reimburse these record holders for their reasonable
out-of-pocket expenses.
RECOMMENDATIONexpenses in connection therewith.
16
RECOMMENDATIONS OF THE CITIZENS'COMMONWEALTH BOARD OF DIRECTORS
The Citizens' BoardCommonWealth board of directors has unanimously approved the merger
agreement and the related plan
andtransactions contemplated by the merger agreement. Based on
CommonWealth's reasons for the merger described in this document, including
Baxter, Fentriss & Co.'s fairness opinion, the board of directors of
CommonWealth believes that the proposed transactionmerger is fair to and in the best interests of CitizensCommonWealth's
shareholders and its shareholders. The Citizens' Board unanimously recommends that Citizens' shareholdersyou vote "FOR" approval of the
plan of merger.merger agreement. See "The Merger -- Background of andCommonWealth's Reasons for the Merger"
beginning on page (11). 10
21The CommonWealth board of directors also unanimously
recommends that you vote "FOR" approval of the proposal to adjourn the special
meeting if necessary to solicit additional proxies to vote in favor of the
merger agreement.
THE MERGER
(PROPOSAL ONE)
The following information describes the material aspects of the merger
agreement and the merger. This description isdoes not purport to be complete and
is qualified in its entirety by reference to the appendicesannexes to this proxy statement/prospectus,document,
including the Agreement
and Plan of Reorganization, whichmerger agreement. You are attachedurged to this proxy
statement/prospectus as Appendix A and incorporated herein by reference. We urge
all shareholders tocarefully read the appendicesannexes in
their entirety.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF MERGER
On June 22, 1999, Citizens' Executive Committee discussed various changes
taking placeGENERAL
Under the terms and conditions set forth in the bankingmerger agreement,
CommonWealth will be merged with and financial industries. The increased dependence
and cost associated with automation,into First Community Bank. At the need to introduce specialized products
and services, increased competition from larger financial institutions and
increased competition from non-bank financial providers prompted the Executive
Committee to address Citizens' alternatives. Considerable discussion was held
regarding various competitive and operational changes affecting Citizens. As a
resulteffective
time of the discussions, onemerger, each share of common stock of CommonWealth, par value $4.00
per share, outstanding immediately before the effective time of the alternativesmerger
(except as provided below) will, by virtue of the committee identified wasmerger and without any action
on the possibilitypart of affiliating with a similar sizeCommonWealth shareholder, be converted into the right to
receive $30.50 in cash, without interest, or larger financial
institution.
The Boarda number of Directors at its July 13, 1999, meeting considered the matter
previously discussedwhole shares of First
Community common stock determined by dividing $30.50 by the Executive Committee. Management andaverage closing
price of the Board
engaged in discussions relatingFirst Community common stock during the 20 trading day period
ending on the fifth business day prior to the futureeffective time of Citizens and the impactmerger, plus
cash in lieu of Citizens remaining independent or affiliating with another financial
institution. Consideration was givenany fractional share interest. CommonWealth shareholders will
have the opportunity to elect the lackform of shareholder dividends,
liquidity concerns for Citizens' common stock, price multiples that mightconsideration to be received for Citizens'all
shares of CommonWealth common stock held by them, subject to allocation
procedures set forth in the potential formerger agreement which are intended to ensure that
at least 50% and not more than 60% of the shareholdersoutstanding shares of CommonWealth
common stock will be converted into the right to receive First Community common
stock and the remaining outstanding shares of CommonWealth common stock will be
converted into the right to receive cash. Shares of CommonWealth common stock
held by CommonWealth shareholders who have elected dissenters' rights will not
be converted into the right to receive the merger consideration upon
consummation of the merger.
BACKGROUND OF THE MERGER
In the summer of 2001, CommonWealth was advised by Cherry, Bekaert &
Holland, L.L.P., CommonWealth's independent auditors, to consider enlisting the
services of a dividendfinancial advisory firm. This advice came after CommonWealth had
received several unsolicited preliminary expressions of interest in combining
the bank with other institutions during 2000 and the first half of 2001, which
CommonWealth had elected not to pursue. In November 2001, Baxter, Fentriss & Co.
was retained as wellfinancial advisor to CommonWealth.
On March 12, 2002, Baxter, Fentriss & Co. presented to the board of
directors of CommonWealth a study of the economic and competitive conditions
regarding the banking industry in Richmond, Virginia, CommonWealth's market
area. Baxter, Fentriss & Co. noted the high growth rate of CommonWealth as
compared to other matters. Followingsimilarly situated community banks in the Richmond area, and
CommonWealth's need in the near future to raise a considerable discussion,amount of
additional capital in order to sustain and build on such growth. Baxter,
Fentriss & Co. also advised the board of directors that another way to increase
shareholder value would be through a motion was madebusiness combination transaction, and seconded appointingthat
a possible affiliation with another banking organization through such a
transaction should be considered by the board of directors in the future as a
strategic alternative to its independent growth plans.
17
The CommonWealth board of directors, at its meeting on May 23, 2002,
appointed a committee of two directors, Harold V. Groome, Jr. and Franklin P.
Hall, to explore the affiliation and merger opportunities available to
Citizens.CommonWealth. On June 14, 2002, this committee directed Baxter, Fentriss & Co.
to assist in identifying financial institutions that would be interested in a
business combination with CommonWealth. At the direction of the committee,
Baxter, Fentriss & Co. initiated confidential discussions with numerous
financial institutions regarding their interest in merging with CommonWealth.
First Community was one of the financial institutions contacted by Baxter,
Fentriss & Co. First Community reviewed certain financial and other material on
CommonWealth prepared by Baxter, Fentriss & Co. and determined that a potential
transaction with CommonWealth would be of interest. First Community's senior
management then proceeded to prepare various financial analyses regarding a
potential transaction with CommonWealth. On October 10, 2002, First Community
presented to Baxter, Fentriss & Co. a preliminary indication of interest to
merge CommonWealth with and into First Community Bank.
On November 13, 2002, representatives of Baxter, Fentriss & Co. met with
Messrs. Groome and Hall, and submitted a presentation outlining the results of
Baxter, Fentriss & Co.'s confidential discussions with a number of financial
institutions, including First Community, identifying those institutions
interested in a potential merger transaction with CommonWealth. After thorough
discussion about the institutions and their interest in CommonWealth, the
committee instructed Baxter, Fentriss & Co. to contact the principal officers of
certain of the institutions to clarify any outstanding remaining issues and
report to CommonWealth's board of directors concerning all acquisition
proposals. Baxter, Fentriss & Co. contacted the financial institutions shortly
after the meeting with CommonWealth's committee.
On November 18, 2002, the CommonWealth board of directors held a meeting at
which representatives of Baxter, Fentriss & Co. summarized all initial merger
proposals that had been received. The committee
metCommonWealth board of directors considered
the proposals from each institution and evaluated them on several occasions to discuss the planlevel and form of
consideration proposed, the specificity of the acquisition consideration
proposed, the context of the financial institution making the proposal and the
opportunities to affiliate.
Duringexpected future operation of CommonWealth. After deliberating on the December 14, 1999, Boardterms of
Directors meeting, further
discussion regardingeach proposal, the strategic direction that Citizens should follow
occurred. Following considerable discussion, a decision was made to compile a
listCommonWealth board of consulting firms to assist the Board in determining the best
opportunities to enhance shareholder value and that the Executive Committee
narrow the choice to two firms which would make presentations to the Board of
Directors.
During the January 6, 2000, Board of Directors meeting, the Directors
received presentations by Jim Baxter, representing Baxter Fentriss and a
representative of the other firm. Each presentation discussed the options
available to Citizens and afforded the Directors an opportunity to ask
questions. Following the presentations, it wasdirectors determined that the Boardmerger
proposal offered by First Community was sufficient enough to warrant further
discussions. The CommonWealth board of Directors should meet on January 11, 2000, to further discuss the presentations.
During the January 11, 2000, Board of Directors meeting, discussions were
held regarding the presentations of the consulting firms. A negotiation
committee was formeddirectors directed J.E. Causey Davis,
CommonWealth's President, and given the authority to negotiate and sign a proposal
contract with Baxter Fentriss.
The Board of Directors met on February 8, 2000, and was informed of the
changes and the signing of the contract with Baxter Fentriss. Upon motion duly
made and seconded, the amended agreement between Baxter, Fentriss and Citizens
dated January 10, 2000 was ratified as presented.
11
22
During February 2000, a memorandum of offering was prepared. During March
2000, 36 potential acquirers were identified regarding the possible affiliation
with Citizens, and fifteen received the confidential memorandum of offering.
Baxter Fentriss received four separate non-binding proposals on April 27, 2000,
and presented them to the Board of Directors on May 2, 2000.
The Board of Directors reviewed the four non-binding proposals regarding
the acquisition of or affiliation with Citizens Baxter Fentriss received. Based
on the review and analysis presented to the Board in detail including the
performance, future growth potential and other factors of each institution,
Baxter Fentriss was instructed to contact Bancshares to narrow the range of its
offer so as to state the exact number of shares being offered. Mr. Baxter
indicated that he would obtain within the following two weeks a specific offer
from Bancshares. It was the consensus of the Directors to authorize Baxter
Fentriss& Co. to proceed with discussionsdue
diligence efforts and for Baxter, Fentriss & Co. to contact First Community
about negotiating a definitive merger agreement.
On November, 19, 2002, after First Community's senior management presented
its financial analyses on a merger transaction involving CommonWealth, First
Community's executive committee instructed senior management to proceed with Bancshares concerninga
merger proposal with respect to CommonWealth. On November 27, 2002, First
Community's counsel, Kelley Drye & Warren LLP, delivered to CommonWealth and its
proposaloutside counsel, LeClair Ryan, A Professional Corporation, a draft merger
agreement and to report the results of these discussions to the Board of Directors.
The Board of Directors met on May 9, 2000other related documents. During December 2002 and January 2003,
CommonWealth and First Community, their respective counsels and Baxter, Fentriss
advised that
it had obtained from Bancshares a specific offer for& Co. negotiated the purchaseterms of Citizens.
Upon motion madethe merger agreement and duly seconded,related documents. The
CommonWealth board of directors met on December 19, 2002 and January 3 and 7,
2003, to review the proposed merger terms and draft merger agreement. At the
December 19 meeting, representatives of Baxter, Fentriss was authorized& Co. and LeClair Ryan
responded to go forward
with further negotiations with Bancshares.
Duringquestions from the June 13, 2000 BoardCommonWealth board of Directors meeting, Baxter Fentriss
updated the Directors as to its negotiations with Bancshares. After performing
due diligence, Bancshares finalized its offer to exchange 435,000 shares of
Bancshares common stock in exchange for the outstanding shares of Citizens, or
an exchange ratio of 1.74.
Counsel for Citizens presented a review of the proposed Agreement and Plan
of Reorganization and his suggested changes, as well as a review of the
regulatory approval process. Baxter Fentriss informed Citizens' Board of
Directors of a news release whereby a management change had taken place at
Bancshares. It was the consensus of the Board of Directors of Citizens to wait
until Wednesday, June 21, 2000, to respond to the proposal of Bancsharesdirectors concerning the
proposed merger. This delay would allow Citizensmerger and the draft merger agreement and related documents. First
Community and CommonWealth also conducted due diligence on their respective
institutions during December 2002 and January 2003.
On January 24, 2003, the CommonWealth board of directors held a meeting at
which Baxter, Fentriss & Co. and LeClair Ryan updated the directors as to determine the
effect, if any,negotiations with First Community. Baxter, Fentriss & Co. informed the board of
directors that the management change would have on the market value of
Bancshares and would allow counsel to finalize the language in the Agreement.
At the meeting of the Board of Directors on June 21, 2000, Citizens'
management reported onFirst Community had completed its due diligence of Bancshares. For the purpose of
issuingand had
reaffirmed its fairness opinion,earlier merger consideration proposal. Baxter, Fentriss also presented the findings of& Co.
then delivered its due diligence efforts. Baxter Fentriss provided an overview of the financial
condition of Bancshares and indicatedopinion that the merger consideration in the form as proposed
exchange ratioby First Community was fair to Citizens' shareholders.
In addition, the BoardCommonWealth shareholders from a financial point
of view. Representatives of LeClair Ryan then reviewed the changesmerger agreement and
related agreements that had been negotiated with First Community. Throughout the
presentations, representatives of
18
Baxter, Fentriss & Co. and LeClair Ryan responded to questions and comments from
the CommonWealth board of directors.
Following a thorough discussion of the terms of the merger agreement, the
structure of the transaction and other items related to the agreement as approved by
legal counsel. After discussions and several questions, and a review of the
resolution as submitted by Citizens' legal counsel authorizing the officers of
the corporation to execute the Agreement, a motion was made and seconded
approving the resolution as presented subject to changes as executive officers
and legal counsel recommended.
At the Executive Committee meeting on June 26, 2000, the Committee reviewed
a memorandum from counsel to Citizens. The memorandum outlined changes made to
the Agreement. After an extensive conversation between the members present at
the meeting, it wasproposed merger,
each CommonWealth director determined that, based on his independent judgment,
the final changes to the Agreement weremerger was in the best interests of theCommonWealth and its shareholders,
of Citizens. Subject to counsel's review
of the final changes, the Executive
12
23
Committee recommended that the President proceed on June 27, 2000 to sign the
Agreement during the regularly scheduled Executive Committee meeting.
During the June 27, 2000 regularly scheduled Executive Committee meeting of
Citizens, representatives of Bancshares and Citizens executed the Agreement.
Bancshares and Citizens publicly announcedapproved the proposed merger afteragreement, subject to the closesatisfactory finalization
of businessthe merger documents, and authorized Mr. Hall, as chairman of the board of
CommonWealth, to execute and deliver the merger documents on Junebehalf of
CommonWealth.
On January 27, 2000.
CITIZENS'2003, representatives of First Community and CommonWealth
met and the parties entered into the merger agreement. After the stock markets
closed on January 27, 2003, First Community and CommonWealth issued a joint
press release publicly announcing the proposed merger. On February 25, 2003,
First Community and CommonWealth entered into an amendment to the merger
agreement. As amended, the merger agreement will permit CommonWealth
shareholders to elect to have up to 50% of their outstanding shares converted
into the right to receive cash, instead of 40% as set forth in the original
agreement.
COMMONWEALTH'S REASONS FOR THE MERGER
The terms of the merger agreement, including the exchange ratio andconsideration to the amount of Bancshares' stockpaid
to be received by Citizens'CommonWealth shareholders, were the result of arm's-length negotiations between representativesarms length negotiations. In
evaluating the proposal to affiliate with First Community, the CommonWealth
board of Bancsharesdirectors considered a number of factors, including the following:
- Information regarding the business, operations, earnings, financial
condition, management, earnings and Citizens. Amongprospects of CommonWealth and First
Community.
- The per share value of the factors considered by the Board of Directors of Citizens in
decidingmerger consideration to approve and recommendCommonWealth's
shareholders.
- The belief that the terms of the merger were:
-are fair to and in the valuebest
interest of the Bancshares' commonCommonWealth shareholders.
- The tax-free nature of the stock to be received by Citizens'
shareholders based on the exchange ratio in relation to the market value,
book value, earnings per share and dividend rates of Citizens' common
stock,
- information concerning the financial condition, results of operations,
capital levels, asset quality and prospects of Citizens,
- industry and economic conditions,
- the impactportion of the merger consideration to
CommonWealth shareholders.
- The fact that First Community common stock is publicly traded on Nasdaq,
therefore offering a more liquid investment for CommonWealth
shareholders.
- The historical dividends paid by First Community to its shareholders.
- First Community's historical record with respect to the depositors, employees customers and the
communities served by Citizens through expanded commercial, consumer,
trust and banking products and services,of the banks it has acquired.
- theThe opinion of Citizens' financial advisor as toBaxter, Fentriss & Co. that the fairness of the
exchange ratiomerger consideration is
fair, from a financial point of view, to the holders of Citizens'
common stock,
- the general structureCommonWealth's shareholders.
The above discussion of the transactioninformation and factors considered by the
compatibilityCommonWealth board of management and business philosophy,
-directors is not intended to be exhaustive, but includes
the likelihoodmaterial factors the CommonWealth board of receiving the requisite regulatory approvals in a
timely manner, and
- the ability of the combined enterprise to compete in relevant banking and
non-banking markets.directors considered. In makingreaching
its determination to approve and recommend the Boardmerger, the CommonWealth board of
Directors of Citizensdirectors did not ascribeassign any relative or specific weights to the foregoing
factors, which it considered. Your Board of
Directors unanimously recommends that you vote "FOR" the merger agreement and plan of merger.
BANCSHARES'individual directors may have given differing weights to different
factors.
THE COMMONWEALTH BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF COMMONWEALTH AND ITS SHAREHOLDERS. ACCORDINGLY THE COMMONWEALTH
BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
FIRST COMMUNITY'S REASONS FOR THE MERGER
In Bancshares consideration ofFirst Community entered into the merger agreement with CommonWealth
because, among other things, First Community believes the merger is consistent
with its management analyzed not onlyexpansion strategy in Eastern Virginia. The acquisition will expand
First Community Bank's commercial banking operations to the financial characteristics of the transaction but also considered various
organizational and operational criteria including the management structure and
philosophy of Citizens, employer and employee relations operational flow within
the geographicRichmond, Virginia
market area served by Citizens, and
the impact on19
complement its existing market
areas bordering those served by Citizens that aremortgage banking and brokerage network which is
currently served by FCB as
well as shareholder perception of the transaction.
13
24
Various financial characteristics of the transaction were evaluated based
upon Citizens' audited financial statements for the year ended December 31, 1999
as well as information provided by Baxter Fentriss. Pricing models were used to
evaluate the transaction fromheadquartered in Richmond. The CommonWealth franchise is a financial perspective and based upon the
characteristics of the transaction, it was determined that Citizens would be a
good affiliation candidate and deserved further study.
Citizens serves customers in the Beckley, West Virginia market, an area
that currently borders three of the existing market areas presently served by
FCB. The addition of Citizens would not only create annatural
extension of the service
area to FCB's existing customer base but could be added with limited cost since
it is within FCB's present strategic market area. Additionally, Citizens brings
with it the added depth of a knowledgeable management team experiencedFirst Community's current operations in retail
banking which can operate with the same degree of personal service and
autonomous operations as presently deployed throughout Bancshares.
Beckley-Raleigh County has become a growing area within West Virginia due
to several conditions which, when factored together, have given Citizens the
opportunity to take advantage of and rapidly expand its asset base since its
inception in 1995. Several of the industries to which the Beckley, West Virginia
area can greatly attribute its success include tourism, wood processing and
timber. Added to the economic support of growing industries, the Beckley, West
Virginia area is also the crossroads of two major highways (Interstates I-77 and
I-64), which also helps fuel the retail economy and provides a good
infrastructure for future development.
After careful consideration of the facts and circumstances surrounding the
proposed merger, it was decided that Citizens was a very good fit to Bancshares'
organizational goals and philosophies and was positioned in an area logistically
convenient to the operations of FCB.
None of the above information has been updated since the date of the merger
agreement. There can be no certainty that the results described in the above
analysis will be achieved or that actual results will not vary materially from
the estimated results. For more information concerning the factors that could
affect actual results, see "A Warning About Forward-Looking Information" on page
iii.Virginia.
OPINION OF COMMONWEALTH'S FINANCIAL ADVISOR
Baxter, Fentriss & Co. has acted as financial advisor to CitizensCommonWealth in
connection with the merger. Baxter, Fentriss & Co. assisted CitizensCommonWealth in
identifying and negotiating with First Community and other prospective
acquirers.acquirors. Baxter, Fentriss & Co. delivered to CitizensCommonWealth its opinion dated
June 27, 2000,January 24, 2003, that on the basis of matters referred to therein,herein, the
exchange ratioconsideration to be received by shareholders of Citizens' common stockCommonWealth is fair from a
financial point of view. Baxter, Fentriss & Co. has confirmed its January 24th
opinion by delivering to the board of directors of CommonWealth a written
opinion dated the date of this document. In rendering its opinion, Baxter,
Fentriss & Co. consulted with the management of CitizensCommonWealth and Bancshares,First
Community, and reviewed the Agreement and Plan of Reorganization entered into on June 27, 2000.merger agreement. Baxter, Fentriss & Co. also
reviewed certain publicly availablepublicly-available information on the parties and certain
additional materials made available by the management of the respective
parties.companies.
In addition, Baxter, Fentriss & Co. discussed with theCommonWealth's
management of Citizens and BancsharesFirst Community their respective businesses and outlook. Baxter Fentriss was involved
in the negotiations between Citizens and Bancshares. No
limitations were imposed by Citizens' BoardCommonWealth's board of Directorsdirectors upon Baxter,
Fentriss & Co. with respect to the investigation made or procedures followed by
it in rendering its opinion. The full text of Baxter, Fentriss'Fentriss & Co.'s written
opinion is attached as Appendix BAnnex II to this prospectus/proxy statement/prospectusstatement and should be
read in its entirety with respect to the procedures followed, assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by Baxter, Fentriss.
14
25Fentriss & Co.
Baxter, Fentriss'Fentriss & Co.'s opinion is directed to Citizens' BoardCommonWealth's board of
Directors,directors and is directed only to the fairness, from a financial point of view,
of the exchange ratiomerger consideration to be received by shareholders of Citizens' common stock.CommonWealth. It
does not address Citizens'CommonWealth's underlying business decision to effect the
proposed merger, nor does it constitute a recommendation to any Citizens'CommonWealth
shareholder as to how a shareholder should vote with respect to the merger at
the shareholdersspecial meeting or as to any other matter.
Baxter, Fentriss'Fentriss & Co.'s opinion was one of many factors taken into
consideration by Citizens' BoardCommonWealth's board of Directorsdirectors in making its determination
to approve the merger agreement and support the merger, and the receipt of Baxter Fentriss'
opinion is a condition precedent to Citizens consummating the merger. The opinion of Baxter, Fentriss & Co. does not address
the relative merits of the merger as compared to any alternative business
strategies that might exist for CitizensCommonWealth or the effect of any other business
combination in which CitizensCommonWealth might engage.
Baxter, Fentriss & Co., as part of its investment banking business, is
continually engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and valuations for
estate, corporate and other purposes. Baxter, Fentriss & Co. is a nationally
recognized advisor to firms in the financial services industry on mergers and
acquisitions. CitizensCommonWealth selected Baxter, Fentriss & Co. as its financial
advisor because Baxter, Fentriss & Co. is an investment banking firm focusing on
transactions involving community banks and thrifts and because of the firm's
extensive experience and expertise in transactions similar to the proposed merger.
Baxter, Fentriss & Co. is not affiliated with Citizens, BancsharesCommonWealth or FCB.First Community.
Baxter, Fentriss & Co. has represented from time-to-time certain financial
institutions that have ultimately been merged with or acquired by First
Community. In addition, Baxter, Fentriss & Co. has been a depository customer of
CommonWealth since 1993 and received $7,500 from CommonWealth in connection with
a strategic evaluation requested by CommonWealth in November 2001.
In connection with rendering its opinion to Citizens' BoardCommonWealth's board of
Directors,directors, Baxter, Fentriss & Co. performed a variety of financial analyses. In
conducting its analyses and arriving at its opinion as expressed herein, Baxter,
Fentriss & Co. considered such financial and other factors as it deemed
appropriate under the circumstances including among others, the following:
- the historical and current financial condition and results of operations
of CitizensCommonWealth and BancsharesFirst Community, including interest income, interest
expense, noninterest income, noninterest expense, earnings, book value,
returns on assets and equity, and possible tax consequences resulting
from the transaction;
20
- the business prospects of CitizensCommonWealth and Bancshares;First Community;
- the economies of Citizens'CommonWealth and Bancshares'First Community's respective market
areas; and
- the nature and terms of certain other mergeracquisition transactions that it
believed to be relevant.
Baxter, Fentriss & Co. also considered its assessment of general economic,
market, financial and regulatory conditions and trends, as well as its knowledge
of the financial institutions industry, its experience in connection with
similar transactions, its knowledge of securities valuation generally, and its
knowledge of mergeracquisition transactions in West Virginia and throughout the United
States.
In connection with rendering its opinion, Baxter, Fentriss & Co. reviewed:
- the merger agreement;
- drafts of this prospectus/proxy statement/prospectus;statement;
- the Annual Reportsannual reports to shareholders of CitizensCommonWealth for the years ended
December 31, 19972000 and 1998, Citizens'2001, CommonWealth's September 30, 2002 call report
and CommonWealth's December 31, 1999 Call Report and
Citizens' March 31,
15
26
20002002 unaudited internal financial
statements, as well as certain current interim reports to shareholders
and regulatory agencies;
- the Annual Reportsannual reports to shareholders of BancsharesFirst Community for the years ended
December 31, 1997, 19981999, 2000, and 1999, Bancshares' March 31, 20002001, First Community's September 30, 2002
Form 10-Q, as well as certain current interim reports to shareholders and
regulatory agencies; and
- certain additional financial and operating information with respect to
the business, operations and prospects of Citizens, BancsharesCommonWealth and FCBFirst
Community as it deemed appropriate.
Baxter, Fentriss & Co. also:
- held discussions with members of Citizens'CommonWealth's and Bancshares'First Community's
senior management regarding the historical and current business
operation, financial condition and future prospects of their respective
companies;
- reviewed the historical market prices and trading activity for
Citizens'CommonWealth's common stock and Bancshares'First Community's common stock, as
applicable, and compared them with those of certain publicly traded
companies that it deemed to be relevant;
- compared the results of operations of CitizensCommonWealth and BancsharesFirst Community
with those of certain banking companies that it deemed to be relevant;
- analyzed the pro-forma financial impact of the merger on Bancshares;First Community;
and
- conducted such other studies, analyses, inquiries, and examinations as
Baxter, Fentriss & Co. deemed appropriate.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
description. Moreover, the evaluation of fairness, from a financial point of
view, of the consideration to be provided to the holders of Citizens'CommonWealth common
stock was to some extent a subjective one based on the experience and judgment
of Baxter, Fentriss & Co. and not merely the result of mathematical analysis of
financial data. Accordingly, notwithstanding the separate factors as summarized
below, Baxter, Fentriss & Co. believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. The ranges of valuations
resulting from any particular analysis described below should not be taken to be
Baxter, Fentriss'Fentriss & Co.'s view of the actual value of CitizensCommonWealth or Bancshares.First
Community.
In performing its analyses, Baxter, Fentriss & Co. made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of
Citizens21
CommonWealth and Bancshares.First Community. The analyses performed by Baxter, Fentriss &
Co. are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold. In
rendering its opinion, Baxter, Fentriss & Co. assumed that, in the course of
obtaining the necessary regulatory approvals for the merger, no conditions will
be imposed that will have a material adverse effect on the contemplated benefits
of the merger, on a pro-forma basis, to Bancshares.
16
27First Community.
The following is a summary of selected analyses performed by Baxter,
Fentriss & Co. in connection with its opinion.
1. STOCK PRICE HISTORY.opinion:
Stock Price History. Baxter, Fentriss & Co. analyzed the history of the
trading prices and volume for Citizens'CommonWealth's and Bancshares'First Community's common stock
and compared them to other publicly traded banks in Virginia and West Virginia. Bancsharesto the price
offered by First Community. As of November 30, 2002, First Community traded at
$32.94, which was a price to earnings multiple of 8.1513.90X and a price to book
multiple of 1.30.2.18X. This compared to corresponding average multiples for Virginia
banks of 16.18X price to earnings and 1.58X price to book. Such multiples are
deemed consistent with the pricing multiples for other such institutions.
2. COMPARATIVE ANALYSIS.Comparative Analysis. Baxter, Fentriss & Co. analyzed and compared the
price to earnings multiple, priceprice-to-book multiple, price-to-assets, and
premium-on-deposits of First Community's offer to book multiple, price to assets, and premium on
depositsthe yearly average of Bancshares' offer with 21 other comparableVirginia
publicly disclosed
community financial institution merger transactions in West Virginia, Virginia
and Kentuckyannounced banking transaction pricing multiples over the last threepast seven
years. The acquired institution in these
transactions had assets of $100 million or less. Using an aggregate value of
$6.8 million, the respectiveFirst Community merger pricing multiples are as follows: price to earnings
of 45.13; price to book of 1.36; price to assets of 10.52%were price-to-book 2.99X;
price-to-earnings 26.88X; price-to-assets 18.51%; and premium on core
depositspremium-on-deposits
15.38%. These pricing ratios reflect as purchase value the sum of 4.37%.
3. DISCOUNTED CASH FLOW ANALYSIS.all value paid
to common shareholders and value paid to option holders in excess of strike
price. For price-to-book multiple, the merger ranks as the second highest of 17
transactions since 2000, and for price-to-earnings the merger ranks as the
highest multiple since 2000. For premium-on-deposits the merger ranks as second
of 17 while for price-to-assets it ranks tenth of 17. In addition, the
transaction values exceed the Virginia average multiple for each ratio since
1996 except price-to-assets which reflects the lower capital to asset ratio that
CommonWealth had at the end of 2002.
Below is a table that summarizes the Virginia average pricing for
transactions since 1996.
VIRGINIA PUBLICLY ANNOUNCED TRANSACTIONS 1996-2002
- -----------------------------------------------------
AVERAGES
------------------------------------------
YEAR P/B (X) P/E (X) P/A (%) PREM/DEP (%)
---- ------- ------- ------- ------------
1996-2002 2.26 20.65 22.72 17.03
1996 1.90 18.15 20.45 13.20
1997 2.53 21.98 23.95 20.83
1998 2.81 24.44 29.65 29.34
1999 2.19 21.27 21.43 15.72
2000 1.40 18.06 12.92 5.72
2001 2.33 19.75 24.41 11.77
2002 1.79 19.83 20.98 11.10
Discounted Cash Flow Analysis. Baxter, Fentriss & Co. performed a
discounted cash flow analysis to determine hypothetical present values for a
share of Citizens'CommonWealth's common stock as both a five and ten year investment. Under
this analysis, Baxter, Fentriss & Co. considered various scenarios for the
performance of Citizens'CommonWealth's common stock using a range of growth rates from
6%eight percent (8%) to 12%fourteen percent (14%) for Citizens' earnings and dividends.CommonWealth's earnings. A
range of terminal values from twelvesixteen to eighteentwenty times earnings was also used in
the analysis as well as a range of discount rates from 12.5%twelve and a half percent
(12.5%) to 14.5%fourteen and a half (14.5%). These ranges of growth rates, discount
rates, and terminal values were chosen based upon what Baxter, Fentriss & Co. in
its judgementjudgment, considered to be appropriate taking into account, among other
things, Citizens'CommonWealth's past and current performance, the general level of
inflation, and rates of return for fixed income and equity securities in the marketplacemarket
place generally and for companies of similar risk profiles. In all of the
scenarios
22
considered, the present value of Citizens'CommonWealth's common stock was calculated at
less than the value of Bancshares'First Community's offer. Thus, Baxter, Fentriss'Fentriss & Co.
discounted cash flow analysis indicated that Citizens'CommonWealth shareholders would be
in a better financial position by receiving the Bancshares'First Community common stock
offered in the merger rather than continuing to hold Citizens'CommonWealth common stock.
FollowingBelow is a table that summarizes the discounted cash flow analysis that
Baxter, Fentriss & Co. performed in forming its fairness opinion. The table presents
the ranges of present values that were calculated using growth rates from 6% to
12%, discount rates from 12.5% to 14.5%, terminal values of 14 to 18 times
earnings, and investment time frames of five and ten years. The table uses
Citizens' MarchCommonWealth's December 31, 20002002 financial data including annualized earnings.data. An example of how to read the
table is as follows:
Using a discount rate of 12.5%, a terminal value of 14x,16x, and growth rates
of 6%8% to 12%14%, the present value of Citizens'CommonWealth's common stock is calculated to
be in the range of $15.51$14.91 to $20.43$19.54 assuming the shares are sold in five years.
The values in the range are less than the $27.08$30.50 which BancsharesFirst Community has
offered, which means that under the assumptions of this particular scenario, a
shareholderholder of Citizens'CommonWealth common stock would be better off taking Bancshares'First Community's
offer than holding Citizens'CommonWealth common stock.
17
28
SUMMARY OF BAXTER, FENTRISS & CO. DISCOUNTED CASH FLOW ANALYSIS
DISCOUNT RATE OF 12.50% AND GROWTH RATES FROM 6%8% TO 12%14%
RANGE OF PRESENT VALUE CALCULATIONS
----------------------------------------------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN OF EARNINGS FIVE YEARS TEN YEARS
- -------------- ---------------- ------------------------------------------ ------------------------- ------------------------
14x......................... $15.5116X $14.91 to $20.43 $11.52$19.54 $12.16 to $19.98
16x......................... $17.73$20.88
18X $16.78 to $23.35 $13.17$21.98 $13.68 to $22.83
18x......................... $19.94$23.49
20X $18.64 to $26.27 $14.84$24.43 $15.20 to $25.69$26.10
DISCOUNT RATE OF 13.50% AND GROWTH RATES FROM 6%8% TO 12%14%
RANGE OF PRESENT VALUE CALCULATIONS
----------------------------------------------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN OF EARNINGS FIVE YEARS TEN YEARS
- -------------- ---------------- ------------------------------------------ ------------------------- ------------------------
14x......................... $14.8416X $14.27 to $19.54 $10.54$18.70 $11.13 to $18.29
16x......................... $16.96$19.11
18X $16.05 to $22.34 $12.05$21.03 $12.52 to $20.90
18x......................... $19.08$21.50
20X $17.83 to $25.13 $13.56$23.37 $13.91 to $23.51$23.89
DISCOUNT RATE OF 14.50% AND GROWTH RATES FROM 6%8% TO 12%14%
RANGE OF PRESENT VALUE CALCULATIONS
-----------------------------------------------------------------------------------------
TERMINAL VALUE OF EARNINGS SELL SHARES IN FIVE YEARS SELL SHARES IN OF EARNINGS FIVE YEARS TEN YEARS
- -------------- ---------------- ------------------------------------------- ------------------------- ------------------------
14x........................ $14.2016X $13.65 to $18.71 $ 9.66$17.89 $10.19 to $16.75
16x........................ $16.23$17.51
18X $15.36 to $21.38 $11.04$20.13 $11.47 to $19.14
18x........................ $18.26$19.69
20X $17.07 to $24.05 $12.42$22.37 $12.74 to $21.54$21.88
The discounted cash flow analysis is a widely used methodology. The results
of thissuch methodology are highly dependent upon the numerous assumptions that must
be made and the results thereof are not necessarily indicative of actual values
or actual future results.
4. PROFORMA UNDERLYING VALUE OF THE BANCSHARES' SHARES RECEIVED.Pro forma Underlying Value of the First Community Shares Received. Baxter,
Fentriss & Co. performed an analysis that compares the underlying value of the
shares of BancsharesFirst Community that shareholders of CitizensCommonWealth would receive as a
result of the merger. In this analysis, the book value per share of $19.92$11.50 as of
MarchDecember 31, 2000, annualized2002 and earnings per share of $1.49, and 1999 reported earnings of
$1.92 per share$1.28 were compared to the
underlying book value, earnings, and dividends that each shareholder will
receive as a result of the merger. The analysis was performed using thean assumed
exchange ratio of 1.74 as described in the
Agreement..9385. Using this exchange ratio, the restated proformapro forma
underlying book value represented by each Citizens'CommonWealth share equates to $20.41,$14.71,
an increase of 2.45
percent.27.9%. The proformapro forma underlying value of Citizens' annualized MarchCommonWealth's December
31, 20002002 earnings per share equates to $3.22,$2.20, an increase of 115.89 percent. The restated
proforma underlying value of Citizens' 1999 reported earnings per share equates
to $3.18, an increase of 429.81 percent. Citizens,71.8%.
CommonWealth, at the time of the transaction announcement, was not issuing
dividends to common shareholders.sharehold-
23
ers. On a proformapro forma basis as a result of the merger,acquisition, each shareholder of
Citizens'CommonWealth common stock would receive $1.53$1.00 in dividends for each share held.
Using publicly available information on CitizensCommonWealth and BancsharesFirst Community
and applying the capital guidelines of banking regulators, Baxter, Fentriss'Fentriss &
Co.'s analysis indicated that the merger would not permanently dilute the
capital and earnings capacity of BancsharesFirst Community and would, therefore, likely
not be opposed by the banking regulatory agencies from a capital 18
29
perspective.
Furthermore, Baxter, Fentriss & Co. considered the likely market overlap and the
Federal Reserve Board guidelines with regard to market concentration and
concluded that possible antitrust issues do not exist.
Baxter, Fentriss & Co. has relied, without any independent verification,
upon the accuracy and completeness of all financial and other information
reviewed. Baxter, Fentriss & Co. has assumed that all estimates were reasonably
prepared by management, and reflect their best current judgments. Baxter,
Fentriss & Co. did not make an independent appraisal of the assets or
liabilities of either CitizensCommonWealth or Bancshares,First Community, and has not been
furnished such an appraisal.
No company or transaction used as a comparison in the above analysis is
identical to Citizens, Bancshares, FCBCommonWealth, First Community, or the merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies used for comparison in the above analysis.
Baxter, Fentriss & Co. will be paid (1) a mergertransaction fee, equal to
approximately 1.25
percent1.50% of the aggregate consideration received by CitizensCommonWealth's
shareholders and (2) reasonable out-of-pocket expenses for its services.
CitizensCommonWealth has agreed to indemnify Baxter, Fentriss & Co. against certain
liabilities, including certain liabilities under federal securities laws.
MERGER CONSIDERATION AND ELECTION AND EXCHANGE RATIO
InPROCEDURES
Upon consummation of the merger, each outstanding share of Citizens'CommonWealth
common stock outstanding when the
merger becomes effective (other than shares held by shareholders who have
properly exercised their dissenters' rights)any dissenting shares) will be converted into the right
to receive 1.74$30.50 in cash, without interest, or shares of Bancshares' common stock.
You should be aware that the actual market value of a share of Bancshares'
common stock when the merger becomes effective and at the time certificates for
those shares are delivered following surrender and exchange of your certificates
for shares of Citizens' common stock may be more or less than the closing price
per share of Bancshares'First Community common
stock, at any other time. You are urgedthe election of each CommonWealth shareholder and subject to obtain
information on the
market value of Bancshares' common stock that is more recent
than that providedelection, allocation and pro ration procedures set forth in this proxy statement/prospectus.the merger agreement
and described below. See "Summary -- Comparative Market Prices"--Merger Consideration," "-- Election Procedures" and
Dividends" on pages 5 and 6."-- Allocation Procedures" below. No fractional shares of Bancshares'First Community common
stock will be issued in connection with the merger. If youInstead, First Community
will make a cash payment to each CommonWealth shareholder who would otherwise
be entitled toreceive a fractional share.
THE FORM OF THE CONSIDERATION ULTIMATELY RECEIVED BY YOU WILL DEPEND UPON
THE ELECTION, ALLOCATION AND PRO RATION PROCEDURES DESCRIBED BELOW AND THE
CHOICES OF OTHER COMMONWEALTH SHAREHOLDERS. ACCORDINGLY, NO GUARANTEE CAN BE
GIVEN THAT YOUR CHOICE WILL BE HONORED.
In addition, because the tax consequences will be dependent on the form of
consideration received, you are urged to read carefully the information set
forth below under "-- Federal Income Tax Consequences" commencing on page .
Merger Consideration. The merger agreement provides that each share of
Bancshares'CommonWealth common stock outstanding immediately prior to the effective time of
the merger (except for dissenting shares) shall be converted into, and shall be
cancelled in exchange for, the right to receive either:
- the number of shares of First Community common stock which is equal to
the quotient (which is known as the exchange ratio) determined by
dividing $30.50 by the average share price of the First Community common
stock (which is referred to as the per share stock consideration), except
that cash will be paid for any remaining fractional shares, or
- cash in an amount equal to $30.50, without interest (which is referred to
as the per share cash consideration).
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As described under "-- Elections" below, you will have the opportunity to
elect the form of consideration to be received for all shares of CommonWealth
common stock held by you, subject to allocation and pro ration procedures set
forth in the merger agreement which are intended to ensure that at least 50% and
not more than 60% of the outstanding shares of CommonWealth common stock will be
converted into the right to receive First Community common stock and the
remaining outstanding shares of CommonWealth common stock will be converted into
the right to receive cash.
For purposes of the merger agreement and determining the merger
consideration, the "average share price" of the First Community common stock
means the average of the closing sales prices of a share of First Community
common stock, as reported on the Nasdaq market on which the common stock then
trades, for the 20 trading-day period ending with the close of business on the
fifth business day preceding the effective time of the merger.
The value of the First Community common stock to be received by you will
depend on the market price of the First Community common stock prior to the
effective time of the merger. The market price of First Community common stock
is subject to change at all times based on the future financial condition and
operating results of First Community, future market conditions and other
factors. The market price of the First Community common stock at the effective
time of the merger or at the time that CommonWealth shareholders who receive
First Community common stock in the merger actually receive stock certificates
evidencing those shares may be higher or lower than recent prices. For further
information concerning the historical prices of the First Community common
stock, see "Market for Common Stock and Dividends" on page . You are urged
to obtain current market prices for the First Community common stock in
connection with voting your shares on the merger agreement at the special
meeting and making your election decision.
Elections. No later than five days after the effective time of the merger,
you will be paidsent an amountelection form which will permit you:
- to elect to receive shares of First Community common stock in exchange
for all shares of CommonWealth common stock held by you, plus cash determinedin
lieu of any fractional share interest,
- to elect to receive cash in exchange for all shares of CommonWealth
common stock held by multiplyingyou, or
- to indicate that you make no election with respect to the fractional partconsideration
to be received by you in exchange for your shares of CommonWealth common
stock ("no-election shares").
The CommonWealth shares in these three categories are referred to below as
stock election shares, cash election shares and no-election shares.
If you either (i) do not submit a properly completed election form in a
timely fashion or (ii) revoke your election form prior to the deadline for the
submission of the shareelection form and do not resubmit a properly completed
election form by the election form deadline, the shares of Bancshares'CommonWealth common
stock held by you will be designated no-election shares.
Election Procedures. All elections will be required to be made on an
election form. To make an effective election with respect to your shares of
CommonWealth common stock, you must, in accordance with the averageelection form:
- properly complete and return the transmittal and election forms to be
provided to you to the exchange agent designated by First Community to
receive these materials,
- deliver the transmittal and election forms with your stock certificates
representing such shares (or an appropriate guarantee of delivery of such
certificates), and
- deliver with the transmittal and election forms any other required
documents prior to the deadline for returning these documents.
It is currently anticipated that the transmittal and election forms will be
mailed to you within five days after the merger is completed.
25
The deadline for surrendering all documentation required for an effective
election (the "election deadline date") will be set forth in the election
instructions and will be 20 days following the mailing of the bidletter of
transmittal and ask priceselection form, although the date may be extended by mutual
agreement of Bancshares'First Community and CommonWealth.
YOU SHOULD NOT RETURN YOUR COMMONWEALTH STOCK CERTIFICATES WITH THE
ENCLOSED PROXY, AND STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO FIRST
COMMUNITY, COMMONWEALTH OR ANY OTHER PARTY UNTIL YOU HAVE RECEIVED THE
TRANSMITTAL AND ELECTION FORMS.
IF YOU HAVE A PARTICULAR PREFERENCE AS TO THE FORM OF CONSIDERATION TO BE
RECEIVED FOR YOUR SHARES OF COMMONWEALTH COMMON STOCK, YOU SHOULD MAKE AN
ELECTION BECAUSE SHARES AS TO WHICH AN ELECTION HAS BEEN MADE WILL BE GIVEN
PRIORITY IN ALLOCATING SUCH CONSIDERATION OVER SHARES AS TO WHICH NO ELECTION
WAS MADE. NEITHER THE COMMONWEALTH BOARD NOR ITS FINANCIAL ADVISOR MAKES ANY
RECOMMENDATION AS TO WHETHER SHAREHOLDERS SHOULD ELECT TO RECEIVE THE CASH
CONSIDERATION OR THE STOCK CONSIDERATION IN THE MERGER. YOU MUST MAKE YOUR OWN
DECISION WITH RESPECT TO SUCH ELECTION, BEARING IN MIND THE TAX CONSEQUENCES OF
THE ELECTION YOU CHOOSE. SEE "-- FEDERAL INCOME TAX CONSEQUENCES" BEGINNING ON
PAGE .
EVEN IF YOU HAVE NO PREFERENCE, IT IS SUGGESTED THAT YOU RETURN YOUR
TRANSMITTAL AND ELECTION FORMS, TOGETHER WITH YOUR STOCK CERTIFICATE(S), BY THE
ELECTION DEADLINE DATE INDICATING THAT YOU HAVE NO PREFERENCE, SO THAT YOU MAY
RECEIVE THE MERGER CONSIDERATION ALLOCABLE TO YOU PROMPTLY FOLLOWING COMPLETION
OF THE EXCHANGE PROCEDURES AFTER THE MERGER IS CONSUMMATED. SEE "-- PROCEDURES
FOR EXCHANGING COMMONWEALTH COMMON STOCK CERTIFICATES" BEGINNING ON PAGE .
Allocation Procedures. Your ability to receive all cash or all shares of
First Community common stock on the date thatin exchange for your shares of CommonWealth common
stock in the merger becomes effective. The average bidis subject to allocation procedures which are designed to
ensure that at least 50% and ask price per sharenot more than 60% of Bancshares'the total number of shares of
CommonWealth common stock will be computed as reported onissued and outstanding at the Nasdaq Level III
Electronic Billboard at 4:00 p.m. Eastern Time, or if not reported on the Nasdaq
Level III Electronic Billboard, another authoritative source.
EXCHANGE OF CITIZENS' STOCK CERTIFICATES
When the merger becomes effective by virtuetime of the
merger and without any
action on the part of Citizens or the Citizens' shareholders, shares of
Citizens' common stock (other than shares held by shareholders who have properly
exercised their dissenters' rights) will be converted into and will represent
the right to receive, upon surrender of the certificate
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30
representing such shares as described below, whole shares of Bancshares'First Community common stock and the
remaining shares will be converted into cash insteadin accordance with the terms of the
merger agreement.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if CommonWealth shareholders in the
aggregate elect to receive more or less of the First Community common stock than
First Community has agreed to issue. These procedures are summarized below.
Pursuant to the merger agreement, the minimum cash consideration shall
amount to the product of the number of shares of CommonWealth common stock
outstanding immediately prior to the effective time of the merger times .4 times
$30.50. In addition, pursuant to the merger agreement, the maximum cash
consideration shall amount to the product of the number of shares of
CommonWealth common stock outstanding immediately prior to the effective time of
the merger times .5 times $30.50.
- If the cash elections total less than the minimum cash consideration, a
sufficient number of shares will be converted into cash election shares,
first from among the holders of no-election shares and then, if
necessary, from among the holders of stock election shares on a pro rata
basis, so that the total cash paid equals as closely as practicable the
minimum cash consideration. This pro ration will reflect the proportion
that the number of stock election shares of each holder of stock election
shares bears to the total number of stock election shares.
- If the cash elections total more than the maximum cash consideration, all
no-election shares will be converted to stock election shares and a
sufficient number of shares from among the holders of cash election
shares (excluding shares of CommonWealth common stock held by dissenting
shareholders) will be converted on a pro rata basis into stock election
shares, so that the total cash paid equals as closely as practicable the
maximum cash consideration. This pro ration will reflect the proportion
that the number of cash election shares of each holder of cash election
shares bears to the total number of cash election shares.
26
- If the cash elections total more than the minimum cash consideration but
less than the maximum cash consideration, a sufficient number of
no-election shares will be converted into cash election shares so that
the total cash paid equals as closely as practicable the maximum cash
consideration.
Upon consummation of the merger, any fractional share interest. Promptlyshares of CommonWealth common stock
that are held directly or indirectly by First Community, other than in a
fiduciary capacity or in satisfaction of a debt previously contracted, will be
canceled and retired and no payment will be made with respect to those shares
and such shares will not be considered for purposes of the foregoing allocation
procedures.
PROCEDURES FOR EXCHANGING OF COMMONWEALTH COMMON STOCK CERTIFICATES
CommonWealth shareholders who surrender their stock certificates and
complete transmittal and election forms prior to the election deadline date, or
any extension of such time period, will automatically receive the merger
consideration allocated to them as the result of the merger promptly following
completion of the allocation procedures. The exchange agent will complete the
allocation within ten business days after the election deadline date. Other
shareholders will receive the merger becomes effective, Bancsharesconsideration allocated to them as soon as
practicable after their stock certificates have been surrendered with
appropriate documentation to the exchange agent or other steps have been taken
to surrender the evidence of their stock interest in CommonWealth in accordance
with the instructions accompanying the letter of transmittal form.
Within five business days after the completion of the merger, the exchange
agent (which will deliver orbe selected by First Community) will mail to youeach holder of
record of shares of CommonWealth common stock a form letter of transmittal and
instructions for use in making the election and effecting the surrender of your Citizens'the
certificates in exchange for the merger consideration allocated to them. Upon
surrender of a stock certificates. When you properly surrender your certificates or provide other
satisfactory evidence of ownership,certificate for CommonWealth common stock for exchange and
returncancellation to the exchange agent, together with a duly executed letter of
transmittal, duly
executed and completed in accordance with its instructions and any other
documents as maythe holder of such certificate will be reasonably requested, Bancshares will promptly deliverentitled to you thereceive such
merger consideration allocated to which you are entitled.
You should not send in yoursuch holder and the certificate for
CommonWealth common stock certificates until you receive the letter
of transmittal and instructions.
Untilso surrendered as described above, each outstanding Citizens' stock
certificate (other than certificates of shareholders who have properly exercised
their dissenters' rights) will be deemed at the time the merger becomes
effective to represent for all purposes only the right to receive the merger
consideration and any declared and unpaid dividends thereon.canceled. No interest will be
paid or accrued on any cash payable forconstituting merger consideration (including cash in
lieu of fractional shares).
No stock certificates representing fractional shares as partof First Community
common stock will be issued upon the surrender for exchange of CommonWealth
stock certificates. In lieu of the issuance of any such fractional share, First
Community will pay to each former shareholder of CommonWealth who otherwise
would be entitled to receive a fractional share of First Community common stock
an amount in cash determined by multiplying the fraction of a share of First
Community common stock which such holder would otherwise be entitled to receive
pursuant to the merger agreement by the average of the per share closing sales
prices of the First Community common stock for the twenty trading-day period
ending with the close of business on the fifth business day preceding the
merger.
If you receive shares of First Community common stock in the merger, you
will receive dividends on First Community common stock or other distributions
declared after the completion of the merger consideration upon the surrenderonly if you have surrendered your
CommonWealth stock certificates. Only then will you be entitled to receive all
previously withheld dividends and distributions, without interest.
After completion of the certificate ormerger, no transfers of CommonWealth common stock
issued and outstanding immediately prior to the completion of the merger will be
allowed. CommonWealth stock certificates representing
sharesthat are presented for transfer after
the completion of Citizens' common stock. With respect to any Citizens'the merger will be canceled and exchanged for the appropriate
merger consideration.
First Community will only issue a First Community stock certificate that has been lost or destroyed, Bancshares will payin a
name other than the merger
consideration attributablename in which a surrendered CommonWealth stock certificate
is registered if you present the exchange agent with all documents required to
such certificate upon receipt of a surety bond or
other adequate indemnity, as required in accordance with Bancshares' standard
policy,show and evidence reasonably satisfactory to Bancshareseffect the unrecorded transfer of ownership of the shares in question. After the time that the merger becomes effective, Citizens'
transfer books will be closed and no transfer of
the shares of Citizens'CommonWealth common stock outstanding immediately priorformerly represented by such CommonWealth stock
certificate, and show that you paid any applicable stock transfer taxes.
27
If your CommonWealth stock certificate has been lost, stolen or destroyed,
you may be required to deliver an affidavit and a lost certificate bond as a
condition to receiving any First Community stock certificate to which you may be
entitled.
ASSUMPTION OF COMMONWEALTH STOCK OPTIONS
At the effective time of the merger, each option to purchase shares of
CommonWealth common stock granted under CommonWealth's stock option plan which
is outstanding and unexercised immediately prior thereto will cease to represent
a right to acquire shares of CommonWealth common stock and will be made.
Bancshares will pay any dividends or other distributions with a record date
before the time that the merger becomes effective that have been declared or
made by Citizens in respect ofconverted
automatically into an option to purchase shares of Citizens'First Community common stock,
that remain
unpaid whenand First Community will assume each CommonWealth stock option, in accordance
with the merger becomes effective,terms of the CommonWealth stock option plan and unless the effective time occurs
priorstock option agreement
by which it is evidenced, including without limitation all terms pertaining to
the record date for Bancshares' dividend payable inacceleration and vesting of the third quarter
of 2000, in which case the former Citizens' shareholders would receive
Bancshares' dividend rather than Citizens' dividend.
To the extent permitted by law, you will be entitled to vote after the
merger at any meeting of Bancshares' shareholders the number of whole shares of
Bancshares' common stock into which your shares of Citizens' common stock are
converted, regardless of whether you have exchanged your Citizens' stock
certificates for Bancshares' stock certificates. Whenever a dividend or other
distribution is declared by Bancshares on the Bancshares' common stock, the
record date for which isholder's option exercise rights, except that
from and after the effective time of the declarationmerger:
- First Community and the compensation committee of the board of directors
of First Community shall be substituted for CommonWealth and the
CommonWealth board of directors or duly authorized board committee
administering the CommonWealth stock option plan;
- each CommonWealth stock option assumed by First Community will include
dividends or other distributions on allbe
exercisable solely for shares of Bancshares'First Community common stock;
- the number of shares of First Community common stock subject to such
CommonWealth stock option will be equal to the number of shares of
CommonWealth common stock subject to such CommonWealth stock option
immediately before the effective time of the merger multiplied by the
exchange ratio, rounded down to the nearest share; and
- the per share exercise price under each such CommonWealth stock option
will be adjusted by dividing the per share exercise price under each such
CommonWealth stock option by the exchange ratio, rounded up to the
nearest cent.
Pursuant to the merger agreement, First Community agreed to register under
the Securities Act of 1933 the shares of First Community common stock issuable
upon exercise of the substitute stock options to be issued pursuant to the
merger agreement. Untilagreement within fifteen business days after consummation of the outstanding certificates
formerly representing Citizens' common stock are received, no dividend or other
distribution that becomes payablemerger.
CONDITIONS TO THE MERGER
Completion of the merger is subject to the holderssatisfaction of recordcertain
conditions set forth in the merger agreement, or the waiver of Bancshares' common
stock will be deliveredsuch conditions
by the party entitled to you until you surrender your Citizens' stock
certificate for exchange as described above. Upon surrenderdo so, at or before the closing date of your Citizens'
stock certificate, both the Bancshares' common stock certificate and any
undelivered dividends and cash payments payablemerger.
Each of the parties' obligation to consummate the merger under the merger
agreement (without interest) will be delivered and paidis subject to you with respect to each sharethe following conditions:
- the holders of Citizens'more than two-thirds of the outstanding CommonWealth
common stock representedmust have approved the merger agreement;
- all regulatory approvals required to consummate the merger by your certificate.
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THE MERGER AGREEMENT
EFFECTIVE DATE AND TIME OF THE MERGER
The merger agreement provides thatany
governmental authority must have been obtained and must remain in full
force and effect, all statutory waiting periods in respect thereof must
have expired, and no required approval may contain any condition,
restriction or requirement which First Community's board of directors
reasonably determines in good faith would, individually or in the
closingaggregate, materially reduce the benefits of the merger will take
place onto such a degree
that First Community, in its good faith judgment, would not have entered
into the business day designated by Bancshares that is reasonably acceptable
to Citizens; provided, that the date so designated shall not be earlier than 15
daysmerger agreement had such conditions, restrictions or
later than 120 days followingrequirements been known as of the date of the decisionmerger agreement;
- no statute, rule, regulation, judgment, decree, injunction or other order
may have been enacted, issued, promulgated, enforced or entered which
prohibits, restricts or makes illegal the consummation of the Officemerger;
28
- the registration statement of the ComptrollerFirst Community of the Currency approving the Merger. If the mergerwhich this document is approved
at the meeting, it is currently anticipated that the filing of the articles of
merger and the effective time will occur during the fourth quarter of 2000.
CONDITIONS TO THE MERGER
The obligations of Bancshares and Citizens to carry out the merger are
subject to satisfaction (or, if permissible, waiver) of the following conditions
at or before the effective time:
- all corporate action necessary to authorize the execution, delivery and
performance of the Agreement and Plan of Reorganization and the Plana
part must have been duly and validly taken by the Board of Directors and
shareholders of Citizens;
- Bancshares' registration statement on Form S-4 relating to the merger
(including any post-effective amendments) must bebecome effective under the Securities Act of 1933 as amended;and no
proceedings may be pending or, to
Bancshares' knowledge, threatened by the SEC to suspendstop order suspending the effectiveness of thesuch registration statement
shall have been issued and no proceedings for that purpose shall have
been initiated by the Bancshares'Securities and Exchange Commission and not
withdrawn;
- the shares of First Community common stock to be issued in connection
with the merger must either have been registered or exempt from
registration under applicable state securities laws;approved for listing on the Nasdaq market
on which the First Community common stock may then be listed; and
- the partieseach of First Community and CommonWealth must have received an opinion of
Kelley Drye & Warren LLP to the effect that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
In addition to the foregoing conditions, the obligation of First Community
to consummate the merger under the merger agreement is subject to the following
conditions, which may be waived by First Community:
- the representations and warranties of CommonWealth in the merger
agreement must be true and correct as of the date of the merger agreement
and as of the effective time of the merger, except as to any
representation or warranty which specifically relates to an earlier date
and except that the representations and warranties of CommonWealth will
be deemed true and correct unless the failure or failures of those
representations and warranties to be true and correct has had or is
reasonably likely to have a material adverse effect (as defined below) on
CommonWealth;
- CommonWealth must have performed in all material respects all obligations
required to be performed by it at or prior to consummation of the merger;
- First Community must have received a certificate from specified officers
of CommonWealth with respect to compliance with the foregoing conditions
to the obligations of First Community;
- dissenting shares shall not represent 10% or more of the outstanding
CommonWealth common stock;
- each director and executive officer of CommonWealth shall have entered
into a shareholder agreement with First Community (see "-- Shareholder
Agreements" beginning on page );
- Mr. Davis shall have entered into an employment agreement with First
Community Bank, the form of which has been agreed to by the parties;
- LeClair Ryan, A Professional Corporation, legal counsel to CommonWealth,
shall have delivered a legal opinion to First Community and First
Community Bank, the form of which has been agreed to by the parties; and
- First Community shall have received such certificates of CommonWealth's
officers or others and such other documents to evidence fulfillment of
the conditions to its obligations as First Community may reasonably
request.
In addition to the other conditions set forth above, the obligation of
CommonWealth to consummate the merger under the merger agreement is subject to
the following conditions, which may be waived by CommonWealth:
- the representations and warranties of First Community in the merger
agreement must be true and correct as of the date of the merger agreement
and as of the effective time of the merger, except as to any
representation or warranty which specifically relates to an earlier date
and except that the representations and warranties of First Community
will be deemed true and correct unless the failure or failures of those
representations and warranties to be true and correct has had or is
reasonably likely to have a material adverse effect (as defined below) on
First Community;
- First Community must have performed in all material respects all
obligations required to be performed by it at or prior to consummation of
the merger;
29
- CommonWealth must have received a certificate from specified officers of
First Community with respect to compliance with the foregoing conditions
to the obligations of CommonWealth;
- Kelley Drye & Warren LLP, legal counsel to First Community, shall have
delivered an opinion to CommonWealth, the form of which has been agreed
to by the parties; and
- CommonWealth shall have received such certificates of First Community's
officers or others and such other documents to evidence fulfillment of
the conditions to its obligations as CommonWealth may reasonably request.
Under the terms of the merger agreement, a material adverse effect on
either First Community or CommonWealth is defined to mean any effect that (1) is
material and adverse to the financial position, results of operations or
business of such entity and its subsidiaries taken as a whole or (2) would
materially impair the ability of such entity and its subsidiaries to perform
their respective obligations under the merger agreement or otherwise materially
impede the consummation of the merger. However, under the terms of the merger
agreement, none of the following would be deemed to constitute a material
adverse effect on any entity:
- changes in banking and similar laws of general applicability or
interpretations of them by governmental authorities;
- changes in United States generally accepted accounting principles or
regulatory approvals requiredaccounting requirements applicable to banks or their holding
companies generally;
- changes in general economic conditions affecting banks and their holding
companies generally;
- modifications or changes to valuation policies and practices, or expenses
incurred, in connection with the transactions contemplated by the merger
agreement all notice periodsor restructuring charges taken in connection with them, in each
case in accordance with United States generally accepted accounting
principles; and
waiting periods required- with respect to CommonWealth only, the approvals must have passed and all approvals must be in effect; and
- neither Bancshares nor Citizens nor any of their respective subsidiaries
may be subject to any order, decree or injunction of a court or agency of
competent jurisdiction that enjoins or prohibits completion of the
transactions provided in the merger agreement.
The obligations of Citizens to carry out the transactions in the merger
agreement are also subject to the satisfaction of the following additional
conditions at or before the effective time, unless, where permissible, waived by
Citizens:
- Bancshares must have performed in all material respects all obligations
and complied in all material respects with all covenants required by the
merger agreement;
- the shares of Bancshares' common stock to be issued in the merger must
have been registered with the Securities Exchange Commission under the
1933 Act;
- Citizens must have received closing certificates from Bancshares to the
effect that certain conditions to the merger have been satisfied; and
- Citizens must have received an opinion of counsel, in form and substance
satisfactory to Citizens, substantially to the effect that the merger
will constitute a reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended, and that the shareholders of Citizens
will not recognize any gain or loss to the extent that they
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32
exchange shares of Citizens common stock for shares of Bancshares' common
stock, and that
- Citizens must have received the Opinion of the Financial Advisor, dated
as of the date of the proxy material and as of the Closing Date, that the
merger is fair from a financial point of view, to Citizens and its
shareholders.
In addition, all representations and warranties made by Bancshares in the
merger agreement will be evaluated as of the date of the merger agreement and at
the time the merger becomes effective as though made at that time (or on the
date designated, in the caseeffects of any representation and warranty that
specifically relates to an earlier date), except as otherwise provided in the
merger agreementaction or consented to in writing by Citizens. There must not be any
inaccuracies in the representations and warranties of Bancshares in the merger
agreement such that the aggregate effect of such inaccuracies has, or is
reasonably likely to have, a material adverse effect on Bancshares.
The obligations of Bancshares to carry out the transactions in the merger
agreement are also subject to satisfaction of the following additional
conditions at or before the effective time, unless, where permissible, waived by
Bancshares:
- no regulatory approval may have imposed any condition or requirement
that, in the reasonable opinion of the Bancshares' Board, would so
materially adversely affect the business or economic benefits to
Bancshares of the transactions in the merger agreement as to render the
consummation of such transactions inadvisable or unduly burdensome;
provided that any condition or requirement does not relate principally to
any regulatory violation or other failure on the part of Bancshares or a
divestiture requirement that is consistent with regulatory precedent;
- Citizens must have performed in all material respects all of its
obligations and complied in all material respects with all of its
covenants required by the merger agreement;
- Bancshares must have received closing certificates from Citizens to the
effect that certain conditions to the merger have been satisfied;
- Bancshares must have received an opinion of counsel, in form and
substance satisfactory to Bancshares, substantially to the effect that
the merger will constitute a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended, and that the shareholders of
Citizens will not recognize any gain or loss to the extent that they
exchange shares of Citizens common stock for shares of Bancshares' common
stock.
In addition, all representations and warranties made by Citizens in the
merger agreement will be evaluated at the date of the merger agreement and at
the time the merger becomes effective as though made on and at that time (or on
the date designated, in the case of any representation and warranty that
specifically relates to an earlier date), except as otherwise provided in the
merger agreement or consented to in writing by Bancshares. The representations
and warranties of Citizens regarding the shareholder vote required to approve
the merger and the actionsomission
taken to exempt the merger from any applicable
anti-takeover laws must be true and correct (except for inaccuracies that are
immaterial in amount). In addition, there must not be any inaccuracies in any of
the representations and warranties of Citizens in the merger agreement such that
the effect of such inaccuracies individually or in the
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aggregate has, or is reasonably likely to have, a material adverse effect on
Citizens and its subsidiaries taken as a whole.
CONDUCT OF CITIZENS' AND BANCSHARES' BUSINESSES PRIOR TO THE EFFECTIVE TIME OF
THE MERGER
Except with the prior consent of Bancshares, not to be unreasonablyFirst Community or arbitrarily withheld or delayed, before the effective time of the merger,
Citizens may not:
- carry on its business except in the ordinary course and in substantially
the same manner as previously conducted, or establish or acquire any new
subsidiary or engage in any new type of activity or expand any existing
activities;
- declare or pay any dividend or distribution on its capital stock;
- issue any shares of capital stock;
- purchase any shares of Citizens' capital stock;
- make any material change in the compensation or title of any executive
officer;
- make any material change in the compensation or title of any other
employee, other than those permitted by current employment policies in
the ordinary course of business, any of which changes shall be promptly
reported to Bancshares;
- enter into any new bonus, incentive compensation, deferred compensation,
profit sharing, thrift, retirement, pension, group insurance or other
benefit plan (except as specifically contemplated in the Agreement and
Plan of Reorganization), or any other employment agreement or consulting
agreement or amend any such plan or agreement to increase the benefits
accruing or payable thereunder;
- amend its Articles of Incorporation or bylaws except as necessary to
consummate the merger;
- waive any right of substantial value;
- propose or take any action which would make any representation or
warranty with regards to the Agreement and Plan of Reorganization untrue;
- merge with any other entity or permit any other entity to merge into it,
acquire control over any other entity or dispose of any material amount
of assets or acquire any material amount of assets, in each case other
than in the ordinary course of its business consistent with past
practices;
- enter into, or assume any material contract or obligation, except in the
ordinary course of business;
- change securities portfolio policies;
- enter into any new agreement, amendment or endorsement or make any
changes relating to insurance coverage, including coverage for its
directors and officers, which would result in an additional payment
obligation of $10,000 or more;
- propose to take action with respect to closing of any branches; or
- agree to do any of the foregoing.
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Citizens has also further agreed that between the date of the Agreement and
Plan of Reorganization and the Effective time of the Merger that they will
consult and cooperate with Bancshares regarding:
- loan portfolio management, including management and workout of
nonperforming assets, and credit review and approval procedures, and
- securities portfolio and funds management, including management of
interest rate risk;
- to keep Bancshares advised of all material developments relevant to its
business prior to completion of the merger; and
- to provide Bancshares reasonable access to Citizens' premises, books and
records.
Except with the prior consent of Citizens, not to be arbitrarily or
unreasonably withheld or delayed, before the effective time, neither Bancshares
nor any subsidiary of Bancshares may take any action (or fail to take any
action) that would or might be expected to:
- cause the merger not to constitute a tax-free reorganization;
- result in any inaccuracy of a representation or warranty that would allow
for termination of the merger agreement;
- cause any of the conditions precedent to the transactionsotherwise
contemplated by the merger agreement to fail to be satisfied;
- fail to comply in any material respect with any laws, regulations,
ordinances or governmental actions applicable to it and to the conduct of
its business.
Bancshares has also agreed to keep Citizens advised of all material
developments relevant to its business prior to completion of the merger.
SUPERIOR OFFERS
Citizens has agreed not to solicit other offers unless it receives a
superior offer. A superior offer is a proposal or offer to acquire or purchase
all or a substantial portion of the assets of or a substantial equity interest
in, or to effect any recapitalization, liquidation or dissolution involving or a
business combination or other similar transaction with, Citizens (including, but
not limited to, a tender offer or exchange offer to purchase Citizens' common
stock) other than as contemplated by the Agreement and Plan Reorganization:
- that did not arise from or involve a breach or violation by Citizensagreement.
REGULATORY APPROVALS
Consummation of the merger agreement;
- was not solicited by Citizens or anyone acting on its behalf;
- that the Citizens' Board determines in its good faith judgment based,
among other things, on adviceis subject to receipt of its Financial Advisor,certain regulatory
approvals.
OCC. The parties currently intend to be more
favorablemerge CommonWealth into First
Community Bank. The merger is subject to the Citizens' shareholders and the Merger; and
- the financing for the implementation of which, to the extent required, is
then committed or in the good faith reasonable judgment of the Citizens'
Board of Directors, based, among other things, on advice of the Financial
Advisor, is capable of being obtained by the party making the proposal or
offer.
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WAIVER; AMENDMENT; TERMINATION; EXPENSES
Except with respect to any required regulatory approval or other condition
imposed by law, Bancshares or Citizens may at any time (whether before or afterprior approval of the merger agreement and plan of merger by the Citizens'
shareholders) extend the time for the performance of any of the obligations or
other acts of the other party and may waive (a) any inaccuracies of the other
party in the representations or warranties contained in the merger agreement,
plan of merger or any document delivered pursuant thereto, (b) compliance with
any of the covenants, undertakings or agreements of the other party, or
satisfaction of any of the conditions precedent to its obligations, contained in
the merger agreement or plan of merger or (c) the performance by the other party
of any of its obligations set out in the merger agreement or plan of merger. The
parties may also mutually amend or supplement the merger agreement in writing at
any time. However, no extension, waiver, amendment or supplement which would
reduce either the exchange ratio or the payment terms for fractional interests
to be provided to holders of Citizens' common stock upon completion of the
merger will be made after the Citizens' shareholders approve the merger
agreement and plan of merger.
If any of the conditions to the obligation of either party to complete the
merger is not fulfilled, that party will consider the materiality of such
nonfulfillment. In the case of the nonfulfillment of a condition to Citizens'
obligations, Citizens will, if it determines it appropriate under the
circumstances, resolicit shareholder approval of the merger agreement and plan
of merger and provide appropriate information concerning the obligation that has
not been satisfied.
The Agreement and Plan of Reorganization shall be terminated, and the
merger abandoned, if the shareholders of Citizens shall not have given the
approval required. Notwithstanding such approval by shareholders this agreement
may be terminated in writing at any time prior to the Effective Time of the
Merger by:
- the mutual consent of FCB and Citizens, as expressed by their respective
boards of directors;
- either FCB or Citizens, as expressed by their respective boards of
directors, after December 31, 2000;
- by FCB in writing authorized by its Board of Directors if Citizens has,
or by Citizens in writing authorized by its Board of Directors if
Bancshares has, in any material respect, breached (i) any covenant or
agreement contained herein, or (ii) any representation or warranty
contained herein, in any case if such breach has not been cured by the
earlier of 30 days after the date on which written notice of such breach
is given to the party committing such breach or the Closing Date;
- either FCB or Citizens, as expressed by their respective boards of
directors, in the event that any of the conditions precedent to the
obligations of such party to consummate the merger have not been
satisfied or waived by the party entitled to so waive on or before the
Closing Date, provided that neither party shall be entitled to terminate
the Agreement pursuant to this subparagraph if the condition precedent or
conditions precedent which provide the basis for termination can
reasonably be and are satisfied within a reasonable period of time, in
which case, the Closing date shall be appropriately postponed;
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- FCB or Citizens, if the Comptroller of the Currency or the West Virginia
Division of Banking deny approval of the merger and the time period for
all appeals or requests for reconsideration have expired;
- Citizens, if the Bancshares' Stock Price is less than $15.00 per share
based on the average bid and ask prices quoted on Nasdaq at the close of
business on the business day prior to the Closing Date;
- FCB if, within ten days of receipt of the Citizens' schedules to be
provided pursuant to this Agreement, it reasonably believes that the
information set forth in such schedules reflects material adverse
information not previously known to FCB and notifies Citizens to that
effect;
- Bancshares, if the holders of more than ten percent of the outstanding
shares of Citizens exercise dissenters' rights with respect to the
Merger.
- In the event of the termination and abandonment of this Agreement and
Plan of Reorganization pursuant to any of the provisions described above,
both the Agreement and Plan of Reorganization shall become void and have
no effect, without any liability on the part of any party or its
directors, officers or shareholders.
In the event this Agreement is terminated other than as permitted under
Section 7.1(a)-(h) of the Agreement and Plan of Reorganization, or if the
stockholders of Citizens fail to approve the proposed transaction, and approve a
merger, sale of assets or similar transaction with a party other than Bancshares
within twelve months, Citizens shall pay to Bancshares, within 30 days following
the effective date of termination hereof or the second meeting of stockholders
as applicable, the sum of $250,000.00 plus the out-of-pocket expenses, not to
exceed $50,000.00, of Bancshares in connection with this transaction, as
compensation for their costs and expenses, their due diligence and other
management efforts, and the loss of opportunity to expand into Citizens' market.
If the Merger is consummated, all expenses of the parties hereto incurred
in connection with the Merger will be borne by Bancshares. If the Merger is not
consummated, each party shall bear its own expense, provided, that if the Merger
is not consummated because of a party's failure to satisfy a condition (other
than the failure of Citizens' shareholders to approve the Merger, or termination
of this Agreement because the Bancshares' Stock Price is less than $15.00) then
the party failing to satisfy the condition will pay the other party's expenses
up to $50,000.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Agreement provides that Bancshares or one of its subsidiaries will
maintain for three years after the Closing Date directors' and officers'
liability insurance providing coverage to directors and officers of Citizens for
acts or omissions occurring prior to the Closing Date. Such insurance shall
provide at least the same coverage and amounts as contained in Citizens' policy
on the date hereof; provided that in no event shall the premium on such policy
exceed $10,000 (the "Maximum Amount"). If the amount of the premiums necessary
to maintain or procure such insurance coverage exceeds the Maximum Amount,
Bancshares shall use its reasonable efforts to maintain the most advantageous
policies of directors' and officers' liability insurance obtainable for a
premium equal to the Maximum Amount. Notwithstanding the foregoing, Bancshares
further agrees to indemnify all individuals who are or may have been officers or
directors of Citizens prior to the Closing Date from any acts or omissions in
such capacities prior to the Closing Date to the same
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extent as the officers and directors of Bancshares. If Bancshares or any of its
successors or assigns consolidates with or merges into any other entity and is
not the continuing or surviving entity, or transfers all or substantially all of
its assets to any entity, then and in each case, Bancshares will make proper
provision so that the successors or assigns of Bancshares shall assume the
obligations described in this paragraph.
RIGHTS OF DISSENTING SHAREHOLDERS
The following is a summary of the steps you must take to perfect your
dissenters' rights under West Virginia law. This summary may not contain all
information that is important to you, and we refer you to Sections 31-1-122 and
31-1-123 of the West Virginia Business Corporation Act (the "Act"), which are
attached in full as Appendix C to this proxy statement/prospectus. You are urged
to read Appendix C in its entirety.
Pursuant to the provisions of the Act, if the merger is consummated, any
shareholder of record of Citizens who objects to the merger and who complies
with Sections 31-1-122 and 31-1-123 of the Act will be entitled to demand and
receive payment in cash of an amount equal to the fair value of all or any
portion of his or her shares of Citizens' common stock. For the purpose of
determining the amount to be received in connection with the exercise of
statutory dissenters' rights, the fair value of a dissenting shareholder's
shares of Citizens' common stock will be determined as of the day prior to the
date on which the shareholder vote was taken with regard to the merger agreement
and plan of merger, excluding any appreciation or depreciation in anticipation
of the merger.
Any Citizens' shareholder desiring to receive payment of the fair value of
his or her Citizens' common stock must:
- deliver to the Secretary of Citizens, prior to the shareholder vote on
the merger agreement and plan of merger, a written objection to the
merger agreement and plan of merger;
- not vote his or her shares in favor of the merger agreement and plan of
merger;
- within ten days after the date on which the vote is taken, make written
demand on Citizens for payment of the fair value of his or her shares;
and
- within twenty days after demanding payment, submit his or her Citizens'
stock certificates for notation that a demand has been made.
Any shareholder making a demand within the above referenced ten-day period
will thereafter be entitled only to payment for the fair value of the shares and
will not be entitled to vote or to exercise any other rights as a shareholder,
and any shareholder failing to make a timely demand will be bound by the terms
of the merger.
Failure of a shareholder to submit his or her Citizens' certificates within
the above referenced 20-day period will, at the option of Citizens (or
Bancshares, as successor to Citizens), terminate his or her rights under Section
31-1- 123 of the Act unless a court of general civil jurisdiction, for good and
sufficient cause shown, otherwise directs.
All written communications from shareholders with respect to the exercise
of dissenters' rights should be mailed before the effective time of the merger
to Citizens Southern Bank, Inc., 111 Citizens Drive, Beckley, West Virginia
25801, Attention: Samuel L. Elmore, and, after the effective time of the merger,
to First Community Bancshares, Inc., One Community Place, P.O. Box 989,
Bluefield, Virginia 24605, Attention: Ruth White. Under the Act, if you
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wish to dissent from the merger, it is not sufficient merely to vote against, to
abstain from voting or to fail to vote on the proposal to approve the merger
agreement and plan of merger. You must also comply with the conditions relating
to the separate written notice of objection to the merger, the separate written
demand for payment of the fair value of shares of Citizens' common stock and the
deposit of the stock certificates.
Within ten days after the merger, Bancshares (as successor to Citizens)
will give written notice to each dissenting shareholder who has made a demand
for payment, including an offer to pay a specified price deemed by Bancshares
(as successor to Citizens) to be the fair value of such shares. The notice and
offer will be accompanied by a balance sheet of Citizens, as of the latest
available date and not more than 12 months prior to making such offer, and a
profit and loss statement for the 12-month period ended on the date of the
balance sheet.
If, within 30 days after the merger, the dissenting shareholder and
Bancshares (as successor to Citizens) agree on the fair value of his or her
Citizens' shares, payment will be made by Bancshares within 90 days after the
merger. Upon payment of the agreed value, the dissenting shareholder will cease
to have any interest in the shares. If, within the 30-day period after the
merger, the dissenting shareholder and Bancshares do not agree upon the fair
value of such shares, then, within 30 days after receipt of written demand from
the dissenting shareholder (which written demand must be given within 60 days
after the merger), or otherwise within the 60-day period at its own election,
Bancshares will file a complaint in a court of general civil jurisdiction
requesting that the fair value of such shares be found and determined. The
complaint will be filed in any court of general civil jurisdiction in Raleigh
County, West Virginia. If Bancshares fails to institute the proceedings, any
dissenting shareholder may do so in the name of Bancshares. All dissenting
shareholders, wherever residing, may be made parties to the proceedings as an
action against their shares quasi in rem. A copy of the complaint will be served
on each dissenting shareholder who is a resident of West Virginia in the same
manner as in other civil actions. Dissenting shareholders who are nonresidents
of West Virginia will be served a copy of the complaint by registered or
certified mail, return receipt requested. In addition, service upon such
nonresident shareholders shall be made by publication, as provided in Rule
4(e)(2) of the West Virginia Rules of Civil Procedure. All shareholders who are
parties to the proceeding will be entitled to judgment against Bancshares for
the amount of the fair value of their shares.
In any such proceeding, the court may, if it so elects, appoint one or more
persons as appraisers to receive evidence and recommend a decision as to fair
value. The appraisers will have the power and authority as specified in the
order of their appointment or any subsequent appointment. The judgment will be
payable only upon and concurrently with the surrender to Bancshares of the
certificates representing such shares. Upon payment of the judgment, the
dissenting shareholder will cease to have any interest in such shares. The
judgment will include an allowance for interest at a rate as the court may find
to be fair and equitable in all the circumstances, from the date on which the
vote was taken on the merger to the date of payment.
The costs and expenses of any such proceeding will be determined by the
court and will be assessed against Bancshares (as successor to Citizens), but
all or any part of such costs and expenses may be apportioned and assessed as
the court may deem equitable against any or all of the dissenting shareholders
who are parties to the proceeding to whom Bancshares has made an offer to pay
for the shares if the court finds that the action of such shareholders in
failing to accept the offer was arbitrary or vexatious or not in good faith.
Expenses will include reasonable compensation for the reasonable expenses of the
appraisers, but will
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exclude the fees and expenses of counsel for and experts employed by any party;
provided, that, if the fair value of the shares as determined materially exceeds
the amount which Bancshares offered to pay, or if no offer was made, the court
in its discretion may award to any shareholder who is a party to the proceeding
such sum as the court may determine to be reasonable compensation for any expert
or experts employed by the shareholder in the proceeding. Any party to the
proceeding may appeal any judgment or ruling of the court as in other civil
cases.
Citizens' shareholders should note that cash paid to dissenting
shareholders in satisfaction of the fair value of their shares will be
recognized as gain or loss for federal income tax purposes, depending upon the
shareholders tax basis in the stock. See "Material Federal Income Tax
Consequences of the Merger" on page .
Any Citizens' shareholder who has properly exercised the right to dissent
as described above will have only the rights of a dissenting shareholder under
the Act and will have no right to receive Bancshares' shares or cash instead of
fractional shares in the merger. Any Citizens' shareholder who withdraws a
demand for payment as described above in accordance with the Act or who becomes
ineligible for such payment will have the right to receive the Bancshares'
shares, cash instead of fractional shares and accrued and unpaid dividends to
the extent permitted by the merger agreement.
Failure by a Citizens' shareholder to follow the steps required by the Act
for perfecting dissenters' rights may result in the loss of such rights. In view
of the complexity of these provisions and the requirement that they be strictly
complied with, if you are considering dissenting from the approval and adoption
of the merger agreement and exercising your dissenters' rights under the Act,
you should consult your legal advisors.
REGULATORY CONSIDERATIONS
Citizens and Bancshares have agreed to use their reasonable best efforts to
obtain all regulatory approvals required to consummate the transactions
contemplated by the merger agreement, which include approval from the Office of the
Comptroller of the Currency as well as("OCC") under the West Virginia Division of Banking
and various state and other regulatory authorities. It is anticipated thatBank Merger Act. First Community
Bank has filed an application with the applications of the Comptroller of the Currency and the West Virginia Division
of Banking will be acted upon by September 2000. The merger cannot proceed in
the absence of these regulatory approvals. There can be no assurance asOCC to when
these regulatory approvals will be obtained, that they will be obtained at all
or, if obtained, that there will not be any litigation challenging them. There
can likewise be no assurance that the United States Department of Justice or any
state attorney general will not attempt to challenge the merger on antitrust
grounds, or, if a challenge is made, there can be no assurance as to its result.
Citizens and Bancshares are not aware of any other material governmental
approvals or actions that are requiredobtain prior to the parties' consummation of the
merger other than those described below. It is presently contemplated that if
any additional governmental approvals or actions are required, they will be
sought. There can be no assurance, however, that any such additional approvals
or actions will be obtained.
THE SUBSIDIARY BANK MERGER
The merger of Citizens' into FCB is expected to occur early during the
fourth quarter of 2000. The merger is subject to approval of the
Comptroller of
the Currency under the Bank
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Merger Act.merger. In granting its approvalreviewing applications under the Bank Merger Act, the Comptroller
must considerOCC strives to
preserve the soundness of the national banking system and to promote market
structures conducive to competition and responsive to community needs. The OCC
considers:
- the effect of the transaction upon competition;
- the financial and managerial resources and future prospects of the
existingmerging and proposed institutionsresulting institutions;
- the performance of the applicants in helping to meet the credit needs of
the relevant communities, including low- and moderate-income
neighborhoods; and
- the convenience and needs of the communities to becommunity served.
Further, the Comptroller mayThe OCC will not approve any
subsidiary bank merger if ita transaction:
- that would result in a monopoly if itor would be in furtherance of any
combination, or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, if theStates; or
- whose effect of the subsidiary bank merger in any section of the countryUnited States may be to substantially
lessen competition, or to tend to create a monopoly, or if it would
bewhich in any other
manner would be in restraint of trade, unless the Comptroller finds that
the anticompetitiveprobable effects of the
subsidiary bank merger are clearly outweighed
in the public interest by the probable effect of such mergertransaction in meeting the convenience and needs of the communitiescommunity clearly
outweigh the anti-competitive effects of the transaction.
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Any transaction approved by the OCC may not be completed until 30 days
after the OCC's approval, during which time the U.S. Department of Justice may
challenge such transaction on antitrust grounds. With the approval of the OCC
and the U. S. Department of Justice, the waiting period may be reduced to 15
days.
Federal Reserve Board. Section 225.12(d)(1) of the Federal Reserve Board's
Regulation Y provides that the approval of the Federal Reserve Board is not
required for the merger of a subsidiary bank of a bank holding company with
another bank, if the transaction requires the prior approval of a federal
supervisory agency, in this case the OCC, under the Bank Merger Act and certain
other requirements are met. Under this regulation, First Community is not
required to submit any formal application or notice to the Federal Reserve
Board. When the OCC receives an application under the Bank Merger Act, it sends
copies to the appropriate Federal Reserve Bank, and the Department of Justice
and the FDIC.
State Approvals. First Community has filed an application with the Bureau
of Financial Institutions of the State Corporation Commission of the
Commonwealth of Virginia to obtain prior approval of the merger.
Status of Applications and Notices. First Community, First Community Bank
and CommonWealth have filed all required applications with applicable regulatory
authorities in connection with the merger. There can be no assurance that all
requisite approvals will be obtained, that such approvals will be received on a
timely basis or that such approvals will not impose conditions or requirements
which, individually or in the aggregate, would so materially reduce the economic
or business benefits of the transactions contemplated by the merger agreement to
First Community that had such condition or requirement been known, First
Community, in its reasonable judgment, would not have entered into the merger
agreement. If any such condition or requirement is imposed, First Community may
elect not to consummate the merger. See " - Conditions to the Merger" beginning
on page .
BUSINESS PENDING THE MERGER
The merger agreement contains certain covenants of the parties regarding
the conduct of their respective businesses pending consummation of the merger.
These covenants, which are contained in Article IV of the merger agreement
included as Annex I hereto, are briefly described below.
Pending consummation of the merger, CommonWealth may not, among other
things, take the following actions without the prior written consent of First
Community:
- conduct its business other than in the ordinary and usual course
consistent with past practice or fail to use reasonable best efforts to
preserve its business organization, keep available the present services
of its employees and preserve for itself and First Community the goodwill
of the customers of CommonWealth and its subsidiaries and others with
whom business relations exist;
- issue, sell or otherwise permit to become outstanding, or authorize the
creation of any additional shares of capital stock or rights to acquire
such stock, other than pursuant to stock options outstanding on the date
of the merger agreement and disclosed to First Community;
- declare any dividend on its capital stock;
- amend its articles of organization and bylaws (or equivalent documents);
- hire any person as an employee unless hired to fill a vacancy or if the
person's salary is less than $40,000 on an annual basis;
- take specified actions with respect to its business, including without
limitation enter into or amend an employment, consulting or severance
agreement with, or increase the rate of compensation of, its directors,
officers or employees; enter into, establish, adopt or amend any employee
benefit plan; purchase or sell assets or deposits; make capital
expenditures in excess of $10,000 individually or $50,000 in the
aggregate; change its methods of accounting; enter into, amend or modify
material contracts; settle litigation claims; enter into new businesses;
change its principal policies; enter into derivatives contracts; incur
indebtedness (other than various forms of short-term indebtedness); make
certain real estate
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investments; make or modify loans outside of the ordinary course; or
acquire any debt security or equity other than federal funds or
short-term U.S. Government securities;
- take any action that would prevent or impede the merger from qualifying
as a reorganization under the Internal Revenue Code;
- take any action that would result in (1) any of the representations and
warranties of CommonWealth not being true and correct in any material
respect at or prior to the effective time of the merger, (2) any of the
conditions to consummation of the merger set forth in the merger
agreement not being satisfied or (3) a material violation of the merger
agreement, except in each case as may be required by applicable law and
regulation; or
- agree to do any of the foregoing.
The merger agreement also provides that pending consummation of the merger,
First Community may not, and will cause each subsidiary of First Community not
to, take the following actions without the prior written consent of
CommonWealth:
- take any action that would prevent or impede the merger from qualifying
as a reorganization under the Internal Revenue Code;
- take any action that would result in (1) any of the representations and
warranties of First Community not being true and correct in any material
respect at or prior to the effective time of the merger, (2) any of the
conditions to consummation of the merger set forth in the merger
agreement not being satisfied or (3) a material violation of the merger
agreement, except in each case as may be required by applicable law and
regulation; or
- agree to do any of the foregoing.
BOARD OF DIRECTORS' COVENANT TO RECOMMEND THE MERGER AGREEMENT
Pursuant to the merger agreement, the CommonWealth board of directors is
required to recommend that CommonWealth shareholders approve the merger
agreement at all times prior to and during the meeting of CommonWealth
shareholders at which the merger agreement is to be served.considered by them. However,
nothing in the merger agreement prevents the CommonWealth board of directors
from withholding, withdrawing, amending or modifying its recommendation if it
determines, after consultation with its outside counsel, that such action is
legally required in order for the directors of CommonWealth to comply with their
fiduciary duties to the CommonWealth shareholders under applicable law, provided
that any such action in connection with an "acquisition proposal" must comply
with the requirements described under "-- No Solicitation" below.
NO SOLICITATION
The merger agreement provides that CommonWealth shall not, and that
CommonWealth shall direct and use its reasonable best efforts to cause its
directors, officers, employees, agents and representatives not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the making of any proposal or offer with respect to an "acquisition
proposal," which is defined to mean any proposal or offer with respect to a
merger, reorganization, share exchange, consolidation or similar transaction
involving CommonWealth, or any purchase of all, or substantially all, of the
assets of CommonWealth, or more than 10% of the outstanding equity securities of
CommonWealth (any such proposal or offer is hereinafter referred to as an
"acquisition proposal").
In the merger agreement, CommonWealth also agreed that it would not and
that it would direct and use its reasonable best efforts to cause its directors,
officers, employees, agents and representatives not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an acquisition
proposal, or otherwise knowingly facilitate any effort
32
or attempt to make or implement an acquisition proposal. However, nothing in the
merger agreement prevents CommonWealth or its board of directors from:
- complying with its disclosure obligations under federal or state law;
- providing information in response to a request therefor by a person who
has made an unsolicited bona fide written acquisition proposal if the
CommonWealth board of directors receives from the person so requesting
such information an executed confidentiality agreement;
- engaging in any negotiations or discussions with any person who has made
an unsolicited bona fide written acquisition proposal; or
- recommending such an acquisition proposal to the shareholders of
CommonWealth,
if and only to the extent that in each of the last three cases referred to
above, (1) the CommonWealth board of directors determines in good faith after
consultation with outside legal counsel that such action would be required in
order for its directors to comply with their respective fiduciary duties under
applicable law and (2) the CommonWealth board of directors determines in good
faith after consultation with its financial advisor that such acquisition
proposal, if accepted, is reasonably likely to be consummated, taking into
account all legal, financial and regulatory aspects of the proposal and the
person making the proposal and would, if consummated, result in a transaction
more favorable to CommonWealth's shareholders from a financial point of view
than the merger with First Community. An acquisition proposal which is received
and considered by CommonWealth in compliance with these requirements is referred
to as a "superior proposal." CommonWealth is required to notify First Community
immediately if any such inquiries, proposals or offers are received by, any such
information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, CommonWealth or any of its
representatives.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Pursuant to the merger agreement, First Community and CommonWealth made
certain customary representations and warranties relating to their respective
companies, subsidiaries, businesses and matters related to the merger. For
detailed information concerning these representations and warranties, reference
is made to Article V of the merger agreement included as Annex I hereto. Such
representations and warranties generally must remain accurate through the
completion of the merger unless the fact or facts that caused a breach of a
representation and warranty has not had or is not reasonably likely to have a
material adverse effect on the party making the representation and warranty. See
"-- Conditions to the Merger" beginning on page .
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of articles of merger with
the Virginia State Corporation Commission pursuant to the Virginia Stock
Corporation Act and a notice of consummation is filed with the OCC pursuant to
OCC guidelines, unless a different date and time is specified as the effective
time in such documents. Articles of merger and notice of consummation will be
filed only after the satisfaction or waiver of all conditions to the merger set
forth in the merger agreement on a date selected by First Community after such
satisfaction or waiver, which is no later than the later of (A) five business
days after such satisfaction or waiver or (B) the first month end following such
satisfaction or waiver, or on such other date as First Community and
CommonWealth may mutually agree upon.
A closing will take place immediately prior to the effective time of the
merger or on such other date as First Community and CommonWealth may mutually
agree upon.
AMENDMENT OF THE MERGER AGREEMENT
To the extent permitted under applicable law, the merger agreement may be
amended or supplemented at any time by written agreement of the parties whether
before or after the approval of the shareholders of CommonWealth, except that
after shareholders of CommonWealth have approved the merger agreement no
33
amendment or supplement which by law requires further approval by the
shareholders of CommonWealth may be made without obtaining such approval.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated:
- by mutual consent of the parties;
- by a non-breaching party if the other party (1) breaches any covenants or
undertakings contained in the merger agreement or (2) breaches any
representations or warranties contained in the merger agreement, in each
case if such breach has not been cured within thirty days after notice
from the terminating party and which breach would be reasonably expected,
individually or in the aggregate with other breaches, to result in a
material adverse effect with respect to the breaching party;
- by either First Community or CommonWealth if the merger is not
consummated by September 30, 2003, unless the failure to consummate the
merger is due to a breach by (1) the party seeking such termination of
its obligations under the merger agreement or (2) any director or
executive officer of CommonWealth (to the extent CommonWealth is seeking
to terminate) through such director's or executive officer's breach of
his respective shareholder agreement;
- by either party if any required regulatory approvals for consummation of
the merger is not obtained;
- by either party if the shareholders of CommonWealth do not approve the
merger agreement at a meeting of the shareholders of CommonWealth duly
called for such purpose;
- by First Community, prior to the special meeting, if CommonWealth shall
have breached the covenants described under "-- No Solicitation" on page
, the CommonWealth board of directors shall have failed to recommend
that the shareholders of CommonWealth approve the merger agreement or has
withdrawn, modified or changed such recommendation in a manner which is
adverse to First Community, or CommonWealth breaches its covenants
requiring the calling and holding of a meeting of shareholders to
consider the merger agreement;
- by First Community if a third party commences a tender offer or exchange
offer for 20% or more of the outstanding CommonWealth common stock and
the board of directors of CommonWealth recommends that CommonWealth
shareholders tender their shares in the offer or otherwise fails to
recommend that they reject the offer within a specified period; and
- by CommonWealth at any time prior to the special meeting in order to
concurrently enter into an acquisition agreement or similar agreement
with respect to an unsolicited "superior proposal," as defined in the
merger agreement and under "-- No Solicitation" beginning on page ,
which has been received and considered by CommonWealth in compliance with
the applicable terms of the merger agreement, provided that CommonWealth
has notified First Community at least five business days in advance of
any such termination and given First Community the opportunity during
such period to make an offer at least as favorable as the superior
proposal, as determined by the CommonWealth board of directors.
CommonWealth also may terminate the merger agreement if during the five-day
period commencing on the date on which the last required governmental approval
of the merger is received and all statutory waiting periods have expired (which
date is referred to in this document and in the merger agreement as the
"determination date"), it so notifies First Community and the average daily per
share closing prices of the First Community common stock during the 20 trading
days ending five business days prior to the effective time of the merger (the
"First Community average price") is more than $35.81, or 115.0% of $31.14 (the
"First Community starting price"), the average of the closing prices of a share
of First Community common stock for the thirty-day period ending on January 15,
2003.
If the foregoing condition is applicable, CommonWealth has the right to
terminate the merger agreement, which would not require any action of
CommonWealth shareholders. The CommonWealth board of directors has
34
made no decision as to whether it would exercise its right to terminate the
merger agreement under such circumstances. Any such decision would be made by
the CommonWealth board of directors in light of the circumstances existing at
the time that the CommonWealth board of directors has the opportunity to make
such an election, if any. Before making any determination to terminate the
merger agreement, the CommonWealth board of directors would consult with its
financial and other advisers and would consider all financial and other
information it deemed relevant to its decision. In this regard, the CommonWealth
board of directors would consider many of the same factors that it considered in
determining whether to approve and adopt the merger agreement, including the
principal factors discussed under "The Merger -- CommonWealth's Reasons for the
Merger" beginning on page . In particular, the CommonWealth board of
directors may analyze, among other factors, whether the then current
consideration to be received in the merger would deliver more value to
CommonWealth shareholders than the value that could be expected if CommonWealth
were to continue as an independent company, which would occur if the
CommonWealth board of directors were to exercise CommonWealth's right to abandon
the merger and First Community determined not to increase the exchange ratio. In
addition, the ComptrollerCommonWealth board of directors would consider whether, in light
of market and other industry conditions at the time of such decision, the
exchange ratio remains fair from a financial point of view to the holders of
shares of CommonWealth common stock. There can be no assurance that the
CommonWealth board of directors would exercise its right to terminate the merger
agreement if each of the conditions set forth above were applicable. If
CommonWealth elected not to exercise its right to terminate the merger
agreement, the exchange ratio and the dollar value of the consideration which
the shareholders of CommonWealth would receive would continue to be calculated
as set forth in the merger agreement.
If CommonWealth elected to exercise its right to terminate the merger
agreement, it must takegive notice to First Community during the five-day period
commencing with the determination date. During the five-day period, First
Community has the option to increase the consideration payable to CommonWealth
shareholders by adjusting the exchange ratio in the manner described below.
First Community is under no obligation to adjust the exchange ratio and there
can be no assurance that First Community would elect to adjust the exchange
ratio if CommonWealth were to exercise its option to terminate the merger
agreement. Any such decision would be made by First Community in light of the
circumstances existing at the time First Community has the opportunity to make
such an election. If First Community elects to adjust the exchange ratio, it
must give CommonWealth prompt notice of that election and the adjusted exchange
ratio, in which case CommonWealth will not have any right to terminate the
merger agreement as a result of the circumstances described above.
The operation and effect of the provisions of the merger agreement dealing
with an increase in the market price of the First Community common stock may be
illustrated by the following two scenarios:
(1) One scenario is that the First Community average price is above the
First Community starting price of $31.14 but is not above $35.81. Under
such circumstances, the First Community average price would not be more
than 115% of the First Community starting price. As a result, there
would be no increase in the merger consideration and CommonWealth would
be obligated to consummate the merger (assuming all other conditions to
CommonWealth's obligations were satisfied or waived).
(2) A second scenario is that the First Community average price increases
to more than $35.81. Under such circumstances, CommonWealth would have
the right but not the obligation to terminate the merger agreement
unless First Community elected to increase the exchange ratio to the
number (rounded to the nearest one ten-thousandth) obtained by dividing
(A) $30.50 by (B) the product of $31.14 multiplied by 1.15.
First Community also may terminate the merger agreement if within five days
following the determination date, it notifies CommonWealth and the First
Community average price is less than $26.47, or 85.0% of $31.14, the First
Community starting price.
If the foregoing condition is applicable, First Community has the right to
terminate the merger agreement. If First Community elected not to exercise its
right to terminate the merger agreement, the exchange ratio and the dollar value
of the consideration which the shareholders of CommonWealth would receive would
continue to be calculated as set forth in the merger agreement.
35
If First Community elects to exercise its right to terminate the merger
agreement, it must give notice to CommonWealth during the five-day period
commencing with the determination date. During the five-day period, CommonWealth
has the option of decreasing the consideration payable to CommonWealth
shareholders by adjusting the exchange ratio in the manner described below. If
CommonWealth elects to adjust the exchange ratio, it must give First Community
prompt notice of that election and the adjusted exchange ratio, in which case
First Community will not have any right to terminate the merger agreement as a
result of the circumstances described above.
The operation and effect of the provisions of the merger agreement dealing
with a decline in the market price of the First Community common stock may be
illustrated by the following two scenarios:
(1) One scenario is that the First Community average price is below the
First Community starting price of $31.14 but is not less than $26.47.
Under such circumstances, the First Community closing price would not
be less than 85% of the First Community starting price. As a result,
there would be no decrease in the merger consideration and First
Community would be obligated to consummate the merger (assuming all
other conditions to CommonWealth's obligations were satisfied or
waived).
(2) A second scenario is that the First Community average price declines to
less than $26.47. Under such circumstances, First Community would have
the right but not the obligation to terminate the merger agreement
unless CommonWealth elected to decrease the exchange ratio to the
number (rounded to the nearest one ten-thousandth) obtained by dividing
(A) $30.50 by (B) the product of $31.14 multiplied by .85.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you are considering the recommendation of CommonWealth's board of
directors with respect to approving the merger agreement and the merger, you
should be aware that CommonWealth directors and executive officers have
interests in the merger as individuals which are in addition to, or different
from, their interests as shareholders of CommonWealth. The CommonWealth board of
directors was aware of these factors and considered them, among other matters,
in approving the merger agreement and the merger. These interests are described
below.
Stock Options. The merger agreement provides that at the effective time of
the merger, each outstanding and unexercised option to purchase shares of
CommonWealth common stock granted pursuant to the CommonWealth stock option plan
will cease to represent the right to acquire shares of CommonWealth common stock
and will be converted into accounta right to acquire shares of First Community common
stock, with the same terms as previously in effect, except that the number of
shares subject to such converted options and the exercise price will be adjusted
to reflect the exchange ratio. See " - Assumption of CommonWealth Stock Options"
beginning on page . At the record date for the special meeting, the
directors and executive officers of CommonWealth as a group (seven persons) held
options to purchase an aggregate of 105,117 shares of CommonWealth common stock,
including options to purchase 35,625, 20,022 and 14,781 shares held by Messrs.
Davis, Bien and Ranson, respectively.
Agreements with Executive Officers of CommonWealth. Pursuant to the merger
agreement, First Community agreed to honor various employment and/or severance
agreements which have been entered into by CommonWealth, including the
agreements described below.
J.E. Causey Davis, president and chief executive officer and a director of
CommonWealth, has entered into an employment agreement with CommonWealth, dated
as of December 20, 1996. Under the agreement, Mr. Davis is currently paid a base
salary of $145,187 per year. The agreement is for an initial three year term,
which automatically extends for an additional one-year period on each January 1.
The agreement further provides that if Mr. Davis' employment is terminated
(which includes a reduction in pay or benefits, a change in duties or
responsibilities in the nature of a demotion, or a requirement to work at a
location more than 25 miles from Richmond) following a change in control (which
would include the consummation of the merger with First Community Bank), Mr.
Davis is entitled to receive his current salary for a period of three years
following the date of termination.
36
A condition to First Community's obligation to consummate the merger is
that Mr. Davis enter into an employment agreement with First Community Bank. The
proposed employment agreement provides that Mr. Davis relinquish all amounts due
him under his prior employment agreement, including any amounts that may
otherwise result from the consummation of the merger. The employment agreement
will have a term of two years with an option to extend for additional one-year
terms. Pursuant to such agreement, Mr. Davis shall become an Executive Vice
President and the Chief Executive Officer of the Eastern Virginia Region of
First Community Bank. Mr. Davis shall be paid a minimum base salary of $150,000
per year and shall be entitled to participate in various benefit plans of First
Community Bank. Mr. Davis is entitled to receive severance pay under certain
circumstances, including a termination for other than cause, disability or Mr.
Davis' death or a termination by Mr. Davis due to a breach of the agreement by
First Community Bank or due to certain adverse actions taken by First Community
Bank with respect to Mr. Davis.
CommonWealth has also entered into severance agreements with William D.
Bien and William W. Ranson. Each severance agreement provides severance pay
benefits to the officer if his employment is terminated under certain
circumstances following a change in control (which would include consummation of
the merger with First Community Bank). If there is such a change in control at
any time during the term of the agreement, and thereafter the officer's
employment was terminated either by CommonWealth or the acquiror for any reason
other than for cause (i.e., a continued and willful failure to perform duties or
conduct demonstrably and materially injurious to CommonWealth's success), or by
the officer following an assignment of duties inconsistent with senior officer
status, a material reduction in pay or benefits, a change in duties or
responsibilities in the nature of a demotion or a requirement to work at a
location more than 25 miles from Richmond, the officer generally would be
entitled to receive his current salary and the continuation of life, health,
disability and dental insurance benefits for a period of 24 months following the
date of termination.
Director of First Community. Pursuant to the merger agreement, First
Community agreed to take all action necessary to appoint or elect, effective
upon consummation of the merger, Harold V. Groome, Jr., a director of
CommonWealth, as a director of First Community.
Director of First Community Bank. Pursuant to the merger agreement, First
Community and First Community Bank agreed to take all action necessary to
appoint or elect, effective upon consummation of the merger, Harold V. Groome,
Jr. and Franklin P. Hall, directors of CommonWealth, as directors of First
Community Bank.
Indemnification and Insurance. CommonWealth's directors and officers are
entitled to continuing indemnification against certain liabilities by virtue of
provisions contained in CommonWealth's articles of incorporation and bylaws and
the merger agreement. Pursuant to the merger agreement, First Community agreed
for a period of six years to indemnify and hold harmless each present and former
director, officer and employee of CommonWealth determined as of the effective
time of the merger against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the effective time of the
merger, whether asserted or claimed prior to, at or after the effective time of
the merger, arising in whole or in part out of or pertaining to the fact that he
or she was a director, officer, employee, fiduciary or agent of CommonWealth or
is or was serving at the request of CommonWealth as a director, officer,
employee, fiduciary or agent of another corporation, partnership, joint venture,
trust or other enterprise, including without limitation matters related to the
negotiation, execution and performance of the existing and
proposed institutionsmerger agreement or the
consummation of any of the transactions contemplated by the merger agreement, to
the fullest extent to which such indemnified parties would be entitled under the
articles of incorporation and bylaws of CommonWealth, or any agreement,
arrangement or understanding disclosed by CommonWealth to First Community
Reinvestmentpursuant to the merger agreement, in each case as in effect on the date of the
merger agreement.
Pursuant to the merger agreement, First Community agreed to purchase an
extended reporting period endorsement under CommonWealth's existing directors'
and officers' liability insurance policy for CommonWealth's directors and
officers or a substitute policy which shall provide such directors and officers
with coverage following the effective time of the merger for an additional three
years of not less than the existing coverage
37
under, and have other terms no materially less favorable on the whole to, the
insured persons than the directors' and officers' liability insurance coverage
presently maintained by CommonWealth, provided that First Community will not be
required to expend in any one year an amount in excess of the annual premiums
currently paid by CommonWealth for such insurance (the "Insurance Amount"), and
further provided that if First Community is unable to maintain or obtain the
insurance specified above as a result of the preceding provision, First
Community shall use its reasonable best efforts to obtain the most advantageous
coverage as is available for the Insurance Amount with respect to acts or
omissions occurring prior to the effective time of the merger by such directors
and officers in their capacities as such.
Other than as set forth above, no director or executive officer of
CommonWealth has any direct or indirect material interest in the merger, except
insofar as ownership of CommonWealth common stock might be deemed such an
interest. See "Certain Beneficial Owners of CommonWealth Common Stock" beginning
on page .
CERTAIN EMPLOYEE MATTERS
The merger agreement contains certain agreements of the parties with
respect to various employee matters, which are briefly described below.
As soon as administratively practicable after the effective time of the
merger, First Community will take all reasonable action so that employees of
CommonWealth will be entitled to participate in the First Community employee
benefit plans of general applicability to the same extent as similarly-situated
employees of First Community and its subsidiaries. For purposes of determining
eligibility to participate in, the vesting of benefits and for all other
purposes, other than for accrual of pension benefits, under the First Community
employee benefit plans, First Community will recognize years of service with
CommonWealth to the same extent as such service was credited for such purpose by
CommonWealth.
If employees of CommonWealth or any of its subsidiaries become eligible to
participate in a medical, dental or health plan of First Community, First
Community will cause each such plan to:
- waive any preexisting condition limitations to the extent such conditions
are covered under the applicable medical, health or dental plans of First
Community,
- provide full credit under such plans for any deductibles, co-payment and
out-of-pocket expenses incurred by the employees and their beneficiaries
during the portion of the calendar year prior to such participation, and
- waive any waiting period limitation or evidence of insurability
requirement which would otherwise be applicable to such employee on or
after the effective time of the merger to the extent such employee had
satisfied any similar limitation or requirement under an analogous plan
prior to the effective time of the merger.
An employee of CommonWealth (other than an employee who is a party to an
employment or severance agreement) whose employment is terminated other than for
cause following the effective time of the merger, shall be entitled to receive
certain severance payments based upon the employee's years of service with
CommonWealth.
RESALE OF FIRST COMMUNITY COMMON STOCK
The First Community common stock issued pursuant to the merger will be
freely transferable under the Securities Act of 1977 in meeting1933, except for shares issued
to any CommonWealth shareholder who may be deemed to be an affiliate of First
Community for purposes of Rule 144 promulgated under the credit needsSecurities Act of 1933
or an affiliate of CommonWealth for purposes of Rule 145 promulgated under the
Securities Act of 1933. Affiliates will include persons (generally executive
officers, directors and 10% shareholders) who control, are controlled by or are
under common control with (1) First Community or CommonWealth at the time of the
community, including low-income and moderate-income
neighborhoods, served byspecial meeting or (2) First Community at or after the institutions. Applicable regulations also require
publication of noticeeffective time of the
applications for approvalmerger.
Rule 145 will restrict the sale of First Community common stock received in
the merger by affiliates and certain of their family members and related
interests. Generally speaking, during the year following the effective
38
time of the subsidiary bank
mergersmerger, those persons who are affiliates of CommonWealth at the time
of the special meeting, provided they are not affiliates of First Community at
or following the effective time of the merger, may publicly resell any First
Community common stock received by them in the merger, subject to certain
limitations as to, among other things, the amount of First Community common
stock sold by them in any three-month period and as to the manner of sale. After
the one-year period, such affiliates may resell their shares without such
restrictions so long as there is adequate current public information with
respect to First Community as required by Rule 144. Persons who are affiliates
of First Community after the effective time of the merger may publicly resell
the First Community common stock received by them in the merger subject to
similar limitations and subject to certain filing requirements specified in Rule
144. At the present time, it is anticipated that only three affiliates of
CommonWealth will become affiliates of First Community after the merger (i.e.,
the directors of CommonWealth who will become directors of First Community Bank
and Mr. Davis).
The ability of affiliates to resell shares of First Community common stock
received in the merger under Rules 144 or 145 as summarized herein generally
will be subject to First Community's having satisfied its reporting requirements
under the Securities Exchange Act of 1934 for specified periods prior to the
time of sale. Affiliates also would be permitted to resell First Community
common stock received in the merger pursuant to an opportunityeffective registration
statement under the Securities Act of 1933 or another available exemption from
the Securities Act of 1933 registration requirements. Neither the registration
statement of which this prospectus/proxy statement is a part nor this
prospectus/proxy statement cover any resales of First Community common stock
received by persons who may be deemed to be affiliates of First Community or
CommonWealth in the merger.
CommonWealth has agreed in the merger agreement to use its reasonable best
efforts to cause each person who may be deemed to be an affiliate of it for
purposes of Rule 145 to deliver to First Community a letter agreement intended
to ensure compliance with the public to comment on the applications in
writing and to request a hearing.
MATERIALSecurities Act of 1933.
FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGERGeneral. The following section describes theis a description of certain material U.S. federal income
tax consequences of the merger to shareholders of CommonWealth, which is based
upon the opinion of Kelley Drye & Warren LLP, legal counsel to First Community.
The federal income tax laws are complex and the tax consequences of the merger
may vary depending upon each shareholder's individual circumstances or tax
status. Accordingly, this description is not a complete description of all of
the consequences of the merger and, in particular, may not address federal
income tax considerations that may affect the treatment of shareholders subject
to special treatment under United States federal income tax law (including, for
example, foreign persons, financial institutions, dealers in securities, traders
in securities who elect to apply a mark-to-market method of accounting,
insurance companies, tax-exempt entities, holders who acquired their shares of
Citizens'CommonWealth common stock pursuant to the exercise of an employee stock option
or right or otherwise as compensation and holders who hold Citizens'CommonWealth common
stock as part of a capital asset"hedge," "straddle" or "conversion transaction"). In
addition, no opinion is expressed with respect to the tax consequences of the
merger under applicable foreign, state or local laws or under any federal tax
laws other than those pertaining to the income tax. This description is based on
laws, regulations, rulings and judicial decisions as in effect on the date of
this prospectus/proxy statement, without consideration of the particular facts
or circumstances of any holder of CommonWealth common stock. These authorities
are all subject to change and any such change may be made with retroactive
effect. No assurance can be given that, after any such change, this description
would not be different.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND UPON THE FACTS OF YOUR PARTICULAR SITUATION. ACCORDINGLY, WE
STRONGLY URGE YOU TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE PARTICULAR
FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES TO YOU OF THE
MERGER.
The Merger. The merger, when consummated in accordance with the terms of
the merger agreement, will constitute a "reorganization" within the meaning of
Section 1221368(a) of the Internal Revenue Code of 1986, as amended to the date of
this prospectus/proxy statement (the "Code"), and, isaccordingly, neither First
Community nor CommonWealth will recognize any taxable gain or loss as a result
of the opinionmerger.
39
The federal income tax consequences of counselthe merger to Bancshares. This section does not apply to special classes of
taxpayers, such as:
- financial institutions,
- insurance companies,
- tax-exempt organizations,
- dealers in securities or currencies,
- traders in securities that elect to use a mark to market method of
accounting,
- persons that hold Citizens'CommonWealth
shareholder generally will depend on whether the shareholder receives cash,
First Community common stock as partor a combination thereof in exchange for the
shareholder's shares of CommonWealth common stock.
- A CommonWealth shareholder who receives solely First Community common
stock in exchange for all of such shareholder's shares of CommonWealth
common stock pursuant to the merger will not recognize gain or loss on
the exchange. However, if the shareholder receives cash in lieu of a
straddle or
conversion transaction,
- persons who are not citizens or residentsfractional share interest in First Community common stock, the
shareholder will be treated as having received a fractional share of
First Community common stock in the merger and having immediately
exchanged that fractional share for cash in a taxable redemption by First
Community. The shareholder's tax basis in the First Community common
stock actually received pursuant to the Merger will equal such
shareholder's tax basis in the shares of CommonWealth common stock being
exchanged, reduced by any amount allocable to a fractional share interest
of First Community common stock for which cash is received. The holding
period of First Community common stock received will include the holding
period of the United States, and
- shareholders who acquired their shares of Citizens'CommonWealth common stock throughbeing exchanged.
- A CommonWealth shareholder who receives solely cash in exchange for all
of such shareholder's shares of CommonWealth common stock pursuant to the
exercisemerger generally will recognize capital gain or loss in an amount equal
to the difference between the amount of an employeecash received and the
shareholder's aggregate tax basis for such shares of CommonWealth common
stock, optionwhich gain or otherwise as compensation.
The followingloss will be long-term capital gain or loss if such
shares of CommonWealth common stock were held for more than one year. If,
however, any such CommonWealth shareholder is based upontreated under the Code its legislative history, existingas
the constructive owner of shares of CommonWealth common stock that are
exchanged for shares of First Community common stock in the merger or
owns shares of First Community common stock actually or constructively
after the merger, some or all of any gain realized by the shareholder may
not qualify for treatment as capital gain but instead may, to the extent
of CommonWealth's accumulated earnings and proposed regulations thereunder and published rulings and decisions, allprofits, be treated as currently in effect asreceipt
of a dividend taxable at ordinary income rates. Under the constructive
ownership rules of the date hereof, and all of which are subject to
change, possibly with retroactive effect. Tax considerations under state, local
and foreign laws are not addressed in this proxy statement/prospectus. AllCode, a shareholder may be treated as owning stock
that is actually owned by another person or entity. CommonWealth
shareholders should consult with their own tax advisors as to the specific tax
consequencespossibility that
all or a portion of any cash received in exchange for their shares of
CommonWealth common stock will be treated as a dividend.
- A CommonWealth shareholder who receives both First Community common stock
and cash consideration in exchange for all of his or her shares of
CommonWealth common stock generally will recognize gain, but not loss, to
the extent of the merger in their particular circumstances, includinglesser of (a) the applicability and effectexcess, if any, of (a) the sum of the
alternative minimumaggregate fair market value of the First Community common stock received
(including any fractional share of First Community common stock deemed to
be received and exchanged for cash) and the amount of cash received
(excluding any cash received in lieu of a fractional share of First
Community common stock) over (b) the shareholder's aggregate tax basis in
the shares of CommonWealth common stock exchanged in the merger; and (b)
the amount of cash received by such shareholder.
- Any gain recognized with respect to a block of CommonWealth shares will
generally be long-term capital gain if the shares of CommonWealth common
stock exchanged were held for more than one year. However, if the receipt
of cash in exchange for such block of CommonWealth shares is treated as
equivalent to the distribution of a dividend under the Code, such gain
will be treated as a dividend to the extent of such shareholder's ratable
share of the undistributed accumulated earnings and profits of
CommonWealth. CommonWealth shareholders should consult their tax advisors
as to the possibility that all or a portion of any state, localcash received in
exchange for their CommonWealth common stock will be treated as a
dividend.
- Such shareholder's aggregate tax basis in the First Community common
stock received pursuant to the merger will equal such shareholder's
aggregate tax basis in the shares of CommonWealth common stock being
exchanged, reduced by any amount allocable to a fractional share interest
of First Community common stock for which cash is received and by the
amount of any cash consideration received, and
40
increased by the amount of taxable gain, if any, recognized by such
shareholder in the merger (including any portion of such gain that is
treated as a dividend).
Cash in Lieu of Fractional Shares. No fractional shares of First Community
common stock will be issued in the merger. A CommonWealth shareholder who
receives cash in lieu of a fractional share will be treated as having received
such fractional share pursuant to the merger and then as having exchanged such
fractional share for cash in a redemption by First Community. A CommonWealth
shareholder should generally recognize capital gain or foreignloss on such a deemed
redemption of the fractional share in an amount determined by the excess of the
amount of cash received and otherthe shareholder's tax lawsbasis in the fractional share.
Any capital gain or loss will be long-term capital gain or loss if the
CommonWealth common stock exchanged was held for more than one year.
Dissenting Shareholders. Holders of CommonWealth common stock who dissent
with respect to the merger, as discussed under "Dissenters' Rights" beginning on
page , and who receive cash in respect of changestheir shares of CommonWealth
common stock generally will be treated in those laws.
30
41the same manner as a holder who
exchanges his or her shares of CommonWealth common stock solely for cash in
accordance with the above discussion.
Closing Opinion. It is a condition precedent to the obligations of First
Community and CommonWealth to effect the merger that Citizensthey receive an opinion
from Kelley Drye & Warren LLP, dated as of counsel,the effective time of the merger,
that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. It is also a
condition toSuch opinion
will be based upon facts existing at the effective time of the merger, that Bancshares receive anand in
rendering such opinion, of its counsel that
the merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that no gain or loss will
be recognized by shareholders of Citizens who receive shares of Bancshares'
common stock in exchange for shares of Citizens' common stock, except with
respect to cash received instead of fractional shares.
In rendering these opinions, the counsel of Bancshares will require and rely as to factual matters, upon facts,
representations contained in letters to be
received from Citizens and Bancshares and may require and rely upon similar
letters, as to factual matters, from large Citizens' shareholders. Neither of
these tax opinionsassumptions that will be binding on the Internal Revenue Service. Neither
Bancshares nor Citizens intends to requestprovided by First Community, First
Community Bank, CommonWealth and others.
First Community and CommonWealth have not and will not seek any ruling from
the Internal Revenue Service as to the U.S. federal income tax consequences of the merger.
Based on factual representations of Bancshares and Citizens, for U.S.
federal income tax purposes:
- the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code,
- each of Bancshares and Citizens will be a party to that reorganization
within the meaning of Section 368(b) of the Code,
- no gain or loss will be recognized by shareholders of Citizens who
receive shares of Bancshares' common stock in exchange for shares of
Citizens' common stock, except with respect to cash received in lieu of
fractional share interests,
- the holding period of Bancshares' common stock received in exchange for
shares of Citizens' common stock will include the holding period of the
Citizens' common stock for which it is exchanged, assuming the shares of
Citizens' common stock are capital assets in the hands of the holder
thereof at the closing of the merger, and
- the basis of the Bancshares' common stock received in the merger will be
the same as the basis of the Citizens' common stock for which it is
exchanged, lessregarding any basis attributable to fractional shares for which
cash is received.
CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE OF BANCSHARES COMMON STOCK
A shareholder of Citizens who receives cash in lieu of a fractional share
of Bancshares' common stock will be treated as having received the fractional
share pursuantmatters relating to the merger, and
then as having exchangeda result there can be no assurance that the fractional share
for cash in a redemption by Bancshares subject to Section 302Internal Revenue Service will not
disagree with or challenge any of the Code. As a
result, a Citizens' shareholder will generally recognize gain or loss equal to
the difference between the amountconclusions described herein.
Backup Withholding. Non-corporate holders of cash received and the portion of the basis
of the shares of Bancshares'CommonWealth common stock allocable to his or her fractional
interest. This gain or loss will generally be capital gain or loss, and will be
long-term capital gain or loss if, as of the date of the exchange, the holding
period for such shares is greater than one year. Long-term capital gain of a
non-corporate holder is generally subject to tax at a maximum federal tax rate
of twenty percent.
31
42
DISSENTERS' RIGHTS
Citizens' shareholders who exercise their dissenters' rights and who
receive cash in exchange for their shares of Citizens' common stock will be
treated as having received that payment in redemption of their shares. In
general, the holder will recognize capital gain or loss measured by the
difference between the amount of cash received and the holder's adjusted tax
basis for the shares. If, however, the holder owns, either actually or
constructively, any Citizens' common stock that is exchanged in the merger for
Bancshares' common stock, the payment for dissenting shares to the holder could,
in certain limited circumstances, be treated as dividend income. In general,
under the constructive ownership rules of the Code, a holder may be considered
to own stock that is owned, and in some cases constructively owned, by certain
related individuals or entities, as well as stock that the holder (or related
individuals or entities) has the right to acquire. Each holder who contemplates
exercising dissenters' rights should consult his or her own tax advisor as to
the possibility that any payment to such holder will be treated as dividend
income.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of cash to a holder surrendering shares of Citizens' common stock
will
be subject to information reporting and backup withholding (whether or not
the holder also receives Bancshares' common stock)imposed at a rate of
31 percent of
the30% on any cash payablepayments they receive. CommonWealth shareholders will not be
subject to the holder, unless the holder furnishes itsbackup withholding, however, if they:
- furnish a correct taxpayer identification number and certify that they
are not subject to backup withholding on the substitute Form W-9 or
successor form included in the manner prescribed in applicable Treasury
Regulations, certifies that such number is correct, certifies as to no losselection form/letter of exemptiontransmittal they
will receive; or
- are otherwise exempt from backup withholding and meets certain other conditions.withholding.
Any amounts withheld from payments to a holder under the backup withholding rules will be allowed as
a refund or credit against the holder's U.S.a CommonWealth shareholder's United States federal
income tax liability, provided they furnish the required information is furnished to the
Internal Revenue Service.
Reporting Requirements. CommonWealth shareholders who receive First
Community common stock as a result of the merger will be required to retain
records pertaining to the merger and will be required to file with their United
States federal income tax return for the year in which the merger takes place a
statement setting forth certain facts relating to the merger.
ACCOUNTING TREATMENT BancsharesOF THE MERGER
The merger will exchange 435,000 of its common stock with an estimated
total value of $6,777,000 for 100% of the outstanding shares of Citizens in a
transaction to be accounted for under the purchase method of accounting.accounting
under accounting principles generally accepted in the United States of America.
Under purchase accounting, Citizens'this method, CommonWealth's assets and liabilities are required toas of the date of the
merger will be adjusted torecorded at their respective estimated fair values. The estimatedAny
difference between the purchase price for CommonWealth and the fair value adjustments
utilizedof the
identifiable net tangible and intangible assets acquired will be recorded as
goodwill. In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," issued in preparingJuly 2001, the goodwill
resulting from the merger will not be amortized to expense, but instead will be
reviewed for impairment at least annually and to the extent goodwill is
impaired, its carrying value will be written down to its implied fair value and
a charge will be made to earnings. Core deposit and other intangibles with
definite useful lives recorded by First Community in
41
connection with the merger will be amortized to expense in accordance with the
new rules. The financial statements of First Community issued after the merger
will reflect the results attributable to the acquired operations of CommonWealth
beginning on the date of completion of the merger. The unaudited per share proformapro
forma financial information contained herein has been prepared using the
purchase method of accounting. See "Summary -- Unaudited Comparative Per Share
and Selected Financial Data" beginning on page .
EXPENSES OF THE MERGER
The merger agreement provides that each of CommonWealth and First Community
will bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated by the merger agreement, including fees and expenses
of its own financial consultants, accountants and counsel, except that expenses
of printing this proxy statement/prospectus have been determined by Bancshares
based upon information set forth in Citizens financial statements and other
available information. Bancshares cannot be sure that such estimated fair values
represent fair values that would ultimately be determined at the acquisition
date. The results of operations of Citizensdocument will be included inshared equally between First Community and
CommonWealth.
LISTING OF THE FIRST COMMUNITY COMMON STOCK
First Community has agreed to use its reasonable best efforts to cause the consolidated
results of operations of Bancshares from the date of acquisition. The proforma
information does not necessarily reflect the actual results that would have
occurred during the periods presented, had the companies been combined nor is it
indicative of future results of the combined companies.
EFFECT ON EMPLOYEES AND EMPLOYEE BENEFIT PLANS
All employees of Citizens immediately prior to the Effective Time of the
merger who are employed by FCB following the Effective Time of the merger
("Transferred Employees") will be covered by FCB's employee benefit plans with
eligibility based on their length of
32
43
service, compensation, job classification, and position with Citizens. FCB's
benefit plans will recognize for purposes of eligibility to participate and for
vesting, all service of Transferred Employees with Citizens, subject to
applicable break in service rules. Eligible employees of Citizens shall be
permitted to contribute funds distributed upon termination of Citizens' benefit
plans to similar FCB benefit plans.
RESTRICTIONS ON RESALES BY AFFILIATES
The
shares of Bancshares'First Community common stock to be issued in the merger to be approved
for listing on the Nasdaq market on which the First Community common stock may
then be listed, before the completion of the merger, subject to official notice
of issuance. First Community's common stock is expected to commence trading on
the Nasdaq National Market under the same symbol on April 1, 2003.
TERMINATION FEE
The merger agreement provides that CommonWealth must pay First Community a
$1.0 million termination fee under the circumstances and in the manner described
below:
- if the merger agreement is terminated by First Community for any of the
reasons described in the sixth or seventh bullet points in the first
paragraph under "-- Termination of the Merger Agreement" on page or
by CommonWealth for the reasons described in the last bullet point in
such section, CommonWealth must pay the termination fee to First
Community concurrently with the termination of the merger agreement); or
- if (x) the merger agreement is terminated by First Community pursuant to
the second bullet point in the first paragraph under "-- Termination of
the Merger Agreement" on page or by either First Community or
CommonWealth because the shareholders of CommonWealth have not approved
the merger agreement as required, or by either First Community or
CommonWealth because the merger has not been consummated by September 30,
2003 (other than due to a breach by the terminating party), and in the
case of any termination referenced in such bullet point, an "acquisition
proposal" (as defined under "-- No Solicitation" on page ) shall
have been publicly announced or otherwise communicated or made known to
the senior management or the board of directors of CommonWealth (or any
person shall have publicly announced, communicated or made known an
intention, whether or not conditional, to make an acquisition proposal)
at any time after the date of the merger agreement and prior to the time
that shareholders of CommonWealth vote on the merger agreement or the
date of termination of the merger agreement, as applicable and (y) within
18 months after such termination, CommonWealth enters into an agreement
with respect to an acquisition proposal or consummates a transaction
which is the subject of an acquisition proposal, then CommonWealth shall
pay to First Community the termination fee on the date of execution of
such agreement or consummation of a transaction which is the subject of
an acquisition proposal, as applicable, provided that if the date of
execution of such agreement is after 12 months but within 18 months after
such termination of the merger agreement, the termination fee shall be
payable by CommonWealth to First Community only upon consummation of a
transaction which is the subject of an acquisition proposal, regardless
whether such consummation occurs within 18 months after termination of
the merger agreement.
Any termination fee that becomes payable pursuant to the merger agreement
shall be paid by wire transfer of immediately available funds to an account
designated by First Community.
42
If CommonWealth fails to timely pay the termination fee to First Community,
CommonWealth will be registered underobligated to pay the Securities Actcosts and willexpenses incurred by First
Community to collect such payment, together with interest.
If the merger agreement is terminated by either First Community or
CommonWealth due to a breach of a representation, warranty, covenant or
undertaking, the party committing such breach shall be freely transferable, exceptliable for $350,000 to
the other party, without prejudice to the rights of First Community to receive
the $1.0 million termination fee set forth above. Under no circumstances,
however, shall First Community be able to collect more than $1.0 million as a
termination fee.
SHAREHOLDER AGREEMENTS
In connection with the execution of the merger agreement, each director and
executive officer of CommonWealth entered into a shareholder agreement with
First Community pursuant to which each director and executive officer agreed
that at any meeting of the shareholders of CommonWealth, or in connection with
any written consent of the shareholders of CommonWealth, the director and/or
officer shall:
- appear at such meeting or otherwise cause all shares issued to any shareholder who may be deemedof CommonWealth
common stock owned by him or her to be an affiliate of
Citizenscounted as present thereat for
purposes of Rule 145 undercalculating a quorum;
- vote (or cause to be voted), in person or by proxy, or deliver a written
consent (or cause a consent to be delivered) covering, all shares of
CommonWealth common stock beneficially owned by him or as to which he
has, directly or indirectly, the Securities Actright to direct the voting:
- in favor of 1933 (the
"Securities Act"). Resalesadoption and approval of shares issued to affiliates are not covered by
this proxy statement/prospectus. Affiliates include generally directors,
executive officersthe merger agreement and beneficial owners of 10 percentthe
merger;
- against any action or moreagreement that would result in a breach of any
classcovenant, representation or warranty or any other obligation or
agreement of capital stock of Citizens. Affiliates may not sell their shares of Bancshares'
common stock acquired in the merger except in transactions that are registered
under the Securities Act, permitted by the resale provisions of Rule 145 under
the Securities Act, or as otherwise permitted by the Securities Act.
The restrictions on resales by an affiliate extend also to related parties
of the affiliate, including parties related by marriage who live in the same
home as the affiliate.
Citizens has agreedCommonWealth contained in the merger agreement or of the
director contained in the shareholder agreement; and
- against any acquisition proposal (as defined in the merger agreement) or
any other action, agreement or transaction that is intended, or could
reasonably be expected, to use its best effortsmaterially impede, interfere or be
inconsistent with, delay, postpone, discourage or materially and
adversely affect consummation of the merger or the shareholder
agreement.
Pursuant to causethe shareholder agreement, each person who may be deemeddirector also agreed not to,
be an affiliate of Citizens to execute
and deliver to Bancshares a written agreement stating, among other things, that
the affiliate will not offer todirectly or indirectly, sell, transfer, pledge, assign or otherwise dispose of,
or enter into any contract, option, commitment or other arrangement or
understanding with respect to the sale, transfer, pledge, assignment or other
disposition of, any of the Bancshares'shares of CommonWealth common stock issuedowned by him
prior to the meeting at which shareholders of CommonWealth will consider the
merger agreement.
The shareholder agreements will remain in effect until the earlier of the
effective time of the merger or the termination of the merger agreement in
accordance with its terms.
DISSENTERS' RIGHTS
Holders of record of CommonWealth common stock who comply with the
procedures described below will be entitled to dissenters' rights under Article
15 of the Virginia Stock Corporation Act. Where appropriate, shareholders are
urged to consult with their legal counsel to determine the appropriate
procedures for the making of a notice of intent (as described below).
A VOTE IN FAVOR OF THE MERGER BY AN ELIGIBLE HOLDER WILL RESULT IN A WAIVER
OF SUCH ELIGIBLE HOLDER'S DISSENTERS' RIGHTS. FAILURE TO FOLLOW THE STEPS
REQUIRED BY ARTICLE 15 OF THE VIRGINIA STOCK CORPORATION ACT (DESCRIBED HEREIN)
FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
The following discussion is only a summary and does not purport to be a
complete statement of the law pertaining to dissenters' rights under the
Virginia Stock Corporation Act. The text of Article 15 of the Virginia Stock
Corporation Act is reprinted in its entirety as Annex III to this
prospectus/proxy statement. This summary is qualified in its entirety by a
reference to Article 15 of the Virginia Stock Corporation Act.
43
Under the Virginia Stock Corporation Act, eligible holders who follow the
procedures set forth in Article 15 of the Virginia Stock Corporation Act will be
entitled to receive payment of the "fair value" of such shares. Any eligible
holder who wishes to exercise dissenters' rights should review the following
discussion and Annex III carefully, because failure to comply in a timely and
proper manner with the procedures specified may result in the loss of
dissenters' rights under the Virginia Stock Corporation Act.
An eligible holder wishing to exercise dissenters' rights must deliver to
CommonWealth, prior to or at the shareholders' meeting (but in any event before
the vote is taken), a written notice of intent to demand payment for the
eligible holder's shares. An eligible holder delivering a notice of intent must
not vote his shares of common stock in favor of the merger or he will lose his
dissenters' rights. All notices of intent should be sent or delivered to
CommonWealth, 900 N. Parham Road, Richmond, Virginia 23229, Attention: William
W. Ranson, Executive Vice President, Treasurer and Chief Financial Officer.
Within ten days after the effective date of the merger, if the shareholders
approve the merger agreement, CommonWealth shall deliver a dissenter's notice in
writing to all dissenting holders. The dissenter's notice shall:
- state where the dissenting holder's payment demands shall be sent and
where and when stock certificates shall be deposited;
- set a date by which the surviving corporation must receive the payment
demand; and
- include such other information as required by the Virginia Stock
Corporation Act.
A dissenting holder to whom a notice is sent must demand payment within the
time specified in the dissenter's notice, deposit his stock certificates in
accordance with the terms of the dissenter's notice and make certain
certifications required by the Virginia Stock Corporation Act. If a dissenting
holder fails to take such actions, the dissenting holder will lose his
dissenters' rights.
Within 30 days of CommonWealth's receipt of a demand for payment from a
dissenting holder, CommonWealth must pay the dissenting holder CommonWealth's
estimate of the fair value of the dissenting holder's shares plus interest. With
any payment, CommonWealth must provide its most recent year-end and interim
financial statements, an explanation of how CommonWealth calculated the fair
value of the shares and interest, a statement of the dissenting holder's right
to continue to demand fair value for his shares and a copy of Article 15 of the
Virginia Stock Corporation Act. CommonWealth's payment obligation may be
enforced by a dissenting holder on an expedited basis in a Virginia circuit
court, if necessary.
A dissenting holder who is not satisfied with the amount paid or offered by
CommonWealth must notify CommonWealth of the dissenting holder's own estimate of
the fair value of his shares and the amount of interest due (less any amount
already received by the dissenting holder from CommonWealth). This notice must
be given in writing within 30 days of the date that affiliateCommonWealth made or offered
to make payment for the dissenting holder's shares.
If a dissenting holder's demand for payment remains unsettled, CommonWealth
is obligated to commence a proceeding to determine the fair value of the shares
and accrued interest within 60 days of the receipt of the dissenting holder's
payment demand. If CommonWealth fails to commence such proceeding in accordance
with the Virginia Stock Corporation Act, CommonWealth must pay the dissenting
holder the amount demanded by the dissenting holder. The appraisal proceeding
must be brought in a Virginia circuit court.
Dissenting holders considering seeking appraisal should be aware that the
fair value of their shares of common stock, as determined under Article 15 of
the Virginia Stock Corporation Act, could be more than, the same as, or less
than, the merger consideration that would be paid to them pursuant to the merger
agreement. The costs and expenses of the appraisal proceeding will be determined
by the court and assessed against CommonWealth unless the court determines that
the dissenting holder did not act in good faith in demanding payment of the fair
value of their shares, in which case, costs and expenses may be assessed against
the dissenting holder.
44
Dissenting holders will only be entitled to receive payment in accordance
with Article 15 of the Virginia Stock Corporation Act and will not be entitled
to vote their shares of common stock or exercise any other rights of a
shareholder. A dissenting holder may withdraw his demand only with the consent
of CommonWealth.
If any eligible holder who demands appraisal of his shares under Article 15
fails to perfect, or effectively withdraws or loses, his right to appraisal, as
provided in the Virginia Stock Corporation Act, the shares of CommonWealth stock
of such holder will be converted into the right to receive the merger
consideration in accordance with the merger agreement.
OPERATIONS OF FIRST COMMUNITY AFTER THE MERGER
For the remainder of 2003, First Community expects to achieve minimal
operational cost savings, revenue enhancements and other operating synergies
subsequent to the merger, which cost savings will be offset by core deposit
amortization expense created by the acquisition of CommonWealth that will
represent an incremental cost of $500,000 annually.
For 2004 and beyond, First Community expects operational cost savings,
revenue enhancements and other operating synergies from the merger with
CommonWealth. The cost savings and operating synergies are expected to amount to
approximately 7% of CommonWealth's current level of operating expenses and are
to be derived primarily from elimination of duplicate legal, accounting and
shareholder-related costs along with savings from the integration of back-office
operations. In addition, because CommonWealth will be merged with and into First
Community, the costs associated with CommonWealth operating as a publicly-held
entity also will be eliminated. Although First Community anticipates certain
cost savings, a portion of these savings will be offset by increased costs
associated with the application of First Community's employee benefit program to
the employees of CommonWealth.
First Community also anticipates that it will be able to increase revenues
from the CommonWealth franchise by cross-selling products and services to
CommonWealth customers that are currently not offered by CommonWealth (e.g.,
asset, trust and estate management, cash management and First Community Bank's
deposit overdraft protection program). First Community has not estimated these
revenue enhancements, however, and did not include them in its financial
analysis of the merger.
Because of the uncertainties inherent in merging two financial
institutions, changes in the regulatory environment and changes in economic
conditions, no assurances can be given that any particular level of cost
savings, revenue enhancements and other operating synergies will be realized,
that any such cost savings, revenue enhancements and other operating synergies
will be realized over the time period currently anticipated or that such cost
savings, revenue enhancements and other operating synergies will not be offset
to some degree by increases in other expenses, including expenses related to
integrating the two companies.
Based on the assumptions set forth above, First Community anticipates that
the acquisition of CommonWealth will decrease its earnings by $.02 to $.03 per
diluted share in 2003 and with no material dilution or accretion in 2004. No
assurances can be given that cost savings or any revenue enhancements will be
realized at any given time in the future.
MARKET FOR COMMON STOCK AND DIVIDENDS
The First Community common stock currently is traded on the Nasdaq SmallCap
Market under the symbol "FCBC." First Community's common stock is expected to
commence trading on the Nasdaq National Market under the same symbol on April 1,
2003. The CommonWealth common stock is traded on the OTC Bulletin Board under
the symbol "CWBV.OB."
As of December 31, 2002, there were 9,888,482 shares of First Community
common stock outstanding, which were held by approximately 3,350 holders of
record; and as of the record date for the special meeting, there were
shares of CommonWealth common stock outstanding, which were held by
approximately
holders of record. Such numbers of shareholders do not reflect the number of
individuals or institutional investors holding stock in nominee name through
banks, brokerage firms and others.
45
The following table sets forth during the periods indicated the high and
low sales prices of the First Community common stock and the CommonWealth common
stock as reported on the Nasdaq SmallCap Market (through March 31, 2003) and on
the Nasdaq National Market (beginning April 1, 2003) and OTC Bulletin Board and
the dividends declared per share of First Community common stock and
CommonWealth common stock.
FIRST COMMUNITY COMMONWEALTH
--------------------------- ---------------------------
DIVIDENDS DIVIDENDS
MARKET PRICE DECLARED MARKET PRICE DECLARED
--------------- PER --------------- PER
HIGH LOW SHARE HIGH LOW SHARE
------ ------ --------- ------ ------ ---------
2003
Second Quarter (through
)........................ $ $ $ $ $ $--
First Quarter.................. $ $ $0.26 $ $ $--
2002
First Quarter.................. $30.75 $25.36 $0.25 $12.40 $10.80 $--
Second Quarter................. 33.00 28.00 0.25 13.00 12.10 --
Third Quarter.................. 33.10 28.00 0.25 19.50 12.54 --
Fourth Quarter................. 33.33 29.17 0.25 19.00 16.65 --
2001
First Quarter.................. 18.88 17.13 0.21 9.57 6.875 --
Second Quarter................. 30.00 17.85 0.21 13.28 8.86 --
Third Quarter.................. 33.80 29.75 0.21 14.00 12.87 --
Fourth Quarter................. 31.60 23.75 0.26 13.875 12.05 --
The following table shows the closing price per share of the First
Community common stock and the CommonWealth common stock on (1) January 27,
2003, the last trading day preceding public announcement of the merger
agreement, and (2) , 2003, the last full trading day for which
closing prices were available at the time of the printing of this document. The
historical prices are as reported on the Nasdaq SmallCap Market and OTC Bulletin
Board. The following table also includes the equivalent price per share of
CommonWealth common stock on those dates. The equivalent per share price
reflects the value of the First Community common stock which would be received
by CommonWealth shareholders who receive shares of First Community common stock
in the merger exceptbased on an assumed exchange ratio of shares of First
Community common stock for each share of CommonWealth common stock.
HISTORICAL MARKET
VALUE PER SHARE EQUIVALENT MARKET
------------------------ VALUE
FIRST PER SHARE OF
DATE COMMUNITY COMMONWEALTH COMMONWEALTH(1)
- ---- --------- ------------ -----------------
January 27, 2003................................... $28.31 $18.75 $
, 2003................................ $ $ $
- ---------------
(1) The equivalent prices per share of CommonWealth common stock on the
indicated dates were determined by multiplying the assumed exchange ratio of
by the closing price per share of the First Community common stock on
the indicated date. The actual exchange ratio will be determined by dividing
$30.50 by the average closing prices of the First Community common stock
during the 20 trading day period ending five business days preceding the
effective time of the merger.
Shareholders are advised to obtain current market quotations for the First
Community common stock and the CommonWealth common stock. The market price of
the First Community common stock at the effective time of the merger or at the
time shareholders of CommonWealth who receive First Community common stock in
compliance with Rule 145the merger receive certificates evidencing such shares following the election
period to be conducted after the merger is consummated may be higher or lower
than the market price at the time the merger agreement was executed, at the date
of mailing of this document or at the time of the special meeting.
46
INFORMATION ABOUT FIRST COMMUNITY
GENERAL
First Community. First Community is a bank holding company incorporated
under the Securities Act, in a transaction that counsel
to Bancshares believes is otherwise exempt from the registration requirementslaws of the Securities Act, or in an offering registered underState of Nevada and the Securities Act.
MANAGEMENT
In the eventparent company of liquidation, dissolution or winding up of the affairs of
Citizens, the rights of shareholders of Citizens' common stock are similar to
those outlined above for Bancshares' shareholders. Additionally, Citizens' right
to participate in the assets of any affiliateFirst Community
Bank, a national bank upon an affiliate bank's
liquidation or recapitalization is similar to the rights outlined above for
Bancshares.
After the merger takes place, Citizens' President and Chief Executive
Officer, Samuel L. Elmore, will be employed by FCB as an Executive Vice
President -- Regional Director. Mr. Elmore, during Citizens' last fiscal year,
served on Citizens' board of directors and has been a director since 1998. Mr.
Elmore's principal occupation for the past five years has been President and
Chief Executive Officer (March 2000 -- Present) of Citizens, Executive Vice
President (May 1998 -- March 2000) of Citizens, and President and Chief
Executive Officer (June 1995 -- April 1998) of Bank One, West Virginia. During
the past two fiscal years, Mr. Elmore deferred his salary during 1998 and was
paid $117,000 in 1999.
33
44
INFORMATION ABOUT BANCSHARES
GENERAL
Bancshares serves as the holding company for FCB whichthat conducts commercial
and retail banking operations within the
states of Virginia, West Virginia and North CarolinaCarolina. UFM is a wholly-owned
subsidiary of First Community Bank and serves as a wholesale and retail
distribution channel for First Community Bank's mortgage banking business
segment. Stone Capital Management, Inc., an asset management company, is also a
wholly-owned subsidiary of First Community Bank. First Community and its
wholly-owned subsidiaries had total assets of approximately $1.5 billion at
December 31, 2002 and conduct commercial and mortgage banking business through
31 full-service banking operationsthe 41 branches of the Bank and 11 mortgage brokerage offices. Bancshares was formed in 1990 by the mergeroffices of UFM. First
Community's principal executive offices are located at One Community Place,
Bluefield, Virginia 24605. First Community's telephone number is (276) 326-9000.
First Community Bancshares, Inc. and Flat Top Bancshares, Inc. and is headquartered in
Bluefield, Virginia. In 1997 Bancshares changed its Corporate domicile from
Delaware to Nevada.
On December 29, 1995, Bancshares reorganized its then existing bank
subsidiary,Bank. First Community Bank Inc., Princeton, West Virginia,engages in a general commercial
and retail banking business through its branch facilities. It provides safe
deposit services and makes all types of loans, including commercial, mortgage
and personal loans. First Community Bank also provides trust services and its
deposits are insured by splitting
it into two separate banks. This was accomplished by charteringthe FDIC. First Community Bank is a second,
affiliated, Federal Deposit Insurance Corporation insured state commercial bank
formed through the acquisitionmember of the
assetsFederal Reserve System and assumptionis a member of the liabilitiesFederal Home Loan Bank of sixAtlanta.
Regulatory oversight of First Community Bank Inc.'s operating divisions and branches located
within Mercer County, West Virginia. This new bank, First Community Bank of
Mercer County, Inc., headquartered in Princeton, West Virginia, consisted of
five divisions with offices in Princeton, Bluefield, and Bluewell, Trust and
Financial Services Division, and Corporate/Administrative Division. The main
office of the reorganized First Community Bank, Inc., was relocated to
Buckhannon, West Virginia. Subsequent bank and branch acquisitions, as mentioned
below, have added to bank's assets base and market coverage area.
Currently, Bancshares is a bank holding company and the banking operations
are expected to remain the principal business and major source of revenue.
Bancshares provides a mechanism for ownership of the subsidiary banking
operations, provides capital funds as required and serves as a conduit for
distribution of dividends to stockholders. Bancshares also considers and
evaluates options for growth and expansion of the existing subsidiary banking
operations.
Bancshares currently derives substantially all of its revenues from
dividends paid by its subsidiary bank. Dividend paymentsconducted by the bank are
determined in relation to earnings, asset growth and capital position and are
subject to certain restrictions by regulatory agencies.
ACQUISITIONS
Past acquisitions have included Citizens Bank of Tazewell on July 3, 1996,
headquartered in Tazewell, Virginia, the Grafton and Rowlesburg, West Virginia
branches of Huntington National Bank West Virginia on September 26, 1996, Blue
Ridge Bank, headquartered in Sparta, North Carolina on April 9, 1997 with
offices located in Sparta, Elkin, Hays and Taylorsville, North Carolina, and
three branches acquired from First Virginia Bank and Premier Bankshares in
September 1997. Additionally, a denovo branch was opened in Wytheville, Virginia
on August 1, 1997.
More recently and effective with the close of business on April 30, 1999,
First Community Bank, Inc. was converted to a national association entitled
First Community Bank, N.A. Concurrent with this conversion, FCB acquired the
outstanding stock of Blue Ridge Bank from Bancshares; and the operations of
First Community Bank of Mercer County, Inc., First Community Bank of Southwest
Virginia, Inc. and Blue Ridge Bank were merged with and into FCB. Additionally,
the Corporate headquarters of Bancshares and FCB were relocated to the new
Corporate Center in Bluefield, Virginia.
34
45
In September 1999, the Company's wholly owned banking subsidiary, FCB,
acquired United First Mortgage, Inc. (UFM). UFM is a mortgage brokerage business
organized under the laws of the State of Virginia. UFM conducts operations
through eleven facilities situated in eastern Virginia.
CAPITAL
The Federal Reserve has established a minimum requirement for a bank
holding company's ratio of capital to risk-weighted assets (including on-balance
sheet activities and certain off-balance sheet activities, such as standby
letters of credit) of 8 percent. At least half of a bank holding company's total
capital is required to be composed of common equity, retained earnings, and
qualifying perpetual preferred stock, less certain intangibles. This is called
Tier 1 capital. The remainder may consist of certain subordinated debt, certain
hybrid capital instruments and other qualifying preferred stock, and a limited
amount of the loan loss allowance. This is called Tier 2 capital. Tier 1 capital
and Tier 2 capital combined are referred to as total capital. At June 30, 2000,
Bancshares' Tier 1 and total capital ratios were 11.7 percent and 12.9 percent,
respectively. Since January 1, 1998, the Federal Reserve has required bank
holding companies that engage in trading activities to adjust their risk-based
capital to take into consideration market risk that may result from movements in
market prices of covered trading positions in trading accounts, or from foreign
exchange or commodity positions, whether or not in trading accounts, including
changes in interest rates, equity prices, foreign exchange rates or commodity
prices. Any capital required to be maintained pursuant to these provisions may
consist of new "Tier 3 capital" consisting of forms of short-term subordinated
debt. In addition, the Federal Reserve has issued a policy statement, pursuant
to which a bank holding company that is determined to have weaknesses in its
risk management processes or a high level of interest rate risk exposure may be
required to hold additional capital.
The Federal Reserve also has established minimum leverage ratio
requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet specified criteria,
including having the highest regulatory rating. Bank holding companies that do
not meet the specified criteria generally are required to maintain a leverage
ratio of from at least 100 to 200 basis points above the stated minimum.
Bancshares' leverage ratio at June 30, 2000 was 8.2 percent. Bank holding
companies experiencing internal growth or making acquisitions are expected to
maintain strong capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets. Furthermore, these
capital requirements indicate that the Federal Reserve will continue to consider
a "tangible Tier 1 leverage ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activity.
The FDIC has adopted minimum risk-based and leverage ratio regulations to
which state-chartered banks are subject that are substantially similar to those
requirements established by the Federal Reserve. The Office of the
Comptroller of the Currency also has similar regulationsCurrency. First Community Bank, through its wholly owned
subsidiary, UFM, provides for the origination and sale of mortgages to secondary
sources.
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to executive compensation, benefit plans,
voting securities and the principal holders thereof, certain relationships and
related transactions and other related matters as to First Community is
incorporated by reference or set forth in First Community's annual report on
Form 10-K for the year ended December 31, 2002, which is incorporated herein by
reference. Shareholders desiring a copy of such document may contact First
Community at its address or telephone number indicated under "Where You Can Find
More Information" beginning on page .
INFORMATION ABOUT COMMONWEALTH
GENERAL
CommonWealth is a Virginia-chartered commercial bank, which began business
in April 1986 and is headquartered in Chesterfield County, Virginia.
CommonWealth operates four retail banking offices, all in the Richmond
metropolitan area. CommonWealth had total assets of $134.1 million, total
deposits of $107.3 million and total stockholders' equity of $8.3 million as of
December 31, 2002. CommonWealth's executives offices are located at 900 N.
Parham Road, Richmond, Virginia 23229.
CommonWealth is a community-oriented bank that would applyprovides a range of
financial banking services to Bancshares'
national bank subsidiary. Under federal banking laws, failure to meet the
minimum regulatory capital requirements could subject a banking institution tosmall and medium-sized businesses and individuals
within its market area. CommonWealth's lending activities include commercial,
consumer, construction, home equity and mortgage loans. CommonWealth offers a
variety of enforcement remedies available to federal regulatory authorities,deposit options, including in the most severe cases, the terminationcertificates of deposit, insuranceIRAs, money
market deposit accounts, savings accounts, personal and commercial demand
checking accounts and interest-bearing checking accounts.
CommonWealth's primary sources of revenue are interest income from its
lending activities and interest earned on its investment of money in federal
funds and securities. The major expenses of CommonWealth are interest on
deposits and general and administrative expenses such as salaries, employee
benefits, office occupancy and other related expenses.
CommonWealth is subject to regulation by the FDICBoard of Governors of the
Federal Reserve and placing the institution into conservatorship or receivership. The
capital ratiosBureau of Bancshares' bank subsidiary exceeded all minimum regulatory
capital requirements asFinancial Institutions of June 30, 2000.
35
46
DEPOSIT INSURANCE ASSESSMENTS
Thethe State
Corporation Commission of the Commonwealth of Virginia. CommonWealth's deposits of Bancshares' subsidiary
are insured by the FDIC up to a maximum of $100,000 for each insured depositor.
47
At February 28, 2003, CommonWealth had 39 employees. None of CommonWealth's
employees are represented by any collective bargaining unit and employee
relations are believed to be good. CommonWealth is not involved in any
litigation matters, either individually or in the limits required by law.aggregate, that are likely to
have a material adverse effect on its financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion, which analyzes the major elements of
CommonWealth's financial condition and results of operations, should be read in
conjunction with the financial statements and the accompanying notes contained
elsewhere in this prospectus/proxy statement.
OVERVIEW
As of December 31, 2002, CommonWealth had total assets of $134.1 million,
net loans of $106.2 million, total deposits of $107.3 million and total
stockholders' equity of $8.3 million. CommonWealth had net income for the years
ended December 31, 2002 and 2001 of $922,000 and $560,000 respectively. Return
on average stockholders' equity was 11.82% and 7.93% for the years ended
December 31, 2002 and 2001, respectively. For the semi-annual period beginningyears ended December 30, 1999,
the effective rate of assessments imposed31, 2002
and 2001, CommonWealth's return on all FDIC deposits for deposit
insurance ranges from 0 to 27 basis pointsaverage assets was 0.85% and 0.74%,
respectively. Basic earnings per $100 of insured deposits,
depending on the institution's capital positionshare were $1.28 and other supervisory factors.
However, because legislation enacted in 1996 requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation, the FDIC is currently assessing
both BIF-insured deposits and SAIF-insured deposits an additional 2.06 basis
points per $100 of deposits on an annualized basis to cover those obligations.
You can find additional information about Bancshares in Bancshares' Annual
Report on Form 10-K$.78 for the fiscalabove
respective years.
RESULTS OF OPERATIONS
NET INCOME
Net income for the year ended December 31, 1999,2002 was $922,000, a 64.6%
increase over net income for 2001 of $560,000. The increase was due primarily to
CommonWealth's increase in earning assets coupled with a significant reduction
in the cost of interest-bearing liabilities.
NET INTEREST INCOME
The principal source of earnings of CommonWealth is net interest income.
Net interest income is the difference between interest and Current
Reportsfees generated by
earning assets and interest expense paid to fund those assets. As such, net
interest income represents the gross profit from CommonWealth's lending,
investment and funding activities. Changes in net interest income result from
changes in volume and mix of these assets and liabilities, as well as changes in
the yield earned and rates paid.
For the year ended December 31, 2002, net interest income increased 37.8%,
from $3.2 million for 2001 to $4.5 million for 2002, despite a narrower net
interest margin than in 2001. Increases in the loan portfolio outstanding of 50%
and a reduction in CommonWealth's cost of funds contributed to the solid growth
in net interest income for 2002. Interest on Form 8-K dated February 22, 2000, June 13, 2000loans and June 30, 2000,
allinterest expense on
deposits represent the largest portion of total interest income and total
interest expense. Interest on loans increased $1.1 million or 20.6% over 2001.
Interest expense decreased $305,000 for a reduction of 12.9% from 2001.
NET INTEREST MARGIN
CommonWealth's net interest margin tightened from 4.57% in 2001 to 4.43% in
2002. The contraction resulted from a repricing of the earning asset portfolio
to lower rates while new loans are originated at a yield less than the average
portfolio. Average costs of deposits decreased from 4.67% for 2001 to 2.85% for
2002 as CommonWealth enjoyed the benefits of the Federal Reserve Bank's
reduction in short-term interest rates in 2001. The Wall Street Journal prime
rate declined from 9.5% on January 1, 2001 to 4.25% by the year's end.
CommonWealth has promoted loan products which are incorporated by referenceshorter in this proxy statement/prospectus.
See "Where You Can Find More Information" on page .
INFORMATION ABOUT CITIZENS
DESCRIPTION OF CITIZENS' BUSINESS
Citizens isterm and/or
have interest rates which adjust in accordance with a West Virginia state-chartered commercial bank that began
banking operationsdesignated index. By
taking these steps, CommonWealth has negated much of the impact of the declines
in Beckley, Raleigh County, West Virginia, on June 12, 1995,the prime rate. While CommonWealth's assets repriced downward faster than its
liabilities in a facility located on Citizens Drive2001, volume growth in Beckley.
BUSINESS OF CITIZENS
Citizens' primary business is attracting deposits from the local public and
investing those deposits in securities and loans to individuals and small
businesses in Beckley and surrounding market areas. The bank offers traditional
community banking services, including night depository, traveler's checks, wire
transfers, note collection and ATM's through a national network.
The bank's loan portfolio consists primarilyallowed CommonWealth's
net interest margin to decrease by only 14 basis points between 2001 and 2002.
48
INTEREST-EARNING ASSETS
Through 2002, CommonWealth continued its strategy of residential real estate
loans to individuals and businesses, commercial loans to small businesses and
consumer installment loans. Residential real estate loans consist primarily of
mortgages on the borrower's personal residence, and are typically secured by a
first lien on the subject property. Consumer and personal loans are generally
secured, often by first liens on automobiles, consumer goods or depositary
accounts. Commercial loans are generally secured by various collateral,
including commercial real estate, accounts receivable and business machinery and
equipment. The bank's lending personnel adhere to established lending limits and
authorities based on each individual's lending expertise and experience.
The principal economic risk associated with the bank's lending activities
is the creditworthiness of the bank's prospective borrowers. With anybuilding its asset
base through loan category, the level of risk increases or decreases depending on economic
conditions prevailing from time to time. The bank makes a substantial portion of
its loans to working individuals, small business and
36
47
professional persons.growth. As of December 31, 1999,2002, average interest-earning
assets increased $29.8 million to $100.9 million, or 41.9%, compared with the
bank'sDecember 31, 2001 average interest-earning assets of $71.0 million. Loan
portfolio growth accounted for $28.1 million of the increase in interest-earning
assets.
INTEREST-BEARING LIABILITIES
For the year ended December 31, 2002, average interest-bearing liabilities
increased $22.1 million, or 43.4%, compared with the December 31, 2001 amount,
and were used to fund loan growth. During 2002, CommonWealth's strong loan
growth was supported with comparable deposit growth and advances from the
Federal Home Loan Bank ("FHLB") of Atlanta. On average, noninterest-bearing
deposits represented 30.3% of total deposits for 2002 and FHLB advances
represented 12.8% of interest-bearing liabilities.
49
The following table provides for each category of earning assets and
interest-bearing liabilities, the average amount outstanding, the interest
earned or incurred on such amounts, and the average rate earned or incurred for
the year ended December 31, 2002 and 2001. The tables also provide the average
rate earned on total earning assets, the average rate paid on total
interest-bearing liabilities, and the net interest margin on average total
earning assets for the same periods.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------------ ---------- ---------- ----------- ---------- ----------
ASSETS:
Interest-earning assets:
Securities...................... $ 767,541 $ 39,764 5.18% $ 644,385 $ 52,584 8.16%
Federal funds sold.............. 7,437,170 120,105 1.61 5,807,847 226,264 3.90
Loans (net of unearned
income)(1).................... 89,966,802 6,327,308 7.03 61,829,982 5,244,413 8.48
Interest-bearing deposits in
banks......................... 2,692,119 44,497 1.65 2,763,199 85,403 3.09
------------ ---------- ----------- ----------
Total interest-earning
assets..................... 100,863,632 6,531,674 6.48 71,045,414 5,608,664 7.89
------------ ---------- ---- ----------- ---------- ----
Noninterest-earning assets:
Cash and due from banks......... 5,821,763 3,306,873
Premises and equipment.......... 868,019 839,018
Other investments............... 1,312,796 606,128
Other assets.................... 839,539 590,857
Less: allowance for loan
losses........................ (916,651) (743,449)
------------ -----------
Total assets.................... $108,789,098 $75,644,841
============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing deposits:
Money market and NOW accounts... $ 26,175,008 $ 504,516 1.93% $18,289,160 $ 605,001 3.31%
Regular savings................. 2,203,384 27,145 1.23 1,545,689 36,157 2.34
Time deposits < $100,000........ 28,255,638 1,033,776 3.66 24,243,346 1,375,021 5.67
Time deposits > $100,000........ 6,892,439 243,707 3.54 4,750,488 262,242 5.52
------------ ---------- ----------- ----------
Total interest-bearing
deposits...................... 63,526,468 1,809,144 2.85 48,828,684 2,278,421 4.67
------------ ---------- ----------- ----------
FHLB advances................... 9,319,219 250,212 2.68 1,979,452 86,231 4.36
Fed funds borrowed.............. 28,263 592 2.09
------------ ----------
Total interest-bearing
liabilities................ 72,873,950 2,059,948 2.83 50,808,136 2,364,652 4.65
------------ ---------- ---- ----------- ---------- ----
Noninterest bearing liabilities:
Demand deposits............... 27,654,701 17,257,522
Other liabilities............. 459,222 517,465
------------ -----------
Total liabilities............... 100,987,873 68,583,122
Stockholders' equity............ 7,801,225 7,061,848
------------ -----------
Total liabilities and
stockholders' equity.......... $108,789,098 $75,644,970
============ ===========
Net interest income............. $4,471,726 $3,244,012
========== ==========
Interest rate spread(2)......... 3.65% 3.24%
==== ====
Interest expense as a percentage
of average earning assets..... 2.04% 3.33%
==== ====
Net interest margin(3).......... 4.43% 4.57%
==== ====
50
- ---------------
(1) Nonaccruing loans are included in average loans outstanding.
(2) Interest rate spread is the average yield earned on earning assets less the
average rate paid on interest-bearing liabilities.
(3) Net interest margin is net interest income expressed as a percentage of
average earning assets.
The following table describes the impact on CommonWealth's interest income
and expense resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
DECEMBER 31,
-------------------------------------
2002 VS. 2001
-------------------------------------
INCREASE (DECREASE)
DUE TO CHANGES IN:
-------------------------------------
VOLUME RATE TOTAL
---------- ----------- ----------
Increase (decrease) in:
Interest-earning assets:
Securities................................. $ 54,517 $ (67,337) $ (12,820)
Federal funds sold......................... 343,785 (449,944) (106,159)
Loans net.................................. 3,020,959 (1,938,064) 1,082,895
Interest-bearing deposits in banks......... 12,796 (53,702) (40,906)
---------- ----------- ----------
Total interest income.................... 3,432,057 (2,509,047) 923,010
---------- ----------- ----------
Interest expense
Interest-bearing liabilities:
Money market and NOW....................... 63,684 (164,170) (100,486)
Regular savings............................ 8,558 (17,570) (9,012)
Time deposits < $100,000................... 114,807 (132,341) (17,534)
Time deposits > $100,000................... 80,669 (422,914) (342,245)
FHLB advances.............................. 577,303 (412,730) 164,573
---------- ----------- ----------
Total interest expense................... 845,021 (1,149,725) (304,704)
---------- ----------- ----------
Net interest earnings........................... $2,587,036 $(1,359,322) $1,227,714
========== =========== ==========
NONINTEREST INCOME
Noninterest income for the year ended December 31, 2002 amounted to
$581,000, an increase of $89,000 or 18.2%, compared to the 2001 level of
$491,000. Noninterest income is primarily generated through service fees on
deposit accounts, accounts receivable financing, increases in the cash surrender
value of bank owned life insurance and fees received for mortgage loan
originations.
NONINTEREST EXPENSES
Noninterest expenses increased 18.7% to $3.2 million for the year ended
December 31, 2002 from $2.7 million for the comparable period in 2001. As
economies of scale began to materialize, CommonWealth's efficiency ratio
(defined as non-interest expense divided by net interest income before
provisions for loan losses plus non-interest income) improved to 62.6% for 2002
versus 71.4% for 2001. Another method in evaluating efficiency is comparing
total operating expense as a percentage of average assets. This ratio improved
in 2002 by declining 61 basis points to 2.91% compared to 3.52% for 2001.
Salaries and employee benefits, which is a major factor in operating expenses,
continues to reflect efficiencies at 1.47% of average assets at December 31,
2002, compared to 1.83% of average assets at December 31, 2001.
51
ANALYSIS OF FINANCIAL CONDITION
ASSETS AND LOANS
At December 31, 2002, CommonWealth's total assets were $134.1 million, an
increase of $46.6 million or 53.2%, from total assets at December 31, 2001.
Asset growth was generated primarily through the loan portfolio. Average earning
assets represented 92.7% of average total assets at December 31, 2002.
Loans represent the largest component of earning assets. The loan portfolio
consistedis predominately comprised of loans on a secured basis, which management
believes is diversified among the various loan segments. Because CommonWealth's
focus is providing community-based financial services, it generally does not
make loans outside its principal market region. During the twelve months ended
December 31, 2002, net loans have increased $35.6 million to $106.2 million, a
50.5% increase. Loan demand continues to be strong in CommonWealth's market. As
a consequence of lower interest rates, loan yields declined 145 basis points to
7.03% during the twelve month period ended December 31, 2002. While lower
interest rates reduced loan yields, this was more than offset by lower funding
costs. For the year ended December 31, 2002, CommonWealth has reduced its
funding costs 182 basis points to 2.83%.
The following table provides information on the composition of
CommonWealth's loan portfolio by type of loan on the dates indicated.
DECEMBER 31,
----------------------------------------------------------------
2002 2001
------------------------------- ------------------------------
PERCENT OF PERCENT OF
TOTAL GROSS TOTAL GROSS
AMOUNT LOANS AMOUNT LOANS
------------ ---------------- ----------- ----------------
Commercial and industrial.... $ 16,465,376 15.32% $13,888,976 19.45%
SBA loans purchased.......... 665,381 0.62 1,213,374 1.70
Real estate construction..... 17,739,007 16.51 11,333,493 15.87
Secured by real estate....... 70,632,561 65.74 42,879,053 60.05
Consumer installment......... 1,946,223 1.81 2,087,648 2.93
------------ ------ ----------- ------
Total gross loans.......... $107,448,548 100.00% $71,402,544 100.00%
====== ======
Less deferred loan fees...... 183,848 141,979
Less allowance for loan
losses..................... 1,089,330 709,716
------------ -----------
Total net loans............ $106,175,370 $70,550,849
============ ===========
The following table presents the maturities of loans for CommonWealth as of
December 31, 2002 by variable and fixed maturities.
DECEMBER 31, 2002
------------------------------------------------------
AFTER ONE
WITHIN ONE BUT WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
----------- ----------- ----------- ------------
Total loans..................... $28,693,860 $23,559,463 $55,011,377 $107,264,700
=========== =========== =========== ============
Loans maturing after one year
with:
Fixed interest rates.......... 7,062,225 12,428,187 19,490,412
Variable interest rates....... 16,497,238 42,583,190 59,080,428
----------- ----------- ------------
Total loans................ $23,559,463 $55,011,377 $ 78,570,840
=========== =========== ============
ASSET QUALITY
As of December 31, 2002, $570,000 of loans were on non-accrual status and
no loans had been acquired through foreclosure. CommonWealth had non-accrual
loans of $4,000 as of December 31, 2001 and $822,000 in loans 90 days past due
which were still accruing interest. There was no real estate acquired through
foreclosure
52
at December 31, 2001. The ratio of allowance for loan losses to loans, net of
unearned income and fees, was 1.02% at December 31, 2002 compared with 1.00% at
December 31, 2001.
CommonWealth places a loan on non-accrual status when a loan is
specifically determined to be impaired or when principal is past due for 90 days
or more, unless the debt is both well secured and in the process of being
collected.
The following table presents information of CommonWealth's asset quality at
the dates indicated.
DECEMBER 31,
-------------------
2002 2001
-------- --------
Nonaccrual loans............................................ $570,412 $ 4,090
Loans past due 90 days accruing interest.................... -- 821,788
Troubled debt restructuring................................. -- --
-------- --------
Total nonperforming loans................................. $570,412 $825,878
Other real estate owned:
Foreclosed properties..................................... -- --
Other real estate owned................................... -- --
-------- --------
Total nonperforming assets.................................. $570,412 $825,878
======== ========
Nonperforming assets to period-end total loans and other
real estate owned......................................... 0.53% 1.16%
======== ========
Foregone interest income on nonaccrual loans................ $ 33,000 $ 5,000
======== ========
Interest income recorded on nonaccrual loans during the
year...................................................... $ 14,120 --
======== ========
PROVISION/ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the following:credit quality and risk of the loan portfolio. CommonWealth
maintains an allowance which management believes represents a conservative
estimate of potential losses in CommonWealth's loan portfolio. To achieve this
goal, the loan loss provision must be sufficient to cover loans charged-off plus
the growth in the loan portfolio. In determining the adequacy of the allowance
for loan losses, management uses a methodology that specifically identifies and
reserves for higher risk loans. A general reserve is established for
non-specifically reserved loans. Loans in a non-accrual status and over 90 days
past due are considered in this evaluation, as well as other loans that may be a
potential loss.
The provision for loan losses for the year ended December 31, 2002 was
$487,000, an increase of $199,000 compared with the provision made for the year
ended December 31, 2001. The increased level of the provision reflects the
growth in the loan portfolio. Loans charged-off amounted to $293,000 in 2002, of
which $165,000 related to one borrower connected to CommonWealth's receivable
financing operation. Management anticipates that additional provisions will be
needed in future periods to ensure an adequate allowance for loan losses. Since
the amount of the provisions are largely dependent on loan growth, the level of
which is difficult to ascertain, management is unable to precisely determine the
amount of provisions that may ultimately be necessary.
53
The following table shows CommonWealth's loan loss and recovery experience
for the past two years.
TYPE OF LOAN PERCENTAGE OF PORTFOLIO
-DECEMBER 31,
--------------------------
2002 2001
------------ ----------------------------------
Residential
Balance, beginning of period.............................. $ 709,716 $ 617,377
------------ -----------
Loans charged-of:
Real Estate Loans................ 53estate............................................. -- --
Commercial.............................................. 290,378 222,194
Consumer Loans............................... 14
Commercial Loans............................. 30
Construction Loans........................... 3installment.................................... 3,041 --
------------ -----------
Total loans charged-off................................... 293,419 222,194
------------ -----------
Recoveries of loans previously charged-off:
Real estate............................................. -- --
Commercial.............................................. 185,733 20,014
Consumer installment.................................... -- 6,219
------------ -----------
Total recoveries.......................................... 185,733 26,233
------------ -----------
Net loans recovered (charged-off)......................... (107,686) (195,961)
Provision for loan losses................................. 487,300 288,300
------------ -----------
Balance, end of period.................................... $ 1,089,330 $ 709,716
============ ===========
Average total loans....................................... $ 89,966,802 $61,829,982
============ ===========
Total loans (net of unearned income)...................... $107,264,700 $71,260,565
============ ===========
Net charge-offs (recoveries) to average loans............. 0.12% 0.32%
Provision for loan losses to average loans................ 0.54% 0.47%
Provision for loan losses to net charge-offs.............. 4.53 1.47
Allowance for loan losses to period-end loans............. 1.02% 1.00%
A breakdown of the allowance for loan losses for the past two years, along
with the percent of loans in each major category, is provided in the following
table. Management of CommonWealth does not believe that the allowance for loan
losses can be fragmented by category with any precision that would be useful to
investors. The bank's lending activitiesbreakdown of the allowance for loan losses is based primarily
upon factors discussed above in computing the allowance as a whole. Because all
of these factors are subject to a varietychange, the breakdown is not necessarily
indicative of lending limitsthe category of future losses.
DECEMBER 31,
-------------------------------------------
2002 2001
-------------------- --------------------
PERCENT OF PERCENT OF
LOANS LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Commercial and industrial.................... $ 514 15.32% $640 19.45%
SBA loans purchased.......................... 0.62 1.70
Real estate construction..................... 236 16.51 -- 15.87
Secured by real estate....................... 333 65.74 69 60.05
Consumer installment......................... 6 1.81 -- 2.93
------ ------ ---- ------
Total allowance for loan losses............ $1,089 100.00% $709 100.00%
====== ====== ==== ======
54
Management and the board of directors believe that federal law imposes. While differing limits applythe allowance at
December 31, 2002 was adequate relative to current levels of risk in certain circumstances
based on the
typeportfolio. Continued loan growth will warrant additional provisions in the
future.
LIQUIDITY AND FUNDING SOURCES
Liquidity represents an institution's ability to meet present and future
financial obligations through the sale or maturity of loanexisting assets or the
natureacquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
investments and loans maturing within one year. CommonWealth's ability to obtain
deposits, borrow from the FHLB and purchase funds at favorable rates determines
its liability liquidity. As a result of CommonWealth's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that CommonWealth maintains overall liquidity that is
sufficient to satisfy its depositors' requirements and meets its customers'
credit needs.
INVESTMENT ACTIVITIES
CommonWealth had no investments at December 31, 2002 or December 31, 2001
except for investments required by law in the Federal Reserve Bank, the FHLB of
Atlanta and stock in correspondent bank for CommonWealth. CommonWealth utilizes
cash as much as possible. The average loan to average deposit ratio for 2002 was
98.7% and 93.6% for the year ended December 31, 2001.
DEPOSITS
CommonWealth's deposit base offers it a primary source of funds to support
asset growth. As of December 31, 2002, total deposits equaled $107.3 million and
represented 80.0% of total assets. The deposit base is comprised of $35.3
million in certificates of deposit, of which $8.7 million had balances greater
than $100,000, $25.8 million in money market and interest-bearing checking
accounts, $2.2 million in savings accounts and $44.0 million in
non-interest-bearing demand deposits. With certificates of deposit representing
32.9% of total deposits at December 31, 2002, the maturing and repricing of
these deposits is an important variable for CommonWealth's net interest margin.
CommonWealth experienced favorable changes in its cost of funds during
2002. Total deposits increased $31.8 million, or 42.2%, from December 31, 2001.
The expansion of the borrower,deposit base basically funded CommonWealth's substantial
loan growth for 2002. The average cost of deposits decreased to 2.85% for the
year ended December 31, 2002 from 4.67% for the year ended December 31, 2001.
Of particular note in general,2002 was the $24.2 million increase in CommonWealth's
non-interest-bearing deposits. This reflects CommonWealth's strategy of
attracting low cost deposits and customers realizing the significant benefits
and value of banking with CommonWealth.
55
The average balance and rates for certain categories of deposits for the
two years ended December 31 are shown in the following table.
DECEMBER 31,
---------------------------------------------------------
2002 2001
--------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE BALANCE PAID RATE AVERAGE BALANCE PAID RATE
--------------- --------- --------------- ---------
Noninterest-bearing accounts........ $27,654,701 $17,257,522
----------- -----------
Interest-bearing liabilities:
Money market and NOW accounts..... 26,175,008 1.93% 18,289,160 3.31%
Savings deposits.................. 2,203,384 1.23 1,545,689 2.34
Time deposits $100,000 and over... 6,892,439 3.54 4,750,488 5.52
Other time deposits............... 28,255,638 3.66 24,243,346 5.67
----------- -----------
Total interest-bearing accounts... 63,526,469 2.85% 48,828,683 4.67%
----------- ==== ----------- ====
Total............................. $91,181,170 $66,086,205
=========== ===========
The following table sets forth the amount of CommonWealth's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2002.
DECEMBER 31, 2002
--------------------
AMOUNT PERCENT
---------- -------
Maturity Period
Three months or less........................................ $1,685,489 19.39%
Over three months to twelve months.......................... 6,274,937 72.19
One year through five years................................. 732,303 8.42
Over five years............................................. -- --
---------- ------
Total..................................................... $8,692,729 100.00%
---------- ------
SHORT-TERM AND LONG-TERM DEBT
CommonWealth uses advances from the FHLB of Atlanta to augment its deposit
activities. At December 31, 2002, CommonWealth's advances from the FHLB totaled
$17.5 million, an increase from $4.3 million at December 31, 2001.
Mortgage-related assets secure the advances. The average rate paid on advances
during 2002 was 2.68%, which was a reduction from 4.36% for the year ended
December 31, 2001.
The following table sets forth the contractual maturities of FHLB advances
by fixed and floating rate.
FIXED RATE FLOATING RATE TOTAL
---------- ------------- -----------
Due in 2003.................................... $5,000,000 $ -- $ 5,000,000
Due in 2004.................................... -- -- --
Due in 2005.................................... 900,000 -- 900,000
Due in 2006.................................... 390,894 -- 309,894
Due in 2007.................................... 1,250,000 10,000,000 11,250,000
---------- ----------- -----------
Total........................................ $7,540,894 $10,000,000 $17,540,894
========== =========== ===========
INTEREST RATE SENSITIVITY
Interest rate risk management is the process of managing the maturity and
repricing characteristics of CommonWealth's assets and liabilities in such a
manner that the downside risk associated with CommonWealth's earnings and
capital position are minimized. Measuring and monitoring interest rate risk is a
dynamic and
56
important process regularly performed by management. CommonWealth recognizes
that correlations and assumptions constantly change and that forecasted results
may vary from actual performance.
Management evaluates current interest rate sensitivity on a periodic basis.
As part of the evaluation, CommonWealth reviews the "static" gap position of the
organization. Business and pricing strategies are adjusted based upon
management's view of likely interest rate scenarios in conjunction with the
current balance sheet structure.
The following table illustrates the interest sensitivity gap position of
CommonWealth as of December 31, 2002. This table presents a position that
existed at one particular day, that changes continually and is not necessarily
indicative of CommonWealth's position at any other time.
DECEMBER 31, 2002
-------------------------------------------------------------------------------
91 DAYS- OVER
1-90 DAYS 1 YEAR 1-3 YEARS 3-5 YEARS 5-15 YEARS 15 YEARS TOTAL
--------- -------- --------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (net).................... $44,054 $ 6,515 $ 6,179 $ 13,936 $32,312 $ 4,269 $107,265
Federal funds sold............. 12,504 -- -- -- -- -- 12,504
Interest-bearing bank
balances..................... 5,679 -- -- -- -- -- 5,679
Securities..................... 1,142 -- -- -- -- -- 1,142
------- -------- -------- -------- ------- -------- --------
Total earning assets....... $63,379 $ 6,515 $ 6,179 $ 13,936 $32,312 $ 4,269 $126,590
======= ======== ======== ======== ======= ======== ========
Interest sensitive Liabilities
Demand deposits................ $23,876 $ -- $ -- $ -- $ -- $ 20,106 $ 43,982
NOW and MMDA................... 25,803 -- -- -- -- -- 25,803
Savings........................ 2,248 -- -- -- -- -- 2,248
Time deposits $100,00 and
over......................... 1,686 6,275 632 100 -- -- 8,693
Other time deposits............ 6,328 17,688 2,112 438 -- -- 26,566
FHLB advances.................. 10,000 5,000 900 1,641 -- -- 17,541
------- -------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities................ $69,941 $ 28,963 $ 3,644 $ 2,179 $ -- $ 20,106 $124,833
======= ======== ======== ======== ======= ======== ========
Period gap..................... $(6,562) $(22,448) $ 2,535 $ 11,757 $32,312 $(15,837) $ 1,757
======= ======== ======== ======== ======= ======== ========
Cumulative gap................. $(6,562) $(29,010) $(26,475) $(14,718) $17,594 $ 1,757
======= ======== ======== ======== ======= ========
Ratio of cumulative gap total
earning assets............... (5.18)% (22.92)% (20.91)% (11.63)% 13.90% 1.39%
======= ======== ======== ======== ======= ========
CAPITAL RESOURCES
The adequacy of CommonWealth's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of its asset
and liability levels and is consistent with regulatory requirements and industry
standards. Management seeks to maintain a capital structure that assures an
adequate level to support anticipated asset growth and depositor needs. During
2002, average equity to average assets decreased from 9.34% at year-end 2001 to
7.17% at year-end 2002.
Total stockholders' equity at December 31, 2002 was $8.3 million, an
increase of $929,944 from December 31, 2001. The increase was primarily the
result of earnings retention.
CommonWealth is subject to certain requirements imposed by state and
federal banking statues and regulations as discussed below under "--
Regulation". These requirements, among other things, establish minimum levels of
capital, restrict the amount of dividends that may be distributed, and require
that CommonWealth maintain a loan-to-one-borrower limit of an amount equalminimum reserve balance. Quantitative measures
established by regulation to $756,000.
The FDIC insures all deposit accounts upensure capital adequacy require CommonWealth to
$100,000 per depositor, subject
to aggregation rules.
EMPLOYEES
As of August 31, 2000, Citizens employed 19 full-time equivalent employees.
COMPETITION
The principal competitive factorsmaintain minimum amounts and ratios (set forth in the marketstable below) of total
capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to
average assets. Management
57
believes that as of December 31, 2002, CommonWealth meets all capital adequacy
requirements to which it is subject.
The table below provides information on CommonWealth's required and actual
capital components as of December 31, 2002.
DESIGNATIONS
MINIMUM REGULATORY CAPITAL REQUIRED
-----------------------------------
ADEQUATELY WELL
ACTUAL CAPITALIZED CAPITALIZED
-------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets)...... $8,278 10.12% $7,398 8.00% $9,247 10.00%
Tier 1 Capital (to Risk Weighted Assets)..... 8,265 8.94 3,699 4.00 5,548 6.00
Tier 1 Capital (to Average Assets)........... 8,265 6.45 5,127 4.00 6,409 5.00
PROPERTIES
CommonWealth operates four retail banking offices in the Richmond
metropolitan area. Each location is a full-service facility offering a range of
deposit and loan products and other customer services. All have drive-in lanes
(except 8th & Main) and 24-hour automated teller machines.
The location of CommonWealth's four retail banking offices are:
- 9310 Midlothian Turnpike, Richmond, Virginia 23235 (Midlothian Office);
- 900 North Parham, Richmond, Virginia 23229 (Parham Office);
- 707 East Main Street, Richmond, Virginia 23219 (8th & Main Office); and
- 12410 Gayton Road, Richmond, Virginia 23233 (Gayton Office).
The Midlothian office was opened in April 1986. The Parham office was
opened in July 1996. The 8th & Main office and Gayton office were opened in
December 1998 and February 1999, respectively.
CommonWealth owns the building and leases the land at the Midlothian
office, owns the land and building at the Parham office and leases the 8th &
Main and Gayton offices. CommonWealth also leases space for depositsadministrative and
loans are
interest rates, eitheraccounting functions at 906 North Parham, Richmond, Virginia 23229.
EXECUTIVE OFFICERS AND DIRECTORS OF COMMONWEALTH
NAME AGE PRINCIPAL OCCUPATION
- ---- --- --------------------
J.E. Causey Davis..................... 67 President, Chief Executive Officer and
Director
William D. Bien....................... 47 Executive Vice President and Chief
Lending Officer
William W. Ranson..................... 54 Executive Vice President, Treasurer,
and Chief Financial Officer
Harold V. Groome, Jr. ................ 58 Director
Franklin P. Hall...................... 64 Chairman of the Board
Thomas Jefferson, III................. 66 Director
M. Pinson Neal, Jr., M.D. ............ 76 Director
J.E. Causey Davis. Mr. Davis has served as the President, Chief Executive
Officer and Director of CommonWealth since 1992. Subsequent to the merger, Mr.
Davis shall become an Executive Vice President and the Chief Executive Officer
of Eastern Virginia of First Community Bank.
William D. Bien. Mr. Bien has served as Executive Vice President and Chief
Lending Officer of CommonWealth since 1994.
58
William W. Ranson. Mr. Ranson has served as Executive Vice President,
Treasurer and Chief Financial Officer since 1995.
Harold V. Groome, Jr. Mr. Groome has served as director of CommonWealth
since 1986. After the merger, Mr. Groome shall become a director of First
Community and First Community Bank. Mr. Groome has served as the Chairman of
Groome Transportation, Inc., a ground transportation firm, since 1968.
Franklin P. Hall. Mr. Hall is a founder of CommonWealth and has served as
the Chairman of CommonWealth since 1986. After the merger, Mr. Hall shall become
a director of First Community Bank. Mr. Hall is an attorney and has served as a
partner of Hall & Hall, attorneys at law, a family law firm, since 1969. Since
1976, Mr. Hall has served as a member of the Virginia House of Delegates.
Thomas Jefferson, III. Mr. Jefferson has served as a director of
CommonWealth since 1993 and Chairman of the Executive Committee since 2000. Mr.
Jefferson is currently president of Jefferson-Jones, Inc. Realtors, a realty
firm, a firm he co-founded in 1973.
M. Pinson Neal, Jr., M.D. Dr. Neal has served as Vice Chairman of
CommonWealth since 1986 and as Chairman of the Audit Committee since 1986. Dr.
Neal currently serves as Emeritus Professor of Radiology at Virginia
Commonwealth University.
EXECUTIVE COMPENSATION
The following table sets forth salaries and bonuses paid during the last
three years to our Chief Executive Officer, the only executive officer of
CommonWealth whose total annual salary and bonus exceeds $100,000.
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- ---- -------- ------ --------------- ------------ ------------
J.E. Causey Davis,........ 2002 $145,187 $4,600 $4,356 -- --
President, Chief Executive 2001 133,842 7,200 4,015 12,500 --
Officer and Director 2000 126,412 -- 3,792 -- --
- ---------------
(1) Includes discretionary contributions to the 401(k) plan for Mr. Davis.
The following table provides information with respect to the value of
unexercised options held by Mr. Davis at December 31, 2002. Mr. Davis did not
exercise any stock options in 2002.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/02 OPTIONS AT 12/31/02(1)
SHARES --------------------------- ---------------------------
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
J.E. Causey Davis......... -- -- 35,625 -- $406,638 --
- ---------------
(1) Value of unexercised "in-the-money" options is the difference between the
fair market value of the securities underlying the options and the exercise
or base price of the options as of December 31, 2002.
Employment Agreements. CommonWealth entered into a written employment
agreement with J. E. Causey Davis, President and Chief Executive Officer, on
depositsDecember 20, 1996. The agreement was for a three-year period, and has been
automatically extended for additional one-year terms on December 31st of each
year since 1999. This agreement will continue to be automatically extended for
one-year terms unless Mr. Davis or charged on loans.CommonWealth gives prior written notice not
to extend. Under this agreement, annual compensation for Mr. Davis is set at a
minimum of $120,000 and compensation for 2002 was $145,187. The banking
business is highly competitive. The bank servesagreement
provides that if CommonWealth terminates the Cityemployment of Beckley, West
Virginia, and surrounding contiguous markets. Citizens facesMr. Davis "for cause"
(conduct involving willful misconduct or negligence) it shall have no further
obligation. If CommonWealth terminates the employment of Mr. Davis "without
cause," it shall continue to compensate him under the terms of the agreement for
a high degreeperiod of competition forthree
59
years. If following a change in control of CommonWealth (defined as a change in
majority ownership, merger into another entity, or if substantially all of its servicesthe
assets of CommonWealth are sold) Mr. Davis is terminated, his pay reduced, or he
is demoted or required to work in a location outside of Richmond, his current
base salary will be continued for a period of three years.
A condition to First Community's obligation to consummate the merger is
that Mr. Davis enter into an employment agreement with First Community Bank. The
employment agreement provides that Mr. Davis relinquish all amounts due him
under his prior employment agreement, including any amounts that may otherwise
result from local banks. Citizens directly competes
against tenthe consummation of the merger. The proposed employment agreement
has a term of two years with an option to extend for additional one-year terms.
Pursuant to such agreement, Mr. Davis shall become an Executive Vice President
and the Chief Executive Officer of the Eastern Virginia Region of First
Community Bank. Mr. Davis shall be paid a minimum base salary of $150,000 per
year and shall be entitled to participate in various benefit plans of First
Community Bank. Mr. Davis is entitled to receive severance pay under certain
circumstances, including a termination for other financial institutions in Beckley. These institutions consistthan cause, disability or Mr.
Davis' death or a termination by Mr. Davis due to a breach of superregional banks, state-wide multi-bank holding companiesthe agreement by
First Community Bank or due to certain adverse actions taken by First Community
Bank with respect to Mr. Davis.
CommonWealth has entered into severance agreements with William D. Bien and
local
community banks. The bank's largest competitors are City National Bank, Bank
One, United National Bank and BB&T. As of June 30, 1999, Citizens had a 3.89
percent market shareWilliam W. Ranson to provide additional compensation for two years in the Beckley market.event
of a change in control of CommonWealth which results in their termination. The
Federal Reserve definesconditions are similar to the Beckleychange in control provisions in the employment
agreement with Mr. Davis.
Stock Option Plan. In 1994, the shareholders of CommonWealth adopted a
stock option plan which provided for 60,000 shares of the common stock of
CommonWealth to be granted under the plan. The plan authorized the Board of
Directors to grant options to employees of CommonWealth. The plan was amended by
the shareholders in April 1997 to allow the granting of options to
CommonWealth's directors and in April 1999 the shareholders approved an
additional 75,000 shares for grant under the same terms, bringing the total
shares available for issuance under the plan to 135,000. Stock option grants are
made for a period of ten years at the greater of the last published book value
per share or market as Raleigh, Fayette and Summers Counties, excludingvalue.
There were 600 stock option grants during the Townsyear ended December 31, 2002.
None of Montgomery and Smithers in Fayette County.
37
48
OWNERSHIP OFCommonWealth's executive officers or directors were granted or exercised
any stock options during the year ended December 31, 2002.
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CITIZENSCOMMONWEALTH COMMON STOCK
The following table sets forth certain information as of August 18, 2000, relating to the beneficial ownership ofrecord date
for the stock by (a)special meeting regarding (i) each person or group known by CitizensCommonWealth to own
beneficially own more than 5 percent5% of its outstandingCommonWealth's common stock; (b)stock, (ii) each director of
CommonWealth, (iii) the bank's directors;executive officer of CommonWealth named in the Summary
Compensation Table and (c)(iv) all directors and executive officers of Citizens,CommonWealth
as a group. UnlessExcept as otherwise noted, the persons namedindicated in the footnotes to the table, the
beneficial owners have sole voting and investment powerspower as to all shares
beneficially owned by them and may be reached at the principal executive offices
of CommonWealth.
PERCENT OF
NUMBER OF SHARES COMMONWEALTH COMMON
NAME AND ADDRESS OWNED STOCK OUTSTANDING(1)
- ---------------- ---------------- --------------------
J.E. Causey Davis(2)........................... 11,965
Franklin P. Hall(3)............................ 28,498
Harold V. Groome, Jr.(4)....................... 26,312
Thomas Jefferson, III(5)....................... 17,343
M. Pinson Neal(6).............................. 4,661
All directors and officers as a group (seven
persons)..................................... 96,132
60
- ---------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on shares of common stock
outstanding as of , 2003 together with options that are
exercisable within 60 days of , 2003 for each shareholder.
(2) Includes 81 shares held by spouse, Beverley H. Davis.
(3) Includes 875 shares held in IRA account for the benefit of spouse, Phoebe
Hall.
(4) Includes 750 shares held by Groome Transportation, Inc.
(5) Includes 4,375 shares held by Jefferson-Jones, Inc. Profit Sharing plan,
3,593 shares held by spouse, Anne Jefferson, and 1,250 shares held by
Jefferson Stock Fund.
(6) Includes 192 shares held by spouse, Gail Neal.
RELATED PARTY TRANSACTIONS
Except as described below, since January 1, 2001, CommonWealth has not been
a party to any transaction or series of transactions in which the amount
involved exceeds $60,000 and in which any director, executive officer, or holder
of more than 5% of CommonWealth common stock had or will have a direct or
indirect material interest.
CommonWealth does not currently make loans to directors or executive
officers with the exception of checking account overdraft loans in the amount
not exceeding $5,000 per individual or related interests. Total loans
outstanding were less than $250 as of December 31, 2002. These loans are made on
substantially the same terms as those prevailing at the time for comparable
loans with other persons and do not involve more than the normal risk of
collectibility and such loans are in compliance with their original terms.
CommonWealth's executive officers and directors, and their associates and
related interests have not entered into any other material interest in any
business transaction, either directly or indirectly, to which CommonWealth is or
was a party outside of the ordinary course of CommonWealth's business.
REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to CommonWealth. This regulatory framework primarily is
intended for the protection of depositors and the deposit insurance funds that
insure deposits of banks, and not for the protection of security holders. To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to those provisions. A
change in these statutes, regulations or regulatory policies may have a material
effect on CommonWealth's business.
General. CommonWealth, as a Virginia chartered commercial bank which is a
member of the Federal Reserve System, is subject to regulation, supervision and
regular examination by the Bureau of Financial Institutions of the Virginia
State Corporation Commission and the Federal Reserve Board. The state and
federal banking laws and regulations administered by these agencies regulate,
among other things, the scope of CommonWealth's business, its investments, its
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. There are periodic
examinations by the aforementioned regulatory authorities to test CommonWealth's
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which CommonWealth can
engage. Any change in such regulation, whether by the Federal Reserve Board, the
FDIC, Virginia or the U.S. Congress could have a material adverse impact on
CommonWealth and its operations.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising banks and in analyzing bank regulatory applications.
The Federal Reserve Board capital adequacy guidelines generally require banks to
maintain total capital equal to 8% of total risk-adjusted assets, with at least
one-half of that amount consisting of Tier I or core capital and up to one-half
of that amount consisting of Tier II or supplementary capital. Tier I capital
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
61
goodwill and, with certain exceptions, intangibles. Tier II capital generally
consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as Tier I capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by banks, including multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Single-family residential first mortgage loans which are not
past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighting system, as are certain privately-issued mortgage-backed
securities representing indirect ownership of such loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics. At
December 31, 2002, CommonWealth's Tier I capital and total capital ratios were
8.94% and 10.12%, respectively.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires top-rated banks to maintain a minimum leverage capital ratio of
Tier I capital to total assets of 3.0%. Total assets for this purpose does not
include goodwill and any other intangible assets and investments that the
Federal Reserve Board determines should be deducted from Tier I capital. The
top-rated banks are those without any supervisory, financial or operational
weaknesses or deficiencies or those which are not experiencing or anticipating
significant growth. Other banks are expected to maintain Tier I leverage capital
ratios of at least 4.0% to 5.0% or more, depending on their overall condition.
CommonWealth's leverage ratio, at December 31, 2002, was 6.45%.
FDIC Insurance Assessments. The deposits of CommonWealth are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund ("BIF"), which is
administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each insured bank in one of nine risk categories based on (1)
the bank's capitalization and (2) supervisory evaluations provided to the FDIC
by the institution's primary federal regulator. Each insured bank's insurance
assessment rate is then determined by the risk category in which it is
classified by the FDIC. The annual insurance premiums on bank deposits insured
by the BIF currently vary between $0.00 per $100 of deposits for banks
classified in the highest capital and supervisory evaluation categories to $0.27
per $100 of deposits for banks classified in the lowest capital and supervisory
evaluation categories.
The FDIC may terminate the deposit insurance of any insured depository
institution, including CommonWealth, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of CommonWealth's deposit insurance.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Act,
as amended ("FDICIA"), among other things, requires the federal banking agencies
to take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An FDIC-insured bank will
be "well capitalized" if it has a total capital ratio of 10.0% or greater, a
Tier 1 capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater
and is not subject to any order or written directive by any such regulatory
authority to meet and maintain a specific capital level for any capital measure.
A depository institution's capital tier will depend upon where its capital
levels compare to various relevant capital measures and certain other factors,
as established by regulation. As of December 31, 2002, CommonWealth had capital
levels that qualify it as being "well capitalized" under such regulations.
Community Reinvestment Act and the Fair Lending Laws. CommonWealth has a
responsibility under the Community Reinvestment Act and related regulations to
help meet the credit needs of its community, including
62
low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. An institution's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities and the denial of applications. In addition, an
institution's failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in the applicable federal regulatory agencies
and/or the Department of Justice taking enforcement actions against the
institution. Based on its most recent examination, CommonWealth received a
satisfactory rating with respect to eachits performance pursuant to the Community
Reinvestment Act.
Activities and Investments of Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things:
- acquiring or retaining a majority interest in a subsidiary;
- acquiring up to 10% of the voting stock of a company that solely provides
or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and
- acquiring or retaining the voting shares reportedof a depository institution if
certain requirements are met.
In addition, an insured state-chartered bank may not, directly, or
indirectly through a subsidiary, engage as beneficially owned by them. Unless"principal" in any activity that is
not permissible for a national bank unless the table notes otherwise,FDIC has determined that such
activities would pose no risk to the addressinsurance fund of all
individualswhich the bank is 111 Citizens Drive, Beckley, West Virginia 25801.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- ---------------- ---------------- ----------------
Rick O. Adkins................................... 6,817(1) 2.73
Jack H. Allison.................................. 5,117(2) 2.05
Carl E. Campbell................................. 8,817(3) 3.53
Richard L. Cornett, II........................... 21,492(4) 8.60
Lori A. Davis.................................... 2,767(5) 1.11
L. Edward Eckley, III............................ 10,949(6) 4.38
Samuel L. Elmore................................. 310 *
Andrew E. Fox.................................... 2,667(7) 1.07
David M. Hill.................................... 5,350(8) 2.14
Thomas W. Jarrett................................ 14,048(9) 5.62
Carl W. Roop..................................... 2,067 *
Don M. Stacy..................................... 12,717 5.09
Byrd E. White, III............................... 667(10) *
All directors and executive officers as a
group.......................................... 93,785 37.51
- ---------------
* Beneficial ownership doesa
member and that the bank is in compliance with applicable regulatory
requirements. Any insured state-chartered bank directly or indirectly engaged in
any activity that is not exceed one percentpermitted for a national bank must cease the
impermissible activity.
Regulatory Enforcement Authority. Federal banking laws grant substantial
enforcement powers to federal banking regulators. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with regulatory authorities.
Federal Home Loan Bank System. CommonWealth is a member of the class.
(1) ConsistsFHLB
system. Among other benefits, each FHLB serves as a reserve or central bank for
its members within its assigned region. Each FHLB is financed primarily from the
sale of 3,817 shares ownedconsolidated obligations of record;the FHLB system. Each FHLB makes available
loans or advances to its members in compliance with the policies and 3,000 shares owned jointly
with spouse.
(2) Consistsprocedures
established by the board of 117 shares owneddirectors of record; and 5,000 shares owned by McDonald'sthe individual FHLB. As an FHLB member,
CommonWealth is required to own capital stock in the FHLB of which Mr. Allison is sole owner.
(3) ConsistsAtlanta.
CommonWealth's required investment in FHLB stock, based on December 31, 2002
financial data, was $877,100. At December 31, 2002, CommonWealth had $877,100 of
3,817 shares ownedFHLB of record; and 5,000 shares owned jointly
with spouse.
(4) Consists of 1,292 shares owned of record; and 20,200 shares owned jointly
with spouse.
(5) Consists of 2,500 shares owned of record; and 267 shares owned jointly with
minor children.
(6) Consists of 150 shares owned of record; 9,408 shares owned through pension
plan; 852 shares owned in an Individual Retirement Account; and 472 shares
owned in spouse's Individual Retirement Account and 67 shares owned by L.
Edward Eckley, DDS. LTD.
(7) Consists of 567 shares owned of record; and 2,100 shares owned through a SEP
Individual Retirement Account.
(8) Consists of 350 shares owned of record; and 5,000 shares owned by David Hill
Concrete, Inc., of which Mr. Hill is Treasurer.
(9) Consists of 110 shares owned of record; and 13,938 shares owned by Jarrett
Enterprises, Inc., of which Dr. Jarrett is General Partner.
(10) Consists of 567 shares owned of record; and 100 shares owned by children.
38
49Atlanta stock.
DESCRIPTION OF BANCSHARES'FIRST COMMUNITY CAPITAL STOCK
GENERAL
TheFirst Community is authorized capital stock of Bancshares consists ofto issue up to 15,000,000 shares of Bancshares'First
Community common stock par value $1.00 per share and up to 1,000,000 shares of preferred stock. The
capital stock with no stated par value. As of July 31, 2000, there were
8,655,530 sharesFirst Community does not represent or constitute a deposit
account and is not insured by the FDIC.
The following description of Bancshares' commonthe First Community capital stock issueddoes not
purport to be complete and outstanding. There were
no sharesis qualified in all respects by reference to First
Community's articles of Bancshares' preferred stock issuedincorporation, as amended, and outstanding asbylaws, the First
Community shareholder rights plan and the General Corporation Law of that date.
BANCSHARES'Nevada.
63
FIRST COMMUNITY COMMON STOCK
Each share of Bancshares'First Community common stock is entitled to one vote on all
matters submitted to a vote at any meeting of shareholders. Holders of Bancshares'First
Community common stock are entitled to receive dividends when, as, and if
declared by the Bancshares' BoardFirst Community board of directors out of funds legally
available therefor and, upon liquidation, to receive pro rata all assets, if
any, of BancsharesFirst Community available for distribution after the payment of
creditors. Holders of Bancshares'First Community common stock have no preemptive rights to
subscribe for any additional securities of any class that BancsharesFirst Community may
issue, nor any conversion, redemption or sinking fund rights. Holders of Bancshares'First
Community common stock have no right to cumulate votes in the election of
directors. The rights and privileges of holders of Bancshares'First Community common stock
are subject to any preferences that the Bancshares' BoardFirst Community board of directors may
set for any series of Bancshares'First Community preferred stock that BancsharesFirst Community may
issue in the future.
The transfer agent and registrar for Bancshares' common stock is FCB,
through its Trust & Financial Services Division. Bancshares' stock is currently
trading on the Nasdaq level III Billboard under the symbol FCBC.
BANCSHARES'FIRST COMMUNITY PREFERRED STOCK
Under Bancshares'First Community's articles of incorporation, BancsharesFirst Community may
issue shares of Bancshares'First Community' preferred stock in one or more series, as may
be determined by the Bancshares' BoardFirst Community's board of directors or a duly authorized
committee. The Bancshares' BoardFirst Community's board of directors or committee may also
establish, from time to time, the number of shares to be included in each series
and may fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and may increase or decrease the number of shares of any series without any
further vote or action by the shareholders. Any Bancshares'First Community preferred stock
issued will rank senior to Bancshares'First Community common stock with respect to the
payment of dividends or amounts paid upon liquidation, dissolution or winding up
of Bancshares,First Community, or both. In addition, any shares of Bancshares'First Community
preferred stock may have class or series voting rights. Under certain
circumstances, the issuance of shares of Bancshares'First Community preferred stock, or
merely the existing authorization of the Bancshares' BoardFirst Community board of directors to
issue shares of Bancshares'First Community preferred stock, may tend to discourage or
impede a merger or other change in control of Bancshares.First Community. The number of
shares of preferred stock to be issued, its par or face value, voting powers,
designations, preferences, interest rate, limitations, restrictions and relative
rights would be determined from time to time by resolution of the Boardboard of
Directorsdirectors of Bancshares.First Community. No shares of preferred stock are currently
outstanding.
PROVISIONS REGARDING THE BANCSHARES' BOARD
Bancshares' articles of incorporationTRANSFER AGENT
The transfer agent and bylaws separateregistrar for the Bancshares'
Board into classesFirst Community common stock is
the Registrar and permit the removal of directors only for cause. This
could make it more difficult
39
50
for a third party to acquire, or discourage a third party from seeking to
acquire, control of Bancshares.
MEETINGS OF SHAREHOLDERS; SHAREHOLDERS' NOMINATIONS AND PROPOSALS
Under Bancshares' bylaws, meetings of the shareholders may be called only
by the Chief Executive Officer, President, Secretary or the Bancshares' Board.
Shareholders of Bancshares may not request that a special meeting of
shareholders be called. This provision could delay until the next annual
shareholders' meeting shareholder actions that are favored by the holders of a
majority of the outstanding voting securities of Bancshares.
The procedures governing the submission of nominations for directors and
other proposals by shareholders may also have a deterrent effect on shareholder
actions designed to result in change of control in Bancshares. See "Comparison
of Shareholders' Rights -- Shareholder Nominations and Shareholder Proposals" on
page 42.Transfer Company.
COMPARISON OF THE RIGHTS OF BANCSHARES' SHAREHOLDERS
AND CITIZENS' SHAREHOLDERS
When the merger becomes effective, holdersshareholders of Citizens'CommonWealth who receive
shares of First Community common stock in exchange for their shares of
CommonWealth common stock will become shareholders of Bancshares.First Community. The
following is a summary of material differences between the rights of holders of
Bancshares'First Community common stock and holders of Citizens'CommonWealth common stock. Since
BancsharesFirst Community is organized under the laws of the State of Nevada and
CitizensCommonWealth is organized under the laws of the StateCommonwealth of
West Virginia,
differences in the rights of holders of Bancshares'First Community common stock and those
of holders of Citizens'CommonWealth common stock arise from differing provisions of the
General Corporation Law of Nevada Statutes and the Virginia Stock Corporation Act in
addition to differing provisions of their respective articles of incorporation
and bylaws.
The following summary does not purport to be a complete statement of the
provisions affecting, and differences between, the rights of holders of Bancshares'First
Community common stock and holders of Citizens'CommonWealth common stock. This summary is
intended to provide a general overview of the differences in shareholders'
rights defined by Nevada law, Virginia law and the governing corporate
instruments of BancsharesFirst Community and Citizens,CommonWealth, or other known material
differences.
64
AUTHORIZED CAPITAL STOCK
BANCSHARES
Bancshares'First Community. First Community's authorized capital stock consists of
15,000,000 shares of Bancshares'First Community common stock and 1,000,000 shares of Bancshares'First
Community preferred stock. Bancshares'First Community's articles of incorporation authorize
the Bancshares' BoardFirst Community's board of directors to issue shares of Bancshares'First Community
preferred stock in one or more series and to fix the designation, powers,
preferences, and rights of the shares of Bancshares'First Community preferred stock in each
series. As of June 30, 2000,, 2003, there were 8,661,715 shares of Bancshares'First Community common
stock outstanding. No shares of Bancshares'First Community preferred stock were issued and
outstanding as of that date.
CITIZENS
Citizens'CommonWealth. CommonWealth's authorized capital stock consists solely of
499,9993,000,000 shares of Citizens'CommonWealth common stock, par value $10.00$4.00 per share, and noshare.
CommonWealth's articles of incorporation do not authorize the issuance of shares
of preferred stock. As of June 30,
2000,, 2003, there were 250,000 shares of
Citizens'CommonWealth common stock outstanding.
40
51
SPECIAL MEETINGSISSUANCE OF SHAREHOLDERS
BANCSHARES
The Bancshares Board may call special meetings ofCAPITAL STOCK
First Community. Under the shareholders of
Bancshares at any time. There is no other provision for calling a special
meeting.
CITIZENS
Special meetings of the shareholders of Citizens may be called at any time
by Citizens' Chairman of the Board, President or by the Board of Directors or by
any number of shareholders owning in the aggregate not less than ten percent of
the stock of Citizens.
DIRECTORS
BANCSHARES
Bancshares' articles of incorporation of First Community
and the General Corporation Law of Nevada, First Community may issue shares of
First Community capital stock and rights or options for the purchase of shares
of capital stock of First Community on such terms and for such consideration as
may be determined by the First Community board of directors. Neither the General
Corporation Law of Nevada nor First Community's articles of incorporation and
bylaws require shareholder approval of any such actions. However, First
Community is subject to the requirements of the National Association of
Securities Dealers, Inc., which generally require corporations, such as First
Community, with securities which are traded on the Nasdaq SmallCap Market, to
obtain shareholder approval of certain issuances of common stock and most stock
compensation plans for directors, officers and key employees. First Community
also may elect to seek shareholder approval of stock-related compensation plans
in certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. Holders of
First Community capital stock do not have preemptive rights with respect to any
shares of First Community capital stock which may be issued.
CommonWealth. Under the Virginia Stock Corporation Act, CommonWealth may
issue shares of CommonWealth common stock and rights or options for the purchase
of shares of common stock of CommonWealth on such terms and for such
consideration as may be determined by the CommonWealth board of directors.
Neither the Virginia Stock Corporation Act nor CommonWealth's articles of
incorporation and bylaws require shareholder approval of any such actions.
CommonWealth may, however, elect to seek shareholder approval of stock-related
compensation plans in certain instances in order to qualify such plans for
favorable federal income tax and securities laws treatment under current laws
and regulations. Holders of CommonWealth common stock do not have preemptive
rights with respect to any shares of CommonWealth common stock which may be
issued.
VOTING RIGHTS
First Community. Each holder of First Community common stock is entitled
to one vote for each share held of record and may not cumulate votes.
CommonWealth. Each holder of CommonWealth common stock is entitled to one
vote for each share held of record and may not cumulate votes.
NUMBER AND ELECTION OF DIRECTORS
First Community. Nevada law states that although changes in the number of
directors in general must be approved by the holders of a majority of the
outstanding shares, the board of directors may fix the exact number of directors
within a stated range set forth in the articles of incorporation or bylaws, if
the stated ranges have been approved by the shareholders. First Community's
articles of incorporation provide that the number of directors shall be
determined in accordance with its bylaws. First Community's bylaws provide for a
board of
65
directors having not less than twelveseven nor more than 2012 members as determined from
time to time by resolution of the board of directors. Currently, the
Bancshares BoardFirst
Community's board of directors consists of 1110 directors.
The Bancshares BoardNevada law requires at least one-fourth of the directors to be elected
annually. First Community's board of directors is divided into three classes,
with directors serving staggered three-year terms.
Under
Bancshares'CommonWealth. Virginia law provides that the board of directors of a
Virginia corporation shall consist of a number of individuals specified or fixed
in accordance with the bylaws of the corporation or, if not specified or fixed
in accordance with the bylaws, then a number specified or fixed in accordance
with the articles of incorporation of the corporation. CommonWealth's articles
of incorporation and bylaws Bancsharesprovide for a board of directors of not less than
five nor more than 12 as fixed from time to time by resolution of the
CommonWealth board of directors. Currently, CommonWealth's board of directors
consists of 5 directors. Virginia law provides that a corporation's board of
directors may be divided into two or three classes with staggered terms of
office. The CommonWealth board of directors is divided into three classes, with
directors serving staggered three-year terms.
REMOVAL OF DIRECTORS
First Community. Under Nevada law, a director of a Nevada corporation may
be removed by the holders of two-thirds of the shares entitled to vote thereon,
unless the articles of incorporation of the corporation provide for a greater
percentage. Nevada law does not distinguish between removal for cause and
without cause. Under First Community's articles of incorporation and bylaws,
First Community directors may be removed only for cause and only by the
affirmative vote of the holders of more than two thirdstwo-thirds of the common stock of
the corporationFirst Community then outstanding and entitled to vote thereon.
HoldersCommonWealth. Under Virginia law, except as otherwise provided in a
corporation's articles of Bancshares common stock do not have cumulative voting
rightsincorporation, a director may be removed from office,
with or without cause, by the holders of a majority of the shares entitled to
vote in the election of directors. CITIZENS
Citizens'CommonWealth's articles of incorporation and
bylaws are silent as to removal of directors.
VACANCIES OF DIRECTORS
First Community. Under Nevada law, the board of directors or the
shareholders may fill any vacancy on the board of directors, other than one
created by removal of a director elected by a voting group of shareholders. If a
vacancy is created by removal of a director elected by a voting group of
shareholders, the board of directors, the majority of the remaining directors
elected by such voting group of shareholders, or the shareholders belonging to
such voting group may fill such vacancy. If the number of directors remaining is
less than a quorum, the majority of the remaining directors may fill such
vacancy. Under First Community's articles of incorporation, all vacancies on the
board of directors are filled by the vote of a majority of the directors then in
office, whether or not a quorum. Each director so chosen shall hold office until
the expiration of the term of the class to which his position has been assigned.
CommonWealth. Under Virginia law, unless a corporation's articles of
incorporation provide otherwise, vacancies, including a vacancy resulting from
an increase in the number of directors, may be filled by a plurality of the
votes cast by the shares entitled to vote in the election at a meeting at which
a quorum is present or by a majority of the directors remaining in office, even
though less than a quorum. If the board of directors fills a vacancy, the
director's term expires at the next shareholders' meeting at which directors are
elected even if the corporation has a classified board of directors with
staggered terms and the new director is filling an unexpired term with more than
one year remaining. Virginia law also provides that a decrease in the number of
directors does not shorten an incumbent director's term. CommonWealth's bylaws
provide that vacancies, including a vacancy resulting from an increase in the
number of directors, shall be filled by a majority of the directors remaining in
office, even though less than a quorum. In the event of an increase in the
number of directors, the vacancy may be filled only until the next annual
meeting of shareholders, at which time the vacancy shall be filled by vote of
the shareholders.
66
DISCHARGE OF DUTIES, EXCULPATION AND INDEMNIFICATION
First Community. Nevada law requires that a director of a Nevada
corporation discharge his or her duties as a director in good faith and with the
view to the interest of the corporation. Directors are presumed to act in good
faith, on an informed basis and with a view to the interests of the corporation.
First Community's bylaws require indemnification of First Community's directors
and officers and any person serving as such for another corporation at First
Community's request, against costs and expenses at any time reasonably incurred
by the director or officer arising out of or in connection with any claim,
action, suit or proceeding, civil or criminal, against him or to which he may be
made a party by reason of his being or having been such director or officer
except in relation to matters as to which he shall be adjudged in such action,
suit or proceeding to be liable for gross negligence or willful misconduct in
the performance of his duty to First Community. If, in the judgment of the board
of directors of not less than five nor more than 25 as fixed from time to timeFirst Community, a settlement of any claim, action, suit or
proceeding so arising be deemed in the best interests of First Community, any
such director or officer shall be reimbursed for any amounts paid by resolution of the Citizens' Board. Currently, the Citizens' Board consists of 11
directors. The Citizens' Board is also divided also into three classes, with
directors serving staggered three-year terms. Under Citizens'him in
effecting such settlement and reasonable expenses incurred in connection
therewith.
First Community's articles of incorporation state that a director of First
Community shall not be liable to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director except (i) for any
breach of the director's duty of loyalty, (ii) for acts which involve
intentional misconduct, fraud or a knowing violation of law, (iii) for the
payment of any distribution in violation of Nevada law, or (iv) for any
transaction from which the director derived an improper personal benefit.
CommonWealth. Virginia law requires that a director of a Virginia
corporation discharge his or her duties as a director in accordance with his or
her good faith business judgment of the best interests of the corporation.
CommonWealth's articles of incorporation provide that CommonWealth shall have
the power to indemnify its officers, directors and bylaws, Citizens'agents to the extent allowed
under Virginia law. Under Virginia law, a corporation may indemnify any person
made a party to a proceeding because he is or was a director or officer against
liability incurred in the proceeding if he acted in good faith and in a manner
he believed to be in or not opposed to the best interests of the corporation,
and in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful, except that a corporation may not indemnify a
director or officer if either (i) the director or officer has been adjudged to
be liable to the corporation, or (ii) in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
Virginia law provides that any indemnification for a director or officer,
unless ordered by a court, is subject to a determination that the director or
officer has met the applicable standard of conduct. The determination will be
made by either (i) a majority vote of a quorum of the directors may be removed, withwho are not
parties to such proceeding, (ii) if there is not a quorum of such directors, by
majority vote of a committee, consisting of two or without
cause, onlymore directors who are not
parties to such proceeding, duly designated by the affirmative votedirectors, (iii) by special
legal counsel, or (iv) by the shareholders.
Under Virginia law, a corporation may advance expenses before the final
disposition of a proceeding if (i) the director or officer furnishes a written
statement of his good faith belief that he has met the proper standard of
conduct, (ii) he undertakes to repay the amount if it is ultimately determined
that the director or officer is not entitled to indemnification and (iii) a
determination made on the facts then known would not preclude indemnification.
In addition, to the extent that a director or officer has been successful on the
merits or otherwise in defense of the holders of 80 percent ofproceeding, the combined
voting power of then-outstanding shares of stock entitleddirector or officer must
be indemnified against reasonable expenses incurred by him in connection with
that proceeding. Moreover, to vote generallythe extent provided in the electionarticles of
directors, voting together asincorporation or an amendment to the bylaws approved by shareholders, a
single class. Holders of
Citizens' common stock have cumulative voting rightscorporation may eliminate a director's or an officer's personal liability for
monetary damages in any proceeding brought by or in the electionright of directors.a corporation
or brought by or on behalf of shareholders, except for liability resulting from
such director's or officer's willful misconduct or a knowing violation of
criminal law or of any federal or state securities law. CommonWealth's articles
of incorporation do not provide for the limitation of director or officer
liability.
67
DIVIDENDS AND OTHER DISTRIBUTIONS
BANCSHARES
TheFirst Community. Nevada corporate statutes prohibitlaw prohibits a Nevada corporation from making any
distributions to shareholders, including the payment of cash dividends, that
would render it insolvent or unable to meet its obligations as they become due
in the ordinary course of business. BancsharesFirst Community is not subject to any other
express regulatory restrictions on payments of dividends and other
distributions. The ability of BancsharesFirst Community to pay distributions to the
holders of its common stock will depend, however, to a large extent upon the
amount of dividends its bank subsidiary,First Community Bank, which is subject to restrictions
imposed by bank regulatory authorities, pays to Bancshares.First Community. In addition,
the Federal Reserve could oppose a distribution by BancsharesFirst Community if it
determined that such a distribution would harm Bancshares'First Community's ability to
41
52
support its bank subsidiary.First Community Bank. There can be no assurances that dividends will be
paid in the future. The declaration, payment and amount of any such future
dividends would depend on business conditions, operating results, capital,
reserve requirements and the consideration of other relevant factors by the
Bancshares Board.
CITIZENS
Under the West Virginia Corporation Act, the board of directors of First Community.
CommonWealth. Virginia law provides that a West
Virginia corporation may declare, andmake
distributions to its shareholders, unless, after giving effect to the
distribution, the corporation maywould not be able to pay dividends except
whenits debts as they become
due in the usual course of business, or the corporation's total assets would be
less than the sum of its total liabilities plus the amount that would be needed,
if the corporation is insolvent or whenwere to be dissolved at the paymenttime of dividends would render
the corporation insolvent. Citizens is not subjectdistribution, to
any other express
regulatory restrictions on paymentssatisfy the preferential rights upon the dissolution of dividends and other distributions.
Bankingshareholders whose
preferential rights are superior to those receiving the distribution. In
addition, bank regulatory authorities may restrict payments if the payment of
dividends would be an unsafe or unsound banking practice. To date, CommonWealth
has not paid dividends to its shareholders.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
First Community. Nevada law provides generally that a Nevada corporation's
articles of incorporation may be amended only upon approval by a majority of the
voting power, or in the case of amendments which would alter the preferences or
rights of any class of shares, upon additional approval by a majority of the
voting power of each class affected by the amendment. First Community's articles
of incorporation impose a greater requirement, the affirmative vote of more than
two-thirds of the outstanding shares entitled to vote, to approve an amendment
that would amend, alter or repeal the provisions of the articles of
incorporation or bylaws relating to classification and staggered terms of First
Community's board of directors, removal of directors or any requirement for a
supermajority vote on such an amendment. First Community's articles of
incorporation authorize First Community's board of directors to amend First
Community's bylaws at any time by vote of a majority of the board of directors
at a meeting called for that purpose.
CommonWealth. Under Virginia law, unless a Virginia corporation's articles
of incorporation provide for a greater or lesser vote, amendments of the
articles of incorporation must be approved by each voting group entitled to vote
on the proposed amendment by more than two-thirds of all the votes entitled to
be cast by that voting group. However, the vote specified in the articles of
incorporation may not be reduced to less than a majority of all votes cast by
the voting group at a meeting at which a quorum of the voting group exists.
CommonWealth's articles of incorporation are silent as the vote required to
amend the articles of incorporation and thus more than a two-thirds vote is
required to amend the articles of incorporation.
Under Virginia law, a corporation's shareholders or board of directors may
amend or repeal bylaws, except to the extent that the corporation's articles of
incorporation or Virginia law reserve the power exclusively to the shareholders.
A corporation's shareholders may amend or repeal bylaws even though the bylaws
may also be amended or repealed by its board of directors. CommonWealth's bylaws
provide that they may be amended or repealed by the board of directors.
NOTICE OF SHAREHOLDER NOMINATIONSMEETINGS
First Community. First Community's bylaws provide that a written notice of
the place, day and time, and in the case of a special meeting, the purpose, of
the meeting must be given to each shareholder entitled to vote at the meeting
not less than 10 days nor more than 60 days prior to the meeting.
68
CommonWealth. Under Virginia law, notice of a shareholders' meeting must
be given not less than 10 nor more than 60 days before the meeting, except that
notice of a shareholders' meeting to act on an amendment to the articles of
incorporation, a plan of merger, share exchange, a proposed sale of all or
substantially all of the corporation's assets or a dissolution of the
corporation must not be given less than 25 nor more than 60 days before the
meeting. CommonWealth's bylaws provide that written notice of the date, time,
place and purpose or purposes of every meeting of shareholders must be given not
less than 10 nor more than 60 days before the date of the meeting.
SPECIAL MEETINGS OF SHAREHOLDERS
First Community. Under Nevada law, meetings of shareholders are to be
called as provided by the bylaws. Pursuant to First Community's bylaws, the
board of directors of First Community may call special meetings of the
shareholders of First Community at any time.
CommonWealth. Special meetings of the shareholders of CommonWealth may be
called at any time by CommonWealth's chairman of the board, president or by the
board of directors.
SHAREHOLDER NOMINATION AND SHAREHOLDER PROPOSALS
BANCSHARES
Bancshares'First Community. First Community's bylaws establish advance notice
procedures for the nomination, other than by or on behalf of the existing management of Bancshares,First Community, of
candidates for election as directors. Bancshares'First Community's bylaws provide that a
shareholder wishing to nominate a person as a candidate for election to the
Bancshares Boardboard of directors of First Community must submit the nomination in writing to
the Secretary of BancsharesFirst Community at least 30 days before any meeting of
stockholdersshareholders calling for the election of directors; provided, however, that if
less than 30 days notice of the meeting is given to stockholders,shareholders, such notice of
nomination shall be mailed or delivered to the Secretary of the Corporation no
later than the close of business on the seventh day following the day on which
the notice of the meeting was mailed. Nominations not made in accordance with
the foregoing provisions may be ruled out of order by the presiding officer or
the chairman of the meeting.
In accordance with SEC Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, shareholder proposals intended to be included in
the proxy statement and presented at a regularly scheduled annual meeting must
be received by BancsharesFirst Community at least 120 days before the anniversary of the
date that the previous year's proxy statement was first mailed to shareholders.
As provided in the SECExchange Act rules, if the annual meeting date has been
changed by more than 30 days from the date of the prior year's meeting, or for
special meetings, the proposal must be submitted within a reasonable time before
BancsharesFirst Community begins to print and mail its proxy materials.
CITIZENS
ACommonWealth. Neither CommonWealth's articles of incorporation nor its
bylaws specify advance notice requirements for the submission of shareholder
intending to make a proposal for consideration at a regularly
scheduled annual meeting of Citizens' shareholders that is not intended to be
includedproposals. However, in the proxy statement for that meeting must notify Citizens' secretary
in writing at least 40 days prior to the meeting, provided that if less than 50
days' notice or prior public disclosureaccordance with Rule 14a-8 of the date of the meeting is given or
made to shareholders, Citizens must receive notice from the shareholder no later
than the close of business on the eighth day following the day on which Citizens
mailed or made public disclosure regarding a notice of such meeting. The
shareholder's notice to the Corporate secretary must contain: (a) a brief
description of the business the shareholder intends to bring before the annual
meeting and the reasons for conducting that business at the annual meeting; (b)
the name and address, as they appear on
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53
Citizens' books, of the shareholder proposing that business; (c) the class and
number of shares of Citizens which that shareholder beneficially owns; and (d)
any material interest that the shareholder has in that business.
Citizens is not subject to the SEC's rules regardingExchange Act,
shareholder proposals intended to be included in the proxy statement and
presented at a regularly scheduled annual meeting.
DISCHARGE OF DUTIES; EXCULPATION AND INDEMNIFICATION
BANCSHARES
Themeeting must be received by
CommonWealth at least 120 days before the anniversary of the date that the
previous year's proxy statement was first mailed to shareholders. As provided in
the Exchange Act rules, if the annual meeting date has been changed by more than
30 days from the date of the prior year's meeting, or for special meetings, the
proposal must be submitted within a reasonable time before CommonWealth begins
to print and mail its proxy materials.
SHAREHOLDER ACTION WITHOUT A MEETING
First Community. Under Nevada business statutes require thatlaw, any action required or permitted to be
taken at a director ofshareholders meeting may be taken without a Nevada
corporation discharge his or her duties as a director in good faith and with the
viewmeeting pursuant to the
interestwritten consent of the corporation. Directors are presumed to act in good
faith, on an informed basis and with a view to the interestsholders of the corporation.
Bancshares' articlesnumber of incorporation provideshares of voting stock that
would have been required to effect the corporation shall
indemnifyaction at an actual meeting of
shareholders.
CommonWealth. Virginia law provides that any action which may be
authorized or taken at a director against whom suit is threatenedmeeting of shareholders may be authorized or initiatedtaken
without a meeting by reasonunanimous written consent of the fact that he is or was a director if he acted in good faith and in a manner
he reasonably believedshareholders who would be
entitled to be in or not opposed tovote on the best interests of the
corporation, unless he is found liable to the corporation or its stockholders
except for a breach of the duty of loyalty, certain intentional acts or illegal
distributions. The articles further provide that no director shall be liable to
the corporation or its stockholders except for a breach of the duty of loyalty.
A director facing a change in control who resists such change is subject to the
same duties and presumptions if the directors have reasonable grounds to believe
that a threat to corporate policy and effectiveness exists and the action taken
which impedes the exercise of the stockholders' rights must be reasonable in
relation to that threat.
CITIZENS
West Virginia law requires that a director of a West Virginia corporation
discharge his or her duties as a director in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner the director reasonably believes to be in the best
interests of the corporation. Indemnification is the practice by which a
corporation pays the expenses of directors and officers who are named as
defendants or otherwise involved in litigation relating to their activities on
behalf of the corporation. Citizens' articles of incorporation provide for
indemnification of Citizens' directors and officers. Also, the indemnification
provision specifies the payments Citizens must make and the binding contractual
nature of Citizens' commitment to do so.action.
69
MERGERS, SHARE EXCHANGES AND SALES OF ASSETS
BANCSHARES
TheFirst Community. Nevada business statuteslaw generally requirerequires that any merger, share
exchange or sale of all, or substantially all, of the assets of a corporation
other than in the ordinary course of business must be approved by a majority of
the voting power or if stockholdersshareholders are entitled to vote as a class, by a
majority of all votes by each class and representing a majority of all votes
entitled to be voted. Approval of a merger by the shareholders of the surviving
corporation is not required in certain instances, however, including (as in the case of the
merger with Citizens) a merger in
which the number of voting shares outstanding immediately after the merger, plus
the number of voting shares issuable as a result of the merger, does not exceed
by more than 20 percent the number of voting shares outstanding immediately
before the merger.
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54
The ArticlesCommonWealth. Under Virginia law, unless a Virginia corporation's articles
of Incorporationincorporation provide for a greater or lesser vote, a plan of Bancshares requiremerger or share
exchange must be approved by each voting group entitled to vote on the proposed
amendment by more than two-thirds of all the votes entitled to be cast by that
voting group. However, the vote specified in the articles of incorporation may
not be reduced to less than a majority of all votes cast by the voting group at
a meeting at which a quorum of the voting group exists. CommonWealth's articles
of incorporation and bylaws are silent as to the vote required, thus a
two-thirds vote is required to approve the merger with First Community Bank.
INTERESTED SHAREHOLDER STATUTES
First Community. First Community has opted out of the "interested
shareholder" statutes of Nevada law. However, First Community's articles of
incorporation contain their own interested shareholder provisions which requires
the approval of the holders of more than 85 percent of the sharesFirst Community's
outstanding stock to authorize business combinations with certain parties known as interested stockholders,any party that owns in
excess of 15% of First Community's outstanding stock, unless approved by the
directors not affiliated with such stockholders,shareholders, or unless certain consideration
and disclosure criteria are satisfied.
CITIZENS
UnderCommonWealth. CommonWealth's articles of incorporation and bylaws are
silent regarding acquisitions involving interested shareholders. However, under
the Act,Virginia anti-takeover law regulating "affiliated transactions," material
acquisition transactions between a Virginia corporation and any merger, share exchange or saleholder of all or substantially
allmore
than 10% of any class of its outstanding voting shares are required to be
approved by the holders of at least two-thirds of the remaining voting shares.
Affiliated transactions subject to this approval requirement include mergers,
share exchanges, material dispositions of corporate assets of a corporation otherwise thannot in the ordinary
course of business, must be approved by the affirmative voteany dissolution of the majoritycorporation proposed by or on behalf
of a 10% holder or any reclassification, including reverse stock splits,
recapitalization or merger of the issued
and outstandingcorporation with its subsidiaries, that
increases the percentage of voting shares owned beneficially by a 10% holder by
more than five percent.
CONTROL SHARE STATUTES
First Community. First Community is subject to the Nevada anti-takeover
law regulating "control share acquisitions." Under Nevada law, a person that
acquires or offers to acquire ownership of each voting group entitled"control shares" of a corporation
(defined as shares obtained pursuant to a transaction in which an acquiring
person reaches the 20%, 33% or majority ownership levels) has the right to vote
unlessthose shares, and shares acquired within the previous 90 days, only to the
extent granted by a corporation's articles of incorporation provide otherwise. Citizens' articles of
incorporation contain a fair price provision which requires the approvalresolution of the holders of 80 percent of Citizens' shares entitled to vote asshareholders approved at a condition to
specified transactions with an interested shareholder, exceptspecial or
annual meeting, unless otherwise provided in cases in which
either (a) price criteria and procedural requirements are satisfied, or (b) the
transaction is approved by a majority of the disinterested directors. If the
minimum price criteria and procedural requirements are met or the requisite
approval of the Citizens' Board is given, the normal requirements of West
Virginia law would apply. The fair price provision does not apply to the merger
with Bancshares. Therefore, only the affirmative vote of the majority of the
issued and outstanding shares of Citizens' common stock is necessary to approve
the merger with Bancshares.
ANTI-TAKEOVER STATUTES
BANCSHARES
The Nevada statutes require the approval of the holders of a majority of
Bancshares stock before certain acquiring persons can exercise voting rights. If
such voting rights are conferred upon a majority interest, any stockholder not
voting in favor of such rights may compel redemption of his shares.
CITIZENS
West Virginia has not adopted any anti-takeover statutes.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
BANCSHARES
The Nevada statutes provide generally that a Nevada corporation's articles
of incorporation may be amended only upon approval by a majority of the voting
power, or in the case of amendments which would alter the preferences or rights
of any class of shares, upon additional approval by a majority of the voting
power of each class affected by the amendment. Bancshares' articles of
incorporation impose a greater requirement, the affirmative vote of more than
two-thirds of the outstanding shares entitled to vote, to approve an amendment
that would amend, alter or repeal the provisions of the articles of incorporation or
bylaws relatingin effect on the tenth day following the control acquisition. The
corporation must, within 50 days after delivery of certain information by the
acquiring person, hold a special meeting to classification and staggered terms ofconsider a resolution authorizing
voting rights for the Bancshares Board, removal of directors or any requirement forcontrol shares, unless the acquiring person consents in
writing to holding a supermajority
vote on such an amendment. The Bancshares'meeting after 50 days. Unless the corporation's articles of
incorporation authorizeprovide otherwise, a resolution granting voting rights must be
approved by a majority vote. The corporation may adopt a provision in its
articles of incorporation or bylaws allowing mandatory redemption of the Bancshares Boardcontrol
shares if the acquiring party fails to amend Bancshares'make certain disclosures within ten days
of acquiring the control shares, or the control shares are not accorded full
voting rights at the meeting held for such purpose. Unless the articles of
incorporation or bylaws of the corporation provide otherwise, if the acquiring
party has acquired a majority (or larger) stake, and been accorded full voting
rights, any holder that did not vote in favor of granting
70
voting rights is entitled to put his or her shares to the corporation for "fair
value" (defined as the highest price paid by the acquiring party for control
shares). A corporation may impose stricter requirements than those established
by this statute through a charter or bylaw amendment or by resolution. The
provisions relating to the acquisition of control shares of a Nevada corporation
do not apply to an acquisition of stock in good faith, without an intention to
avoid the statutory requirements, including acquisitions.
CommonWealth. CommonWealth is subject to the Virginia anti-takeover law
regulating "control share acquisitions." Under that Virginia statute, shares
acquired in a control share acquisition (defined as shares obtained pursuant to
a transaction in which an acquiring person reaches the 20%, 33% or majority
ownership level) have no voting rights unless granted by a majority vote of all
outstanding shares other than those held by the acquiring person or any officer
or employee director of the corporation, or the articles of incorporation or
bylaws of the corporation provide that this statute does not apply to
acquisitions of its shares. An acquiring person that owns five percent or more
of the corporation's voting stock may require that a special meeting of the
shareholders be held, within 50 days of the acquiring person's request, to
consider the grant of voting rights to the shares acquired in the control share
acquisition. If voting rights are not granted and the corporation's articles of
incorporation or bylaws permit, the acquiring person's shares may be repurchased
by the corporation, at its option, at a price per share equal to the acquiring
person's cost. Virginia law grants dissenters' rights to any timeshareholder who
objects to a control share acquisition that is approved by a vote of
disinterested shareholders and that gives the acquiring person control of a
majority of the board of directors at a meeting called for that purpose.
44
55
CITIZENS
The Act provides that a West Virginia corporation's articles of
incorporation may be amended only upon approval by a majority of the votes cast
within each voting group entitled to vote. In certain circumstances, Citizens'
articles of incorporation and bylaws impose greater requirements. For instance,
Citizens' articles of incorporation and bylaws provide that the affirmative vote
of the holders of at least 80 percent of the outstanding shares entitled to vote
are required to amend or repeal articles of incorporation provisions dealing
with the classification of the board of directors, director nominations,
appointment to newly created directorships, vacancies of directors, removal of
directors, and business combinations by unsolicited and unapproved third
parties. Citizens' bylaws also require a two-thirds' affirmative vote of the
members of the Citizens' Board to amend the bylaws to change the principal
office, change the number of directors, change the number of directors on the
executive committee, or make a substantial change in the duties of the Chairman
of the Board of the Directors or the President.shares.
SHAREHOLDERS' RIGHTSRIGHT OF DISSENT AND APPRAISAL
BANCSHARESFirst Community. The holders of BancsharesFirst Community common stock do not have
dissenters rights under Nevada law because its stock is included in the national market system by the
National Association of Securities Dealers and is held of record by more
than 2,000 stockholders.
CITIZENS
The Act provides that holdersshareholders.
CommonWealth. For a discussion of Citizens' common stock havethe dissenters' rights in connection with the merger so long as any shareholder of record of
Citizens who objectsunder Virginia
law, please refer to the merger complies withsection entitled "The Merger#Dissenters' Rights" and to
Sections 31-1-122 and 31-1-12313.1-729 through 13.1-741 of the Virginia Stock Corporation Act, the full textsa copy
of which areis attached as Appendix C. Those provisions
are summarized under the heading "Rights of Dissenting Shareholders" on page 27.Annex III to this document.
LIQUIDATION RIGHTS
BANCSHARESFirst Community. In the event of the liquidation, dissolution or winding
up of the affairs of Bancshares,First Community, holders of outstanding shares of Bancshares'First
Community's common stock are entitled to share, in proportion to their
respective interests, in Bancshares'First Community's assets and funds remaining after
payment, or provision for payment, of all debts and other liabilities of Bancshares,First
Community, including any issued and outstanding preferred stock.
Because BancsharesFirst Community is a bank holding company, its rights, the rights
of its creditors and of its shareholders, including the holders of the shares of
any Bancshares'sFirst Community's preferred stock that may be issued, to participate in the
assets of any subsidiary upon the latter's liquidation or recapitalization may
be subject to the prior claims of the subsidiary's creditors, except to the
extent that BancsharesFirst Community may itself be a creditor with recognized claims
against the subsidiary.
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56
CITIZENSCommonWealth. In the event of liquidation, dissolution or winding up of
the affairs of Citizens, the rightsCommonWealth, holders of shareholdersoutstanding shares of Citizens'CommonWealth's
common stock are entitled to share, in proportion to their respective interests,
in CommonWealth's assets and funds remaining after payment, or provision for
payment, of all debts and other liabilities of CommonWealth, including any
issued and outstanding preferred stock.
CONSTITUENCY PROVISIONS
First Community. Nevada law contains a provision that provides that
directors and officers of a corporation, in exercising their respective powers
with a view to the interests of the corporation, may consider, in addition to
the interests of the common shareholders of a corporation, any of the following:
the interests of the corporation's employees, suppliers, creditors and
customers; the economy of the state of Nevada and the nation; the interests of
the community and of society; and the long-term as well as short-term interests
of the corporation and its shareholders, including the possibility that these
interests may best be served by the continued
71
independence of the corporation. Nevada law further provides that directors and
officers are not required to consider the effect of a proposed corporate action
upon any particular group having an interest in the corporation as a dominant
factor.
CommonWealth. CommonWealth's articles of incorporation state that its
board of directors, when evaluating any offer of a party or entity to (a) make a
tender or exchange offer for any equity security of CommonWealth, (b) merge or
consolidate CommonWealth with another corporation or bank, (c) purchase or
otherwise acquire any or substantially all of the property and assets of
CommonWealth, or (d) engage in any transaction similar to, those outlined above for Bancshares' shareholders. Additionally, Citizens' right
to participateor having similar
effects as, any of the foregoing transactions, shall, in connection with the
exercise of its judgment in determining what is in the assetsbest interest of any affiliate bank uponthe
CommonWealth and its shareholders, give due consideration to all relevant
factors, including, without limitation, the social and economic effects of the
proposed transaction on the depositors, employees, suppliers, customers and
other constituents of CommonWealth and on the communities in which CommonWealth
operates or is located, the business reputation of the party or entity involved,
and the board of directors' evaluation of the value of CommonWealth in a freely
negotiated sale and of the future prospects of the CommonWealth as an
affiliate bank's
liquidation or recapitalization is similar to the rights outlined above for
Bancshares.
SHAREHOLDER PROPOSALSindependent entity.
ADJOURNMENT OF THE SPECIAL MEETING
(PROPOSAL TWO)
In the event that there are not sufficient votes to constitute a quorum or
approve the merger is not completed, any proposal which a
Citizens shareholder wishes to have presentedagreement at the next annual meeting of
shareholders must give notice of such proposals to Citizens not less than 40
days prior to the datetime of the annualspecial meeting, the merger
agreement could not be approved unless the annual meeting iswas adjourned to a later date
or dates in order to permit further solicitation of proxies. In order to allow
proxies that have been received by CommonWealth at the time of the special
meeting to be held less than 50 days after Citizens givesvoted for an adjournment, if necessary, CommonWealth has submitted
the question of adjournment to its shareholders as a separate matter for their
consideration. The board of directors of CommonWealth unanimously recommends
that shareholders vote "FOR" the adjournment proposal. If it is necessary to
adjourn the special meeting, no notice of the adjourned meeting in which caseis required to
be given to shareholders, must give notice of such proposals no laterother than 8 days followingan announcement at the date on which Citizens gave noticespecial meeting of
the annual meeting. Itplace, date and time to which the special meeting is urged that
any proposals be sent by certified mail, return receipt requested.
OTHER BUSINESS
The Citizens' Board is not aware of any business to come before the meeting
other than those matters described in this proxy statement/prospectus. However,
if any other matters should properly come before the meeting, it is intended
that the proxies solicited hereby will be voted with respect to those other
matters in accordance with the judgment of the persons voting the proxies.adjourned.
LEGAL MATTERSOPINION
The validity of the shares of Bancshares'First Community common stock offered by this
proxy statement/ prospectusto be issued in the merger
will be passed upon for First Community by Gentry, Locke, RakesKelley Drye & Moore,Warren LLP, Roanoke, Virginia, as counsel to Bancshares. As ofVienna,
Virginia.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the date of this proxy
statement/prospectus, certain members of Gentry, Locke, Rakes & Moore, LLP owned
an aggregate amount of 582 shares of Bancshares' common stock.
EXPERTS
The consolidated
financial statements of Bancshares and its subsidiaryFirst Community incorporated in this prospectus by reference from Bancshares' Annual Reportin its annual
report on Formform 10-K for the year ended December 31, 19992002, as set forth in their
report, which is incorporated by reference in this prospectus/proxy statement
and elsewhere in the registration statement. The consolidated financial
statements of First Community are incorporated by reference in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of Commonwealth as of December 31, 2002 and 2001,
and for each of the two years in the period ended December 31, 2002 included in
this prospectus/proxy statement have been audited by DeloitteCherry, Bekaert & Touche LLP,Holland,
L.L.P., independent auditors, as stated in their report which is
incorporatedappearing herein by reference, and
have been so incorporatedincluded in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
With respect72
PROPOSALS FOR THE 2003 ANNUAL MEETING
Pursuant to Rule 14a-8 under the unaudited condensed consolidated interim financial
informationExchange Act, the deadline for the
three-month period ended June 30, 2000, incorporatedsubmission of proposals by referenceshareholders for inclusion in this Prospectus, Ernst & Young LLP have reported that they have
applied limited proceduresthe proxy statement and
form of proxy to be used by CommonWealth in accordanceconnection with professional standards for a
reviewthe next annual
meeting of shareholders of CommonWealth, which will be held only if the merger
is not consummated before the time of such information. However, their separate report, included in First
Community Bancshares, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, and incorporated herein by reference, states that they did not
audit and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted considering the limited nature of the review procedures applied.
The independent auditors are not subject to
46
57
the liability provisions of Section 11 of the Securities Act of 1933 ( the
"Act") for their report on the unaudited interim financial information because
that report is not a "report" or a "part" of the Registration Statement prepared
or certified by the auditors within the meaning of Sections 7 and 11 of the Act.
The consolidated financial statements of Citizens at December 31, 1999 and
1998, and for each of the three years in the period ended December 31, 1999,
included in the Proxy Statement of Bancshares, which is referred to and made a
part of this Prospectus and Registration Statement, have been audited by
Richmond Smith & Co., independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
Citizens expects representatives of Richmond, Smith & Co. to attend
Citizens' special meeting. These representatives will have an opportunity to
make a statement if they desire to do so, and Citizens expects that they will be
available to respond to any appropriate questions you may have.meeting, was no later than January 1,
2003.
WHERE YOU CAN FIND MORE INFORMATION
BancsharesFirst Community files annual, quarterly and specialcurrent reports, proxy
statements and other information with the SEC. Citizens is not a reporting Company under
SEC lawsSecurities and regulations, and does not file reports thereunder.Exchange Commission, or
the Commission. You may read and copy any reports, proxy statements or certain other
information that Bancshares files
withfiled by First Community at the SECCommission's public reference room
in Washington, D.C., which is located at the following SEC locations:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
address: Public Reference
Room, Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549.
You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Commission. Please call the SECCommission at (800)SEC-03301-800-SEC-0330
for further information on the operation of the Commission's public reference
rooms. These SECFirst Community's Commission filings are also available to the public
from commercial document retrieval services and at the Commission's Internet world wide web site
maintained by the SEC at "http:website
(http://www.sec.gov."
Bancshareswww.sec.gov).
First Community has filed with the Commission a registration statement to register withon
Form S-4 under the SECSecurities Act and the Bancshares' common stock to be issued to Citizens' shareholders in the
merger.rules and regulations thereunder. This
proxy statement/prospectusdocument is a part of that registration statement
and constitutes a prospectus of Bancshares.statement. As allowedpermitted by SECthe
Commission's rules, this proxy
statement/prospectusdocument does not contain all of the information you
can find in Bancshares' registration statement or the exhibits to the registration statement. The SECregistration statement is available
for inspection and copying as set forth above.
The Commission allows BancsharesFirst Community to "incorporate by reference" information ininto
this proxy statement/prospectus,document, which means that BancsharesFirst Community can disclose important
information to you by referring you to another document filed separately with
the SEC.Commission. The information incorporated by reference is considered to be
part of this proxy statement/prospectus,document, except for any information superseded by information
contained directly in this proxy statement/ prospectus or in later filed documents incorporated by reference in this proxy statement/prospectus.
47
58
This proxy statement/prospectusdocument.
First Community incorporates by reference the respective documents set
forth below that Bancshares has previously filed by them
with the SEC. These documents
contain important information about BancsharesCommission listed below and its business.any future filings made by it with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the election deadline date.
BANCSHARES'FIRST COMMUNITY SEC FILINGS (FILE NO. 000-19297) PERIOD/DATE
- -------------------------------------------------------------------------------------------- ------------------------------------
Quarterly Report on Form 10-Q............. For the fiscal quarter ended June 30,
2000
Annual Report on Form 10-K................ For the fiscal year10-K Year ended December 31, 19992002
Current Reports on Form 8-K............... Filed8-K January 16, 2003, January 27, 2003,
January 28, 2003, February 22, 2000, June 13, 2000,
June 30, 2000
Registration Statements on Form 8-A
(describing Bancshares' common stock)..... Filed May 20, 199126, 2003,
March 4, 2003, March 25, 2003, March
26, 2003 and March 28, 2003
Bancshares also incorporates by reference additional documents thatYou may be
filed with the SEC between the daterequest a copy of this proxy statement/prospectus and the
completion of the merger or the termination of the merger agreement. These
include periodic reports, such as Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
Bancshares has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Bancshares.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through Bancshares,
the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from the companies without charge,
excluding all exhibits except those that the companies have specifically
incorporated by reference in this proxy statement/prospectus.
Shareholders may obtain documents incorporated by reference in this
proxy
statement/ prospectusdocument but not otherwise accompanying this document, at no cost, by requesting them in writing or
by telephonetelephoning First Community at the following address:
First Community Bancshares, Inc.
Ruth White
Post Office Box 989
Bluefield, Virginiaaddresses:
FIRST COMMUNITY BANCSHARES, INC.
ONE COMMUNITY PLACE
BLUEFIELD, VIRGINIA 24605
(540)ATTENTION: ROBERT L. SCHUMACHER
(276) 326-9000
IfTo obtain timely delivery, you would likeshould request desired information no later
than five business days prior to request documents please do so by September , 2000,
so as to receive them before the meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. Bancshares and Citizens have not
authorized anyone to provide you with information that is different from what is
contained in this proxy statement/prospectus or in anydate of the materials that
have been incorporatedspecial meeting, or by
reference into this document. If you are in a
jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or where the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
document does not extend to you. This proxy statement/prospectus is dated August
31, 2000. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date subsequent to that date. Neither
the mailing of this proxy statement/prospectus to shareholders nor the issuance
of Bancshares' common stock in the merger creates any implication to the
contrary.
48, 2003.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT. FIRST COMMUNITY HAS NOT AUTHORIZED ANYONE ELSE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THAT WHICH IS CONTAINED IN
THIS DOCUMENT. MOREOVER, FIRST COMMUNITY IS NOT MAKING AN OFFER TO SELL OR
SOLICITING AN OFFER TO BUY ANY SECURITIES OTHER THAN THE FIRST COMMUNITY COMMON
STOCK TO BE ISSUED BY FIRST COMMUNITY IN THE MERGER, AND NEITHER FIRST COMMUNITY
NOR COMMONWEALTH IS MAKING AN OFFER OF SUCH SECURITIES IN ANY STATE WHERE THE
OFFER IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS DOCUMENT SPEAKS ONLY
AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
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59
CITIZENS SOUTHERN BANK, INC.
INDEX OFTO COMMONWEALTH FINANCIAL STATEMENTS
FOR YEARS ENDED
DECEMBER 31, 2002 AND 2001
CONTENTS
PAGE
----------
Management Discussion and Analysis for Year Ended December
31, 1999..................................................Report of Independent Certified Public Accountants.......... F-2
Balance Sheets.............................................. F-3
Financial Statements:
Statements of Financial Condition as of December 31, 1999
and 1998............................................... F-12Income........................................ F-4
Statements of Income for the Three Years Ended December
31, 1999............................................... F-13
Statements of Changes in Shareholders' Equity for the
Three Years Ended December 31, 1999.................... F-14Stockholders' Equity.......................... F-5
Statements of Cash Flows for the Three Years Ended
December 31, 1999...................................... F-15Flows.................................... F-6
Notes to Financial Statements............................. F-16
Management Discussion and Analysis for the Interim period
Ended June 30, 2000 and 1999.............................. F-27
Interim Financial Statements:
Statements of Financial Condition as of June 30, 2000 and
December 31, 1999...................................... F-31
Statements of Income for the Three and Six Months Ended
June 30, 2000 and 1999................................. F-32
Statements of Cash Flows for the Six Months Ended June 30,
2000 and 1999.......................................... F-33
Statements of Changes in Shareholders' Equity for the Six
Months Ended June 30, 2000 and 1999.................... F-34
Notes to Interim Financial Statements..................... F-35Statements............................... F-7
F-1
60
CITIZENS SOUTHERN BANK, INC.
FIVE-YEAR SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PERCENT AND PER SHARE DATA)
BALANCE SHEET SUMMARY (AT END OF
PERIOD):
Loans, net of unearned income... $42,729 $27,573 $16,730 $14,858 $ 7,509
Reserve for loan losses......... 530 342 214 194 75
Securities...................... 16,911 11,967 5,636 948 113
Total assets.................... 64,550 48,313 30,606 21,952 12,604
Deposits........................ 53,381 42,301 25,312 16,684 7,726
Other indebtedness.............. 5,997 667 186 399 --
Stockholders' Equity............ 4,942 5,111 5,005 4,792 4,765
SUMMARY OF EARNINGS:
Total interest income........... $ 3,842 $ 2,576 $ 1,753 $ 1,131 $ 412
Total interest expense.......... 2,159 1,462 864 419 62
Provision for loan losses....... 204 130 24 123 75
Non-interest income............. 182 75 42 31 4
Non-interest expense............ 1,431 908 625 587 471
Income tax expense (benefit).... 79 48 67 6 (44)
Net Income (Loss)............... 150 104 215 26 (148)
PER SHARE DATA:
Basic earnings (loss) per common
share......................... $ .60 $ .42 $ .86 $ .11 $ (.60)
Diluted earnings (loss) per
common share.................. .60 .42 .86 .11 (.60)
Cash dividends..................
Book value at year-end.......... 19.77 20.44 20.02 19.17 19.06
SELECTED RATIOS:
Return on average assets........ .27% .26% .82% .15% (2.35)%
Return on average equity........ 2.99% 2.06% 4.38% .55% (6.21)%
Dividend payout................. -- -- -- -- --
Average equity to average
assets........................ 8.91% 12.82% 18.64% 27.66% 37.81%
Risk based capital to risk
adjusted assets............... 13.04% 19.42% 32.30% 37.30% 67.86%
Leverage ratio.................. 8.78% 13.33% 16.35% 21.83% 37.81%
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61
CITIZENS SOUTHERN BANK, INC.
TABLE II -- YIELD ANALYSIS
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------ ------- -------- ------
(IN THOUSANDS OF DOLLARS)
Assets
Loans:
Commercial, Financial, and
Agriculture................ $ 4,492 $ 351 7.81% $ 2,547 $ 199 7.81% $ 1,660 $ 144 8.67%
Real Estate Mortgage......... 25,174 2,046 8.13% 16,273 1,346 8.27% 12,453 1,031 8.28%
Installment.................. 4,452 351 7.88% 2,604 209 8.03% 2,016 161 7.99%
Other........................ -- -- 0.00% -- -- 0.00% -- -- 0.00%
------- ------ ---- ------- ------ ---- ------- ------ ----
Gross Loans.................. 34,118 2,748 8.05% 21,424 1,754 8.19% 16,129 1,336 8.28%
Allowance for Loan Losses.... (418) -- 0.00% (268) -- 0.00% (205) -- 0.00%
------- ------ ---- ------- ------ ---- ------- ------ ----
Net Loans*................. 33,700 2,748 8.15% 21,156 1,754 8.29% 15,924 1,336 8.39%
------- ------ ---- ------- ------ ---- ------- ------ ----
Investments:
Taxable...................... 16,290 966 5.93% 6,807 410 6.02% 2,762 164 5.94%
Tax Exempt................... -- -- 0.00% -- -- 0.00% -- -- 0.00%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Investments*......... 16,290 966 5.93% 6,807 410 6.02% 2,762 164 5.94%
------- ------ ---- ------- ------ ---- ------- ------ ----
Federal Funds Sold............. 2,663 128 4.81% 7,540 412 5.46% 4,520 253 5.60%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Interest Earning
Assets................... 52,653 3,842 7.30% 35,503 2,576 7.26% 23,206 1,753 7.55%
Cash and Due From Banks........ 1,459 1,078 846
Premises and Equipment......... 1,522 1,373 1,377
Other Assets................... 663 377 210
------- ------- -------
Total Assets............... $56,297 $38,331 $25,639
======= ======= =======
Liabilities and Shareholders
Equity
Interest Bearing Deposits:
Demand....................... $ 6,363 $ 221 3.47% $ 2,948 $ 98 3.32% $ 1,502 $ 47 3.13%
Savings...................... 6,805 218 3.20% 6,216 210 3.38% 5,155 178 3.45%
Time......................... 31,086 1,662 5.35% 20,395 1,149 5.63% 11,655 631 5.41%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Interest Bearing
Deposits................. 44,254 2,101 4.75% 29,559 1,457 4.93% 18,312 856 4.67%
------- ------ ---- ------- ------ ---- ------- ------ ----
Borrowings..................... 1,127 58 5.15% 168 5 2.98% 244 8 3.28%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Interest Bearing
Liabilities.............. 45,381 2,159 4.76% 29,727 1,462 4.92% 18,556 864 4.66%
------- ------ ---- ------- ------ ---- ------- ------ ----
Non-interest Bearing
Deposits..................... 5,642 3,349 2,075
Other Liabilities.............. 245 180 115
Equity......................... 5,029 5,075 4,893
------- ------- -------
Total Liabilities and
Equity................... $56,297 $38,331 $25,639
======= ======= =======
Net Interest Income............ $1,683 $1,114 $ 889
====== ====== ======
Net Interest Rate Spread....... 2.54% 2.34% 2.90%
==== ==== ====
Net Interest Margin............ 3.20% 3.14% 3.83%
---- ---- ----
- ---------------
* Note: There are no tax-exempt investments or loans included.
F-2
62
CITIZENS SOUTHERN BANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSISCBH logo
REPORT OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
INTRODUCTION AND SUMMARYINDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The following is management's discussion and analysis of the financial
condition and results of operation for Citizens Southern Bank, Inc. for each of
the three years in the period ended December 31, 1999, 1998 and 1997. This
discussion and analysis should be read in conjunction with the financial
statements and accompanying notes thereto of the Bank as of December 31, 1999
and 1998 and for each of the three years in the period ended in December 31,
1999.
RESULTS OF OPERATION
EARNINGS SUMMARY
Net income for the three years ended December 31, 1999, 1998 and 1997, was
$150,000, $104,000 and $215,000, respectively. On a per share basis, net income
was $.60 in 1999 compared to $.42 in 1998 and $.86 in 1997. Return on average
total assets for the year ended December 31, 1999 was .27% compared to .26% in
1998 and .82% in 1997. Return on average equity was 2.99% for 1999 compared to
2.06% in 1998 and 4.38% in 1997. A summary of significant factors influencing
the Bank's results of operations and related ratios is included in the following
discussion.
NET INTEREST INCOME
The major component of the Bank's net earnings is net interest income,
which is the excess of interest earned on earning assets over the interest
expense incurred on interest bearing sources of funds. Net interest income is
affected by changes in volume, resulting from growth and alterations of the
balance sheet's composition, fluctuations in interest rates and maturities of
sources and uses of funds.
Net interest income totaled $1,683,000, $1,114,000, and $889,000 for the
years ended December 31, 1999, 1998 and 1997 respectively, resulting in a net
interest margin of 3.08% for 1999, compared to 3.03% and 3.72% for 1998 and
1997. In 1999, the yield on interest earning assets increased .03 percent from
7.12% in 1998 to 7.15% in 1999. The rate on interest bearing liabilities
decreased .15 percent from 4.91% in 1998 to 4.76% in 1999. The primary reason
for the improved net interest margin was the Bank's ability to attract time
deposits at a lower cost, partially offset by an increase in cost of borrowings.
Net interest income, average balance sheet amounts, and corresponding
average yields on earning assets and costs of interest bearing liabilities for
the years 1999, 1998 and 1997 are presented in Table II. Table III presents, for
the periods indicated, the changes in interest income and expenses attributable
to (a) changes in volume (changes in volume multiplied by prior period rate) and
(b) changes in rate (change in rate multiplied by prior period volume). Changes
in interest income and expense attributable to both rate and volume have been
allocated between the factors in proportion to the relationship of the absolute
dollar amounts of the change in each.
As identified in Table III, the change in net interest margin from 1999 to
1998 was primarily attributed to the change in volume of certain interest
bearing assets and liabilities.
F-3
63
CITIZENS SOUTHERN BANK, INC.
TABLE III -- RATE/VOLUME ANALYSIS
DECEMBER 31, 1999 VS. 1998 DECEMBER 31, 1998 VS. 1997
----------------------------- -----------------------------
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------- -------- ------ -------
(IN THOUSANDS OF DOLLARS)
Earnings Assets:
Available for Sale Securities....... 562 (6) 556 244 2 246
Fed Funds Sold...................... (239) (45) (284) 165 (6) 159
Loans............................... 1,023 (29) 994 433 (15) 418
----- --- ----- ----- --- -----
Total Earning Assets............. 1,346 (80) 1,266 842 (19) 823
----- --- ----- ----- --- -----
Interest-bearing Liabilities:
Interest-bearing Demand............. 118 5 123 48 3 51
Savings Deposits.................... 19 (11) 8 36 (4) 32
Time Deposits....................... 575 (62) 513 491 27 518
Borrowings.......................... 47 6 53 (2) (1) (3)
----- --- ----- ----- --- -----
Total Interest-bearing
Liabilities.................... 759 (62) 698 573 25 598
----- --- ----- ----- --- -----
Change in Net Interest Income......... 587 (18) 569 269 (44) 225
----- --- ----- ----- --- -----
NONINTEREST INCOME
Noninterest income totaled $182,000, $75,000 and $42,000 for each of the
years ended December 31, 1999, 1998 and 1997, respectively. The most significant
items contributing to the increase of $107,000 in 1999 over the 1998 level was
an increase in service charges on deposit accounts in the amount of $58,000 and
secondary market loan origination fees of $45,000.
NONINTEREST EXPENSE
Noninterest expense totaled $1,431,000, $908,000 and $625,000 for each of
the years ended December 31, 1999, 1998 and 1997, respectively. Total
noninterest expense increased $523,000 from 1998 to 1999. During December 1998,
the Bank established its Branch. Noninterest expense for 1999 reflects a full
year of operating the branch and primarily accounts for the increase in
noninterest expense in 1999 as compared to 1998. In addition, data processing
costs increased $79,000 in 1999 as compared to 1998. Refer to Note 13 of the
accompanying financial statements for further information and additional
discussion regarding the Branch.
INCOME TAX EXPENSE
Income tax expense for the three years ended December 31, 1999, 1998 and
1997 totaled $79,000, $48,000 and $67,000 respectively. Refer to Note 7 of the
accompanying financial statements for further information and additional
discussion of the significant components influencing the effective tax rates.
SECURITIES
Securities comprised approximately 26.4% of total assets at December 31,
1999 compared to 24.5% at December 31, 1998. All securities are classified as
available for sale to provide management with flexibility to better manage its
balance sheet structure and react to asset/liability management issues as
F-4
64
they arise. Average securities approximate $16.3 million for 1999 as compared to
1998's average of $6.8 million. Refer to Note 2 of the accompanying financial
statements for details of amortized cost, the fair values, unrealized gains and
losses as well as the security classifications by type.
At December 31, 1999, the Bank did not own securities of any one issuer
that exceeded ten percent of shareholders' equity. The maturity distribution of
the securities portfolio at December 31, 1999 together with the weighted average
yields for each range of maturity, are summarized in Table IV.
CITIZENS SOUTHERN BANK, INC.
TABLE IV -- INVESTMENT PORTFOLIO
MARKET VALUE OF SECURITIES AVAILABLE FOR SALE:
DECEMBER 31,
----------------------------
1999 1998 1997
------- ------- ------
(IN THOUSANDS OF DOLLARS)
U.S. Government Agencies................................... $16,530 $11,859 $4,795
States and Political Subdivisions.......................... 0 0 0
Federal Home Loan Bank Stock............................... 381 108 91
------- ------- ------
Total............................................... $16,911 $11,967 $4,886
======= ======= ======
AMORTIZED COST OF SECURITIES AVAILABLE FOR SALE:
DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------------ ------
U.S. Government Agencies............................... $17,026 $11,859 $4,797
States and Political Subdivisions...................... 0 0 0
Federal Home Loan Bank Stock........................... 381 108 91
------- ------- ------
Total........................................... $17,407 $11,967 $4,888
======= ======= ======
MATURITY OF AGENCIES AT AMORTIZED COST:
BALANCE YIELD
------- -----
December 31, 1999
Maturity:
Within one year............................................. $ 2,250 5.06%
After one year through five years........................... 12,592 6.01%
After five years through ten years.......................... 2,184 5.98%
After ten years............................................. 0 0.00%
------- ----
Total Book Value..................................... $17,026 5.86%
======= ====
- ---------------
Note: (1) There were no tax exempt investments
(2) As of December 31, 1997, Citizens had $750,000 in Securities Held to
Maturity which consisted of the following:
-- FHLB $250,000 @ 6.27% Purchased 7/28/97; Maturity 7/28/00; Called
7/28/98
-- FFCB Step-Up $500,000 @ 6.30 Purchased 9/9/97; Maturity 2/2/02;
Called 9/8/98
F-5
65
LOAN PORTFOLIO
The following table depicts loan balances at December 31, 1999 and 1998 by
types along with their respective total loans outstanding.
CITIZENS SOUTHERN BANK, INC.
TABLE V -- MATURITIES AND RATE SENSITIVITY
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
END OF PERIOD END OF PERIOD END OF PERIOD
BALANCE BALANCE BALANCE
------------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
Commercial Financial and Other................ $ 5,069 $ 2,916 $ 1,699
Real Estate -- Mortgage....................... 31,747 20,511 12,710
Installment Loans............................. 5,913 4,146 2,302
Other......................................... -- -- 19
------- ------- -------
Total Loans............................ $42,729 $27,573 $16,730
======= ======= =======
DECEMBER 31, 1999
-----------------
MATURITY SCHEDULE:
One Year or Less............................................ $ 9,745
After One Year to five years................................ 20,904
After Five Years............................................ 12,007
-------
Total................................................ $42,656
=======
Loans due after one year with Variable Rate................. $19,425
Fixed Rate.................................................. 13,486
-------
Total................................................ $32,911
=======
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
END OF PERIOD END OF PERIOD END OF PERIOD
BALANCE BALANCE BALANCE
----------------- ----------------- -----------------
RISK ELEMENTS:
Loans Contractually Past Due over
90 days and still accruing....... $-- $-- $--
Non Accrual Loans.................. 73 6 --
Restructured Loans................. -- -- --
--- -- --
Total Non performing
Loans.................... $73 $6 $--
=== == ==
Total loans averaged $34.1 million in 1999 compared to $21.4 million in
1998 or an increase of $12.7 million. This increase in the dollar volume of
loans is primarily attributable to the Bank's strategy, which began in 1997 to
aggressively expand the Bank's commercial and real estate loan portfolios.
In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities which are disclosed in Notes 9 and 10, but
not reflected in the accompanying financial statements. There have been no
significant changes in these types of commitments and contingent liabilities and
the Bank does not anticipate any material losses as a result of these
commitments.
F-6
66
RISK ELEMENTS
The Bank, on a quarterly basis, performs a loan evaluation to encompass the
identification of potential problem credits which are included on an internally
generated "watch list". The identification of loans for inclusion on the watch
list is identified by utilizing past due reports, previous internal and external
loan reviews, and classified loans identified as part of regulatory agency loan
reviews. Once this list is compiled, specific loans for collectibility,
performance and collateral protection are reviewed. As a result of the review
process, specific reserves for potential losses are identified and the allowance
for loan losses is adjusted through a provision for loan losses.
CITIZENS SOUTHERN BANK, INC.
TABLE VII -- SUMMARY OF LOAN LOSS EXPERIENCE:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS OF DOLLARS)
Balance of reserve at beginning of period................... $342 $214 $194
Chargeoffs:
Commercial, Financial and Other........................... 3 -- --
Real Estate Mortgage...................................... -- -- --
Installment............................................... 13 2 4
---- ---- ----
Total Charge-offs.................................... 16 2 4
---- ---- ----
Recoveries:
Commercial, Financial and Other........................... -- -- --
Real Estate Mortgage...................................... -- -- --
Installment............................................... -- -- --
---- ---- ----
Total Recoveries..................................... 0 0 0
---- ---- ----
Net Charge-offs............................................. $ 16 $ 2 $ 4
Provision Expense........................................... 204 130 24
---- ---- ----
Balance at end of period.................................... $530 $342 $214
==== ==== ====
Ratio of Net Chargeoffs to Average Loans Outstanding........ 0.00% 0.00% 0.00%
ALLOCATION FOR RESERVE FOR LOAN LOSSES:
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------ ------------------
% OF % OF % OF
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL
--------- ----- --------- ----- --------- -----
(AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT PERCENT DATA)
Commercial..................... $159 30% $103 30% $64 30%
Real Estate Mortgage........... 297 56% 184 54% 117 55%
Installment.................... 74 14% 55 16% 33 15%
PROVISION FOR LOAN LOSS
The provision for loan losses represents management's determination of the
amount necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level
F-7
67
which is considered adequate in relation to the estimated risk inherent in the
loan portfolio. The provision for loan losses for each of the years ended
December 31, 1999, 1998 and 1997 totaled $204,000, $130,000 and $24,000,
respectively. As discussed in the Loan Portfolio and Risk Elements section of
this analysis, increases in the Bank's provision for loan losses are primarily
attributed to the Bank's continued, strong loan growth. An analysis of the
components comprising the allowance for loan losses for the years ended December
1999, 1998 and 1997, including charge off and recoveries is included in Note 3
of the accompanying financial statements. At December 31, 1999 and 1998
respectively, the allowance for loan losses represented 1.24% and 1.24% of gross
loans or $530,000 and $342,000, and was considered adequate to cover inherent
losses. The Bank maintains an allowance for loan losses at a level considered
adequate to provide for losses that can be reasonably anticipated. The allocated
portion of the Bank's allowance for loan losses is established on a loan by loan
basis. At December 31, 1999, the Bank did not have outstanding any other real
estate owned.
DEPOSITS
Total deposits at December 31, 1999 increased approximately $11.1 million
compared to December 31, 1998. Average interest-bearing deposits increased
approximately $14.7 million during 1999. The growth was primarily the result of
management's decision to aggressively grow the deposit base of the Bank and the
opening of its branch December 15, 1998. This significant growth in deposits is
considered normal since the incorporation of the bank in June 1995, however,
those growth levels may not be attained moving forward. Of the deposits
outstanding at December 31, 1999, $11.9 million related to deposits of $100,000
or more. Those deposits are considered to be more volatile than other deposits
and more subject to leaving the bank upon maturity. A schedule of the periods of
maturity of these accounts is as follows:
TABLE VI -- TIME DEPOSITS OVER $100,000
(IN THOUSANDS OF DOLLARS)
MATURITY OF TIME DEPOSITS $100,000 AND OVER AT DECEMBER 31, 1999:
3 months or less............................................ $ 5,703
Over 3 months through 6 months.............................. 4,629
Over 6 months through 12 months............................. 1,614
Over 12 months.............................................. --
-------
Total Time Deposits $100,000 and over................ $11,946
=======
See Note 5 of the accompanying financial statements for a maturity
distribution of time deposits as of December 31, 1999.
SHORT-TERM BORROWINGS
Total short-term borrowings increased $5.3 million from $667,000 at
December 31, 1998 to $6.0 million at December 31, 1999. See Note 6 of the
financial statements for a discussion of short-term borrowings.
The Bank has available lines of credit from the Federal Home Loan Bank of
Pittsburgh, Pennsylvania "FHLB". At December 31, 1999, the Bank had
approximately $13.0 million of additional available borrowings. Management uses
this line of credit to make additional funds available to customers in the form
of loans. Funds acquired through this program are reflected on the balance sheet
as part of short-term borrowings. Other lines of credit available to the Bank
through correspondent banks total approximately $2.0 million as of December 31,
1999.
F-8
68
LIQUIDITY
Liquidity is defined as the Bank's ability to meet the customer's loan
demand and meet deposit demands. The Bank monitors its ability to meet
anticipated changes in its sources and use of funds. Liquidity was available
through cash, due from banks, federal funds sold, securities and interest
bearing deposits with other banks maturing within one year and totaled
approximately $3.0 million and $7.0 million at December 31, 1999 and 1998,
respectively. Secondary sources of liquidity are provided by the remaining
securities available for sale, federal funds purchased, FHLB lines of credit and
correspondent bank lines of credit.
CITIZENS SOUTHERN BANK, INC.
TABLE VIII -- ASSET AND LIABILITY MATURITY AND RATE SENSITIVITY
DECEMBER 31, 1999
THREE THREE ONE THREE OVER
MONTHS OR TO TWELVE TO THREE TO FIVE FIVE
LESS MONTHS YEARS YEARS YEARS
--------- --------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
Loans:
Commercial....................... $ 1,292 $ 838 $ 819 $ 1,989 $ 60
Real Estate...................... 1,771 4,317 7,210 6,942 11,507
Consumer and Other............... 945 582 1,880 2,064 440
-------- -------- -------- -------- --------
Total Loans................... 4,008 5,737 9,909 10,995 12,007
Investments........................ 1,996 249 1,323 10,894 2,068
Federal Funds sold and other....... 404 -- -- -- --
-------- -------- -------- -------- --------
Total Earning Assets............. $ 6,408 $ 5,986 $ 11,232 $ 21,889 $ 14,075
======== ======== ======== ======== ========
Deposits:
Savings.......................... $ 8,417 $ -- $ -- $ -- $ --
CD's............................. 12,316 10,518 6,929 29 --
-------- -------- -------- -------- --------
Total Deposits................ 20,733 10,518 6,929 29 --
Borrowings......................... 5,750 -- -- -- --
-------- -------- -------- -------- --------
Total Interest Bearing
Liabilities................. $ 26,483 $ 10,518 $ 6,929 $ 29 $ --
======== ======== ======== ======== ========
Interest Sensitivity Gap........... $(20,075) $ (4,532) $ 4,303 $ 21,860 $ 14,075
======== ======== ======== ======== ========
Cumulative Gap..................... $(20,075) $(24,607) $(20,304) $ 1,556 $ 15,631
======== ======== ======== ======== ========
Cumulative Gap as a percent of
Earning Assets................... (313.28)% (411.08)% (180.77)% 7.11% 111.06%
======== ======== ======== ======== ========
INTEREST RATE RISK MANAGEMENT
The Bank analyzes interest rate risk by monitoring its interest rate
sensitivity "gaps". An asset or liability is said to be interest rate sensitive
within a specified time period if it will mature or reprice within that time
period. The interest rate sensitivity "gap" is defined as the difference between
interest earning assets and interest bearing liabilities maturing or repricing
within a given time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period of
declining interest rates, a positive gap would
F-9
69
tend to adversely affect net interest income, while a negative gap would tend to
result in an increase in net interest income. During a period of rising interest
rates, a positive gap would tend to result in an increase in net interest income
while a negative gap would tend to affect net interest income adversely.
As shown in Table VIII, the Bank has a cumulative negative interest
sensitivity gap of $24.6 million for the short-term 3-12 month period and a
cumulative negative interest sensitivity gap of $20.3 million for the 1-3 year
period. Included in the one-year period is $8,417,000 of interest bearing
savings deposit, which on a contractual basis are immediately repriceable. The
actual repricing of these deposits tends to lag well behind movements in market
interest rates.
CAPITAL
The capital percentage of the Bank has declined during the past three years
as the Bank experienced substantial growth with limited earnings. While the Bank
has grown, Total capital (to risk weighted assets), Tier I capital (to risk
weighted assets) and Tier I Leverage (to average assets) were 13.04%, 13.04% and
8.78% at December 31, 1999, which is considered well capitalized under
regulatory guidelines for prompt corrective action provisions. The Bank has not
paid a dividend since the inception of the Company in order to facilitate growth
and maintain adequate capital.
At June 30, 2000, Citizens had a Tier I capital ratio of 13.58%, a total
capital ratio of 14.83% and a leverage ratio of 8.31%, which qualify it as "well
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991.
You can find additional information about Citizens by writing to Citizens
Southern Bank, Inc., Attention Samuel L. Elmore, 111 Citizens Drive, Beckley,
West Virginia 25801.
F-10
70
INDEPENDENT AUDITOR'S REPORT
To The Stockholders and Board of Directors
CITIZENS SOUTHERN BANK
Beckley, Westand Stockholders
The CommonWealth Bank
Richmond, Virginia
We have audited the accompanying balance sheets of CITIZENS SOUTHERN BANK
("THE BANK")The CommonWealth Bank as
of December 31, 19992002 and 1998,2001, and the related statements of income,
changes in stockholders' equity, and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 1999.ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States of America. Those standards require that we plan
and perform the auditaudits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CITIZENS SOUTHERN BANK atThe CommonWealth Bank as of
December 31, 19992002 and 19982001, and the results of its operations and its cash flows
for each of the years in the three-year periodthen ended December 31, 1999 in conformity with accounting principles
generally accepted accounting principles.in the United States of America.
/s/ Richmond, SmithCherry, Bekaert & Co.
Beckley, WestHolland, L.L.P.
Richmond, Virginia
January 19, 2000
F-1127, 2003, except for Note 2, as to which the date is
February 25, 2003
F-2
71
CITIZENS SOUTHERNTHE COMMONWEALTH BANK
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
-----------DECEMBER 31,
--------------------------
2002 2001
------------ -----------
ASSETS
CURRENT ASSETS
Cash and due from banks.....................................banks................................... $ 2,489,775 $ 1,359,09010,938,941 $10,036,856
Federal funds sold.......................................... 404,000 5,621,000
----------- -----------
CASH AND CASH EQUIVALENTS (NOTE 1)........................ 2,893,775 6,980,090
----------- -----------
Certificates of deposit (Note 2)............................ 98,781 98,429
----------- -----------
INVESTMENT SECURITIES (NOTES 1 AND 2)
Available-for-sale........................................ 16,529,138 11,858,708
Restricted equity security -- Federal Home Loan Bank
stock.................................................. 381,400 108,400
----------- -----------
16,910,538 11,967,108
----------- -----------
LOANS (NOTES 1, 3, 8 AND 9)
Business.................................................. 5,372,416 3,551,670
Real estate loans -- business............................. 8,382,768 6,126,403
Real estate loans -- personal............................. 23,640,409 14,601,783
Loans to individuals...................................... 5,333,396 3,292,797
-----------sold........................................ 12,504,000 3,689,000
------------ -----------
Total Loans............................................ 42,728,989 27,572,653
Allowance for loan losses............................ (530,075) (341,920)
----------- -----------
NET LOANS......................................... 42,198,914 27,230,733cash and cash equivalents........................ 23,442,941 13,725,856
Restricted securities (at cost)........................... 1,141,500 473,400
Other investments......................................... 1,393,900 1,235,000
Loans, net................................................ 106,175,370 70,550,849
Land...................................................... 125,000 125,000
Premises and equipment, (Notes 1 and 4)...................... 1,609,159 1,580,249net............................... 706,642 724,642
Accrued interest receivable............................... 413,625 341,111
Deferred income tax asset (Note 7).......................... 340,000 105,637
Accrued Interest receivableTax Asset........................................ 406,214 226,214
Prepaid expenses and other assets................ 499,197 351,149
-----------assets......................... 331,671 146,346
------------ -----------
TOTAL ASSETS................................................ $64,550,364 $48,313,395
===========ASSETS...................................... $134,136,863 $87,548,418
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS (NOTE 5)
Noninterest bearing....................................... $ 5,934,886 $ 5,199,326
Interest bearing.......................................... 47,446,383 37,101,990
----------- -----------
TOTAL DEPOSITS.................................... 53,381,269 42,301,316
Short-term borrowings (Note 6).............................. 5,997,509 666,611LIABILITIES
Deposits.................................................. $107,292,235 $75,462,406
Accrued Interest on deposits................................ 79,963 79,550interest payable.................................. 152,646 188,389
FHLB Advances............................................. 17,540,894 4,300,000
Other liabilities........................................... 149,294 154,832
-----------liabilities......................................... 872,694 249,173
------------ -----------
TOTAL LIABILITIES................................. 59,608,035 43,202,309
-----------125,858,469 80,199,968
------------ -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 9 AND 10)CONTINGENCIES
STOCKHOLDERS' EQUITY
(NOTE 8)
Common stock (Par$4 par value $10 per share, 499,999authorized, 3,000,000 shares
issued and 250,000outstanding, 720,049 shares authorizedand 719,175
shares at December 31, 19992002 and 1998,
respectively, 250,000 issued and outstanding).......... 2,500,000 2,500,000
Capital surplus........................................... 2,500,000 2,500,0002001 respectively...... 2,880,196 2,876,700
Paid-in-capital........................................... 4,116,292 4,111,616
Retained earnings......................................... 260,583 110,445
Accumulated other comprehensive (loss) income (Note 1).... (318,254) 641
-----------Earnings......................................... 1,281,906 360,134
------------ -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 4,942,329 5,111,086
-----------EQUITY........................ 8,278,394 7,348,450
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $64,550,364 $48,313,395
=========== ===========
Book Value Per Share Outstanding (Note 1)................... $ 19.77 $ 20.44
===========EQUITY........ $134,136,863 $87,548,418
============ ===========
F-12See notes to financial statements.
F-3
72
CITIZENS SOUTHERNTHE COMMONWEALTH BANK
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
---------- ----------
INTEREST INCOME:AND DIVIDEND INCOME
Loans..................................................... $6,327,308 $5,244,413
Federal funds sold........................................ 120,105 226,264
Interest bearing deposits................................. 44,497 85,403
Government agencies....................................... -- 30,740
Corporate notes and fees on loans........................... $2,748,240 $1,754,101 $1,336,328
Interest on federal funds sold....................... 128,174 411,685 253,117
Interest and dividends on investment securities...... 959,038 398,010 158,167
Interest on certificates of deposit and other........ 6,673 11,896 5,622
----------stocks................................ 39,764 21,844
---------- ----------
TOTAL INTEREST INCOME............................. 3,842,125 2,575,692 1,753,234
---------- ---------- ----------AND DIVIDEND INCOME................ 6,531,674 5,608,664
INTEREST EXPENSE:
Interest on time deposits of $100,000 or more........ 740,766 518,560 399,082
Interest on other deposits........................... 1,360,778 937,568 456,963
Interest on short-term borrowings.................... 57,890 5,428 8,105
----------EXPENSE
Deposits.................................................. 1,809,736 2,278,421
FHLB interest............................................. 250,212 86,231
---------- ----------
TOTAL INTEREST EXPENSE............................ 2,159,434 1,461,556 864,150
---------- ---------- ----------
Net Interest Income.................................. 1,682,691 1,114,136 889,084
Less: Provision for loan losses (Note 3)............. 203,700 129,800 23,700
----------2,059,948 2,364,652
NET INTEREST INCOME............................... 4,471,726 3,244,012
PROVISION FOR CREDIT LOSSES................................. 487,300 288,300
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOANCREDIT
LOSSES.......................................... 1,478,991 984,336 865,3843,984,426 2,955,712
---------- ----------
----------
NON-INTEREST INCOME:NONINTEREST INCOME
Service charges on deposit accounts.................. 96,498 38,414 26,887
Secondary marketaccounts....................... 134,906 121,017
Late charges on loan origination fees............... 56,771 11,818 --
Realized (loss) gain on sale of available-for-sale
securities........................................ (3,750) 625 --
Other Income......................................... 32,024 24,429 14,950
----------accounts............................. 47,108 39,319
Receivable financing...................................... 145,679 135,250
Other..................................................... 253,167 195,913
---------- ----------
TOTAL NONINTEREST INCOME.......................... 181,543 75,286 41,837
---------- ---------- ----------
NON-INTEREST EXPENSES:580,860 491,499
NONINTEREST EXPENSES
Salaries and employee benefits (Notes 10benefits............................ 1,594,762 1,387,293
Occupancy................................................. 233,686 208,585
Data processing........................................... 197,674 180,282
Depreciation and 12)..... 723,628 471,138 315,663
Occupancy, furnitureamortization............................. 211,708 228,116
Legal and equipment expense........... 249,056 134,222 105,048
Data processing...................................... 139,474 60,958 60,700
Advertising.......................................... 74,425 61,506 29,085
Other expenses....................................... 244,613 179,814 114,994
----------professional.................................... 61,828 25,381
Equipment repairs and maintenance......................... 84,584 70,515
Bank franchise tax........................................ 58,180 54,791
Bank supplies............................................. 45,962 35,110
Other..................................................... 675,130 476,188
---------- ----------
TOTAL NONINTEREST EXPENSES........................ 1,431,196 907,638 625,4903,163,514 2,666,261
---------- ----------
----------
Income Before Income Tax............................. 229,338 151,984 281,731NET INCOME BEFORE TAXES........................... 1,401,772 780,950
Provision for Income Tax............................. 79,200 47,800 67,200
========== ========== ==========income taxes................................ 480,000 221,000
---------- ----------
NET INCOME........................................ $ 150,138921,772 $ 104,184 $ 214,531559,950
========== ==========
NET INCOME PER SHARE
(NOTE 1).....................Basic..................................................... $ 0.601.28 $ 0.420.78
========== ==========
Fully diluted............................................. $ 0.86
==========1.19 $ 0.77
========== ==========
F-13See notes to financial statements.
F-4
73
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
OTHERNUMBER TOTAL
OF COMMON PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
-------- ---------- ---------- --------- ----------------------- -------------
BALANCE AT JANUARY 1, 1997........ $2,500,000 $2,500,000 $(208,270)2001........ 719,175 $2,876,700 $4,111,616 $ -- $4,791,730
Comprehensive income:(199,816) $6,788,500
Net income for the year....... -- -- 214,531 -- 214,531
Other comprehensive loss, net
of deferred income taxes of
$848........................
Comprised of unrealized
holding losses of $2,292 on
available-for-sale
securities..................income...................... -- -- -- (1,444) (1,444)
----------
Total comprehensive income...... 213,087559,950 559,950
-------- ---------- ---------- --------- ------------------- ----------
BALANCE AT DECEMBER 31, 1997...... $2,500,000 $2,500,000 $ 6,261 $ (1,444) $5,004,817
Comprehensive income:2001...... 719,175 2,876,700 4,111,616 360,134 7,348,450
Net income for the year....... -- -- 104,184 -- 104,184
Other comprehensive income, net
of deferred income taxes of
$363:
Comprised of unrealized
holding gains of $2,479 on
available for sale
securities, net of
reclassification adjustment
for gains included in net
income of $394..............income...................... -- -- -- 2,085 2,085
----------
Total comprehensive income...... 106,269921,772 921,772
Option exercise................. 874 3,496 4,676 -- 8,172
-------- ---------- ---------- --------- ------------------- ----------
BALANCE AT DECEMBER 31, 1998...... 2,500,000 2,500,000 110,445 641 5,111,086
Comprehensive income:
Net income for the year....... -- -- 150,138 -- 150,138
Other comprehensive income net
of deferred income tax credit
of $179,381:
Comprised of unrealized
holding losses of $321,257
on available-for sale
securities, net of
reclassification adjustment
for losses included in net
income of $2,362............ -- -- -- (318.895) (318.895)
----------
Total comprehensive loss........ (168,757)
---------- ---------- --------- --------- ----------
BALANCE, DECEMBER 31, 1999...... $2,500,000 $2,500,000 $ 260,583 $(318,254) 4,942,3292002...... $720,049 $2,880,196 $4,116,292 $1,281,906 $8,278,394
======== ========== ========== ========= =================== ==========
F-14See notes to financial statements.
F-5
74
CITIZENS SOUTHERNTHE COMMONWEALTH BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997YEAR ENDED DECEMBER 31,
---------------------------
2002 2001
------------ ------------ -----------
OPERATING ACTIVITIES:ACTIVITIES
Net income........................................income................................................ $ 150,138921,772 $ 104,184 $ 214,531559,950
Adjustments to reconcile net income to net cash provided by
provided by operating activities:activities
Depreciation and amortization................. 79,255 46,925 43,910
Loss (gain) on sale of securities............. 3,750 (625) --amortization.......................... 211,708 228,116
Provision for loan losses..................... 203,700 129,800 23,700
Premium amortization (discount
accretion) -- net.......................... (2,449) (1,476) (2,368)
Credit for deferred income taxes.............. (55,140) (24,825) (17,800)
Increaselosses............................ 487,300 368,320
(Increase) decrease in accrued interest receivablereceivable... (72,514) (7,674)
(Increase) decrease in prepaid expenses and other
assets............................... (148,048) (98,744) (153,542)assets.............................................. (185,325) 38,496
(Increase) decrease in deferred tax assets........... (180,000) (226,214)
Increase (decrease) in accrued interest on deposits...... 413 42,016 19,907payable...... (35,743) (28,850)
Increase (decrease) in other liabilities...... (5,538) 89,020 5,784liabilities............. 623,521 (123,796)
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 226,081 286,275 134,122ACTIVITIES......... 1,770,719 808,348
------------ ------------
-----------
INVESTING ACTIVITIES:
Loan originations and principal payments on
loans -- net............................... (15,171,880) (10,842,842) (1,874,849)
Purchases of available-for-sale securities.... (7,841,451) (14,363,643) (4,996,878)ACTIVITIES
Proceeds from maturities calls and sales of available-for-sale securities.............. 2,671,250 7,301,475 200,000
Proceeds from maturities and calls of
held-to-maturity securities................securities held-to-maturity... -- 750,000 950,000984,479
Purchases of certificates of deposit.......... -- -- (296,097)
Proceeds from sales or maturities of
certificates of deposit.................... -- 198,000 --
Purchases of held-to-maturity securities...... -- -- (750,000)
Purchase of Federal Home Loan Bank common
stock...................................... (273,000) (17,300) (91,100)restricted equity securities.............. (668,100) (156,100)
Purchases of premises and equipment........... (108,166) (199,437) (10,335)equipment.................... (193,708) (287,571)
Proceeds from sale of other real estate owned.......... -- 70,679
Purchase of other investments.......................... (158,900) (1,235,000)
Net increase in loans.................................. (36,111,821) (17,380,463)
------------ ------------ -----------
NET CASH USED BYIN INVESTING ACTIVITIES...... (20,723,247) (17,173,747) (6,869,259)ACTIVITIES............. (37,132,529) (18,003,976)
------------ ------------
-----------
FINANCING ACTIVITIES:ACTIVITIES
Net increase in deposits...................... 11,079,953 16,989,400 8,628,306demand savings and money market
accounts............................................... 27,639,175 12,218,915
Net increase (decrease) in short-term
borrowings................................. 5,330,898 480,293 (212,441)certificates of deposit................... 4,190,654 6,715,712
Increase in FHLB advances................................. 13,240,894 4,300,000
Proceeds from issuance of common stock.................... 8,172 --
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 16,410,851 17,469,693 8,415,865ACTIVITIES......... 45,078,895 23,234,627
------------ ------------
-----------INCREASE (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.............................. (4,086,315) 582,221 1,680,728EQUIVALENTS.................................... 9,717,085 6,038,999
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR.... 6,980,090 6,397,869 4,717,141YEAR................ 13,725,856 7,686,857
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, AT END OF YEAR..........YEAR...................... $ 2,893,77523,442,941 $ 6,980,090 $ 6,397,86913,725,856
============ ============
===========
SUPPLEMENTAL INFORMATION:
CashDISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the year for:
Interest on deposits and other borrowings.....year............................. $ 2,159,0222,119,107 $ 1,419,540 $ 844,243
============2,393,502
============ ===========
Income taxes.................................. $ 115,960 $ 76,783 $ 85,000
============ ============ ===========
F-15See notes to financial statements.
F-6
75
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION:
CITIZENS SOUTHERN BANK ("CITIZENS"), organized in 1994, is a local
independent community bank principally owned by residents of Raleigh County,
West Virginia. The Bank began operations on June 12, 1995, in a facility located
on Citizens Drive, Beckley, Raleigh County, West Virginia. A branch location was
opened during mid-December, 1998 (see Note 13). The Bank provides a full range
of commercial banking services to its customers.YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING:The CommonWealth Bank (the "Bank") is a state chartered commercial bank
located in Richmond, Virginia. The Bank opened for business in April 1986 and
operates four retail banking offices. The Bank is subject to regulation by the
Board of Governors of the Federal Reserve and the Bureau of Financial
Institutions of the State Corporation Commission of the Commonwealth of
Virginia. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to a maximum of $100,000 for each insured depositor. The
accounting and reporting policies of CITIZENSthe Bank conform to generally accepted
accounting principles and general practices within the bankingfinancial services
industry. The following is a descriptionsummary of the more significant accounting and reporting policies.
CASH AND CASH EQUIVALENTS:
For the purpose of presentation in the statementsthose policies:
Cash equivalents -- Cash equivalents include short-term highly liquid
investments with maturities of cash flow, CITIZENS
has defined cash and cash equivalents to include cash and due from banks and
federalthree months or less at date of purchase,
including Federal funds sold.
INVESTMENT SECURITIES:
Management determines the appropriate classification of securities at the
time of purchase.Securities -- Debt securities that management hasare purchased with the positive intent
and ability to hold to maturity or call date are classified as held-to-maturity.
They are carried and reported at amortized cost. Other debt securitiesThe amortization of premium and
accretion of discount are recognized as adjustments to be held for indefinite periods of time are classified as available-for-saleinterest income using the
interest method. Debt and carried at estimated fair value. Unrealized holding gains and losses, net of
deferred income taxes, onequity securities classified as available-for-sale are
those needed to meet liquidity needs, provide portfolio restructuring, or to
minimize interest rate market risk. They are carried at their market value, with
unrealized gains and losses excluded from income and reported net of tax effect
as a separate component of stockholders' equity entitled, "Accumulated
Other Comprehensive (Loss) Income".equity. Gains or losses on salesdisposition
of securities are determined usingcomputed on the specific identification methodof the cost of each
security.
Loans and allowance for credit losses -- Loans are concentrated to
borrowers in the Richmond metropolitan area and are reported separately instated at the statementsamount of
income.
LOANS:unpaid principal reduced by an allowance for credit losses. Interest on loans is
computed and credited to operationscalculated by using methods
which generally result in level rates of returnthe simple interest method on daily balances on the
principal amountsamount outstanding. The accrual of interest income generallyon loans is discontinued
when, a loan
becomes 90 days past due as to principal or interest. When interest accruals are
discontinued, unpaid interest credited to income in the opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due. The Bank defers loan origination
and commitment fees, net of certain direct loan origination costs, and the net
deferred fees are amortized into interest income over the lives of the related
loans as yield adjustments.
The allowance for loan losses is an amount management believes will be
adequate to absorb losses on existing loans that may become uncollectible.
Management determines the adequacy of the allowance based upon reviews of
individual credits, delinquencies, current year is removed
from income,economic conditions, the risk
characteristics of the various categories of loans, recent loan loss experience
and interest accruedother pertinent factors. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in prior years is chargedeconomic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance for loan losses. Management may electlosses based on their judgments
about information available at the time of the examination.
Loan sales -- The Bank periodically generates additional funds for lending
by selling participating interests in loans. Gains or losses on such sales are
recognized at the time of sale and are determined by the difference between the
net sales proceeds and the unpaid balance of the loans sold adjusted for any
yield differential, servicing fees and servicing cost applicable to continuefuture year.
Loan servicing rights -- Loan servicing fees, retained upon the accrualsale of
interest whenloan participations, are capitalized by allocating the estimated net realizableproceeds of sale of the
loans, between the present value of collateral is sufficient to cover the principal balance and accrued interestservicing fees and the loan is incost of the
processloans. The present value of collection.
Loan originationthe servicing fees and related loan origination costs are recognized as
collected and incurred, respectively. Management feelsamortized over the useperiod of
thisnet servicing income, using the interest method does not produce amounts that would be
F-16with average life assumptions
using current industry trends.
F-7
76
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
materially different than if the costsBank premises and fees were deferred and amortized over
the life of the loan, in accordance with current accounting pronouncements.
CITIZENS grants commercial, financial, real estate, and consumer loans to
customers in southern West Virginia. Although CITIZENS has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
obligations is either directly or indirectly dependent upon the tourism, health
care, and coal industries. Substantially, all loans outstanding are
collateralized by cash equivalents, real estate, equipment or personal consumer
goods.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance. The allowance for loan losses is maintained at a
level believed adequate by management to absorb estimated losses based on an
evaluation of the current loan portfolio, which is based on the Bank'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. There are no loans in
the portfolio categorized by management as impaired under SFAS No. 114.
PREMISES AND EQUIPMENT:-- Premises and equipment are stated at cost
less accumulated depreciation.
CITIZENS is depreciating assetsdepreciation and amortization. For financial reporting
purposes, provisions for bookdepreciation and tax purposesamortization are computed using the
straight-line method over the estimated useful lives of the individual assets or
the terms of the related leases, if shorter, for leasehold improvements.
Accelerated depreciation methods are used for income tax purposes. Expenditures
for betterments and double declining methods, respectively, over periods ranging
from threemajor renewals are capitalized and ordinary maintenance and
repairs are charged to thirty-nine years.
INCOME TAXES:
CITIZENS utilizes anoperations as incurred.
Income taxes -- Income taxes are accounted for under the asset and
liability approach to financial accounting
and reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined annually.method. Deferred income tax assets and liabilities are computedrecognized for those differences that havethe
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using currently enacted tax laws and rates that apply toin effect for the periodsyear in which theythose temporary
differences are expected to affect taxable income. Valuation
allowances are established, if considered necessary, to reduce thebe recovered or settled. The effect on deferred tax
assetassets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
Advertising costs -- The Bank expenses all costs of advertising as
incurred. Advertising expense amounted to $81,667 in 2002 and $92,798 in 2001,
and is included in noninterest expenses on the amount that will more likely than not be realized.
OTHER COMPREHENSIVE INCOME:
Effective January 1, 1998, Citizens adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
establishes standards for reporting and displayIncome.
Use of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period, except those resulting from investments by and distributions to
owners. Other comprehensive income is defined to be revenues, expenses, gains
and losses that under generally accepted accounting principles are included in
comprehensive income but excluded from net income.
F-17
77
CITIZENS SOUTHERN BANK, INC.
NOTES TO FINANCIAL STATEMENTSestimates -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The item of other comprehensive income for each of the years presented is
as follows:
1999 1998 1997
--------- ------ -------
Unrealized (loss) gain on available-for-sale securities,
net of tax............................................. $(318,895) $2,085 $(1,444)
========= ====== =======
USE OF ESTIMATES: The preparation of the financial statements in conformity
with accounting principles generally accepted accounting principlesin the United States of America
requires management to make estimates and assumptions that affect the reported
amounts reported inof assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and accompanying notes.the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
TheMaterial estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. While management
uses available information to recognize losses on loans, future additions to the
allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is onereasonably possible that the allowance for
losses on loans may change in the near term.
Stock Split -- The common stock of CITIZENS most significant estimates.
RECLASSIFICATIONS:The CommonWealth Bank split on a five
shares for four shares basis for all stockholders of record as of June 10, 2002.
The remaining fractional shares, if any, of each stockholder were sold in the
open market and the net proceeds were distributed to the stockholder of such
fractional share by Bank check on July 10, 2002. The number of shares and per
share amounts have all been retroactively adjusted to reflect this split.
Reclassification -- Certain reclassifications have been made in the prior
year's financial statements to conform to the 1998 and 1997 financial
statements in order to conform with the current year2002 presentation.
NET INCOME AND BOOK VALUE PER SHARE:
Net income and book value per share are based upon the weighted average
number of shares outstanding of 250,000 for 1999, 1998 and 1997.
ADVERTISING:
CITIZENS expenses advertising costs when the advertisement occurs. Total
advertising costs amounted to $74,425, $61,506, and $29,085 in 1999, 1998 and
1997, respectively.
NOTE 2 -- CERTIFICATESAGREEMENT AND PLAN OF DEPOSIT AND INVESTMENT SECURITIES
At December 31, 1999MERGER
On January 27, 2003, the Bank entered into an Agreement and 1998, CITIZENS hadPlan of Merger
with First Community Bank, National Association, a certificatewholly owned subsidiary of
deposit with
an amortized costFirst Community Bancshares, Inc. ("FCBS"). On February 25, 2003, the parties
amended the merger agreement.
Under the terms of $98,781the merger agreement, each share of the Bank common
stock issued and $98,429 respectively, being held as an
investment. It maturesoutstanding immediately prior to the merger shall become and be
converted into the right to receive either $30.50 in cash or a number of whole
shares of FCBS's common stock, determined by dividing $30.50 by the average
closing price of FCBS's common stock during a specified period preceding the
merger, plus cash in lieu of any fractional share interest, subject to election
and allocation procedures set forth in the year 2000.merger agreement. This certificate earns interest at 5.85
percent.
The amortized costis intended to
ensure that not more than 60% and estimated fair valuesnot less than 50% of investment securities are
as follows:
DECEMBER 31, 1999
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
AVAILABLE-FOR-SALE:
U.S. Government agencies and
corporation securities.......... $17,026,411 $ -- $(497,273) $16,529,138
=========== ======= ========= ===========
F-18the value of
consideration will be in the form of FCBS
F-8
78
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- CERTIFICATESAGREEMENT AND PLAN OF DEPOSIT AND INVESTMENT SECURITIESMERGER -- (CONTINUED)
common stock and the remaining consideration will be in the form of cash. The
merger is expected to close during the second quarter of the calendar year 2003,
pending the receipt of all required regulatory approvals and the approval of the
Bank's shareholders.
NOTE 3 -- LOANS
Loans receivable are summarized as follows:
DECEMBER 31, 1998
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------2002 2001
------------ -----------
AVAILABLE-FOR-SALE:
U.S. Government agenciesCommercial and corporation securities........... $11,857,704 $30,011 $(29,007) $11,858,708
=========== ======= ========industrial................................. $ 16,465,376 $13,888,976
SBA loans purchased....................................... 665,381 1,213,374
Secured by real estate.................................... 70,632,561 42,879,053
Consumer installment...................................... 1,946,223 2,087,648
Construction.............................................. 17,739,007 11,333,493
------------ -----------
107,448,548 71,402,544
Less
Allowance for credit losses............................. 1,089,330 709,716
Deferred loan fees, net................................. 183,848 141,979
------------ -----------
$106,175,370 $70,550,849
============ ===========
The amortized costLoans on which the accrual of interest has been discontinued or whose terms
have been renegotiated amounted to $570,412 and estimated fair values of investment securities$4,000 at December 31, 19992002 and
1998, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain securities
include2001, respectively. Specific allowances for these loans amounted to $84,000 for
2002 and $4,000 for 2001. The Bank is not committed to lend additional funds to
debtors whose loans have been modified.
A summary of the right to call or prepay the obligations prior to their contractual
maturities.allowance for loan losses is as follows:
1999
--------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------2002 2001
---------- --------
AVAILABLE-FOR-SALE:
DueBalance, beginning of year.................................. $ 709,716 $617,377
Provision charged to expense................................ 487,300 288,300
Recoveries.................................................. 185,733 26,233
Charge-offs................................................. (293,419) (222,194)
---------- --------
Balance, end of year........................................ $1,089,330 $709,716
========== ========
The Bank makes loans guaranteed by the U.S. Small Business Administration
("SBA"). With SBA guarantees, which amount to 75%-90% of the loan balances, the
Bank was able to offer business loans to start up companies and for expansion of
existing firms. In these cases, without SBA guarantee, the Bank would have been
unable to offer a loan to the business, or if offered would have required much
more restricted terms.
The SBA guaranteed portion of the loan may be sold in the secondary market
at virtually the same time the loan is funded. The gains on sales are reported
in one year or less............................ $ 2,250,000 $ 2,244,693
Due after one but through five years............... 12,592,250 12,216,328
Due after five years............................... 2,184,161 2,068,117
----------- -----------
$17,026,411 $16,529,138
=========== ===========
1998
--------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
AVAILABLE-FOR-SALE:
Due in one year or less............................ $ 175,816 $ 176,477
Due after one but through five years............... 5,497,991 5,513,675
Due after five years............................... 6,183,897 6,168,556
----------- -----------
$11,857,704 $11,858,708
=========== ===========
At December 31, 1999 and 1998, investment securities with an estimated fair
value of approximately $1,849,000 and $1,921,000, respectively, were pledged to
secure public deposits and repurchase agreements.
Gross realized losses on sale of available-for-sale securities amounted to
$3,750 for the year ended December 31, 1999, and gross realized gains amounted
to $625 for the year ended December 31, 1998. The gross proceeds from sales of available-for-sale securities amounted to $996,250 and $250,625 for the years
ended December 31, 1999 and 1998, respectively.sale, since all such loans are sold without recourse. There were
no sales of
securitiesloans sold during 2002 or 2001.
There were no loans held for the year endedresale at December 31, 1997.
The Federal Home Loan Bank stock, which is carried at its cost, is
considered a restricted investment because its ownership is restricted2002 and it
lacks a market.
F-192001.
F-9
79
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS ALLOWANCE FOR LOAN LOSSES AND NON-ACCRUAL LOANS-- (CONTINUED)
A summary of changes in the allowance forcapitalized loan lossesservicing fees is as follows:
1999 1998 1997
-------- -------- --------2002 2001
------- -------
BALANCE, BEGINNING OF YEAR............................ $341,920 $214,246 $193,827
Net Charge-Offs:
Loans charged off, netBalance, beginning of recoveries................ (15,545) (2,126) (3,281)
Provision for loan losses........................... 203,700 129,800 23,700
-------- -------- --------
BALANCE, END OF YEAR.................................. $530,075 $341,920 $214,246
======== ======== ========year.................................. $20,199 $43,574
Amortization of servicing fees.............................. (6,763) (23,375)
------- -------
Balance, end of year........................................ $13,436 $20,199
======= =======
At December 31, 1999The Bank services loans for the SBA and 1998, there were non-accruing loans amountingother financial institutions which
are not included in the accompanying financial statements. The servicing
portfolio amounted to approximately $74,000$4,455,001 and $6,500, respectively. Of the amount$5,219,749 and respectively at December 31,
1999, $70,000 represented a2002 and 2001, and consisted primarily of commercial and construction loan
which is 80% secured by the Small Business
Administration.participations. There were no gains reported from sales of servicing rights, net
of related expenses, in 2002 or 2001.
NOTE 4 -- LAND, PREMISES AND EQUIPMENT
Included in the accompanying balance sheets are the following components ofLand, premises and equipment:equipment are summarized as follows:
1999 19982002 2001
---------- ----------
Land...................................................Land........................................................ $ 611,106125,000 $ 611,106
Bank premises.......................................... 756,138 737,053125,000
========== ==========
PREMISES AND EQUIPMENT:
Building.................................................... $ 447,968 $ 447,968
Furniture, fixtures and equipment................................ 449,108 364,578equipment........................... 1,298,203 1,270,972
Leasehold improvements...................................... 233,207 230,505
Computer Software........................................... 194,669 154,013
Conversion Costs............................................ 77,888 77,888
---------- ----------
1,816,352 1,712,7372,251,935 2,181,346
Less accumulated depreciation and amortization......... (207,193) (132,488)amortization.............. 1,545,293 1,456,704
---------- ----------
$1,609,159 $1,580,249$ 706,642 $ 724,642
========== ==========
NOTE 5 -- DEPOSITS
The carrying amount of major categories of deposits outstanding areAccumulated depreciation and amortization at December 31 was as follows:
1999 1998
----------- -----------2002 2001
---------- ----------
Non-interest bearing.................................Building.................................................... $ 5,934,886177,831 $ 5,199,326
----------- -----------
Interest bearing:
Interest checking.................................. 9,237,158 4,143,380
Money-market deposit accounts...................... 6,517,349 4,054,803
Savings............................................ 2,294,903 1,917,593
Certificates of deposit, $100,000 or more.......... 11,946,480 12,032,335
Other certificates of deposit...................... 17,450,493 14,953,879
----------- -----------
Total Interest Bearing..................... 47,446,383 37,101,990
----------- -----------
$53,381,269 $42,301,316
=========== ===========169,498
Furniture, fixtures and equipment........................... 980,765 970,877
Leasehold improvements...................................... 205,052 184,715
Computer Software........................................... 156,750 122,296
Conversion Costs............................................ 24,895 9,318
---------- ----------
$1,545,293 $1,456,704
========== ==========
F-20Depreciation and amortization expense amounted to $211,708 and $228,116 for
the years ended December 31, 2002 and 2001, respectively.
F-10
80
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEPOSITS
(CONTINUED)Major categories of deposits at December 31, 2002 and 2001 follow:
2002 2001
--------------------------- --------------------------
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------ ------------ ----------- ------------
Noninterest-bearing deposits
Demand deposits................ $ 43,982,409 --% $19,794,321 --%
Interest-bearing deposits
Money market and NOW
accounts.................... 25,802,672 1.47% 22,840,629 2.15%
Savings deposits............... 2,248,208 0.75% 1,759,164 1.75%
Certificate of deposits
Less than $100,000.......... 26,566,217 3.11% 24,849,847 4.70%
$100,000 or more............ 8,692,729 3.10% 6,218,445 4.64%
------------ ---- ----------- ----
$107,292,235 $75,462,406
============ ===========
Time deposits will mature as follows:
2003................................... $31,976,753
2004................................... 1,583,949
2005................................... 1,160,626
2006................................... 138,560
2007................................... 399,058
-----------
$35,258,946
===========
The weighted average rate on interest-bearing deposit accounts was
approximately 2.85% in 2002 and 4.66% in 2001.
The aggregate amount of deposits exceeding $100,000 was $57,895,957 and
$30,592,135 at December 31, 2002 and 2001, respectively.
NOTE 6 -- OTHER BORROWINGS
The Bank's long-term debt consists of advances from the Federal Home Loan
Bank of Atlanta, which are secured by mortgage-related assets totaling
$45,309,719. At December 31, 1999,2002, the scheduledBank's fixed-rate long-term debt totals
$7,540,894 and matures through May 2, 2007. The interest rate on the fixed-rate
note payable ranges from 1.390% to 5.010%. At December 31, 2001, the Bank's
fixed-rate long-term debt totals $4,300,000 and matures through December 11,
2006. The interest rate on the fixed-rate note payable ranges from 3.980% to
5.010%.
At December 31, 2002, the Bank's floating-rate long-term debt totals
$10,000,000 and matures through May 27, 2007. The interest rate on floating-rate
long-term debt ranged from 1.410% to 1.778% during 2002.
F-11
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- OTHER BORROWINGS -- (CONTINUED)
The contractual maturities of certificates of depositlong-term debt are as follows:
YEAR(S)
MATURING
- --------2002
----------------------------------------
FIXED RATE FLOATING RATE TOTAL
---------- ------------- -----------
2000................................................ $21,682,330
2001-2002........................................... 7,685,182
2003-2004........................................... 29,461
Due in 2003.................................... $5,000,000 $ -- $ 5,000,000
Due in 2004.................................... -- -- --
Due in 2005.................................... 900,000 -- 900,000
Due in 2006.................................... 390,894 -- 390,894
Due in 2007.................................... 1,250,000 10,000,000 11,250,000
---------- ----------- $29,396,973-----------
$7,540,894 $10,000,000 $17,540,894
========== =========== ===========
At December 31, 1999 and 1998, related party deposits, defined as officer,
director or employee deposits amountedNOTE 7 -- INCOME TAXES
Income tax expense attributable to approximately $8,800,000 and
$8,700,000, respectively.
NOTE 6 -- SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31, 1999 and
1998:
1999 1998
---------- ----------
Collateralized advances from the Federal Home Loan Bank
of Pittsburgh........................................ $5,750,000 $ --
Securities sold under agreements to repurchase......... 247,509 666,611
---------- ----------
$5,997,509 $ 666,611
========== ==========
At December 31, 1999, $5,750,000 of FHLB advances with interest rate of
4.05% had an overnight maturity.
CITIZENS is a member of the Federal Home Loan Bank (FHLB). Membership in
the FHLB makes available short-term and long-term borrowings from collateralized
advances. All FHLB advances are collateralized by a similar amount of single
family residential mortgage loans and U.S. Government and Agency Securities. At
December 31, 1999, CITIZENS had approximately $13,000,000 of additional
available borrowings in the form of collateralized advances from FHLB at
prevailing interest rates.
Securities sold under agreements to repurchase generally mature daily and
are secured by selected securities. Information concerning the agreementsincome before income tax expense is
summarized as follows:
1999 1998DECEMBER 31
-------------------
2002 2001
-------- --------
Average balance during the year........................... $358,365 $168,044
======== ========
Average interest rate during the year..................... 3.92% 3.23%
======== ========
Maximum month-end balance during the year................. $509,873 $666,611
======== ========
Securities underlying the agreements at year-end:
Carrying value.......................................... $470,000 $470,000
======== ========
Estimated fair value.................................... $457,993 $475,308Current federal income tax expense.......................... $660,000 $258,846
Deferred federal income tax expense (benefit)............... (180,000) (37,846)
-------- --------
Total..................................................... $480,000 $221,000
======== ========
F-21The following is a reconciliation of the expected tax expense with the
reported expense for the years ended December 31, 2002 and 2001:
2002 2001
--------------------- ---------------------
PERCENT OF PERCENT OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ----------
Expected tax expense at statutory rate...... $476,602 34% $265,523 34%
Realization of deferred tax asset valuation
allowance................................. -- -- (34,610) (4)
Permanent non-deductible expenses........... 3,398 -- (9,913) (2)
-------- -- -------- --
$480,000 34% $221,000 28%
======== == ======== ==
F-12
81
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES -- (CONTINUED)
The net deferred tax asset in the accompanying balance sheets includes the
following amountseffects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities:deferred tax liabilities at December 31,
2002 and 2001, are summarized below:
1999 19982002 2001
-------- --------
DEFERRED TAX ASSET:Deferred tax assets
Deferred compensation..................................... $119,995 $ 30,556
Allowance for loancredit losses............................... $196,000 $126,549
Organization costs...................................... -- 3,960
Excess (deficit) of amortized cost of available-for-sale
securities over their market values.................. 179,000 (223)295,071 192,058
Depreciation.............................................. 5,963 10,856
-------- --------
375,000 130,286421,029 233,470
-------- --------
Less valuation allowance................................ -- --Deferred tax liabilities
Excess servicing.......................................... 14,815 7,256
-------- --------
375,000 130,28614,815 7,256
-------- --------
DEFERRED TAX LIABILITY:
Basis of depreciable assets............................. (35,000) (24,649)
-------- --------
NET DEFERRED TAX ASSET.................................... $340,000 $105,637Net deferred tax asset...................................... $406,214 $226,214
======== ========
The provisionNOTE 8 -- EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for income taxes on the statementperiod. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, or resulted in the issuance of income is comprisedcommon stock that then shared
in the earnings of the following:entity.
The basic and diluted earnings per share calculation are as follows:
1999 1998 19972002 2001
-------- ------- ---------------
FEDERAL:
Current............................................... $121,159 $73,800 $85,000
Deferred.............................................. (54,520) (28,000) (11,800)
STATE:
Current............................................... 13,181 -- --
Deferred.............................................. (620) 2,000 (6,000)Numerator:
(a) Net income available to Shareholders...................... $921,772 $559,950
Denominator:
Weighted-average shares outstanding....................... 719,473 719,175
-------- ------- ---------------
(b) Basic EPS weighted average shares outstanding............. 719,473 719,175
Effect of dilutive securities:
Incremental shares attributable to Stock Option Plan and
warrants issued........................................... 57,506 6,450
-------- --------
(c) Diluted EPS weighted-average shares outstanding........... $776,979 $725,625
======== ========
Basic earnings per share.................................. $ 79,200 $47,800 $67,2001.28 $ 0.78
======== ======= =======
A reconciliation of the differences between the tax provision and the
expected tax expense computed by applying the federal statutory income tax rate
is as follows:
1999 1998 1997
------- ------- -------
Expected income tax expense at federal rate.............. $73,000 $52,000 $96,000
Increase (decrease) in provision resulting from:
State income tax, net of federal tax benefit........... 7,300 3,000 8,500
Change in valuation allowance.......................... -- -- (36,500)
Other items, net....................................... (1,100) (7,200) (800)
------- ------- -------
PROVISION FOR INCOME TAXES............................... $79,200 $47,800 $67,200
======= ======= =======
F-22
82
CITIZENS SOUTHERN BANK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- REGULATORY REQUIREMENTS AND RESTRICTIONS
CITIZENS is subject to certain requirements imposed by federal and state
banking statutes and regulations. These requirements, among other things,
establish minimum levels for capital and restrict the amount of dividends that
may be distributed.
CITIZENS is required to maintain average cash balances with the Federal
Reserve Bank or as cash in vault. The amount of the required reserve balance at
December 31, 1999, was approximately $267,000.
CITIZENS is subject to various regulatory capital requirements administered
by the banking regulatory agencies. Under capital adequacy guidelines, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures require CITIZENS 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 Leverage
Ratio (as defined) to average assets (as defined). Management believes, as of
December 31, 1999, that CITIZENS meets all capital adequacy requirements to
which it is subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized CITIZENS as well capitalized. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the institution's category. However, the volatility of the
unrealized gain or loss on available-for-sale securities, which is a component
of capital, could significantly affect capital adequacy in the future.
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands of dollars, except percentages):
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
--------------- ----------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------- ------ ------ -----
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets)........... $4,942 13.04% $3,033 8.00% $3,791 10.00%
Tier I Capital
(to Risk Weighted Assets)........... 4,942 13.04% 1,516 4.00% 2,274 6.00%
Tier I Leverage
(to Average Assets)................. 4,942 8.78% 2,252 4.00% 2,815 5.00%
AS OF DECEMBER 31, 1998:
Total Capital
(to Risk Weighted Assets)........... 5,111 19.42% 2,105 8.00% 2,631 10.00%
Tier I Capital
(to Risk Weighted Assets)........... 5,111 19.42% 1,053 4.00% 1,579 6.00%
Tier I Leverage
(to Average Assets)................. 5,111 13.33% 1,534 4.00% 1,917 5.00%
CITIZENS cannot make dividend distributions to its stockholders without
regulatory approval.
F-23
83
CITIZENS SOUTHERN BANK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- REGULATORY REQUIREMENTS AND RESTRICTIONS (CONTINUED)
CITIZENS has granted loans to related parties, consisting of executive
officers, directors and their associates. Related party loans were made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the same time for comparable transactions with unrelated persons
and do not involve more than normal risk of collectibility.
The following presents the activity with respect to related party loans
during 1999 and 1998:
1999 1998
---------- ----------
BALANCE AT JANUARY 1................................... $3,765,947 $2,209,045
Loans made............................................. 1,582,623 2,580,885
Payoffs and payments collected......................... (1,614,004) (1,023,983)
---------- ----------
Loan balances of entities no longer classified as
related parties at year-end.......................... (644,666) --
---------- ----------
BALANCE AT DECEMBER 31................................. $3,089,900 $3,765,947
========== ==================
Diluted earnings per share................................ $ 1.19 $ 0.77
======== ========
NOTE 9 -- OFF-BALANCE SHEETFINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATION OF CREDIT RISK
CITIZENS offers financial instruments with off-balance sheet risk inIn the normal course of business the Bank is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These financial instruments include loan commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the
F-13
THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (CONTINUED)
amount recognized on the statement of financial condition. Financial instruments
with off-balance-sheet risk are summarized as follows:
2002 2001
----------- -----------
Commitments to extend credit............................... $ 8,813,813 $ 8,090,150
Standby letters of credit.................................. $ 948,081 $ 1,129,628
Unused commercial lines of credit.......................... $14,711,845 $11,194,812
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, unused
lines of credit and standby letters of credit. CITIZENS hadcredit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit consisting
ofand unused lines of credit and open loan commitments approximating $4,245,000 and
$3,117,000 as of December 31, 1999 and 1998, respectively. CITIZENS had issued
and outstanding standby letters of credit of approximately $657,000 and $520,000
at December 31, 1999 and 1998, respectively.
Commitments to extend credit are obligationsagreements to
lend to customers at
prevailing market rates specific sums,a customer as long as there is no pre-establishedviolation of any condition ofestablished
in the loan agreement is violated. The amount and type of collateral to be
obtained is normally established at the time of the commitment.contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. CITIZENS usesThe Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include personal property, commercial property, residential property, land
and accounts receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same credit and collateral policiesas that involved
in making commitments
and conditional obligations as it does for all other lending. Collateral, which
secures these types of commitments, is the same type as collateral for other
types of lending such as accounts receivable, inventory, real estate and
equipment. Management does not expect any material losses as a result of the
commitments.
There were no significant concentrations of credit risk other than the
geographic area and the loan categories disclosed in the accompanying balance
sheets.extending loans to customers.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Effective July 1, 1997, CITIZENS entered into an Employment Agreement (the
"Agreement") with its PresidentThe Bank leases land and Chief Executive Officer ("CEO"). In general,office space under operating leases, which expire
at various dates through December 31, 2018. Total rental expense from operating
leases amounted to approximately $172,782 in 2002 and $145,541 in 2001. The Bank
has the Agreement calls onoption to terminate the CEO to provide services in return for a $100,000 per
year salary during the first yearleases upon written notice and payment of the
Agreement.balance of rents due and penalties, if applicable.
2003.................................... $ 155,801
2004.................................... 128,895
2005.................................... 125,236
2006.................................... 122,778
2007.................................... 131,110
Thereafter.............................. 1,324,572
----------
$1,988,392
==========
NOTE 11 -- REGULATORY MATTERS
The salary escalates
approximately 5% each year duringBank is subject to certain requirements imposed by state and federal
banking statues and regulations. These requirements, among other things,
establish minimum levels of capital, restrict the remaining two yearsamount of dividends that may
be distributed, and require that the initial term.
The CEO also receives certain other nominal fringe benefits. The Agreement
provides for additional renewal terms, terminationBank maintain a minimum reserve balance.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total capital and Tier I capital (as defined in the relationship with
causeregulations) to
risk-weighted assets (as defined), and a covenant notof Tier I capital (as defined) to compete byaverage
assets (as defined). Management believes that as of December 31, 2002, the CEO.
F-24Bank
meets all capital adequacy requirements to which it is subject.
F-14
84
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1011 -- COMMITMENTS AND CONTINGENCIESREGULATORY MATTERS -- (CONTINUED)
On November 15, 1998, CITIZENS entered into a lease agreement for branch
office space (see Note 13),An institution is considered well capitalized if it significantly exceeds
the required leverage and risk-based capital ratios. If an institution meets the
required minimum capital measures, but does not qualify as well capitalized, it
is categorized as adequately capitalized. As of December 31, 2002, the most
recent notification from the Federal Reserve Bank, in accordance with a company ownedthe prompt
corrective action guidelines established by a Board of Directors Member
and significant stockholder. The initial termSection 38 of the leaseFederal Deposit
Insurance Corporation Act of 1991, the institution is considered adequately
capitalized. This designation, however, is not the sole criterion for
forty months
commencing December 1, 1998. Monthly lease rental payments of $2,663determining capital adequacy. There are due
commencingno conditions or events since that
notification that management believes have changed the fifth month of the initial term.Bank's category.
The lease is renewable for five
three-year terms at the option of CITIZENS. Monthly lease rental escalations
during these renewal termsBank's actual capital amounts and ratios are determinable based on a function of the Consumer
Price Index. An option to purchase the premises is also containedpresented in the
agreement.
CITIZENS has entered into non-cancelable vehicle lease and information
technology service agreements. These operating agreements are for terms of two
and five years, respectively. The technology service agreement's monthly cost is
based primarily on utilization and provides for renewal options. Therefore,
CITIZENS must meet a minimum number of accounts before it incurs additional
charges. The base annual charge for the agreement was $43,200. As the number of
accounts has increased, CITIZENS has incurred additional charges on a per
account basis. The total cost of the information technology service agreement
was $139,474, $60,958, and $60,700 in 1999, 1998 and 1997, respectively.
CITIZENS' current agreement expires June 30, 2000. Management anticipates the
technology service agreement expense will approximate $170,000 in 2000. The cost
of other lease agreements totaled $36,526, $21,042, and $11,484 in 1999, 1998,
and 1997, respectively.
Future minimum payments under non-cancelable lease agreements for years
subsequent to December 31, 1999 are as follows:table.
DESIGNATIONS
MINIMUM REGULATORY CAPITAL REQUIRED
---------------------------------------
COMMONWEALTH BANK ADEQUATELY WELL
ACTUAL CAPITAL RATIOS CAPITALIZED CAPITALIZED
---------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------- ---------- ----- ---------- -----
2000......................................... $32,106
2001......................................... 31,599
2002......................................... 5,268
-------
Total........................................ $68,973
=======
As of December 31, 2002
Total capital (to risk weighted
assets)........................ $8,278,000 10.12% $7,397,520 8% $9,246,900 10%
Tier I capital (to risk weighted
assets)........................ 8,265,000 8.94% 3,698,760 4% 5,548,140 6%
Tier I capital (to average
assets)........................ 8,265,000 6.45% 5,127,160 4% 6,408,950 5%
As of December 31, 2001
Total capital (to risk weighted
assets)........................ $8,038,965 12.12% $5,306,080 8% $6,632,600 10%
Tier I capital (to risk weighted
assets)........................ 7,328,000 11.05% 2,653,040 4% 3,979,560 6%
Tier I capital (to average
assets)........................ 7,328,000 8.12% 3,611,560 4% 4,514,450 5%
NOTE 11 -- LINE OF CREDIT
CITIZENS has entered into an agreement with The Bankers' Bank of Kentucky
to periodically borrow Federal Funds. The Bank may borrow, on an unsecured
basis, an amount not to exceed 50% of the Bank's unimpaired capital and surplus.
Should an amount in excess of 50% be requested, the Bank would be required to
pledge marketable securities as additional collateral. There were no borrowings
under the agreement at December 31, 1999 and 1998.
NOTE 12 -- EMPLOYEE BENEFITDIVIDENDS
The Bank is subject to certain regulatory restrictions pertaining to the
amount of dividends that it may pay. The Federal Reserve restricts, without
prior approval, the total dividend payments of a member bank in any calendar
year to the Bank's net income of that year, as defined, combined with its
retained net income of the preceding two calendar years, less any required
transfers to surplus. At December 31, 2002 and 2001, retained earnings which are
free of such restrictions amounted to approximately $1,732,964.
NOTE 13 -- STOCK OPTION PLAN
On April 1, 1996, CITIZENS establishedDuring 1994, the Bank stockholders approved a compensation
reduction/profit-sharingstock option plan for its
employees underemployees. The plan reserved 75,000 shares of common stock for grant and
provides that the provisionsterms of Section
401(k) of the Internal Revenue Code. All employees who meet certain eligibility
requirements are allowed to participate in the Plan. Under the Plan, each participant is allowed to defer the receipt of pay by an amount not less than 1%
nor more than 15% of their compensation before the reduction.
CITIZENS' contributions under the plan are discretionary and willaward be determined annually by the Board of Directors.
Currently,In April 1999, the stockholders approved an additional 93,750 shares for grant
under the same terms, bringing the total to 168,750 shares of common stock for
grant.
The Bank has issued stock options to certain officers and employees. These
options are accounted for under the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation. As permitted by Statement No. 123, the
Bank will not
match elective deferral contributionshas elected to continue using the measurement method prescribed in
excessAccounting Principles Board Opinion No. 25 and, accordingly, Statement No. 123
has no effect on the Bank's financial position or results of 4%operations.
Because the Bank had adopted the disclosure only provisions of pay, but CITIZENS will
match fifty percentStatement
No. 123, no compensation cost has been recognized for the stock options plan.
Had compensation cost for the Bank's stock option plan been determined based on
the fair value at the grant date of the employee's contribution to a maximumawards consistent with the provisions of
4% of their
F-25Statement
F-15
85
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1213 -- EMPLOYEE BENEFITSTOCK OPTION PLAN -- (CONTINUED)
pay. ContributionsNo. 123, the Bank's net earnings and earnings per share would have decreased to
the pro forma amounts indicated below:
2002 2001
---------------------------- ----------------------------
AS REPORTED PROFORMA UNDER AS REPORTED PROFORMA UNDER
UNDER SFAS UNDER SFAS
APB NO. 25 NO. 123 APB NO. 25 NO. 123
----------- -------------- ----------- --------------
Net income..................... $921,772 $918,361 $559,950 $495,555
Earnings per share:
Basic.......................... $ 1.28 $ 1.28 $ 0.78 $ 0.69
Diluted........................ 1.19 1.18 0.77 0.60
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002 and 2001. Dividend yield of 0% for both
years, expected volatility of 44.81% and 20%, respectively, risk-free interest
rates of 3.82% and 5.00%, respectively, and expected lives of 10 years for the
options.
Under the terms of the plan, totaled $9,881, $6,493, and $6,433 forthe exercise price of each share of stock
covered by the options granted shall be equal to the greater of the fair value
or the book value as defined. For the years ended December 31, 1999, 1998,2002 and 1997, respectively.
NOTE 13 -- NEW BRANCH LOCATION
During mid-December, 1998, CITIZENS opened a branch location on South
Eisenhower Drive, Beckley. This branch is a full service location, including
both deposit and lending activities. Costs associated with the branch are
included in the Statements of Income.
During the fourth quarter of 1998 and during 1999, CITIZENS expended
significant resources in terms of both out-of-pocket costs and personnel
resources in establishing the branch. These costs were expensed2001,
stock option activity was as incurred in
accordance with the most recent accounting pronouncements regarding start-up
costs.
NOTE 14 -- YEAR 2000 ("Y2K") ISSUES (UNAUDITED)
Management has considered the impact of "Year 2000 ("Y2K") Issues" on
CITIZENS'information systems and applications and accordingly has developed a
remediation plan. As of January 19, 2000, CITIZENS has not experienced any
significant Y2K related issues.
F-26
86
CITIZENS SOUTHERN BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999follows:
WEIGHTED AVERAGE
OPTION PRICE NUMBER
PER SHARE OF SHARES
---------------- ---------
Balance at December 31, 2000................................ $6.87 72,654
Granted..................................................... 9.44 53,125
Forfeited................................................... 8.64 (875)
-------
Balance at December 31, 2001................................ 7.95 124,904
Granted..................................................... 16.75 600
Exercised................................................... 9.35 (874)
-------
Balance at December 31, 2002................................ 7.90 124,630
=======
The following discusses changes in financial conditiontable summarizes information concerning currently outstanding
and the results of
operation of "Citizens" for the periods indicated. This discussion should be
read in conjunction with Citizens 1999 audited annual report.
RESULTS OF OPERATION
EARNINGS SUMMARY
Net income for the three months ended June 30, 2000 was $78,000. This
represents an increase of $54,000 or 225% over the same period in 1999. For the
six-month period ended June 30, 2000, Citizen's net income of $171,000 increased
$119,000 or 229% for the same period in 1999. The increase in earnings for the
three-month and six-month periods resulted from growth in earning assets and
improved service fee revenues. Basic and diluted earnings per share were $0.31
for the quarter ended June 30, 2000 compared to the $0.10 reported for the
second quarter of 1999. For the six-month period ended June 30, 2000, basic and
diluted earnings per common share totaled $0.68 compared to $0.21 for the same
period of 1999.
NET INTEREST INCOME
The bank's net interest income on a fully tax equivalent basis totaled
$997,000 for the six-month period ended June 30, 2000 compared to $724,000 for
the same period of 1999, representing an increase of $273,000 or 38%. This
increase resulted from growth in the volume of earning assets for the period
primarily funded by borrowed funds at a cost less than competitive market rates.
Further analysis of the Bank's yields on interest earning assets and
interest-bearing liabilities are presented in Table I.
F-27
87
CITIZENS SOUTHERN BANK, INC.
TABLE I-YIELD ANALYSIS
(IN THOUSANDS OF DOLLARS)exercisable options:
JUNE 30, 2000 JUNE 30, 1999
---------------------------- ----------------------------OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ ----------------------
WEIGHTED
AVERAGE YIELD/WEIGHTED WEIGHTED
REMAINING AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATEAVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- -------- ------ -------- -------- ------
Assets
Loans:
Loans Taxable............................ $44,923 $1,800 8.06% $30,048 $1,178 7.91%
------- ------ ---- ------- ------ ----
Total Loans............................ 44,923 1,800 8.07% 30,048 1,178 7.91%
Reserve for Loan Losses................ (548) (369)$ 4.71 - $8.00 68,308 3.66 $6.74 68,308 $6.74
$9.09 - $17.25 56,322 8.12 9.50 56,322 9.50
------- -------
Net Loans-Taxable...................... 44,375 29,679
Investments:
Available for Sale (All Taxable)......... 15,667 485 6.23% 15,237 447 5.92%
------- ------ ---- ------- ------ ----
Total Investments...................... 15,667 485 6.23% 15,237 447 5.92%
Federal Funds Sold....................... 640 21 6.60% 4,370 103 4.75%
------- ------ ---- ------- ------ ----
Total Earning Assets................... 60,682 2,306 7.64% 49,286 1,728 7.07%
Other Assets........................... 4,041 3,489
------- -------
Total Assets........................... $64,723 $52,775
=======124,630 124,630
======= Liabilities and Shareholders Equity
Interest Bearing Deposits:
Demand................................... $ 8,280 $ 144 3.50% $ 4,943 $ 83 3.39%
Savings.................................. 7,906 145 3.69% 6,396 98 3.09%
Time..................................... 28,981 792 5.50% 30,398 816 5.41%
Borrowings............................... 7,396 228 6.20% 416 7 3.39%
------- ------ ---- ------- ------ ----
Total Interest Bearing Liabilities..... 52,563 1,309 5.01% 42,153 1,004 4.80%
Non-interest Bearing Deposits............ 6,907 5,273
Other Liabilities........................ 281 259
Equity................................... 4,972 5,090
------- -------
Total Liabilities and Equity........... $64,723 $52,775
======= =======
Net Interest Income...................... $ 997 $ 724
====== ======
Net Interest Rate Spread................. 2.63% 2.27%
==== ====
Net Interest Margin...................... 3.30% 2.96%
==== ====
PROVISION FOR LOAN LOSS
The provision for loan losses represents management's determination ofNOTE 14 -- OTHER EMPLOYEE BENEFIT PLANS
During 1994, the amount necessary to be charged againstBank instituted a contributory thrift plan through the
current periods earnings in order to
maintain the allowance for loan losses at a level which is considered adequate
in relationVirginia Bankers Association, covering all eligible full time employees.
Participants may make contributions to the estimated risk inherent inplan during the loan portfolio.year, with certain
limitations. The provision
for loan losses forBank contributes to the plan an amount equal to one-half of the
first six monthspercent contributed (maximum of 2000 was $54,000 comparedthree percent). Expenses amounted to
$81,000
for the same period$26,906 in 1999. Net charge-offs for the first half of 2000 were
$24,000 as compared to $4,000 over the same period2002 and $23,327 in 1999. At June 30, 2000,
the allowance for loan losses totaled $560,000 or 1.19% of loans as compared to
$530,000 or 1.24% at December 31, 1999. The following is an analysis of the
activity in the Bank's allowance for loan losses for the six-month periods ended
June 30, 2000 and 1999.
F-282001.
F-16
88
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
TABLE II -- RESERVE FOR LOAN LOSSES
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
----------- -----------
(IN THOUSANDS OF DOLLARS)
Balance Beginning of Year............................... $ 530 $ 342
Net Charge-Offs:
Loans charged off, net of recoveries.................. 24 4
Provision for loan losses............................. 54 81
------- -------
Balance, End of Period.................................. $ 560 $ 419
======= =======
The bank's non-performing assets and loans past due 90 days or more
increased from $73,000 at December 31, 1999, to $152,000 at June 30, 2000. This
increase resulted principally from two credits totaling $80,000 that are
non-accruing and have a government SBA guarantee. The additional $72,000 is a
real estate loan that is secured by a first lien deed of trust.
NON-INTEREST INCOME AND EXPENSE
Total non-interest income increased approximately $2,000 to $120,000 during
the first six months of 2000 as compared to the first six months of 1999. While
the increase is small, the bank has increased service charges on deposit
accounts from $37,000 for the first six months of 1999 to $73,000 for the same
period in 2000. This increase offset a decrease in other operating income, which
was $59,000 for the six months ended June 30, 1999 as compared to $24,000 for
the same period in 2000. The decrease in other income for 2000 is a result of
increased interest rates that slowed the origination of secondary market real
estate loans, therefore creating a reduction in origination fees.
Total non-interest expense increased approximately $97,000 to $784,000
during the first six months of 2000 as compared to $687,000 for the first six
months of 1999. This increase is primarily attributable to normal increase in
salary and employee benefits and an increase in other operating expense, which
is attributable to settlement with previous management.
FINANCIAL CONDITION
Total assets of the bank were $65,396,000 at June 30, 2000 compared to
$64,554,000 at December 31, 1999. Significant changes in the bank's financial
position between December 31, 1999 and June 30, 2000, are reflected on the
balance sheet as well as the changes in average balances noted on the Yield
Analysis in Table I.
LOANS
The most significant change in the financial condition of the bank resulted
in an increase of $4,273,000 in net loans outstanding to $46,472,000 at June 30,
2000 as compared to $42,199,000 in 1999. This increase was primarily funded by
short-term borrowings from the FHLB.
F-29
89
DEPOSITS
Total deposits decreased $1,111,000 from $53,381,000 at December 31, 1999
to $52,270,000 at June 30, 2000. This decrease was partially offset by an
increase of $622,000 in securities sold under agreements to repurchase and
management's decision not to aggressively reprice its interest bearing deposits.
CAPITAL
Shareholders equity at June 30, 2000 totaled $5,040,000 compared to
$4,942,000 at December 31, 1999, representing an increase of $98,000. The
increase in retained earnings of $170,000 was offset by an increase in
accumulated other comprehensive loss of $72,000. This increase in other
comprehensive loss is a result of the decline in value of investments held for
sale during the period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Citizens' environment has not changed substantially from the discussion and
analysis presented for the December 31, 1999 financials included in this proxy
statement/prospectus. A more complete discussion is included with the December
31, 1999 Financial Statements under Interest Rate Risk Management (See page
F-9).
F-30
90
CITIZENS SOUTHERN BANK, INC. (UNAUDITED)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30 DECEMBER 31
2000 1999
------- -----------
Assets
Cash and cash equivalents................................... $ 1,882 $ 2,993
Securities available for sale (amortized cost of $15,265
June 30, 2000; $17,407 December 31, 1999)................. 14,654 16,911
Total loans, net of unearned income......................... 47,032 42,729
Less: allowance for loan losses........................... 560 530
------- -------
Net loans................................................. 46,472 42,199
Premises and equipment, net................................. 1,569 1,609
Other assets................................................ 819 842
------- -------
Total Assets.............................................. $65,396 $64,554
======= =======
Liabilities
Deposits, non-interest bearing.............................. $ 6,692 $ 5,935
Deposits, interest-bearing.................................. 45,578 47,446
------- -------
Total Deposits............................................ 52,270 53,381
Interest, taxes and other liabilities....................... 268 233
Federal funds purchased..................................... 196 248
Securities sold under agreement to repurchase............... 622 0
FHLB borrowings and other indebtedness...................... 7,000 5,750
------- -------
Total Liabilities......................................... 60,356 59,612
------- -------
Stockholders' Equity
Common stock, $10 par value; 250,000 shares authorized and
outstanding in 2000 and 1999, respectively................ 2,500 2,500
Additional paid-in capital.................................. 2,500 2,500
Retained earnings........................................... 431 261
Accumulated other comprehensive loss........................ (391) (319)
------- -------
Total Stockholders' Equity................................ 5,040 4,942
------- -------
Total Liabilities and Stockholders' Equity................ $65,396 $64,554
======= =======
See Notes to Financial Statements
F-31
91
CITIZENS SOUTHERN BANK, INC.
STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans............... $ 1,800 $ 1,178 $ 932 $ 613
Interest on securities available for
sale.................................. 485 447 233 240
Interest on federal funds sold and
deposits.............................. 21 103 15 48
-------- -------- -------- --------
Total Interest Income............... 2,306 1,728 1,180 901
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits..................... 1,081 997 546 518
Interest on borrowings................... 228 7 138 3
-------- -------- -------- --------
Total Interest Expense................ 1,309 1,004 684 521
-------- -------- -------- --------
NET INTEREST INCOME................. 997 724 496 380
PROVISION FOR LOAN LOSSES.................. 54 81 23 46
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.............................. 943 643 473 334
-------- -------- -------- --------
NON-INTEREST INCOME:
Service charges on deposit accounts...... 73 37 40 20
Other charges, commissions and fees...... 23 22 11 14
Other operating income................... 24 59 17 23
-------- -------- -------- --------
Total Non-Interest Income............. 120 118 68 57
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits........... 378 337 192 176
Occupancy expense of bank premises....... 81 71 41 40
Furniture and equipment expense.......... 45 53 20 27
Other operating expense.................. 280 226 161 114
-------- -------- -------- --------
Total Non-Interest Expense.......... 784 687 414 357
-------- -------- -------- --------
Income before income taxes............... 279 74 127 34
Income tax expense....................... 109 22 49 10
-------- -------- -------- --------
NET INCOME.......................... $ 170 $ 52 $ 78 $ 24
======== ======== ======== ========
Basic and diluted earnings per common
share.................................... $ .68 $ .21 $ .31 $ .10
======== ======== ======== ========
Weighted average shares outstanding........ 250,000 250,000 250,000 250,000
======== ======== ======== ========
See Notes to Financial Statements
F-32
92
CITIZENS SOUTHERN BANK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
--------------------
2000 1999
-------- --------
(AMOUNTS IN
THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 171 $ 52
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 43 37
Provision for loan losses.............................. 54 81
(Discount accretion) premium amortization-net.......... (2) 1
Decrease (increase) in accrued interest receivable and
other assets.......................................... 62 (121)
Increase (decrease) in other liabilities............... 38 (56)
-------- --------
Net Cash Provided by (Used in) Operating
Activities.......................................... 366 (6)
-------- --------
INVESTING ACTIVITIES:
Loan originations and principal payments on
loans-net............................................. (4,327) (5,743)
Purchase of available for sale securities.............. -- (6,593)
Proceeds from maturities, calls and sales of available
for sale securities................................... 2,250 1,000
Purchase of FHLB common stock.......................... (106) (37)
Purchase of premises and equipment..................... (3) (96)
-------- --------
Net Cash Used in Investing Activities................ (2,186) (11,469)
-------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits.................... (1,111) 8,810
Net increase (decrease) in short-term borrowings....... 1,820 (303)
-------- --------
Net Cash Provided by Financing Activities............ 709 8,507
-------- --------
Decrease in Cash and Cash Equivalents.................. (1,111) (2,968)
Cash and cash equivalents at beginning of year......... 2,993 7,078
-------- --------
Cash and Cash Equivalents at End of Year............... $ 1,882 $ 4,110
======== ========
See Notes to Financial Statements.
F-33
93
CITIZENS SOUTHERN BANK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ---------- -------- ------------- ------
(AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
Balance beginning of the period,
January 1, 1999...................... $2,500 $2,500 $110 $ 1 $5,111
Comprehensive income:
Net Income........................... -- -- 52 -- 52
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax...................... -- -- -- (217) (217)
------ ------ ---- ----- ------
Comprehensive income............ -- -- 52 (217) (165)
Common dividends declared.............. -- -- -- -- --
------ ------ ---- ----- ------
Balance, June 30, 1999................. $2,500 $2,500 $162 $(216) $4,946
====== ====== ==== ===== ======
Balance beginning of the period,
January 1, 2000...................... $2,500 $2,500 $261 $(319) $4,942
Comprehensive income:
Net Income........................... -- -- 170 -- 170
Other comprehensive income:
Unrealized holding losses on
securities available for sale,
net of tax...................... -- -- -- (72) (72)
------ ------ ---- ----- ------
Comprehensive income............ -- -- 170 (72) 98
Common dividends declared.............. -- -- -- -- --
------ ------ ---- ----- ------
Balance, June 30, 2000................. $2,500 $2,500 $431 $(391) $5,040
====== ====== ==== ===== ======
See Notes to Financial Statements.
F-34
94
CITIZENS SOUTHERN BANK, INC.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION:
CITIZENS SOUTHERN BANK ("CITIZENS"), organized in 1994, is a local
independent community bank principally owned by residents of Raleigh County,
West Virginia. The Bank began operations on June 12, 1995, in a facility located
on Citizens Drive, Beckley, Raleigh County, West Virginia. A branch location was
opened during mid-December, 1998. The Bank provides a full range of commercial
banking services to its customers.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING:
The accounting and reporting policies of CITIZENS conform to generally
accepted accounting principles within the banking industry. The following is a
description of the more significant accounting and reporting policies.
CASH AND CASH EQUIVALENTS:
For the purpose of presentation in the statements of cash flow, CITIZENS
has defined cash and cash equivalents to include cash and due from banks and
federal funds sold.
INVESTMENT SECURITIES:
Management determines the appropriate classification of securities at the
time of purchase. Debt securities that management has the positive intent and
ability to hold to maturity are carried at amortized cost. Other debt securities
to be held for indefinite periods of time are classified as available-for-sale
and carried at estimated fair value. Unrealized holding gains and losses, net of
deferred income taxes, on securities classified as available-for-sale are
carried as a separate component of stockholders' equity entitled, "Accumulated
Other Comprehensive (Loss) Income".
Gains or losses on sales of securities are determined using the specific
identification method and are reported separately in the statements of income.
LOANS:
Interest on loans is computed and credited to operations using methods
which generally result in level rates of return on principal amounts
outstanding.
The accrual of interest income generally is discontinued when a loan
becomes 90 days past due as to principal or interest. When interest accruals are
discontinued, unpaid interest credited to income in the current year is removed
from income, and interest accrued in prior years is charged to the allowance for
loan losses. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to cover the
principal balance and accrued interest and the loan is in the process of
collection.
Loan origination fees and related loan origination costs are recognized as
collected and incurred, respectively. Management feels the use of this method
does not produce amounts that would be materially different than if the costs
and fees were deferred and amortized over the life of the loan, in accordance
with current accounting pronouncements.
F-35
95
CITIZENS SOUTHERN BANK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 114 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOTHER EMPLOYEE BENEFIT PLANS -- (CONTINUED)
CITIZENS grantsDuring 1998, the Bank instituted two deferred compensation plans, the
Directors' Deferred Compensation Plan and the Executive Deferred Compensation
Plan. Both plans are administered by the Bank as the "Plan Administrator". Day
to day administration is handled by the Virginia Bankers Association. Both plans
are non-qualified, restricted to Directors and Executive Officers respectively.
The participants may elect to defer any or all of their fees, salary and bonus.
Elections generally must be made prior to the beginning of the calendar year for
which the deferral contributions will be made. However in the event that an
officer or director becomes eligible to participate on a date other than the
first day of a calendar year, the Administrator will permit such an individual
to file a deferral election within 30 days after becoming eligible to
participate.
The participants are 100% vested upon acceptance to the plans, and employer
contributions to the plans are not permitted. The participant elects the form of
and duration of benefit payments. All payments must begin when the participant
attains the retirement age of 70 as set forth in the plan.
During 2001, the Bank entered into a deferred compensation arrangement with
members of the Board of Directors and an Executive Officer. Amounts accrued for
the years 2002 and 2001 were approximately $183,555 and $22,150. This
arrangement is partially funded by life insurance.
NOTE 15 -- MARKET CONCENTRATION
The Bank has a diversified loan portfolio consisting of commercial, financial, real
estate and consumer (installment) loans toas set forth in Note 3 above. Generally,
the loans are collateralized by assets of the borrowing customer. Substantially
all of the Bank's customers are residents of or operate business ventures in southern West Virginia. Although CITIZENS has a diversified loan
portfolio,its
market consisting primarily of the Richmond metropolitan area. Therefore, a
substantial portion of its debtors' ability to honor their obligationscontracts is
either directly or indirectly dependent uponinfluenced by the tourism, health
care, and coal industries. Substantially, all loans outstanding are
collateralized by cash equivalents, real estate, equipment, or personal consumer
goods.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance. The allowance for loan losses is maintained at a
level believed adequate by management to absorb estimated losses based on an
evaluation of the current loan portfolio, which is based on the Bank's past loan
loss experience, known and inherent riskseconomic conditions 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. There are no loans in
the portfolio categorized by management as impaired under SFAS No. 114.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation.
CITIZENS is depreciating assets for book and tax purposes using the
straight-line and double declining methods, respectively, over periods ranging
from three to thirty-nine years.
INCOME TAXES:
CITIZENS utilizes an asset and liability approach to financial accounting
and reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those differences that have future
tax consequences using currently enacted tax laws and rates that apply to the
periods in which they are expected to affect taxable income. Valuation
allowances are established, if considered necessary, to reduce the deferred tax
asset to the amount that will more likely than not be realized.
OTHER COMPREHENSIVE INCOME:
Effective January 1, 1998, Citizens adoptedthis market area.
NOTE 16 -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
establishes standards107, Disclosures about Fair
Value of Financial Instruments requires the Bank to disclose estimated fair
values of its financial instruments.
The following methods and assumptions were used to estimate the approximate
fair value of each class of financial instrument for reportingwhich it is practicable to
estimate fair value.
Cash and displaydue from banks and federal funds sold -- The carrying amount is a
reasonable estimate of comprehensive incomefair value.
Securities -- The fair value of securities, except certain state and
its
componentsmunicipal securities, is estimated based on bid prices published in a full setfinancial
newspapers or bid quotations received from securities dealers. The fair value of
general purposecertain state and municipal securities is not readily available through market
sources other than dealer quotations, so fair value estimates are based on
quoted market prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
Loans -- Fair values are estimated for portfolios of loans with similar
financial statements. Comprehensive
incomecharacteristics. Loans are segregated by type, such as commercial,
real estate -residential, real estate -- other, loans to individuals and other
loans. Each loan category is definedfurther segmented into fixed and adjustable rate
interest terms.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan, as well as
estimates for prepayments. The estimate of maturity is based on the change in equity (net assets) of a business enterprise
during a period, except those resulting from investmentsBank's
historical experience with repayments for each loan classification, modified, as
required, by and distributions to
owners. Other comprehensive income is defined to be revenues, expenses, gains
and losses that under generally accepted accounting principles are included in
comprehensive income but excluded from net income.
USE OF ESTIMATES:
The preparationan estimate of the financial statements in conformity with generally
accepted accounting principles requires management to make estimateseffect of current economic and assumptions that affect the amounts reported in
F-36lending
conditions.
F-17
96
CITIZENS SOUTHERNTHE COMMONWEALTH BANK INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 116 -- SUMMARYDISCLOSURES ABOUT FAIR VALUES OF SIGNIFICANT ACCOUNTING POLICIESFINANCIAL INSTRUMENTS -- (CONTINUED)
Deposits -- The fair values of noninterest-bearing demand deposits,
interest-bearing demand deposits and savings deposits are equal to their
carrying amounts since the amounts are payable on demand. The fair value of
fixed maturity time deposits and certificates of deposit is estimated by
discounting scheduled cash flows through maturity using interest rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit -- The only
amounts recorded for commitments to extend credit and standby letters of credit
are the deferred fees arising from these unrecognized financial instruments.
These deferred fees are not material at December 31, 2001 and 2000, and as such,
the related fair values have not been estimated.
2002 2001
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets:
Cash and cash
equivalents............. $ 23,442,941 $ 23,442,941 $ 13,725,856 $ 13,725,856
Equity
securities -- restricted... 1,141,500 1,141,500 473,400 473,400
Loans, net................. 106,175,370 106,291,112 70,550,849 70,637,208
Interest receivable........ 413,625 413,625 341,111 341,111
------------ ------------ ------------ ------------
Total financial
assets................ $131,173,436 $131,289,178 $ 85,091,216 $ 85,177,448
============ ============ ============ ============
Financial liabilities:
Deposits................... $107,292,235 $107,704,993 $ 75,462,406 $ 75,754,448
Accrued expenses........... 872,694 872,694 249,173 249,173
FHLB advances.............. 17,540,894 17,586,500 4,300,000 4,300,000
Unrecognized financial
instruments:
Commitments to extend
credit.................. 8,813,813 8,813,813 8,090,150 8,090,150
Standby letters of
credit.................. 948,081 948,081 1,129,628 1,219,628
Unused commercial lines of
credit.................. 14,711,845 14,711,845 11,194,812 11,194,812
------------ ------------ ------------ ------------
Total financial
liabilities........... $150,179,562 $150,637,926 $100,426,169 $100,808,211
============ ============ ============ ============
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial statementsinstrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and accompanying notes. Actual resultsother factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore, cannot be determined with precision.
Changes in assumptions could differ
from thosesignificantly affect the estimates.
The allowance for loan losses is oneFair value estimates are based on existing on-balance-sheet and
off-balance-sheet financial instruments without attempting to estimate the value
of CITIZENS mostanticipated future business and the value of assets and liabilities that are
not considered financial instruments. Significant assets that are not considered
financial assets include deferred income taxes and bank premises and equipment;
a significant estimates.
NOTE 2 -- INFORMATION WITH RESPECT TO FORM S-4 FILERS
The accompanying Management Discussion and Analysis disclosure and
discussion accompanying Citizens' financial statements for June 30, 2000 were
prepared to facilitate certain disclosures to meet Securities and Exchange
Commission filing requirements. Citizensliability that is not considered a reporting entityfinancial liability is accrued
post-retirement benefits. In addition, the tax ramifications related to the
Securitiesrealization of the unrealized gains and Exchange Commission,losses can have a significant effect on
fair value estimates and therefore,have not been considered in the information provided
herein is substantially less in scope than if Citizens had been a reporting
entity. The quarterly financial and other information as would have been
required, had Citizens been required to file Partestimates.
F-18
THE COMMONWEALTH BANK
ANNEX I of Form 10-Q for the most
recent quarter for which such a report would have been made, is included herein.
F-37
97
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATIONMERGER
DATED AS OF JANUARY 27, 2003
AMONG
FIRST COMMUNITY BANCSHARES, INC.,
FIRST COMMUNITY BANK, N. A.NATIONAL ASSOCIATION
AND
CITIZENS SOUTHERNTHE COMMONWEALTH BANK
INC.
98THE COMMONWEALTH BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TABLE OF CONTENTS
PAGE
----
ARTICLE I GENERAL
1.1 Merger........................................................... A-1
1.2 Issuance of Bancshares Common Stock.............................. A-1
1.3 Taking of Necessary Action....................................... A-1CERTAIN DEFINITIONS......................................... 1
1.01 Certain Definitions......................................... 1
ARTICLE II EFFECT OF MERGER ON COMMON STOCK OF CITIZENS
2.1THE MERGER.................................................. 6
2.01 The Merger.................................................. 6
2.02 Effective Date and Effective Time; Closing.................. 6
ARTICLE III CONSIDERATION; ELECTION AND EXCHANGE PROCEDURES............. 7
3.01 Conversion of Stock.............................................. A-1
2.2 Manner of Exchange............................................... A-2
2.3Shares........................................ 7
3.02 Election Procedures......................................... 7
3.03 Exchange Procedures......................................... 9
3.04 Rights as Shareholders; Stock Transfers..................... 11
3.05 No Fractional Shares............................................. A-2Shares........................................ 11
3.06 Dissenting Shares........................................... 11
3.07 Anti-Dilution Provisions.................................... 11
3.08 Withholding Rights.......................................... 11
3.09 CommonWealth Bank Options................................... 11
ARTICLE IIIIV ACTIONS PENDING ACQUISITION................................. 12
4.01 Forbearances of CommonWealth Bank........................... 12
4.02 Forbearances of Parent...................................... 14
ARTICLE V REPRESENTATIONS AND WARRANTIES
3.1WARRANTIES.............................. 14
5.01 Disclosure Schedules........................................ 14
5.02 Standard.................................................... 15
5.03 Representations and Warranties of Citizens....................... A-3
(a) Organization, Standing and Power............................ A-3
(b) Capital Structure........................................... A-3
(c) Authority................................................... A-3
(d) Investments................................................. A-4
(e) Financial Statements........................................ A-4
(f) Absence of Undisclosed Liabilities.......................... A-4
(g) Tax Matters................................................. A-4
(h) Options, Warrants and Related Matters....................... A-5
(i) Property; Leases............................................ A-5
(j) Additional Schedules Furnished to FCB....................... A-6
(k) Agreements in Force and Effect.............................. A-6
(l) Legal Proceedings; Compliance with Laws..................... A-6
(m) Employee Benefit Plans...................................... A-7
(n) Insurance................................................... A-8
(o) Loan Portfolio.............................................. A-9
(p) Absence of Changes.......................................... A-9
(q) Brokers and Finders......................................... A-9
(r) Reports..................................................... A-9
(s) Environmental Matters....................................... A-9
(t) Community Reinvestment Act.................................. A-10
(u) Disclosure.................................................. A-11
3.2CommonWealth Bank......... 15
Representations and Warranties of FCBParent and Bancshares............. A-11
(a) Organization, StandingFirst Community
5.04 Bank........................................................ 23
ARTICLE VI COVENANTS................................................... 27
6.01 Reasonable Best Efforts..................................... 27
6.02 Shareholder Approval........................................ 27
6.03 Registration Statement...................................... 27
6.04 Regulatory Filings.......................................... 28
6.05 Press Releases.............................................. 28
6.06 Access; Information......................................... 28
6.07 Affiliates.................................................. 29
6.08 Acquisition Proposals....................................... 29
6.09 Certain Policies............................................ 30
6.10 Nasdaq Listing.............................................. 30
6.11 Indemnification............................................. 30
6.12 Benefit Plans............................................... 31
6.13 Parent Board and Power............................ A-11
(b) Capital Structure........................................... A-11
(c) Authority................................................... A-11
(d) Financial Statements........................................ A-12
(e) AbsenceFirst Community Bank Board................. 32
6.14 Notification of Undisclosed Liabilities.......................... A-12
(f) Absence of Changes.......................................... A-12
(g) Brokers and Finders......................................... A-12
(h) Reports..................................................... A-12
(i) Tax Matters................................................. A-13
(j) Property; Leases............................................ A-13
(k) Legal Proceedings; Compliance with Laws..................... A-13
(l) Employee Benefit Plans...................................... A-14
(m) Loan Portfolio.............................................. A-14
(n) Environmental Matters....................................... A-14
(o) Community Reinvestment Act.................................. A-14
(p) Disclosure.................................................. A-14Certain Matters............................. 32
iA-i
99TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE IV
CONDUCT PRIORVII CONDITIONS TO CONSUMMATION OF THE EFFECTIVE TIME OF MERGER
4.1 AccessMERGER.................... 32
Conditions to Records and PropertiesEach Party's Obligation to Effect the
7.01 Merger...................................................... 32
7.02 Conditions to Obligation of FCB and Citizens............. A-15
4.2 Registration Statement; Proxy Statement; Shareholder Approval.... A-15
4.3 Operation of the Business of Citizens............................ A-16
4.4 No Solicitation.................................................. A-16
4.5 Regulatory Filings............................................... A-17
4.6 Tax Opinion...................................................... A-17
4.7 Public Announcements............................................. A-17
4.8 Transactions in Bancshares Common Stock.......................... A-17
4.9 Agreement as to Efforts to Consummate............................ A-17
4.10 Adverse Changes in Condition..................................... A-18
4.11 Updating of Schedules............................................ A-18
ARTICLE V
CONDITIONS OF MERGER
5.1CommonWealth Bank............... 33
Conditions to Obligations of FCB................................. A-18
(a) RepresentationsParent and Warranties; PerformanceFirst Community
7.03 Bank........................................................ 33
ARTICLE VIII TERMINATION................................................. 34
8.01 Termination................................................. 34
8.02 Effect of Obligations;Termination and Abandonment....................... 35
ARTICLE IX MISCELLANEOUS............................................... 37
9.01 Survival.................................................... 37
9.02 Waiver; Amendment........................................... 37
9.03 Counterparts................................................ 37
9.04 Governing Law............................................... 37
9.05 Expenses.................................................... 37
9.06 Notices..................................................... 37
9.07 Entire Understanding; No Adverse Change......................................... A-18
(b) AuthorizationThird Party Beneficiaries.......... 38
9.08 Severability................................................ 38
9.09 Enforcement of Merger..................................... A-18
(c)the Agreement................................ 38
9.10 Interpretation.............................................. 38
9.11 Assignment.................................................. 38
9.12 Alternative Structure....................................... 39
ANNEX A Form of Shareholder Agreement
ANNEX B Form of Affiliate Letter
Employment Agreement Between First Community Bank and J.E.
ANNEX C Causey Davis
Matters to be Covered by Opinion of Counsel.......................................... A-18
(d) Registration Statement...................................... A-20
(e) Tax Opinion................................................. A-20
(f) Regulatory Approvals........................................ A-20
(g) Affiliate Letters........................................... A-20
(h) AcceptanceCounsel to Parent and
ANNEX D First Community Bank
Matters to be Covered by Bancshares Counsel............................ A-21
(i) Disclosure Schedules........................................ A-21
5.2 Conditions to Obligations of Citizens............................ A-21
(a) Representations and Warranties; Performance of Obligations;
No Adverse Change......................................... A-21
(b) Authorization of Merger..................................... A-21
(c) Opinion of Counsel.......................................... A-21
(d) Registration Statement...................................... A-23
(e) Regulatory Approvals........................................ A-23
(f) Tax Opinion................................................. A-23
(g) Acceptance by Citizens' Counsel............................. A-23
(h) Fairness Opinion............................................ A-23
ARTICLE VI
CLOSING DATE; EFFECTIVE TIME OF THE MERGER
6.1 Closing Date..................................................... A-23
6.2 Filings at Closing............................................... A-24
6.3 Effective Time................................................... A-24
ARTICLE VII
TERMINATION; SURVIVAL OF REPRESENTATIONS
WARRANTIES AND COVENANTS; WAIVER AND AMENDMENT
7.1 Termination...................................................... A-24
7.2 Effect of Termination............................................ A-25
7.3 Survival of Representations, Warranties and Covenants............ A-25
7.4 Waiver and Amendment............................................. A-25Counsel to CommonWealth
ANNEX E Bank
iiA-ii
100
ARTICLE VIII
ADDITIONAL COVENANTS
8.1 Registration Statement........................................... A-25
8.2 Employee Benefits................................................ A-26
8.3 Protection of Directors and Officers............................. A-26
ARTICLE IX
MISCELLANEOUS
9.1 Expenses......................................................... A-26
9.2 Entire Agreement................................................. A-26
9.3 Descriptive Headings; Recitals................................... A-27
9.4 Notices.......................................................... A-27
9.5 Counterparts..................................................... A-27
9.6 Governing Law.................................................... A-28
Consent of Directors................................................... A-29
Exhibit A -- Plan of Merger............................................ A-30
iii
101
SCHEDULE DESCRIPTION SECTION IN AGREEMENT
- -------- ----------- --------------------
A Citizens' Articles of Incorporation 3.1(a)(A)
B Citizens' Bylaws 3.1(a)(B)
C Securities Owned by Citizens 3.1(d)
D Citizens' Conflicts, Breaches or Defaults 3.1(c)
E Citizens' Financial Statements 3.1(e)
F Citizens' Tax Matters 3.1(g)
G Salary Rates and Citizens' Common Stock Owned by 3.1(j)(i), 3.1(b)
Employees and Directors of Bank; Owners of 5% of
Citizens' Common Stock
H Notes, Bonds, Mortgages, Indentures, Licenses, Lease 3.1(j)(ii),
Agreements and Other Contracts of Citizens 5.1(c)(v),
5.1(c)(vii)
I Employment Contracts and Related Matters of Citizens 3.1(m)(i),
3.1(j)(iii),
3.1(m)(vii),
3.1(m)(viii)
J Real Estate Owned or Leased by Citizens 3.1(i), 3.1(j)(iv)
K Citizens' Directors and 10% Shareholders 5.1(g)
L Citizens' Legal Proceedings 3.1(l)
M Citizens' Insurance 3.1(n)
N Citizens' Loans 3.1(o)
O Citizens' Material Adverse Changes 3.1(p)
P Citizens' Environmental Matters 3.1(s)
Q Bancshares Tax Matters 3.2(i)
iv
102
JUNE 27, 2000
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made and
entered intoMERGER, dated as of the 27th day of June, 2000 by andJanuary 27, 2003 (this
"Agreement"), among First Community Bancshares, Inc., a Nevada corporation ("Bancshares"Parent"), First Community
Bank, N.National Association ("First Community Bank") and The CommonWealth Bank
("CommonWealth Bank").
RECITALS
A., CommonWealth Bank. CommonWealth Bank is a Virginia-chartered
commercial bank, having its principal place of business in Richmond, Virginia.
B. Parent. Parent is a Nevada corporation, having its principal place of
business in Bluefield, Virginia.
C. First Community Bank. First Community Bank is a national association ("FCB"), and Citizens Southern Bank, Inc.,bank, having
its principal place of business in Bluefield, Virginia.
D. Intention of the Parties. It is the intention of the parties to this
Agreement that the Merger provided for herein be treated as a banking
corporation incorporated"reorganization"
under Section 368(a) of the lawsInternal Revenue Code of West Virginia ("Citizens"1986, as amended (the
"Code"), recites
and provides:
A..
E. Board Action. The respective Boards of Directors of Bancshares, FCBeach of Parent,
First Community Bank and Citizens deemCommonWealth Bank have determined that it advisableis in the
best interests of their respective companies and their stockholders to
merge Citizensconsummate the Merger provided for herein.
F. Shareholder Agreements. As a material inducement to Parent and First
Community Bank to enter into FCB pursuant to this Agreement, and simultaneously with the
Planexecution of Merger attached as Exhibitthis Agreement, each Shareholder (as defined herein) is entering
into an agreement, in the form of Annex A (the "Plan of Merger"hereto (collectively, the "Shareholder
Agreements") whereby the holders ofpursuant to which they have agreed, among other things, to vote
their shares of common stockCommonWealth Bank Common Stock (as defined herein) in favor of
Citizens ("Citizens Common Stock") will receive common
stock of First Community Bancshares, Inc. ("Bancshares Common Stock") in
exchange therefor.
B. To effectuate the foregoing, the parties desire to adopt a plan of
reorganization in accordance with the provisions of Section 368(a) of the United
States Internal Revenue Code, as amended (the "Code").this Agreement.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement,premises and of the mutual
covenants, representations, warranties conditions and promises
herein contained, FCB and Citizens adopt this Agreement whereby at the
"Effective Time of the Merger" (as defined in Article VI hereof) Citizens shall
be merged into FCB in accordance with the Plan of Merger. The outstanding shares
of Citizens Common Stock shall be exchanged for shares of Bancshares Common
Stock on the basis, terms and conditionsagreements contained herein and in the Plan of
Merger. In connection therewith, the
parties hereto agree as follows:
ARTICLE I
GENERAL
1.1CERTAIN DEFINITIONS
1.01 Certain Definitions. The following terms are used in this Agreement
with the meanings set forth below:
"Acquisition Proposal" has the meaning set forth in Section 6.08.
"Affiliate Letter" has the meaning set forth in Section 6.07.
"Aggregate Cash Consideration" has the meaning set forth in Section
3.01(b)(2)(i).
"Agreement" means this Agreement, as amended or modified from time to
time in accordance with Section 9.02.
"Articles of Merger" has the meaning set forth in Section 2.02(a).
"Average Share Price" has the meaning set forth in Section
3.01(b)(2)(ii).
"Bank Insurance Fund" means the Bank Insurance Fund maintained by the
FDIC.
"Bank Secrecy Act" means the Bank Secrecy Act of 1970, as amended.
"Benefit Plans" has the meaning set forth in Section 5.03(m).
"Bureau" means the Bureau of Financial Institutions of the State
Corporation Commission of the Commonwealth of Virginia.
Annex I-1
"Business Day" means Monday through Friday of each week, except a legal
holiday recognized as such by the U. S. Government or any day on which
banking institutions in the Commonwealth of Virginia are authorized or
obligated to close.
"Capital Change" has the meaning set forth in Section 3.07.
"Cash Election Shares" has the meaning set forth in Section 3.02(a).
"Certificate" means any certificate which immediately prior to the
Effective Time represented shares of CommonWealth Bank Common Stock.
"Closing" and "Closing Date" have the meanings set forth in Section
2.02(b).
"Code" has the meaning set forth in the recitals to this Agreement.
"CommonWealth Bank" has the meaning set forth in the preamble to this
Agreement.
"CommonWealth Bank Affiliates" has the meaning set forth in Section
6.07.
"CommonWealth Bank Articles" means the Articles of Incorporation of
CommonWealth Bank, as amended.
"CommonWealth Bank Board" means the Board of Directors of CommonWealth
Bank.
"CommonWealth Bank Bylaws" means the By-laws of CommonWealth Bank, as
amended.
"CommonWealth Bank Common Stock" means the common stock, $4.00 par value
per share, of CommonWealth Bank.
"CommonWealth Bank Group" means any "affiliated group" (as defined in
Section 1504(a) of the Code without regard to the limitations contained in
Section 1504(b) of the Code) that includes CommonWealth Bank or any
predecessor of or any successor to CommonWealth Bank (or to another such
predecessor or successor).
"CommonWealth Bank Loan Property" has the meaning set forth in Section
5.03(o)(i).
"CommonWealth Bank Meeting" has the meaning set forth in Section 6.02.
"CommonWealth Bank Options" means the options to acquire CommonWealth
Bank Common Stock issued under the CommonWealth Bank Stock Option Plan.
"CommonWealth Bank Regulatory Authorities" has the meaning set forth in
Section 5.03(i).
"CommonWealth Bank Stock Option Plan" means The CommonWealth Bank
Amended and Restated Stock Option Plan.
"Community Reinvestment Act" means the Community Reinvestment Act of
1977, as amended.
"DOL" has the meaning set forth in Section 5.03(m)(i).
"Derivatives Contract" has the meaning set forth in Section 5.03(q).
"Determination Date" means the date on which the last required approval
of a Governmental Authority is obtained with respect to the Transaction,
all statutory waiting periods in respect thereof have expired and all other
conditions to the consummation of the Merger specified in Article VII
hereof (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have been
satisfied or waived.
"Disclosure Schedule" has the meaning set forth in Section 5.01.
"Dissenting Shares" has the meaning set forth in Section 3.06.
"Effective Date" has the meaning set forth in Section 2.02(a).
"Effective Time" has the meaning set forth in Section 2.02(a).
Annex I-2
"Election Deadline" has the meaning set forth in Section 3.02(b).
"Employees" has the meaning set forth in Section 5.03(m).
"Environmental Laws" has the meaning set forth in Section 5.03(o).
"Equal Credit Opportunity Act" means the Equal Credit Opportunity Act,
as amended.
"Equity Investment" means (i) an Equity Security; and (ii) an ownership
interest in any company or other entity, any membership interest that
includes a voting right in any company or other entity, any interest in
real estate; and any investment or transaction which in substance falls
into any of these categories even though it may be structured as some other
form of investment or transaction.
"Equity Security" means any stock (other than adjustable-rate preferred
stock, money market (auction rate) preferred stock or other instrument
determined by the OCC to have the character of debt securities),
certificate of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or subscription,
transferable share, investment contract, or voting-trust certificate; any
security convertible into such a security; any security carrying any
warrant or right to subscribe to or purchase any such security; and any
certificate of interest or participation in, temporary or interim
certificate for, or receipt for any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(m)(iii).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.02(a).
"Exchange Ratio" has the meaning set forth in Section 3.01(b)(1)(i),
subject to adjustment pursuant to Sections 3.02(f), 3.07, 8.01(i) and
8.01(j).
"Fair Housing Act" means the Fair Housing Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Act" means the Federal Reserve Act, as amended.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"First Community Bank" has the meaning set forth in the preamble to this
Agreement.
"First Community Bank Articles" means the Articles of Association of
First Community Bank, as amended.
"First Community Bank Board" means the Board of Directors of First
Community Bank.
"First Community Bank Bylaws" means the Bylaws of First Community Bank,
as amended.
"First Community Bank Common Stock" means the common stock, $1,200.00
par value per share, of First Community Bank.
"GAAP" means accounting principles generally accepted in the United
States of America.
"Governmental Authority" means any federal, state or local court,
administrative agency or commission or other governmental authority or
instrumentality.
"Hazardous Substance" has the meaning set forth in Section 5.03(o).
"Indemnified Parties" and "Indemnifying Party" have the meanings set
forth in Section 6.11(a).
"Insurance Amount" has the meaning set forth in Section 6.11(c).
"Insurance Policies" has the meaning set forth in Section 5.03(w).
Annex I-3
"IRS" has the meaning set forth in Section 5.03(m)(i).
"Liens" means any charge, mortgage, pledge, security interest,
restriction, claim, lien or encumbrance.
"Loans" has the meaning set forth in Section 4.01(r).
"Material Adverse Effect" means, with respect to Parent or CommonWealth
Bank any effect that (i) is material and adverse to the financial position,
results of operations or business of Parent and its Subsidiaries taken as a
whole or CommonWealth Bank, as the case may be, or (ii) would materially
impair the ability of any of Parent and its Subsidiaries or CommonWealth
Bank to perform their respective obligations under this Agreement or
otherwise materially impede the consummation of the Transaction; provided,
however, that Material Adverse Effect shall not be deemed to include the
impact of (a) changes in banking and similar laws of general applicability
or interpretations thereof by Governmental Authorities, (b) changes in GAAP
or regulatory accounting requirements applicable to banks and their holding
companies generally, (c) changes in general economic conditions affecting
banks and their holding companies generally, (d) any modifications or
changes to valuation policies and practices, or expenses incurred, in
connection with the Transaction or restructuring charges taken in
connection with the Transaction, in each case in accordance with GAAP, and
(e) with respect to CommonWealth Bank, the effects of any action or
omission taken with the prior consent of Parent or as otherwise
contemplated by the Agreement.
"Material Contracts" has the meaning set forth in Section 5.03(k)(i).
"Merger" has the meaning set forth in Section 2.01(a).
"Merger Consideration" means the number of whole shares of Parent Common
Stock, plus cash in lieu of any fractional share interest, and/or the
amount of cash into which shares of CommonWealth Bank Common Stock shall be
converted pursuant to the provisions of Article III.
"Nasdaq" means The Nasdaq Stock Market, Inc.'s SmallCap Market or such
other securities exchange on which the Parent Common Stock may be listed.
"National Bank Act" means the National Bank Act, as amended.
"National Labor Relations Act" means the National Labor Relations Act,
as amended.
"No-Election Shares" has the meaning set forth in Section 3.02(a).
"Notice of Consummation" has the meaning set forth in Section 2.02(a).
"OCC" means the Office of the Comptroller of the Currency.
"OREO" means other real estate owned.
"Parent" has the meaning set forth in the preamble to this Agreement.
"Parent Benefit Plans" has the meaning set forth in Section 6.12(a).
"Parent Board" means the Board of Directors of the Parent.
"Parent Common Stock" means the common stock, $1.00 par value per share,
of Parent.
"Parent Preferred Stock" means the preferred stock of Parent.
"Parent Regulatory Authorities" has the meaning set forth in Section
5.04(k).
"Pension Plan" has the meaning set forth in Section 5.03(m)(ii).
"Person" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust, limited liability company
or unincorporated organization.
"Per Share Cash Consideration" has the meaning set forth in Section
3.01(b)(1)(ii).
"Per Share Stock Consideration" has the meaning set forth in Section
3.01(b)(1)(i).
Annex I-4
"Previously Disclosed" by a party shall mean information set forth in a
section of its Disclosure Schedule corresponding to the section of this
Agreement where such term is used.
"Proxy Statement" has the meaning set forth in Section 6.03(a).
"Reallocated Cash Shares " has the meaning set forth in Section
3.02(d)(i)(3).
"Reallocated Stock Shares" has the meaning set forth in Section
3.02(d)(ii)(2).
"Registration Statement" has the meaning set forth in Section 6.03(a).
"Rights" means, with respect to any Person, warrants, options, rights,
convertible securities and other arrangements or commitments which obligate
the Person to issue or dispose of any of its capital stock or other
ownership interests.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Securities Documents" has the meaning set forth in Sections 5.03(g) and
5.04(g) in the case of CommonWealth Bank and Parent, respectively.
"Shareholder Agreements" has the meaning set forth in the recitals to
this Agreement.
"Shareholders" means each director and executive officer of CommonWealth
Bank.
"Starting Price" means $31.14, the average of the closing sales price of
a share of Parent Common Stock, as reported on Nasdaq (as reported by an
authoritative source), for the 30 trading-day period ending with the close
of business on January 15, 2003.
"Stock Election Shares" has the meaning set forth in Section 3.02(a).
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
those terms in Rule l-02 of Regulation S-X of the SEC.
"Superior Proposal" has the meaning set forth in Section 6.08.
"Surviving Corporation" has the meaning set forth in Section 2.01(a).
"Tax" and "Taxes" mean all federal, state, local or foreign income,
gross income, gains, gross receipts, sales, use, ad valorem, goods and
services, capital, production, transfer, franchise, windfall profits,
license, withholding, payroll, employment, disability, employer health,
excise, estimated, severance, stamp, occupation, property, environmental,
custom duties, unemployment or other taxes of any kind whatsoever, together
with any interest, additions or penalties thereto and any interest in
respect of such interest and penalties.
"Tax Returns" means any return, declaration or other report (including
elections, declarations, schedules, estimates and information returns) with
respect to any Taxes.
"Termination Fee" has the meaning set forth in Section 8.02(b).
"Transaction" means the Merger and any other transaction contemplated by
this Agreement.
"Treasury Stock" means shares of Parent Common Stock held by Parent or
any of its Subsidiaries, other than in a fiduciary (including custodial or
agency) capacity or as a result of debts previously contracted in good
faith.
"VSCA" means the Virginia Stock Corporation Act.
Annex I-5
ARTICLE II
THE MERGER
2.01 The Merger.
(a) The Merger. Subject to the provisionsterms and conditions of this Agreement, at
the Effective Time, CommonWealth Bank shall merge with and into First Community
Bank in accordance with the applicable provisions of federal law and the VSCA
(the "Merger"), the separate corporate existence of CommonWealth Bank shall
cease and First Community Bank shall survive and continue to exist as a national
bank (First Community Bank, as the surviving corporation in the Merger,
sometimes being referred to herein as the "Surviving Corporation").
(b) Name. The name of the Surviving Corporation shall be "First Community
Bank, National Association'
(c) Articles and Bylaws. The articles of association and bylaws of First
Community Bank immediately after the Merger shall be the First Community Bank
Articles and the First Community Bank Bylaws as in effect immediately prior to
the Merger.
(d) Directors and Executive Officers of the Surviving Corporation. The
directors of the Surviving Corporation immediately after the Merger shall be the
directors of First Community Bank immediately prior to the Merger plus the two
persons appointed or elected as directors pursuant to Section 6.13 hereof, each
of whom shall serve until such time as their successors shall be duly elected
and qualified. The executive officers of the Surviving Corporation immediately
after the Merger shall be the executive officers of First Community Bank
immediately prior to the Merger, each of whom shall serve until such time as
their successors shall be duly elected and qualified.
(e) Authorized Capital Stock. The authorized capital stock of the
Surviving Corporation upon consummation of the Merger Citizens shall be merged with and into FCB andas set forth in
the separate
existence of Citizens shall cease. FCB shall continueFirst Community Bank Articles immediately prior to conduct allthe Merger.
(f) Effect of the business of Citizens.
1.2 Issuance of Bancshares Common Stock.Merger. At the Effective Time, the effect of the Merger
Bancshares will issue shares of its Common Stock of the same class and
standingshall be as is presently issued and outstanding to the extent set forth in, andprovided in accordance with federal law and regulation and the termsVSCA.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
CommonWealth Bank shall vest in the Surviving Corporation, and all debts,
liabilities, obligations, restrictions, disabilities and duties of CommonWealth
Bank shall become the debts, liabilities, obligations, restrictions,
disabilities and duties of the Surviving Corporation.
(g) Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider that any further assignments or assurances
in law or any other acts are necessary or desirable to (i) vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation its right, title
or interest in, to or under any of the rights, properties or assets of
CommonWealth Bank acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or (ii) otherwise carry out the
purposes of this Agreement, CommonWealth Bank, and its proper officers and
directors, shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the purposes of
this Agreement, and the Planproper officers and directors of the Surviving
Corporation are fully authorized in the name of the Surviving Corporation or
otherwise to take any and all such action.
2.02 Effective Date and Effective Time; Closing.
(a) Subject to the satisfaction or waiver of the conditions set forth in
Article VII (other than those conditions that by their nature are to be
satisfied at the consummation of the Merger, but subject to the fulfillment or
waiver of those conditions), the parties shall cause articles of merger relating
to the Merger (the "Articles of Merger") to be filed with the Virginia State
Corporation Commission pursuant to Section 13.1-720 of the VSCA and the notice
of consummation (the "Notice of Consummation") to be filed with the OCC pursuant
to OCC guidelines
Annex I-6
on (i) a date selected by Parent after such satisfaction or waiver which is no
later than the later of (A) five Business Days after such satisfaction or waiver
or (B) the first month end following such satisfaction or waiver, or (ii) such
other date to which the parties may mutually agree in writing. The Merger
provided for herein shall become effective upon such filings or on such date as
may be specified therein. The date of such filings or such later effective date
is herein called the "Effective Date." The "Effective Time" of the Merger shall
be the time of such filings or as set forth in such filings.
(b) A closing (the "Closing") shall take place immediately prior to the
Effective Time at 10:00 a.m., Eastern Time, at the principal offices of Parent
in Bluefield, Virginia, or at such other place, at such other time, or on such
other date as the parties may mutually agree upon (such date, the "Closing
Date"). At the Closing, there shall be delivered to Parent and CommonWealth Bank
the opinions, certificates and other documents required to be delivered under
Article VII hereof.
ARTICLE III
CONSIDERATION; ELECTION AND EXCHANGE PROCEDURES
3.01 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of a holder of shares of CommonWealth Bank
Common Stock:
(a) Each share of Parent Common Stock and First Community Bank Common Stock
that is issued and outstanding immediately prior to the Effective Time shall
remain issued and outstanding and shall be unchanged by the Merger.
1.3 Taking(b) (1) Subject to Sections 3.02, 3.05, 3.06, 3.07, 8.01(i) and 8.01(j),
each share of Necessary Action. PriorCommonWealth Bank Common Stock issued and outstanding immediately
prior to the Effective Time shall be converted into, and shall be canceled in
exchange for, the right to receive, at the election of the holder thereof:
(i) the number of shares of Parent Common Stock which is equal to the
quotient (the "Exchange Ratio") (rounded to the nearest one ten-thousandth)
determined by dividing (x) $30.50 by (y) the Average Share Price of the
Parent Common Stock (the "Per Share Stock Consideration"), or
(ii) a cash amount equal to $30.50 per share of CommonWealth Bank
Common Stock (the "Per Share Cash Consideration").
(2) For purposes of this Agreement:
(i) the "Aggregate Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock outstanding
immediately prior to the Effective Time times .4 times $30.50; and
(ii) the "Average Share Price" of the Parent Common Stock shall mean
the average of the closing sales price of a share of Parent Common Stock,
as reported on Nasdaq (as reported by an authoritative source), for the 20
trading-day period ending with the close of business on the fifth Business
Day preceding the Effective Time.
3.02 Election Procedures.
(a) Parent shall designate an exchange agent to act as agent (the "Exchange
Agent") for purposes of conducting the election procedure and the exchange
procedure described in Sections 3.01 and 3.02. Provided that CommonWealth Bank
has delivered, or caused to be delivered, to the Exchange Agent all information
which is necessary for the Exchange Agent to perform its obligations as
specified herein, the Exchange Agent shall, no later than five (5) Business Days
after the Effective TimeDate, mail or make available to each holder of record of a
Certificate or Certificates (i) a notice and letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates theretofore representing shares of CommonWealth Bank Common Stock
shall pass, only upon proper delivery of the Certificates to the Exchange Agent)
advising such holder of the effectiveness of the Merger (as definedand the procedure for
surrendering to the Exchange Agent such Certificate or Certificates in Article VI hereof)exchange
for the consideration set forth in Section 3.01(b) hereof deliverable in
Annex I-7
respect thereof pursuant to this Agreement and (ii) an election form in such
form as Parent and CommonWealth Bank shall mutually agree (the "Election Form").
Each Election Form shall permit the holder (or in the case of nominee record
holders, the beneficial owner through proper instructions and documentation) (i)
to elect to receive Parent Common Stock with respect to all of such holder's
CommonWealth Bank Common Stock as hereinabove provided (the "Stock Election
Shares"), (ii) to elect to receive cash with respect to all of such holder's
CommonWealth Bank Common Stock as hereinabove provided (the "Cash Election
Shares"), or (iii) to indicate that such holder makes no such election with
respect to such holder's shares of CommonWealth Bank Common Stock (the
"No-Election Shares"). Nominee record holders who hold CommonWealth Bank Common
Stock on behalf of multiple beneficial owners shall indicate how many of the
shares held by them are Stock Election Shares, Cash Election Shares and
No-Election Shares. If a shareholder either (i) does not submit a properly
completed Election Form in a timely fashion or (ii) revokes an Election Form
prior to the Election Deadline and does not resubmit a properly completed
Election Form prior to the Election Deadline, the shares of CommonWealth Bank
Common Stock held by such shareholder shall be designated No-Election Shares.
Any Dissenting Shares shall be deemed to be Cash Election Shares and, with
respect to such shares, the holders thereof shall in no event be classified as
holders of Reallocated Stock Shares.
(b) The term "Election Deadline" shall mean 5:00 p.m., Eastern Time, on the
20th day following but not including the date of mailing of the Election Form or
such other date as Parent and CommonWealth Bank shall mutually agree upon.
(c) Any election to receive Parent Common Stock or cash shall have been
properly made only if the Exchange Agent shall have actually received a properly
completed Election Form by the Election Deadline. An Election Form will be
properly completed only if accompanied by Certificates representing all shares
of CommonWealth Bank Common Stock covered thereby, subject to the provisions of
this
Agreement, FCB, Bancshares, and Citizens, respectively, each shall take all such
action asparagraph (c) of Section 3.03. Any Election Form may be necessaryrevoked or appropriatechanged by
the person submitting such Election Form to the Exchange Agent by written notice
to the Exchange Agent only if such written notice is actually received by the
Exchange Agent at or prior to the Election Deadline. The Certificate or
Certificates representing CommonWealth Bank Common Stock relating to any revoked
Election Form shall be promptly returned without charge to the person submitting
the Election Form to the Exchange Agent. The Exchange Agent shall have
reasonable discretion to determine when any election, modification or revocation
is received, whether any such election, modification or revocation has been
properly made and to disregard immaterial defects in any Election Form, and any
good faith decisions of the Exchange Agent regarding such matters shall be
binding and conclusive. Neither Parent nor the Exchange Agent shall be under any
obligation to notify any person of any defect in an Election Form.
(d) Within ten (10) Business Days after the Election Deadline, the Exchange
Agent shall effect the Merger.
ARTICLE II
EFFECT OF MERGER ON COMMON STOCK OF CITIZENS
2.1 Conversionallocation among holders of Stock. At the Effective Time of the Merger.
A-1
103
(a) Each share of CitizensCommonWealth Bank Common
Stock which is issued and
outstanding at the Effective Time of rights to receive Parent Common Stock or cash in the Merger shall, and without any
action byin
accordance with the holder thereof,Election Forms as follows:
(i) If the number of Cash Election Shares times the Per Share Cash
Consideration is less than the Aggregate Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 3.06 with respect to
Dissenting Shares) shall be converted into the right to receive acash,
(2) No-Election Shares shall then be deemed to be Cash Election
Shares to the extent necessary to have the total number of Cash Election
Shares times the Per Share Cash Consideration equal the Aggregate Cash
Consideration. If less than all of the No-Election Shares need to be
treated as Cash Election Shares, then the Exchange Agent shall select
which No-Election Shares shall be treated as Cash Election Shares in
such manner as the Exchange Agent shall determine, and all remaining No-
Election Shares shall thereafter be treated as Stock Election Shares,
(3) If all of the No-Election Shares are treated as Cash Election
Shares under the preceding subsection and the total number of Cash
Election Shares times the Per Share Cash Consideration is less than the
Aggregate Cash Consideration, then the Exchange Agent shall convert on a
pro rata basis as described below in Section 3.02(e) a sufficient number
of Stock Election Shares into Cash Election
Annex I-8
Shares ("Reallocated Cash Shares") such that the sum of the number of
Cash Election Shares plus the number of Reallocated Cash Shares times
the Per Share Cash Consideration equals the Aggregate Cash
Consideration, and all Reallocated Cash Shares will be converted into
the right to receive cash, and
(4) the Stock Election Shares which are not Reallocated Cash Shares
shall be converted into the right to receive Parent Common Stock.
(ii) If the number of Cash Election Shares times the Per Share Cash
Consideration is greater than the Aggregate Cash Consideration, then:
(1) all Stock Election Shares and all No-Election Shares shall be
converted into the right to receive Parent Common Stock,
(2) the Exchange Agent shall convert on a pro rata basis as described
below in Section 3.02(e) a sufficient number of Cash Election Shares
(excluding any Dissenting Shares) ("Reallocated Stock Shares") such that
the number of remaining Cash Election Shares (including Dissenting
Shares) times the Per Share Cash Consideration equals the Aggregate Cash
Consideration, and all Reallocated Stock Shares shall be converted into
the right to receive Parent Common Stock, and
(3) the Cash Election Shares (subject to Section 3.06 with respect to
Dissenting Shares) which are not Reallocated Stock Shares shall be
converted into the right to receive cash.
(iii) If the number of Cash Election Shares times the Per Share Cash
Consideration is equal to the Aggregate Cash Consideration, then
subparagraphs (d)(i) and (ii) above shall not apply and all No-Election
Shares and all Stock Election Shares will be converted into the right to
receive Parent Common Stock.
(e) In the event that the Exchange Agent is required pursuant to Section
3.02(d)(i)(3) to convert some Stock Election Shares into Reallocated Cash
Shares, each holder of Stock Election Shares shall be allocated a pro rata
portion of the total Reallocated Cash Shares. In the event the Exchange Agent is
required pursuant to Section 3.02(d)(ii)(2) to convert some Cash Election Shares
into Reallocated Stock Shares, each holder of Cash Election Shares shall be
allocated a pro rata portion of the total Reallocated Stock Shares.
(f) If at the time of the Closing, the aggregate value of the shares of
BancsharesParent Common Stock equal to 1.74 shares for each
share of Citizens, for a total of 435,000 shares of Bancshares common stock to be exchanged for 100% of Citizens common stock outstanding. All such
shares of BancsharesCommonWealth Bank Common Stock
is less than fifty percent (50%) of the aggregate value of the Merger
Consideration, then Parent shall direct the Exchange Agent to convert a minimum
number of No-Election Shares and, to the extent necessary a minimum number of
Cash Election Shares, into Stock Election Shares so that the aggregate value of
the shares of Parent Common Stock exchanged for shares of CommonWealth Bank
Common Stock (other than cash in lieu of fractional shares) constitutes fifty
percent (50%) of the aggregate value of the Merger Consideration. For purposes
of this Section 3.02(f) only, the value of a share of Parent Common Stock will
be validly issued, fully paid and
nonassessable.
(b) In the event that Bancshares changesvalue as of the time of the Closing as determined for federal income tax
purposes.
3.03 Exchange Procedures.
(a) At the Effective Time, for the benefit of the holders of Certificates,
(i) Parent shall deliver to the Exchange Agent certificates evidencing the
number of shares of BancsharesParent Common Stock issuedissuable and outstanding prior(ii) Parent shall deliver,
or cause First Community Bank to deliver, to the Effective Time
as a resultExchange Agent, the Aggregate
Cash Consideration payable pursuant to this Article III in exchange for
Certificates representing outstanding shares of a stock split, stock dividendCommonWealth Bank Common Stock.
The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of Parent Common Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
similar
recapitalization, anddistributions paid or distributed with respect to such shares for the record date thereof (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or
similar recapitalization for which a record date is not established) shall
be prior to the Effective Time, the exchange ratio provided for in Section
2.1(a) shall be proportionately adjusted.
2.2 Manner of Exchange. (a) After the Effective Timeaccount of
the Merger,persons entitled thereto.
(b) After completion of the allocation referred to in paragraph (d) of
Section 3.02, each holder of a certificate theretofore evidencingan outstanding shares of Citizens
Common Stock, upon surrender ofCertificate or Certificates who has
surrendered such certificateCertificate or Certificates to the Trust & Financial
Services Division of First Community Bank, N. A., which shall act as exchange
agent, accompaniedExchange Agent will, upon
acceptance thereof by a Letter of Transmittal, shallthe Exchange Agent, be entitled to receive in
exchange therefor a certificate or
certificates representing the number of fullwhole shares of BancsharesParent Common Stock
forand/or the amount of cash into which the aggregate number
Annex I-9
of shares of CitizensCommonWealth Bank Common Stock theretoforepreviously represented by the certificatesuch
Certificate or certificates soCertificates surrendered shall have been exchangedconverted pursuant to
this Agreement and, if such holder's shares of CommonWealth Bank Common Stock
have been converted into Parent Common Stock, any other distribution theretofore
paid with respect to Parent Common Stock issuable in the Merger, in each case
without interest. The Exchange Agent shall accept such Certificates upon
compliance with such reasonable terms and conditions as providedthe Exchange Agent may
impose to effect an orderly exchange thereof in this Article II. Until so surrendered, eachaccordance with normal exchange
practices. Each outstanding Citizens certificateCertificate which prior to the Effective Time
of the
Merger, represented CitizensCommonWealth Bank Common Stock willand which is not surrendered to the
Exchange Agent in accordance with the procedures provided for herein shall,
except as otherwise herein provided, until duly surrendered to the Exchange
Agent be deemed to evidence ownership of the number of shares of Parent Common
Stock or the right to receive the numberamount of shares of Bancsharescash into which such CommonWealth
Bank Common Stock into which the shares
of Citizens Common Stock represented therebyshall have been converted. (b) Until such outstanding certificates formerly representing Citizens
Common Stock are surrendered, no dividend payable to holders of record of
Bancshares Common Stock for any period as of any date subsequent to the
Effective Time of the Merger shall be paid to the holder of such
outstanding certificates in respect thereof. After the Effective Time, of
the Merger, there
shall be no further registry of transferstransfer on the records of CitizensCommonWealth Bank of Certificates
representing shares of CitizensCommonWealth Bank Common Stock. Upon surrenderStock and if such Certificates
are presented to CommonWealth Bank for transfer, they shall be cancelled against
delivery of certificates for Parent Common Stock or cash as hereinabove
provided. No dividends which have been declared will be remitted to any person
entitled to receive shares of CitizensParent Common Stock under Section 3.02 until such
person surrenders the Certificate or Certificates representing CommonWealth Bank
Common Stock, at which time such dividends shall be remitted to such person,
without interest.
(c) The Exchange Agent and Parent, as the case may be, shall not be
obligated to deliver cash and/or a certificate or certificates representing
shares of Parent Common Stock to which a holder of CommonWealth Bank Common
Stock would otherwise be entitled as a result of the Merger until such holder
surrenders the Certificate or Certificates representing the shares of
CommonWealth Bank Common Stock for exchange as provided in this Section 3.03,
or, in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond in an amount as may be reasonably required in each case by Parent.
If any certificates evidencing shares of Parent Common Stock are to be issued in
a name other than that in which the Certificate evidencing CommonWealth Bank
Common Stock surrendered in exchange therefore is registered, it shall be a
condition of the issuance thereof that the Certificate so surrendered shall be
properly endorsed or accompanied by an executed form of assignment separate from
the Certificate and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Parent Common
Stock in exchange for Bancshares Common
Stock, there shall be paid toany name other than that of the recordregistered holder of the certificatesCertificate
surrendered or otherwise establish to the satisfaction of Bancsharesthe Exchange Agent
that such tax has been paid or is not payable.
(d) Any portion of the shares of Parent Common Stock issued in exchange therefor (i)and cash delivered to
the amountExchange Agent by Parent pursuant to Section 3.03(a) that remains unclaimed
by the stockholders of dividends theretofore paid with respect to such full shares of Bancshares
Common Stock as of any date subsequent toCommonWealth Bank for six months after the Effective Time
(as well as any proceeds from any investment thereof) shall be delivered by the
Exchange Agent to Parent. Any stockholders of the Merger
whichCommonWealth Bank who have not
yet beentheretofore complied with Section 3.03(b) shall thereafter look only to Parent
for the consideration deliverable in respect of each share of CommonWealth Bank
Common Stock such shareholder holds as determined pursuant to this Agreement
without any interest thereon. If outstanding Certificates for shares of
CommonWealth Bank Common Stock are not surrendered or the payment for them is
not claimed prior to the date on which such shares of Parent Common Stock or
cash would otherwise escheat to or become the property of any governmental unit
or agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of Parent (and to the
extent not in its possession shall be delivered to it), free and clear of all
claims or interest of any person previously entitled to such property. Neither
the Exchange Agent nor any party to this Agreement shall be liable to any holder
of stock represented by any Certificate for any consideration paid to a public
official pursuant to applicable abandoned property, laws;escheat or similar laws.
Parent and (ii) at the appropriate payment dateExchange Agent shall be entitled to rely upon the amountstock transfer
books of dividendsCommonWealth Bank to establish the identity of those persons entitled
to receive the consideration specified in this Agreement, which books shall be
conclusive with respect thereto. In the event of a record date afterdispute with respect to
ownership of stock represented by any Certificate, Parent and the Exchange Agent
shall be entitled to deposit any consideration represented thereby in escrow
with an independent third party and thereafter be relieved with respect to any
claims thereto.
Annex I-10
(e) Notwithstanding anything in this Agreement to the contrary,
Certificates surrendered for exchange by any CommonWealth Bank Affiliate shall
not be exchanged for certificates representing shares of Parent Common Stock to
which such CommonWealth Bank Affiliate may be entitled pursuant to the terms of
this Agreement until Parent has received a written agreement from such person as
specified in Section 6.07.
3.04 Rights as Shareholders; Stock Transfers. At the Effective Time,
holders of CommonWealth Bank Common Stock shall cease to be, and shall have no
rights as, stockholders of CommonWealth Bank other than to receive the
Merger but
prior to surrender and a payment date subsequent to surrender. No interestconsideration provided under this Article III. After the Effective Time, there
shall be payable with respect to such dividends upon surrenderno transfers on the stock transfer books of outstanding certificates.
2.3CommonWealth Bank or the
Surviving Corporation of shares of CommonWealth Bank Common Stock.
3.05 No Fractional Shares. NoNotwithstanding any other provision of this
Agreement, neither certificates ornor scrip for fractional shares of BancsharesParent Common
Stock willshall be issued. In lieu thereof, Bancshares will payissued in the valueMerger. Each holder of such fractional shares in cash in an amount equalCommonWealth Bank Common
Stock who otherwise would have been entitled to sucha fraction of a share of Parent
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive in lieu thereof cash (without interest) in an amount
determined by multiplying the fractional share interest to which such holder
would otherwise be entitled by the Average Share Price of the Parent Common
Stock, rounded to the nearest whole cent. No such holder shall be entitled to
dividends, voting rights or any other rights in respect of any fractional share.
3.06 Dissenting Shares. Each outstanding share of CommonWealth Bank
Common Stock the holder of which has perfected his right to dissent under the
VSCA and has not effectively withdrawn or lost such right as of the Effective
Time (the "Dissenting Shares") shall not be converted into or represent a right
to receive shares of Parent Common Stock or cash hereunder, and the holder
thereof shall be entitled only to such rights as are granted by the VSCA.
CommonWealth Bank shall give Parent prompt notice upon receipt by CommonWealth
Bank of any such written demands for payment of the fair value of such shares of
CommonWealth Bank Common Stock and of withdrawals of such demands and any other
instruments provided pursuant to the VSCA. If any holder of Dissenting Shares
shall fail to perfect or shall have effectively withdrawn or lost the right to
dissent at or prior to the Effective Time and shall have delivered a properly
completed Election Form to the Exchange Agent by the Election Deadline, the
Dissenting Shares held by such holder shall be converted into a right to receive
Parent Common Stock and/or cash in accordance with the applicable provisions of
this Agreement; and if any such holder of Dissenting Shares shall not have
delivered a properly completed Election Form to the Exchange Agent by the
Election Deadline, the Dissenting Shares held by such holder shall be designated
No-Election Shares. If any holder of Dissenting Shares shall have effectively
withdrawn or lost the right to dissent (through failure to perfect or otherwise)
after the Effective Time, the Dissenting Shares held by such holder shall be
converted on a share by share basis into either the right to receive Parent
Common Stock and/or cash in accordance with the applicable provisions of this
Agreement as Parent or the Exchange Agent shall determine. Any payments made in
respect of Dissenting Shares shall be made by the Surviving Corporation.
3.07 Anti-Dilution Provisions. If, between the date hereof and the
Effective Time, the shares of Parent Common Stock shall be changed into a
different number or class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date within said period
(a "Capital Change"), the Exchange Ratio shall be adjusted accordingly.
3.08 Withholding Rights. Parent (through the Exchange Agent, if
applicable) shall be entitled to deduct and withhold from any amounts otherwise
payable pursuant to this Agreement to any holder of shares of CommonWealth Bank
Common Stock such amounts as Parent is required under the Code or any state,
local or foreign tax law or regulation thereunder to deduct and withhold with
respect to the making of such payment. Any amounts so withheld shall be treated
for all purposes of this Agreement as having been paid to the holder of
CommonWealth Bank Common Stock in respect of which such deduction and
withholding was made by Parent.
3.09 CommonWealth Bank Options.
(a) At the Effective Time, each vested CommonWealth Bank Option which is
then outstanding shall cease to represent a right to acquire shares of
CommonWealth Bank Common Stock and shall be converted
Annex I-11
automatically into an option to purchase shares of Parent Common Stock, and
Parent shall assume each CommonWealth Bank Option, in accordance with the terms
of the CommonWealth Bank Stock Option Plan and stock option or other agreement
by which it is evidenced, except that from and after the Effective Time, (i)
Parent and the Compensation Committee of its Board of Directors shall be
substituted for CommonWealth Bank and the committee of the Board of Directors of
CommonWealth Bank (including, if applicable, the entire Board of Directors of
CommonWealth Bank) administering such CommonWealth Bank Stock Option Plan, (ii)
each CommonWealth Bank Option assumed by Parent may be exercised solely for
shares of Parent Common Stock, (iii) the number of shares of Parent Common Stock
subject to such CommonWealth Bank Option shall be equal to the number of shares
of CommonWealth Bank Common Stock subject to such CommonWealth Bank Option
immediately prior to the Effective Time multiplied by the averageExchange Ratio,
provided that any fractional shares of Parent Common Stock resulting from such
multiplication shall be rounded down to the nearest share, and (iv) the per
share exercise price under each such CommonWealth Bank Option shall be adjusted
by dividing the per share exercise price under each such CommonWealth Bank
Option by the Exchange Ratio, provided that such exercise price shall be rounded
up to the nearest cent. Notwithstanding clauses (iii) and (iv) of the bidpreceding
sentence, each CommonWealth Bank Option which is an "incentive stock option"
shall be adjusted as required by Section 424 of the Code, and ask pricethe regulations
promulgated thereunder, so as not to constitute a modification, extension or
renewal of Bancsharesthe option within the meaning of Section 424(h) of the Code. Parent
and CommonWealth Bank agree to take all necessary steps to effect the foregoing
provisions of this Section 3.09(a).
(b) Within fifteen Business Days after the Effective Time, Parent shall
file a registration statement on Form S-3 or Form S-8, as the case may be (or
any successor or other appropriate forms), with respect to the shares of Parent
Common Stock subject to the options referred to in paragraph (a) of this Section
3.09 and shall use its reasonable efforts to maintain the current status of the
prospectus or prospectuses contained therein for so long as such options remain
outstanding in the case of a Form S-8 or, in the case of a Form S-3, until the
shares subject to such options may be sold without a further holding period
under Rule 144 under the Securities Act.
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01 Forbearances of CommonWealth Bank. From the date hereof until the
Effective Time, except as expressly contemplated or permitted by this Agreement
or as Previously Disclosed, without the prior written consent of Parent,
CommonWealth Bank will not:
(a) Ordinary Course. Conduct its business other than in the ordinary and
usual course consistent with past practice or fail to use reasonable best
efforts to preserve its business organization, keep available the present
services of its employees and preserve for itself and Parent the goodwill of the
customers of CommonWealth Bank and others with whom business relations exist.
(b) Capital Stock. Other than pursuant to Rights set forth on Schedule
4.01(b) of CommonWealth Bank's Disclosure Schedule and outstanding on the date
hereof, (i) issue, sell or otherwise permit to become outstanding, or authorize
the creation of, any additional shares of stock or any Rights or (ii) permit any
additional shares of stock to become subject to grants of employee or director
stock options or other Rights.
(c) Dividends; Etc. (i) Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any shares
of CommonWealth Bank Stock or (ii) directly or indirectly adjust, split,
combine, redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or renew
any employment, consulting, severance or similar agreements or arrangements with
any director, officer or employee of CommonWealth Bank or grant any salary or
wage increase or increase any employee benefit (including incentive or bonus
payments), except (i) for normal individual increases in compensation to
employees in the ordinary course of business consistent with past practice,
provided that no such increase shall result in an annual adjustment of more than
5%, (ii) for other changes that are required by applicable law, (iii) to satisfy
contractual obligations existing as of the date hereof and set forth in Schedule
4.01(d) of CommonWealth Bank's Disclosure Schedule and (iv) for grants of awards
to newly-hired employees consistent with past practice.
Annex I-12
(e) Hiring. Hire any person as an employee of CommonWealth Bank or
promote any employee, except (i) to satisfy contractual obligations existing as
of the date hereof and set forth on Schedule 4.01(e) of CommonWealth Bank's
Disclosure Schedule and (ii) persons hired to fill any vacancies arising after
the date hereof and whose employment is terminable at the will of CommonWealth
Bank other than any person to be hired who would have a base salary, including
any guaranteed bonus or any similar bonus, considered on an annual basis of more
than $40,000.
(f) Benefit Plans. Enter into, establish, adopt or amend, or make any
contributions to (except (i) as may be required by applicable law or (ii) to
satisfy contractual obligations existing as of the date hereof and set forth on
Schedule 4.01(f) of CommonWealth Bank's Disclosure Schedule), any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement (or
similar arrangement) related thereto, in respect of any director, officer or
employee of CommonWealth Bank or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder.
(g) Dispositions. Sell, transfer, mortgage, encumber or otherwise dispose
of or discontinue any of its assets, deposits, business or properties except in
the ordinary course of business consistent with past practice and in a
transaction that, together with all other such transactions, is not material to
CommonWealth Bank.
(h) Acquisitions. Acquire (other than by way of foreclosures or
acquisitions of control in a bona fide fiduciary capacity or in satisfaction of
debts previously contracted in good faith, in each case in the ordinary and
usual course of business consistent with past practice) all or any portion of
the assets, business, deposits or properties of any other entity.
(i) Capital Expenditures. Make any capital expenditures other than
capital expenditures in the ordinary course of business consistent with past
practice in amounts not exceeding $10,000 individually or $50,000 in the
aggregate.
(j) Governing Documents. Amend the CommonWealth Bank Articles or the
CommonWealth Bank Bylaws.
(k) Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by changes in
laws or regulations or GAAP.
(l) Contracts. Except in the ordinary course of business consistent with
past practice or as otherwise permitted under this Section 4.01, enter into or
terminate any Material Contract or amend or modify in any material respect any
of its existing Material Contracts.
(m) Claims. Enter into any settlement or similar agreement with respect
to any action, suit, proceeding, order or investigation to which CommonWealth
Bank is or becomes a party after the date of this Agreement, which settlement,
agreement or action involves payment by CommonWealth Bank of an amount which
exceeds $10,000 and/or would impose any material restriction on the business of
CommonWealth Bank or create precedent for claims that are reasonably likely to
be material to CommonWealth Bank.
(n) Banking Operations. Enter into any new material line of business;
change its material lending, investment, underwriting, risk and asset liability
management and other material banking and operating policies, except as required
by applicable law, regulation or policies imposed by any Governmental Authority;
or file any application or make any contract with respect to branching or site
location or branching or site relocation.
(o) Derivatives Contracts. Enter into any Derivatives Contract.
(p) Indebtedness. Incur any indebtedness for borrowed money (other than
deposits, federal funds purchased, cash management accounts, Federal Home Loan
Bank borrowings that mature within one year and securities sold under agreements
to repurchase that mature within one year, in each case in the ordinary course
of business consistent with past practice) or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other Person, other than in the ordinary course of business consistent with past
practice.
Annex I-13
(q) Investment Securities. Acquire (other than by way of foreclosures or
acquisitions in a bona fide fiduciary capacity or in satisfaction of debts
previously contracted in good faith, in each case in the ordinary course of
business consistent with past practice) any debt security or Equity Investment
other than federal funds or United States Government securities or United States
Government agency securities, in each case with a term of one (1) year or less.
(r) Loans. Make, renew or otherwise modify any loan, loan commitment,
letter of credit or other extension of credit (collectively, "Loans") other than
in the ordinary course of business consistent with past practice, provided that
any commercial business loan, multi-family residential loan, or commercial real
estate loan that is originated, renewed or modified cannot have a principal
balance in excess of $200,000 without Parent's written consent.
(s) Investments in Real Estate. Make any investment or commitment to
invest in real estate or in any real estate development project (other than by
way of foreclosure or acquisitions in a bona fide fiduciary capacity or in
satisfaction of a debt previously contracted in good faith, in each case in the
ordinary course of business consistent with past practice).
(t) Adverse Actions. (i) Take any action that would, or is reasonably
likely to, prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code or (ii) take any action that is
intended or is reasonably likely to result in (x) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time at or prior to the Effective Date.
A-2
104Time, (y) any of the conditions
to the Merger set forth in Article VII not being satisfied or (z) a material
violation of any provision of this Agreement except as may be required by
applicable law or regulation.
(u) Commitments. Enter into any contract with respect to, or otherwise
agree or commit to do, any of the foregoing.
4.02 Forbearances of Parent. From the date hereof until the Effective
Time, except as expressly contemplated or permitted by this Agreement, without
the prior written consent of CommonWealth Bank, Parent will not, and will cause
each of its Subsidiaries not to:
(a) Adverse Actions. Take any action that would, or is reasonably likely
to, prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code or (ii) take any action that is intended
or is reasonably likely to result in (x) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect at any time at or prior to the Effective Time, (y) any of the conditions
to the Merger set forth in Article VII not being satisfied or (z) a material
violation of any provision of this Agreement, except as may be required by
applicable law or regulation.
(b) Commitments. Enter into any contract with respect to, or otherwise
agree or commit to do, any of the foregoing.
ARTICLE IIIV
REPRESENTATIONS AND WARRANTIES
3.15.01 Disclosure Schedules. On or prior to the date hereof, Parent has
delivered to CommonWealth Bank a schedule and CommonWealth Bank has delivered to
Parent a schedule (respectively, its "Disclosure Schedule") setting forth, among
other things, items the disclosure of which is necessary or appropriate either
in response to an express disclosure requirement contained in a provision hereof
or as an exception to one or more representations or warranties contained in
Section 5.03 or 5.04 or to one or more of its covenants contained in Article IV;
provided, however, that (a) no such item is required to be set forth in a
Disclosure Schedule as an exception to a representation or warranty if its
absence would not be reasonably likely to result in the related representation
or warranty being deemed untrue or incorrect under the standard established by
Section 5.02 and (b) the mere inclusion of an item in a Disclosure Schedule as
an exception to a representation or warranty shall not be deemed an admission by
a party that such item represents a material exception or fact, event or
circumstance or that, absent such inclusion in the Disclosure Schedule, such
item is or would be reasonably likely to result in a Material Adverse Effect.
Annex I-14
5.02 Standard. No representation or warranty of CommonWealth Bank on the
one hand or Parent and First Community Bank on the other hand contained in
Sections 5.03 or 5.04, respectively, shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 or 5.04, has had or is reasonably likely to have a
Material Adverse Effect on the party making such representation or warranty.
5.03 Representations and Warranties of Citizens. CitizensCommonWealth Bank. Subject to
Sections 5.01 and 5.02, CommonWealth Bank hereby represents and warrants to
FCB and Bancshares as follows:Parent:
(a) Organization, Standing and Power. CitizensAuthority. CommonWealth Bank is a corporation duly
organized, validly existing and in good standing as a Virginia-chartered bank
under the laws of West
Virginiathe Commonwealth of Virginia. CommonWealth Bank is duly
qualified to do business and is in good standing in each jurisdiction where its
ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified. CommonWealth Bank has in effect all requisite powerfederal,
state, local and authorityforeign governmental authorizations necessary for it to own or
lease and
operate its properties and assets and to carry on its business as now being conducted
and, subject to the approvalconducted.
The deposit accounts of the Plan of Merger by the shareholders of
Citizens as contemplated by Section 4.2, to perform this Agreement to
effect the transactions contemplated hereby. Citizens has delivered to FCB
complete and correct copies of (A) the Articles of Incorporation of
Citizens and all amendments thereto to the date hereof; and (B) the Bylaws
of Citizens as amended to the date hereof, which are attached hereto as
Schedule A and Schedule B, respectively. Citizens' depositsCommonWealth Bank are insured by the Bank Insurance Fund
ofin the Federal Deposit Insurance Corporationmanner and to the maximum extent permittedprovided by law.applicable law, and
CommonWealth Bank has paid all deposit insurance premiums and assessments
required by applicable laws and regulations.
(b) CommonWealth Bank Capital Structure.Stock. The authorized capital stock of
CitizensCommonWealth Bank consists solely of 499,9993,000,000 shares of common stock, par value $10.00 per share,CommonWealth Bank
Common Stock, of which 250,000720,049 shares are issued and outstanding.outstanding as of the date
hereof. As of the Effective Timedate hereof, no shares of the Merger, the issued andCommonWealth Bank Common Stock were
held in treasury by CommonWealth Bank or otherwise directly or indirectly owned
by CommonWealth Bank. The outstanding shares of CitizensCommonWealth Bank Common Stock
will behave been duly authorized and validly issued and are fully paid and
nonassessable, except as provided in
W. Va. Code sec. 31A-4-12. Except as disclosed on Schedule G, Citizens
knows of no person who beneficially owns 5% or morenon-assessable, and none of the outstanding Citizensshares of CommonWealth Bank Common
Stock.Stock have been issued in violation of the preemptive rights of any Person.
Section 5.03(b) of CommonWealth Bank's Disclosure Schedule sets forth for each
CommonWealth Bank Stock Option, the name of the grantee, the date of the grant,
the type of grant, the status of the option grant as qualified or non-qualified
under Section 422 of the Code, the number of shares of CommonWealth Bank Common
Stock subject to each option, the number of shares of CommonWealth Bank Common
Stock subject to options that are currently exercisable and the exercise price
per share. Except as set forth in the preceding sentence, there are no shares of
CommonWealth Bank Common Stock reserved for issuance, CommonWealth Bank does not
have any Rights issued or outstanding with respect to CommonWealth Bank Common
Stock and CommonWealth Bank does not have any commitment to authorize, issue or
sell any CommonWealth Bank Common Stock or Rights.
(c) No Subsidiaries.
(i) CommonWealth Bank does not own beneficially, directly or
indirectly, any Subsidiary.
(ii) Except for securities and other interests held in a fiduciary
capacity and beneficially owned by third parties or taken in
consideration of debts previously contracted, CommonWealth Bank does not
own beneficially, directly or indirectly, any equity securities or
similar interests of any Person or any interest in a partnership or
joint venture of any kind.
(d) Corporate Power. CommonWealth Bank has the corporate power and
authority to carry on its business as it is now being conducted and to own all
its properties and assets; and CommonWealth Bank has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the Transaction, subject to receipt of all necessary approvals
of Governmental Authorities and the approval of CommonWealth Bank's stockholders
of this Agreement.
(e) Corporate Authority. Subject to the approval of the Plan of Mergerthis Agreement by the
shareholdersholders of Citizens as contemplated by Section 4.2 hereof, the execution and delivery ofoutstanding CommonWealth Bank Common Stock, this Agreement and
the consummation of the
transactions contemplated hereby and by the Plan of MergerTransaction have been duly
and validly authorized by all necessary corporate action of
CommonWealth Bank and the CommonWealth Bank Board on or prior to the part of Citizens,date
hereof. CommonWealth Bank has duly executed and delivered this Agreement and,
assuming due authorization, execution and delivery by Parent and First Community
Bank, this Agreement is a valid and legally binding
Annex I-15
obligation of Citizens,CommonWealth Bank, enforceable in accordance with its terms. Theterms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any Governmental Authority or with any third party
are required to be made or obtained by CommonWealth Bank in connection
with the execution, and delivery or performance by CommonWealth Bank of this
Agreement or to consummate the Transaction, except as Previously
Disclosed and except for (A) filings of applications or notices with,
and approvals or waivers by, the Federal Reserve Board, the OCC and the
Bureau, as required, (B) filings with the SEC and state securities
authorities, as applicable, in connection with the submission of this
Agreement for the approval of the holders of CommonWealth Bank Common
Stock and the issuance of Parent Common Stock in the Merger, (C) the
filing of Articles of Merger with the Virginia State Corporation
Commission pursuant to the VSCA and the filing of a Notice of
Consummation with the OCC pursuant to OCC guidelines and (D) the
approval of this Agreement by the holders of the outstanding shares of
CommonWealth Bank Common Stock. As of the date hereof, CommonWealth Bank
is not aware of any reason why the approvals set forth above and
referred to in Section 7.01(b) will not be received in a timely manner
and without the imposition of a condition, restriction or requirement of
the type described in Section 7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and the
expiration of related waiting periods, the execution, delivery and
performance of this Agreement by CommonWealth Bank and the consummation
of the transactions contemplated herebyTransaction do not and by the Plan of
Merger and compliance by Citizens with any of the provisions hereof will not except as noted on Schedule D, (i) conflict with or result in(A) constitute a breach of any provision of its respective Articles of Incorporation or
Bylawsviolation of, or a default (orunder, or give rise to any Lien, any
acceleration of remedies or any right of termination cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, debenture, mortgage, indenture, license, material agreement or other
material instrument or obligation to which Citizens is a party, by which
any of its properties or assets may be bound (except for such conflict,
breach or default, as to which requisite waivers or consent shall have been
obtained by Citizens prior to the Effective Time of the Merger or the
obtaining of which shall have been waived by FCB); or (ii) violate any
order, writ, injunction, decree, statute,law,
rule or regulation applicableor any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of CommonWealth Bank
or to Citizenswhich CommonWealth Bank or any of its properties is subject or
assets. Nobound, (B) constitute a breach or violation of, or a default under, the
CommonWealth Bank Articles or the CommonWealth Bank Bylaws or (C)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument.
(g) Financial Reports; Undisclosed Liabilities.
(i) CommonWealth Bank's Annual Reports on Form 10-KSB for the fiscal
years ended December 31, 2001, December 31, 2000 and December 31, 1999
and all other reports, registration statements, definitive proxy
statements or information statements filed or to be filed by any
governmental authority, other than complianceit
subsequent to December 31, 1999 with applicable federal and
state corporate, securities and banking laws, and regulationsthe Federal Reserve Board
(collectively, CommonWealth Bank's "Securities Documents"), as of the
Board
of Governorsdate filed or to be filed and as amended prior to the date hereof, (A)
complied or will comply in all material respects as to form with the
applicable regulations of the Federal Reserve System (the "Federal Reserve Board")Board as the case may be
and the West Virginia Division(B) did not and will not contain any untrue statement of Banking, isa material
fact or omit to state a material fact required to be obtained by
Citizensstated therein or
necessary to make the statements therein, in connectionthe light of the
circumstances under which they were made, not misleading, except that
information as of a later date shall be deemed to modify information as
of an earlier date; and each of the balance sheets contained in any such
Securities Documents (including the related notes and schedules thereto)
fairly presents, or will fairly present, the financial position of
CommonWealth Bank as of its date, and each of the statements of income
and changes in stockholders' equity and cash flows or equivalent
statements in such Securities Documents (including any related notes and
schedules thereto) fairly presents, or will fairly present, the results
of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of CommonWealth Bank for the periods to which
they relate, in each case in accordance with GAAP consistently applied
during the executionperiods involved, except in each case as may be noted
therein.
Annex I-16
(ii) Except as Previously Disclosed, since September 30, 2002,
CommonWealth Bank has not incurred any liability other than in the
ordinary course of business consistent with past practice (excluding the
incurrence of expenses related to this Agreement and delivery by Citizensthe Transaction).
(iii) Since September 30, 2002, (A) CommonWealth Bank has conducted
its businesses in the ordinary and usual course consistent with past
practice (excluding the incurrence of expenses related to this Agreement
and the Transaction), (B) except as Previously Disclosed, CommonWealth
Bank has not taken nor permitted any of the actions set forth in Section
4.01 hereof between September 30, 2002 and the date hereof (except with
respect to Sections 4.01(r) and (u), where the relevant period is
between November 30, 2002 and the date hereof) and (C) no event has
occurred or circumstance arisen that, individually or taken together
with all other facts, circumstances and events (described in any
paragraph of this AgreementSection 5.03 or otherwise), is reasonably likely to
have a Material Adverse Effect with respect to CommonWealth Bank.
(iv) No agreement pursuant to which any loans or other assets have
been or shall be sold by CommonWealth Bank entitled the buyer of such
loans or other assets, unless there is material breach of a
representation or covenant by CommonWealth Bank, to cause CommonWealth
Bank to repurchase such loan or other asset or the consummation by Citizensbuyer to pursue any
other form of the transactions contemplated
herebyrecourse against CommonWealth Bank. Since December 31,
1999, no cash, stock or by the Plan of Merger.
A-3
105
(d) Investments. All securities owned by Citizens of record and
beneficially are free and clear of all mortgages, liens, pledges,
encumbrancesother dividend or any other restriction, whether contractual or statutory,
which would materially impair the ability of Citizens freely to dispose of
any such security at any time, except as noted on Schedule C. Any
securities owned of record by Citizens in an amount equal to 5% or more of
the issued and outstanding voting securities of the issuer thereof have
been noted on Schedule C. To the knowledge of Citizens, there are no voting
trusts or other agreements or undertakingsdistribution with
respect to the votingCommonWealth Bank Common Stock has been declared, set
aside or paid. No shares of CommonWealth Bank Common Stock have been
purchased, redeemed or otherwise acquired, directly or indirectly, by
CommonWealth Bank since September 30, 2002, and no agreements have been
made to do the foregoing.
(h) Litigation. No litigation, claim or other proceeding before any court
or governmental agency is pending against CommonWealth Bank and, to CommonWealth
Bank's knowledge, no such securities. Withlitigation, claim or other proceeding has been
threatened and there are no facts which could reasonably give rise to such
litigation, claim or other proceeding. CommonWealth Bank is not a party to any
order, judgment or decree which has or could reasonably be expected to have a
Material Adverse Effect with respect to all repurchase agreements to which
CitizensCommonWealth Bank.
(i) Regulatory Matters.
(i) Neither CommonWealth Bank nor any of its properties is a party Citizens hasto
or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a valid, perfected first liencommitment letter or
security
interestsimilar submission to, or extraordinary supervisory letter from, any
federal or state governmental agency or authority charged with the
supervision or regulation of financial institutions or issuers of
securities or engaged in the government securitiesinsurance of deposits or other collateral securing the repurchase agreement, andsupervision or
regulation of it (collectively, the value of the collateral securing each such
repurchase agreement equaled"CommonWealth Bank Regulatory
Authorities"). CommonWealth Bank has paid all assessments made or exceeded the amount of the debt secured by
such collateral under such agreement as of the date of this Agreement,
except as noted on Schedule C.
(e) Financial Statements. Schedule E contains copies of the following
financial statements of Citizens (the "Citizens Financial Statements"):
(i) balance sheets of Citizens as of December 31, 1999 and 1998 and
as of March 31, 2000.
(ii) statements of income of Citizens for each of the three years
ended December 31, 1999, 1998, and 1997 and the three month periods
ended March 31, 2000 and 1999; and
(iii) statements of changes in stockholders' equity of Citizens for
each of the three years ended December 31, 1999, 1998 and 1997 and the
three-month periods ended March 31, 2000 and 1999.
Such financial statements and the notes thereto (except for interim
statements) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated. Each
of such statements of financial condition, together with the notes thereto,
presents fairly as of its date, the financial condition and assets and
liabilities of Citizens. Such statements of operations and statements of
stockholders' equity, together with the notes thereto, present fairly the
results of operations of Citizens for the periods indicated.
Subject to the limitations
imposed by federal and state laws, and except as
disclosed in the Citizens Financial Statements, there are no restrictions
precluding Citizens from paying dividends when, as, and if declaredany CommonWealth Bank Regulatory Authority.
(ii) CommonWealth Bank has not been advised by, their
Boardnor does it have any
knowledge of Directors.
(f) Absence of Undisclosed Liabilities. At December 31, 1999 and March
31, 2000, Citizens had no obligations or liabilities (contingent or
otherwise) of any naturefacts which were not reflected in the Citizens Financial
Statements as of such date, or disclosed in the notes thereto, except for
those which in the aggregate are immaterial or disclosed in Schedules
specifically referredcould give rise to herein.
(g) Tax Matters. Citizens has filed or caused to be filed or (in the
case of returns or reports not yet due) will file all tax returns and
reports required to have been filed by or for it before the Effective Time
of the Merger, and all information set forth in such returns or reports is
or (in the case of such returns or reports not yet due) will be accurate
and complete in all material respects. Citizens has paid or made adequate
provision in all material respects for or (with respect to returns or
reports not yet filed) before the Effective Time of the Merger will pay or
make adequate provision for all
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106
taxes, additions to tax, penalties, and interest for all periods covered by
those returns or reports. Except as disclosed on Schedule F, there are, and
at the Effective Time of the Merger will be, no unpaid taxes, additions to
tax, penalties, or interest due and payable by Citizens oran advisory notice by, any
other
personCommonWealth Bank Regulatory Authority that aresuch CommonWealth Bank
Regulatory Authority is contemplating issuing or could become a lien onrequesting (or is
considering the appropriateness of issuing or requesting) any assetsuch
order, decree, agreement, memorandum of understanding, commitment
letter, supervisory letter or otherwise materially
adversely affect the business, property or financial condition of Citizens.
Citizens has collected or withheld, or will collect or withhold before the
Effective Time of the Merger, all amounts required to be collected or
withheld by it for any taxes, and all such amounts have been, or before the
Effective Time of the Merger will have been, paid to the appropriate
governmental agencies or set aside in appropriate accounts for future
payment when due. Citizenssimilar submission.
(j) Compliance With Laws. CommonWealth Bank:
(i) is in material compliance with and its records
contain all applicable information and documents (including, without
limitation, properly completed IRS Forms W-9) necessary to comply in all
material respects with all information reporting and tax withholding
requirements under federal, state,
local and localforeign statutes, laws, regulations, ordinances, rules,
and regulations,
and such records identify with specificity all accounts subject to backup
withholding under Section 3406 of the Code. The balance sheets contained in
Citizens Financial Statements fully and properly reflect, as of the dates
thereof, the aggregate liabilities of Citizens for all accrued taxes,
additions to tax, penalties and interest in all material respects. For
periods ending after March 31, 2000, the books and records of Citizens
fully and properly reflect its liability for all accrued taxes, additions
to tax, penalties and interest. Except as disclosed in Schedule F, Citizens
has not granted (nor is it subject to) any waiver of the period of
limitations for the assessment of tax for any currently open taxable
period, no tax returnjudgments, orders or report of Citizens is under examination by any
taxing authority or the subject of any administrative or judicial
proceeding, and no unpaid tax deficiency has been asserted against or with
respect to it by any taxing authority. Citizens has not made or entered
into, or holds any asset subject to, a consent filed pursuant to former
Section 341(f) of the Code and the regulations thereunder or a "safe harbor
lease" subject to former Section 168(f)(8) of the Code and the regulations
thereunder. Schedule F describes all tax elections, consents and agreements
affecting Citizens. To the knowledge of Citizens, no Citizens shareholder
is a "foreign person" for purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There are no outstanding
unexercised options, warrants, calls, commitments or agreements of any
character to which Citizens is a party or by which is bound, calling for
the issuance of securities of Citizens or any security representing the
right to purchase or otherwise receive any such security.
(i) Property; Leases. Citizens owns (or enjoys use of under capital
leases) all property reflected on the Citizens' Financial Statements as of
March 31, 2000 (except personal property sold or otherwise disposed of in
the ordinary course of business). All property shown as being owned is
owned free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever. Liens for current taxes not yet due
and payable, any unfiled mechanics' liens and such encumbrances and
imperfections of title, if any, are not substantial in character or amount
nor will otherwise materially impair business operations.
Any leases relating to leased property are valid and subsisting and there
does not exist with respect to Citizens' obligations thereunder any material
default or event or condition which, after notice or lapse of time or both,
would constitute a material default thereunder. There is no condemnation
proceeding pendingdecrees applicable thereto or to the knowledgeemployees
conducting such businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act, the Home Mortgage Disclosure Act, the Bank Secrecy Act and all
other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals
of, Citizens, threatened which would
precludeand has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit it
Annex I-17
to own or impair the use of any propertylease its properties and to conduct its business as presently
being used in the
conductconducted; all such permits, licenses, certificates of the business of Citizens. All leasesauthority, orders
and approvals are reflected in Schedule J.
A-5
107
All property and assets material to the business or operations of Citizens
are in an operating condition and state of repair that is fit for their current
intended purpose and such property and assets are adequate for the business and
operations of Citizens as currently conducted.
No notice of violation of zoning laws, building or fire codes or other
statutes, ordinances or regulations relating to the operations of Citizens has
been received by Citizens.
(j) Additional Schedules Furnished to FCB. In addition to any
Schedules furnished to FCB pursuant to other provisions of this Agreement,
Citizens has previously furnished to FCB the following Schedules which are
correct and complete as of the date hereof:
(i) Employees. Schedule G lists (A) name of, current annual salary
rates for, and the number of shares of Citizens Common Stock owned
beneficially by, all present employees of Citizens; and (B) the number
of shares of Citizens Common Stock owned beneficially by each director
of Citizens.
(ii) Certain Contracts. Schedule H lists all notes, bonds,
mortgages, indentures, licenses, lease agreements and other contracts
and obligations to which Citizens is a party, except for those entered
into by Citizens in the ordinary course of their respective businesses
consistent with their prior practices and that do not involve an amount
greater than $10,000.
(iii) Employment Contracts and Related Matters. Except in all cases
as set forth in Schedule I, Citizens is not a party to (A) any
employment contract not terminable at the option of Citizens without
liability; (B) any retirement, stock option, profit sharing or pension
plan or thrift plan or agreement or employee benefit plan (as defined in
Section 3 of the Employee Retirement Income Security Act of 1974); (c)
any management or consulting agreement not terminable at the option of
Citizens without liability; or (D) any union or labor agreement.
(iv) Real Estate. Schedule J describes all interests in real
property owned, leased or otherwise claimed by Citizens, including
"other real estate owned."
(k) Agreements in Force and Effect. All material contracts,
agreements, plans, leases, policies and licenses referred to in any
Schedule of Citizens referred to herein are valid and in full force and effect and, Citizens has not breached any material provision of, nor is in
default in any material respect under the termsto CommonWealth Bank's
knowledge, no suspension or cancellation of any of them is threatened;
and
(iii) has received, since December 31, 1999, no notification or
communication from any Governmental Authority (A) asserting that
CommonWealth Bank is not in compliance with any of the statutes,
regulations or ordinances which such contract,
agreement, lease, policyGovernmental Authority enforces or
license.
(l) Legal Proceedings; Compliance with Laws. Except as set forth in
Schedule L, there is no legal, administrative, arbitration or other
proceeding(B) threatening to revoke any license, franchise, permit or governmental
investigation pending (includingauthorization (nor, to CommonWealth Bank's knowledge, do any legal,
administrative, arbitration or other proceeding or governmental
investigation pending involving a violation of federal antitrust laws), or,
to the knowledge of Citizens' management, threatened or probable of
assertion, which might result in money damages payable by Citizens in
excess of insurance coverage, which might result in a permanent injunction
against Citizens, which might result in a change in the zoning or building
ordinances materially affecting the property or leasehold interests of
Citizens, or which otherwise, either individually or in the aggregate, is
likely to have a material adverse affect on the financial condition of
Citizens. Except as set forth in Schedule L, Citizens has complied in all
material respects withgrounds for
any laws, ordinances, requirements, regulations or
orders applicable to its respective business (including environmental laws,
ordinances, requirements, regulations
A-6
108
or orders). Citizens has all licenses, permits, orders or approvals of any
federal, state, local or foreign governmental or regulatory body
(collectively, "Permits") that are material to or necessary for the conduct of the business of Citizens; the Permits are in full force and effect; no
violations areforegoing exist).
(k) Material Contracts; Defaults.
(i) Except for documents listed as exhibits to CommonWealth Bank's
Securities Documents or have been recorded in respect of any Permits, nor has
Citizens received notice of any such violation; and no proceeding is
pending or, to the knowledge of Citizens, threatened or probable of
assertion to revise, revoke or limit any Permit. Except as set forth in
Schedule L, CitizensPreviously Disclosed, CommonWealth Bank is
not a party to, bound by or subject to any currently effective agreementsagreement, contract,
arrangement, commitment or understanding (whether written understandings with the Federal Reserve Board, the FDIC, the
Division or any other regulatory authority, except for a Memorandum of
Understanding issued by the FDIC dated March 1, 2000. Citizens and its
directors represent and certify in Schedule L that such Memorandum of
Understanding will be of no forceoral) (i)
with respect to Bancsharesthe employment of any directors, officers, employees or
FCB
followingconsultants, (ii) which would entitle any present or former director,
officer, employee or agent of CommonWealth Bank to indemnification from
CommonWealth Bank, (iii) which is a material contract (as defined in
Item 601(b)(10) of Regulation S-K of the mergerSEC) to be performed after the
date of this Agreement that has not been filed or incorporated by
reference in accordance with correspondence between
representativesCommonWealth Bank's Securities Documents, (iv) which is a
consulting agreement (including data processing, software programming
and licensing contracts) not terminable on 60 days or less notice and
involving the payment of Citizensmore than $50,000 per annum or (v) which
materially restricts the conduct of any business by CommonWealth Bank
(collectively, "Material Contracts"). CommonWealth Bank has Previously
Disclosed and the FDIC. Citizensmade available to Parent true and correct copies of each
such document.
(ii) CommonWealth Bank is not subjectin material default under any contract,
agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its assets, business, or
operations may be bound or affected, or under which it or its assets,
business, or operations receives benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both,
would constitute such a default. No power of attorney or similar
authorization given directly or indirectly by CommonWealth Bank is
currently outstanding.
(l) No Brokers. No action has been taken by CommonWealth Bank that would
give rise to any judgment, order, writ, injunctionvalid claim against any party hereto for a brokerage
commission, finder's fee or decree which materially adversely
affects, or might reasonablyother like payment with respect to the Transaction,
excluding a Previously Disclosed fee to be expectedpaid to materially adversely affect,
the condition (financial or otherwise) or business of Citizens or the
ability to fulfill the respective obligations pursuant to this Agreement.Baxter, Fentriss & Co.
(m) Employee Benefit Plans.
(i) Schedule I includes a correctAll benefit and complete list of, and FCB has
been furnished a true and correct copy of, (A) all qualified pension and
profit-sharingcompensation plans, all deferred compensation, consultant, severance,
thrift, option, bonus and group insurance contracts, and all other
incentive, welfare and employee benefit plans, trust, annuitypolicies or
other
funding agreements, and all other agreements that are presently in
effect, or have been approved prior to the date hereof, for the benefit
of employeesarrangements covering current or former employees of Citizens,CommonWealth Bank
(the "Employees") and current or former directors of CommonWealth Bank
including, but not limited to, "employee benefit plans" within the
dependents or
beneficiariesmeaning of Section 3(3) of ERISA, and deferred compensation, stock
option, stock purchase, stock appreciation rights, stock based,
incentive and bonus plans (the "Benefit Plans"), are Previously
Disclosed in the Disclosure Schedule. True and complete copies of (A)
all Benefit Plans including, but not limited to, any trust instruments
and insurance contracts forming a part of any employee or former employee of Citizens, whether or
not subject to ERISA (the "Employee Plans");Benefit Plans and all
amendments thereto; (B) the most recent actuarialannual report (Form 5500),
together with all schedules, as required, filed with the Internal
Revenue Service ("IRS") or Department of Labor (the "DOL"), as
applicable, and any financial reports prepared orstatements and opinions required to be preparedby
Section 103(e)(3) of ERISA with respect to any Employeeeach Benefit Plan; and (C) for
each Benefit Plan which is a "top-hat" plan, a copy of filings with the
DOL; (D) the most recent annual reports
filed with any governmental agency, the most recent favorable determination letter issued by the Internal Revenue Service,IRS for each
Benefit Plan; (E) the most recent summary plan description and any
open requestsmodifications for rulingseach Benefit Plan; (F) the most recent actuarial
report, if any relating to each Benefit Plan, and (G) the most recent
actuarial valuation, study or determination letters, that pertainestimate of any retiree medical and life
insurance benefits plan or supplemental retirement benefits plan, have
been provided or made available to anyParent.
Annex I-18
(ii) Each Benefit Plan has been administered to date in all material
respects in accordance with the applicable provisions of ERISA, the Code
and applicable law and with the terms and provisions of all documents,
contracts or agreements pursuant to which such qualified Employee Plan. Schedule I identifies each EmployeeBenefit Plan thatis
maintained. Each Benefit Plan which is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and
which is intended to be qualified under Section 401(a) of the Code. With
respect to each Employee Plan so identified and except as set forth in
Schedule I, the IRSCode, has
issuedreceived a favorable determination lettersletter from the Internal Revenue
Service, and CommonWealth Bank is not aware of any circumstances likely
to result in revocation of any such plans tofavorable determination letter or
the effect thatloss of the formsqualification of such plans (or predecessor plans)
satisfy the requirements of Code Section 401(a) and for all years
subsequent to the establishment of the plans and up to the Effective
Time of the Merger, and with respect to which Citizens' tax returns and
the plans' returns on Form 5500 are open to audit, to Citizens'
knowledge the plans have satisfied, in form and operation, the
qualification requirements ofPension Plan under Section 401(a)
of the Code. CommonWealth Bank has not received any correspondence or
written or verbal notice from the IRS, DOL, any other governmental
agency, any participant in or beneficiary of, a Benefit Plan, or any
agent representing any of the foregoing that brings into question the
qualification of any such Benefit Plan. There is no material pending or,
to CommonWealth Bank's knowledge, threatened litigation relating to the
Benefit Plans. CommonWealth Bank has not engaged in a transaction with
respect to any Benefit Plan or Pension Plan that, assuming the taxable
period of such transaction expired as of the date hereof, could subject
CommonWealth Bank to a tax or penalty imposed by either Section 4975 of
the Code or Section 502(i) of ERISA in an amount which would be
material. There are no matters pending before the IRS, DOL or other
governmental agency with respect to any Benefit Plan.
(iii) No liability under Subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by CommonWealth Bank with respect to
any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by it or the single-employer plan of any entity which is
considered one employer with CommonWealth Bank under Section 4001 of
ERISA or Section 414 of the Code (an "ERISA Affiliate"). CommonWealth
Bank has not incurred, and does not expect to incur, any withdrawal
liability with respect to a multiemployer plan under Subtitle E of Title
IV of ERISA (regardless of whether based on contributions of an ERISA
Affiliate). No notice of a "reportable event," within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan or by
any ERISA Affiliate within the 12-month period ending on the date hereof
or will be required to be filed in connection with the Transaction.
(iv) All contributions required to be made under the terms of any
Benefit Plan have been timely made or have been reflected on the
financial statements of CommonWealth Bank included in CommonWealth
Bank's Securities Documents. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA and no actionERISA Affiliate has an
outstanding funding waiver. CommonWealth Bank has not provided, and is
not required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
(v) CommonWealth Bank has no obligations for retiree health and life
benefits under any Benefit Plan, other than coverage as may be required
under Section 4980B of the Code or Part 6 of Title I of ERISA, or under
the continuation of coverage provisions of the laws of any state or
locality. CommonWealth Bank may amend or terminate any such Benefit Plan
at any time without incurring any liability thereunder. No event or
condition exists with respect to a Benefit Plan that could subject
CommonWealth Bank to a material tax under Section 4980B of the Code.
(vi) None of the execution of this Agreement, shareholder approval of
this Agreement or consummation of the Transaction will (A) except as
Previously Disclosed, entitle any employees of CommonWealth Bank to
severance pay or any increase in severance pay upon any termination of
employment after the date hereof, (B) accelerate the time of payment or
vesting or trigger any payment or funding (through a grantor trust or
otherwise) of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Benefit Plans, (C) result in any breach or violation of, or a default
under, any of the Benefit Plans or (D) result in any payment that would
be a "parachute payment" to a "disqualified individual" as those terms
are defined in
Annex I-19
Section 280G of the Code, without regard to whether such payment is
reasonable compensation for personal services performed or to be
performed in the future.
(vii) All required reports and descriptions (including but not
limited to Form 5500 annual reports and required attachments, Forms
1099-R, summary annual reports, Forms PBGC-1 and summary plan
descriptions) have been filed or distributed appropriately with respect
to each Benefit Plan. All required tax filings with respect to each
Benefit Plan have been made, and any taxes due in connection with such
filings have been paid.
(n) Labor Matters. CommonWealth Bank is not a party to and is not bound by
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is CommonWealth Bank
the subject of a proceeding asserting that it has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel CommonWealth Bank to bargain with any labor organization as to wages or
conditions of employment, nor is there any strike or other labor dispute
involving it pending or, to CommonWealth Bank's knowledge, threatened, nor is
CommonWealth Bank aware of any activity involving its employees seeking to
certify a collective bargaining unit or engaging in other organizational
activity.
(o) Environmental Matters.
(i) CommonWealth Bank is in compliance with applicable Environmental
Laws; (ii) to CommonWealth Bank's knowledge, no real property (including
buildings or other structures) currently or formerly owned or operated
by CommonWealth Bank, or any property in which CommonWealth Bank has
held a security interest, Lien or a fiduciary or management role
("CommonWealth Bank Loan Property"), has been takencontaminated with, or has
had any release of, any Hazardous Substance except in compliance with
Environmental Laws; (iii) CommonWealth Bank could not takenbe deemed the
owner or operator of, nor has it participated in the management
regarding Hazardous Substances of, any CommonWealth Bank Loan Property
which has been contaminated with, or has had any release of, any
Hazardous Substance except in compliance with Environmental Laws; (iv)
CommonWealth Bank has no liability for any Hazardous Substance disposal
or contamination on any third party property; (v) CommonWealth Bank has
not received any notice, demand letter, claim or request for information
alleging any violation of, or liability under, any Environmental Law;
(vi) CommonWealth Bank is not subject to any order, decree, injunction
or other agreement with any Governmental Authority or any third party
relating to any Environmental Law; (vii) to CommonWealth Bank's
knowledge, there are no circumstances or conditions (including the
presence of asbestos, underground storage tanks, lead products,
polychlorinated biphenyls, prior manufacturing operations, dry-cleaning,
or automotive services) involving CommonWealth Bank, any currently or
formerly owned or operated property, or any CommonWealth Bank Loan
Property, that could reasonably be expected to result in any claims,
liability or investigations against CommonWealth Bank, result in any
restrictions on the ownership, use, or transfer of any property pursuant
to any Environmental Law, or adversely affect the value of any
CommonWealth Bank Loan Property; and (viii) CommonWealth Bank has
Previously Disclosed and made available to Parent copies of all
environmental reports or studies, sampling data, correspondence and
filings in its possession or reasonably available to it relating to
CommonWealth Bank and any currently or formerly owned or operated
property.
As used herein, the term "Environmental Laws" means any federal,
state or local law, regulation, order, decree, permit, authorization,
opinion or agency requirement relating to: (A) the protection or
restoration of the environment, health, safety, or natural resources,
(B) the handling, use, presence, disposal, release or threatened release
of any Hazardous Substance or (C) wetlands, indoor air, pollution,
contamination or any injury or threat of injury to persons or property
in connection with any Hazardous Substance; and the term "Hazardous
Substance" means any substance that is: (A) listed, classified or
regulated pursuant to any Environmental Law, (B) any petroleum product
or by-product, asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or radon or
(C) any other substance which is the subject of regulatory action by any
Governmental Authority in connection with any Environmental Law.
Annex I-20
(p) Tax Matters.
(i) (A) All Tax Returns that are required to be filed on or before
the Effective Date (taking into account any extensions of time within
which to file which have not expired) by or with respect to the
plans subsequentCommonWealth Bank Group have been or will be timely filed on or before
the Effective Date, (B) all such Tax Returns are or will be true and
complete in all material respects, (C) all Taxes shown to such date has had or is reasonably expected to have any adverse impactbe due on the
continued qualification ofTax Returns referred to in clause (A) have been or will be timely paid
in full, (D) the plans through the Effective Time
of the Merger. The IRS has not revoked any letter of determination or
opinion letterTax Returns referred to which reference is made above, nor has the IRS
threatened any such revocation.
(ii) Neither Citizens nor any employee pension benefit plan (as
defined in Section 3(2) of ERISA Ia "Pension Plan"J) maintained or
previously maintainedclause (A) have been
examined by it, has incurred any material liability to the
Pension Benefit Guaranty
A-7
109
Corporation ("PBGC") or to the Internal Revenue Service or the appropriate Tax
authority or the period for assessment of the Taxes in respect of which
such Tax Returns were required to be filed has expired, (E) all
deficiencies asserted or assessments made as a result of examinations
conducted by any taxing authority have been paid in full, (F) no
material issues that have been raised by the relevant taxing authority
in connection with the examination of any of the Tax Returns referred to
in clause (A) are currently pending and (G) no member of the
CommonWealth Bank Group has waived any statutes of limitation with
respect to any Pension Plan. There is not currently pending withTaxes of CommonWealth Bank.
(ii) CommonWealth Bank has made available to Parent true and correct
copies of the PBGC any
filingUnited States federal income Tax Returns filed by
CommonWealth Bank for each of the three most recent fiscal years for
which such returns have been filed.
(iii) CommonWealth Bank has no liability with respect to income,
franchise or similar Taxes that accrued on or before the end of the most
recent period covered by CommonWealth Bank's Securities Documents filed
prior to the date hereof in excess of the amounts accrued or subject to
a reserve with respect thereto that are reflected in the financial
statements included in CommonWealth Bank's Securities Documents filed on
or prior to the date hereof.
(iv) CommonWealth Bank is not a party to any reportable eventTax allocation or
sharing agreement, is not nor has it been a member of an affiliated
group filing consolidated or combined Tax Returns (other than a group
the common parent of which is or was CommonWealth Bank) and does not
otherwise has any liability for the Taxes of any Person (other than
CommonWealth Bank).
(v) No closing agreements, private letter rulings, technical advice
memoranda or similar agreements or rulings have been entered into or
issued by any taxing authority with respect to CommonWealth Bank.
(vi) CommonWealth Bank does not maintain any compensation plans,
programs or arrangements the payments under which would not reasonably
be expected to be deductible as a result of the limitations under
Section 4043162(m) of ERISA
northe Code and the regulations issued thereunder.
(vii) As of the date hereof, CommonWealth Bank has no reason to
believe that any reportable event occurredconditions exist that might prevent or impede the
Merger from qualifying as to which a filingreorganization within the meaning of Section
368(a) of the Code.
(viii) (A) No Tax is required to be withheld pursuant to Section 1445
of the Code as a result of the Transaction and (B) all Taxes that
CommonWealth Bank is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required by
applicable law, have been paid to the proper Governmental Authority or
other Person.
(q) Risk Management Instruments. CommonWealth Bank is not a party and has
not been made.
(iii) Full paymentagreed to enter into an exchange traded or over-the-counter equity, interest
rate, foreign exchange or other swap, forward, future, option, cap, floor or
collar or any other contract that is not included on its balance sheet and is a
derivatives contract (including various combinations thereof) (each, a
"Derivatives Contract") nor does CommonWealth Bank own securities that (i) are
referred to generically as "structured notes," "high risk mortgage derivatives,"
"capped floating rate notes" or "capped floating rate mortgage derivatives" or
(ii) are likely to have changes in value as a result of interest or exchange
rate changes that significantly exceed normal changes in value attributable to
interest or exchange rate changes.
Annex I-21
(r) Loans; Nonperforming and Classified Assets.
(i) Each Loan on the books and records of CommonWealth Bank was made
and has been made (or proper accruals have been
established) of all contributions which are required for periods prior
to the Closing Date under the terms of each Employee Plan. No
accumulated funding deficiency (as defined in Section 302 of ERISA or
Section 412 of the Code) whether or not waived, exists with respect to
any Pension Plan (including any Pension Plan previously maintained by
Citizens). There is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any Pension Plan.
(iv) No Employee Plan is a "multi-employer plan" (as defined in
Section 3(37) of ERISA). Citizens has not participated in or agreed to
participate in, a multi-employer plan (as defined in Section 3(37) of
ERISA).
(v) All Employee Plans that are "employee benefit plans," as
defined in Section 3(3) of ERISA, that are maintained by or were
previously maintained by Citizens comply and have been administered in
complianceserviced in all material respects with ERISA and all other legal
requirements, including the terms of such plans, collective bargaining
agreements and securities laws. Citizens has no material liability under
any such plans that are not reflected in Citizens Financial Statements.
(vi) No prohibited transaction has occurred with respect to any
Employee Plan that is an "employee benefit plan" (as defined in Section
3(3) of ERISA) maintained by Citizens or any "employee benefit plan"
previously maintained by Citizens that would result, directly or
indirectly, in material liability under ERISA or in the imposition of a
material excise tax under Section 4975 of the Code.
(vii) Schedule I identifies each Employee Plan that is an "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA) and which is
funded. The funding under each such plan does not exceed the limitations
under Section 419A(b) or 419A(c) of the Code. Citizens is not subject to
taxation on the income of any such plan or any such plan previously
maintained by Citizens.
(viii) Schedule I identifies the funding (including any individual
accounting) for all post-retirement medical or life insurance benefits
for the employees of Citizens. Schedule I also discloses the funded
status of these Employee Plans.
(n) Insurance. All policies or binders of fire, liability, product
liability, workmen's compensation, vehicular and other insurance held by or
on behalf of Citizens are described on Schedule M and are valid and
enforceable in accordance with
their terms, are in full force and effect,
and insure against risks and liabilities to the extent and in the manner
customary for the industry and are deemed appropriate and sufficient by
Citizens. Citizens is not in default with respect to any provision
contained in any such policy or binder and has not failed to give any
notice or present any claim under any such policy or binder in due and
timely fashion. Citizens has not received notice of cancellation or
non-renewal of any such policy or binder. Citizens has no knowledge of any
inaccuracy in any application for such policies or binders, any failure to
pay premiums when due or any similar state of facts that might form the
basis for termination of any such insurance. Citizens has no knowledge of
any state of facts or of the occurrence of any event that is reasonably
likely to form the basis for any material
A-8
110
claim against it not fully covered (except to the extent of any applicable
deductible) by the policies or binders referred to above. Citizens has not
received notice from any of its respective insurance carriers that any
insurance premiums will be materially increased in the future or that any
such insurance coverage will not be available in the future on
substantially the same terms as now in effect.
(o) Loan Portfolio. Each loan outstanding on the books of Citizens is
reflected correctly in all material respects by the loan documentation, was
madelending standards in the ordinary course of business, was not known to be uncollectible
at the time it was made, and was made in accordance with Citizens' standard
loan policies in effect at the time the loans were made. The records of
Citizens regarding all loans outstanding on its books are accurateis
evidenced in all material respects. The reserves for possible loan losses on the outstanding
loans of Citizensrespects by appropriate and the reserves for other real estate owned by Citizens
as reflected in the Citizens Financial Statements, have been established in
accordance with generally accepted accounting principlessufficient
documentation and, with the
requirements of the Division and the Federal Deposit Insurance Corporation,
and in the best judgment of the management of Citizens, are adequate to
absorb all material known and anticipated loan losses in the loan portfolio
of Citizens, and any losses associated with other real estate owned or held
by Citizens. Except as identified in Schedule N, no loan with a principal
balance in excess of $50,000 has been classified as of the date hereof by
Citizens or regulatory examiners as "Other Loans Specifically Mentioned,"
"Substandard," "Doubtful" or "Loss." Except as identified in Schedule N,
each loan reflected as an asset on Citizens' balance sheets is, to the knowledge of Citizens,CommonWealth Bank, constitutes
the legal, valid and binding obligation of the obligor and any guarantor,named therein,
subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyancetransfer and othersimilar laws of general applicability relating
to or affecting creditor's rights and toor by general equity principles, and no defense, offsetprinciples.
(ii) CommonWealth Bank has Previously Disclosed as to CommonWealth
Bank as of the latest practicable date: (A) any written or, counterclaimto
CommonWealth Bank's knowledge, oral Loan under the terms of which the
obligor is 60 or more days delinquent in payment of principal or
interest, or to CommonWealth Bank's knowledge, in default of any other
material provision thereof; (B) each Loan which has been assertedclassified as
"substandard," "doubtful," "loss" or "special mention" (or words of
similar import) by CommonWealth Bank or an applicable regulatory
authority (it being understood that no representation is being made that
the Federal Reserve Board or the Bureau would agree with the loan
classifications established by CommonWealth Bank); (C) a listing of the
OREO acquired by foreclosure or by deed-in-lieu thereof, including the
book value thereof; and (D) each Loan with any director, executive
officer or five percent or greater shareholder of CommonWealth Bank, or
to the best knowledge of CommonWealth Bank, any Person controlling,
controlled by or under common control with any of the foregoing.
(s) Properties. All real and personal property owned by CommonWealth Bank
or presently used by it in its business is in an adequate condition (ordinary
wear and tear excepted) and is sufficient to carry on its business in the
ordinary course of business consistent with its past practices. CommonWealth
Bank has good and marketable title free and clear of all Liens to all of the
material properties and assets, real and personal, reflected on the balance
sheet of CommonWealth Bank as of September 30, 2002 included in CommonWealth
Bank's Securities Documents or acquired after such date, other than properties
sold by CommonWealth Bank in the ordinary course of business, except (i) Liens
for current taxes and assessments not yet due or payable (ii) pledges to secure
deposits and other Liens incurred in the ordinary course of its banking
business, (iii) such imperfections of title, easements and encumbrances, if any,
as are not material in character, amount or extent and (iv) as reflected on the
balance sheet of CommonWealth Bank as of September 30, 2002 included in
CommonWealth Bank's Securities Documents. All real and personal property which
is material to CommonWealth Bank's business and leased or licensed by
CommonWealth Bank is held pursuant to leases or licenses which are valid and
enforceable in accordance with their respective terms and such leases will not
terminate or lapse prior to the Effective Time.
(t) Intellectual Property. CommonWealth Bank owns or possesses valid and
binding licenses and other rights to use without payment of any material amount
all material patents, copyrights, trade secrets, trade names, service marks and
trademarks used in its businesses, all of which have been Previously Disclosed
by CommonWealth Bank, and CommonWealth Bank has not received any notice of
conflict with respect thereto that asserts the right of others. CommonWealth
Bank has performed in all material respects all the obligations required to be
performed by it and is not in default under any contract, agreement, arrangement
or commitment relating to any of the foregoing.
(u) Fiduciary Accounts. CommonWealth Bank has properly administered all
accounts for which it acts as a fiduciary, including but not limited to accounts
for which it serves as a trustee, agent, custodian, personal representative,
guardian, conservator or investment advisor, in accordance with the terms of the
governing documents and applicable laws and regulations. Neither CommonWealth
Bank, nor any of its directors, officers or employees, has committed any breach
of trust with respect to any fiduciary account and the records for each such
fiduciary account are true and correct and accurately reflect the assets of such
fiduciary account.
(v) Books and Records. The books and records of CommonWealth Bank are
being maintained in material compliance with applicable legal and accounting
requirements, and such books and records accurately reflect in all material
respects all dealings and transactions in respect of the business, assets,
liabilities and affairs of CommonWealth Bank.
Annex I-22
(w) Insurance. CommonWealth Bank has Previously Disclosed all of the
material insurance policies, binders, or bonds currently maintained by
CommonWealth Bank ("Insurance Policies"). CommonWealth Bank is insured with
reputable insurers against such risks and in such amounts as the management of
CommonWealth Bank reasonably has determined to be prudent in accordance with
industry practices. All the Insurance Policies are in full force and effect;
CommonWealth Bank is not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(x) Allowance For Loan Losses. CommonWealth Bank's allowance for loan
which if
successful wouldlosses is, and shall be as of the Effective Date, in compliance with
CommonWealth Bank's existing methodology for determining the adequacy of its
allowance for loan losses as well as the standards established by applicable
Governmental Authorities and the Financial Accounting Standards Board and is and
shall be adequate under all such standards.
(y) Transactions With Affiliates. All "covered transactions" between
CommonWealth Bank and an "affiliate" within the meaning of Sections 23A and 23B
of the Federal Reserve Act have a material adverse effectbeen in compliance with such provisions.
(z) Required Vote; Antitakeover Provisions; Company Rights Agreement.
(i) The affirmative vote of the holders of two-thirds of the issued
and outstanding shares of CommonWealth Bank is necessary to approve this
Agreement and the Transaction on behalf of CommonWealth Bank. No other
vote of the stockholders of CommonWealth Bank is required by law, the
CommonWealth Bank Articles, the CommonWealth Bank Bylaws or otherwise to
approve this Agreement and the Transaction.
(ii) Based on the financial condition,
resultsrepresentation and warranty of operationsParent contained in
Section 5.04(m), no "control share acquisition," "business combination
moratorium," "fair price" or businessother form of Citizens.
(p) Absence of Changes. Except as set forth in Schedule O, since
December 31, 1999, thereantitakeover statute or
regulation is applicable to this Agreement or the Transaction.
(aa) Fairness Opinion. The CommonWealth Bank Board has not been any material adverse change inreceived the
condition (financial or otherwise), of aggregate assets or liabilities, or
in the earnings or business of Citizens. Since such date the business of
Citizens has been conducted only in the ordinary course.
(q) Brokers and Finders. Citizens has employed the firmwritten opinion of Baxter, Fentriss and Company, Richmond, Virginia, ("Financial Advisor")& Co., to the effect that as broker
on this transaction under Agreement dated January 10, 2000, which provides
for payment of an advisory fee of $7,500 and a success fee of 1.25% of the aggregate considerationdate
hereof the Merger Consideration is fair to the holders of CommonWealth Bank
Common Stock from a financial point of view.
(bb) Transactions in Securities.
(i) All offers and sales of CommonWealth Bank Common Stock by
CommonWealth Bank were at all relevant times exempt from or complied
with the registration requirements of the Securities Act.
(ii) Neither CommonWealth Bank nor, to CommonWealth Bank's knowledge,
(a) any transaction (lessdirector or executive officer of CommonWealth Bank, (b) any
person related to any such director or officer by blood, marriage or
adoption and residing in the $7,500 advisory fee).
(r) Reports. For the past five years, Citizenssame household and (c) any person who has
filed all reports
and statements, together withbeen knowingly provided material nonpublic information by any amendments requiredone or
more of these persons, has purchased or sold, or caused to be made with
respect thereto, that were required to be filed withpurchased
or sold, any shares of CommonWealth Bank Common Stock or other
securities issued by CommonWealth Bank (i) the FDIC;during any period when
CommonWealth Bank was in possession of material nonpublic information or
(ii) the
Division; and (iii)in violation of any other governmental or regulatory authority or
agency having jurisdiction over its operations. None of such reports or
statements, or any amendments thereto, contains any statement which, at the
time and in the lightapplicable provision of the circumstances under which it was made, was
falseExchange Act.
(cc) Disclosure. The representations and warranties contained in this
Section 5.03, when considered as a whole, do not contain any untrue statement of
a material fact or misleading with respectomit to state any material fact necessary in order to make
the statements and information contained thereinin this Section 5.03 not false or misleading.
(s) Environmental Matters. For purposes of this subsection, the
following terms shall have the indicated meaning:
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111
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity 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, producing, release or disposal of Hazardous Substances. The term
"Environmental Law" includes without limitation (I) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended 42 U.S.C.
sec. 9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. sec. 6901, et seq; the Clean Air Act, as amended, 42 U.S.C. sec. 7401, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. sec. 1251,
et seq; the Toxic Substances Control Act, as amended, 15 U.S.C. sec. 9601, et
seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. sec.
1101, et seq; the Safe Drinking Water Act, 42 U.S.C. sec. 300f, et seq; and all
comparable state and local laws; and (ii) any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or any derivative or
by-product thereof, asbestos, radioactive material, and polychlorinated
biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned or operated by Citizens, including those properties serving as
collateral for any loans made by Citizens.
To the knowledge of Citizens, except as set forth in Schedule P,
(i) Citizens has not been and is not currently in violation of or
liable in any material respect under any Environmental Law;
(ii) none of the Loan Portfolio Properties and Other Properties
Owned has been or is in violation of or liable in any material respect
under any Environmental Law; and
(iii) there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties Owned
under any Environmental Law, including without limitation any notices,
demand letters or requests for information from any federal or state
environmental agency relating to any such liabilities under or
violations of Environmental Law, except for such violations and
liabilities, and actions, suits, demands, notices, claims,
investigations or proceedings, which would not individually or in the
aggregate have a material adverse effect on the financial condition,
results of operations or business of Citizens.
(t) Community Reinvestment Act. Citizens has no reason to believe that
the transactions contemplated by this Agreement will not be approved by all
required regulatory authorities for reasons related to compliance by
Citizens with the Community Reinvestment Act of 1977 (12 U.S.C. sec. 2901,
et seq) ("CRA"). Citizens received at
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112
least a "satisfactory" CRA rating as of its last CRA examination and has no
reason to believe that its CRA rating will be downgraded on or before the
Closing Date.
(u) Disclosure. Except to the extent of any subsequent correction or
supplement with respect thereto furnished prior to the date hereof, all
written statements, certificates, schedules, lists and other written
information furnished by or on behalf of Citizens at any time to FCB in
connection with this Agreement are true and correct in all material
respects. Each document delivered or to be delivered by Citizens to FCB is
or will be a true and complete copy of such document, unmodified except by
another document delivered by Citizens.
3.25.04 Representations and Warranties of FCBParent and Bancshares. FCBFirst Community
Bank. Subject to Sections 5.01 and Bancshares, to the extent applicable,5.02, Parent and First Community Bank hereby
represent and warrant to CitizensCommonWealth Bank as follows:
(a) Organization, Standing and Power. (i) BancsharesAuthority. Parent is a corporation
duly organized, validly existing and in good standing under the laws of
Nevada and has all requisite corporate power and authority to own, lease
and operate its properties, to effect the Merger and to carry on its
business as now being conducted. Bancshares has delivered to Citizens
complete and correct copies of (A) the Articles of Incorporation of
Bancshares and all amendments thereto to the date hereof, and (B) the
Bylaws of Bancshares as amended to the date hereof.
(ii) FCB is a national association duly organized,
validly existing and in good standing under the laws of the United StatesState of AmericaNevada.
Parent is duly qualified to do business and is in good standing in each
jurisdiction where its ownership or leasing of property or assets or the conduct
of its business requires it to be so qualified. Parent has in effect all
requisite corporate authorityfederal, state, local and foreign governmental authorizations necessary for it
to own or lease and operate its properties to effect the Mergerand assets and to carry on its business as it is
now being conducted.
FCB has delivered to Citizens complete and correct
copiesAnnex I-23
(b) Parent Stock.
(i) As of (A) the Articles of Association of FCB and all amendments
thereto to the date hereof, and (B) the Bylaws of FCB as amended to the
date hereof.
(b) Capital Structure. As of March 31, 2000, the authorized capital stock of Bancshares consistedParent
consists solely of 10,000,00015,000,000 shares of common stock, par
value $1.00 per share,Parent Common Stock, of which
8,991,5869,888,482 shares of common stock were
issued, with 8,726,836 such shares outstanding and 264,750 such shares held
in treasury. All of such issued and outstanding as of the date hereof, and
1,000,000 shares of commonParent Preferred Stock, of which no shares were
issued and outstanding as of the date hereof. The outstanding shares of
Parent Common Stock have been duly authorized and validly issued and are
fully paid and non-assessable, and none of the shares of Parent Common
Stock have been issued in violation of the preemptive rights of any
Person. As of the date hereof, except as Previously Disclosed, there are
no Rights authorized, issued or outstanding with respect to the capital
stock wereof Parent, except for shares of Parent Common Stock issuable
pursuant to the Parent Benefits Plans and by virtue of this Agreement.
(ii) The shares of Parent Common Stock to be issued in exchange for
shares of CommonWealth Bank Common Stock in the Merger, when issued in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable at suchand the issuance thereof is
not subject to any preemptive right.
(c) First Community Bank.
(i) First Community Bank has been duly organized and is validly
existing in good standing under the laws of the United States and is
duly qualified to do business and is in good standing in the
jurisdictions where its ownership or leasing of property or the conduct
of its business requires it to be so qualified. First Community Bank is
duly licensed by the OCC and its deposits are insured by the FDIC in the
manner and to the maximum extent provided by law.
(ii) As of the date andhereof, (A) Parent owns, directly or indirectly,
all of such
shares issued since March 31, 2000, were issued in all material respects in
compliance with the Securities Act of 1933, as amended.
Bancshares owns all of the issued and outstanding common stockequity securities of FCB free
and clearFirst Community
Bank, (B) no equity securities of First Community Bank are or may become
required to be issued (other than to Parent) by reason of any liens, claims, encumbrances, chargesRight or
rightsotherwise, (C) there are no contracts, commitments, understandings or
arrangements by which First Community Bank is or may be bound to sell or
otherwise transfer any of third partiesits equity securities (other than to Parent or
any of any kind whatsoever.
(c) Authority. The executionits wholly-owned Subsidiaries) and delivery(D) there are no contracts,
commitments, understandings, or arrangements relating to Parent's right
to vote or to dispose of such securities.
(d) Corporate Power. Each of Parent and First Community Bank has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets. Parent has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the consummationTransaction, subject to the receipt of all
necessary approvals of Governmental Authorities.
(e) Corporate Authority. This Agreement and the transactions contemplated herebyTransaction have been duly and
validly
authorized by all necessary corporate action onof Parent, the part of FCBParent Board, First
Community Bank and Bancshares,the First Community Bank Board. This Agreement has been duly
executed and delivered by Parent and First Community Bank and, assuming due
authorization, execution and delivery by CommonWealth Bank, this Agreement is a
valid and legally binding obligationagreement of FCBParent and Bancshares, the consummationFirst Community Bank
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of the transactions contemplated hereby and
compliancegeneral applicability relating to or
affecting creditors' rights or by FCB and Bancsharesgeneral equity principles).
(f) Regulatory Approvals; No Defaults.
(i) No consents or approvals of, or waivers by, or filings or
registrations with, any of the provisions hereof will not
(i) conflictGovernmental Authority or with any third party
are required to be made or result in a breach of any provision of FCB's or
Bancshares' respective Articles of Association or Incorporation, or either
of their respective Bylaws or a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or to which FCB or Bancshares is a party, orobtained by which either of themParent or any of their properties or assets may be bound;
or (ii) violate any order, writ, injunction, decree, statute, rule or
A-11
113
regulation applicable to FCB or Bancshares or any of their properties or
assets. No consent or approval by any government authority, other than
compliance with applicable federal and state corporate, securities and
banking laws, and regulations of the Office of the Comptroller of the
Currency and the Federal Reserve Board, is requiredits Subsidiaries
in connection with the execution, delivery or performance by Parent and
delivery by FCB or BancsharesFirst Community Bank of this Agreement or to consummate the consummationTransaction,
except for (A) filings of applications or notices with and approvals or
waivers by FCB and Bancshares of the Merger, orFederal Reserve Board, the Plan of Merger.
(d) Financial Statements. Bancshares has delivered to Citizens copies
of the following financial statements of Bancshares (the "Bancshares
Financial Statements"):
(i) Consolidated Balance Sheets as of December 31, 1999 and 1998
and as of March 31, 2000;
(ii) Consolidated Statements of Income of Bancshares for each of
the three years ended December 31, 1999, 1998, and 1997OCC and the three
months ended March 31, 2000 and 1999;
(iii) Consolidated Statements of Changes in Stockholders' Equity of
Bancshares for each of the three years ended December 31, 1999, 1998 and
1997.
(iv) Consolidated Statements of Cash Flows of Bancshares for each
of the three years ended December 31, 1999, 1998 and 1997.
Such consolidated financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated. Each of such consolidated
balance sheets, togetherBureau, as
required, (B) filings with the notes thereto, presents fairlySEC and state securities authorities, as
of its date
the financial condition and assets and liabilities of Bancshares. The
consolidated statements of income, statements of changes in stockholders' equity
and statements of cash flows, together with the notes thereto, present fairly
the results of operations of Bancshares and its consolidated subsidiary for the
periods indicated.
(e) Absence of Undisclosed Liabilities. At December 31, 1999 and March
31, 2000, Bancshares and its consolidated subsidiaries had no material
liabilities of any nature which were not reflected on the Bancshares
Financial Statements or disclosed in the notes thereto at such date, except
for those which individually or in the aggregate are immaterial.
(f) Absence of Changes. Since December 31, 1999, there has not been
any material adverse change in the condition (financial or otherwise), of
aggregate assets or liabilities, or in the earnings or business of
Bancshares as reflected on its consolidated financial statements as of such
date and for the year then ended.
(g) Brokers and Finders. Neither FCB or Bancshares nor any of its
officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' feesapplicable, in connection with the Merger.
(h) Reports. Since its datesubmission of organization, Bancshares has filed all
reportsthis Agreement for the
approval of the holders of CommonWealth Bank Common Stock and statements, together with any amendments requiredthe
issuance of Parent Common Stock in the Merger, (C) the approval of the
listing on Nasdaq of the Parent Common Stock to be madeissued in the Merger
and (D) the filing of Articles of Merger with respect thereto, that were requiredthe
Annex I-24
Virginia State Corporation Commission pursuant to the VSCA and the
filing of a Notice of Consummation with the OCC pursuant to OCC
guidelines. As of the date hereof, Parent is not aware of any reason why
the approvals set forth above and referred to in Section 7.01(b) will
not be received in a timely manner and without the imposition of a
condition, restriction or requirement of the type described in Section
7.01(b).
(ii) Subject to receipt, or the making, of the consents, approvals,
waivers and filings referred to in the preceding paragraph and
expiration of the related waiting periods, the execution, delivery and
performance of this Agreement by Parent and First Community Bank and the
consummation of the Transaction do not and will not (A) constitute a
breach or violation of, or a default under, or give rise to any Lien,
any acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of Parent or of any of
its Subsidiaries or to which Parent or any of its Subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of,
or a default under, the articles of incorporation or bylaws (or similar
governing documents) of Parent or any of its Subsidiaries or (C) require
any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license, agreement, indenture or
instrument.
(g) Financial Reports and Securities Documents; Material Adverse Effect.
(i) Parent's Annual Report on Form 10-K for the year ended December
31, 2001 and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed with (i)by it
subsequent to December 31, 1999 under the SEC; (ii)Securities Act, or under
Section 13(a), 13(c), 14 or 15(d) of the Federal Reserve Board; (iii)Exchange Act in the FDIC; (iv) the Division; and (v) any
other governmentalform filed
or regulatory authority or agency having jurisdiction
over their operations. Each of such reports and documents, including the
financial statements, exhibits and schedules thereto, which wasto be filed (collectively, Parent's "Securities Documents") with the
SEC, wasas of the date filed or to be filed, (A) complied or will comply in
all material respects as to form and substance in compliance with the 1933applicable requirements under
the Securities Act or the 1934Exchange Act, as the case may be. No such reportbe and (B) did
not and will not contain any untrue statement of a material fact or statement,omit
to state a material fact required to be stated therein or any
amendments thereto, contains
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114
any statement which, atnecessary to
make the time andstatements therein, in the light of the circumstances under
which it wasthey were made, was falsenot misleading, except that information as of a
later date shall be deemed to modify information as of an earlier date;
and each of the consolidated balance sheets contained in or misleadingincorporated
by reference into any such Securities Document (including the related
notes and schedules thereto) fairly presents, or will fairly present,
the consolidated financial position of Parent and its Subsidiaries as of
its date, and each of the consolidated statements of income and changes
in stockholders' equity and cash flows or equivalent statements in such
Securities Documents (including any related notes and schedules thereto)
fairly presents, or will fairly present, the consolidated results of
operations, changes in stockholders' equity and cash flows, as the case
may be, of Parent and its Subsidiaries for the periods to which they
relate, in each case in accordance with GAAP consistently applied during
the periods involved, except in each case as may be noted therein.
(ii) Since September 30, 2002, no event has occurred or circumstance
arisen that, individually or taken together with all other facts,
circumstances and events (described in any paragraph of this Section
5.04 or otherwise), is reasonably likely to have a Material Adverse
Effect with respect to Parent.
(h) Litigation. No litigation, claim or other proceeding before any court
or governmental agency is pending against Parent or its Subsidiaries and, to
Parent's knowledge, no such litigation, claim or other proceeding has been
threatened and there are no facts which could reasonably give rise to such
litigation, claim or other proceeding. Neither Parent nor any of its
Subsidiaries is a party to any order, judgment or decree which has or could
reasonably be expected to have a Material Adverse Effect with respect to Parent.
(i) No Brokers. No action has been taken by Parent or its Subsidiaries
that would give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the Transaction,
except a fee to be paid to Ryan, Beck & Co., Inc.
Annex I-25
(j) Tax Matters. As of the date hereof, Parent does not have any reason to
believe that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
(k) Regulatory Matters.
(i) Neither Parent nor any of its Subsidiaries nor any of any of
their respective properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, or extraordinary
supervisory letter from, any federal or state governmental agency or
authority charged with the supervision or regulation of financial
institutions or issuers of securities or engaged in the insurance of
deposits or the supervision or regulation of it (collectively, the
"Parent Regulatory Authorities"). Parent and its Subsidiaries have paid
all assessments made or imposed by any Parent Regulatory Authority.
(ii) Neither Parent nor any its Subsidiaries has been advised by, and
does not have any knowledge of facts which could give rise to an
advisory notice by, any Parent Regulatory Authority that such Parent
Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, decree, agreement, memorandum of understanding, commitment
letter, supervisory letter or similar submission.
(l) Compliance With Laws. Each of Parent and its Subsidiaries:
(i) is in material compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act, the Home Mortgage Disclosure Act, the Bank Secrecy Act and all
other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to
own or lease their properties and to conduct their businesses as
presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to
Parent's knowledge, no suspension or cancellation of any of them is
threatened; and
(iii) has received, since December 31, 1999, no notification or
communication from any Governmental Authority (A) asserting that Parent
or any of its Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit or
governmental authorization (nor, to Parent's knowledge, do any grounds
for any of the foregoing exist).
(m) Ownership of CommonWealth Bank Common Stock. Except as Previously
Disclosed, none of Parent or any of its Subsidiaries, or to Parent's knowledge,
any of its other affiliates or associates (as such terms are defined under the
Exchange Act), owns beneficially or of record, directly or indirectly, or is a
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, shares of CommonWealth Bank (other
than shares held in a fiduciary capacity that are beneficially owned by third
parties or as a result of debts previously contracted).
(n) Financial Ability. On the Effective Date and through the date of
payment of the Aggregate Cash Consideration by Parent, Parent or First Community
Bank will have all funds necessary to consummate the Merger and pay the
Aggregate Cash Consideration to holders of CommonWealth Bank Common Stock
pursuant to Sections 3.01 and 3.02 hereof. Each of Parent and First Community
Bank is, and immediately following completion of the Transaction will be, in
compliance with all capital requirements applicable to it.
(o) Disclosure. The representations and warranties contained in this
Section 5.04, when considered as a whole, do not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements and information contained therein
not false or misleading.
(i) Tax Matters. Bancshares has filed or caused to be filed or (in the
case of returns of reports not yet due) will file all tax returns and
reports required to have been filed by or for it before the Effective Time
of the Merger, and all information set forth in such returns or reports is
or (in the case of such returns or reports not yet due) will be accurate
and complete in all material respects. Bancshares has paid or made adequate
provision in all material respects for or (with respect to returns or
reports not yet filed) before the Effective Time of the Merger will pay or
make adequate provision for all taxes, additions to tax, penalties, and
interest for all periods covered by those returns or reports. Except as
disclosed in Schedule Q, at the Effective Time of the Merger there will be
no unpaid taxes, additions to tax, penalties, or interest due and payable
by Bancshares or by any other person that are or could become a lien on any
asset or otherwise adversely affect the business, property or financial
condition of Bancshares. The consolidated balance sheets of Bancshares
fully and properly reflect, as of the dates thereof, the aggregate
liabilities for all accrued taxes, additions to tax, penalties and interest
in all material respects. Except as disclosed in Schedule Q, no tax return
or report of Bancshares is under examination by any taxing authority or the
subject of any administrative or judicial proceeding, and no unpaid tax
deficiency has been asserted against Bancshares by any taxing authority.
(j) Property; Leases. Bancshares owns (or enjoys use of under capital
leases) all property reflected on its financial statements as of December
31, 1999 (except property sold or otherwise disposed of in the ordinary
course of business). All property shown as being owned is owned free and
clear of all mortgages, liens, pledges, charges or encumbrances of any
nature whatsoever, except those referred to in the notes to the financial
statements. Liens for current taxes not yet due and payable, any unfiled
mechanics' liens and such encumbrances and imperfections of title, if any,
are not substantial in character or amount nor will otherwise materially
impair business operations.
(k) Legal Proceedings; Compliance with Laws. There is no legal,
administrative, arbitration or other proceeding or governmental
investigation pending (including any legal, administrative, arbitration or
other proceeding or governmental investigation pending involving a
violation of the federal antitrust laws), or, to the knowledge of
Bancshares, threatened or probable of assertion, which might result in
money damages payable by Bancshares in excess of insurance coverage, which
might result in a permanent injunction against Bancshares, which might
result in a change in the zoning or building ordinances materially
affecting the property or leasehold interests of Bancshares, or which
otherwise, either individually or in the aggregate, is likely to have a
material adverse affect on the financial condition of Bancshares.
Bancshares has complied in all material respects with any laws, ordinances,
requirements, regulations or orders applicable to its respective business
(including environmental laws, ordinances, requirements, regulations or
orders). Bancshares has all licenses, permits, orders or approvals of any
federal, state, local or foreign governmental or regulatory body that are
material to or necessary for the conduct of its business. All of such
Permits are in full force and effect; no violations are or have been
recorded in respect of any Permits. Bancshares has not entered into any
agreements or written understandings with the Federal Reserve Board, the
FDIC, or any other regulatory authority. Bancshares is not
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subject to any judgment, order, writ, injunction or decree which materially
adversely affects, or might reasonably be expected to materially adversely
affect, the condition (financial or otherwise) or business of Bancshares or
its ability to fulfill the respective obligations pursuant to this
Agreement.
(l) Employee Benefit Plans. Neither Bancshares nor any employee
pension benefit plan (as defined in Section 3(2) of ERISA) maintained or
previously maintained by it, has incurred any material liability to the
PBGC or to the Internal Revenue Service. There is not currently pending
with the PBGC any filing with respect to any reportable event under Section
4043 of ERISA nor has any reportable event occurred as to which a filing is
required and has not been made. Full payment has been made (or proper
accruals have been established) of all contributions which are required for
periods prior to the Closing Date under the terms of each Employee Plan,
ERISA or a collective bargaining agreement of Bancshares. No accumulated
funding deficiency (as defined in Section 302 of ERISA or Section 412 of
the Code) whether or not waived, exists with respect to any Pension Plan of
Bancshares. There is no "unfunded current liability" (as defined in Section
412 of the Code) with respect to any Pension Plan of Bancshares.
(m) Loan Portfolio. Each loan outstanding on the books of Bancshares
or any Bancshares subsidiaries is reflected correctly in all material
respects by the loan documentation, was made in the ordinary course of
business, was not known to be uncollectible at the time it was made, and
was made in accordance with standard loan policies in effect at the time
the loans were made. The reserves for possible loan losses on such loans
and the reserves for other real estate owned by Bancshares or any
Bancshares subsidiary have been established in accordance with generally
accepted accounting principles and with the requirements of the FDIC, or
any other regulatory authority and, in the best judgment of the management
of Bancshares, are adequate to absorb all material known and anticipated
loan losses in the loan portfolio of Bancshares, and any losses associated
with other real estate owned or held by Bancshares and its subsidiary.
(n) Environmental Matters. There are no actions, suits, demands,
notices, claims, investigations or proceedings pending or threatened
relating to the liability under any Environmental Law (as defined in
Section (s)(iii) of Article III) including, without limitation, any
notices, demand letters or requests for information from any federal or
state environmental agency relating to any such liabilities under or
violations of Environmental Law, except for such violations and
liabilities, and actions, suits, demands, notices, claims, investigations
or proceedings, which would not individually or in the aggregate have a
material adverse effect on the financial condition, results of operations
or business of Bancshares.
(o) Community Reinvestment Act. Bancshares has no reason to believe
that the transactions contemplated by this Agreement will not be approved
by all required regulatory authorities for reasons related to compliance
with the CRA. The subsidiary of Bancshares received a "satisfactory" CRA
rating as of its last CRA examination and Bancshares has no reason to
believe that its CRA rating will be downgraded on or before the Closing
Date.
(p) Disclosure. Except to the extent of any subsequent correction or
supplement with respect thereto furnished prior to the date hereof, all
written statements, certificates, schedules, lists and other written
information furnished by or on behalf of FCB at any time to Citizens in
connection with this Agreement are true and correct in all material
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respects. Each document delivered or to be delivered by FCB to Citizens is
or will be a true and complete copy of such document, unmodified except by
another document delivered by FCB.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME OF MERGER
4.1. Access to Records and Properties of FCB and Citizens. Between the
date of this Agreement and the Effective Time of the Merger, FCB and Citizens
each agree to give to the other reasonable access to all its premises and books
and records and to cause its officers to furnish the other with such financial
and operating data and other information with respect to the business and
properties as the other shall from time to time request for the purposes of
verifying the warranties and representations set forth herein, preparing the
Registration Statement (as defined in Section 4.2) and applicable regulatory
filings and preparing consolidated financial statements of Citizens as of a date
prior to the Effective Time of the Merger in order to facilitate FCB in
performance of its post-Closing Date financial reporting requirements; provided,
that any such investigation shall be conducted in such manner as not to
interfere unreasonably with the operation of the respective business of the
other. FCB, Bancshares and Citizens shall each maintain the confidentiality of
all information furnished to them by the other parties hereto concerning the
business, operations, and financial condition of the party furnishing such
information, and shall not use any such information except in furtherance of the
Merger. If this Agreement is terminated, each party hereto shall promptly return
all documents and copies of, and all work papers received from the other party
hereto. The obligations of confidentiality under this Section 4.1 shall survive
any such termination of this Agreement and shall remain in effect, except to the
extent that (a) one party shall have directly or indirectly acquired the assets
and business of the other party; (b) as to any particular confidential
information with respect to one party, such information (i) shall become
generally available to the public other than as a result of an unauthorized
disclosure by the other party or (ii) was available to the other party on a
nonconfidential basis or regulatory authority prior to its disclosure by the
first party; or (c) disclosure by any party is required by subpoena or order of
a court of competent jurisdiction.
4.2 Registration Statement; Proxy Statement; Shareholder
Approval. Citizens will duly call and will hold a meeting of its shareholders as
soon as practicable for the purpose of approving the Merger and in connection
therewith will recommend to shareholders that they vote in favor of the Merger,
except as in the case of a Superior Offer, as defined in Section 4.4. Citizens
will comply fully with the provisions of Section 31-1-117 of the West Virginia
Code, the 1933 Act and the 1934 Act and the rules and regulations of the SEC
under such acts, and the Articles of Incorporation and Bylaws of Citizens
relating to the call and holding of a meeting of shareholders for such purpose.
Bancshares and Citizens will jointly prepare the proxy statement-prospectus to
be used in connection with such meeting (the "Proxy Statement-Prospectus") and
Bancshares will prepare and file with the SEC a Registration Statement on Form
S-4 (the "Registration Statement"), of which such Proxy Statement-Prospectus
shall be a part, and use its best efforts promptly to have the Registration
Statement declared effective. In connection with the foregoing, Bancshares will
comply with the requirements of the 1933 Act and the 1934 Act and the rules and
regulations of the SEC under such Acts with respect to the offering and sale of
Bancshares Common Stock in connection with the Merger and with all applicable
state Blue Sky and securities laws. The notices of such meetings and the Proxy
Statement-Prospectus shall not
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be mailed to Citizens shareholders until the Registration Statement shall have
become effective under the 1933 Act. Citizens covenants that none of the
information supplied by Citizens, and Bancshares covenants that none of the
information supplied by Bancshares, for inclusion in the Proxy Statement-
Prospectus will, at the time of the mailing of the Proxy Statement-Prospectus to
Citizens shareholders, contain any untrue statements of a material fact nor will
any such information omit any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading; and at all times subsequent to the time
of the mailing of the Proxy Statement-Prospectus, including the date of the
meeting of Citizens shareholders to which the statement relates and the
Effective Time of the Merger, none of such information in the Proxy
Statement-Prospectus, as amended or supplemented, will contain an untrue
statement of a material fact or omit any material fact required to be stated
therein in order to make the statements therein, in light of the circumstances
in which they were made,5.04 not misleading.
4.3 Operation of the Business of Citizens. Citizens agrees that from the
date hereof to the Effective Time of the Merger, it will operate its business
substantially as presently operated and only in the ordinary course, and,
consistent with such operation, it will use its best efforts to preserve intact
its present business organization and relationships with persons having business
dealings with it. Without limiting the generality of the foregoing, Citizens
agrees that it will not, without the prior written consent of FCB, unless
consistent with past practices and in the ordinary course of business (i) make
any material change in the compensation or title of any executive officer; (ii)
make any material change in the compensation or title of any other employee,
other than those permitted by current employment policies in the ordinary course
of business, any of which changes shall be promptly reported to FCB; (iii) enter
into any new bonus, incentive compensation, deferred compensation, profit
sharing, thrift, retirement, pension, group insurance or other benefit plan
(except as otherwise specifically contemplated in this Agreement), or any other
employment or consulting agreement or amend any such plan or agreement to
increase the benefits accruing or payable thereunder; (iv) create or otherwise
become liable with respect to any indebtedness for money borrowed or purchase
money indebtedness except in the ordinary course of business; (v) amend
Citizens' Articles of Incorporation, or its Bylaws except as may be necessary to
consummate the Merger; (vi) issue or contract to issue any shares of Citizens
capital stock or securities exchangeable for or convertible into capital stock;
(vii) purchase any shares of Citizens capital stock; (viii) enter into or assume
any material contract or obligation, except in the ordinary course of business;
(ix) waive any right of substantial value; (x) propose or take any other action
which would make any representation or warranty in Section 3.1 hereof untrue;
(xi) change securities portfolio policies; (xii) enter into any new agreement,
amendment or endorsement or make any changes relating to insurance coverage,
including coverage for its directors and officers, which would result in an
additional payment obligation of $10,000 or more; (xiii) pay any dividend; or
(xiv) propose or take action with respect to the closing of any branches.
Citizens further agrees that, between the date of this Agreement and the
Effective time of the Merger, they will consult and cooperate with FCB regarding
(a) loan portfolio management, including management and workout of nonperforming
assets, and credit review and approval procedures, and (b) securities portfolio
and funds management, including management of interest rate risk.
4.4 No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to its terms, neither Citizens nor any of its respective
officers, directors, representatives, agents or affiliates shall, directly or
indirectly, encourage, solicit or initiate discussions or negotiations (with any
person or entity other than FCB) concerning any
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118
merger, sale of substantial assets, tender offer, sale of shares of stock or
similar transaction involving Citizens or disclose, directly or indirectly, any
information not customarily disclosed to the public concerning Citizens, afford
to any other person access to the properties, books or records of Citizens or
otherwise assist any person preparing to make or who has made such an offer, or
enter into any agreement with any third party providing for a business
combination transaction, equity investment or sale of a significant amount of
assets. Citizens will promptly communicate to FCB the terms of any proposal
which either of them may receive in respect to any of the foregoing
transactions; provided, however, that this Section 4.4 shall not apply to
furnishing information or to participating in negotiations or discussions with
any person that has made, or that the Citizens' Board of Directors determined in
good faith is reasonably likely to make, a Superior Offer, if the Citizens'
Board of Directors determines in good faith, after consultation with outside
legal counsel, that its failure to take such actions would constitute a breach
of its fiduciary duty to Citizens' shareholders. For purposes of this Agreement,
"Superior Offer" shall mean a proposal or offer to acquire or purchase all or a
substantial portion of the assets of or a substantial equity interest in, or to
effect any recapitalization, liquidation or dissolution involving, or a business
combination or other similar transactions with, Citizens (including, but not
limited to, a tender offer or exchange offer to purchase Citizens' Common Stock)
other than as contemplated by this Agreement: (i) that did not arise from or
involve a breach or violation by Citizens of any provision of this Agreement;
(ii) was not solicited by Citizens or anyone acting on its behalf; (iii) that
the Citizens' Board of Directors determines in its good-faith judgment, based,
among other things, on the advice of its Financial Advisor, to be materially
more favorable to the Citizens' shareholders and the Merger; and (iv) the
financing for the implementation of which, to the extent required, is then
committed or in the good-faith reasonable judgment of the Citizens' Board of
Directors, based, among other things, on advice of the Financial Advisor, is
capable of being obtained by the party making the proposal or offer.
4.5 Regulatory Filings. FCB and Citizens shall jointly prepare all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Plan of Merger and submit the filings for approval with the
applicable agency or agencies, as soon as practicable after the date hereof. FCB
and Citizens shall use their best efforts to obtain approvals of such filings.
4.6 Tax Opinion. FCB and Citizens shall use their best efforts to obtain
the tax opinion referred to in paragraph (e) of Section 5.1 and paragraph (f) of
Section 5.2 hereof.
4.7 Public Announcements. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Merger and shall not issue any press release or make any such public
statement prior to such consultations except as may be required by law.
4.8 Transactions in Bancshares Common Stock. Other than the issuance of
Bancshares Common Stock in connection with the operation in the ordinary course
of Bancshares' Dividend Reinvestment Plan and Employee Stock Ownership Plan,
none of Bancshares, Citizens or the directors and executive officers of either
of them or any person or entity on their behalf will purchase, sell or otherwise
acquire or dispose of any shares of Bancshares Common Stock during the period of
calculation of the Bancshares Stock Price.
4.9 Agreement as to Efforts to Consummate.ARTICLE VI
COVENANTS
6.01 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of FCBCommonWealth Bank, Parent and CitizensFirst Community Bank agrees to
use allits reasonable best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
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119desirable, or advisable under applicable laws, so as to permit consummation of
the Transaction as promptly as practicable and regulationsotherwise to consummateenable consummation
of the Transaction, including the satisfaction of the conditions set forth in
Article VII hereof, and make
effective,shall cooperate fully with the other party hereto to
that end.
6.02 Shareholder Approval. CommonWealth Bank agrees to take, in accordance
with applicable law and the CommonWealth Bank Articles and the CommonWealth Bank
Bylaws, all action necessary to convene as soon as reasonably practicable a
special meeting of its stockholders to consider and vote upon the approval of
this Agreement and any other matters required to be approved by CommonWealth
Bank's stockholders for consummation of the Transaction (including any
adjournment or postponement, the "Commonwealth Bank Meeting"). Except with the
prior approval of Parent, no other matters shall be submitted for the approval
of the CommonWealth Bank stockholders at the CommonWealth Bank Meeting. The
CommonWealth Bank Board shall at all times prior to and during such meeting
recommend such approval and shall take all reasonable lawful action to solicit
such approval by its stockholders; provided that nothing in this Agreement shall
prevent the CommonWealth Bank Board from withholding, withdrawing, amending or
modifying its recommendation if the CommonWealth Bank Board determines, after
consultation with its outside counsel, that such action is legally required in
order for the directors to comply with their fiduciary duties to the
CommonWealth Bank stockholders under applicable law; provided, further, that
Section 6.08 shall govern the withholding, withdrawing, amending or modifying of
such recommendation in the circumstances described therein.
6.03 Registration Statement.
(a) Parent agrees to prepare a registration statement on Form S-4 or other
applicable form (the "Registration Statement") to be filed by Parent with the
SEC in connection with the issuance of Parent Common Stock in the Merger
(including the proxy statement and prospectus and other proxy solicitation
materials of CommonWealth Bank constituting a part thereof (the "Proxy
Statement") and all related documents). CommonWealth Bank shall prepare and
furnish such information relating to it and its directors, officers and
stockholders as may be reasonably required in connection with the above
referenced documents based on its knowledge of and access to the information
required for said documents, and CommonWealth Bank, and its legal, financial and
accounting advisors, shall have the right to review in advance such Registration
Statement prior to its filing. CommonWealth Bank agrees to cooperate with Parent
and Parent's counsel and accountants in requesting and obtaining appropriate
opinions, consents and letters from its financial advisor and independent
auditor in connection with the Registration Statement and the Proxy Statement.
Provided that CommonWealth Bank has cooperated as described above, Parent agrees
to file, or cause to be filed, the Registration Statement and the Proxy
Statement with the SEC as promptly as reasonably practicable. Each of
CommonWealth Bank and Parent agrees to use its reasonable best efforts to cause
the Registration Statement to be declared effective under the Securities Act as
promptly as reasonably practicable after the date of this Agreement, the
transactions contemplated by this Agreement, including, without limitation,
using reasonable effortfiling thereof. Parent also agrees
to lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated herein. Each of FCB and Citizens shall use its reasonable best efforts to obtain consents of all third partiesnecessary state securities law
or "Blue Sky" permits and governmental bodies
necessary or desirable for the consummation ofapprovals required to carry out the transactions
contemplated by this Agreement. 4.10 Adverse Changes in Condition. BancsharesAfter the Registration Statement is declared
effective under the Securities Act, CommonWealth Bank shall promptly mail at its
expense the Proxy Statement to its stockholders.
(b) Each of CommonWealth Bank and Citizens eachParent agrees to
give written notice promptly to the other concerning any material change in its
condition from the date of this Agreement until the Effective Timethat none of the
Merger
that might adversely affect the consummation of the transactions contemplated
herebyinformation supplied or upon becoming aware of the occurrence or impending occurrence of any
event or circumstance which may cause or constitute, or with the lapse of time
might result in, a material breach of any of the representations, warranties or
covenants of such party contained herein. Each of Bancshares and Citizens shall
use its best efforts to prevent or promptly remedy the same.
4.11 Updating of Schedules. From the date of execution of this Agreement
until the consummation of the Merger, Citizens agrees to keep up to date all of
the Schedules hereto and to notify Bancshares concerning any changes or
additions or events which have caused, or with the lapse of time may cause, any
such change or addition in any of the Schedules hereto.
ARTICLE V
CONDITIONS OF MERGER
5.1 Conditions to Obligations of FCB. The obligations of FCB to perform
this Agreement are subject to the satisfaction of the following conditions
unless waived by FCB.
(a) Representations and Warranties; Performance of Obligations; No
Adverse Change. The representations and warranties of Citizens set forth in
Section 3.1 hereof shall be true and correct in all material respects as of
the date of this Agreement and as of the Effective Time of the Merger as
though made on and as of the Effective Time of the Merger; Citizens shall
have performed in all material respects all obligations required to be performedsupplied by them under this Agreement prior toit for inclusion or incorporation by
reference in (i) the Effective Time ofRegistration Statement shall, at the Merger; there shall have occurred no material adverse change in the
condition (financial or otherwise), assets, liabilities, properties or
business of Citizens from March 31, 2000 to the Effective Date of the
Merger; and FCB shall have received a certificate of authorized officers of
Citizens to such effects.
(b) Authorization of Merger. All action necessary to authorize the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein (including the shareholder action
referred to in Section 4.2) shall have been duly and validly taken by the
Board of Directors of Citizens, and by the shareholders of Citizens, and
Citizens shall have full power and right to merge on the terms provided
herein.
(c) Opinion of Counsel. FCB shall have received an opinion or opinions
of Jackson & Kelly PLLC, special counsel to Citizens, or other counsel
reasonably satisfactory to FCB, dated the Closing Date and reasonably
satisfactory to counsel to FCB to the effect that:
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(i) Citizens is a corporation organized and in good standing under
the laws of the State of West Virginia and has all requisite corporate
power to own, lease and operate its properties and to carry on its
business as now being conducted as described intime the Registration
Statement and Proxy Statement-Prospectus.
(ii) Citizens has full power to carry out the transactions provided
for in the Agreement; all corporate and other proceedings required to be
taken byeach amendment or on the part of Citizens to authorize them to execute and
deliver the Agreement and to consummate the transactions contemplated
thereby and by the Plan of Merger have been duly and validly taken; the
Agreement has been duly and validly authorized, executed and delivered
by Citizens and constitutes a valid and binding obligation of Citizens
enforceable in accordance with its terms except as same (A) may be
limited by bankruptcy, insolvency, reorganization or other similar laws
relating to the rights of creditors, and (B) is subject to general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or law); and the Plan of Merger has
been approved by the Board of Directors and the shareholders of
Citizens;
(iii) All outstanding shares of Citizens Common stock to be
exchanged for shares of Bancshares Common Stock at the Effective Time of
the Merger have been duly authorized and are validly issued, fully paid
and nonassessable, except as provided in W. Va. sec. 31A-4-12.
(iv) To the knowledge of such counsel, except as disclosed in
Section 3.1(h) of the Agreement, Citizens is not a party to or bound bysupplement thereto, if any, outstanding option or agreement to sell, issue, buy or otherwise
dispose of or acquire any shares of Citizens Common Stock or other
security of Citizens;
(v) Execution and delivery by Citizens of the Agreement,
consummation by Citizens of the transactions contemplated hereby, and
compliance by Citizens with the provisions hereof will not conflict with
or result in a breach of any provision of the Articles of Incorporation
or Bylaws of Citizens, as applicable, or, a default (or give rise to
rights of termination, cancellation or acceleration)becomes effective
under the terms,
conditions, or provisions of any note, bond, mortgage, indenture,
license, agreement or any other instrument or listed in Schedule H (such
counsel having no knowledge of any item called for by such schedule
which is not disclosed therein), or violate any court order, writ,
injunction or decree applicable to Citizens or any of its properties or
assets, of which such counsel has knowledge after making inquiry with
respect thereto;
(vi) Such counsel does not know of any litigation that is pending
or threatened which might result in money damages payable by Citizens in
excess of insurance coverage, which might result in a permanent
injunction against Citizens or which, individually or in the aggregate,
might otherwise have a material adverse effect on Citizens or the
transactions contemplated by this Agreement;
(vii) Such counsel does not know of any default under, or the
occurrence of any event which with the lapse of time, action or inaction
by a third party would result in a default under any outstanding
indenture, contract or agreement listed in Schedule H to the Agreement
(such counsel having no knowledge of any item called for by such
Schedule which is not disclosed therein) or under any
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governmental license or permit or a breach of any provision of the
Articles of Incorporation or Bylaws of Citizens, as applicable;
(viii) All legal obligations of Citizens pertaining to consummation
of the Merger under the laws of West Virginia and the United States,
including receipt of all regulatory approvals required to be obtained by
Citizens, other than actions to be taken after the Effective Time and
the completion of legal obligations not the responsibility of Citizens
pursuant to this Agreement, have been completed to the satisfaction of
such counsel in all material respects;
(ix) On the basis of facts within their knowledge, such counsel has
no reason to believe that (except as to financial statements and other
financial data of either party, or as to material relating to, and
supplied by, Bancshares for inclusion in the Proxy Statement-Prospectus,
as to which no belief need be expressed) the Proxy Statement-Prospectus
(as amended or supplemented, if so amended or supplemented) containedSecurities Act, contain any untrue statement of a material fact or
omittedomit to state any material fact required to be stated therein or necessary in order to
make the statements therein in light of the circumstances under which they were
made, not misleading asand (ii) the Proxy Statement and any
amendment or supplement thereto shall, at the date(s) of (A) the time the Registration Statement
became effective, (B)mailing to stockholders
and at the time of the meeting of Citizens shareholders
referred to in Section 4.2 of the Agreement, or (C) at the Closing Date.
(d) Registration Statement. The Registration Statement shall be
effective under the 1933 Act and Bancshares shall have complied with or be
exempt from all state securities laws or "blue sky" registration
requirements related to the offer and issuance of Bancshares Common Stock
in connection with the Merger, and neither the Registration Statement nor
any such permit, authorization or exemption shall be subject to a stop
order or threatened stop order by the SEC or any state securities
authority.
(e) Tax Opinion. Bancshares and Citizens shall have received, in form
and substance reasonably satisfactory to them, an opinion of Gentry Locke
Rakes & Moore LLP to the effect, for federal income tax purposes, that
consummation of the Merger will constitute a "reorganization" as defined in
Section 368(a) of the Code and no taxable gain will be recognized by
Bancshares, FCB or Citizens upon consummation of the Merger.
(f) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit Citizens and FCB
to consummate the Merger and Bancshares to issue its Common Stock to
Citizens shareholders shall have been received and all related waiting
periods shall have expired, all applicable federal and state laws governing
the Merger shall have been complied with and there shall not be in any
order or decree of any regulatory authority any condition or requirement
reasonably deemed objectionable to Bancshares or FCB, and more
specifically, FCB shall not be required to assume responsibility under the
March 1, 2000 FDIC Memorandum of Understanding beyond its current duty to
maintain adequate programs in support of consumer compliance.
(g) Affiliate Letters. Each person listed on Schedule K shall have
executed and delivered a commitment and undertaking to the effect that (i)
such shareholder will dispose of the shares of Bancshares Common Stock
received by him in connection with the Merger only in accordance with the
provisions of paragraph (d) of Rule 145; (ii) such shareholder will not
dispose of any such shares until Bancshares has received
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an opinion of counsel acceptable to it that such proposed disposition will
not violate the provisions of any applicable securities laws; (iii) that
they will not sell or reduce their risk with respect to the Bancshares
shares acquired in the Merger until after the publication of combined
financial results covering 30 days of combined operations; and (iv) the
certificates representing said shares may bear a legend referring to the
foregoing restrictions.
(h) Acceptance by Bancshares Counsel. The form and substance of all
legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for Bancshares.
(i) Disclosure Schedules. Within 45 days after the date of this
Agreement, FCB shall have received from Citizens the Schedules required to
be provided pursuant to this Agreement.
5.2 Conditions to Obligations of Citizens. The obligations of Citizens to
perform this Agreement are subject to the satisfaction of the following
conditions unless waived by Citizens:
(a) Representations and Warranties; Performance of Obligations; No
Adverse Change. The representations and warranties of Bancshares and FCB
set forth in Section 3.2 hereof shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time of
the Merger as though made on and as of the Effective Time of the Merger;
Bancshares and FCB shall have performed all obligations required to be
performed by them under this Agreement prior to the Effective Time of the
Merger; there shall have occurred no material adverse change in the
condition (financial or otherwise), assets, liabilities, properties or
business of Bancshares from March 31, 2000 to the Effective Date of the
Merger; and Citizens shall have received a certificate of authorized
officers of Bancshares to such effects.
(b) Authorization of Merger. All action necessary to authorize the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby shall have been duly and validly
taken by the boards of directors of Bancshares and FCB; FCB shall have full
power and right to merge and to acquire and assume the assets and
liabilities of Citizens on the terms provided herein.
(c) Opinion of Counsel. Citizens shall have received an opinion of
Gentry Locke Rakes & Moore LLP, special counsel to Bancshares and FCB,
dated the Closing Date and reasonably satisfactory to counsel to Citizens
to the effect that:
(i) The shares of Bancshares Common Stock to be issued pursuant to
the Agreement have been duly registered under the 1933 Act;
(ii) All legal obligations of Bancshares pertaining to consummation
of the Merger under the laws of the State of West Virginia, Commonwealth
of Virginia and the United States of America including the receipt of
all regulatory approvals required to be obtained by Bancshares, other
than action to be taken after the Effective Time and the completion of
legal obligations not the responsibility of Bancshares pursuant to this
Agreement, have been completed to the satisfaction of such counsel in
all material respects; and
(iii) On the basis of facts within their knowledge, such counsel
has no reason to believe that (except as to financial statements and
other financial data of any party hereto, or as to material relating to,
and supplied by, Citizens for inclusion in
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the Proxy Statement-Prospectus, as to which no belief need be expressed)
the Proxy Statement-Prospectus (as amended or supplemented, if so
amended or supplemented) containedCommonWealth Bank Meeting, contain any untrue statement
of a material fact or omittedomit to state any material fact required to be stated
therein or necessary in order to make the statements therein in lightnot misleading. Each of
CommonWealth Bank and Parent further agrees that if such party shall become
aware prior to the Effective Date of any
Annex I-27
information furnished by such party that would cause any of the circumstances under which they were made, not misleading (A) as of the
time the Registration Statement became effective; (B) as of the time of
the special meeting of shareholders of Citizens mentioned in Section 4.2
of the Agreement; or (C) as of the Closing Date.
(iv) Bancshares (a corporation) and FCB (a national association)
are organized and in good standing under the laws of Nevada and the
United States of America, respectively, and have all requisite corporate
power to own, lease and operate their respective properties and to carry
on their respective business as describedstatements in
the Registration Statement andor the Proxy Statement-Prospectus.
(v) Bancshares and FCB have full power to carry out the
transactions provided for in the Agreement; all corporate and other
proceedings requiredStatement to be takenfalse or misleading with
respect to any material fact, or to omit to state any material fact necessary to
make the statements therein not false or misleading, to promptly inform the
other parties thereof and to take the necessary steps to correct the
Registration Statement or the Proxy Statement.
(c) Parent agrees to advise CommonWealth Bank, promptly after Parent
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 Parent Common Stock for
offering or sale in any jurisdiction, of the initiation or, to the extent Parent
is aware thereof, threat of any proceeding for any such purpose, or of any
request by the SEC for the amendment or onsupplement of the partRegistration Statement
or for additional information.
6.04 Regulatory Filings.
(a) Each of BancsharesParent, First Community Bank and FCBCommonWealth Bank shall
cooperate and use their respective reasonable best efforts to authorize themprepare all
documentation, to executeeffect all filings and deliver the Agreementto obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary to consummate the transactions contemplated herebyTransaction; and any initial filings with
Governmental Authorities shall be made by Parent as soon as reasonably
practicable after the Planexecution hereof. Each of MergerParent and CommonWealth Bank
shall have been
dulythe right to review in advance, and validly taken;to the Agreement has been duly and validly
authorized, executed and delivered by Bancshares and FCB and constitutes
a valid and binding obligation of Bancshares and FCB enforceableextent practicable each
shall consult with the other, in accordance with its terms except as same (A) may be limited by
bankruptcy, insolvency, reorganization or other similareach case subject to applicable laws relating
to the rightsexchange of creditors;information, with respect to all written information
submitted to any third party or any Governmental Authority in connection with
the Transaction. In exercising the foregoing right, each of such parties agrees
to act reasonably and (B) is subjectas promptly as practicable. Each party hereto agrees that
it shall consult with the other parties hereto with respect to general principlesthe obtaining of
equity (regardlessall permits, consents, approvals, waivers and authorizations of whether such enforceability is considered in a
proceeding in equityall third
parties and Governmental Authorities necessary or law);advisable to consummate the
Transaction, and each party shall keep the Plan of Merger has been approved
by the Boards of Directors of Bancshares and FCB, respectively; and the
shares of Bancshares Common Stock have been duly authorized and when so
issued will be validly issued, fully paid and nonassessable.
(vi) All outstanding shares of Bancshares Common Stock have been
duly authorized and are validly issued, fully paid and nonassessable;
(vii) Execution and delivery by Bancshares and FCBother parties apprised of the Agreement, consummation by Bancshares and FCBstatus
of material matters relating to completion of the transactions
contemplated hereby,Transaction.
(b) Each party agrees, upon request, to furnish the other parties with all
information concerning itself, its Subsidiaries (if applicable), directors,
officers and compliancestockholders and such other matters as may be reasonably necessary
or advisable in connection with any filing, notice or application made by Bancshares and FCB with the
provisions thereof will not conflict with or result in a breachon
behalf of any
provisions of either Bancshares' or FCB's respective Articles of
Incorporation or Association, or either of their Bylaws or a default (or
give rise to rights of termination, cancellation or acceleration) under
any of the terms, conditions, or provisions of any note, bond, mortgage,
indenture, license, agreement or anysuch other instrument of Bancshares or
FCB known to such counsel, or violate any court order, writ, injunction
or decree applicable to Bancshares or FCBparties or any of their propertiesSubsidiaries (if applicable) to any
third party or assets, of which such counsel has knowledge after making inquiryGovernmental Authority.
6.05 Press Releases. CommonWealth Bank and Parent shall consult with each
other before issuing any press release with respect thereto;
(viii) Suchto the Transaction or this
Agreement and shall not issue any such press release or make any such public
statements without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party (but after such consultation, to the extent
practicable under the circumstances), issue such press release or make such
public statements as may upon the advice of outside counsel does not know of any litigation that is pending
or threatened which might result in money damages payablebe required by Bancshares
or FCB in excess of insurance coverage, which might result in a
permanent injunction against Bancshares or FCB or which, individually or
in the aggregate, otherwise might have a material adverse effect on
Bancshares or FCBlaw
or the transactions contemplated by this Agreement;
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(ix) Such counsel does not knowrules or regulations of any default under, or the
occurrence of any event which with the lapse of time, action or inaction
by a third party would result in a default under any outstanding
indenture, contract or agreement or under any governmental license or
permit or a material breach of any provision of the Articles of
Incorporation, or Bylaws of Bancshares;
(d) Registration Statement. The Registration StatementNasdaq. CommonWealth Bank and Parent shall
be
effective under the 1933 Actcooperate to develop all public announcement materials and Bancshares shall have complied or be
exempt from all state securities laws or "blue sky" registration
requirementsmake appropriate
management available at presentations related to the offerTransaction as reasonably
requested by the other party.
6.06 Access; Information.
(a) CommonWealth Bank agrees that upon reasonable notice and issuancesubject to
applicable laws relating to the exchange of Bancshares Common Stockinformation, it shall afford Parent
and Parent's officers, employees, counsel, accountants and other authorized
representatives such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, Tax Returns and work papers of independent auditors), properties and
personnel of CommonWealth Bank and to such other information relating to
CommonWealth Bank as Parent may reasonably request and, during such period, it
shall furnish promptly to Parent all information concerning the business,
properties and personnel of CommonWealth Bank as Parent may reasonably request.
(b) Parent agrees that upon reasonable notice and subject to applicable
laws relating to the exchange of information, it shall afford CommonWealth Bank
and its authorized representatives such access to Parent's personnel as
CommonWealth Bank may reasonably request.
Annex I-28
(c) Each party agrees that it will not, and will cause its representatives
not to, use any information obtained pursuant to this Section 6.06 (as well as
any other information obtained prior to the date hereof in connection with the
Merger,entering into of this Agreement) for any purpose unrelated to the consummation
of the Transaction. Subject to the requirements of law, each party shall keep
confidential, and neithershall cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 6.06 (as well as any
other information obtained prior to the Registration Statement nordate hereof in connection with the
entering into of this Agreement) unless such information (i) was already known
to such party, (ii) becomes available to such party from other sources not known
by such party to be bound by a confidentiality obligation, (iii) is disclosed
with the prior written approval of the party to which such information pertains
or (iv) is or becomes readily ascertainable from publicly available sources. In
the event that this Agreement is terminated or the Transaction shall otherwise
fail to be consummated, each party shall promptly cause all copies of documents
or extracts thereof containing information and data as to another party hereto
to be returned to the party which furnished the same. No investigation by any
such permit, authorizationparty of the business and affairs of any other party shall affect or exemptionbe deemed
to modify or waive any representation, warranty, covenant or agreement in this
Agreement, or the conditions to any party's obligation to consummate the
Transaction.
6.07 Affiliates. CommonWealth Bank shall use its reasonable best efforts
to identify those persons who may be subjectdeemed to a stop
order or threatened stop orderbe "affiliates" of CommonWealth
Bank within the meaning of Rule 145 promulgated by the SEC orunder the Securities
Act (the "Company Affiliates") and to cause each person so identified to deliver
to Parent as soon as practicable, and in any state securities
authority.
(e) Regulatory Approvals. All required approvals from federal and
state regulatory authorities having jurisdiction to permit Citizens and FCB
to consummate the Merger and Bancshares to issue its Common Stock to
Citizens' shareholders shall have been received and all related waiting
periods shall have expired.
(f) Tax Opinion. Citizens and Bancshares shall have received, in form
and substance reasonably satisfactory to it, an opinion of Gentry Locke
Rakes & Moore LLPevent prior to the effect, for federal income tax purposes, that
consummationdate of
CommonWealth Bank Meeting, a written agreement to comply with the Merger will constitute a "reorganization" as definedrequirements
of Rule 145 under the Securities Act in Section 368(a)connection with the sale or other
transfer of the Code; that no taxable gain will be recognized by
Bancshares, FCB or Citizens upon consummation of the Merger; that no
taxable gain will be recognized by a Citizens' shareholder on the exchange
by such shareholder of shares of Citizens' Common Stock solely for shares
of Bancshares Common Stock; that the basis of BancsharesParent Common Stock received in the Merger, willwhich agreement shall be
in the sameform attached hereto as Annex B (the "Affiliate Letter").
6.08 Acquisition Proposals. CommonWealth Bank agrees that it shall not,
and that it shall direct and use its reasonable best efforts to cause its
directors, officers, employees, agents and representatives not to, directly or
indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries
or the basismaking of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation or similar transaction involving CommonWealth
Bank, or any purchase of all or substantially all of the Citizens'
Common Stock surrendered in exchange therefor; that the holding periodassets of such Bancshares Common stock will include the holding periodCommonWealth
Bank or more than 10% of the Citizens' Common Stock surrenderedoutstanding equity securities of CommonWealth Bank
(any such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"). CommonWealth Bank further agrees that it shall not, and that it
shall direct and use its reasonable best efforts to cause its directors,
officers, employees, agents and representatives not to, directly or indirectly,
engage in exchangeany negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any Person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prevent the CommonWealth Bank or the CommonWealth Bank Board
from (A) complying with its disclosure obligations under federal or state law;
(B) providing information in response to a request therefor if such Citizens'
Common Stock is held asby a capital asset at the Effective Time of the
Merger; andPerson who has
made an unsolicited bona fide written Acquisition Proposal if the Exchange Ratio resultsCommonWealth
Bank Board receives from the Person so requesting such information an executed
confidentiality agreement; (C) engaging in any negotiations or discussions with
any Person who has made an unsolicited bona fide written Acquisition Proposal or
(D) recommending such an Acquisition Proposal to the issuancestockholders of
a fractional
share interest,CommonWealth Bank, if and only to the extent that, a Citizens' shareholder who receives cash in lieu of a
fractional share of Bancshares Common Stock will recognize gain or loss
equal to any difference between the amount of cash received and the
shareholder's basis in the fractional share interest.
(g) Acceptance by Citizens' Counsel. The form and substance of all
legal matters contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for Citizens.
(h) Fairness Opinion. Citizens shall have received the opinion of the
Financial Advisor, dated as of the date of the proxy materialseach such case referred to
in Section 4.2clause (B), (C) or (D) above, (i) the CommonWealth Bank Board determines in
good faith (after consultation with outside legal counsel) that such action
would be required in order for its directors to comply with their respective
fiduciary duties under applicable law and as(ii) the CommonWealth Bank Board
determines in good faith (after consultation with its financial advisor) that
such Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the Closing Date, thatproposal
and the Merger is fair,Person making the proposal and would, if consummated, result in a
transaction more favorable to CommonWealth Bank's stockholders from a financial
point of view to Citizensthan the Merger. An Acquisition Proposal which is received and
its shareholders.
ARTICLE VI
CLOSING DATE; EFFECTIVE TIME OF THE MERGER
6.1 Closing Date. Unless another date or place is agreed to in writingconsidered by the parties,CommonWealth Bank in compliance with this Section 6.08 and
which meets the closingrequirements set forth in clause (D) of the transactions contemplated in this Agreement
shall take place at the Corporate Center of FCB at One Community Place,
Bluefield, Virginia, at 10:00 A.M., local time, on such datepreceding sentence
is herein referred to as FCB shall
designate to Citizensa "Superior Proposal." CommonWealth Bank agrees that it
will immediately cease and is reasonably acceptable to
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Citizens; provided, that the date so designated shall not be earlier than 15
days or later than 120 days following the date of the decision of the Office of
the Comptroller of the Currency approving the Merger (the "Closing Date").
6.2 Filings at Closing. Subject to the provisions of Article V, at the
Closing Date, FCB shall cause appropriate documents memorializing the Merger to be filedterminated any existing activities,
discussions or negotiations with the Officeany parties conducted heretofore with respect
to any Acquisition Proposals. CommonWealth Bank agrees that it will notify
Parent if any such inquiries, proposals or offers are received by, any such
information is requested from, or any
Annex I-29
such discussions or negotiations are sought to be initiated or continued with,
CommonWealth Bank or any of the Comptroller of the Currency ("Comptroller") and
each of FCB, Bancshares, and Citizens shall take any and all lawful actions to
cause the Merger to become effective.
6.3 Effective Time. Subject to the terms and conditions set forth herein,
including receipt of all required regulatory approvals, the Merger shall become
effective at the time the Merger is made effective by the Comptroller (the
"Effective Time of the Merger").
ARTICLE VII
TERMINATION; SURVIVAL OF REPRESENTATIONS
WARRANTIES AND COVENANTS; WAIVER AND AMENDMENT
7.1 Termination. This Agreement shall be terminated, and the Merger
abandoned, if the shareholders of Citizens shall not have given the approval
required by Section 5.1(b). Notwithstanding such approval by such shareholders,
this Agreement may be terminated in writing at any time priorits representatives.
6.09 Certain Policies. Prior to the Effective Time ofDate, CommonWealth Bank
shall, consistent with GAAP, the Merger by:
(a) The mutual consent of FCB and Citizens, as expressed by their
respective boards of directors;
(b) Either FCB or Citizens, as expressed by their respective boards of
directors, after December 31, 2000;
(c) By FCB in writing authorized by its Board of Directors if Citizens
has, or by Citizens in writing authorized by its Board of Directors if FCB
has, in any material respect, breached (i) any covenant or agreement
contained herein, or (ii) any representation or warranty contained herein,
in any case if such breach has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the party
committing such breach or the Closing Date;
(d) Either FCB or Citizens, as expressed by their respective boards of
directors, in the event that any of the conditions precedent to the
obligations of such party to consummate the Merger have not been satisfied
or waived by the party entitled to so waive on or before the Closing Date,
provided that neither party shall be entitled to terminate this Agreement
pursuant to this subparagraph (d) if the condition precedent or conditions
precedent which provide the basis for termination can reasonably be and are
satisfied within a reasonable period of time, in which case, the Closing
date shall be appropriately postponed;
(e) FCB or Citizens, if any of the Federal Reserve Board, the
Comptroller or the Division deny approval of the Merger and the time period
for all appeals or requests for reconsideration have expired;
(f) Citizens, if the Bancshares Stock Price is less than $15.00 per
share based on the average bid and ask price quoted on NASDAQ at the close
of business on the business day prior to the Closing Date;
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(g) FCB if, within ten days of receipt of the Citizens Schedules to be
provided pursuant to this Agreement, it reasonably believes that the
information set forth in such Schedules reflects material adverse
information not previously known to FCB and notifies Citizens to that
effect;
(h) Bancshares, if the holders of more than ten percent (10%) of the
outstanding shares of Citizens exercise dissenters' rights with respect to
the Merger.
7.2 Effect of Termination.
(a) In the event of the termination and abandonment of this Agreement
and Merger pursuant to Section 7.1, this Agreement, other than the
provisions of Sections 4.1 (last sentence) and 9.1 shall become void and
have no effect, without any liability on the part of any party or its
directors, officers or shareholders.
(b) In the event this Agreement is terminated other than as permitted
under Section 7.1(a)-(h), or if the stockholders of Citizens fail to
approve the proposed transaction, and approve a merger, sale of assets or
similar transaction with a party other than FCB and Bancshares within
twelve months, Citizens shall pay to FCB, within 30 days following the
effective date of termination hereof or the second meeting of stockholders
as applicable, the sum of $250,000.00 plus the out-of-pocket expense, not
to exceed $50,000.00, of FCB and Bancshares in connection with this
transaction, as compensation for their costs and expenses, their due
diligence and other management efforts, and the loss of opportunity to
expand into Citizens' market.
7.3 Survival of Representations, Warranties and Covenants. The respective
representations and warranties, covenants and agreements (except for those
contained in Sections 1.3, 2.2, 2.3, 4.1 (last sentence), 7.3, 8.2, 9.1, 9.2,
9.3, and 9.6, which shall survive the effectiveness of the Merger) of
Bancshares, FCB, and Citizens contained herein shall expire with, and be
terminated and extinguished by, the effectiveness of the Merger and shall not
survive the Effective Time of the Merger.
7.4 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders are,
entitled to the benefits thereof; and this Agreement may be amended or
supplemented by written instructions duly executed by all parties hereto at any
time, whether before or after the meeting of Citizen' shareholders referred to
in Section 4.2 hereof, except statutory requirements and requisite approvals of
shareholders and regulatory authorities.
ARTICLE VIII
ADDITIONAL COVENANTS
8.1 Registration Statement. Bancshares, FCB and Citizens acknowledge that
the Merger is a transaction to which the 1933 Act is applicable. Each of the
parties agree to comply with the provisions of the 1933 Act and all rules and regulations of the SEC promulgatedand applicable
banking laws and regulations, modify or change its loan, OREO, accrual, reserve,
tax, litigation and real estate valuation policies and practices (including loan
classifications and levels of reserves) so as to be applied on a basis that is
consistent with that of Parent; provided, however, that no such modifications or
changes need be made prior to the satisfaction of the conditions set forth in
Section 7.01(b); and further provided that in any event, no accrual or reserve
made by CommonWealth Bank pursuant to this Section 6.09 shall constitute or be
deemed to be a breach, violation of or failure to satisfy any representation,
warranty, covenant, agreement, condition or other provision of this Agreement or
otherwise be considered in determining whether any such breach, violation or
failure to satisfy shall have occurred. The recording of any such adjustments
shall not be deemed to imply any misstatement of previously furnished financial
statements or information and shall not be construed as concurrence of
CommonWealth Bank or its management with any such adjustments.
6.10 Nasdaq Listing. Parent agrees to use its reasonable best efforts to
list, prior to the 1933 Act and cooperateEffective Date, on the Nasdaq the shares of Parent Common
Stock to be issued in connection with the preparationMerger.
6.11 Indemnification.
(a) From and filing by Bancsharesafter the Effective Time through the sixth anniversary of the
Effective Time, Parent (the "Indemnifying Party") shall indemnify and hold
harmless each present and former director, officer and employee of CommonWealth
Bank, determined as of the Effective Time (the "Indemnified Parties") against
any costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, arising in whole or in part out of or pertaining to
the fact that he or she was a Registration
Statementdirector, officer, employee, fiduciary or agent of
CommonWealth Bank or is or was serving at the request of CommonWealth Bank as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust or other enterprise, including without
limitation matters related to the negotiation, execution and performance of this
Agreement or consummation of the Transaction, to the fullest extent which such
Indemnified Parties would be entitled under the 1933 Act relatingCommonWealth Bank Articles and
the CommonWealth Bank Bylaws, or any agreement, arrangement or understanding
which has been Previously Disclosed by CommonWealth Bank pursuant to this
Section, in each case as in effect on the Merger. Bancsharesdate hereof.
(b) Any Indemnified Party wishing to claim indemnification under this
Section 6.11, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not actually prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and Citizens
agree (a)the
Indemnifying Party shall not be liable to give their respective authorized representatives complete access to
the books, records and filessuch Indemnified Parties for any legal
expenses of the other party atcounsel or any reasonable time for the
purpose of preparingother expenses subsequently incurred by such
Registration Statement and Proxy Statement; (b) to
provide the other party upon request such information relating to their
businesses and financial condition,
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as shall be appropriateIndemnified Parties in connection with the preparationdefense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
said Registration
Statementinterest between the Indemnifying Party and Proxy Statement; and (c) to submitthe Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to the
other partyIndemnifying Party, and the Indemnifying Party shall pay, promptly as statements
therefor are received, the reasonable fees and expenses of such counsel for the
Indemnified Parties (which may not exceed one firm in any jurisdiction), (ii)
the Indemnified Parties will cooperate in the defense of any such matter, (iii)
the Indemnifying Party shall not be liable for any settlement effected without
its prior approval all press releaseswritten consent and (iv) the Indemnifying Party shall have no
obligation hereunder in the event that a federal or other oralstate banking agency or written statements made or
issued which relatea
court of competent jurisdiction shall determine that indemnification of an
Indemnified Party in the manner contemplated hereby is prohibited by applicable
laws and regulations.
(c) Prior to Effective Time, Parent shall cause the Merger in any manner.
8.2 Employee Benefits. All employeespersons serving as
directors and officers of CitizensCommonWealth Bank immediately prior to the Effective
Time of the Merger who are employed by FCB following the Effective
Time of the Merger ("Transferred Employees") willto be covered by FCB's employee
benefit plans with eligibility based on their length of service, compensation,
job classification,the directors' and position with Citizens. FCB's benefit plans will
recognize for purposes of eligibility to participate and for vesting, all
service of Transferred Employees with Citizens, subject to applicable break in
service rules. Eligible employees of Citizens shall be permitted to contribute
funds distributed upon termination of Citizens' benefit plans to similar FCB
benefit plans.
8.3 Protection of Directors and Officers. FCB shall provide and keep in
forceofficers' liability
Annex I-30
insurance policy maintained by CommonWealth Bank for a period of three years
after the Closing Date directors'Effective Time (provided that Parent may substitute therefore policies
of at least the same coverage and officers' liability insurance providingamounts containing terms and conditions which
are not materially less advantageous than such policy or single premium tail
coverage with policy limits equal to directors and officers of
Citizens forCommonWealth Bank's existing coverage
limits) with respect to acts or omissions occurring prior to the Closing Date. Such
insurance shall provide at least the same coverageEffective Time
which were committed by such directors and amountsofficers in their capacities as contained in
Citizens' policy on the date hereof;such,
provided that in no event shall the
premium on such policy exceed $10,000 (the "Maximum Amount"). If theParent be required to expend for any one year an
amount in excess of the premiums necessaryannual premium currently paid by CommonWealth Bank for
such insurance (the "Insurance Amount"), and further provided that if Parent is
unable to maintain or procure suchobtain the insurance coverage exceedscalled for by this Section 6.11(c) as
a result of the Maximum Amount, FCBpreceding provision, Parent shall use its reasonable best
efforts to maintainobtain the most advantageous policies of directors' and officers' liability insurance obtainablecoverage as is available for a premium equal to the
MaximumInsurance Amount.
Notwithstanding the foregoing, FCB
further agrees to indemnify all individuals who are or may have been officers or
directors of Citizens prior to the Closing Date from any acts or omissions in
such capacities prior to the Closing Date to the same extent as the officers and
directors of FCB.(d) If FCBParent or any of its successors or assigns shall consolidate with or
merge withinto any other entity and shall not be the continuing or surviving entity
of such consolidation or merger or shall transfer all or substantially all of
its assets to any other entity, then and in each case, proper provisionsprovision shall be
made so that the successors and assigns of FCBParent shall assume the obligations
set forth in this Section 8.3.6.11.
6.12 Benefit Plans.
(a) As soon as administratively practicable after the Effective Time,
Parent shall take all reasonable action so that employees of CommonWealth Bank
shall be entitled to participate in each employee benefit plan, program or
arrangement of Parent of general applicability (the "Parent Benefit Plans") to
the same extent as similarly-situated employees of Parent and its Subsidiaries
(it being understood that inclusion of the employees of CommonWealth Bank in the
Parent Benefit Plans may occur at different times with respect to different
plans), provided, however, that nothing contained herein shall require Parent or
any of its Subsidiaries to make any grants to any former employee of
CommonWealth Bank under any discretionary equity compensation plan of Parent.
Parent shall cause each Parent Benefit Plan in which employees of CommonWealth
Bank are eligible to participate to recognize, for purposes of determining
eligibility to participate in, the vesting of benefits and for all other
purposes (but not for accrual of pension benefits) under the Parent Benefit
Plans, the service of such employees with CommonWealth Bank to the same extent
as such service was credited for such purpose by CommonWealth Bank, provided,
however, that such service shall not be recognized to the extent that such
recognition would result in a duplication of benefits. Nothing herein shall
limit the ability of Parent to amend or terminate any of CommonWealth Bank's
Benefit Plans in accordance with their terms at any time.
(b) At and following the Effective Time, Parent shall honor, and the
Surviving Corporation shall continue to be obligated to perform, in accordance
with their terms, all benefit obligations to, and contractual rights of, current
and former employees of CommonWealth Bank existing as of the Effective Date, as
well as all employment, severance, deferred compensation, split dollar,
supplemental retirement or "change-in-control" agreements, plans or policies of
CommonWealth Bank which are Previously Disclosed, subject in each case as the
same may be modified or terminated with respect to certain executive officers of
CommonWealth Bank pursuant to an employment or change-in-control agreement. The
severance or termination payments which are payable pursuant to such agreements,
plans or policies of CommonWealth Bank (which have been quantified in reasonable
detail) have been Previously Disclosed.
(c) At such time as employees of CommonWealth Bank become eligible to
participate in a medical, dental or health plan of Parent or its Subsidiaries,
Parent shall cause each such plan to (i) waive any preexisting condition
limitations to the extent such conditions covered under the applicable medical,
health or dental plans of Parent, (ii) provide full credit for under such plans
any deductibles, co-payment and out-of-pocket expenses incurred by the employees
and their beneficiaries during the portion of the calendar year prior to such
participation and (iii) waive any waiting period limitation or evidence of
insurability requirement which would otherwise be applicable to such employee on
or after the Effective Time to the extent such employee had satisfied any
similar limitation or requirement under an analogous Plan prior to the Effective
Time.
(d) Effective as of the Effective Time, J.E. Causey Davis shall have
entered into an employment agreement with First Community Bank, the form of
which is set forth as Annex C hereto.
Annex I-31
(e) An employee of CommonWealth Bank (other than an employee who is party
to an employment agreement or a severance agreement) whose employment is
involuntarily terminated other than for cause following the Effective Time shall
be entitled to receive severance payments as Previously Disclosed.
6.13 Parent Board and First Community Bank Board. Parent agrees to take
all action necessary to appoint or elect, effective as of the Effective Time,
Harold V. Groome, Jr. to the Parent Board, and Parent and First Community Bank
agree to take all action necessary to appoint or elect, effective as of the
Effective Time, Harold V. Groome, Jr. and Franklin P. Hall to the First
Community Bank Board.
6.14 Notification of Certain Matters. Each of CommonWealth Bank and Parent
shall give prompt notice to the other of any fact, event or circumstance known
to it that (i) is reasonably likely, individually or taken together with all
other facts, events and circumstances known to it, to result in any Material
Adverse Effect with respect to it or (ii) would cause or constitute a material
breach of any of its representations, warranties, covenants or agreements
contained herein.
ARTICLE IX
MISCELLANEOUS
9.1 Expenses. IfVII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger is consummated, all expensesMerger. The
respective obligation of each of the parties hereto to consummate the Merger is
subject to the fulfillment or, to the extent permitted by applicable law,
written waiver by the parties hereto prior to the Closing Date of each of the
following conditions:
(a) Shareholder Approval. This Agreement shall have been duly approved by
the requisite vote of the holders of outstanding shares of CommonWealth Bank
Common Stock.
(b) Regulatory Approvals. All regulatory approvals required to consummate
the Transaction shall have been obtained and shall remain in full force and
effect and all statutory waiting periods in respect thereof shall have expired
and no such approvals shall contain any conditions, restrictions or requirements
which the Parent Board reasonably determines in good faith would, individually
or in the aggregate, materially reduce the benefits of the Transaction to such a
degree that Parent would not have entered into this Agreement had such
conditions, restrictions or requirements been known at the date hereof.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and prohibits consummation of the
Transaction.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated by the SEC and not
withdrawn.
(e) Listing. The shares of Parent Common Stock to be issued in the Merger
shall have been approved for listing on the Nasdaq.
(f) Tax Opinion. Each of Parent and CommonWealth Bank shall have received
the written opinion of Kelley Drye & Warren LLP, in form and substance
reasonably satisfactory to both CommonWealth Bank and Parent, dated as of the
Effective Date, substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. In rendering such opinion, such counsel may
require and rely upon representations and covenants, including those contained
in certificates of officers of Parent, CommonWealth Bank and others, reasonably
satisfactory in form and substance to such counsel.
Annex I-32
7.02 Conditions to Obligation of CommonWealth Bank. The obligation of
CommonWealth Bank to consummate the Merger is also subject to the fulfillment or
written waiver by CommonWealth Bank prior to the Closing Date of each of the
following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent and First Community Bank set forth in this Agreement, subject in all
cases to the standard set forth in Section 5.02, shall be true and correct as of
the date of this Agreement and as of the Effective Date as though made on and as
of the Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be true
and correct as of such date), and CommonWealth Bank shall have received a
certificate, dated the Effective Date, signed on behalf of Parent and First
Community Bank by the Chief Executive Officer and the Chief Financial Officer of
both Parent and First Community Bank to such effect.
(b) Performance of Obligations of Parent and First Community Bank. Parent
and First Community Bank shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or prior to
the Effective Time, and CommonWealth Bank shall have received a certificate,
dated the Effective Date, signed on behalf of Parent and First Community Bank by
the Chief Executive Officer and the Chief Financial Officer of both Parent and
First Community Bank to such effect.
(c) Legal Opinion. CommonWealth Bank shall have received an opinion of
Kelley Drye & Warren LLP, dated the date of the Closing, that addresses the
matters set forth in Annex D hereto.
(d) Other Actions. Parent and First Community Bank shall have furnished
CommonWealth Bank with such certificates of its respective officers or others
and such other documents to evidence fulfillment of the conditions set forth in
Sections 7.01 and 7.02 as CommonWealth Bank may reasonably request.
7.03 Conditions to Obligations of Parent and First Community Bank. The
obligations of Parent and First Community Bank to consummate the Merger are also
subject to the fulfillment or written waiver by Parent prior to the Closing Date
of each of the following conditions:
(a) Representations and Warranties. The representations and warranties of
CommonWealth Bank set forth in this Agreement, subject in all cases to the
standard set forth in Section 5.02, shall be true and correct as of the date of
this Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their terms
speak as of the date of this Agreement or some other date shall be true and
correct as of such date), and Parent shall have received a certificate, dated
the Effective Date, signed on behalf of CommonWealth Bank by the Chief Executive
Officer and the Chief Financial Officer of CommonWealth Bank to such effect.
(b) Performance of Obligations of Company. CommonWealth Bank shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Parent shall have
received a certificate, dated the Effective Date, signed on behalf of
CommonWealth Bank by the Chief Executive Officer and the Chief Financial Officer
of CommonWealth Bank to such effect.
(c) Shareholder Agreements. Shareholder Agreements, substantially in the
form attached as Annex A hereto, shall have been executed and delivered by each
director and executive officer of CommonWealth Bank in connection with
CommonWealth Bank's execution and delivery of this Agreement.
(d) Employment Agreement. J.E. Causey Davis shall have executed the
employment agreement required by Section 6.12(d) hereof.
(e) Dissenting Shares. Dissenting Shares shall not represent 10% or more
of the outstanding shares of CommonWealth Bank Common Stock.
(f) Legal Opinion. Parent and First Community Bank shall have received an
opinion of LeClair Ryan, A Professional Corporation, dated the date of the
Closing, that addresses the matters set forth in Annex E.
(g) Other Actions. CommonWealth Bank shall have furnished Parent with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 7.01 and 7.03 as Parent may
reasonably request.
Annex I-33
ARTICLE VIII
TERMINATION
8.01 Termination. This Agreement may be terminated, and the Transaction
may be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the mutual
consent of Parent, First Community Bank and CommonWealth Bank if the Board of
Directors of each so determines by vote of a majority of the members of its
entire Board.
(b) Breach. At any time prior to the Effective Time, by Parent and First
Community Bank on the one hand or CommonWealth Bank on the other hand, if their
Board of Directors so determines by vote of a majority of the members of their
entire Board, in the event of: (i) a breach by Parent and First Community Bank
on the one hand or CommonWealth Bank on the other hand, as the case may be, of
any representation or warranty contained herein (subject to the standard set
forth in Section 5.02), which breach cannot be or has not been cured within 30
days after the giving of written notice to the breaching party or parties of
such breach; or (ii) a breach by Parent and First Community Bank on the one hand
or CommonWealth Bank on the other hand, as the case may be, of any of the
covenants or agreements contained herein, which breach cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
or parties of such breach, which breach (whether under (i) or (ii)) would be
reasonably expected, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect with respect to Parent or CommonWealth Bank,
as the case may be.
(c) Delay. At any time prior to the Effective Time, by Parent and First
Community Bank on the one hand or CommonWealth Bank on the other hand, if their
Board of Directors so determines by vote of a majority of the members of their
entire Board, in the event that the Transaction is not consummated by September
30, 2003, except to the extent that the failure of the Merger then to be
consummated arises out of or results from the knowing action or inaction of (i)
the party seeking to terminate pursuant to this Section 8.01(c) or (ii) any of
the Shareholders (if CommonWealth Bank is the party seeking to terminate), which
action or inaction is in violation of its obligations under this Agreement or,
in the case of the Shareholders, his, her or its obligations under the relevant
Shareholder Agreement.
(d) No Regulatory Approval. By Parent and First Community Bank on the one
hand or CommonWealth Bank on the other hand, if their Board of Directors so
determines by a vote of a majority of the members of their entire Board, in the
event the approval of any Governmental Authority required for consummation of
the Merger and the other transactions contemplated by this Agreement shall have
been denied by final nonappealable action of such Governmental Authority or an
application therefor shall have been permanently withdrawn at the request of a
Governmental Authority.
(e) No Shareholder Approval. By either Parent and First Community Bank on
the one hand or CommonWealth Bank on the other hand, if any approval of the
stockholders of CommonWealth Bank contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote at the
CommonWealth Bank Meeting.
(f) Failure to Recommend. At any time prior to CommonWealth Bank Meeting,
by Parent and First Community Bank if (i) CommonWealth Bank shall have breached
Section 6.08, (ii) the CommonWealth Bank Board shall have failed to make its
recommendation referred to in Section 6.02, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse in any respect to
the interests of Parent and First Community Bank or (iii) CommonWealth Bank
shall have materially breached its obligations under Section 6.02 by failing to
call, give notice of, convene and hold the CommonWealth Bank Meeting in
accordance with Section 6.02.
(g) Certain Tender or Exchange Offers. By Parent if a tender offer or
exchange offer for 20% or more of the outstanding shares of CommonWealth Bank
Common Stock is commenced (other than by Parent or a Subsidiary thereof), and
the CommonWealth Bank Board recommends that the stockholders of CommonWealth
Bank tender their shares in such tender or exchange offer or otherwise fails to
recommend that such stockholders reject such tender offer or exchange offer
within the ten-Business Day period specified in Rule 14e-2(a) under the Exchange
Act.
Annex I-34
(h) Superior Proposal. At any time prior to the CommonWealth Bank Meeting,
by CommonWealth Bank in order to concurrently enter into an acquisition
agreement or similar agreement (each, an "Acquisition Agreement") with respect
to a Superior Proposal which has been received and considered by CommonWealth
Bank and the CommonWealth Bank Board in compliance with Section 6.08 hereof,
provided, however, that this Agreement may be terminated by CommonWealth Bank
pursuant to this Section 8.01(h) only after the fifth Business Day following
CommonWealth Bank's provision of written notice to Parent advising Parent that
the CommonWealth Bank Board is prepared to accept a Superior Proposal, and only
if, during such five-Business Day period, Parent does not, in its sole
discretion, make an offer to CommonWealth Bank that the CommonWealth Bank Board
determines in good faith, after consultation with its financial and legal
advisors, is at least as favorable as the Superior Proposal.
(i) Decrease in Average Share Price. By Parent and First Community Bank,
at any time during the five-day period commencing with the Determination Date,
if the Average Share Price shall be less than 85.0% of the Starting Price (as
the same may be adjusted to reflect any Capital Change), subject, however, to
the following three sentences. If Parent and First Community Bank elect to
exercise their termination right pursuant to the immediately preceding sentence,
they shall give written notice to CommonWealth Bank (provided that such notice
of election to terminate may be withdrawn at any time within the aforementioned
five-day period). During the five-day period commencing with its receipt of such
notice, CommonWealth Bank shall have the option of decreasing the consideration
to be received by the holders of CommonWealth Bank Common Stock hereunder by
adjusting the Exchange Ratio to equal a number equal to the quotient (rounded to
the nearest one ten-thousandth), the numerator of which is $30.50 and the
denominator of which is the product of the Starting Price and .85. If
CommonWealth Bank makes an election contemplated by the preceding sentence
within such five-day period, it shall give prompt written notice to Parent and
First Community Bank of such election and the revised Exchange Ratio, whereupon
no termination shall have occurred pursuant to this Section 8.01(i) and this
Agreement shall remain in effect in accordance with its terms (except as the
Exchange Ratio shall have been so modified), and any references in this
Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the
Exchange Ratio as adjusted pursuant to this Section 8.01(i).
(j) Increase in Average Share Price. By CommonWealth Bank, at any time
during the five-day period commencing with the Determination Date, if the
Average Share Price shall be greater than 115.0% of the Starting Price (as the
same may be adjusted to reflect any Capital Change), subject, however, to the
following three sentences. If CommonWealth Bank elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall give
written notice to Parent (provided that such notice of election to terminate may
be withdrawn at any time within the aforementioned five-day period). During the
five-day period commencing with its receipt of such notice, Parent shall have
the option of increasing the consideration to be received by the holders of
CommonWealth Bank Common Stock hereunder by adjusting the Exchange Ratio to
equal a number equal to the quotient (rounded to the nearest one
ten-thousandth), the numerator of which is $30.50 and the denominator of which
is the product of the Starting Price and 1.15. If Parent makes an election
contemplated by the preceding sentence within such five-day period, it shall
give prompt written notice to CommonWealth Bank of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to this
Section 8.01(j) and this Agreement shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 8.01(j).
8.02 Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article VIII, no party to this Agreement shall have
any liability or further obligation to any other party hereunder except as set
forth in this Section 8.02 and Section 9.01.
(b) If this Agreement is terminated by either Parent or CommonWealth Bank
due to a breach of a representation, warranty, covenant or undertaking, the
party committing such breach shall be liable for $350,000 to the other party,
without prejudice to any other rights or remedies as may be available to Parent
under Section 8.02(c) below, provided however that to the extent Parent is
entitled to be paid both the $350,000 fee set
Annex I-35
forth in this Section 8.02(b) as well as the Termination Fee set forth in
Section 8.2(c) below, in no event will the amount payable to Parent pursuant to
Sections 8.02(b) and (c) exceed $1.0 million.
(c) In recognition of the efforts, expenses and other opportunities
foregone by Parent while structuring and pursuing the Merger, the parties hereto
agree that CommonWealth Bank shall pay Parent the sum of $1.0 million (the
"Termination Fee") if this Agreement is terminated as follows:
(i) if this Agreement is terminated by Parent pursuant to Section
8.01(f) or (g) or by CommonWealth Bank pursuant to Section 8.01(h), in
either of which case payment shall be made to Parent concurrently with
the termination of this Agreement; or
(ii) if (x) this Agreement is terminated by (A) Parent pursuant to
Section 8.01(b), (B) by either Parent or CommonWealth Bank pursuant to
Section 8.01(c) or (C) by either Parent or CommonWealth Bank pursuant to
Section 8.01(e), and in the case of any termination pursuant to clause
(A), (B) or (C), an Acquisition Proposal shall have been publicly
announced or otherwise communicated or made known to the senior
management of CommonWealth Bank or the CommonWealth Bank Board (or any
Person shall have publicly announced, communicated or made known an
intention, whether or not conditional, to make an Acquisition Proposal)
at any time after the date of this Agreement and prior to the taking of
the vote of the stockholders of CommonWealth Bank contemplated by this
Agreement at the CommonWealth Bank Meeting, in the case of clause (C),
or the date of termination, in the case of clause (A) or (B), and (y)
within 18 months after such termination CommonWealth Bank enters into an
agreement with respect to an Acquisition Proposal or consummates a
transaction which is the subject of an Acquisition Proposal, then
CommonWealth Bank shall pay to Parent the Termination Fee on the date of
execution of such agreement or consummation of a transaction which is
the subject of an Acquisition Proposal, provided that if the date of
execution of such agreement is after 12 months but within 18 months
after such termination of this Agreement, the Termination Fee shall be
payable by CommonWealth Bank to Parent only upon consummation of a
transaction which is the subject of an Acquisition Proposal, regardless
whether such consummation occurs within 18 months after termination of
this Agreement.
Any amount that becomes payable pursuant to this Section 8.02(c) shall be paid
by wire transfer of immediately available funds to an account designated by
Parent.
(d) CommonWealth Bank and Parent agree that the agreement contained in
paragraph (c) of this Section 8.02 is an integral part of the transactions
contemplated by this Agreement, that without such agreement Parent would not
have entered into this Agreement and that such amounts do not constitute a
penalty or liquidated damages in the event of a breach of this Agreement by
CommonWealth Bank. If CommonWealth Bank fails to pay Parent the amounts due
under paragraph (c) above within the time periods specified therein,
CommonWealth Bank shall pay the costs and expenses (including reasonable legal
fees and expenses) incurred by Parent in connection with any action in which
Parent prevails, including the filing of any lawsuit, taken to collect payment
of such amounts, together with interest on the amount of any such unpaid amounts
at the prime lending rate prevailing during such period as published in The Wall
Street Journal, calculated on a daily basis from the date such amounts were
required to be paid until the date of actual payment.
Annex I-36
ARTICLE IX
MISCELLANEOUS
9.01 Survival. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
agreements or covenants contained herein that by their express terms are to be
performed after the Effective Time) or the termination of this Agreement if this
Agreement is terminated prior to the Effective Time (other than Sections
6.06(c), 8.02 and, excepting Section 9.12 hereof, this Article IX, which shall
survive any such termination). Notwithstanding anything in the foregoing to the
contrary, no representations, warranties, agreements and covenants contained in
this Agreement shall be deemed to be terminated or extinguished so as to deprive
a party hereto or any of its affiliates of any defense at law or in equity which
otherwise would be available against the claims of any Person, including without
limitation any shareholder or former shareholder.
9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be (i) waived, by the party benefited by the provision or (ii)
amended or modified at any time, by an agreement in writing among the parties
hereto executed in the same manner as this Agreement, except that after the
CommonWealth Bank Meeting no amendment shall be made which by law requires
further approval by the stockholders of CommonWealth Bank without obtaining such
approval.
9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of Nevada applicable to contracts made
and to be performed entirely within such State.
9.05 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby,
including fees and expenses of its own financial consultants, accountants and
counsel and, in the case of Parent, the registration fee to be paid to the SEC
in connection with the Merger willRegistration Statement, except that expenses of printing
the Proxy Statement shall be borne by FCB. If the
Merger is not consummated, each partyshared equally between CommonWealth Bank and
Parent, and provided further that nothing contained herein shall bear its own expense, provided, that
if the Merger is not consummated becauselimit either
party's rights to recover any liabilities or damages arising out of a party's failure to satisfy a
condition (other than the failure of Citizens' shareholders to approve the
Merger, or termination of this Agreement because the Bancshares Stock Price is
less than $15.00) then the party failing to satisfy the condition will pay the other
party's expenses up to $50,000. Nothing contained in this Section 9.1
shall relievewillful breach of any party from liability for damages for any breachprovision of this Agreement.
9.2 Entire Agreement. This Agreement contains the entire agreement among
Bancshares, FCB and Citizens with respect to the Merger and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
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9.3 Descriptive Headings; Recitals. The descriptive headings and recitals
contained in this Agreement are for convenience only and shall not control or
affect the meaning or construction of any provisions of this Agreement.
9.49.06 Notices. All notices, orrequests and other communications which are required or
permitted hereunder to
a party shall be in writing and sufficientshall be deemed given if personally delivered,
personallytelecopied (with confirmation) or sentmailed by telecopier or registered or certified mail postage prepaid,(return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by recognized overnight delivery service, addressed as follows:
IF TO BANCSHARES OR FCB:notice to the parties hereto.
If to CommonWealth Bank to:
The CommonWealth Bank
900 N. Parham Road
Richmond, Virginia 23229
Attention: J.E. Causey Davis,
President and Chief Executive Officer
Fax:
With a copy to:
LeClair Ryan, A Professional Corporation
Eleventh Floor
707 East Main Street
Richmond, Virginia 23219
Attention: George P. Whitley, Esq.
Fax: (804) 783-7628
Annex I-37
If to Parent or First Community Bank to:
First Community Bancshares, Inc.
One Community Place
P. O. Box 989
Bluefield, Virginia 24605-098924605
Attention: Mr. John M. Mendez, President
and Chief Executive Officer
Fax: (276) 326-9010
With a copy to:
Kelley Drye & CEOWarren LLP
8000 Towers Crescent Drive
Suite 1200
Vienna, Virginia 22182
Attention: Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
Fax: (540) 326-9010
COPY TO:
Jerry J. Cameron, Esquire
Brewster, Morhous & Cameron
418 Bland Street
P. O. Box 529
Bluefield, WV 24701
Fax: (304) 327-9317
Eugene E. Derryberry, Esquire
Gentry Locke Rakes & Moore
10 Franklin Road, SE
P. O. Box 40013
Roanoke, VA 24022-0013
Fax: (540) 983-9469
IF TO CITIZENS:
Citizens Southern Bank, Inc.
111 Citizens Drive
Beckley, WV 25801
Attention: Mr. Samuel L. Elmore, CEO
Fax: (304) 252-9418
COPY TO:
Charles Dunbar, Esquire
Jackson & Kelly PLLC
1600 Laidley Tower (Zip 25301)
P. O. Box 553
Charleston, WV 25322
Fax: (304) 340-1080
9.5 Counterparts.(703) 918-2450
9.07 Entire Understanding; No Third Party Beneficiaries. This Agreement
mayand the Shareholder Agreements represent the entire understanding of the parties
hereto and thereto with reference to the Transaction, and this Agreement and the
Shareholder Agreements supersede any and all other oral or written agreements
heretofore made. Except for the Indemnified Parties' right to enforce Parent's
obligation under Section 6.11, which are expressly intended to be executedfor the
irrevocable benefit of, and shall be enforceable by, each Indemnified Party and
his or her heirs and representatives, nothing in this Agreement, expressed or
implied, is intended to confer upon any Person, other than the parties hereto or
their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.08 Severability. Except to the extent that application of this Section
9.08 would have a Material Adverse Effect on CommonWealth Bank or Parent, any
term or provision of this Agreement which is invalid or unenforceable in any
numberjurisdiction shall, as to that jurisdiction, be ineffective to the extent of
counterparts,such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and eachprovisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable. In all such counterpartcases, the parties shall use their reasonable best
efforts to substitute a valid, legal and enforceable provision which, insofar as
practicable, implements the original purposes and intents of this Agreement.
9.09 Enforcement of the Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
9.10 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
an original
instrument, but all such counterparts together shall constitute one agreement.
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129
9.6 Governing Law. Except as may otherwise be requiredfollowed by the lawswords "without limitation." Whenever the words "as of the United Statesdate
hereof" are used in this Agreement, they shall be deemed to mean the day and
year first above written (January 27, 2003).
9.11 Assignment. No party may assign either this Agreement or any of America,its
rights, interests or obligations hereunder without the prior written approval of
the other parties. Subject to the preceding sentence, this Agreement shall be
governed bybinding upon and construed in
accordance withshall inure to the lawsbenefit of the Commonwealthparties hereto and their
respective successors and permitted assigns.
Annex I-38
9.12 Alternative Structure. Notwithstanding any provision of Virginia.this
Agreement to the contrary, Parent may at any time modify the structure of the
acquisition of CommonWealth Bank set forth herein, subject to the prior written
consent of CommonWealth Bank, which consent shall not be unreasonably withheld
or delayed, provided that (i) the Merger Consideration to be paid to the holders
of CommonWealth Bank Common Stock is not thereby changed in kind or reduced in
amount as a result of such modification, (ii) such modification will not
adversely affect the tax treatment to CommonWealth Bank's stockholders as a
result of receiving the Merger Consideration and (iii) such modification will
not materially delay or jeopardize receipt of any required approvals of
Governmental Authorities.
[SIGNATURE PAGE TO FOLLOW]
Annex I-39
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be
executed on their behalf and their Corporate seals affixed and attestedin counterparts by their officers thereunto duly authorized officers, all as of the day
and year first above written.
ATTEST: (SEAL) FIRST COMMUNITY BANCSHARES, INC.
By: /s/ JOHN M. MENDEZ
By: /s/ ROBERT L. BUZZO --------------------------------------
- -------------------------------------- Name: John M. Mendez
Name: Robert L. Buzzo
ATTEST: (SEAL) FIRST COMMUNITY BANK, N. A.
By: /s/ JOHN M. MENDEZ By: /s/ ROBERT L. BUZZO
-------------------------------------- --------------------------------------
Name: John M. Mendez Name: Robert L. Buzzo
ATTEST: (SEAL) CITIZENS SOUTHERN BANK, INC.
By: /s/ DON M. STACEY By: /s/ JACK H. ALLISON
-------------------------------------- --------------------------------------
Name: Don M. Stacey Name: Jack H. Allison
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CONSENT OF DIRECTORS
The undersigned, being all of the members of the Board of Directors of
Citizens Southern Bank, Inc. ("Citizens"), do hereby consent to the aforesaid
Agreement and do individually agree to support the Agreement, to vote the shares
of Citizens each owns or controls in favor of the transaction described in the
Agreement, to recommend its approval by the other stockholders of Citizens,
subject to the provisions of Section 4.4 of the Agreement, and to comply with
Section 5.1(g) of the Agreement.
/s/ RICK O. ADKINS
- ------------------------------------------------
Rick O. Adkins
/s/ JACK H. ALLISON
- ------------------------------------------------
Jack H. Allison
/s/ CARL E. CAMPBELL
- ------------------------------------------------
Carl E. Campbell
/s/ RICHARD L. CORNETT, II
- ------------------------------------------------
Richard L. Cornett, II
/s/ LORI A. DAVIS
- ------------------------------------------------
Lori A. Davis
/s/ L. EDWARD ECKLEY, III
- ------------------------------------------------
L. Edward Eckley, III
/s/ SAMUEL L. ELMORE
- ------------------------------------------------
Samuel L. Elmore
/s/ ANDREW E. FOX
- ------------------------------------------------
Andrew E. Fox
/s/ DAVID M. HILL
- ------------------------------------------------
David M. Hill
/s/ THOMAS W. JARRETT
- ------------------------------------------------
Thomas W. Jarrett
/s/ CARL W. ROOP
- ------------------------------------------------
Carl W. Roop
/s/ DON M. STACEY
- ------------------------------------------------
Don M. Stacy
/s/ BYRD E. WHITE, III
- ------------------------------------------------
Byrd E. White, III
A-29
131
EXHIBIT A
PLAN OF MERGER OF
FIRST COMMUNITY BANCSHARES, INC.
By: /s/ JOHN M. MENDEZ
------------------------------------
Name: John M. Mendez
Title: President and Chief
Executive Officer
FIRST COMMUNITY BANK, N.A.
AND
CITIZENS SOUTHERNNATIONAL
ASSOCIATION
By: /s/ JOHN M. MENDEZ
------------------------------------
Name: John M. Mendez
Title: Executive Vice President
THE COMMONWEALTH BANK
INC.
Section 1. Citizens Southern Bank, Inc., a West Virginia corporation
("Citizens"), shall, at the time that the Articles of Merger are made effective
by the OfficeBy: /s/ FRANKLIN P. HALL
------------------------------------
Name: Franklin P. Hall
Title: Chairman of the ComptrollerBoard
Annex I-40
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This AMENDMENT TO AGREEMENT AND PLAN OF MERGER, dated as of the CurrencyFebruary 25,
2003 (the "Effective Time of the
Merger""Amendment"), be merged (the "Merger"by and among FIRST COMMUNITY BANCSHARES, INC.
("Parent"), FIRST COMMUNITY BANK, NATIONAL ASSOCIATION ("First Community Bank"),
and THE COMMONWEALTH BANK ("CommonWealth Bank," and together with Parent and into
First Community Bank, N.A., a
national association ("FCB"the "Parties"), which is a subsidiary. Capitalized terms not otherwise defined
herein shall have the meaning as set forth in the original Agreement.
WHEREAS, the Parties entered into an Agreement and Plan of First Community
Bancshares, Inc. ("Bancshares"Merger, dated as
of January 27, 2003 (the "Agreement"), a Nevada corporation, with FCB;
WHEREAS, the Parties hereto wish to bemodify and amend the surviving corporation (the "Surviving Corporation").
Section 2. Conversion of Stock. At the Effective TimeAgreement as set
forth herein.
NOW, THEREFORE, in consideration of the Merger, each
sharepremises, covenants and agreements
hereinafter set forth, the Parties hereto agree as follows:
SECTION 1. AMENDMENT OF SECTION 1.01 OF THE AGREEMENT.
The definition of Citizens'"Maximum Cash Consideration" is hereby added to Section
1.01 of the Agreement to read as follows:
"Maximum Cash Consideration" has the meaning set forth in Section
3.01(b)(2)(iii).
SECTION 2. AMENDMENT TO SECTION 3.01 OF THE AGREEMENT.
Subsection (2) of subsection (b) of Section 3.01 of the Agreement is
amended to read in its entirety as follows:
(2) For purposes of this Agreement:
(i) the "Aggregate Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock ("Citizens' Common Stock") issued and outstanding
immediately prior to the Effective Time times .4 times $30.50;
(ii) the "Average Share Price" of the Merger, other than
Dissenting SharesParent Common Stock shall mean
the average of the closing sales price of a share of Parent Common
Stock, as reported on Nasdaq (as hereinafter defined)reported by an authoritative source),
for the 20 trading-day period ending with the close of business on the
fifth Business Day preceding the Effective Time; and
which, under(iii) the terms"Maximum Cash Consideration" shall amount to the product of
the number of shares of CommonWealth Bank Common Stock outstanding
immediately prior to the Effective Time times .5 times $30.50.
SECTION 3. AMENDMENT OF SECTION 3.02 OF THE AGREEMENT.
Subsections (ii) and (iii) of subsection (d) of Section 33.02 of this Planthe
Agreement are amended and restated in their entirety and a new subsection (iv)
is added, in each case to read as follows:
(ii) If the number of Merger,Cash Election Shares times the Per Share Cash
Consideration is to be converted intogreater than the Maximum Cash Consideration, then:
(1) all Stock Election Shares and exchangeable for
Common Stock of Bancshares ("Bancshares Common Stock")all No-Election Shares shall be
converted into the right to receive 1.74 sharesParent Common Stock,
(2) the Exchange Agent shall convert on a pro rata basis as
described below in Section 3.02(e) a sufficient number of Bancshares Common Stock.
Section 3. MannerCash
Election Shares (excluding any Dissenting Shares) ("Reallocated Stock
Shares") such that the number of Conversion of Citizens' Common Stock. The manner in
which outstanding shares of Citizens' Commonremaining Cash Election Shares
(including Dissenting Shares) times the Per Share Cash Consideration
equals the Maximum Cash Consideration, and all Reallocated Stock
Shares shall be converted into Bancsharesthe right to receive Parent Common
Stock, as specified inand
A-A-1
(3) the Cash Election Shares (subject to Section 2 hereof, after the Effective
Time of the Merger, shall be as follows:
(i) Each share of Citizens' Common3.06 with
respect to Dissenting Shares) which are not Reallocated Stock Shares
shall be converted into 1.74
shares of Bancshares Common Stock.
(ii) No fractional shares of Bancshares Common Stock shall be issued,
but instead the value of fractional shares shall be paid in cash (less all
applicable withholding taxes), as determined in accordance with Section 2.3
of the Agreement (defined below).
(iii) Certificates for shares of Citizens' Common Stock shall be
submitted for exchange for Bancshares Common Stock accompanied by the
Letter of Transmittal to be furnished by Citizens within fifteen business
days after the Effective Time of the Merger, to shareholders of record as
of the Effective Time of the Merger. Until so surrendered, each outstanding
certificate, which prior to the Effective Time of the Merger, represented
Citizens' Common stock, shall be deemed to evidence only the right to receive 1.74 sharescash.
(iii) If the number of Bancshares Common Stock. Until such outstanding
shares formerly representing Citizens' Common stock are surrendered, no
dividend payable to holders of record of Bancshares Common Stock as of any
date subsequentCash Election Shares times the Per Share Cash
Consideration is equal to the Effective Time of the MergerAggregate Cash Consideration, then
subparagraphs (d)(i) and (ii) above shall not apply and all Cash
Election Shares (subject to Section 3.06 with respect to Dissenting
Shares) shall be paid to the
holder of such outstanding certificates in respect thereof. Upon such
surrender, dividends accrued or declared on Bancshares Common Stock shall
be paid in accordance with Section 2.2 of the Agreement and Plan of
Reorganization dated as of June 27, 2000, among First Community Bancshares,
Inc., First Community Bank, N. A. and Citizens Southern Bank, Inc. (the
"Agreement").
Section 4. Articles of Association, Bylaws and Directors of the Surviving
Association. At and following the Effective Time of the Merger, there shall be
no change caused by the
A-30
132
Merger in the Articles of Association (except any change caused by the filing of
Articles of Merger relating to the Merger), Bylaws, or Board of Directors of the
Surviving Association.
Section 5. Effect of the Merger. The Merger, upon the Effective Time of the
Merger, shall have the effect provided by Section 92A.250 of the Nevada Revised
Statutes.
Section 6. Amendment. The Boards of Directors of FCB and Citizens reserveconverted into the right to amend this Planreceive cash and all
No-Election Shares and all Stock Election Shares will be converted into
the right to receive Parent Common Stock.
(iv) If the number of Merger at any time priorthe Cash Election Shares times the Per Share
Cash Consideration is greater than the Aggregate Cash Consideration but
less than the Maximum Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 3.06 with
respect to Dissenting Shares) shall be converted into the right to
receive cash,
(2) all Stock Election Shares shall be converted into the right
to receive Parent Common Stock,
(3) the Exchange Agent shall convert a sufficient number of
No-Election Shares into Reallocated Cash Shares such that the sum of
the number of Cash Election Shares plus the number of Reallocated
Cash Shares times the Per Share Cash Consideration equals the Maximum
Cash Consideration, and
(4) the No-Election Shares which are not Reallocated Cash Shares
shall be converted into the right to receive Parent Common Stock.
SECTION 4. MISCELLANEOUS.
(a) The Agreement is incorporated herein by reference.
(b) Except as otherwise set forth herein, the Agreement, as amended hereby,
shall remain in full force and effect and the Parties shall have all the rights
and remedies provided thereunder with the same force and effect as if the
Agreement were restated herein in its entirety.
(c) The provisions hereof shall be binding upon and inure to the Effective Timebenefit of
the Merger, provided, however,Parties and their respective executors, heirs, personal representatives,
successors and assigns.
(d) This Amendment may be executed and delivered in several counterparts
with the intention that anyall such amendment made subsequent tocounterparts, when taken together, constitute
one and the submission ofsame instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Plan of Merger to the shareholders of Citizens, may not: (i)
alter or change the amount or kind of shares, securities, cash, property or
rights to be received in exchange for or in conversion of all or anyAmendment as of
the shares of any class or series of Citizens; (ii) alter or change any of the terms
and conditions of this Plan of Merger if such alteration or change would
adversely affect the shares of any class or series of Citizens; or (iii) alter
or change any term of the Articles of Incorporation of Citizens (except as
provided herein).
A-31date first above written.