Document:

Filed by Automated Filing Services Inc. (604) 609-0244 - EYI Industries, Inc. - Exhibit 10.44

 THIS SECURED DEBENTURE, AND THE SECURITIES INTO WHICH IT IS
  CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED
  WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
  COMMISSION OF ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE
  HARBOR FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
  ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES ARE "RESTRICTED"
  AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE
  ACT, PURSUANT TO REGULATION D OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
  REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL
  OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
  EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS INVOLVING THE SECURITIES
  MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE ACT. 

 SECURED DEBENTURE

 EYI INDUSTRIES, INC.

 5% Secured Convertible Debenture 

 September 27, 2006 

	No. 004	US$245,000

                This
  Secured Debenture (the "Debenture") is issued on September 27, 2004 (the
  "Closing Date") by EYI Industries, Inc., a Nevada corporation (the "Company"),
  to Taib Bank, E.C. (together with its permitted successors and assigns, the
  "Holder") pursuant to exemptions from registration under the Securities
  Act of 1933, as amended. 

 ARTICLE I.

                Section
  1.01 Principal and Interest. For value received, the Company
  hereby promises to pay to the order of the Holder on September 27, 2006 in lawful
  money of the United States of America and in immediately available funds the
  principal sum of Two Hundred Forty-Five Thousand U.S. Dollars (US$245,000),
  together with interest on the unpaid principal of this Debenture at the rate
  of five percent (5%) per year (computed on the basis of a 365-day year and the
  actual days elapsed) from the date of this Debenture until paid. At the Company's
  option, the entire principal amount and all accrued interest shall be either
  (a) paid to the Holder on the second (2nd) year anniversary from
  the date hereof or (b) converted in accordance with Section 1.02 herein provided,
  however, that in no event shall the Holder be entitled to convert this Debenture
  for a number of shares of Common Stock in excess of that number of shares of
  Common Stock which, upon giving effect to such conversion, would cause the aggregate
  number

 of shares of Common Stock beneficially owned by the Holder
  and its affiliates to exceed 4.99% of the outstanding shares of the Common Stock
  following such conversion. 

                Section
  1.02 Optional Conversion. The Holder is entitled, at its
  option, to convert, and sell on the same day, at any time and from time to time,
  until payment in full of this Debenture, all or any part of the principal amount
  of the Debenture, plus accrued interest, into shares (the "Conversion Shares")
  of the Company's common stock, par value US$0.001 per share ("Common Stock"),
  at the price per share (the "Conversion Price") equal to the lesser of
  (a) an amount equal to one hundred twenty percent (120%) of the closing bid
  price of the Common Stock as listed on a Principal Market (as defined herein),
  as quoted by Bloomberg L.P. (the "Closing Bid Price") as of the date
  hereof, or (b) an amount equal to one hundred percent (100%) of the average
  of the three (3) lowest volume weighted average prices of the Company's Common
  Stock, as quoted by Bloomberg, LP (the "VWAP"), for the thirty (30) trading
  days immediately preceding the Conversion Date (as defined herein). Subparagraphs
  (a) and (b) above are individually referred to as a "Conversion Price".
  As used herein, "Principal Market" shall mean The National Association
  of Securities Dealers Inc.'s Over-The-Counter Bulletin Board, Nasdaq SmallCap
  Market, or American Stock Exchange. If the Common Stock is not traded on a Principal
  Market, the Closing Bid Price and/or the VWAP shall mean, the reported Closing
  Bid Price or the VWAP for the Common Stock, as furnished by the National Association
  of Securities Dealers, Inc., for the applicable periods. No fraction of shares
  or scrip representing fractions of shares will be issued on conversion, but
  the number of shares issuable shall be rounded to the nearest whole share. To
  convert this Debenture, the Holder hereof shall deliver written notice thereof,
  substantially in the form of Exhibit "A" to this Debenture, with appropriate
  insertions (the "Conversion Notice"), to the Company at its address as
  set forth herein. The date upon which the conversion shall be effective (the
  "Conversion Date") shall be deemed to be the date set forth in the Conversion
  Notice. 

                Section
  1.03 Reservation of Common Stock. The Company shall reserve
  and keep available out of its authorized but unissued shares of Common Stock,
  solely for the purpose of effecting the conversion of this Debenture, such number
  of shares of Common Stock as shall from time to time be sufficient to effect
  such conversion, based upon the Conversion Price. If at any time the Company
  does not have a sufficient number of Conversion Shares authorized and available,
  then the Company shall call and hold a special meeting of its stockholders within
  sixty (60) days of that time for the sole purpose of increasing the number of
  authorized shares of Common Stock. 

                Section
  1.04 Right of Redemption. The Company at its option shall have
  the right to redeem, with fifteen (15) days advance written notice (the "Redemption
  Notice"), a portion or all outstanding convertible debenture. The redemption
  price shall be one hundred twenty percent (120%) of the amount redeemed plus
  accrued interest.

                In
  the event the Company exercises a redemption of either all or a portion the
  Convertible Debenture, the Holder shall receive a warrant to purchase fifty
  thousand (50,000) shares of the Company's Common Stock for every One Hundred
  Thousand U.S. Dollars (US$100,000) redeemed, pro rata (the "Warrant").
  The Warrant shall be exercisable on a "cash basis" and have an exercise price
  of one hundred twenty percent (120%) of the Closing Bid Price of the

 2

 Company's Common Stock on the Closing Date. The Warrant shall
  have "piggy-back" and demand registration rights and shall survive for two (2)
  years from the Closing Date.

                Section
  1.05 Registration Rights. The Company is obligated to register
  the resale of the Conversion Shares under the Securities Act of 1933, as amended,
  pursuant to the terms of a Registration Rights Agreement, between the Company
  and the Holder of even date herewith (the "Investor Registration Rights Agreement").

                Section
  1.06 Interest Payments. The interest so payable will be paid at
  the time of maturity or conversion to the person in whose name this Debenture
  is registered. At the time such interest is payable, the Company, may elect
  to pay the interest in cash (via wire transfer or certified funds) or in the
  form of Common Stock. In the event of default, as described in Article III Section
  3.01 hereunder, the interest shall be paid in the form of Common Stock. If paid
  in the form of Common Stock, the amount of stock to be issued will be calculated
  as follows: the value of the stock shall be the Closing Bid Price on: (i) the
  date the interest payment is due; or (ii) if the interest payment is not made
  when due, the date the interest payment is made. A number of shares of Common
  Stock with a value equal to the amount of interest due shall be issued. No fractional
  shares will be issued; therefore, in the event that the value of the Common
  Stock per share does not equal the total interest due, the Company will pay
  the balance in cash. 

                Section
  1.07 Paying Agent and Registrar. Initially, the Company will act
  as paying agent and registrar. The Company may change any paying agent, registrar,
  or Company-registrar by giving the Holder not less than ten (10) business days'
  written notice of its election to do so, specifying the name, address, telephone
  number and facsimile number of the paying agent or registrar. The Company may
  act in any such capacity. 

                Section
  1.08 Secured Nature of Debenture. This Debenture is secured by
  all of the assets and property of the Company as set forth on Exhibit A to the
  Security Agreement dated the date hereof between the Company and the Holder
  (the "Security Agreement"). As set forth in the Security Agreement, Holder's
  security interest shall terminate upon the occurrence of an Expiration Event
  as defined in the Security Agreement. 

 ARTICLE II. 

                Section
  2.01 Amendments and Waiver of Default. The Debenture may
  not be amended. Notwithstanding the above, without the consent of the Holder,
  the Debenture may be amended to cure any ambiguity, defect or inconsistency,
  or to provide for assumption of the Company obligations to the Holder. 

 ARTICLE III.

                Section
  3.01 Events of Default. An Event of Default is defined
  as follows: (a) failure by the Company to pay amounts due hereunder within fifteen
  (15) days of the date of maturity of this Debenture; (b) failure by the Company
  to comply with the terms of the Irrevocable Transfer Agent Instructions attached
  to the Securities Purchase Agreement; (c) failure by the Company's transfer
  agent to issue freely tradeable Common Stock to the Holder within five (5) days
  of the Company's receipt of the attached Notice of Conversion from Holder; (d)
  failure by the Company for ten (10) days after notice to it to comply with any
  of its other agreements in the

 3

 Debenture; (e) events of bankruptcy or insolvency; (f) a breach
  by the Company of its obligations under the Securities Purchase Agreement or
  the Investor Registration Rights Agreement which is not cured by the Company
  within ten (10) days after receipt of written notice thereof. Upon the occurrence
  of an Event of Default, the Holder may, in its sole discretion, accelerate full
  repayment of all debentures outstanding and accrued interest thereon or may,
  notwithstanding any limitations contained in this Debenture and/or the Securities
  Purchase Agreement dated the date hereof between the Company and Cornell Capital
  Partners, L.P. (the "Securities Purchase Agreement"), convert all debentures
  outstanding and accrued interest thereon into shares of Common Stock pursuant
  to Section 1.02 herein.

                Section
  3.02 Failure to Issue Unrestricted Common Stock. As indicated
  in Article III Section 3.01, a breach by the Company of its obligations under
  the Investor Registration Rights Agreement shall be deemed an Event of Default,
  which if not cured within ten (10) days, shall entitle the Holder to accelerate
  full repayment of all debentures outstanding and accrued interest thereon or,
  notwithstanding any limitations contained in this Debenture and/or the Securities
  Purchase Agreement, to convert all debentures outstanding and accrued interest
  thereon into shares of Common Stock pursuant to Section 1.02 herein. The Company
  acknowledges that failure to honor a Notice of Conversion shall cause irreparable
  harm to the Holder.

 ARTICLE IV.

                Section
  4.01 Rights and Terms of Conversion. This Debenture, in
  whole or in part, may be converted at any time following the Closing Date, into
  shares of Common Stock at a price equal to the Conversion Price as described
  in Section 1.02 above. 

                Section
  4.02 Re-issuance of Debenture. When the Holder elects to
  convert a part of the Debenture, then the Company shall reissue a new Debenture
  in the same form as this Debenture to reflect the new principal amount. 

                Section
  4.03 Termination of Conversion Rights. The Holder's right
  to convert the Debenture into the Common Stock in accordance with paragraph
  4.01 shall terminate on the date that is the second (2nd) year anniversary
  from the date hereof and this Debenture shall be automatically converted on
  that date in accordance with the formula set forth in Section 4.01 hereof, and
  the appropriate shares of Common Stock and amount of interest shall be issued
  to the Holder. 

 ARTICLE V.

                Section
  5.01 Anti-dilution. In the event that the Company shall
  at any time subdivide the outstanding shares of Common Stock, or shall issue
  a stock dividend on the outstanding Common Stock, the Conversion Price in effect
  immediately prior to such subdivision or the issuance of such dividend shall
  be proportionately decreased, and in the event that the Company shall at any
  time combine the outstanding shares of Common Stock, the Conversion Price in
  effect immediately prior to such combination shall be proportionately increased,
  effective at the close of business on the date of such subdivision, dividend
  or combination as the case may be. 

                Section
  5.02 Consent of Holder to Sell Capital Stock or Grant Security Interests.
  Except for the Standby Equity Distribution Agreement dated the date hereof
  between the

 4

 Company and Cornell Capital Partners, LP, so long as any of
  the principal of or interest on this Debenture remains unpaid and unconverted,
  the Company shall not, without the prior consent of the Holder, issue or sell
  (i) any Common Stock or Preferred Stock without consideration or for a consideration
  per share less than its fair market value determined immediately prior to its
  issuance, (ii) issue or sell any Preferred Stock, warrant, option, right, contract,
  call, or other security or instrument granting the holder thereof the right
  to acquire Common Stock without consideration or for a consideration per share
  less than such Common Stock's fair market value determined immediately prior
  to its issuance, (iii) enter into any security instrument granting the holder
  a security interest in any of the assets of the Company, or (iv) file any registration
  statement on Form S-8. 

 ARTICLE VI.

                Section
  6.01 Notice. Notices regarding this Debenture shall be
  sent to the parties at the following addresses, unless a party notifies the
  other parties, in writing, of a change of address: 

	 If to the Company, to:  	EYI Industries, Inc.  
	  	 3960 Howard Hughes Parkway - Suite 500  
	  	Las Vegas, Nevada 89109  
	  	 Attention:  	 Jay Sargeant, President  
	  	 Telephone:  	 (702) 296-8034  
	  	 Facsimile:  	 (604) 502-5144  
	  	 	 
	 With a copy to:  	 Kirkpatrick & Lockhart LLP  
	  	201 South Biscayne Boulevard – Suite 2000 
    
	  	 Miami, FL  	 33131-2399  
	  	 Attention:  	 Clayton E. Parker, Esq.  
	  	 Telephone:  	 (305) 539-3300  
	  	 Facsimile:  	 (305) 358-7095  
	  	 	 
	 If to the Holder:  	 Kent Chou
	  	111 Camino De Las Crucitas
	  	Santa Fe, NM  87501  
	  	 	 
	 With a copy to:  	Butler Gonzalez LLP  
	  	1416 Morris Avenue, Suite 207  
	  	Union, NJ 07083  
	  	 Attention:  	 David Gonzalez, Esq.  
	  	 Telephone:  	 (908) 810-8588  
	  	 Facsimile:  	 (908) 810-0973  

                Section
  6.02 Governing Law. This Debenture shall be deemed to be
  made under and shall be construed in accordance with the laws of the State of
  Nevada without giving effect to the principals of conflict of laws thereof.
  Each of the parties consents to the jurisdiction of the

 5

 U.S. District Court sitting in the District of the State of
  New Jersey or the state courts of the State of New Jersey sitting in Hudson
  County, New Jersey in connection with any dispute arising under this Debenture
  and hereby waives, to the maximum extent permitted by law, any objection, including
  any objection based on forum non conveniens to the bringing
  of any such proceeding in such jurisdictions. 

                Section
  6.03 Severability. The invalidity of any of the provisions
  of this Debenture shall not invalidate or otherwise affect any of the other
  provisions of this Debenture, which shall remain in full force and effect. 

                Section
  6.04 Entire Agreement and Amendments. This Debenture represents
  the entire agreement between the parties hereto with respect to the subject
  matter hereof and there are no representations, warranties or commitments, except
  as set forth herein. This Debenture may be amended only by an instrument in
  writing executed by the parties hereto. 

                Section
  6.05 Counterparts. This Debenture may be executed in multiple
  counterparts, each of which shall be an original, but all of which shall be
  deemed to constitute on instrument. 

                IN
  WITNESS WHEREOF, with the intent to be legally bound hereby, the Company
  as executed this Debenture as of the date first written above. 

	 	EYI INDUSTRIES, INC. 
	 	 	 
	 	By:	/s/
      Jay Sargeant
	 	Name:	Jay Sargeant
	 	Title:	President 

6

 

 EXHIBIT "A"

 NOTICE OF CONVERSION

(To be executed by the Holder in order to Convert the Debenture)

TO: 

               The
  undersigned hereby irrevocably elects to convert US$ ________________________
  of the principal amount of the above Debenture into Shares of Common Stock of
  EYI Industries, Inc., according to the conditions stated therein, as of the
  Conversion Date written below. 

	 Conversion Date:  	 	 
	 		 
	 Applicable Conversion Price:  	 	 
	 		 
	 Signature:  	 	 
	 		 
	 Name:  	 	 
	 		 
	 Address:  	 	 
	 		 
	 Amount to be converted:  	US$	 
	 	 	 
	 Amount of Debenture unconverted: 
    	US$	 
	 	 	 
	 Conversion Price per share:  	US$	 
	  	 	  
	 Number of shares of Common Stock to be issued: 
    	 	 
    
	  	 	  
	Please issue the shares of Common Stock in the following
      name and to the following address:	 	 
    
	  	 	  
	Issue to:	 	 
    
	  	 	  
	Authorized Signature:	 	 
    
	  	 	  
	Name:	 	 
    
	  	 	  
	Title:	 	 
    
	  	 	  
	Phone Number:	 	 
    
	  	 	  
	Broker DTC Participant Code:	 	 
    
	  	 	  
	Account Number:	 	 
    

 A-1Exhibit
10.1

 

AGREEMENT

 

by and between

 

COMMUNITY BANKS, INC.

 

and

 

PENNROCK FINANCIAL SERVICES CORP.

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I- GENERAL

  	
   

  
	
  1.01  Definitions

  	
   

  
	
  1.02  The
  Merger.

  	
   

  
	
  1.03  Bank Merger

  	
   

  
	
   

  	
   

  
	
  ARTICLE II- CONSIDERATION; EXCHANGE
  PROCEDURES

  	
   

  
	
  2.01  CMTY Common Stock.

  	
   

  
	
  2.02  PRFS Common Stock

  	
   

  
	
  2.03  Cancellation of Certain Common Stock

  	
   

  
	
  2.04  Fractional Shares

  	
   

  
	
  2.05  [INTENTIONALLY OMITTED]

  	
   

  
	
  2.06  Stock Options.

  	
   

  
	
  2.07
   Surrender and Exchange of PRFS Stock
  Certificates.

  	
   

  
	
  2.08
   Anti-Dilution Provisions

  	
   

  
	
   

  	
   

  
	
  ARTICLE III- REPRESENTATIONS AND WARRANTIES
  OF PRFS

  	
   

  
	
  3.01  Organization.

  	
   

  
	
  3.02
   Capitalization.

  	
   

  
	
  3.03  Authority; No Violation.

  	
   

  
	
  3.04  Consents

  	
   

  
	
  3.05  Financial Statements.

  	
   

  
	
  3.06  No Material Adverse Change

  	
   

  
	
  3.07  Taxes.

  	
   

  
	
  3.08  Contracts.

  	
   

  
	
  3.09  Ownership of Property; Insurance Coverage.

  	
   

  
	
  3.10  Legal Proceedings

  	
   

  
	
  3.11  Compliance with Applicable Law and
  Agreements.

  	
   

  
	
  3.12  ERISA.

  	
   

  
	
  3.13  Brokers and Finders

  	
   

  
	
  3.14  Environmental Matters.

  	
   

  
	
  3.15
   Business of PRFS

  	
   

  
	
  3.16
   CRA Compliance

  	
   

  
	
  3.17  Bank Merger.

  	
   

  
	
  3.18  Information to be Supplied.

  	
   

  
	
  3.19  Related Party Transactions.

  	
   

  
	
  3.20  Loans

  	
   

  
	
  3.21  Allowance for Loan Losses

  	
   

  
	
  3.22
   Reorganization

  	
   

  
	
  3.23  Fairness Opinion

  	
   

  
	
  3.24  Securities Documents.

  	
   

  
	
  3.25  Quality of Representations

  	
   

  

 

i

 

	
  ARTICLE
  IV- REPRESENTATIONS AND WARRANTIES OF CMTY

  	
   

  
	
  4.01  Organization.

  	
   

  
	
  4.02
   Capitalization.

  	
   

  
	
  4.03  Authority; No Violation.

  	
   

  
	
  4.04  Consents.

  	
   

  
	
  4.05
   Financial Statements.

  	
   

  
	
  4.06  No Material Adverse Change

  	
   

  
	
  4.07  Taxes.

  	
   

  
	
  4.08  Contracts

  	
   

  
	
  4.09  Ownership of Property; Insurance Coverage.

  	
   

  
	
  4.10  Financing

  	
   

  
	
  4.11  Legal Proceedings

  	
   

  
	
  4.12  Compliance with Applicable Law and
  Agreements.

  	
   

  
	
  4.13  ERISA.

  	
   

  
	
  4.14
   Brokers and Finders

  	
   

  
	
  4.15  Environmental Matters.

  	
   

  
	
  4.16
   Business of CMTY

  	
   

  
	
  4.17  CRA Compliance

  	
   

  
	
  4.18  Allowance for Loan Losses

  	
   

  
	
  4.19  Bank Merger.

  	
   

  
	
  4.20  Information to be Supplied.

  	
   

  
	
  4.21  Related Party Transactions.

  	
   

  
	
  4.22  Loans

  	
   

  
	
  4.23  Reorganization

  	
   

  
	
  4.24  Fairness Opinion

  	
   

  
	
  4.25  CMTY Common Stock

  	
   

  
	
  4.26
   Securities Documents

  	
   

  
	
  4.27  Rights Agreement

  	
   

  
	
  4.28  “Well Capitalized”

  	
   

  
	
  4.29
   Quality of Representations

  	
   

  
	
   

  	
   

  
	
  ARTICLE V-
  COVENANTS OF THE PARTIES

  	
   

  
	
  5.01  Conduct of PRFS’s Business

  	
   

  
	
  5.02  Access; Confidentiality

  	
   

  
	
  5.03  Regulatory Matters

  	
   

  
	
  5.04  Taking of Necessary Actions

  	
   

  
	
  5.05
   No Solicitation

  	
   

  
	
  5.06  Update of Disclosure Schedules

  	
   

  
	
  5.07  Other Undertakings by CMTY and PRFS.

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI- CONDITIONS

  	
   

  
	
  6.01  Conditions to the Obligations of PRFS under
  this Agreement

  	
   

  
	
  6.02  Conditions to CMTY’s Obligations under this
  Agreement

  	
   

  

 

ii

 

	
  ARTICLE VII- TERMINATION

  	
   

  
	
  7.01  Termination prior to the Closing Date

  	
   

  
	
  7.02  Effect of Termination

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII- MISCELLANEOUS

  	
   

  
	
  8.01  Expenses and Other Fees.

  	
   

  
	
  8.02
   Non-Survival of Representations and
  Warranties; Disclosure Schedules

  	
   

  
	
  8.03  Amendment, Extension and Waiver

  	
   

  
	
  8.04  Entire Agreement.

  	
   

  
	
  8.05
   No Assignment

  	
   

  
	
  8.06  Notices

  	
   

  
	
  8.07  Disclosure Schedules

  	
   

  
	
  8.08
   Tax Disclosure

  	
   

  
	
  8.09  Captions

  	
   

  
	
  8.10
   Counterparts

  	
   

  
	
  8.11
   Severability

  	
   

  
	
  8.12
   Governing Law

  	
   

  

 

iii

 

	
  EXHIBITS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit 1

  	
  -

  	
  Form of
  Letter Agreement

  
	
  Exhibit 1.03

  	
  -

  	
  Form
  of Bank Plan of Merger

  
	
   

  	
   

  	
   

  
	
  SCHEDULES:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PRFS
  Schedule 3.01(d)

  	
  -

  	
  Subsidiaries

  
	
  PRFS
  Schedule 3.02(b)

  	
  -

  	
  Equity
  Interests

  
	
  PRFS
  Schedule 3.03(b)

  	
  -

  	
  Interests
  in Properties

  
	
  PRFS
  Schedule 3.04

  	
  -

  	
  Third
  Party Consents

  
	
  PRFS
  Schedule 3.05(b)

  	
  -

  	
  Liabilities
  and Obligations

  
	
  PRFS
  Schedule 3.08(a)

  	
  -

  	
  Employment
  Agreements and Material Contracts

  
	
  PRFS
  Schedule 3.09(a)

  	
  -

  	
  Title
  to Properties

  
	
  PRFS
  Schedule 3.10

  	
  -

  	
  Legal
  Proceedings

  
	
  PRFS
  Schedule 3.11(c)

  	
  -

  	
  Regulatory
  Investigations

  
	
  PRFS
  Schedule 3.11(d)

  	
  -

  	
  Regulatory
  Agreements

  
	
  PRFS
  Schedule 3.11(f)

  	
  -

  	
  Unresolved
  Matters re: Regulatory Agreements

  
	
  PRFS
  Schedule 3.12(a)

  	
  -

  	
  ERISA

  
	
  PRFS
  Schedule 3.12(f)

  	
  -

  	
  Services
  Performed under ERISA

  
	
  PRFS
  Schedule 3.14(a)

  	
  -

  	
  Environmental
  Matters

  
	
  PRFS
  Schedule 3.19

  	
  -

  	
  Related
  Party Transactions

  
	
  PRFS
  Schedule 5.01(c)

  	
  -

  	
  Accelerated
  Payments

  
	
  PRFS
  Schedule 5.01(e)

  	
  -

  	
  New
  Branch Offices

  
	
  PRFS
  Schedule 5.01(p)

  	
  -

  	
  Expenditures

  
	
   

  	
   

  	
   

  
	
  CMTY
  Schedule 4.01(d)

  	
  -

  	
  Subsidiaries

  
	
  CMTY
  Schedule 4.08

  	
  -

  	
  Contracts

  
	
  CMTY
  Schedule 4.09

  	
  -

  	
  Titles
  to Properties

  
	
  CMTY
  Schedule 4.11

  	
  -

  	
  Legal
  Proceedings

  
	
  CMTY
  Schedule 4.13

  	
  -

  	
  ERISA

  
	
  CMTY
  Schedule 4.15

  	
  -

  	
  Environmental
  Matters and Real Estate

  
	
  CMTY Schedule 4.21

  	
  -

  	
  Related Party
  Transactions

  

 

iv

 

AGREEMENT

 

THIS
AGREEMENT, dated as of November 16, 2004 (“Agreement”), is made by and
between COMMUNITY BANKS, INC., a Pennsylvania corporation (“CMTY”), and
PENNROCK FINANCIAL SERVICES CORP., a Pennsylvania corporation (“PRFS”).

 

BACKGROUND

 

A.  CMTY owns directly all of the outstanding
capital stock of Community Banks, a bank and trust company chartered by the
Commonwealth of Pennsylvania (“Community Banks”).

 

B.  PRFS owns directly all of the outstanding
capital stock of Blue Ball National Bank, a national banking association (“Blue
Ball”).

 

C.  CMTY and PRFS desire for PRFS to merge with
and into CMTY, with CMTY surviving such merger, in accordance with the
applicable laws of the Commonwealth of Pennsylvania and this Agreement.  Promptly thereafter, CMTY desires to merge
Blue Ball with and into Community Banks, with Community Banks surviving such
merger as a wholly-owned subsidiary of CMTY, in accordance with the applicable
laws of the United States and the Commonwealth of Pennsylvania and the terms of
this Agreement.

 

D.  As a condition and inducement to CMTY to
enter into this Agreement, the directors of PRFS are each concurrently
executing a Letter Agreement in the form attached hereto as Exhibit 1 (the
“Letter Agreement”).

 

E.  Each of the parties, by signing this
Agreement, adopts it as a plan of reorganization as defined in IRC
Section 368(a), and intends the Merger to be a reorganization as defined
in IRC Section 368(a).

 

F.  CMTY and PRFS desire to provide the terms and
conditions governing the transactions contemplated herein.

 

1

 

NOW
THEREFORE, in consideration of the premises and of the mutual covenants,
agreements, representations and warranties herein contained, the parties hereto,
intending to be legally bound, do hereby agree as follows:

 

ARTICLE I-

GENERAL

 

1.01 Definitions.  As used in this Agreement, the following
terms shall have the indicated meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):

 

“Acquisition
Proposal” has the meaning given to that term in Section 5.05 of this
Agreement.

 

“Acquisition
Transaction” shall mean one of the following transactions with a party other
than CMTY or an affiliate of CMTY: (i) a merger or consolidation, or any
similar transaction, involving PRFS or Blue Ball, (ii) a purchase, lease or
other acquisition of all or a substantial portion of the assets or liabilities
of PRFS or Blue Ball or (iii) a purchase or other acquisition (including by way
of share exchange, tender offer, exchange offer or otherwise) of 24.9% or more
of any class or series of equity securities of PRFS or Blue Ball.

 

“Aquisition
Transaction Notice” has the meaning given to that term in Section 7.01(e) of
this Agreement.

 

“Adjusted
PRFS Option” has the meaning given to that term in Section 2.06(a) of this
Agreement.

 

“Affiliate”
means, with respect to any corporation, any person that directly or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such corporation and, without limiting the generality of
the foregoing, includes any executive officer, director or 10% equity owner of
such corporation.

 

“Agreement”
means this Agreement, including any amendment or supplement hereto.

 

“Application”
means an application for regulatory approval which is required by the
Contemplated Transactions.

 

2

 

“Articles
Amendment” means the amendment of the CMTY Articles of Incorporation to
increase the number of authorized shares of common stock that may be issued by
CMTY to 50,000,000 shares.

 

“Articles
of Merger” mean the articles of merger to be executed by CMTY and PRFS and to
be filed in the PDS in accordance with the applicable laws of the Commonwealth
of Pennsylvania.

 

“Bank
Merger” means the merger of Blue Ball with and into Community Banks, with
Community Banks surviving such merger, contemplated by Section 1.03 of
this Agreement.

 

“Bank
Plan of Merger” has the meaning given to that term in Section 1.03 of this
Agreement.

 

“Banking
Code” means the Pennsylvania Banking Code of 1965, as amended.

 

“BCL”
means the Pennsylvania Business Corporation Law of 1988, as amended.

 

“BHC
Act” means the Bank Holding Company Act of 1956, as amended.

 

“Blue
Ball” means the Blue Ball National Bank, a national banking association, all
the outstanding capital stock of which is owned by PRFS.

 

“Blue
Ball Designees” has the meaning given to that term in Section 1.02(e)(iii)
of this Agreement.

 

“Blue
Ball Division” has the meaning given to that term in Section 5.07(c)(iv)(A)
of this Agreement.

 

“Blue
Ball Qualified Plans” has the meaning given to that term in
Section 5.07(c)(ii)(C) of this Agreement.

 

“Break-Up
Fee” has the meaning given to that term in Section 8.01(d) of this
Agreement.

 

3

 

“Business
Day” means any day other than (i) a Saturday or Sunday or (ii) a day
on which Community Banks is authorized or obligated by law or executive order
to close.

 

“Cash
Consideration” has the meaning given to that term in Section 2.04 of this
Agreement.

 

“CERCLA”
has the meaning given to that term in Section 3.14(b) of this Agreement.

 

“Closing”
has the meaning given to that term in Section 1.02(a) of this Agreement.

 

“Closing
Date” means the date mutually agreed to by the parties as soon as practicable
after the last condition precedent provided in this Agreement (other than those
conditions which are to be fulfilled at the Closing) has been fulfilled or
waived.

 

“CMTY”
means Community Banks, Inc., a Pennsylvania corporation.

 

“CMTY
Benefit Plans” has the meaning given to that term in Section 4.13(a) of
this Agreement.

 

“CMTY
Certificate” has the meaning given to that term in Section 2.07(c) of this
Agreement.

 

“CMTY
Common Stock” means the shares of common stock of CMTY, with such par value as
is set forth in CMTY’s Articles of Incorporation.

 

“CMTY
Disclosure Schedules” means, collectively, the disclosure schedules delivered
by CMTY to PRFS at or prior to the execution and delivery of this Agreement.

 

“CMTY
ERISA Affiliate” has the meaning given to that term in Section 4.13(a) of
this Agreement.

 

“CMTY
Financials” means (a) the audited consolidated financial statements of
CMTY as of December 31, 2003 and 2002 and for each of the three years in
the period ended December 31, 2003, including the notes thereto and
(b) the unaudited interim consolidated financial statements of CMTY for
each calendar quarter after December 31, 2003.

 

4

 

“CMTY
Market Value” means, as of any date, the average of the closing sales price of
a share of CMTY Common Stock, as reported on Nasdaq, for the ten (10)
consecutive trading days ending on the trading day preceding the date as of
which the CMTY Market Value is determined.

 

“CMTY
Ratio” has the meaning given to that term in Section 7.01(f)(ii)(A) of
this Agreement.

 

“CMTY
Shareholders Meeting” means the meeting of the holders of CMTY Common Stock
concerning the Merger pursuant to the Joint Prospectus/Proxy Statement.

 

“CMTY
Subsidiary” means each direct and indirect Subsidiary of CMTY and Community
Banks.

 

“Common
Stock Consideration” has the meaning given to that term in Section 2.02 of
this Agreement.

 

“Comparable
Employment” has the meaning given to that term in Section 5.07(c)(i)(A) of
this Agreement.

 

“Confidentiality
Agreement” means the confidentiality agreement, dated October 18, 2004,
between CMTY and PRFS.

 

“Contemplated
Transactions” means all of the transactions contemplated by this Agreement,
including: (a) the merger of PRFS with and into CMTY, with CMTY surviving
such merger; (b) the merger of Blue Ball with and into Community Banks,
with Community Banks surviving such merger as a wholly-owned subsidiary of
CMTY; (c) the performance by CMTY and PRFS of their respective covenants
and obligations under this Agreement; and (d) the performance by Community
Banks and Blue Ball of their respective covenants and obligations under the
Bank Plan of Merger.

 

“CRA”
means the Community Reinvestment Act of 1977, as amended, and the rules and
regulations promulgated from time to time thereunder.

 

“D&O
Insurance” has the meaning given to that term in Section 5.07(c)(v)(C)(1)
of this Agreement.

 

5

 

“Determination
Date” has the meaning given to that term in Section 7.01(f) of this
Agreement.

 

“Effective
Date” means the date upon which the Articles of Merger shall be filed in the
PDS and shall be the same as the Closing Date or as soon thereafter as is
practicable.

 

“EIC
Plan” has the meaning given to that term in Section 5.01(d)(iii) of this
Agreement.

 

“Eligible
PRFS Employee” has the meaning given to that term in Section 5.07(c)(i)(C)
of this Agreement.

 

“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 Regulatory Authority
relating to (i) the protection, preservation or restoration of the
environment, including, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal life or
any other natural resource, and/or (ii) the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated for the protection of human health, safety or the
environment, whether by type or by quantity, including any material containing
any such substance as a component.

 

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended.

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated from time to time thereunder.

 

“Exchange
Agent” means the agent designated by CMTY (as soon as practicable following
execution of this Agreement) to act as the exchange agent for purposes of
conducting exchange procedure described in Section 2.07.

 

“Exchange
Fund” has the meaning given to that term in Section 2.07(a) of this
Agreement.

 

“Exchange
Ratio” means the exchange ratio set forth in Section 2.02.

 

“Executives”
has the meaning given to that term in Section 5.01(d)(3).

 

6

 

“Expenses”
has the meaning given to that term in Section 8.01(b) of this Agreement.

 

“FDIC”
means the Federal Deposit Insurance Corporation.

 

“FHLB”
means the Federal Home Loan Bank.

 

“FRB”
means the Board of Governors of the Federal Reserve System.

 

“Full
Term” has the meaning given to that term in Section 1.02(e)(i) of this
Agreement.

 

“GAAP”
means accounting principles generally accepted in the United States.

 

“Griffin”
has the meaning given to that term in Section 3.13 of this Agreement.

 

“Indemnified
Party” has the meaning given to that term in Section 5.07(c)(v)(A) of this
Agreement.

 

“Index
Price” has the meaning given to that term in Section 7.01(f) of this
Agreement.

 

“IRC”
means the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder.

 

“IRS”
means the Internal Revenue Service.

 

“Joint
Prospectus/Proxy Statement” means the prospectus/proxy statement, together with
any supplements thereto, to be sent to holders of CMTY Common Stock and PRFS
Common Stock in connection with the Contemplated Transactions.

 

“Knowledge
of CMTY” means the actual knowledge of CMTY’s executive officers and directors.

 

“Knowledge
of PRFS” means the actual knowledge of PRFS’s executive officers and directors.

 

“Letter
Agreement” has the meaning given to that term in the Background Section of this
Agreement.

 

7

 

“Material
Adverse Effect” means a material adverse effect on (a) the business,
financial condition or results of operations of PRFS on a consolidated basis
(when such term is used in Article III hereof) or CMTY on a consolidated basis
(when such term is used in Article IV hereof) other than, in each case, any
change, circumstance or effect relating to (i) any change in the value of
the respective assets and liabilities of CMTY or PRFS resulting from a change
in interest rates generally, (ii) any change occurring after the date
hereof in any federal or state law, rule or regulation or in GAAP, which change
affects banking institutions generally, including any change affecting the Bank
Insurance Fund, (iii) changes in general economic (except in the context
of determining a Material Adverse Effect for purposes of asset quality), legal,
regulatory or political conditions affecting banking institutions generally,
(iv) reasonable expenses (including reasonable legal fees, costs and
expenses relating to any litigation arising as a result of the Contemplated
Transactions) incurred in connection with this Agreement and the transactions contemplated
hereby, (v) actions or omissions of a party (or any of its Subsidiaries)
taken pursuant to the terms of this Agreement with the prior written consent of
the other party in contemplation of the transactions contemplated hereby
(including without limitation any actions taken by PRFS pursuant to
Section 5.07 of this Agreement), and (vi) any effect with respect to
a party hereto caused, in whole or in substantial part, by the other party, or
(b) the ability of a party to consummate the Contemplated Transactions.

 

“Material
Contract” means a material contract as described in 17 C.F.R. §229.601(b)(10).

 

“Maximum
Amount” has the meaning given to that term in Section 5.07(c)(v)(C) of
this Agreement.

 

“Merger”
means the merger of PRFS with and into CMTY, contemplated by this Agreement.

 

“Merger
Consideration” means Cash Consideration and Common Stock Consideration.

 

“NASD”
means the National Association of Securities Dealers, Inc.

 

“Nasdaq”
means the National Market tier of The Nasdaq Stock Market operated by the NASD.

 

8

 

“OCC”
means the Office of the Comptroller of the Currency.

 

“PDB”
means the Department of Banking of the Commonwealth of Pennsylvania.

 

“PDS”
means the Department of State of the Commonwealth of Pennsylvania.

 

“Peer
Group” has the meaning given to that term in Section 7.01(f) of this Agreement.

 

“PRFS”
means PennRock Financial Services Corp., a Pennsylvania corporation.

 

“PRFS
Benefit Plans” has the meaning given to that term in Section 3.12(a) of this
Agreement.

 

“PRFS
Certificate” has the meaning given to that term in Section 2.07(b) of this
Agreement.

 

“PRFS
Common Stock” has the meaning given to that term in Section 3.02(a) of
this Agreement.

 

“PRFS
Disclosure Schedules” means, collectively, the disclosure schedules delivered
by PRFS to CMTY at or prior to the execution and delivery of this Agreement.

 

“PRFS
ERISA Affiliate” has the meaning given to that term in Section 3.12(a) of
this Agreement.

 

“PRFS
Financials” means (a) the audited consolidated financial statements of
PRFS as of December 31, 2003 and 2002 and for each of the three years in
the period ended December 31, 2003, including the notes thereto, and
(b) the unaudited interim consolidated financial statements of PRFS for
each calendar quarter after December 31, 2003.

 

“PRFS
Nominees” has the meaning given to that term in Section 1.02(e)(i) of this
Agreement.

 

“PRFS
Option” has the meaning given to that term in Section 2.06(a) of this
Agreement.

 

9

 

“PRFS
Option Plans” means the Omnibus Stock Plan of 1992, the Stock Incentive Plan of
2002 and the Blue Ball National Bank Employee Stock Purchase Plan maintained by
PRFS.

 

“PRFS
Shareholders Meeting” has the meaning given to that term in Section 5.07(a)(i)
of this Agreement.

 

“PRFS
Subsidiary” means each direct and indirect Subsidiary of PRFS and of Blue Ball.

 

“Prior
Acts” has the meaning given to that term in Section 5.07(c)(v)(A) of this
Agreement.

 

“Quarterly
Per Share Dividend Amount” has the meaning given to that term in
Section 5.01(b)(ii) of this Agreement.

 

“Registration
Statement” means the registration statement on Form S-4, including any
pre-effective or post-effective amendments or supplements thereto, as filed
with the SEC under the Securities Act with respect to the CMTY Common Stock to
be issued in connection with the Contemplated Transactions.

 

“Regulatory
Agreement” has the meaning given to that term in Sections 3.11(d)(iv) and
4.12(d)(iv) of this Agreement.

 

“Regulatory
Authority” means any agency or department of any federal, state or local
government or of any self-regulatory organization, including without limitation
the SEC, the PDB, the FRB, the OCC, the FDIC, the NASD, and the respective
staffs thereof.

 

“Required
Meeting Notice” has the meaning given to that term in Section 7.01(e) of this
Agreement.

 

“Rights”
means warrants, options, rights, convertible securities and other capital stock
equivalents which obligate an entity to issue its securities.

 

“Rights
Agreement” means the rights agreement dated February 28, 2002, between
CMTY and Community Banks, as rights agent.

 

“Sandler”
has the meaning given to that term in Section 4.14 of this Agreement.

 

“SEC”
means the Securities and Exchange Commission.

 

10

 

“Securities
Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated from time to time thereunder.

 

“Securities
Documents” means all registration statements, schedules, statements, forms,
reports, proxy material, and other documents required to be filed with the SEC
under the Securities Laws.

 

“Securities
Laws” means the Securities Act and the Exchange Act and the rules and
regulations promulgated from time to time thereunder.

 

“Significant
Subsidiary” has the meaning given to that term in 17 C.F.R. §210.1-02(w).

 

“Subsidiary”
means any corporation or limited liability company, 25% or more of the capital
stock or membership interests of which is owned, either directly or indirectly,
by another entity, except any corporation the stock of which is held in the
ordinary course of the lending activities of a bank.

 

“Starting
Date” has the meaning given to that term in Section 7.01(f) of this
Agreement.

 

“Termination
Fee” has the meaning given to that term in Section 8.01(c) of this
Agreement.

 

“Well
Capitalized” has the meaning given to that term in Section 4.28 of this
Agreement.

 

1.02 The Merger.

 

(a)  Closing.  The closing of the transactions contemplated
by this Agreement (the “Closing”) will take place on the Closing Date at a time
and place to be agreed upon by the parties hereto; provided, in any case, that
all conditions to closing set forth in Article VI of this Agreement (other
than the delivery of certificates, opinions, and other instruments and
documents to be delivered at the Closing) have been satisfied or waived at or
prior to the Closing Date.  On the
Closing Date, CMTY and PRFS shall cause the Articles of Merger to be duly
executed and filed with the PDS.

 

11

 

(b)  The Merger.  Subject to the terms and conditions of this
Agreement and in accordance with the BCL, on the Effective Date:

 

(i)  PRFS shall merge with and into CMTY;

 

(ii)  the separate existence of PRFS shall cease;

 

(iii)  CMTY shall be the surviving corporation in
the Merger; and

 

(iv)  all of the property (real, personal and
mixed), rights, powers, duties, obligations and liabilities of PRFS shall be
taken and deemed to be transferred to and vested in CMTY, as the surviving corporation
in the Merger, without further act or deed; all in accordance with the
applicable laws of the Commonwealth of Pennsylvania and the United States of
America.

 

(c)  Change to Structure of
Merger.  The parties may at
any time change the method of effecting the combination (including by providing
for the merger of PRFS and a wholly owned subsidiary of CMTY) if and to the
extent requested by either party and consented to by the other party (such
consent not to be unreasonably withheld);  provided,
however, that no such change shall (i) alter or change the amount or kind of
Merger Consideration, (ii) adversely affect the Tax treatment of PRFS’s
shareholders as a result of receiving the Merger Consideration or the Tax
treatment of either party pursuant to this Agreement or (iii) materially impede
or delay completion of the transactions contemplated by this Agreement.

 

(d)  CMTY’s Articles of
Incorporation and Bylaws.  On
and after the Effective Date, the articles of incorporation and bylaws of CMTY,
as amended in accordance with the Articles Amendment and as in effect
immediately prior to the Effective Date, shall automatically be and remain the
articles of incorporation and bylaws of CMTY, as the surviving corporation in
the Merger, until thereafter altered, amended or repealed.

 

(e)  Board of Directors and
Officers of CMTY and Community Banks.

 

(i)  On and after the Effective Date,
(A) nine (9) directors of CMTY duly elected and holding office immediately
prior to the Effective Date, and (B) six (6) persons (the

 

12

 

“PRFS
Nominees”) selected by the PRFS Board of Directors and approved by CMTY (which
approval shall not be unreasonably withheld) in accordance with applicable
Securities Laws and policies and procedures of the Nominating Committee of the
CMTY Board of Directors shall be the directors of CMTY, as the surviving
corporation in the Merger, each to hold office until his successor is elected
and qualified or otherwise in accordance with applicable law, the articles of
incorporation and bylaws of CMTY. 
Provided that a PRFS Nominee continues to satisfy the nomination
criteria of the Nominating Committee of the CMTY Board of Directors at the time
such director’s initial term is set to expire, the CMTY Board of Directors
shall re-nominate and recommend the election of such PRFS Nominee for election
by the CMTY shareholders to at least one full four (4) year term (the “Full
Term”) following the expiration of such director’s initial term of office.  CMTY approves Melvin Pankuch as one of the
PRFS Nominees and agrees to appoint Mr. Pankuch to serve as the
vice-chairman of the CMTY Board promptly following the Effective Date (but in
no event more than two (2) Business Days thereafter).

 

(ii)  On and after the Effective Date, the
(A) officers of CMTY duly appointed and holding office immediately prior
to the Effective Date and (B) such officers of PRFS as are offered and
accept positions of employment with CMTY shall be the officers of CMTY, as the
surviving corporation in the Merger, each to hold office until his or her
successor is appointed and qualified or otherwise in accordance with applicable
law, the articles of incorporation and bylaws of CMTY.

 

(iii)  On the effective date of the Bank Merger, the
Board of Directors of Community Banks, as the surviving institution in the Bank
Merger, shall consist of (A) those persons holding such office immediately
prior to such effective date, and (B) the members of the Blue Ball Board
of Directors immediately before the Effective Date (other than the PRFS
Nominees appointed to the CMTY Board of Directors) (the “Blue Ball Designees”).  CMTY shall cause each of the Blue Ball
Designees to be appointed as a director of Community Banks effective as of the
effective date of the Bank Merger to hold office until the first annual
reorganization meeting of the Board of Directors of Community Banks after the
effective date of the Bank Merger.  CMTY
agrees to cause each Blue Ball Designee who wishes to continue to serve to be
renominated as a director of Community Banks for election at the 2006 and 2007
annual reorganization meetings of the Board of Directors of Community Banks,
and agrees to

 

13

 

vote
its shares of Community Banks capital stock in favor of such election at such
meetings.  Notwithstanding the foregoing,
each Blue Ball Designee must satisfy all Community Banks policies and
procedures applicable to Community Banks directors, including its mandatory
retirement policy.

 

(iv)  On the effective date of the Bank Merger, the
officers of Community Banks, as the surviving institution in the Bank Merger,
shall consist of (A) the officers of Community Banks duly elected and holding
office immediately prior to such effective date and (B) such officers of Blue
Ball as are offered and accept positions of employment as officers of Community
Banks.

 

1.03 Bank
Merger.  CMTY and PRFS shall each
use their best efforts to cause Blue Ball to merge with and into Community
Banks, with Community Banks surviving such merger (the “Bank Merger”) on, or as
soon as practicable after, the Effective Date. 
Concurrently with the execution and delivery of this Agreement, CMTY
shall cause Community Banks to execute and deliver, and PRFS shall cause Blue
Ball to execute and deliver, the Bank Plan of Merger, a form of which is
attached hereto as Exhibit 1.03 (the “Bank Plan of Merger”).  The Bank Merger shall not be effected prior
to the Effective Date.

 

ARTICLE II-

CONSIDERATION; EXCHANGE PROCEDURES

 

2.01 CMTY Common Stock.

 

(a)  Outstanding Shares.
Each share of CMTY Common Stock issued and outstanding immediately prior to the
Effective Date shall, on and after the Effective Date, continue to be issued
and outstanding as an identical share of CMTY Common Stock.

 

(b)  Treasury Stock.  Each share of CMTY Common Stock issued and
held in the treasury of CMTY immediately prior to the Effective Date, if any,
shall, on and after the Effective Date, continue to be issued and held in the
treasury of CMTY.

 

2.02 PRFS Common Stock.  Subject to Sections 2.03 and 2.04 below
with respect to treasury stock and fractional shares of PRFS Common Stock, each
share of PRFS Common

 

14

 

Stock
issued and outstanding immediately prior to the Effective Date, shall, on the
Effective Date, by reason of the Merger and without any action on the part of
the holder thereof, cease to be outstanding and be converted into the right to
receive one and four-tenths (1.40) fully paid and nonassessable shares of CMTY
Common Stock (the “Exchange Ratio”), including the associated rights to
purchase securities pursuant to the Rights Agreement (the “Common Stock
Consideration”).

 

2.03 Cancellation of Certain Common Stock.  Each share of PRFS Common Stock which is owned
by CMTY, PRFS or any of their Subsidiaries on the Effective Date (other than
shares that are held in trust, managed, custodial or nominee accounts and the
like and which are beneficially owned by third parties) shall be canceled and
cease to be issued and outstanding, and no consideration shall be delivered
therefor.

 

2.04 Fractional Shares.  No fractional shares of CMTY Common Stock and
no scrip or certificates therefor shall be issued in connection with the
Merger.  Any former holder of PRFS Common
Stock who would otherwise be entitled to receive a fraction of a share of CMTY
Common Stock shall receive, in lieu thereof, cash in an amount equal to such
fraction of a share multiplied by the closing price of CMTY Common Stock on the
Effective Date (“Cash Consideration”).

 

2.05 [INTENTIONALLY
OMITTED]

 

2.06 Stock
Options.

 

(a)  At the Effective Date, each option to
purchase shares of PRFS Common Stock (each, a “PRFS Option”) that (i) is
outstanding at the Effective Date and (ii) has been granted pursuant to
the PRFS Option Plans, shall become fully vested and exercisable and cease to
represent a right to acquire shares of PRFS Common Stock and shall be converted
automatically into an option to acquire shares of CMTY Common Stock on the
terms set forth below (each PRFS Option, as substituted, an “Adjusted PRFS
Option”).

 

(b)  An Adjusted PRFS Option shall be a stock
option to acquire shares of CMTY Common Stock (including the associated rights
to purchase securities pursuant to the Rights Agreement) with the following
terms: (i) the number of shares of CMTY Common Stock, which

 

15

 

may
be acquired pursuant to the Adjusted PRFS Option, shall be equal to the product
of the number of shares of PRFS Common Stock covered by the corresponding PRFS
Option multiplied by the Exchange Ratio, provided that any fractional share of
CMTY Common Stock resulting from the multiplication shall be rounded down to
the nearest whole share; (ii) the exercise price per share of CMTY Common
Stock issuable upon exercise of the Adjusted PRFS Option shall be equal to the
exercise price of the corresponding PRFS Option immediately prior to its
conversion to an Adjusted PRFS Option, divided by the Exchange Ratio, provided
that the exercise price shall be rounded down to the nearest whole cent;
(iii) the duration and other terms of the Adjusted PRFS Option shall be
identical to the duration and other terms of the corresponding PRFS Option
immediately prior to its conversion to an Adjusted PRFS Option, except that all
references to PRFS shall be deemed to be references to CMTY and its affiliates,
where the context so requires and shall remain exercisable until the stated
expiration date of the corresponding PRFS Option; (iv) CMTY shall assume
the PRFS Option, as contemplated by the IRC; and (v) to the extent PRFS
Options qualify as incentive stock options under IRC Section 424, the
Adjusted PRFS Options exchanged therefor shall also so qualify.

 

(c)  No later than the Effective Date, CMTY shall
file a registration statement on Form S-8 (or any other successor or
appropriate form) with respect to the shares of CMTY Common Stock (and the
associated rights to purchase securities pursuant to the Rights Agreement)
subject to the Adjusted PRFS Options, and shall use its reasonable best efforts
to maintain the current status of the prospectus or prospectuses contained
therein for so long as such options remain outstanding.

 

(d)  As soon as practicable after the Effective
Date, but in no event later than ten (10) Business Days after the
Effective Date, CMTY shall deliver to the holders of Adjusted PRFS Options
appropriate notices setting forth the effect of the adjustments described in
Section 2.06(b), above.

 

(e)  With respect to those individuals who, subsequent
to the Merger, will be subject to the reporting requirements under
Section 16(a) of the Exchange Act, where applicable, CMTY shall administer
the PRFS Option Plan in a manner consistent with the exemptions provided by
Rule 16b-3 promulgated under the Exchange Act.

 

16

 

2.07 Surrender and Exchange of PRFS Stock
Certificates.

 

(a)  Exchange Fund.  On or prior to the Effective Date, CMTY shall
deposit with the Exchange Agent, in trust for the benefit of holders of shares
of PRFS Common Stock, sufficient cash and certificates representing shares of
CMTY Common Stock to make all payments and deliveries to shareholders of PRFS
pursuant to this Article II.  Any
cash and certificates for CMTY Common Stock deposited with the Exchange Agent
shall hereinafter be referred to as the “Exchange Fund.”

 

(b)  Exchange Procedures.  As soon as reasonably practicable after the
Effective Date (and in any case no later than ten (10) Business Days
thereafter), CMTY shall cause the Exchange Agent to mail to each record holder
of PRFS Common Stock immediately prior to the Effective Date a letter of
transmittal which shall specify that delivery of the certificates for shares of
PRFS Common Stock (each, a “PRFS Certificate”) shall be effected, and risk of
loss and title to the PRFS Certificates shall pass, only upon delivery of the
PRFS Certificates to the Exchange Agent, and which letter shall be in customary
form and have such other provisions as CMTY may reasonably specify and instructions
for effecting the surrender of such PRFS Certificates in exchange for the
Merger Consideration, as the case may be. 
Upon surrender of a PRFS Certificate to the Exchange Agent together with
such letter of transmittal, duly executed and completed in accordance with the
instructions thereto, and such other documents as may reasonably be required by
the Exchange Agent, the holder of such PRFS Certificate shall be entitled to
receive within ten (10) Business Days thereafter and in exchange therefor (i) a
certificate representing, in the aggregate, the whole number of shares of CMTY
Common Stock that such holder has the right to receive pursuant to this Article
II and (ii) a check in the amount equal to any cash that such holder has
the right to receive pursuant to this Article II.  No interest will be paid or will accrue on
any cash payment pursuant to this Section 2.07.

 

(c)  Each certificate for shares of CMTY Common
Stock (each, a “CMTY Certificate”) issued in exchange for PRFS Certificates
pursuant to this Section 2.07 shall be dated the Effective Date and be
entitled to dividends, distributions and all other rights and privileges
pertaining to such shares of CMTY Common Stock from the Effective Date.  Until

 

17

 

surrendered,
each PRFS Certificate shall, from and after the Effective Date, evidence solely
the right to receive the Merger Consideration.

 

(d)  If a PRFS Certificate is exchanged on a date
following one or more record dates after the Effective Date for the payment of
dividends or any other distribution on shares of CMTY Common Stock, CMTY shall
pay to the holder of such PRFS Certificate cash in an amount equal to dividends
payable on the shares of CMTY Common Stock issued in exchange therefor and pay
or deliver any other distribution to which such shareholder is entitled.  Upon surrender of certificates for shares of
PRFS Common Stock in exchange for certificates for CMTY Common Stock, CMTY also
shall pay any dividends to which such holder of PRFS Common Stock may be
entitled as a result of the declaration of a dividend on the PRFS Common Stock
by PRFS in accordance with the terms of this Agreement with a record date prior
to the Effective Date and a payment date after the Effective Date.  No interest shall accrue or be payable in
respect of dividends or any other distribution otherwise payable under this
Section 2.07(d) upon surrender of PRFS Certificates.  Notwithstanding the foregoing, no party hereto
shall be liable to any holder of PRFS Common Stock for any amount paid in good
faith to a public official or agency pursuant to any applicable abandoned
property, escheat or similar law.  Until
such time as PRFS Certificates are surrendered to CMTY for exchange, CMTY shall
have the right to withhold dividends or any other distributions on the shares
of CMTY Common Stock issuable to such shareholder.

 

(e)  Upon the Effective Date, the stock transfer
books for PRFS Common Stock will be closed and no further transfers of PRFS
Common Stock will thereafter be made or recognized. All PRFS Certificates
surrendered pursuant to this Section 2.07 will be cancelled.

 

(f)  If there is a transfer of ownership of PRFS
Common Stock which is not registered in the transfer records of PRFS, one or
more CMTY Certificates evidencing, in the aggregate, the proper number of
shares of CMTY Common Stock, a check in the proper amount of cash in lieu of
any fractional shares and any dividends or other distributions to which such
holder is entitled pursuant to Section 2.07(d), as applicable and
appropriate, may be issued with respect to such PRFS Common Stock to such a
transferee if the PRFS Certificate representing such shares of PRFS Common
Stock is presented to the Exchange Agent, accompanied by all

 

18

 

documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.

 

(g)  If any PRFS Certificate shall have been lost,
stolen or destroyed, the Exchange Agent shall deliver in exchange for such
lost, stolen or destroyed PRFS Certificate, upon the making of a sworn
affidavit of that fact by the holder thereof in form satisfactory to the
Exchange Agent, the Merger Consideration, and any dividends or other
distributions to which such holder is entitled pursuant to this
Section 2.07 as may be required pursuant to this Agreement; provided,
however, that the Exchange Agent may, in its sole discretion and as a condition
precedent to the delivery of the Merger Consideration to which the holder of
such PRFS Certificate is entitled as a result of the Merger, require the owner
of such lost, stolen or destroyed PRFS Certificate to deliver a bond in such
amount as it may direct as indemnity against any claim that may be made against
PRFS, CMTY or the Exchange Agent or any other party with respect to the PRFS
Certificate alleged to have been lost, stolen or destroyed.

 

2.08 Anti-Dilution Provisions.  If CMTY shall, at any time before the
Effective Date:

 

(a)  declare a dividend in shares of CMTY Common
Stock with a record date on or prior to the Closing Date;

 

(b)  combine the outstanding shares of CMTY Common
Stock into a smaller number of shares;

 

(c)  resolve to effect a split or subdivide the
outstanding shares of CMTY Common Stock with a record date on or prior to the
Closing Date; or

 

(d)  reclassify the shares of CMTY Common Stock;
then, in any such event, the number of shares of CMTY Common Stock to be
delivered to PRFS shareholders who are entitled to receive shares of CMTY Common
Stock in exchange for shares of PRFS Common Stock shall be adjusted so that
each PRFS shareholder shall be entitled to receive such number of shares of
CMTY Common Stock as such shareholder would have been entitled to receive if
the Effective Date had occurred prior to the happening of such event.  (By way of illustration, if CMTY declares a
stock dividend of 5% payable with respect to a record date on or prior to the
Effective Date, the Exchange Ratio shall be correspondingly adjusted from 1.40
to 1.47).  In

 

19

 

addition,
in the event that, prior to the Effective Date, CMTY enters into an agreement
pursuant to which shares of CMTY Common Stock would be converted into shares or
other securities or obligations of another corporation, proper provision shall
be made in such agreement so that each PRFS shareholder entitled to receive
shares of CMTY Common Stock in the Merger shall be entitled to receive such
number of shares or other securities or amount or obligations of such other
corporation as such shareholder would be entitled to receive if the Effective
Date had occurred immediately prior to the happening of such event.

 

ARTICLE III-

REPRESENTATIONS AND WARRANTIES OF PRFS

 

PRFS hereby represents and warrants, on the date
hereof and on the Closing Date, to CMTY that:

 

3.01 Organization.

 

(a)  PRFS is a corporation duly incorporated,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania.  PRFS is a bank holding
company, duly registered under the BHC Act, and has made a valid financial
holding company election.  PRFS has the
corporate power and authority to carry on its businesses and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it.  PRFS is duly
licensed, registered or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing, registration
or qualification necessary, except where the failure to be so licensed,
registered or qualified would not have a Material Adverse Effect, and all such
licenses, registrations and qualifications are in full force and effect in all
material respects.

 

(b)  Blue Ball is a national banking association
duly organized, validly existing and in good standing under the laws of the
United States of America.  Blue Ball has
the corporate power and authority to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it.  Blue Ball is duly
licensed, registered or qualified to do business in each jurisdiction in which
the nature of the

 

20

 

business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing, registration or qualification necessary, except where the
failure to be so licensed, registered or qualified would not have a Material
Adverse Effect, and all such licenses, registrations and qualifications are in
full force and effect in all material respects.

 

(c)  The deposits of Blue Ball are insured by the
Bank Insurance Fund of the FDIC to the extent provided in the Federal Deposit
Insurance Act.

 

(d)  PRFS has no direct or indirect Subsidiaries
other than Blue Ball and those identified in PRFS
Disclosure Schedule 3.01(d).

 

(e)  The respective minute books of PRFS and each
PRFS Subsidiary accurately reflect all material corporate actions of their
respective shareholders and boards of directors, including committees, in each
case in accordance with normal business practice of PRFS and each PRFS
Subsidiary.

 

(f)  PRFS has delivered or made available to CMTY
true and correct copies of the articles of incorporation and bylaws of PRFS and
Blue Ball, and the articles of incorporation and bylaws of each other PRFS
Subsidiary, each as in effect on the date hereof.

 

(g)  Each PRFS Subsidiary is (i) duly
organized, validly existing and in good standing under the laws of either the
United States of America or of the Subsidiary’s state of organization,
(ii) has the corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the properties and
assets now owned and being operated by it, (iii) is duly licensed,
registered or qualified to do business in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing, registration or
qualification necessary, except where the failure to be so licensed, registered
or qualified would not have a Material Adverse Effect, and all such licenses,
registrations and qualifications are in full force and effect in all material
respects.

 

21

 

3.02 Capitalization.

 

(a)  The authorized capital stock of PRFS consists
of 20,000,000 shares of common stock, par value $2.50 per share (“PRFS Common
Stock”), of which at the date hereof 7,640,515 shares are validly issued and
outstanding, fully paid and nonassessable, and free of preemptive rights, and
78,028 are held as treasury shares.  PRFS
has not issued, nor is PRFS bound by, any subscription, option, warrant, call,
commitment, agreement or other Right of any character relating to the purchase,
sale, or issuance of, or right to receive dividends or other distributions on,
any shares of PRFS Common Stock or any other security of PRFS or any securities
representing the right to vote, purchase or otherwise receive any shares of
PRFS Common Stock or any other security of PRFS, except (i) for PRFS
Options for 303,475 shares of PRFS Common Stock issued and outstanding under
the PRFS Stock Option Plans and (ii) pursuant to PRFS’s Dividend
Reinvestment Plan.

 

(b)  PRFS owns, directly or indirectly, all of the
capital stock of Blue Ball and the other PRFS Subsidiaries, free and clear of
any liens, security interests, pledges, charges, encumbrances, agreements and
restrictions of any kind or nature. 
Except for the Bank Plan of Merger, there are no subscriptions, options,
warrants, calls, commitments, agreements or other Rights outstanding with
respect to the capital stock of Blue Ball or any other PRFS Subsidiary.  Except for the PRFS Subsidiaries, PRFS does
not possess, directly or indirectly, any material equity interest in any
corporation, except for equity interests in the investment portfolio of 1906
Founders, Inc. and other PRFS Subsidiaries, equity interests held in connection
with Blue Ball’s commercial loan activities, equity interests held by PRFS or
PRFS’s Subsidiaries in a fiduciary capacity, and as set forth in PRFS Disclosure Schedule 3.02(b).

 

(c)  To the Knowledge of PRFS, except as may be
disclosed in any subsequent Schedule 13D or 13G filed with the SEC, no person
or group is the beneficial owner of 5% or more of the outstanding shares of
PRFS Common Stock (the terms “person,” “group” and “beneficial owner” are as
defined in Section 13(d) of the Exchange Act, and the rules and
regulations thereunder).

 

22

 

3.03 Authority; No Violation.

 

(a)  PRFS has full corporate power and authority
to execute and deliver this Agreement and to consummate the Contemplated Transactions.  The execution and delivery of this Agreement
by PRFS and the consummation by PRFS of the Contemplated Transactions have been
duly and validly approved by the Board of Directors of PRFS and, except for approval
by the shareholders of PRFS as required by the BCL, no other corporate
proceedings on the part of PRFS are necessary to consummate the Merger.  This Agreement has been duly and validly
executed and delivered by PRFS and, subject to approval by the shareholders of
PRFS and subject to receipt of the required approvals of Regulatory Authorities
described in Section 4.04 hereof, constitutes the valid and binding
obligation of PRFS, enforceable against PRFS in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors’ rights generally and subject, as to enforceability, to general
principles of equity.

 

(b)  Subject to (i) receipt of approval from
the shareholders of PRFS, (ii) receipt of approvals from the Regulatory
Authorities referred to in Section 4.04 hereof and (iii) PRFS’s and
CMTY’s compliance with any conditions contained therein, the execution and
delivery of this Agreement by PRFS, the consummation of the Merger, and
compliance by PRFS or any PRFS Subsidiary with any of the terms or provisions
hereof, do not and will not:

 

(A)  conflict with or result in a breach of any
provision of the respective articles of incorporation or bylaws of PRFS or any
PRFS Subsidiary;

 

(B)  violate any statute, rule, regulation,
judgment, order, writ, decree or injunction applicable to PRFS or any PRFS
Subsidiary or any of their respective properties or assets; or

 

(C)  except as described in PRFS Disclosure Schedule 3.03,
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, or acceleration of,
the performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or other
encumbrance upon any of the properties

 

23

 

or assets of PRFS or any PRFS
Subsidiary under any of the terms or conditions of any note, bond, mortgage,
indenture, license, lease, agreement, commitment or other instrument or
obligation to which PRFS or any PRFS Subsidiary is a party, or by which they or
any of their respective properties or assets may be bound or affected,
excluding from clauses (B) and (C) hereof, any items which, in the
aggregate, would not have a Material Adverse Effect.

 

3.04 Consents.  Except as described in Section 4.04 of
this Agreement, no consents or approvals of, or filings or registrations with,
any public body or authority are necessary and, except as described in PRFS Disclosure Schedule 3.04 or where the
failure to obtain any consent or approval would constitute a Material Adverse
Effect, no consents or approvals of any third party to a Material Contract are
(or will be ) necessary in connection with the execution and delivery of this
Agreement by PRFS or the Bank Plan of Merger by Blue Ball or, subject to the
consents, approvals, filings and registrations from or with the Regulatory
Authorities referred to in Section 4.04 hereof and compliance with any
conditions contained therein and subject to the approval of this Agreement by
the shareholders of PRFS as required under the BCL, the consummation by PRFS or
Blue Ball of the Contemplated Transactions. 
Shareholders of PRFS are not entitled to exercise dissenters’ rights in
connection with the Contemplated Transactions under applicable law.

 

3.05 Financial Statements.

 

(a)  PRFS has filed the PRFS Financials with the
SEC, except those pertaining to quarterly periods commencing after
September 30, 2004, which it will file on before the applicable
deadline.  The filed PRFS Financials
fairly present, in all material respects, the consolidated financial position,
results of operations and cash flows of PRFS as of and for the periods ended on
the dates thereof, in accordance with GAAP consistently applied, except in each
case as may be noted therein, and subject to normal year-end adjustments and as
permitted by Form 10-Q in the case of unaudited statements.

 

(b)  To the Knowledge of PRFS and except as set
forth in PRFS Disclosure
Schedule 3.05(b), PRFS did not, as of September 30, 2004,
have any liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise, which are not fully reflected or reserved against in
the balance sheets included in the PRFS Financials at the date of such balance

 

24

 

sheets which would have been
required to be reflected therein in accordance with GAAP consistently applied
or disclosed in a footnote thereto, except for liabilities and obligations
which were incurred in the ordinary course of business consistent with past
practice, and except for liabilities and obligations which are within the
subject matter of a specific representation and warranty herein or which
otherwise have not had a Material Adverse Effect.

 

3.06 No Material Adverse Change.  Neither PRFS nor any PRFS Subsidiary has
suffered any adverse change in their respective assets, business, financial
condition or results of operations since September 30, 2004, which change
has had a Material Adverse Effect.

 

3.07 Taxes.

 

(a)  PRFS and the PRFS Subsidiaries are members of
the same affiliated group within the meaning of IRC Section 1504(a) of
which PRFS is a common parent.  PRFS has
filed, and will file, all material federal, state and local tax returns
required to be filed by, or with respect to, PRFS and the PRFS Subsidiaries on
or prior to the Closing Date, except to the extent that any failure to file or
any inaccuracies would not, individually or in the aggregate, have a Material
Adverse Effect, and has paid or will pay, or made or will make, provisions for
the payment of all federal, state and local taxes which are shown on such
returns to be due for the periods covered thereby from PRFS or any PRFS Subsidiary
to any applicable taxing authority, on or prior to the Closing Date, other than
taxes which (i) are not delinquent or are being contested in good faith,
(ii) have not been finally determined, or (iii) the failure to pay
would not, individually or in the aggregate, have a Material Adverse Effect.

 

(b)  No consent pursuant to IRC
Section 341(f) has been filed, or will be filed prior to the Closing Date,
by or with respect to PRFS or any PRFS Subsidiary.

 

(c)  To the Knowledge of PRFS, there are no material
disputes pending, or claims asserted in writing, for taxes or assessments upon
PRFS or any PRFS Subsidiary, nor has PRFS or any PRFS Subsidiary been requested
in writing to give any currently effective waivers extending the statutory
period of limitation applicable to any federal, state, county or local income
tax return for any period.

 

25

 

(d)  Proper and accurate amounts have been
withheld by PRFS and each PRFS Subsidiary from their employees for all prior
periods in compliance in all material respects with the tax withholding
provisions of applicable federal, state and local laws, except where failure to
do so is not reasonably likely to have a Material Adverse Effect.

 

3.08 Contracts.

 

(a)  Except as described in PRFS Disclosure Schedule 3.08(a) or PRFS Disclosure Schedule 3.12(a) or in
documents listed as exhibits to PRFS’s Securities Documents, neither PRFS nor
any PRFS Subsidiary is a party to or subject to:

 

(i)  any employment, consulting, severance, “change-in-control”
or termination contract or arrangement with any officer, director, employee,
independent contractor, agent or other person, except for “at will”
arrangements;

 

(ii)  any plan, arrangement or contract providing
for bonuses, pensions, options, deferred compensation, retirement payments,
profit sharing or similar arrangements for or with any officer, director,
employee, independent contractor, agent or other person;

 

(iii)  any collective bargaining agreement with any
labor union relating to employees;

 

(iv)  any agreement which by its terms limits the
payment of dividends by PRFS or any PRFS Subsidiary;

 

(v)  except in the ordinary course of business,
any material instrument evidencing or related to indebtedness for borrowed
money, whether directly or indirectly, by way of purchase money obligation,
conditional sale, lease purchase, guaranty or otherwise, in respect of which
PRFS or any PRFS Subsidiary is an obligor to any person, other than deposits,
repurchase agreements, bankers acceptances and treasury tax and loan accounts
established in the ordinary course of business, instruments relating to
transactions entered into in the customary course of the banking business of
Blue Ball, including FHLB advances and transactions in “federal funds,” or
which contains financial covenants or other restrictions, other than those

 

26

 

relating to the payment of
principal and interest when due, which would be applicable on or after the
Closing Date;

 

(vi)  any contract, other than this Agreement,
which restricts or prohibits it from engaging in any type of business
permissible under applicable law;

 

(vii)  any contract, plan or arrangement which
provides for payments or benefits in certain circumstances which, together with
other payments or benefits payable to any participant therein or party thereto,
might render any portion of any such payments or benefits subject to
disallowance of deduction therefor as a result of the application of Section 280G
of the IRC;

 

(viii)  any lease for real property;

 

(ix)  any contract or arrangement with any
broker-dealer or investment adviser;

 

(x)  any investment advisory contract with any
investment company registered under the Investment Company Act of 1940;

 

(xi)  any contract or arrangement with, or
membership in, any local clearing house or self-regulatory organization;

 

(xii)  any contract or arrangement for the
acquisition of, or any payment in connection with the acquisition of, any
equity interest in, or substantially all the assets of, any business
organization; or

 

(xiii)  any Material Contract.

 

(b)  (i) 
All the contracts, plans, arrangements and instruments listed in PRFS Disclosure Schedule 3.08(a) or PRFS Disclosure Schedule 3.12(a) are in
full force and effect on the date hereof, and neither PRFS, any PRFS
Subsidiary, nor, to the Knowledge of PRFS, any other party to any such
contract, plan, arrangement or instrument, has breached any provision of, or is
in default under any term of, any such contract, plan, arrangement or
instrument the breach of which or default under which will have a Material
Adverse Effect, and no party to any such contract, plan, arrangement or
instrument will have the right to terminate any or all of the

 

27

 

provisions thereof as a result
of the Contemplated Transactions, the termination of which will have a Material
Adverse Effect.

 

(ii)  Except as otherwise described in PRFS Disclosure Schedule 3.08(a) or PRFS Disclosure Schedule 3.12(a), no plan,
employment agreement, termination agreement or similar agreement or arrangement
to which PRFS or any PRFS Subsidiary is a party or by which PRFS or any PRFS
Subsidiary may be bound:

 

(A)  contains provisions which permit an employee
or an independent contractor to terminate it without cause and continue to
accrue future benefits thereunder;

 

(B)  provides for acceleration in the vesting of
benefits thereunder upon the occurrence of a change in ownership or control or
merger or other acquisition of PRFS or any PRFS Subsidiary; or

 

(C)  requires PRFS or any PRFS Subsidiary to
provide a benefit in the form of PRFS Common Stock or determined by reference
to the value of PRFS Common Stock.

 

3.09 Ownership of Property; Insurance
Coverage.

 

(a)  PRFS and each PRFS Subsidiary has, and will
have as to property acquired after the date hereof, good, and as to real
property, marketable, title to all material assets and properties owned by PRFS
or such PRFS Subsidiary, whether real or personal, tangible or intangible,
including securities, assets and properties reflected in the balance sheets
contained in the PRFS Financials or acquired subsequent thereto (except to the
extent that such securities are held in any fiduciary or agency capacity and
except to the extent that such assets and properties have been disposed of for
fair value, in the ordinary course of business, or have been disposed of as
obsolete since the date of such balance sheets), subject to no encumbrances,
liens, mortgages, security interests or pledges, except:

 

(i)  those items that secure liabilities for
borrowed money and that are described in PRFS
Disclosure Schedule 3.09(a) or permitted under Article V
hereof;

 

28

 

(ii)  statutory liens for amounts not yet
delinquent or which are being contested in good faith;

 

(iii)  liens for current taxes not yet due and
payable;

 

(iv)  pledges to secure deposits and other liens
incurred in the ordinary course of banking business;

 

(v)  such imperfections of title, easements and
encumbrances, if any, as are not material in character, amount or extent; and

 

(vi)   dispositions and encumbrances for adequate
consideration in the ordinary course of business.

 

PRFS and each PRFS Subsidiary have the right under
leases of material properties used by them in the conduct of their respective
businesses to occupy and use all such properties in all material respects as
presently occupied and used by them.

 

(b)  With respect to all agreements pursuant to
which PRFS or any PRFS Subsidiary has purchased securities subject to an
agreement to resell, if any, PRFS or such PRFS Subsidiary has a valid,
perfected first lien or security interest in the securities or other collateral
securing the repurchase agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby, except to the extent that any
failure to obtain such a lien or maintain such collateral would not,
individually or in the aggregate, have a Material Adverse Effect.

 

(c)  PRFS and each PRFS Subsidiary maintain
insurance in amounts considered by PRFS to be reasonable for their respective
operations, and such insurance is similar in scope and coverage in all material
respects to that maintained by other businesses similarly situated.  Neither PRFS nor any PRFS Subsidiary has
received notice from any insurance carrier that:

 

(i)  such insurance will be cancelled or that
coverage thereunder will be reduced or eliminated; or

 

29

 

(ii)  premium costs with respect to such insurance
will be substantially increased; except to the extent such cancellation,
reduction, elimination or increase would not have a Material Adverse Effect.

 

(d)  PRFS and each PRFS Subsidiary maintain such
fidelity bonds, directors’ and officers’ liability insurance and errors and
omissions insurance as may be customary or required under applicable laws or
regulations.

 

3.10 Legal Proceedings.  Except as set forth in PRFS Disclosure Schedule 3.10, neither
PRFS nor any PRFS Subsidiary is a party to any, and there are no pending or, to
the Knowledge of PRFS, threatened, legal, administrative, arbitration or other
proceedings, claims, actions, customer complaints, or governmental
investigations or inquiries of any nature:

 

(a)  against PRFS or any PRFS Subsidiary;

 

(b)  to which the assets of PRFS or any PRFS
Subsidiary are subject;

 

(c)  challenging the validity or propriety of any
of the Contemplated Transactions; or

 

(d)  which could materially adversely affect the
ability of PRFS, Blue Ball or any other PRFS Subsidiary to perform their
respective obligations under this Agreement and the Bank Plan of Merger; except
for any proceedings, claims, actions, investigations, or inquiries referred to
in clauses (a) or (b) of this Section 3.10 which, individually or in the
aggregate, would not have a Material Adverse Effect.

 

3.11 Compliance with Applicable Law and
Agreements.

 

(a)  PRFS and each PRFS Subsidiary hold all
licenses, franchises, permits and authorizations necessary for the lawful
conduct of their respective businesses under, and have complied in all material
respects with, applicable laws, statutes, orders, rules or regulations of any
Regulatory Authority relating to them, other than where such failure to hold or
such noncompliance will neither result in a limitation in any material respect
on the conduct of its businesses or otherwise have a Material Adverse Effect.

 

30

 

(b)  PRFS and each PRFS Subsidiary have filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file with any
Regulatory Authority, and have filed all other reports and statements required
to be filed by them, including without limitation any report or statement
required to be filed pursuant to the laws, rules or regulations of the United
States, any state or any Regulatory Authority, and have paid all fees and
assessments due and payable in connection therewith, except where the failure
to file such report, registration or statement or to pay such fees and
assessments, either individually or in the aggregate, would not have a Material
Adverse Effect.

 

(c)  Except as set forth on PRFS Disclosure Schedule 3.11(c), no Regulatory
Authority has initiated any proceeding or, to the Knowledge of PRFS,
investigation into the business or operations of PRFS or any PRFS Subsidiary,
except where any such proceedings or investigations will not, individually or
in the aggregate, have a Material Adverse Effect, or such proceedings or
investigations have been terminated or otherwise resolved.

 

(d)  Except as set forth on PRFS Disclosure Schedule 3.11(d), neither
PRFS nor any PRFS Subsidiary has received any notification or communication
from any Regulatory Authority:

 

(i)  asserting that PRFS or any PRFS Subsidiary is
not in substantial compliance with any of the statutes, regulations or
ordinances which such Regulatory Authority enforces, unless such assertion has
been waived, withdrawn or otherwise resolved;

 

(ii)  threatening to revoke any license, franchise,
permit or governmental authorization which is material to PRFS or any PRFS
Subsidiary;

 

(iii)  requiring or threatening to require PRFS or
any PRFS Subsidiary, or indicating that PRFS or any PRFS Subsidiary may be
required, to enter into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting, or purporting to
restrict or limit, in any manner the operations of PRFS or any PRFS Subsidiary,
including without limitation any restriction on the payment of dividends; or

 

31

 

(iv)  directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the operations of PRFS
or any PRFS Subsidiary (any such notice, communication, memorandum, agreement
or order described in this sentence herein referred to as a “Regulatory
Agreement”).

 

(e)  Neither PRFS nor any PRFS Subsidiary has
consented to or entered into any pending Regulatory Agreement.

 

(f)  To the Knowledge of PRFS, except as set forth
in PRFS Disclosure Schedule 3.11(f),
there is no unresolved violation, criticism, or exception by any Regulatory
Authority with respect to any Regulatory Agreement which if resolved in a
manner adverse to PRFS or any PRFS Subsidiary would have a Material Adverse
Effect.

 

(g)  There is no injunction, order, judgment or
decree imposed upon PRFS or any PRFS Subsidiary or the assets of PRFS or any
PRFS Subsidiary which has had, or, to the Knowledge of PRFS, would have, a
Material Adverse Effect.

 

(h)  Neither PRFS nor any PRFS Subsidiary has
breached or defaulted on any agreement, contract, commitment, arrangement or
other instrument to which any of them is a party or by which any of them may be
bound, other than any breach or default that would not have a Material Adverse
Effect.

 

3.12 ERISA.

 

(a)  PRFS has made available or delivered to CMTY
true and complete copies of any employee pension benefit plans within the
meaning of ERISA Section 3(2), profit sharing plans, stock purchase plans,
deferred compensation and supplemental income plans, supplemental executive
retirement plans, annual incentive plans, group insurance plans, and all other
employee welfare benefit plans within the meaning of ERISA Section 3(1)
(including vacation pay, sick leave, short-term disability, long-term
disability, and medical plans) and all other employee benefit plans, policies,
agreements and arrangements, all of which are listed in PRFS Disclosure Schedule 3.12(a),
currently maintained or contributed to for the benefit of the employees or
former employees (including retired employees) and any beneficiaries thereof or
directors or former directors of PRFS or any other entity (a “PRFS ERISA
Affiliate”) that,

 

32

 

together with PRFS, is treated
as a single employer under IRC Sections 414(b), (c), (m) or (o)
(collectively, the “PRFS Benefit Plans”), together with:

 

(i)  the most recent actuarial reports (if any)
and financial reports relating to those PRFS Benefit Plans which constitute “qualified
plans” under IRC Section 401(a);

 

(ii)  the most recent Form 5500 (if any) relating
to such PRFS Benefit Plans filed by them, respectively, with the IRS; and

 

(iii)  the most recent IRS determination letters
which pertain to any such PRFS Benefit Plans.

 

(b)  Neither PRFS nor any PRFS ERISA Affiliate,
and no pension plan (within the meaning of ERISA Section 3(2)) maintained
or contributed to by PRFS or any PRFS ERISA Affiliate, has incurred any
liability to the Pension Benefit Guaranty Corporation or to the IRS with
respect to any pension plan qualified under IRC Section 401(a), except
liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA Section 4007,
all of which have been fully paid, nor has any reportable event under ERISA
Section 4043(b) (with respect to which the 30 day notice requirement
has not been waived) occurred with respect to any such pension plan.

 

(c)  Neither PRFS nor any PRFS ERISA Affiliate has
ever contributed to or otherwise incurred any liability with respect to a
multi-employer plan (within the meaning of ERISA Section 3(37)).

 

(d)  Each PRFS Benefit Plan has been maintained,
operated and administered in compliance in all respects with its terms and
related documents or agreements and the applicable provisions of all laws,
including ERISA and the IRC, except where any such non-compliance would not
have a Material Adverse Effect.

 

(e)  There is no existing, or, to the Knowledge of
PRFS, contemplated, audit of any PRFS Benefit Plan by the IRS, the U.S.
Department of Labor, the Pension Benefit Guaranty Corporation or any other
governmental authority.  In addition,
there are no pending or threatened claims by, on behalf of or with respect to
any PRFS Benefit Plan, or by or on behalf of any individual participant or
beneficiary of any PRFS Benefit Plan, alleging any violation of ERISA

 

33

 

or any other applicable laws,
or claiming benefits (other than claims for benefits not in dispute and
expected to be granted promptly in the ordinary course of business), nor to the
Knowledge of PRFS, is there any basis for such claim.

 

(f)  Except as set forth in PRFS Disclosure Schedule 3.12(f), with
respect to any services which PRFS or any PRFS Subsidiary may provide as a
record-keeper, consultant, administrator, custodian, fiduciary, trustee or
otherwise for any plan, program, or arrangement subject to ERISA (other than
any PRFS Benefit Plan), to the Knowledge of PRFS, PRFS or the relevant PRFS
Subsidiary:

 

(i)  has correctly computed all contributions,
payments or other amounts in accordance with the applicable documents of any
such plan, program or arrangement;

 

(ii)  has not engaged in any prohibited transactions
(as defined in ERISA Section 406 for which an exemption does not exist);

 

(iii)  has not breached any duty imposed on PRFS or
the relevant PRFS Subsidiary acting as a record-keeper, consultant,
administrator, custodian, fiduciary or trustee by ERISA: and

 

(iv)  has not otherwise incurred any liability to
the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation, or
to any beneficiary, fiduciary or sponsor of any ERISA plan in the performance
(or non-performance) of services; except as previously disclosed to CMTY and
except where any such action or inaction would not have a Material Adverse
Effect.

 

3.13 Brokers and Finders.  Neither PRFS, any PRFS Subsidiary, nor any of
their respective officers, directors, employees, independent contractors or
agents, has employed any broker, finder, investment banker or financial
advisor, or incurred any liability for any fees or commissions to any such
person, in connection with the Contemplated Transactions, except for Griffin
Financial Group, LLC (“Griffin”).

 

34

 

3.14 Environmental Matters.

 

(a)  Except as set forth in PRFS Disclosure Schedule 3.14(a), to the
Knowledge of PRFS, neither PRFS nor any PRFS Subsidiary, nor any property owned
or operated by PRFS or any PRFS Subsidiary, has been or is in violation of or
liable under any Environmental Law, except for such violations or liabilities
that, individually or in the aggregate, would not have a Material Adverse
Effect.  There are no actions, suits or
proceedings, or demands, claims or notices, including without limitation
notices, demand letters or requests for information from any Regulatory
Authority, instituted or pending, or to the Knowledge of PRFS, threatened, or
any investigation pending, relating to the liability of PRFS or any PRFS
Subsidiary with respect to any property owned or operated by PRFS or any PRFS
Subsidiary under any Environmental Law, except as to any such actions or other
matters which would not result in a Material Adverse Effect.

 

(b)  To the Knowledge of PRFS, no property, now or
formerly owned or operated by PRFS or any PRFS Subsidiary or on which PRFS or
any PRFS Subsidiary holds or held a mortgage or other security interest or has
foreclosed or taken a deed in lieu of foreclosure, has been listed or proposed
for listing on the National Priority List under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended (“CERCLA”), on the
Comprehensive Environmental Response Compensation and Liabilities Information
System, or any similar state list, or which is the subject of federal, state or
local enforcement actions or other investigations which may lead to claims
against PRFS or any PRFS Subsidiary for response costs, remedial work, investigation,
damage to natural resources or for personal injury or property damage claim,
including, but not limited to, claims under CERCLA, which would have a Material
Adverse Effect.

 

3.15 Business
of PRFS.  Since
September 30, 2004, neither PRFS nor any PRFS Subsidiary has, in any
material respect:

 

(a)  increased the wages, salaries, compensation,
pension or other employee benefits payable to any executive officer, employee
or director, except as is permitted in Section 5.01(d);

 

35

 

(b)  terminated any material employee benefit
plans;

 

(c)  deferred routine maintenance of real property
or leased premises;

 

(d)  eliminated a reserve where the liability
related to such reserve has remained;

 

(e)  failed to depreciate capital assets in
accordance with past practice or to eliminate capital assets which are no
longer used in its business; or

 

(f)  had extraordinary reduction or deferral of
ordinary or necessary expenses.

 

3.16 CRA
Compliance.  PRFS and Blue Ball
are in material compliance with the applicable provisions of the CRA, and, as
of the date hereof, Blue Ball has received a CRA rating of “satisfactory” or
better from the OCC.  To the Knowledge of
PRFS, there is no fact or circumstance or set of facts or circumstances which
would cause PRFS or Blue Ball to fail to comply with such provisions in a
manner which would have a Material Adverse Effect.

 

3.17 Bank
Merger.

 

(a)  Blue Ball has full corporate power and
authority to execute and deliver the Bank Plan of Merger and to consummate the
Bank Merger.  The execution and delivery
of the Bank Plan of Merger by Blue Ball and the consummation by Blue Ball of
the Bank Merger have been (or will be) duly and validly approved by the Board
of Directors of Blue Ball and by PRFS as sole shareholder of Blue Ball, and no
other corporate proceedings on the part of Blue Ball are necessary to
consummate the Bank Merger.  Subject to
receipt of required approvals of Regulatory Authorities, the Bank Plan of
Merger, upon its execution and delivery by Blue Ball concurrently with the
execution and delivery of this Agreement, will constitute the valid and binding
obligation of Blue Ball, enforceable against Blue Ball in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors’ rights generally and subject, as to enforceability, to general
principles of equity.

 

(b)  The execution and delivery of the Bank Plan
of Merger and the consummation of the Bank Merger will not:

 

36

 

(i)  conflict with or result in a breach of any
provision of the respective articles of incorporation or bylaws of PRFS, Blue
Ball or any Subsidiary of Blue Ball;

 

(ii)  subject to receipt of required Regulatory
Approvals, violate any statute, rule, regulation, judgment, order, writ, decree
or injunction applicable to PRFS, Blue Ball, any Subsidiary of Blue Ball or any
of their respective properties or assets; or

 

(iii)  violate, conflict with, result in a breach of
any provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of, or acceleration of the performance required by, or result in a
right of termination or acceleration or the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties or
assets of PRFS or Blue Ball under, any of the terms or conditions of any note,
bond, mortgage, indenture, license, lease, agreement, commitment or other
instrument or obligation to which PRFS or Blue Ball is a party, or by which
they or any of their respective properties or assets may be bound or affected;
excluding from clauses (ii) and (iii) any such items which, in the
aggregate, would not have a Material Adverse Effect.

 

3.18 Information to be Supplied.

 

(a)  The information supplied by PRFS for
inclusion in the Registration Statement (including the Joint Prospectus/Proxy
Statement) will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act, and as of the date the Joint
Prospectus/Proxy Statement is mailed to shareholders of CMTY and PRFS, and up
to and including the date of the CMTY Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances in
which they were made, not misleading.

 

(b)  The information supplied by PRFS for
inclusion in the Applications will, at the time each such document is filed
with any Regulatory Authority and up to and including the dates of any required
regulatory approvals or consents, as such Applications may be amended by
subsequent filings, be accurate in all material respects.

 

37

 

3.19 Related Party Transactions.

 

(a)  Except as set forth on PRFS Disclosure Schedule 3.19, or as
is disclosed in the footnotes to the PRFS Financials, as of the date hereof,
neither PRFS nor any PRFS Subsidiary is a party to any transaction (including
any loan or other credit accommodation but excluding deposits in the ordinary
course of business) with any Affiliate of PRFS or any PRFS Subsidiary, and all
such transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other “persons” (as defined in Section 13(d) of the
Exchange Act, and the rules and regulations thereunder), except with respect to
variations in such terms as would not, individually or in the aggregate, have a
Material Adverse Effect.

 

(b)  Except as set forth in PRFS Disclosure Schedule 3.19, as of
the date hereof, no loan or credit accommodation to any PRFS Affiliate is
presently in default or, during the three-year period prior to the date of this
Agreement, has been in material default or has been restructured, modified or
extended in any manner which would have a Material Adverse Effect.  To the Knowledge of PRFS, as of the date
hereof, principal and interest with respect to any such loan or other credit
accommodation will be paid when due and the loan grade classification accorded
such loan or credit accommodation is appropriate.

 

3.20 Loans.  To the Knowledge of PRFS, all loans reflected
as assets in the PRFS Financials are evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and correct, and to the
extent secured, are secured by valid liens and security interests which have
been perfected, excluding loans as to which the failure to satisfy the
foregoing standards would not have a Material Adverse Effect.

 

3.21 Allowance for Loan Losses.  The allowance for loan losses shown, and to
be shown, on the balance sheets contained in the PRFS Financials have been, and
will be, established in accordance with GAAP and all applicable regulatory
criteria.

 

3.22 Reorganization.  As of the date hereof, PRFS does not have any
reason to believe that the Merger will fail to qualify as a reorganization
under Section 368(a) of the IRC. PRFS

 

38

 

shall not take any action which
would preclude the Merger from qualifying as a reorganization within the
meaning of Section 368 of the IRC.

 

3.23 Fairness Opinion.  PRFS has received a written opinion from
Griffin to the effect that, as of the date hereof, the transaction is fair to
PRFS from a financial point of view.

 

3.24 Securities Documents.

 

(a)  PRFS has delivered or made available to CMTY
copies of the annual reports to shareholders for the years 2001, 2002 and 2003
that were delivered with its proxy statements for such years.

 

(b)  PRFS’s annual reports on SEC Form 10-K for
the years ended December 31, 2003 and 2002, quarterly report on SEC
Form 10-Q for the quarters ended March 31, 2004, June 30, 2004
and September 30, 2004, all other reports, registration statements and
filings of PRFS filed with the SEC since January 1, 2004 and proxy
materials used in connection with its meetings of shareholders held in 2004 and
2003 complied, in all material respects, and all future SEC reports, filings,
and proxy materials will comply, in all material respects, with the rules and
regulations of the SEC to the extent applicable thereto, and all such SEC
reports, filings and proxy materials did not and will not, at the time of their
filing, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances in which they were made, not
misleading.

 

3.25 Quality of Representations.  To the Knowledge of PRFS, no representation
made by PRFS in this Agreement contains any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.

 

ARTICLE
IV-

REPRESENTATIONS AND WARRANTIES OF CMTY

 

CMTY
hereby represents and warrants, on the date hereof and on the Closing Date, to
PRFS that:

 

39

 

4.01 Organization.

 

(a)  CMTY is a corporation duly incorporated,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania.  CMTY is a bank holding
company duly registered under the BHC Act and has made a valid financial
holding company election.  CMTY has the
corporate power to carry on its businesses and operations as now being
conducted and to own and operate the properties and assets now owned and being
operated by it.  CMTY is duly licensed,
registered or qualified to do business in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing, registration or
qualification necessary, except where the failure to be so licensed, registered
or qualified will not have a Material Adverse Effect, and all such licenses,
registrations and qualifications are in full force and effect in all material
respects.

 

(b)  Community Banks is a bank and trust company
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania.  Community
Banks has the corporate power to carry on its business and operations as now
being conducted and to own and operate the properties and assets now owned and
being operated by it.  Community Banks is
duly licensed, registered or qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the character or location
of the properties and assets owned or leased by it makes such licensing,
registration or qualification necessary, except where the failure to be so
licensed, registered or qualified will not have a Material Adverse Effect, and
all such licenses, registrations and qualifications are in full force and
effect in all material respects.

 

(c)  The deposits of Community Banks are insured
by the Bank Insurance Fund of the FDIC to the extent provided in the Federal
Deposit Insurance Act.

 

(d)  CMTY has no direct or indirect Subsidiaries
other than those identified in CMTY Disclosure
Schedule 4.01(d).

 

(e)  The respective minute books of CMTY and each
CMTY Subsidiary accurately reflect all material corporate actions of their
respective shareholders and boards of directors,

 

40

 

including committees, in each
case in accordance with the normal business practice of CMTY and each CMTY
Subsidiary.

 

(f)  CMTY has delivered or made available to PRFS
true and correct copies of the respective articles of incorporation, articles
of association and bylaws of CMTY and each CMTY Subsidiary, as in effect on the
date hereof.

 

(g)  Each CMTY Subsidiary is (i) duly
organized, validly existing and in good standing under the laws of either the
United States of America or of the Subsidiary’s state of organization,
(ii) has the corporate power and authority to carry on its business and
operations as now being conducted and to own and operate the properties and
assets now owned and being operated by it, (iii) is duly licensed,
registered or qualified to do business in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing, registration or
qualification necessary, except where the failure to be so licensed, registered
or qualified would not have a Material Adverse Effect, and all such licenses,
registrations and qualifications are in full force and effect in all material
respects.

 

4.02 Capitalization.

 

(a)  The authorized capital stock of CMTY consists
of (a) 20,000,000 shares of common stock, par value of $5.00 (“CMTY Common
Stock”), of which 194,799 shares are validly issued and held by CMTY as
treasury stock and 12,226,892 shares are validly issued and outstanding, fully
paid and nonassessable and free of preemptive rights, and (b) 500,000 shares of
preferred stock, without par value, of which none are issued.  CMTY has not issued nor is CMTY bound by any
subscription, option, warrant, call, commitment, agreement or other Right of
any character relating to the purchase, sale, or issuance of, or right to
receive dividends or other distributions on, any shares of CMTY Common Stock or
any other security of CMTY or any securities representing the right to vote,
purchase or otherwise receive any shares of CMTY Common Stock or any other
security of CMTY, except (i) for options to acquire shares of CMTY Common
Stock issued under CMTY’s various stock option plans, (ii) pursuant to
CMTY’s employee stock purchase plan and dividend reinvestment plan,
(iii) pursuant to the Rights Agreement and (iv) this Agreement.

 

41

 

(b)  CMTY owns, directly or indirectly, all of the
capital stock of Community Banks and the capital stock and membership interests
of the other CMTY Subsidiaries, free and clear of any liens, security
interests, pledges, charges, encumbrances, agreements and restrictions of any
kind or nature.  There are no
subscriptions, options, warrants, calls, commitments, agreements or other
Rights outstanding with respect to the capital stock of Community Banks or any
other CMTY Subsidiary.  Except for the
CMTY Subsidiaries, CMTY does not possess, directly or indirectly, any material
equity interest in any corporation, except for equity interests in the
investment portfolios of CMTY’s Subsidiaries, equity interests held by CMTY or
CMTY’s Subsidiaries in a fiduciary capacity, and equity interests held in
connection with the commercial loan activities of Community Banks.

 

4.03 Authority; No Violation.

 

(a)  CMTY has full corporate power and authority
to execute and deliver this Agreement and to consummate the Contemplated
Transactions.  The execution and delivery
of this Agreement by CMTY and the consummation by CMTY of the Contemplated
Transactions (including, without limitation, the issuance of the Adjusted PRFS
Options) have been duly and validly approved by the Board of Directors of CMTY
by unanimous vote and, except for approval by the shareholders of CMTY as
required by Nasdaq and the BCL, no other corporate proceedings on the part of
CMTY are necessary to consummate the Merger. 
This Agreement has been duly and validly executed and delivered by CMTY
and, subject to receipt of approval of the shareholders of CMTY and the required
approvals of Regulatory Authorities described in Section 4.04 hereof,
constitutes the valid and binding obligation of CMTY, enforceable against CMTY
in accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors’ rights generally and subject, as to
enforceability, to general principles of equity.

 

(b)  Subject to (i) receipt of approvals from
the Regulatory Authorities referred to in Section 4.04 hereof,
(ii) receipt of the approval of the shareholders of CMTY with respect to
the Contemplated Transactions and the Articles Amendment and (iii) CMTY’s
and PRFS’s compliance with any conditions contained therein, the execution and
delivery of this Agreement

 

42

 

by CMTY, the consummation of
the Contemplated Transactions, and compliance by CMTY or any CMTY Subsidiary
with any of the terms or provisions hereof, do not and will not:

 

(A)  conflict with or result in a breach of any
provision of the respective articles of incorporation, articles of association
or bylaws of CMTY or any CMTY Subsidiary;

 

(B)  violate any statute, rule, regulation,
judgment, order, writ, decree or injunction applicable to CMTY or any CMTY
Subsidiary or any of their respective properties or assets; or

 

(C)  violate, conflict with, result in a breach of
any provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of, or acceleration of the performance required by, or result in a
right of termination or acceleration or the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets of
CMTY or any CMTY Subsidiary under, any of the terms or conditions of any note,
bond, mortgage, indenture, license, lease, agreement, commitment or other
instrument or obligation to which CMTY or any CMTY Subsidiary is a party, or by
which they or any of their respective properties or assets may be bound or
affected, excluding from clauses (B) and (C) any such items which, in
the aggregate, would not have a Material Adverse Effect.

 

4.04 Consents.

 

Except
for consents and approvals of, or filings with, the SEC, the FRB, the FDIC, the
OCC, the PDB, the PDS, the NASD and state securities authorities, no consents or
approvals of, or filings or registrations with, any public body or authority
are necessary and, except where the failure to obtain any consent or approval
would constitute a Material Adverse Effect, no consents or approvals of any
third party to a Material Contract are (or will be) necessary in connection
with the execution and delivery of this Agreement by CMTY or the consummation
of the Contemplated Transactions. 
Shareholders of CMTY are not entitled to exercise dissenters’ rights in
connection with the Contemplated Transactions under applicable law.

 

43

 

4.05 Financial
Statements.

 

(a)  CMTY has filed the CMTY Financials with the
SEC, except those pertaining to quarterly periods commencing after September 30,
2004, which it will file on or before the applicable deadline.  The filed CMTY Financials fairly present, in
all material respects, the consolidated financial position, results of
operations and cash flows of CMTY as of and for the periods ended on the dates
thereof, in accordance with GAAP consistently applied, except in each case as
may be noted therein, and subject to normal year-end adjustments and as
permitted by Form 10-Q in the case of unaudited statements.

 

(b)  To the Knowledge of CMTY, CMTY did not have
any liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise, which are not fully reflected or reserved against in
the balance sheets included in the CMTY Financials as of September 30,
2004, which would have been required to be reflected therein in accordance with
GAAP consistently applied or disclosed in a footnote thereto, except for
liabilities and obligations which were incurred in the ordinary course of
business consistent with past practice, and except for liabilities and
obligations which are within the subject matter of a specific representation
and warranty herein or which otherwise have not had a Material Adverse Effect.

 

4.06 No Material Adverse Change.  Neither CMTY nor any CMTY Subsidiary has suffered
any adverse change in their respective assets, financial condition or results
of operations since September 30, 2004 which change has had a Material
Adverse Effect.

 

4.07 Taxes.

 

(a)  CMTY and the CMTY Subsidiaries are members of
the same affiliated group within the meaning of IRC Section 1504(a) of
which CMTY is the common parent.  CMTY
has filed, and will file, all material federal, state and local tax returns
required to be filed by, or with respect to, CMTY and the CMTY Subsidiaries on
or prior to the Closing Date, except to the extent that any failure to file or
any inaccuracies would not, individually or in the aggregate, have a Material
Adverse Effect, and has paid or will pay, or made or will make, provisions for
the payment of all federal, state and local taxes which are shown on such
returns to be due for the periods covered thereby from CMTY or any CMTY
Subsidiary to any applicable taxing

 

44

 

authority, on or prior to the
Closing Date, other than taxes which (i) are not delinquent or are being
contested in good faith, (ii) have not been finally determined, or
(iii) the failure to pay would not, individually or in the aggregate, have
a Material Adverse Effect.

 

(b)  No consent pursuant to IRC Section 341(f)
has been filed, or will be filed prior to the Closing Date, by or with respect
to CMTY or any CMTY Subsidiary.

 

(c)  To the Knowledge of CMTY, there are no
material disputes pending, or claims asserted in writing, for taxes or
assessments upon CMTY or any CMTY Subsidiary, nor has CMTY nor any CMTY
Subsidiary been requested in writing to give any currently effective waivers
extending the statutory period of limitation applicable to any federal, state,
county or local income tax return for any period.

 

(d)  Proper and accurate amounts have been
withheld by CMTY and each CMTY Subsidiary from their employees for all prior
periods in compliance in all material respects with the tax withholding
provisions of applicable federal, state and local laws, except where failure to
do so is not reasonably likely to have a Material Adverse Effect.

 

4.08 Contracts.  Except as described on CMTY Disclosure Schedule 4.08 or in
documents listed as exhibits to CMTY’s Securities Documents, neither CMTY nor
any CMTY Subsidiary is a party to or subject to: (i) any agreement which
by its terms limits the payment of dividends by CMTY or any CMTY Subsidiary,
(ii) any contract, other than this Agreement, which restricts or prohibits
it from engaging in any type of business permissible under applicable law or
(iii) any agreement which may adversely affect the ability of CMTY or any CMTY
Subsidiary to consummate the Contemplated Transactions.

 

4.09 Ownership of Property; Insurance
Coverage.

 

(a)  CMTY and each CMTY Subsidiary has, and will
have as to property acquired after the date hereof, good, and as to real
property, marketable, title to all material assets and properties owned by CMTY
or such CMTY Subsidiary, whether real or personal, tangible or intangible,
including securities, assets and properties reflected in the balance sheets
contained in the CMTY Financials or acquired subsequent thereto (except to the
extent that such securities are held in any fiduciary or agency capacity and
except to the extent that such assets and properties

 

45

 

have been disposed of for fair
value, in the ordinary course of business, or have been disposed of as obsolete
since the date of such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except:

 

(i)  those items that secure liabilities for
borrowed money and that are described in CMTY
Disclosure Schedule 4.09 or permitted under Article V
hereof;

 

(ii)  statutory liens for amounts not yet
delinquent or which are being contested in good faith;

 

(iii)  liens for current taxes not yet due and
payable;

 

(iv)  pledges to secure deposits and other liens
incurred in the ordinary course of banking business;

 

(v)  such imperfections of title, easements and
encumbrances, if any, as are not material in character, amount or extent; and

 

(vi)  dispositions and encumbrances for adequate
consideration in the ordinary course of business.

 

CMTY and each CMTY Subsidiary have the right under
leases of material properties used by CMTY or such CMTY Subsidiary in the
conduct of their respective businesses to occupy and use all such properties in
all material respects as presently occupied and used by them.

 

(b)  With respect to all agreements pursuant to
which CMTY or any CMTY Subsidiary has purchased securities subject to an
agreement to resell, if any, CMTY or such CMTY Subsidiary has a valid,
perfected first lien or security interest in the securities or other collateral
securing the repurchase agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby, except to the extent that any
failure to obtain such a lien or maintain such collateral would not,
individually or in the aggregate, have a Material Adverse Effect.

 

(c)  CMTY and each CMTY Subsidiary maintain
insurance in amounts considered by CMTY to be reasonable for their respective
operations, and such insurance is similar in scope

 

46

 

and coverage in all material
respects to that maintained by other businesses similarly situated. Neither
CMTY nor any CMTY Subsidiary has received notice from any insurance carrier
that:

 

(i)  such insurance will be cancelled or that
coverage thereunder will be reduced or eliminated; or

 

(ii)  premium costs with respect to such insurance
will be substantially increased; except to the extent such cancellation,
reduction, elimination or increase would not have a Material Adverse Effect.

 

(d)  CMTY and each CMTY Subsidiary maintain such
fidelity bonds, directors’ and officers’ liability insurance and errors and
omissions insurance as may be customary or required under applicable laws or
regulations.

 

4.10 Financing.  At the Effective Date, CMTY will have
available cash sufficient to pay the amounts required to be paid to PRFS
shareholders pursuant to this Agreement and shares available and reserved to
pay the Common Stock Consideration, upon consummation of the Merger.

 

4.11  Legal
Proceedings.  Except as
set forth in CMTY Disclosure
Schedule 4.11, neither CMTY nor any CMTY Subsidiary is a party
to any, and there are no pending or, to the Knowledge of CMTY, threatened,
legal, administrative, arbitration or other proceedings, claims, actions,
customer complaints, or governmental investigations or inquiries of any nature:

 

(a)  against CMTY or any CMTY Subsidiary;

 

(b)  to which the assets of CMTY or any CMTY
Subsidiary are subject;

 

(c)  challenging the validity or propriety of any
of the Contemplated Transactions; or

 

(d)  which could materially adversely affect the
ability of CMTY or any other CMTY Subsidiary to perform their respective
obligations under this Agreement and the Bank Plan of Merger; except for any
proceedings, claims, actions, investigations, or inquiries referred

 

47

 

to in clauses (a) or
(b) which, individually or in the aggregate, would not have a Material
Adverse Effect.

 

4.12 Compliance with Applicable Law
and Agreements.

 

(a)  CMTY and each CMTY Subsidiary hold all
licenses, franchises, permits and authorizations necessary for the lawful
conduct of their respective businesses under, and have complied in all material
respects with, applicable laws, statutes, orders, rules or regulations of any
Regulatory Authority relating to them, other than where such failure to hold or
such noncompliance will neither result in a limitation in any material respect
on the conduct of their respective businesses nor otherwise have a Material
Adverse Effect.

 

(b)  CMTY and each CMTY Subsidiary have filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file with any
Regulatory Authority, and have filed all other reports and statements required
to be filed by them, including without limitation any report or statement
required to be filed pursuant to the laws, rules or regulations of the United
States, any state or any Regulatory Authority, and have paid all fees and
assessments due and payable in connection therewith, except where the failure
to file such report, registration or statement or to pay such fees and
assessments, either individually or in the aggregate, would not have a Material
Adverse Effect.

 

(c)  No Regulatory Authority has initiated any
proceeding or, to the Knowledge of CMTY, investigation into the businesses or
operations of CMTY or any of its Subsidiaries, except where any such
proceedings or investigations will not, individually or in the aggregate, have
a Material Adverse Effect, or such proceedings or investigations have been
terminated or otherwise resolved.

 

(d)  Neither CMTY nor any CMTY Subsidiary has
received any notification or communication from any Regulatory Authority:

 

(i)  asserting that CMTY or any CMTY Subsidiary is
not in substantial compliance with any of the statutes, regulations or
ordinances which such Regulatory Authority enforces, unless such assertion has
been waived, withdrawn or otherwise resolved;

 

48

 

(ii)  threatening to revoke any license, franchise,
permit or governmental authorization which is material to CMTY or any CMTY
Subsidiary;

 

(iii)  requiring or threatening to require CMTY or
any CMTY Subsidiary, or indicating that CMTY or any CMTY Subsidiary may be
required, to enter into a cease and desist order, agreement or memorandum of
understanding or any other agreement restricting or limiting, or purporting to
restrict or limit, in any manner the operations of CMTY or any CMTY Subsidiary,
including without limitation any restriction on the payment of dividends; or

 

(iv)  directing, restricting or limiting, or
purporting to direct, restrict or limit, in any manner the operations of CMTY
or any CMTY Subsidiary (any such notice, communication, memorandum, agreement
or order described in this sentence herein referred to as a Regulatory
Agreement”); in each case except as heretofore disclosed to PRFS.

 

(e)  Neither CMTY nor any CMTY Subsidiary has
received, consented to, or entered into any pending Regulatory Agreement.

 

(f)  To the Knowledge of CMTY, there is no
unresolved violation, criticism, or exception by any Regulatory Authority with
respect to any Regulatory Agreement which if resolved in a manner adverse to
CMTY or any CMTY Subsidiary would have a Material Adverse Effect.

 

(g)  There is no injunction, order, judgment or
decree imposed upon CMTY or any CMTY Subsidiary or the assets of CMTY or any
CMTY Subsidiary which has had, or, to the Knowledge of CMTY, would have, a
Material Adverse Effect.

 

(h)  Neither CMTY nor any CMTY Subsidiary has
breached or defaulted on any agreement, contract, commitment, arrangement or
other instrument to which any of them is a party or by which any of them may be
bound, other than any breach or default that would not have a Material Adverse
Effect.

 

49

 

4.13 ERISA.

 

(a)  CMTY has delivered or made available to PRFS
true and complete copies of any employee pension benefit plans within the
meaning of ERISA Section 3(2), profit sharing plans, stock purchase plans,
deferred compensation and supplemental income plans, supplemental executive
retirement plans, annual incentive plans, group insurance plans, and all other
employee welfare benefit plans within the meaning of ERISA Section 3(1)
(including vacation pay, sick leave, short-term disability, long-term
disability, and medical plans) and all other employee benefit plans, policies,
agreements and arrangements, all of which are listed in CMTY Disclosure Schedule 4.13,
currently maintained or contributed to for the benefit of the employees or
former employees (including retired employees) and any beneficiaries thereof or
directors or former directors of CMTY or any other entity (a “CMTY ERISA
Affiliate”) that, together with CMTY, is treated as a single employer under IRC
Sections 414(b), (c), (m) or (o) (collectively, the “CMTY Benefit Plans”),
together with:

 

(i)  the most recent actuarial reports (if any)
and financial reports relating to those CMTY Benefit Plans which constitute “qualified
plans” under IRC Section 401(a);

 

(ii)  the most recent Form 5500 (if any)
relating to such CMTY Benefit Plans filed by them, respectively, with the IRS;
and

 

(iii)  the most recent IRS determination letters
which pertain to any such CMTY Benefit Plans.

 

(b)  Neither CMTY nor any CMTY ERISA Affiliate,
and no pension plan (within the meaning of ERISA Section 3(2)) maintained
or contributed to by CMTY or any CMTY ERISA Affiliate, has incurred any
liability to the Pension Benefit Guaranty Corporation or to the IRS with
respect to any pension plan qualified under IRC Section 401(a), except
liabilities to the Pension Benefit Guaranty Corporation pursuant to ERISA
Section 4007, all of which have been fully paid, nor has any reportable
event under ERISA Section 4043(b) (with respect to which the 30 day notice
requirement has not been waived) occurred with respect to any such pension
plan.

 

50

 

(c)  Neither CMTY nor any CMTY ERISA Affiliate has
ever contributed to or otherwise incurred any liability with respect to a
multi-employer plan (within the meaning of ERISA Section 3(37)).

 

(d)  Each CMTY Benefit Plan has been maintained,
operated and administered in compliance in all respects with its terms and
related documents or agreements and the applicable provisions of all laws,
including ERISA and the IRC, except where any such non-compliance would not
have a Material Adverse Effect.

 

(e)  There is no existing, or, to the Knowledge of
CMTY, contemplated, audit of any CMTY Benefit Plan by the IRS, the U.S.
Department of Labor, the Pension Benefit Guaranty Corporation or any other
governmental authority. In addition, there are no pending or threatened claims
by, on behalf of or with respect to any CMTY Benefit Plan, or by or on behalf
of any individual participant or beneficiary of any CMTY Benefit Plan, alleging
any violation of ERISA or any other applicable laws, or claiming benefits
(other than claims for benefits not in dispute and expected to be granted
promptly in the ordinary course of business), nor to the Knowledge of CMTY, is
there any basis for such claim.

 

(f)  With respect to any services which CMTY or
any CMTY Subsidiary may provide as a record-keeper, administrator, custodian,
fiduciary, trustee or otherwise for any plan, program, or arrangement subject
to ERISA (other than any CMTY Benefit Plan), to the Knowledge of CMTY, CMTY or
the relevant CMTY Subsidiary:

 

(i)  has correctly computed all contributions,
payments or other amounts in accordance with the applicable documents of any
such plan, program or arrangement;

 

(ii)  has not engaged in any prohibited
transactions (as defined in ERISA Section 406 for which an exemption does not
exist);

 

(iii)  has not breached any duty imposed on CMTY or
the relevant CMTY Subsidiary acting as a record-keeper, administrator,
custodian, fiduciary, or trustee by ERISA: and

 

51

 

(iv)  has not otherwise incurred any liability to
the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation, or
to any beneficiary, fiduciary or sponsor of any ERISA plan in the performance
(or non-performance) of services; except where any such action or inaction
would not have a Material Adverse Effect.

 

4.14 Brokers
and Finders.  Neither
CMTY, any CMTY Subsidiary, nor any of their respective officers, directors,
employees, independent contractors or agents, has employed any broker, finder,
investment banker or financial advisor, or incurred any liability for any fees
or commissions to any such person, in connection with the Contemplated
Transactions, except for Sandler O’Neill & Partners, L.P. (“Sandler”).

 

4.15 Environmental Matters.

 

(a)  Except as set forth on CMTY Disclosure Schedule 4.15, to the
Knowledge of CMTY, neither CMTY nor any CMTY Subsidiary, nor any property owned
or operated by CMTY or any CMTY Subsidiary, has been or is in violation of or
liable under any Environmental Law, except for such violations or liabilities
that, individually or in the aggregate, would not have a Material Adverse
Effect.  Except as set forth on CMTY Disclosure Schedule 4.15, there
are no actions, suits or proceedings, or demands, claims or notices, including
without limitation notices, demand letters or requests for information from any
Regulatory Authority, instituted or pending, or to the Knowledge of CMTY,
threatened, or any investigation pending, relating to the liability of CMTY or
any CMTY Subsidiary with respect to any property owned or operated by CMTY or
any CMTY Subsidiary under any Environmental Law, except as to any such actions
or other matters which would not result in a Material Adverse Effect.

 

(b)  Except as set forth on CMTY Disclosure Schedule 4.15, to the
Knowledge of CMTY, no property, now or formerly owned or operated by CMTY or
any CMTY Subsidiary or on which CMTY or any CMTY Subsidiary holds or held a
mortgage or other security interest or has foreclosed or taken a deed in lieu
or foreclosure, has been listed or proposed for listing on the National
Priority List under CERCLA on the Comprehensive Environmental Response
Compensation and Liabilities Information System, or any similar state list, or
which is the subject of federal, state or local enforcement actions or other
investigations which may lead to

 

52

 

claims against CMTY or any CMTY
Subsidiary for response costs, remedial work, investigation, damage to natural
resources or for personal injury or property damage claim, including, but not
limited to, claims under CERCLA, which would have a Material Adverse Effect.

 

4.16 Business
of CMTY.  Since
September 30, 2004, neither CMTY nor any CMTY Subsidiary has, in any
material respect:

 

(a)  increased the wages, salaries, compensation,
pension or other employee benefits payable to any executive officer, employee
or director;

 

(b)  terminated any material employee benefit plan;

 

(c)  deferred routine maintenance of real property
or leased premises;

 

(d)  eliminated a reserve where the liability
related to such reserve has remained;

 

(e)  failed to depreciate capital assets in
accordance with past practice or to eliminate capital assets which are no
longer used in its business; or

 

(f)  had extraordinary reduction or deferral of
ordinary or necessary expenses.

 

4.17 CRA
Compliance.  CMTY and
Community Banks are in material compliance with the applicable provisions of
the CRA, and, as of the date hereof, Community Banks has received a CRA rating
of “satisfactory” or better from the FDIC. 
To the Knowledge of CMTY, there is no fact or circumstance or set of
facts or circumstances which would cause Community Banks to fail to comply with
such provisions in a manner which would have a Material Adverse Effect.

 

4.18 Allowance for Loan Losses.  The allowance for loan losses shown, and to
be shown, on the balance sheets contained in the CMTY Financials have been, and
will be, established in accordance with GAAP and all applicable regulatory
criteria.

 

4.19 Bank
Merger.

 

(a)  Community Banks has full corporate power and
authority to execute and deliver the Bank Plan of Merger and to consummate the
Bank Merger.  The execution and delivery
of the Bank Plan of Merger by Community Banks and the consummation by

 

53

 

Community Banks of the Bank Merger have been (or will be) duly and
validly approved by the Board of Directors of Community Banks and by CMTY as
sole shareholder of Community Banks, and no other corporate proceedings on the
part of Community Banks are necessary to consummate the Bank Merger.  Subject to receipt of required approvals of
Regulatory Authorities, the Bank Plan of Merger, upon its execution and
delivery by Community Banks concurrently with the execution and delivery of
this Agreement, will constitute the valid and binding obligation of Community
Banks, enforceable against Community Banks in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors’ rights generally and subject, as to enforceability, to general
principles of equity.

 

(b)  The execution and delivery of the Bank Plan
of Merger and the consummation of the Bank Merger will not:

 

(i)  conflict with or result in a breach of any
provision of the respective articles of incorporation or association or bylaws
of CMTY or Community Banks;

 

(ii)  subject to receipt of required approvals of
Regulatory Authorities, violate any statute, rule, regulation, judgment, order,
writ, decree or injunction applicable to CMTY or Community Banks or any of
their respective properties or assets; or

 

(iii)  violate, conflict with, result in a breach of
any provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of, or acceleration of the performance required by, or result in a
right of termination or acceleration or the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties or
assets of CMTY or Community Banks under, any of the terms or conditions of any
note, bond, mortgage, indenture, license, lease, agreement, commitment or other
instrument or obligation to which CMTY or Community Banks is a party, or by
which they or any of their respective properties or assets may be bound or
affected; excluding from clauses (ii) and (iii) any such items which,
in the aggregate, would not have a Material Adverse Effect.

 

54

 

4.20 Information to be Supplied.

 

(a)  The information supplied by CMTY for
inclusion in the Registration Statement (including the Joint Prospectus/Proxy
Statement) will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act, and as of the date the Joint
Prospectus/Proxy Statement is mailed to shareholders of CMTY and PRFS, and up
to and including the date of the PRFS Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances in
which they were made, not misleading.

 

(b)  The information supplied by CMTY for
inclusion in the Applications will, at the time each such document is filed
with any Regulatory Authority and up to and including the dates of any required
regulatory approvals or consents, as such Applications may be amended by
subsequent filings, be accurate in all material respects.

 

4.21 Related Party Transactions.

 

(a)  Except as set forth on CMTY Disclosure Schedule 4.21, or as is
disclosed in the footnotes to the CMTY Financials, as of the date hereof,
neither CMTY nor any CMTY Subsidiary is a party to any transaction (including
any loan or other credit accommodation but excluding deposits in the ordinary
course of business) with any Affiliate of CMTY or any CMTY Subsidiary, and all
such transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other “persons” (as defined in Section 13(d) of the
Exchange Act and the rules and regulations thereunder), except with respect to
variations in such terms as would not, individually or in the aggregate, have a
Material Adverse Effect.

 

(b)  Except as set forth in CMTY Disclosure Schedule 4.21, as of
the date hereof, no loan or credit accommodation to any Affiliate of CMTY or
any CMTY Subsidiary is presently in default or, during the three-year period
prior to the date of this Agreement, has been in material default or has been
restructured, modified or extended in any manner which would have a Material
Adverse Effect.  To the Knowledge of
CMTY, as of the date hereof, principal

 

55

 

and interest with respect to
any such loan or other credit accommodation will be paid when due and the loan
grade classification accorded such loan or credit accommodation is appropriate.

 

4.22 Loans.  To the Knowledge of CMTY, all loans reflected
as assets in the CMTY Financials are evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and correct, and to the
extent secured, are secured by valid liens and security interests which have
been perfected, excluding loans as to which the failure to satisfy the
foregoing standards would not have a Material Adverse Effect.

 

4.23 Reorganization.  As of the date hereof, CMTY does not have any
reason to believe that the Merger will fail to qualify as a reorganization
under Section 368(a) of the IRC. 
CMTY shall not take any action which would preclude the Merger from
qualifying as a reorganization within the meaning of Section 368 of the
IRC.

 

4.24 Fairness
Opinion.  CMTY has received
a written opinion from Sandler to the effect that, as of the date hereof, the
consideration to be paid by CMTY pursuant to this Agreement is fair, from a
financial point of view, to CMTY and the CMTY Shareholders.

 

4.25 CMTY Common
Stock.  The shares of CMTY Common
Stock to be issued and delivered to PRFS shareholders in accordance with this
Agreement, and the shares of CMTY Common Stock issuable pursuant to the
Adjusted PRFS Options, when so issued and delivered, will be validly authorized
and issued and fully paid and non-assessable, and no shareholder of CMTY shall
have any pre-emptive right with respect thereto.

 

4.26 Securities
Documents.  CMTY has
delivered to or made available to PRFS copies of:

 

(a)  the annual reports to shareholders for the
years 2001, 2002 and 2003 that were delivered with its proxy statements for
such years;

 

(b)  all other reports, registration statements
and filings of CMTY filed with the SEC since January 1, 2004; and

 

56

 

(c)  CMTY’s proxy materials used in connection
with its meetings of shareholders held in 2003 and 2004.

 

Such
reports and proxy materials complied, in all material respects, and any future
SEC reports, filings, and proxy materials will comply, in all material
respects, with the rules and regulations of the SEC to the extent applicable
thereto.  All such SEC reports, filings
and proxy materials did not and will not, at the time of their filing, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances in which they were made, not misleading.

 

4.27 Rights Agreement.  No event or circumstance has occurred
resulting in, and neither the execution nor consummation of this Agreement by
CMTY will result in the grant, issuance or triggering of any right or
entitlement or the obligation to grant or issue any interest in CMTY Common
Stock or enable or allow any right or other interest associated with the Rights
Agreement to be exercised, distributed or triggered.

 

4.28 “Well Capitalized”. 
CMTY and Community Banks are “well capitalized” within the meaning of
the FRB’s and FDIC’s regulations, respectively. CMTY and Community Banks will
be “well capitalized” on the Closing Date.

 

4.29 Quality
of Representations.  To
the Knowledge of CMTY, no representation made by CMTY in this Agreement
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.

 

ARTICLE V-

COVENANTS OF THE PARTIES

 

5.01 Conduct of PRFS’s Business.  Through the Closing Date, PRFS shall, and
shall cause each PRFS Subsidiary to, in all material respects, conduct its businesses
and engage in transactions only in the ordinary course and consistent with past
practice, except as otherwise required or contemplated by this Agreement or
with the written consent of CMTY.  PRFS
shall, and shall cause each PRFS Subsidiary to, use its reasonable good faith
efforts to preserve its business organization intact, maintain good
relationships with employees, and preserve the good

 

57

 

will of customers of PRFS or the PRFS Subsidiaries and others with whom
business relationships exist.  Through
the Closing Date, except as otherwise consented to in writing by CMTY (such
consent shall not be unreasonably withheld) or as permitted by this Agreement,
PRFS shall not, and shall not permit any PRFS Subsidiary to:

 

(a)  change any provision of its articles of
incorporation or of its bylaws;

 

(b)  change the number of authorized or issued
shares of its capital stock; repurchase any shares of capital stock; or issue
or grant any option, warrant, call, commitment, subscription, Right or
agreement of any character relating to its authorized or issued capital stock
or any securities convertible into shares of capital stock; declare, set aside
or pay any dividend or other distribution in respect of capital stock; or
redeem or otherwise acquire any shares of PRFS capital stock; except that:

 

(i)  PRFS may issue shares of PRFS Common Stock
upon the valid exercise of any PRFS Options issued and outstanding on the date
hereof;

 

(ii)  PRFS may declare and pay quarterly cash
dividends at a rate of $0.22 per share each quarter until the Closing Date in
accordance with past practice (the “Quarterly Per Share Dividend Amount”);

 

(iii)  subject to applicable regulatory
restrictions, if any, Blue Ball may pay cash dividends to PRFS sufficient for
PRFS to fund any dividend by PRFS permitted hereunder;

 

(iv)  any PRFS Subsidiary may pay dividends to PRFS
in the ordinary course of business consistent with past practice;

 

(v)  Nothing set forth in this Agreement shall be
construed to permit PRFS shareholders to receive two quarterly dividends either
from PRFS or from PRFS and CMTY in any calendar quarter or to deny or prohibit
them from receiving one quarterly dividend from PRFS or CMTY in any calendar
quarter, and the parties shall cooperate with one another to coordinate
quarterly dividend payment dates and record dates in the quarter in which the
Closing Date is reasonably anticipated to occur to achieve such results;

 

58

 

(c)  grant any severance or termination pay to
(except under the agreements identified in PRFS
Disclosure Schedule 5.01(c) and other than pursuant to policies or
agreements of PRFS or any PRFS Subsidiary in effect on the date hereof) or
enter into or amend any employment, consulting, severance, “change-in-control”
or termination contract or arrangement with any officer, director, employee,
independent contractor, agent or other person associated with PRFS or any PRFS
Subsidiary; notwithstanding anything contained in this Agreement to the
contrary, the payment of any severance benefit, termination pay, deferred
compensation or other benefit to any officer of PRFS or Blue Ball pursuant to
and in accordance with any agreement identified in PRFS Disclosure Schedule 5.01(c) shall not constitute a breach
of any representation, warranty or covenant contained in this Agreement and
shall be honored by CMTY and be given full force and effect by CMTY on and
after the Closing Date;

 

(d)  grant job promotions or increase the rate of
compensation of, or pay any bonus to, any director, officer, employee,
independent contractor, agent or other person associated with PRFS or any PRFS
Subsidiary, except for:

 

(i)  routine periodic pay increases, selective
merit pay increases and pay-raises in connection with promotions, all in
accordance with past practice; provided, however, that such pay increases and
raises shall not exceed five percent (5%) in the aggregate;

 

(ii)  annual bonuses in the ordinary course for
2004, determined consistently with past practice and in accordance with the
Bonus Compensation Plan and the Executive Incentive Compensation Plan of PRFS
in effect as of the date hereof, to be payable on or before December 31,
2004, to persons designated by PRFS;

 

(iii)  with respect to Melvin Pankuch, Joseph Spada,
George Crisp and Michael Peuler (“Executives”), in lieu of the annual bonus
under the Executive Incentive Compensation Plan (the “EIC Plan”) which would
otherwise be payable to the Executives in 2005 in respect of PRFS’ 2004
financial performance, PRFS shall pay to each Executive who is eligible to
participate in the EIC Plan, on or before December 31, 2004, an amount equal to
the bonus paid to him under the EIC Plan in 2004 with respect to PRFS’ 2003
financial performance, subject to the advance written approval of CMTY (which
approval shall not be unreasonably withheld);

 

59

 

(iv)  annual bonuses in the ordinary course for
2005, determined consistently with past practice and in accordance with the
Bonus Compensation Plan and the EIC Plan of PRFS in effect as of the date
hereof but pro-rated to the Closing Date, to be payable on or immediately prior
to the Closing Date, to persons designated by PRFS and approved by CMTY (which
approval shall not be unreasonably withheld); and

 

(e)  except as set forth in PRFS Disclosure Schedule 5.01(e), merge or
consolidate with any other corporation; sell or lease all or any substantial
portion of its assets or businesses; make any acquisition of all or any
substantial portion of the business or assets of any other person, firm,
association, corporation or business organization; enter into a purchase and
assumption transaction with respect to deposits, loans or liabilities; relocate
or surrender its certificate of authority to maintain, or file an application
for the relocation of, any existing office; file an application for a
certificate of authority to establish a new office; change the status of any
office as to its supervisory jurisdiction; or fail to maintain and enforce in
any material respect its code of ethics and applicable compliance procedures;

 

(f)  sell or otherwise dispose of any material
asset, other than in the ordinary course of business, consistent with past
practice; subject any asset to a lien, pledge, security interest or other
encumbrance, other than in the ordinary course of business consistent with past
practice; modify in any material manner the manner in which it has heretofore
conducted its business or enter into any new line of business; incur any
indebtedness for borrowed money, except in the ordinary course of business,
consistent with past practice;

 

(g)  take any action which would result in any of
the conditions set forth in Article VI hereof not being satisfied;

 

(h)  change any method, practice or principle of
accounting, except as required by changes in GAAP concurred in by its
independent certified public accountants; or change any assumption underlying,
or any method of calculation of, depreciation of any type of asset or
establishment of any reserve;

 

60

 

(i)  waive, release, grant or transfer any rights
of material value or modify or change in any material respect any existing
material agreement to which it is a party, other than in the ordinary course of
business, consistent with past practice;

 

(j)  implement any pension, retirement,
profit-sharing, bonus, welfare benefit or similar plan or arrangement that was
not in effect on the date of this Agreement, or except as may otherwise be
provided for herein, amend any existing plan or arrangement except as required
by law;

 

(k)  amend or otherwise modify its underwriting
and other lending guidelines and policies in effect as of the date hereof or
otherwise fail to conduct its lending activities in the ordinary course of
business consistent with past practice;

 

(l)  enter into, renew, extend or modify any other
transaction with any Affiliate, other than deposit and loan transactions in the
ordinary course of business and which are in compliance with the requirements
of applicable laws and regulations;

 

(m)  enter into any interest rate swap, floor or
cap or similar commitment, agreement or arrangement;

 

(n)  take any action that would accelerate any
right of payment to any individual under any employment agreement, except
(i) in the ordinary course of business consistent with past practice, (ii)
for the execution of this Agreement or (iii) pursuant to Sections 5.01(c)
and 5.01(d)(iii) of this Agreement;

 

(o)  purchase any security for its investment
portfolio rated less than “AAA” or higher by either Standard & Poor’s
Corporation or higher by Moody’s Investor Services, Inc., except as approved by
CMTY (which approval shall not be unreasonably withheld) ;

 

(p)  except as set forth on PRFS Disclosure Schedule 5.01(p), make
any capital expenditure of $100,000 or more; or undertake or enter into any
lease, contract or other commitment for its account, other than in the ordinary
course of business, involving an unbudgeted expenditure by PRFS of more than
$75,000, or extending beyond twelve (12) months from the date hereof;

 

61

 

(q)  take any action that would preclude the
Merger from qualifying as a reorganization within the meaning of
Section 368 of the IRC; or

 

(r)  agree to do any of the foregoing.

 

5.02 Access; Confidentiality.  Through the Closing Date:

 

(a)  Each party hereto shall afford to the other,
including its authorized agents and representatives, reasonable access to its
and its Subsidiaries’ businesses, properties, assets, books and records and
personnel, at reasonable hours and after reasonable notice; and the officers of
each party shall furnish the other party making such investigation, including
its authorized agents and representatives, with such financial and operating
data and other information with respect to such businesses, properties, assets,
books and records and personnel as the party making such investigation, or its
authorized agents and representatives, shall from time to time reasonably
request.

 

(b)  Each party hereto agrees that it, and its
authorized agents and representatives, will conduct such investigation and
discussions hereunder in a confidential manner and otherwise in a manner so as
not to interfere unreasonably with the other party’s normal operations and
customer and employee relationships. 
Neither PRFS, CMTY, nor any of their respective Subsidiaries, shall be
required to provide access to or disclose information where such access or disclosure
would violate or prejudice the rights of customers, jeopardize attorney-client
privilege or similar privilege with respect to such information or contravene
any law, rule, regulation, decree, order, fiduciary duty or agreement entered
into prior to the date hereof.

 

(c)  All information furnished to CMTY or PRFS by
the other in connection with the Contemplated Transactions, whether prior to
the date of this Agreement or subsequent hereto, shall be held in confidence to
the extent required by, and in accordance with, the Confidentiality Agreement.

 

5.03 Regulatory Matters.  Through the Closing Date:

 

(a)  CMTY and PRFS shall cooperate with one
another in the preparation of the Registration Statement (including the Joint
Prospectus/Proxy Statement) and all Applications and

 

62

 

the making of all filings for, and shall use their reasonable best
efforts to obtain, as promptly as practicable, all necessary permits, consents,
approvals, waivers and authorizations of all Regulatory Authorities necessary
or advisable to consummate the Contemplated Transactions.  CMTY and PRFS shall each give the other
reasonable time to review any Application to be filed by it prior to the filing
of such Application with the relevant Regulatory Authority, and each shall
consult the other with respect to the substance and status of such filings.

 

(b)  PRFS and CMTY shall each promptly furnish the
other with copies of written communications to, or received by them from, any
Regulatory Authority in respect of the Contemplated Transactions.

 

(c)  PRFS and CMTY shall cooperate with each other
in the foregoing matters and shall furnish the other with all information
concerning itself as may be necessary or advisable in connection with any
Application or filing, including any report filed with the SEC, made by or on
behalf of such party to or with any Regulatory Authority in connection with the
Contemplated Transactions, and in each such case, such information shall be
accurate and complete in all material respects. 
In connection therewith, PRFS and CMTY shall use their reasonable good
faith efforts to provide each other certificates, “comfort” letters and other
documents reasonably requested by the other.

 

5.04 Taking of Necessary Actions.  Through the Closing Date, in addition to the
specific agreements contained herein, each party hereto shall use reasonable
best efforts to take, or cause to be taken by each of its Subsidiaries, all
actions, and to do, or cause to be done by each of its Subsidiaries, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Contemplated Transactions including, if
necessary, appealing any adverse ruling in respect of any Application.

 

5.05 No
Solicitation.  PRFS shall not,
nor shall it authorize or permit any of its officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by it to:

 

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(a)  initiate, solicit, encourage (including by
way of furnishing information), or take any other action to facilitate, any
inquiries or the making of any proposal which constitutes an Acquisition
Proposal (as defined herein);

 

(b)  enter into or maintain or continue
discussions or negotiate with any person in furtherance of an Acquisition
Proposal, unless the failure to do so, in the good faith judgment of the PRFS
board of directors, after consultation with its legal counsel, could reasonably
constitute a breach of fiduciary duty by the directors of PRFS under the laws
of the Commonwealth of Pennsylvania; or

 

(c)  agree to or endorse any Acquisition Proposal,
unless the failure to do so, in the good faith judgment of the PRFS board of
directors, after consultation with its legal counsel, could reasonably
constitute a breach of fiduciary duty by the directors of PRFS under the laws
of the Commonwealth of Pennsylvania.

 

PRFS shall notify CMTY as promptly as practicable, in
reasonable detail, as to any inquiries and proposals which it or any of its
representatives or agents may receive.

 

As used
herein, the term “Acquisition Proposal” means a bona fide proposal (including a
written communication) from a party other than CMTY or an Affiliate of CMTY for:
(A) any merger, consolidation or acquisition of all or substantially all
the assets or liabilities of PRFS or Blue Ball, or any other business
combination involving PRFS or Blue Ball; or (B) a transaction involving
the transfer of beneficial ownership of securities representing,
or the right to acquire beneficial ownership or to vote securities
representing, 24.9% or more of the then outstanding shares of PRFS Common Stock
or the then outstanding shares of common stock of Blue Ball.

 

5.06 Update of Disclosure Schedules.  Through the Closing Date, PRFS shall update
the PRFS Disclosure Schedules, and CMTY shall update the CMTY Disclosure
Schedules, as promptly as practicable after the occurrence of any event which,
if such event had occurred prior to the date hereof, would have been disclosed
on such schedule.

 

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5.07 Other Undertakings by CMTY and PRFS.

 

(a)  Undertakings of PRFS.

 

(i)  Shareholder Approval.  PRFS shall submit this Agreement to its
shareholders for approval at a meeting (the “PRFS Shareholders Meeting”) with
the recommendation (unless it believes, after consultation with its legal
counsel, that such recommendation could reasonably violate the PRFS Board of
Directors’ fiduciary duties) of its Board of Directors to such shareholders to
approve this Agreement.  The PRFS
Shareholders Meeting shall be held not later than 45 days (subject to the
effectiveness of the Registration Statement) after all consents of Regulatory
Authorities have been received and all other conditions have been satisfied or
waived (other than those conditions which are to be fulfilled at the Closing).
In the event PRFS receives an Acquisition Proposal and it has not violated
Section 5.05 of this Agreement, nothing set forth in this Agreement shall
prohibit PRFS from submitting an Acquisition Proposal to its shareholders for
consideration.

 

(ii)  Phase I Environmental Audit.  PRFS shall permit CMTY, if CMTY elects to do
so, at its own cost and expense, to cause a “Phase I environmental audit” to be
performed at any physical location owned or occupied by PRFS or any PRFS
Subsidiary; provided that CMTY shall obtain, with the assistance of PRFS, any
consents or approvals required by any landlord that leases any such physical
location to PRFS or a PRFS Subsidiary.

 

(iii)  Dividend Reinvestment Plan.  As soon as legally permissible after the date
of this Agreement, PRFS shall suspend the operation of PRFS’s Dividend
Reinvestment Plan through the earlier of the Closing Date or the termination of
this Agreement.

 

(b)  Undertakings of CMTY and
PRFS.

 

(i)  Filings and Approvals.  CMTY and PRFS shall cooperate with each other
in the preparation and filing, as soon as practicable, of:

 

(A)  the Applications;

 

65

 

(B)  the Registration Statement (including the
Joint Prospectus/Proxy Statement) and related filings, if any, under state
securities laws relating to the Merger; and

 

(C)  all other documents necessary to obtain any
other approvals and consents required to effect consummation of the
Contemplated Transactions.

 

(ii)  Public Announcements.  CMTY and PRFS shall agree upon the form and
substance of any press release related to this Agreement and the Contemplated
Transactions, but nothing contained herein shall prohibit either party,
following notification to the other party, from making any disclosure which its
counsel deems necessary under applicable law.

 

(iii)  Maintenance of Insurance.  CMTY and each CMTY Subsidiary, and PRFS and
each PRFS Subsidiary, shall maintain insurance in such amounts as CMTY and
PRFS, respectively, believe are reasonable to cover such risks as are customary
in relation to the character and location of its and their respective
Subsidiaries’ properties and the nature of its and their respective
Subsidiaries’ businesses.

 

(iv)  Maintenance of Books and Records.  CMTY and each CMTY Subsidiary, and PRFS and
each PRFS Subsidiary, shall maintain books of account and records on a basis
consistent with past practice.

 

(v)  Taxes. 
CMTY and each CMTY Subsidiary, and PRFS and each PRFS Subsidiary, shall
file all federal, state, and local tax returns required to be filed by it on or
before the date such returns are due, including any extensions, and pay all
taxes shown to be due on such returns on or before the dates such payments are
due, except those being contested in good faith.

 

(vi)  Integration Team.  CMTY and PRFS shall cooperate with each other
in the selection of an integration team, which team shall plan and implement an
orderly, cost-effective consolidation of the deposit and information technology
operations of Community Banks into Blue Ball’s operations in Blue Ball,
Pennsylvania.

 

(vii)  In-House Operations.  CMTY and PRFS shall, subject to applicable
legal requirements, cooperate with each other in an orderly, cost-effective
consolidation of operations.

 

66

 

(viii)  Delivery of Financial Statements.  CMTY and PRFS shall each deliver to the
other, as soon as practicable after the end of each month and after the end of
each calendar quarter prior to the Effective Date, commencing with the month
ended October 31, 2004, an unaudited consolidated balance sheet as of such
date and related unaudited consolidated statements of income for the periods
then ended, which financial statements shall fairly present, in all material
respects, its consolidated financial condition, results of operations for the
periods then ended in accordance with GAAP, subject to year-end audit adjustments
and footnotes.

 

(c)  Undertakings of CMTY.

 

(i)  Employee Severance Policy.

 

(A)  Subject to CMTY’s usual personnel and
qualification policies, CMTY will endeavor to continue the employment of all
current non-management employees of PRFS in positions that will contribute to
the successful performance of the combined organization.  More specifically, CMTY will, after
consultation with PRFS, prior to or soon after the Closing Date, inform each
PRFS employee of the likelihood of such employee having continued employment
with CMTY, Community Banks or any other CMTY Subsidiary following the Closing,
and will permit any PRFS employee to apply for any employment position posted
as available with CMTY, Community Banks or any other CMTY Subsidiary.  If CMTY elects to eliminate a position or
does not offer the employee a position of substantially similar job
descriptions or responsibilities at substantially the same salary level in a
work location within twenty-five (25) miles of the employee’s then current work
location with PRFS (referred to herein as “Comparable Employment”), CMTY will
make severance payments to the displaced employee as set forth in this Section
5.07(c)(i).

 

(B)  Subject to the following minimum benefits,
CMTY will grant an eligible full-time employee, who was exempt as of the date
of this Agreement, two weeks of severance pay (at his then current pay rate)
for each year of service with PRFS or any PRFS Subsidiary prior to the
employment termination date.  The minimum
benefit for exempt employees shall be two (2) weeks’ salary, and the maximum
severance benefit will be fifty-two (52) weeks’ salary for PRFS exempt
employees.  CMTY will grant an eligible
full-time employee, who was not exempt as of the date of this Agreement, one
week of severance pay (at

 

67

 

his then current pay rate) for each year of service with PRFS or any
PRFS Subsidiary prior to the employment termination date.  The minimum benefit for non-exempt employees
shall be one (1) week’s salary, and the maximum severance benefit will be
twenty-six (26) weeks’ salary for PRFS non-exempt employees.

 

(C)  All employees of PRFS or of any PRFS
Subsidiary as of the Closing Date to whom CMTY does not offer Comparable
Employment (as defined in Section 5.07(c)(i)(A)) with CMTY (each, an “Eligible
PRFS Employee”) will be eligible for severance benefits set forth in this
Section 5.07(c)(i), except that no employee of PRFS or of any PRFS
Subsidiary who shall receive any payment or benefit pursuant to any “change in
control” agreement or similar plan or right shall be an Eligible PRFS Employee.

 

(D)  Each Eligible PRFS Employee will remain
eligible for such benefits if his or her employment is terminated, other than
for “cause,” within twelve months after the Effective Date.

 

(E)  CMTY shall make outplacement services and job
counseling services available to each PRFS employee who becomes eligible to
receive severance benefits hereunder, and who was an exempt employee as of the
date of this Agreement, on a basis to be mutually agreed upon by PRFS and CMTY
prior to the Effective Date.

 

(F)  For purposes of this Section 5.07(c)(i),
“cause” means the employer’s good faith reasonable belief that the employee
(1) committed fraud, theft or embezzlement; (2) falsified corporate
records; (3) disseminated confidential information concerning customers,
CMTY, any CMTY Subsidiary or any of its or their employees in violation of any
applicable confidentiality agreement or policy; (4) had documented unsatisfactory
job performance; or (5) violated CMTY’s Code of Conduct.

 

(ii)  Employee Benefits

 

(A)  As of the Effective Date, each employee of
PRFS or of any PRFS Subsidiary who becomes an employee of CMTY or of any CMTY
Subsidiary shall be entitled to full credit for each year of service with PRFS
or the PRFS Subsidiary for purposes of determining eligibility for
participation and vesting and other appropriate benefits, but not

 

68

 

benefit accrual, in CMTY’s, or as appropriate, in the CMTY Subsidiary’s,
employee benefit plans, programs and policies. 
CMTY shall use the original date of hire by PRFS or a PRFS Subsidiary in
making these determinations.

 

(B)  The employee benefits provided to former
employees of PRFS or a PRFS Subsidiary after the Effective Date shall be
equivalent in the aggregate to the employee benefits provided by CMTY or its
Subsidiaries to their similarly situated employees.  The medical, dental and life insurance plans,
programs or policies, if any, that become applicable to former employees of
PRFS or any PRFS Subsidiary shall not contain any waiting period for coverage
or exclusion or limitation with respect to any pre-existing condition of any
such employees or their dependents.  In
the event that the parties’ medical or dental welfare benefit plans are merged
prior to December 31, 2005, any deductibles, co-payments or other
out-of-pocket expenses paid by a participant under any PRFS or PRFS Subsidiary
medical or dental welfare benefit plan with respect to the period from
January 1, 2005 through the Effective Date shall be credited towards the
satisfaction of any like deductible, co-payment or other out-of-pocket
expenses under the applicable CMTY or CMTY Subsidiary medical or dental welfare
benefit plan.

 

(C)  Blue Ball National Bank Employee’ Profit
Sharing Plan and Blue Ball National Bank 401(k) Plan (the “Blue Ball Qualified
Plans”).  Prior to the Effective Date,
PRFS shall amend the Blue Ball Qualified Plans to freeze participation and
contributions under such plans.  As of
the Effective Date, or as soon as practicable thereafter, the Blue Ball
Qualified Plans shall be merged into CMTY’s 401(k) plan.  Prior to the Effective Date, contributions to
the Blue Ball Qualified Plans shall be made consistent with past practices on
the regularly scheduled payment dates.

 

(D)  Subject to the other provisions of this
Section 5.07(c)(ii) and Section 2.06, after the Effective Date, CMTY
may discontinue, amend, convert to, or merge with, an CMTY or CMTY Subsidiary plan
any PRFS Benefit Plan, subject to such plan’s provisions and applicable law.

 

(E)  PRFS and CMTY Vacation Time.  Each employee of PRFS or a PRFS Subsidiary
who remains an employee of PRFS or a PRFS Subsidiary, or CMTY or a CMTY

 

69

 

Subsidiary, as applicable, until or after the
Effective Date, shall be entitled to receive a cash payment equal to such
employee’s accrued but unused PRFS vacation time (determined as of the
Effective Date) and accrued but unused CMTY vacation time (from the Effective
Date through the date of termination of employment) upon termination of
employment with PRFS or a PRFS Subsidiary, or CMTY or a CMTY Subsidiary, as
applicable.  Each employee of PRFS or a
PRFS Subsidiary who becomes an employee of CMTY or a CMTY Subsidiary shall
receive, for purposes of CMTY vacation policy, credit for all service with PRFS
or a PRFS Subsidiary credited to each such employee under PRFS’s vacation
policy.  The cash payment will be made on
CMTY’s next available payroll date following termination of employment.

 

(iii)  Election of Community Banks Directors.  Upon consummation of the Bank Merger and
subject to compliance with all applicable legal requirements, CMTY shall cause
Community Banks to elect all those individuals who were members of PRFS’s Board
of Directors as of the Closing Date, except for the PRFS Nominees, as directors
of Community Banks, effective the effective date of the Bank Merger, to hold
office until his successor is elected and qualified or otherwise in accordance
with applicable law, the articles of incorporation and bylaws of Community
Banks.

 

(iv)  Blue Ball Division.

 

(A)  Upon consummation of the Contemplated
Transactions, CMTY shall cause Community Banks to establish and operate a
separate banking division called the “Blue Ball Bank, a Division of Community
Banks” (the “Blue Ball Division”).  The
Blue Ball Division will consist of all Blue Ball’s branch offices which are in
operation on the Effective Date.

 

(B)  All offices and operations of the Blue Ball
Division will be branded using the name “Blue Ball Bank, a Division of
Community Banks,” in accordance with applicable banking regulations.

 

(C)  CMTY shall cause Community Banks to operate
the Blue Ball Division for a period of at least two years after the Effective
Date.

 

70

 

(D)  CMTY shall cause Community Banks to establish
a regional advisory board of directors for the Blue Ball Division, whose
members shall be such current Blue Ball and Community Banks directors or
advisory directors as are agreed upon by PRFS and CMTY.

 

(E)  Each of the covenants contained in this
Section 5.07(c)(iv) shall survive for at least two (2) years after the
Effective Date, except any of the covenants contained in this
Section 5.07(c)(iv) shall expire if and when CMTY shall be acquired or
otherwise sold.

 

(v)  Indemnification, Insurance.

 

(A)  CMTY shall indemnify, defend, and hold
harmless the present and former directors, officers, employees and agents of
PRFS and the PRFS Subsidiaries (each, an “Indemnified Party”) against all
losses, expenses (including reasonable attorneys’ fees), claims, damages or
liabilities and amounts paid in settlement arising out of actions or omissions
or alleged acts or omissions (collectively, “Prior Acts”) occurring at or prior
to the Effective Date (including the Contemplated Transactions) to the fullest
extent permitted by Pennsylvania law, including provisions relating to advances
of expenses incurred in the defense of any proceeding to the fullest extent
permitted by Pennsylvania law upon receipt of any undertaking required by
Pennsylvania law.  Without limiting the
foregoing, in a case (if any) in which a determination by CMTY is required to
effectuate any indemnification, CMTY shall direct, at the election of the
Indemnified Party, that the determination shall be made by independent counsel
mutually agreed upon between CMTY and the Indemnified Party.

 

(B)  CMTY shall, and it shall cause Community
Banks to, keep in effect provisions in its articles of incorporation or
association and bylaws providing for exculpation of director and officer
liability and its indemnification of the Indemnified Parties to the fullest
extent permitted by applicable law, which provisions shall not be amended
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties’ right to indemnification.

 

(C)  CMTY shall use its reasonable best efforts
(and PRFS shall cooperate and assist prior to the Effective Date in these
efforts), at no expense to the beneficiaries, to:

 

71

 

(1) maintain
directors’ and officers’ liability insurance (“D&O Insurance”) with respect
to matters occurring at or prior to the Effective Date, issued by a carrier
assigned a claims-paying ability rating by A.M. Best & Co. of “A
(Excellent)” or higher; or

 

(2) obtain coverage
for Prior Acts of the Indemnified Parties under the D&O Insurance policies
currently maintained by CMTY;

 

in either case, providing at least the same coverage
as the D&O Insurance currently maintained by PRFS, for a period of at least
six (6) years from the Effective Date; provided, that CMTY shall not be
obligated to make annual premium payments for such six-year period in respect
of the D&O Insurance which exceed, for the portion related to PRFS’s
directors and officers, 150% of the annual premium payment, as of the date
hereof, under PRFS’s current policy in effect on the date of this Agreement)
(the “Maximum Amount”).  If the amount of
the premiums necessary to maintain or procure such insurance coverage exceeds
the Maximum Amount, CMTY shall use its reasonable best efforts to maintain the
most advantageous policies of D&O Insurance obtainable for a premium equal
to the Maximum Amount.

 

(D)  If any claim is made against an Indemnified
Party who is covered or potentially covered by insurance, neither Community
Banks nor CMTY shall do anything that would forfeit, jeopardize, restrict or
limit the insurance coverage available for that claim until the final
disposition thereof.

 

(E)  If CMTY or any of its successors or assigns
shall consolidate with or merge into any other person and shall not be the
continuing or surviving person of such consolidation or merger or shall
transfer all or substantially all of its assets to any person, then and in each
case, proper provision shall be made so that the successors and assigns of CMTY
shall assume the obligations set forth in this Section 5.07(c)(v).

 

(F)  The provisions of this
Section 5.07(c)(v) are intended to be for the benefit of and shall be
enforceable by, each Indemnified Party, his or her heirs and representatives.

 

72

 

(G)  CMTY shall pay all expenses, including
reasonable attorneys’ fees, that may be incurred by any Indemnified Party in
enforcing the indemnity and other obligations provided for in this
Section 5.07(c)(v).

 

(vi)  Retention Bonuses.  CMTY shall pay retention bonuses on account
of the Contemplated Transactions, granted in good faith reasonable amounts to
be mutually agreed upon by PRFS and CMTY prior to the Effective Date, to
persons designated by PRFS and approved by CMTY (which approval shall not be
unreasonably withheld) not earlier than 30 days, nor later than
45 days, after the operational merger of Blue Ball and Community Banks (including
the agreed upon computer system conversion).

 

(vii)  Reorganization.  Through the Closing Date, CMTY shall not take
any action that would preclude the Merger from qualifying as a reorganization
within the meaning of Section 368 of the IRC.

 

(viii)  Conduct of CMTY’s Business.  Through the Closing Date, CMTY shall
(A) use its reasonable good faith efforts to preserve its business
organization intact, maintain good relationships with employees, and preserve
the good will of customers of CMTY and others with whom business relationships
exist, (B) not, directly or indirectly, enter into any agreement for the
acquisition of any bank or other financial institution other than PRFS whether
by merger, consolidation, reorganization, stock or asset sale, if such
acquisition would constitute the acquisition of a Significant Subsidiary, (C)
not take any action that, individually or in the aggregate, could result in the
Merger not being consummated or otherwise materially adversely affect the
ability of CMTY to consummate the Contemplated Transactions by this Agreement
in a timely manner, or (D) not enter into any contract with respect to, or
otherwise agree to commit to do, any of foregoing contained in clauses (B) and
(C) of this Section 5.07(c)(viii).

 

(ix)  Shareholder Approval.  CMTY shall submit this Agreement and a
proposal relating to the Articles Amendment to its shareholders for approval at
a meeting (the “CMTY Shareholders Meeting”) with the recommendation of its
Board of Directors to such shareholders (unless the CMTY Board of Directors
believes in good faith, after consultation with its legal counsel, that such
recommendation would violate the CMTY Board of Directors’ fiduciary duties) to
approve this Agreement and the Articles Amendment.  The CMTY Shareholders

 

73

 

Meeting
shall be held not later than 45 days (subject to the effectiveness of the
Registration Statement) after all consents of Regulatory Authorities have been
received and all other conditions have been satisfied or waived (other than
those conditions which are to be fulfilled at the Closing).

 

(x)  Employment Agreements. CMTY shall
offer employment agreements to Joseph C. Spada, George B. Crisp and
Michael H. Peuler, effective as of the Effective Date, that are substantially
similar to the employment agreements of Community Banks’ regional presidents.

 

(xi)  Operations Center.  CMTY shall relocate and integrate its
principal deposit and information technology operations to and with the
operations center currently operated by PRFS in Blue Ball, Pennsylvania for at
least two (2) years after the Effective Date.

 

(xii)  CMTY Board of Directors on the Effective
Date.  On the Effective Date, CMTY
shall cause the CMTY Board of Directors to consist of fifteen (15) directors,
nine (9) of whom shall be current members of the CMTY Board of Directors and
six (6) of whom shall be the PRFS Nominees.

 

(xiii)  CMTY Board of Directors after the
Effective Date.  From and after the
Effective Date, CMTY shall not take any action, directly or indirectly, that
would result in less than six (6) current members of the PRFS Board of
Directors from serving as directors on the CMTY Board of Directors before the
expiration of the Full Term.

 

ARTICLE
VI-

CONDITIONS

 

6.01  Conditions to the Obligations of PRFS
under this Agreement.  The
obligations of PRFS hereunder shall be subject to satisfaction at or prior to
the Closing Date of each of the following conditions, unless waived by PRFS
pursuant to Section 8.03 hereof:

 

(a)  Corporate Proceedings.  All action required to be taken by, or on the
part of, CMTY and Community Banks, including the approval of CMTY’s
shareholders, to authorize the execution, delivery and performance of this
Agreement, the Bank Plan of Merger and the

 

74

 

Articles
Amendment, respectively, and the consummation of the Contemplated Transactions,
shall have been duly and validly taken by CMTY and Community Banks,
respectively, and PRFS shall have received certified copies of the resolutions
evidencing such authorizations.

 

(b)  Covenants; Representations.  The obligations of CMTY and Community Banks
required by this Agreement to be performed by CMTY or Community Banks at or
prior to the Closing Date shall have been duly performed and complied with in
all material respects; and the representations and warranties of CMTY set forth
in this Agreement shall be true and correct in all material respects, as of the
date of this Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty which
specifically relates to an earlier date and except as to any representation or
warranty to the extent the breach of such representation or warranty does not
have a Material Adverse Effect.

 

(c)  Approvals of Regulatory
Authorities.  Procurement by
PRFS and CMTY of all requisite approvals and consents of Regulatory Authorities
and the expiration of the statutory waiting period or periods relating thereto
for the Contemplated Transactions; and no such approval or consent shall have
imposed any condition or requirement which would so materially and adversely
impact the economic or business benefits to PRFS or CMTY of the Contemplated
Transactions that, had such condition or requirement been known, such party
would not, in its reasonable judgment, have entered into this Agreement.

 

(d)  No Injunction.  There shall not be in effect any order,
decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits consummation of the Contemplated Transactions.

 

(e)  Officer’s Certificate.  CMTY shall have delivered to PRFS a
certificate, dated the Closing Date and signed, without personal liability, by
its Chairman or President or Chief Executive Officer, to the effect that the
conditions set forth in subsections (a) through (d) of this
Section 6.01 have been satisfied.

 

(f)  Registration Statement.  The Registration Statement shall be effective
under the Securities Act, and no proceedings shall be pending or threatened by
the SEC to suspend the effectiveness of the Registration Statement; and all
approvals deemed necessary by CMTY’s

 

75

 

counsel
from state securities or authorities with respect to the transactions
contemplated by this Agreement shall have been obtained.

 

(g)  Tax Opinion.  PRFS shall have received an opinion of
Stevens & Lee, P.C., legal counsel to PRFS, in form and substance
reasonably satisfactory to PRFS, dated the Closing Date, substantially to the
effect that, on the basis of the facts, representations and assumptions set
forth in such opinion, the Merger will constitute a reorganization described in
Section 368(a) of the IRC;  in
rendering its opinion, such counsel may require and rely upon representations
and reasonable assumptions, including those contained in certificates of
officers of PRFS, CMTY and others.

 

(h)  Approval by PRFS’s and
CMTY’s Shareholders.  This
Agreement shall have been approved by the respective shareholders of PRFS and
CMTY at their respective shareholders’ meetings by such vote as is required by
the BCL, and the respective articles of incorporation and bylaws of PRFS and
CMTY.

 

(i)  Other Documents.  PRFS shall have received such other
certificates, documents or instruments from CMTY or its officers or others as
PRFS shall have reasonably requested in connection with accounting or income
tax treatment of the Contemplated Transactions, or related securities law
compliance.

 

(j)  Nasdaq Listing.  The CMTY Common Stock, including the CMTY
Common Stock to be issued in the Merger and pursuant to the Adjusted PRFS
Options, shall have been authorized for quotation on Nasdaq.

 

(k)  Articles Amendment.  CMTY shall have effected the Articles
Amendment.

 

6.02 Conditions to CMTY’s Obligations
under this Agreement.  The
obligations of CMTY hereunder shall be subject to satisfaction at or prior to
the Closing Date of each of the following conditions, unless waived by CMTY
pursuant to Section 8.03 hereof:

 

(a)  Corporate Proceedings.  All action required to be taken by, or on the
part of, PRFS and Blue Ball, including the approval of the shareholders of
PRFS, to authorize the execution, delivery and performance of this Agreement
and the Bank Plan of Merger,

 

76

 

respectively,
and the consummation of the Contemplated Transactions, shall have been duly and
validly taken by PRFS and Blue Ball, respectively, and CMTY shall have received
certified copies of the resolutions evidencing such authorizations.

 

(b)  Covenants; Representations.  The obligations of PRFS and Blue Ball
required by this Agreement to be performed by PRFS and Blue Ball at or prior to
the Closing Date shall have been duly performed and complied with in all
material respects; and the representations and warranties of PRFS set forth in
this Agreement shall be true and correct in all material respects, as of the
date of this Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty which
specifically relates to an earlier date and except as to any representation or
warranty to the extent the breach of such representation or warranty does not
have a Material Adverse Effect.

 

(c)  Approvals of Regulatory
Authorities.  Procurement by
CMTY and PRFS of all requisite approvals and consents of Regulatory Authorities
and the expiration of the statutory waiting period or periods relating thereto
for the Contemplated Transactions; and no such approval or consent shall have
imposed any condition or requirement which would so materially and adversely
impact the economic or business benefits to CMTY or PRFS of the Contemplated
Transactions that, had such condition or requirement been known, such party
would not, in its reasonable judgment, have entered into this Agreement.

 

(d)  No Injunction.  There shall not be in effect any order,
decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits consummation of the Contemplated Transactions.

 

(e)  Officer’s Certificate.  PRFS shall have delivered to CMTY a
certificate, dated the Closing Date and signed, without personal liability, by
its Chairman or President or Chief Executive Officer, to the effect that the
conditions set forth in subsections (a) through (d) of this
Section 6.02 have been satisfied.

 

(f)  Registration Statement.  The Registration Statement shall be effective
under the Securities Act, and no proceedings shall be pending or threatened by
the SEC to suspend the effectiveness of the Registration Statement; and all
approvals deemed necessary by CMTY’s

 

77

 

counsel
from state securities authorities with respect to the transactions contemplated
by this Agreement shall have been obtained.

 

(g)  Tax Opinion.  CMTY shall have received an opinion of Mette,
Evans & Woodside, legal counsel to CMTY, in form and substance reasonably
satisfactory to CMTY, dated the Closing Date, to the effect that, on the basis
of the facts, representations and assumptions set forth in such opinion, the
Merger will constitute a reorganization described in Section 368(a) of the
IRC; in rendering its opinion, such counsel may require and rely upon
representations and reasonable assumptions, including those contained in
certificates of officers of PRFS, CMTY and others.

 

(h)  Approval by CMTY’s and
PRFS’s Shareholders.  This
Agreement shall have been approved by the respective shareholders of CMTY and
PRFS at their respective shareholders’ meetings by such vote as is required by
the BCL and the respective articles of incorporation and bylaws of CMTY and
PRFS.

 

(i)  Other Documents.  CMTY shall have received such other
certificates documents or instruments from PRFS or its officers or others as
CMTY shall have reasonably requested in connection with accounting or income
tax treatment of the Contemplated Transactions or related securities law
compliance

 

(j)  Phase I Environmental
Audit Results.  The results of
any Phase I environmental audit conducted pursuant to Section 5.07(a)(ii)
hereof shall not result in a Material Adverse Effect on PRFS; provided, however
that (i) any such environmental audit must be completed within forty-five
(45) days of the date of this Agreement, (ii) a copy of any such
environmental audit must be delivered to PRFS within five (5) days after the
completion of such environmental audit and (iii) CMTY must terminate or
irrevocably waive its right to terminate the Agreement for failure of the
condition set forth in this Section 6.02(j) within ten (10) days of
receiving the results of such environmental audit.

 

78

 

ARTICLE
VII-

TERMINATION

 

7.01  Termination prior to the Closing Date.  This Agreement may be terminated on or at any
time

 

(a)  By the mutual written consent of the parties
hereto

 

(b)  By CMTY or PRFS:

 

(i)  If there shall have been any breach of any
representation, warranty or obligation of the other party hereto (subject to
the same standards as set forth in Sections 6.01(b) or 6.02(b), as the
case may be) and such breach cannot be, or shall not have been, remedied within
30 days after receipt by such party of written notice specifying the
nature of such breach and requesting that it be remedied; provided, that, if
such breach cannot reasonably be cured within such 30-day period but may
reasonably be cured within 60 days, and such cure is being diligently
pursued, no such termination shall occur prior to the expiration of such 60-day
period;

 

(ii)  If the Closing Date shall not have occurred
prior to August 31, 2005 (except that if the Closing Date shall not have
occurred by such date because of a breach of this Agreement by a party hereto,
such breaching party shall not be entitled to terminate this Agreement in
accordance with this provision);

 

(iii)  If any Regulatory Authority whose approval or
consent is required for consummation of the Contemplated Transactions shall
issue a definitive written denial of such approval or consent and the time
period for appeals and requests for reconsideration has run; or

 

(iv)  If the PRFS Shareholders vote but fail to
approve the Merger at the PRFS Shareholders Meeting or if the PRFS shareholders
approve an Acquisition Proposal.

 

(c)  By CMTY, if PRFS shall have breached, in any
material respect, the provisions of Section 5.05 of this Agreement.

 

(d)  By PRFS, if the CMTY shareholders vote but
fail to approve the Merger at the CMTY Shareholders Meeting.

 

79

 

(e)  Prior to the mailing of the Joint
Prospectus/Proxy Statement, by PRFS, in order to concurrently enter into an
agreement for an Acquisition Transaction in accordance with and following
compliance with Section 5.05 of this Agreement; provided, however, that PRFS
may not terminate this Agreement pursuant to this Section 7.01(e) if, after
providing written notice (which written notice shall be provided before the
mailing of the Joint Prospectus/Proxy Statement) to CMTY that it intends to
enter into an Acquisition Transaction (the “Acquisition Transaction Notice”),
CMTY delivers, within twenty-four (24) hours after receipt of such Acquisition
Transaction Notice, written notice to PRFS that CMTY will require PRFS to hold
a meeting of PRFS shareholders to consider the Merger (the “Required Meeting
Notice”).

 

(f)  By PRFS, on the Determination Date, if both of
the following conditions are satisfied:

 

(i)  the CMTY Market Value as of the close of
business on the Determination Date shall be less than $24.96; and

 

(ii)  (A) the quotient obtained by dividing
the CMTY Market Value as of the close of business on the Determination Date by
$31.20 (such number being referred to herein as the “CMTY Ratio”) shall be less
than (B) the quotient obtained by dividing the Index Price on the
Determination Date by the Index Price on the Starting Date and subtracting 0.20
from the quotient in this clause (ii)(B).

 

Provided
however, if PRFS elects to exercise its termination right pursuant to the
immediately preceding sentence, it shall give written notice to CMTY on the
Determination Date.  CMTY shall have the
option of increasing the consideration to be received by the holders of PRFS
Common Stock by adjusting the Exchange Ratio to an amount which, when
multiplied by the CMTY Market Value on the Determination Date equals
$34.94.  If CMTY delivers to PRFS on the
Effective Date written notice that it intends to proceed with the Merger by
paying such additional consideration, as contemplated by the preceding
sentence, then no termination shall have occurred pursuant to this
Section 7.01(f).

 

For
purposes of this Section 7.01(f), the following terms shall have the
meanings indicated.

 

80

 

“Determination
Date” shall mean the trading day immediately preceding the
Effective Date.

 

“Index Price” on a given date shall mean the weighted average
(weighted in accordance with the factors listed in the definition of “Peer Group” below) of the closing sales prices of the
companies composing the Peer Group (reported as provided with respect to the
CMTY Market Value).

 

“Peer Group” shall mean the fourteen (14) bank holding
companies listed below, the common stocks of all of which shall be publicly
traded and as to which there shall not have been, since the Starting Date and
before the Determination Date, any public announcement of a proposal for such
company to be acquired or for such company to acquire another company or
companies in transactions with a value exceeding 25% of the acquirer’s market
capitalization.  In the event that any
such company or companies are removed from the Peer Group, the weights (which
have been determined based upon relative market capitalization) redistributed
proportionately for purposes of determining the Index Price.  The fourteen (14) bank holding companies and
the weights attributed to them are as follows:

 

	
  Bank or
  Thrift Holding Companies

  	
   

  	
  % Weighting

  	
   

  
	
  Columbia Bancorp

  	
   

  	
  4.7

  	
   

  
	
  First Mariner Bancorp

  	
   

  	
  2.0

  	
   

  
	
  First United Corporation

  	
   

  	
  2.5

  	
   

  
	
  Harleysville National Corporation

  	
   

  	
  13.9

  	
   

  
	
  Interchange Financial Services Corporation

  	
   

  	
  6.4

  	
   

  
	
  Lakeland Bancorp, Incorporated

  	
   

  	
  7.0

  	
   

  
	
  Omega Financial Corporation

  	
   

  	
  9.0

  	
   

  
	
  Pennsylvania Commerce Bancorp, Inc.

  	
   

  	
  3.2

  	
   

  
	
  Royal Bancshares of Pennsylvania, Inc.

  	
   

  	
  5.7

  	
   

  
	
  Sandy Spring Bancorp, Inc.

  	
   

  	
  10.4

  	
   

  
	
  Sterling Financial Corporation

  	
   

  	
  12.4

  	
   

  
	
  Sun Bancorp, Inc.

  	
   

  	
  8.1

  	
   

  
	
  Univest Corporation of Pennsylvania

  	
   

  	
  7.6

  	
   

  
	
  Yardville National Bancorp

  	
   

  	
  7.2

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  100.00

  	
  %

  

 

“Starting Date” shall mean the trading day immediately prior
to public announcement of this Agreement.

 

81

 

(g)  By CMTY, if PRFS fails to call, give notice
of, convene or hold a meeting of shareholders to consider the Merger after CMTY
has delivered a Required Meeting Notice to PRFS.

 

7.02 Effect of Termination.  If this Agreement is terminated pursuant to
Section 7.01 hereof or otherwise, this Agreement shall forthwith become
void, other than Section 5.02(b)(ii), this Section 7.02 and
Section 8.01 hereof which shall remain in full force and effect, and there
shall be no further liability on the part of CMTY or PRFS to the other, except
for any liability of CMTY or PRFS under such sections of this Agreement and
except for any liability arising out of a willful breach of this Agreement
giving rise to such termination.

 

ARTICLE
VIII-

MISCELLANEOUS

 

8.01 Expenses and Other Fees.

 

(a)  Except as set forth in Sections 8.01(b),
8.01(c), 8.01(d) and 8.01(e), each party hereto shall bear and pay all costs
and expenses incurred by it in connection with the Contemplated Transactions,
including fees and expenses of its own financial consultants, accountants and
counsel.

 

(b)  If this Agreement is terminated as a result
of any breach of a representation, warranty, covenant or other agreement which
is caused by the willful or intentional breach of a party hereto, such party
shall be liable to the other for out-of-pocket costs and expenses,
including, without limitation, the reasonable fees and expenses of lawyers,
accountants and investment bankers, incurred by such other party in connection
with the entering into of this Agreement and the carrying out of any and all
acts contemplated hereunder (“Expenses”); provided, however, that the maximum
amount PRFS shall be liable to CMTY for Expenses pursuant to this
Section 8.01(b) shall be $500,000, and the maximum amount CMTY shall be
liable to PRFS for Expenses pursuant to this Section 8.01(b) shall be
$500,000.  The payment of Expenses shall
not constitute an exclusive remedy, but is in addition to any other rights or remedies
available to the parties hereto at law.

 

82

 

(c)  In the event this Agreement is terminated by:
(i) PRFS pursuant to Section 7.01(b)(iv) and PRFS enters into an agreement for
an Acquisition Transaction within eighteen (18) months from the date hereof;
(ii) CMTY pursuant to Section 7.01(c) in circumstances where both
(A) PRFS shall have entered into an agreement to engage in or there has
otherwise occurred an Acquisition Transaction with a party other than CMTY or
any Affiliate of CMTY at any time before August 1, 2005 and (B) at the
time of such termination or event giving rise to such termination, it shall
have been publicly announced that any Person (other than CMTY or any affiliate
of CMTY) shall have (y) made, or disclosed an intention to make, a bona
fide offer to engage in an Acquisition Transaction, or (z) filed an
application (or given a notice), whether in draft or final form, under the BHC Act
or the Change in Bank Control Act of 1978, for approval to engage in an
Acquisition Transaction; (iii) PRFS pursuant to Section 7.01(e) and CMTY has
elected not to deliver a Required Meeting Notice to PRFS; or (iv) CMTY pursuant
to Section 7.01(g); then PRFS shall
make a single cash payment, as liquidated damages, to CMTY in the amount of
Fifteen Million Dollars ($15,000,000) (the “Termination Fee”).  Any payment required under this Section
8.01(c) shall be payable by PRFS to CMTY (by wire transfer of immediately
available funds to an account designated by CMTY) within two (2) Business
Days after CMTY shall have become entitled thereto and shall have made demand
therefor.

 

(d)  In the event this Agreement is terminated by
PRFS pursuant to 7.01(e) of this Agreement and CMTY has theretofore delivered
(and PRFS has received) a Required Meeting Notice and the shareholders of PRFS
do not approve the Merger, PRFS shall make a single cash payment, as liquidated
damages, to CMTY in the amount of Seven Million Five Hundred Thousand Dollars
($7,500,000) (the “Break-Up Fee”).  Any
payment required under this Section 8.01(d) shall be payable by PRFS to CMTY
(by wire transfer of immediately available funds to an account designated by
CMTY) within two (2) Business Days after CMTY shall have become entitled
thereto and shall have made demand therefor.

 

(e)  In the event this Agreement is terminated by
(i) PRFS pursuant to Section 7.01(d) of this Agreement, CMTY shall be
liable to PRFS for its Expenses up to $500,000 in the aggregate or (ii) CMTY
pursuant to Section 7.01(b)(iv) of this Agreement in circumstances where the
PRFS shareholders vote but fail to approve the Merger and the PRFS

 

83

 

shareholders
do not approve an Acquisition Proposal, PRFS shall be liable to CMTY for its
Expenses up to $500,000 in the aggregate.

 

(f)  Notwithstanding anything set forth in this
Agreement to the contrary, if PRFS pays or causes to be paid to CMTY the
Termination Fee or the Break-Up Fee, the Termination Fee or the Break-Up Fee,
as applicable, shall be the sole and exclusive remedy of CMTY hereunder and
PRFS will not have any further obligations or liabilities to CMTY with respect
to this Agreement or the Contemplated Transactions, except that CMTY shall have
the right to enforce the provisions of Section 5.02(c) and the Confidentiality
Agreement.

 

8.02 Non-Survival
of Representations and Warranties; Disclosure Schedules.  All representations, warranties and, except
to the extent specifically provided otherwise herein, agreements and covenants
shall terminate on the Closing Date. 
Without limiting the foregoing, Sections 1.02(d), 1.02(e), 2.06,
2.07, and 5.07(c) (i), (ii), (iii), (iv), (v), (vi), (xi), (xii) and (xiii)
shall survive the Closing.

 

8.03  Amendment,
Extension and Waiver.  Subject to
applicable law, at any time prior to the Closing Date, the parties may:

 

(a)  amend this Agreement;

 

(b)  extend the time for the performance of any of
the obligations or other acts of either party hereto;

 

(c)  waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant hereto;
or

 

(d)  to the extent permitted by law, waive
compliance with any of the agreements or conditions contained in
Articles V and VI hereof or otherwise.

 

This Agreement may not be amended except by an
instrument in writing signed, by authorized officers, on behalf of the parties
hereto.  Any agreement on the part of a
party hereto to any extension or waiver shall be valid only if set forth in an
instrument in writing signed by a duly authorized officer on behalf of such party,
but such waiver or failure to insist on strict

 

84

 

compliance with such obligation, covenant, agreement
or condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.

 

8.04 Entire Agreement.

 

(a)  This Agreement, including the documents
referred to herein or delivered pursuant hereto, contains the entire agreement
and understanding of the parties with respect to its subject matter.  This Agreement supersedes all prior
arrangements and understandings between the parties, both written and oral,
with respect to its subject matter other than the Confidentiality Agreement.

 

(b)  This Agreement shall inure to the benefit of
and be binding upon the parties hereto and its successors; provided, however,
that nothing in this Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto and their respective successors,
any rights, remedies, obligations or liabilities, except that: any PRFS Nominee
may enforce Sections 1.02(e) and 5.07(c)(iii) and any Indemnified Party
may enforce Section 5.07(c)(v).

 

8.05 No
Assignment.  Neither party hereto
may assign any of its rights or obligations hereunder to any other person,
without the prior written consent of the other party hereto.

 

8.06 Notices.  All notices or other communications hereunder
shall be in writing and shall be deemed given upon delivery if delivered
personally, two business days after mailing if mailed by prepaid registered or certified
mail, return receipt requested, or upon confirmation of good transmission if
sent by telecopy, addressed as follows:

 

(a)  If to CMTY or Community Banks, to:

 

Community Banks, Inc.

750 East Park Drive

Harrisburg, Pennsylvania  17111

Attention:  Eddie L.
Dunklebarger, Chairman, President and CEO

Telecopy No.:  717-920-1683

 

85

 

with copy to:

 

James A. Ulsh, Esquire

Timothy A. Hoy, Esquire

Mette, Evans & Woodside

P.O. Box 5950

3401 North Front Street

Harrisburg, Pennsylvania 17110-0950

Telecopy No.:  717-236-1816

 

(b)  If to PRFS, to:

 

PennRock Financial Services Corp.

1060 Main St.

Blue Ball, Pennsylvania 17506

Attention:  Melvin Pankuch,
Executive Vice President and CEO

Telecopy No.:

 

with a copy to:

 

Clinton W. Kemp, Esquire

Stevens & Lee, P.C.

25 North Queen Street, Suite 602

P.O. Box 1594

Lancaster, PA 17608-1594 (17603 for courier)

Telecopy No.:  610-236-4177

 

8.07 Disclosure Schedules.  Information contained on either the PRFS
Disclosure Schedules or the CMTY Disclosure Schedules shall be deemed to cover
the express disclosure requirement contained in a representation or warranty of
this Agreement and any other representation or warranty of this Agreement of
such party where it is readily apparent it applies to such provision.  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 such item is or could result in a Material
Adverse Effect.

 

8.08 Tax
Disclosure.  Notwithstanding
anything else in this Agreement to the contrary, each party hereto (and each
employee, representative or other agent of any party) may disclose to any and
all persons, without limitation of any kind, the federal income tax treatment
and federal income tax structure of any and all transaction(s) contemplated
herein and all materials of any kind (including opinions or other tax analyses)
that are or have been provided to any party (or to

 

86

 

any
employee, representative, or other agent of any party) relating to such tax
treatment or tax structure; provided, however, that this authorization of
disclosure shall not apply to restrictions reasonably necessary to comply with
securities laws.  This authorization of
disclosure is not effective until the earlier of (i) the date of the
public announcement of discussions relating to the Contemplated Transactions,
(ii) the date of the public announcement of the Contemplated Transactions,
or (iii) the date of execution of an agreement (with or without
conditions) to enter into the Contemplated Transactions.

 

8.09 Captions.  The captions contained in this Agreement are
for reference purposes only and are not part of this Agreement.

 

8.10 Counterparts.  This Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

 

8.11 Severability.  If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by law.

 

87

 

8.12 Governing
Law.  This Agreement shall be
governed by and construed in accordance with the domestic internal law of the
Commonwealth of Pennsylvania and applicable laws of the United States of
America.

 

IN WITNESS
WHEREOF, the parties have caused this Agreement to be executed by their duly
authorized officers as of the day and year first above written.

 

 

	
  COMMUNITY BANKS, INC.

  	
   

  	
  Attest:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Eddie L.
  Dunklebarger

  	
   

  	
  /s/ Patricia E. Hoch

  
	
  Eddie L. Dunklebarger

  	
   

  	
  Patricia E. Hoch,
  Senior VP and Secretary

  
	
  Chairman, President and
  CEO

  	
   

  	
   

  
				

 

 

	
  PENNROCK FINANCIAL

  	
   

  	
   

  
	
  SERVICES CORP.

  	
   

  	
  Attest:

  

 

 

	
  By:

  	
  /s/ Melvin Pankuch

  	
   

  	
  /s/ Robert K. Weaver

  
	
  Melvin Pankuch,
  Executive Vice

  	
   

  	
  Robert K. Weaver,
  Secretary of the Board

  
	
  President and CEO

  	
   

  	
   

  

 

88

 

Exhibit 1

 

Form of Letter
Agreement

 

             ,
2004

 

Community Banks, Inc.

750 East Park Drive

Harrisburg, PA 17111

 

Ladies and Gentlemen:

 

Community
Banks, Inc. (“CMTY”) and PennRock Financial Services Corp. (“PRFS”) are
considering entering into an Agreement (the “Merger Agreement”), pursuant to
which, and subject to the terms and conditions set forth therein: (a) CMTY
will acquire PRFS by a merger of PRFS with and into CMTY; (b) shareholders
of PRFS will receive shares of CMTY common stock and/or cash in exchange for
their shares of PRFS common stock owned on the closing date; and
(c) option holders of PRFS will receive stock options exercisable for
common stock of CMTY in exchange for options exercisable for common stock of
PRFS outstanding on the closing date (the foregoing, collectively, the “Transactions”).

 

I have
been advised that I may be deemed to be an “affiliate” of PRFS for purposes of
certain rules issued by the Securities and Exchange Commission (the “SEC”)
under the Securities Act of 1933.

 

I
understand that CMTY is requiring, as a condition to its execution and delivery
to PRFS of the Agreement, that I execute and deliver to CMTY this Letter
Agreement.  Intending to be legally bound
hereby, I irrevocably agree and represent as follows:

 

1. I
agree to vote or cause to be voted for approval of the Merger Agreement all
shares of PRFS common stock over which I exercise sole or shared voting power
as of the record date of the PRFS shareholder meeting at which the Merger
Agreement will be presented for approval.

 

2.
Through the conclusion of the Transactions, I agree not to offer, sell,
transfer or otherwise dispose of, or to permit the offer, sale, transfer or
other disposition of, any shares of PRFS common stock over which I exercise
sole or shared voting power or any options that I hold to acquire shares of
PRFS common stock. Notwithstanding the foregoing: (i) I shall have the right to
sell on or before December 31, 2004 any shares that I have acquired on or
before such date pursuant to the exercise of an incentive or non-qualified stock
option, and (ii) after the record date for the approval of the Transactions, I
have the right to make gifts of any shares of my PRFS common stock, or any
options that I hold to acquire PRFS common stock to the extent gifts are
permitted by any applicable option plan.

 

3. I
agree, if I am an option holder, to exchange my options to acquire shares of
common stock of PRFS for options to acquire such number of shares of common
stock of CMTY, and at such per share exercise price, as is provided in
Section 2.06 of the Agreement, and otherwise on the same terms and
conditions as the exchanged PRFS options (unless I shall have exercised any
such option prior to the Transactions).

 

89

 

4. I
have sole or shared voting power over the number of shares of PRFS common
stock, and hold stock options for the number of shares of PRFS common stock, if
any, set forth below opposite my signature line. CMTY recognizes that with
respect to any such shares which have been pledged to a third party (which are
specifically identified below), I will not be able to control the voting or
disposition of such shares in the event of a default.

 

5. I
agree not to offer, sell, transfer or otherwise dispose of any shares of CMTY
common stock received pursuant to the Transactions, except:

 

(a) at
such time as a registration statement under the Securities Act of 1933, as
amended (“Securities Act”), covering sales of such CMTY common stock is
effective and a prospectus is made available under the Securities Act;

 

(b) within
the limits, and in accordance with the applicable provisions of, Rule 145
under the Securities Act (“Rule 145”); or

 

(c) in
a transaction which, in an opinion of counsel satisfactory to CMTY or as
described in a “no-action” or interpretive letter from the staff of the SEC (a “No
Action Letter”), is not required to be registered under the Securities Act;

 

and I
acknowledge and agree that CMTY is under no obligation to register the sale,
transfer or other disposition of CMTY common stock by me or on my behalf, or to
take any other action necessary to make an exemption from registration
available.

 

6.
CMTY shall take all steps necessary to ensure that CMTY is in compliance with
all those requirements of Rule 145 and Rule 144 with which CMTY must
comply in order for the resale provisions of Rule 145(d) to be available
to me.

 

7. I
agree that CMTY shall not be bound by any attempted sale of any shares of CMTY
common stock acquired by me pursuant to the Transactions, and CMTY’s transfer agent
shall be given appropriate stop transfer orders and shall not be required to
register any such attempted sale, unless the sale has been effected in
compliance with the terms of this Letter Agreement; and I further agree that
the certificate representing shares of CMTY common stock acquired by me
pursuant to the Transactions by me may be endorsed with a restrictive legend
consistent with the terms of this Letter Agreement, stating in substance as
follows:

 

“THE SHARES
REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145
APPLIES AND MAY ONLY BE TRANSFERRED (A) IN CONFORMITY WITH RULE 145(d), OR
(B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (C) IN ACCORDANCE WITH A WRITTEN OPINION OF
COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE, THAT SUCH
TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.”

 

The undersigned understands and hereby further
acknowledges that the legend set forth above will be removed from any such
certificate (by delivery of a substitute certificate without such legend) and
CMTY will instruct its transfer agent to remove such legend from any such
certificate, if the undersigned delivers to CMTY (i) satisfactory written
evidence that the shares of CMTY common stock represented by any such

 

90

 

certificate have been sold in compliance with Rule
145(d) (as such rule may be hereafter amended) (in which case, the substitute
certificate will be issued in the name of the transferee), (ii) a No Action
Letter, or (iii) an opinion of counsel, in form and substance reasonably
satisfactory to CMTY, to the effect that public sale of shares represented by
such certificate by the holder thereof is no longer subject to the restrictions
imposed by Rule 145.

 

8. I
represent that I have no present plan or intention to offer, sell, exchange, or
otherwise dispose of any shares of CMTY common stock to be received in the
Transactions.

 

9. I
represent that I have the capacity to enter into this Letter Agreement and that
it is a valid and binding obligation enforceable against me in accordance with
its terms, subject to bankruptcy, insolvency and other laws affecting creditors’
rights and general equitable principles.

 

I am
signing this Letter Agreement in my capacity as a shareholder of PRFS, and as
an option holder if I am an option holder, and not in any other capacity
(including as a director).  This Letter
Agreement shall be effective upon acceptance by CMTY.

 

Execution
of this Agreement by the undersigned is not an admission by the undersigned
that he or she is an “affiliate” for purposes of the Rule 145 of the Securities
Act.

 

This
Letter Agreement shall terminate concurrently with, and automatically upon, any
termination of the Merger Agreement in accordance with its terms, except that
any such termination shall be without prejudice to CMTY’s rights arising out of
any willful breach of any covenant or representation contained herein.

 

 

	
   

  	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  
	
  Witness

  	
   

  	
   

  

 

	
  Number of shares
  held

  	
   

  	
   

  
	
  Sole voting
  power: 

  	
            

  	
   

  
	
   

  	
   

  	
   

  
	
  Shared voting
  power:

  	
            

  	
   

  
	
   

  	
   

  	
   

  
	
  Number of shares
  subject to stock options:

  	
            

  	
   

  

 

91

 

	
  Number of
  pledged shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Accepted

  	
   

  	
   

  
	
  COMMUNITY
  BANKS, INC.

  	
   

  	
   

  

 

	
  By:

  	
   

  	
   

  
	
  Name: Eddie L.
  Dunklebarger

  	
   

  
	
  Title: Chairman,
  President and CEO

  	
   

  

 

92

 

Exhibit 1.03

 

Form of Bank Plan
of Merger

 

THIS
BANK PLAN OF MERGER (“Bank Plan of Merger”) dated November 16, 2004, is by
and between COMMUNITY BANKS, a Pennsylvania bank and trust company (“Community
Banks”) and BLUE BALL NATIONAL BANK, a national banking association (“Blue Ball”).

 

BACKGROUND

 

A.            Community Banks is a wholly-owned
subsidiary of Community Banks, Inc., a Pennsylvania corporation (“CMTY”).

 

B.            Blue Ball is a wholly-owned
subsidiary of PennRock Financial Services Corp., a Pennsylvania corporation (“PRFS”).

 

C.            CMTY and PRFS have executed an Agreement
dated November 16, 2004 (the “Agreement”). The Agreement provides for the
merger of Blue Ball with and into Community Banks, with Community Banks
surviving such merger, but only after closing of the “Merger” provided for in
the Agreement. After closing of the “Merger,” Community Banks and Blue Ball
will each be direct wholly-owned subsidiaries of CMTY. This Bank Plan of Merger
is being executed by Community Banks and Blue Ball pursuant to the Agreement.

 

D.            Capitalized terms used in this Bank
Plan of Merger that are not otherwise defined herein shall have the meanings
given them in the Agreement.

 

In
consideration of the premises and of the mutual covenants and agreements herein
contained, and in accordance with the applicable laws and regulations of the
United States of America and the Commonwealth of Pennsylvania, Community Banks
and Blue Ball, intending to be legally bound hereby, agree:

 

93

 

ARTICLE I - MERGER

 

Subject
to the terms and conditions of this Bank Plan of Merger, and in accordance with
the applicable laws and regulations of the United States of America and the
Commonwealth of Pennsylvania, on the Effective Date (as that term is defined in
Article V hereof):

 

(a)           Blue Ball shall merge with and into
Community Banks, under the charter of Community Banks;

 

(b)           the separate existence of Blue Ball
shall cease; and

 

(c)           Community Banks shall be the surviving
bank.

 

Such transaction is referred to herein as the “Bank
Merger,” and Community Banks, as the surviving bank in the Bank Merger, is
referred to herein as the “Surviving Bank.”

 

ARTICLE II - NAME AND BUSINESS OF BANK

 

The
name of the Surviving Bank shall be Community Banks.  The business of the Surviving Bank shall be
that of a state, non-member bank with trust powers.  This business shall be conducted by the
Surviving Bank at its main office which shall be located at 150 Market
Square, Millersburg, Pennsylvania, and its legally established branches and
other facilities.

 

ARTICLE III - ARTICLES OF ASSOCIATION AND BYLAWS

 

3.1 Articles
of Incorporation.  On and after the
Effective Date, the articles of Community Banks, as in effect immediately prior
to the Effective Date, shall automatically be and remain the articles of
incorporation of the Surviving Bank, until changed in accordance with
applicable law, such articles of incorporation, and the Surviving Bank’s
bylaws.

 

3.2 Bylaws.  On and after the Effective Date, the bylaws
of Community Banks, as in effect immediately prior to the Effective Date, shall
automatically be and remain the bylaws of the Surviving Bank, until changed in
accordance with applicable law, the Surviving Bank’s articles of association,
and such bylaws.

 

94

 

ARTICLE IV - BOARD OF DIRECTORS AND OFFICERS

 

4.1 Board
of Directors.  On and after the
Effective Date, (a) the directors of Community Banks duly elected and holding
office immediately prior to the Effective Date and (b) those members of
the Board of Directors of PRFS as of the Effective Date who are not PRFS
Nominees shall be the directors of the Surviving Bank, each to hold office
until his or her successor is elected and qualified or otherwise in accordance
with applicable law, the articles of incorporation and bylaws of the Surviving
Bank.

 

4.2 Officers.  On and after the Effective Date, the officers
of Community Banks duly elected and holding office immediately prior to the
Effective Date shall be the officers of the Surviving Bank, together with those
officers of Blue Ball who have been offered and who have accepted positions of
employment with Community Banks, and such other officers as may be appointed
from time to time, each to hold office until his or her successor is elected
and qualified or otherwise in accordance with applicable law, the articles of
association and bylaws of the Surviving Bank.

 

ARTICLE V - CONVERSION OF SHARES

 

5.1 Community
Banks Capital Stock.  Each share of
Community Banks capital stock issued and outstanding immediately prior to the
Effective Date shall, on and after the Effective Date, continue to be issued
and outstanding as a share of identical capital stock of the Surviving Bank.

 

5.2 Blue
Ball Capital Stock.  Each share of
Blue Ball capital stock issued and outstanding immediately prior to the
Effective Date shall, on the Effective Date, be cancelled, and no cash, stock
or other property shall be delivered in exchange therefor.

 

ARTICLE VI - EFFECTIVE DATE OF THE MERGER

 

The
Bank Merger shall be effective at the time specified in the articles of merger
filed with the Department of Banking of the Commonwealth of Pennsylvania (the “Effective
Date”).

 

95

 

ARTICLE VII - EFFECT OF THE MERGER 

 

On the
Effective Date the separate existence of Blue Ball shall cease, and all of the
property (real, personal and mixed), rights, powers, duties and obligations of
Blue Ball shall be taken and deemed to be transferred to and vested in the
Surviving Bank, without further act or deed, as provided by applicable laws and
regulations.

 

ARTICLE VIII - CONDITIONS PRECEDENT 

 

The
obligations of Community Banks and Blue Ball to effect the Bank Merger shall be
subject to closing of the “Merger” provided for in the Agreement.

 

ARTICLE IX - TERMINATION

 

This
Bank Plan of Merger shall terminate automatically upon any termination of the
Agreement in accordance with its terms; provided, however, that any such
termination of this Bank Plan of Merger shall not relieve any party hereto from
liability on account of a breach by such party of any of the terms hereof or
thereof.

 

ARTICLE X - AMENDMENT

 

This
Bank Plan of Merger may be amended at any time prior to consummation of the
Bank Merger, but only by an instrument in writing signed by duly authorized
officers on behalf of the parties hereto.

 

ARTICLE XI - MISCELLANEOUS

 

11.1 Extensions;
Waivers.  Each party, by a written
instrument signed by a duly authorized officer, may extend the time for the
performance of any of the obligations or other acts of the other party hereto
and may waive compliance with any of the covenants, or performance of any of
the obligations, of the other party contained in this Bank Plan of Merger.

 

11.2 Notices.  Any notice or other communication required or
permitted under this Bank Plan of Merger shall be given, and shall be
effective, in accordance with the provisions of Section 8.06 of the Agreement.

 

96

 

11.3 Captions.  The headings of the several Articles herein
are intended for convenience of reference only and are not intended to be part
of, or to affect the meaning or interpretation of, this Bank Plan of Merger.

 

11.4 Counterparts.  For the convenience of the parties hereto,
this Bank Plan of Merger may be executed in several counterparts, each of which
shall be deemed the original, but all of which together shall constitute one
and the same instrument.

 

11.5 Governing
Law.  This Bank Plan of Merger shall
be governed by and construed in accordance with applicable laws of the United
States of America and in accordance with the laws of the Commonwealth of
Pennsylvania.

 

IN
WITNESS WHEREOF, Community Banks and Blue Ball National Bank have caused this
Bank Plan of Merger to be executed by their duly authorized officers on the
date first written above, each pursuant to a resolution of its board of
directors, acting by a majority. 

 

	
  COMMUNITY BANKS

  	
  Attest:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Eddie L.
  Dunklebarger

  	
  Patricia E. Hoch,
  Senior VP and Secretary

  
	
  Chairman, President and
  CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  BLUE BALL NATIONAL BANK

  	
  Attest:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
  Melvin Pankuch, President
  and CEO 

  	
  Robert K. Weaver,
  Secretary

  
									

 

97

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