N. Y. Banks Sued Over Bid to Buy Chase Branches

Three shareholders of upstate New York's Community Bank System Inc. want a court to prevent the bank's buying 15 branches and $455 million of deposits from Chase Manhattan Corp.

The shareholders are alleging in a suit filed this week in state Supreme Court in Albany that the bank is paying far too much - $37.5 million - for the branches, and that if the sale goes through it will drain away capital and reduce book value and earnings.

The shareholders of the DeWitt-based company, which has $916 million of assets, are also accusing Community Bank and its directors of failing to protect the interests of the stockholders.

What management proposes to do is "take a strong bank and put it in a much weaker financial condition, making it susceptible to many different types of financial flu," said plaintiffs' attorney Leslie M. Apple, a senior partner with Whiteman, Osterman & Hanna in Albany.

Sanford A. Belden, president and chief executive of Community Bank, dismissed the shareholders' contentions, saying they are acting without "the benefit of full facts." He said those facts will be disclosed shortly in a filing with the Securities and Exchange Commission.

Community Bank announced on Dec. 7 that it would buy the branches for an 8.25% deposit premium. Bank officials said they would finance the acquisition by issuing about 50% more shares in a public offering to raise as much as $40 million of capital.

The agreement included a $1.85 million break-up fee, which Community Bank would have to pay Chase if the deal collapses, even if the transaction is rejected by regulators.

Since then, Mr. Belden has found himself at odds not only with the three shareholders, but with several institutional investors.

Two days after the deal was announced, bank officials were entangled in a telephone conference with these angry investors. Warren Marcus, president of WRM Equity Management Inc., whose firm holds more than 50,000 shares, characterized the discussion as "combative and confrontational."

Following the telephone conference, he and three other institutional investors wrote letters to bank officials urging them to call off the "extremely detrimental" deal and pay the break-up fee because it "would be far less damaging than going through with the purchase," the suit contends.

According to the lawsuit, bank officials "virtually ignored" the letters, as well as complaints that the deal caused Community's stock to drop 14%, to around $26.63 a share.

Calling the acquisition "ill-conceived," the shareholders accuse bank directors of breaching their duty of care, and of arbitrariness and negligence in failing "to adequately consider the impact of the acquisition on the bank's capital."

The lawsuit charges that the directors' approval "could not have been the product of informed decision-making." It also states that the purchase price would reduce Community Bank's Tier 1 capital ratio to the 4.1%-to- 4.3% range, which is close to the regulatory minimum for "adequate" capitalization.

The bank is currently considered a "well-capitalized" institution, the plaintiffs note.

The shareholders also claim that the purchase agreement would cause a drop in tangible equity per share to $12 from $21.59, and an 8% decline in earnings per share after the deal is done.

The shareholders argue that their stake in the company would have been diluted by the public offering.

Responding to criticism voiced shortly after the announcement, the bank scrapped its $50 million public-offering plan, opting for a $10 million private offering and a $20 million public offering.

The shareholders still don't like the new strategy of raising funds, because it "left in place most if not all of the harm to CBSI, its shareholders and the bank," the court papers state.

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