<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Community Banks, Inc.
- - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Community Banks, Inc.
- - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] #500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
COMMUNITY BANKS, INC.
150 MARKET SQUARE
P.O. BOX 350
MILLERSBURG, PA 17061
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 16, 1996
TO OUR SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Community
Banks, Inc. ("CBI") will be held at 9:30 a.m. on April 16, 1996 at CBI's
executive offices, 150 Market Square, Millersburg, Pennsylvania, for the
purpose of considering and voting upon the following matters:
1. Election of Directors. To elect four (4) Class A Directors to serve
until the 2000 Annual Meeting of Shareholders.
2. Merger with Citizens National Bank of Ashland. To ratify the merger of
Citizens National Bank of Ashland into Community Banks, N.A., which merger
became effective at the close of business on January 12, 1996.
3. Approval of Accountants. To approve the selection of Coopers & Lybrand
LLP, Certified Public Accountants, Harrisburg, Pennsylvania, as independent
certified public accountants for CBI for the year ending December 31, 1996.
4. Other Business. Such other business as may be properly brought before
the Annual Meeting of Shareholders or any adjournment or adjournments
thereof.
Information regarding the matters to be acted upon at the meeting is
contained in the Proxy Statement accompanying this notice.
IN ACCORDANCE with the statutes in such case made and PROVIDED only those
holders of record of Common Stock of CBI at the close of business on February
9, 1996 (the "Record Date"), are entitled to notice of and to vote at the
Annual Meeting of Shareholders and any adjournment or adjournments thereof.
The Stock Transfer Books of CBI will not be closed.
BY ORDER OF THE BOARD OF DIRECTORS
PATRICIA E. HOCH
Secretary
Millersburg, Pennsylvania
March 18, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, MANAGEMENT URGES THAT
YOU SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE PREPAID ENVELOPE
PROVIDED. THIS PROXY WILL NOT BE USED IF YOU ARE PRESENT AND DESIRE TO VOTE IN
PERSON.
<PAGE>
COMMUNITY BANKS, INC.
----------------
PROXY STATEMENT
MARCH 18, 1996
----------------
GENERAL INFORMATION
This proxy statement is furnished in connection with solicitation by the
Board of Directors of Community Banks, Inc. ("CBI"), a corporation organized
under the laws of the Commonwealth of Pennsylvania, of proxies to be voted at
the Annual Meeting of Shareholders of CBI to be held on April 16, 1996 at 9:30
a.m. prevailing time and at any and all adjournments or postponements thereof.
This Proxy Statement and the enclosed Form of Proxy (the "Proxy") are first
being sent to shareholders of CBI on or about March 18, 1996.
The costs of preparing, printing and mailing the Proxy and all materials
used in the solicitation thereof will be borne by CBI. In addition to the use
of the mail, proxies may be solicited by officers, directors and employees of
CBI personally, by telephone or by telegraph.
CBI's executive offices are located at 150 Market Square, Millersburg,
Pennsylvania, and its telephone number is (717) 692-4781. CBI's mailing
address is P.O. Box 350, Millersburg, Pennsylvania 17061.
DATE BY WHICH SECURITY HOLDER PROPOSALS MUST BE RECEIVED TO BE PRESENTED AT
NEXT ANNUAL MEETING OF SHAREHOLDERS.
Proposals of security holders of CBI intended to be presented at the next
annual meeting of shareholders of CBI must be received by CBI for inclusion in
CBI's proxy statement and the form of proxy relating to that meeting by
November 19, 1996.
If the date of the next annual meeting of shareholders of CBI is advanced or
delayed by more than 30 days from May 13, 1997, security holders will be
timely informed of the change of the annual meeting of shareholders and the
date by which proposals of security holders must be received.
VOTING; REVOCATION OF PROXIES
Each Proxy may be revoked at any time before its exercise by, among other
methods, giving written notice to the Secretary of CBI. A subsequently dated
Proxy will, if presented to the Secretary of CBI, revoke a prior dated Proxy.
Any shareholder of CBI may attend the meeting and vote in person whether or
not he has previously given a Proxy.
The enclosed Proxy confers discretionary authority to vote with respect to
any and all of the following matters that may come before the Annual Meeting
of Shareholders: (i) matters which the Board of Directors does not know, a
reasonable time before the proxy solicitation, are to be presented at the
meeting; (ii) approval of the minutes of a prior meeting of the shareholders,
if such approval does not amount to ratification of the action taken at that
meeting; and (iii) matters incident to the conduct of the meeting. In
connection with such matters, the persons named in the enclosed Proxy will
vote in accordance with their best judgment.
The Board of Directors of CBI is not presently aware of any matters (other
than procedural matters) which will be brought before the Annual Meeting of
Shareholders which are not referred to in the Notice of Annual Meeting of
Shareholders. If other business is properly brought before the Annual Meeting
of Shareholders, the persons named in the Proxies will act or vote in
accordance with their judgment.
VOTE REQUIRED; SHARES ENTITLED TO VOTE
The presence in person or by proxy of the holders of a majority of the
outstanding shares of CBI's Common Stock will constitute a quorum for the
transaction of business at the Annual Meeting of Shareholders. At the
<PAGE>
close of business on the Record Date, there were 2,608,602 shares of CBI Common
Stock outstanding. Each share of CBI's Common Stock outstanding on the Record
Date is entitled to one vote on all matters, including the election of
directors, to come before the Annual Meeting.
Management of CBI in the aggregate beneficially owned 457,187 shares of the
outstanding stock of CBI on the Record Date. The Trust Department of Community
Banks, N.A. ("CBNA"), held, as sole trustee, in the aggregate, 7,491 shares of
CBI Common Stock, which may not be voted in the election of directors of CBI.
To the knowledge of management, one person beneficially owned 5% or more of the
outstanding Common Stock of CBI on the Record Date. The number and percentage
of shares of Common Stock of CBI owned by this person is disclosed below under
"BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS."
All matters which are expected to come before the shareholders, including
election of directors and approval of Coopers & Lybrand LLP as independent
certified public accountants for CBI for the year ending December 31, 1996,
will require the affirmative vote of the holders of a majority of CBI's
outstanding Common Stock represented at the meeting, if a quorum is present.
The Board of Directors of CBI is seeking the ratification of the merger of The
Citizens National Bank of Ashland, Ashland, Pennsylvania ("Citizens") into
Community Banks, N.A. ("CBNA"), CBI's wholly-owned banking subsidiary. This
merger became effective at the close of business on January 12, 1996.
Ratification of the merger is not required as a condition to the effectiveness
of the merger or its legality under the National Bank Act ("NBA"), the Articles
of Incorporation and the Bylaws of CBI or Pennsylvania law.
The merger of Citizens with and into CBNA, which became effective as of the
close of business on January 12, 1996 did not require the consent of the
shareholders of CBI. However, management of CBI is seeking the ratification of
this merger by CBI shareholders for the reasons set forth below under
RATIFICATION OF CITIZENS NATIONAL BANK MERGER. The merger will be considered
ratified upon the affirmative vote of the holders of a majority of CBI's
outstanding Common Stock represented at the meeting, if a quorum is present.
At the Annual Meeting, the Judges of Election will manually tabulate all
votes which are cast in person or by proxy. Those Shareholders wishing to vote
in person will be provided ballots with which to vote.
Voting is an important right of Shareholders. If a Shareholder abstains or
otherwise fails to cast a vote on any matter brought before the Shareholders,
the Pennsylvania Business Corporation Law provides that notwithstanding any
intention to the contrary, the abstention or failure is not a vote and will not
be counted. This is true of broker non-votes as well as non-votes by other
Shareholders.
INCORPORATION OF DOCUMENTS BY REFERENCE
Certain documents previously filed by CBI with the Commission pursuant to the
Exchange Act are hereby incorporated by reference in this Proxy Statement as
follows:
(1) the Annual Report on Form 10-K for the year ended December 31, 1995.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein, or in any other subsequently filed document that also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement. All
information appearing in this Proxy Statement should be read in conjunction
with, and is qualified in its entirety by, the information and financial
statements (including notes thereto) appearing in the documents incorporated
herein by reference, except to the extent set forth in the immediately
preceding statement.
2
<PAGE>
PURPOSES OF THE MEETING
The Annual Meeting of Shareholders will be held for the following purposes:
1. To elect four (4) Class A Directors to serve until the 2000 Annual
Meeting of Shareholders;
2. To ratify the merger of Citizens National Bank of Ashland into
Community Banks, N.A., which merger became effective on January 12, 1996;
3. To approve the selection of Coopers & Lybrand LLP, Certified Public
Accountants, Harrisburg, Pennsylvania, as independent certified public
accountants for CBI for the year ending December 31, 1996; and
4. To transact such other business as may be properly brought before the
meeting or any adjournment thereof.
ELECTION OF DIRECTORS OF CBI
The Bylaws of CBI provide that the Board of Directors may, from time to time,
fix the number of directors. The number of directors that shall constitute the
whole Board of Directors shall be not less than 5 nor more than 25. The Bylaws
of CBI also provide that the Board of Directors shall be classified into four
(4) classes as nearly equal in number as possible, each class to be elected for
a term of four (4) years. Each class shall be elected in a separate election.
At each annual meeting of shareholders, successors to the class of directors
whose term is expiring shall be elected to hold office for a term of four (4)
years so that the term of office of one class of directors expires in each
year.
Nomination for elections to the Board of Directors may be made by the Board
of Directors or by any holder of the Common Stock of CBI entitled to vote at
the election of directors. Nominations, other than those made by or in behalf
of the existing management of CBI, shall be made in writing and shall be
delivered or mailed to the Secretary of CBI not less than 45 days prior to the
date of any meeting of shareholders called for the election of directors. Such
notification shall contain the following information to the extent known by the
notifying shareholder: (a) the name and address of each proposed nominee; (b)
the age of each proposed nominee; (c) the principal occupation of each proposed
nominee; (d) the number of shares of CBI owned by each proposed nominee; (e)
total number of shares that, to the knowledge of the notifying shareholder,
will be voted for each proposed nominee; (f) the name and residence address of
the notifying shareholder; and (g) the number of shares of CBI owned by the
notifying shareholder. Any nomination for director not made in accordance with
the above procedure shall be disregarded by the chairman of the meeting, and
votes cast for each such nominee shall be disregarded by the judges of
election.
It is the intention of persons named in the Proxy to vote for the election of
the four individuals listed as Class A directors to serve as Class A directors
until the 2000 Annual Meeting of Shareholders.
In absence of instructions to the contrary, proxies will be voted in favor of
the election of the management's nominees. In the event any nominee should
become unavailable, it is intended that the proxies will be voted for such
substitute nominee as may be nominated by management. Management has no present
knowledge that any of the nominees will be unavailable to serve.
Each nominee is currently a director of CBI and is also a Director of CBNA,
CBI's wholly-owned banking subsidiary.
3
<PAGE>
The following table sets forth the name and age of all directors, including
nominees for director of CBI, as well as the director's business experience,
including principal occupation for the past five years, the period during
which he has served as a director of CBI or CBNA (formerly Upper Dauphin
National Bank), and the number and percentage of outstanding shares of Common
Stock of CBI beneficially owned by said director as of February 9, 1996.
DIRECTORS OF CBI
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE, AMOUNT AND PERCENTAGE
INCLUDING PRINCIPAL NATURE OF OF
OCCUPATION FOR THE DIRECTOR BENEFICIAL OUTSTANDING
NAME AND AGE PAST FIVE YEARS SINCE (/1/) OWNERSHIP (/2/) STOCK OWNED
------------ -------------------- ----------- --------------- -----------
<C> <S> <C> <C> <C>
CLASS A DIRECTORS:
To be elected for a four-year term ending in 2000:
Chairman and C.E.O., 1966 20,999(3) .80%
Thomas L. Miller.............. CBI, and President and
Age 63 C.E.O., CBNA
Attorney-at-Law, Mette, 1977 8,839 .34%
James A. Ulsh................. Evans & Woodside,
Age 49 Harrisburg, PA
Ronald E. Boyer............... President, Alvord Polk 1981 11,533(4) .44%
Age 58 Tool Company
(manufacture of cutting
tools), Millersburg, PA
Peter DeSoto.................. President, Metal 1981 23,479 .90%
Age 56 Industries, Inc.
(manufacture of metal
products),
Elizabethville, PA
CLASS D DIRECTORS:
To continue in office to 1999:
Leon E. Kocher................ Chairman of the Board, 1963 15,705 .60%
Age 83 Kocher Enterprises
Secretary/Treasurer 1968 137,131(5) 5.26%
Alvord Polk Inc.
Robert W. Rissinger........... Engle Rissinger Auto
Age 69 Group
William C. Troutman........... President, The W.C. 1968 84,065(6) 3.22%
Age 80 Troutman Co. (auto
dealership)
Millersburg, PA
CLASS C DIRECTORS:
To continue in office to 1998:
Self-Employed Insurance 1966 19,697(7) .76%
Kenneth L. Deibler............ Broker, Elizabethville,
Age 73 PA
Attorney-at-Law, 1961 24,613(8) .94%
Allen Shaffer................. Millersburg and
Age 70 Harrisburg, PA
Ernest L. Lowe................ President, CBI 1990 11,134(9) .43%
Age 59
CLASS B DIRECTORS:
To continue in office to 1997:
Ray N. Leidich................ Dentist, Tremont, PA 1985 38,948(10) 1.49%
Age 67
Owner, Millersburg 1981 12,526(11) .48%
Thomas W. Long................ Hardware Co.,
Age 66 Millersburg, PA
President, Miller Bros. 1981 50,797 1.95%
Donald L. Miller.............. Dairy,
Age 66 Millersburg, PA
Samuel E. Cooper.............. Superintendent, Warrior 1992 1,111 .04%
Age 62 Run School District
</TABLE>
4
<PAGE>
- - - --------
(1) Includes service as a director of CBNA (formerly Upper Dauphin National
Bank), a wholly-owned subsidiary of CBI, prior to 1983 and service as a
director of CBI after 1983.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they
may include securities owned by or for, among others, the wife and/or
minor children of the individual and any other relative who has the same
home as such individual, as well as other securities as to which the
individual has or shares voting or investment power or has the right to
acquire under outstanding stock options within 60 days after March 18,
1996. Beneficial ownership may be disclaimed as to certain of the
securities.
(3) Includes incentive stock options to acquire 17,299 shares.
(4) Includes 3,388 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and
135 shares owned by Mr. Boyer's spouse, Judith Boyer, and her mother.
(5) Includes 3,388 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer. Also
includes 7,548 shares owned by Engle Rissinger Auto Group, Inc., 372
shares owned by Mr. Rissinger's spouse, Shirley Rissinger, 4,163 shares
owned by Engle Rissinger Auto Group, Inc. Profit Sharing Plan (R.
Rissinger and H. Engle, Co-Trustees), and 52,735 shares held by Mr.
Rissinger's IRA.
(6) Includes 18,703 shares owned by Mr. Troutman's spouse, Dorothy Troutman,
and 5,295 shares owned by W. C. Troutman Co.
(7) Includes 1,507 shares owned by Mr. Deibler's grandchildren.
(8) Includes 4,198 shares owned by Mr. Shaffer's Retirement account.
(9) Includes 99 shares owned by Mr. Lowe's spouse, Barbara Lowe and 62 shares
owned by Mr. Lowe's children, and also includes Incentive Stock Options to
acquire 9,999 shares.
(10)Includes 19,474 shares owned by Dr. Leidich's wife, Dolores Leidich.
(11)Includes 7,416 shares owned by the Trust of Mr. Long's mother, Leah Long.
None of the directors or nominee directors are directors of other companies
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
The following is all shares owned beneficially by all directors and
executive officers of CBI as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
---------------------
TITLE OF CLASS DIRECT INDIRECT PERCENT OF CLASS
-------------- ---------- ---------- ----------------
<S> <C> <C> <C>
Common......................... 398,481 58,706 17.53%
</TABLE>
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS
The following table sets forth the name, address, amount and nature of
beneficial ownership, and percent of class of outstanding CBI Common Stock of
each person known to CBI to be the beneficial owner of more than 5% of CBI's
Common Stock. Share information is stated as of February 9, 1996.
5
<PAGE>
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (/1/) OUTSTANDING STOCK
----------------------------- -------------------------- -----------------
<S> <C> <C>
Robert W. Rissinger.......... 137,131(/2/) 5.26%
900 Manor Drive
Millersburg, PA 17061
</TABLE>
- - - --------
1 See footnote 2 on page 5.
2 See footnote 5 on page 5.
MANAGEMENT OF CBI
EXECUTIVE OFFICERS
The following table sets forth the executive officers of CBI (as determined
in accordance with the rules and regulations of the Securities and Exchange
Commission), their ages, their positions with CBI and the beneficial ownership
of Common Stock of CBI by each of such persons. Share information is stated as
of February 9, 1996.
EXECUTIVE OFFICERS OF CBI
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL OUTSTANDING
NAME AND AGE TITLE OWNERSHIP (/1/) STOCK
------------ ------------------ --------------- -----------
<S> <C> <C> <C>
Thomas L. Miller................. Chairman and Chief 20,999 .80%
Age 63 Executive Officer
Ernest L. Lowe................... President and 11,134 .43%
Age 59 Chief Operating
Officer
</TABLE>
- - - --------
1 Includes currently exercisable Incentive Stock Options to acquire shares of
CBI.
6
<PAGE>
BOARD EXECUTIVE COMMITTEE REPORT ON EXECUTIVE COMPENSATION
CBI does not have a Compensation Committee. The Board of Directors has
delegated to the Executive Committee initial review and recommendations for
executive compensation. Recommendations of the Executive Committee are
reviewed and ratified by the full Board of Directors.
Members of the Executive Committee are Robert W. Rissinger, William C.
Troutman, Peter DeSoto, Allen Shaffer, James A. Ulsh and Donald L. Miller.
None of these committee members have been officers or employees of CBI or any
of its subsidiaries at any time, and none had any relationship with CBI or any
of its subsidiaries requiring specific disclosure under applicable Securities
and Exchange Commission regulations.
The CBI Executive Committee adopted an Executive Compensation Policy which
sets forth the following goals to be achieved in determining compensation of
the executive officers of CBI and CBNA: (i) integrate compensation with CBI
and CBNA annual and long-term performance goals; (ii) reward above average
performance; (iii) recognize individual initiative and achievements; (iv)
attract and retain qualified executives; (v) be consistent with compensation
packages offered by other similarly situated bank holding companies and banks;
and (vi) encourage stock ownership by executive officers.
In order to achieve the goals set forth in the Executive Compensation
Policy, a variety of criteria in evaluating and establishing compensation are
to be considered. The Executive Committee has identified several reports and
groups as appropriate sources of comparative information in evaluating
executive compensation. These are: the SNL Securities Bank Performance Report,
the SNL Executive Compensation Review for Commercial Banks, and the NASDAQ
Bank Performance Summary.
The Executive Committee recognizes that compensation, particularly for the
Chief Executive Officer and other Executive Officers, can best be accomplished
through a combination of techniques, including salary, the CBI Bonus Plan, the
Long-Term Incentive Plan, and the provision of appropriate fringe benefits.
CBI BONUS PLAN
CBI has adopted the CBI Bonus Plan for the Chief Executive Officer and other
officers of CBI and CBNA. Pursuant to this plan, a certain percentage of net
income, before security gains and losses, of the amount in excess of one
percent of the return on average assets for the year, is placed in a bonus
pool. The percentage of 1994 net income placed in the bonus pool was 15%, and
bonuses based on 1994 net income were paid in 1995. From this pool, between
20% and 25% (23% in 1994) is allocated to bonuses for staff officers. The
remainder of the pool is distributed to the Chief Executive Officer and the
other executive officers of the bank. The percentage distributable to the CEO
and the other officers is reviewed on an annual basis and adjusted as deemed
appropriate. In 1995 the CEO received 26% of the 1994 Net Bonus Pool remaining
after staff officers' bonuses were deducted, and the President received 15%.
The Executive Committee delegated to the CEO the distribution of the staff
officers' bonuses and the remainder of the Net Bonus Pool to executive
officers.
LONG-TERM INCENTIVE PLAN
In 1988, CBI adopted a Long-Term Incentive Plan which authorizes the
issuance of incentive stock options, stock appreciation rights, and non-
qualified stock options. The Executive Committee believes that stock ownership
by management is beneficial in aligning management's interests with the
interests of the shareholders in enhancing and increasing the value of CBI
common stock. The Executive Committee considers the same criteria in awarding
stock options that it considers in making other compensation decisions. These
criteria are outlined above.
7
<PAGE>
EXECUTIVE COMPENSATION
In 1995 the trading price performance of CBI Common Stock followed a modest
upward trend. The per share market value of CBI Common Stock increased from
$23.75 at year-end 1994 to $27.25 at year-end 1995. This compared favorably
with the sharp drop in the per share market value which occurred in 1994. CBI
Common Stock was trading at a price times earnings ratio of 11.7 at year-end
1994 (based on historical earnings) versus a price times earnings ratio of
12.67 at year-end 1995 (also based on historical earnings).
Using 1994 data from a SNL Executive Compensation Review, the Committee
compared Mr. Miller's compensation to a group of 18 banks with assets between
250 million and 500 million, headquartered in Pennsylvania. This report showed
that CBI was ranked 10th out of 18 in asset size. While Mr. Miller's salary
was ranked 7th out of 18, CBI's return on assets was ranked 3rd. The SNL
report also compared CBI's performance with other banks in the peer group and
showed that CBI had a 1.41% Return on Average Assets versus the peer group's
average of 1.23% and a 13.63 Return on Average Equity versus the peers'
12.98%. CBI outperformed the peers' average performance in all indices
reported by the SNL Report.
In summary, the Committee concluded that Mr. Miller's compensation, when
compared to that of his peers and the performance of CBI in 1995, required
adjustment. For 1996 Mr. Miller's annual salary was increased to $190,000. He
is also a participant in the CBI Long Term Incentive Plan and CBI Bonus Plan.
Mr. Miller's Bonus for 1994, paid in 1995, was $33,079. His 1996 bonus, based
on 1995 performance, was $41,420. In addition Mr. Miller was awarded Incentive
Stock Options to purchase 6,000 shares of CBI Common Stock at an exercise
price of $26.875 per share. This option, granted in 1995, was based on 1995
performance.
The Executive Committee considered the same factors in evaluating the
compensation of the President, Mr. Lowe, and reached similar conclusions about
his compensation.
This report is given over the signatures of the Executive Committee,
consisting of Robert W. Rissinger, Peter DeSoto, Allen Shaffer, James A. Ulsh,
Donald L. Miller, and William C. Troutman.
8
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph sets forth the yearly percentage change in CBI's
cumulative total shareholder return on its Common Stock from December 31, 1990
to December 31, 1995. This percentage change is measured by dividing (i) the
sum of (A) the cumulative amount of dividends for the period measured,
assuming dividend reinvestment and (B) the difference between CBI's share
price at December 31, 1995 and December 31, 1990 by (ii) the share price as of
December 31, 1990. This result, on the following performance graph, is
compared with cumulative total return of the NASDAQ Stock Market (US
Companies) and the NASDAQ Bank Stocks Indices:
9
<PAGE>
CASH COMPENSATION
The following Summary Compensation Table sets forth the executive officers
of CBI (as defined in applicable securities regulations), the annual salary
and bonus of those officers for the preceding three years, and certain
information concerning stock option awards to these officers pursuant to the
CBI Long-Term Incentive Plan:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------ -------------
OTHER AWARDS
NAME ANNUAL RESTRICTED ALL OTHER
AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL SATION /(1)/ AWARDS /(2)/ SARS /(3)/ PAYOUTS /(4)/ SATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) (#) ($) ($)
--------- ---- ---------- --------- ------------ ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas L. Miller/(7)/... 1995 176,000 33,079 4,800/(5)/ -- 11,000 -- 30,464/(7)/
Chairman & CEO 1994 160,000 38,367 4,800 -- 3,500 -- --
1993 139,463 34,400 4,800 -- 3,300 -- --
Ernest L. Lowe.......... 1995 123,000 19,084 2,400/(6)/ -- 4,500 -- --
President & CEO 1994 114,500 22,135 2,400 -- 2,000 -- --
1993 106,590 20,000 2,400 -- 2,000 -- --
</TABLE>
- - - --------
(1) The aggregate of personal benefits provided by CBI and its subsidiaries
for any executive officer, individually or all executive officers as a
group did not exceed the lesser of (i) $50,000 or (ii) 10% of the salary
and bonus of the officer for any of the years referenced. This does not
include benefits that are available to all salaried officers, directors
and employees on a non-discriminatory basis.
(2) CBI has not issued any Restricted Stock Awards to any executive officer.
(3) In 1993, 1994, and 1995, Mr. Miller and Mr. Lowe each were awarded Stock
Options to acquire the number of shares disclosed in the Summary
Compensation Table. These options, granted pursuant to the CBI Long-Term
Incentive Plan, are discussed in greater detail below. See "Stock
Options".
(4) CBI does not maintain any Long-Term Incentive Plan as defined in the
applicable Securities and Exchange Commission Regulations, and
consequently has made no payouts pursuant to any such plan.
(5) Includes $4,800 in fees for service as a director of CBNA and CBI in 1995,
$4,800 for service as a director of CBI and CBNA in 1994, and $4,800 for
service as a director of CBI and CBNA in 1993.
(6) Includes $2,400 in fees for service as a director of CBI in 1995, $2,400
in fees for service as a director in 1994, and $2,400 in fees for service
as a director in 1993.
(7) Represents the amount accrued as an expense by CBI in connection with Mr.
Miller's Supplemental Pension Benefits. See "Supplemental Pension Benefits
Agreement/Thomas L. Miller."
10
<PAGE>
STOCK OPTIONS
In 1988, the shareholders of CBI adopted the CBI Long-Term Incentive Plan.
This Plan authorizes the issuance of Awards to key officers of CBI. Awards may
be made in the form of Incentive Stock Options, Nonqualified Stock Options and
Stock Appreciation Rights.
INCENTIVE STOCK OPTIONS
The Internal Revenue Code requires all ISOs to be granted at a price not
less than 100% of the fair market value of CBI Common Stock on the date the
ISO is granted. ISOs are not transferable, except upon death by will or
descent and distribution, and may not have a term of exercise in excess of ten
years. In addition, no ISO may be exercised for a period of at least six
months after the ISO is granted.
All ISOs granted by CBI to date are subject to a vesting schedule, and may
only be exercised to the extent vested on the date of the exercise. If the
optionee is 55 years or older on the date the ISO is awarded, ISOs are 33.33%
vested after one year, 66.67% vested after two years, and 100% vested three
years from the date awarded. In December 1995 Thomas L. Miller was granted 146
ISO's which vest after one year, 963 ISO's which vest after two years, and
2000 ISO's which vest after three years. In December 1995 Mr. Miller was also
awarded 1854 non-qualified options which vest after one year, and 1037 non-
qualified options which vest after two years. If the optionee is under 55
years on the date the ISO is awarded, ISOs vest at the rate of 20% per year
after year one, becoming fully vested in the fifth year.
The Plan requires adjustment of the option price for all ISOs as appropriate
to reflect changes in the number of outstanding shares caused, among other
events, by the declaration and payment of a stock dividend. Consequently, the
option price of all ISOs granted has been adjusted each time a stock dividend
has been declared and paid.
With one exception, to date all grants under the Plan have been ISOs.
NONQUALIFIED STOCK OPTIONS
The Plan requires all nonqualified stock options (NQSOs) to be granted at a
price not less than 80% of the fair market value of CBI Common Stock on the
date the NQSO is granted. NQSOs may or may not have a vesting schedule,
depending on the terms of the grant as determined by the Committee
administering the Plan. Although tax treatment of ISOs and NQSOs may differ,
the Plan imposes the same general conditions and restrictions on NQSOs as it
does on ISOs. These are generally described above.
To date, all NQSOs granted have carried an option price equal to the fair
market value of CBI Common Stock on the date the NQSO was granted.
STOCK OPTION GRANTS
The following table sets forth, for each executive officer, the number of
ISOs and NQSOs (collectively "Options") granted in 1995, the percentage the
Options awarded to the executive officer bears to total Options granted to all
key employees during the years, the option price, the expiration of the
option, and the potential realizable value of the Options assuming certain
rates of stock appreciation:
11
<PAGE>
STOCK OPTION GRANTS
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL ALTERNATIVE
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- - - -------------------------------------------------------------------- --------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE EXPIRA-
GRANTED IN FISCAL PRICE TION
(#) YEAR ($/SH) (/1/) DATE 5% ($) (/2/) 10% ($) (/2/)
NAME ---------- ---------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. Miller........ 5,000 20.39% $23.610 01-03-05 $ 74,371 $187,700
6,000 22.75% 26.875 12-22-05 101,587 256,387
Ernest L. Lowe.......... 2,000 8.15% $23.610 01-03-05 $ 29,748 $ 75,080
2,500 9.48% 26.875 12-22-05 42,328 106,828
</TABLE>
- - - --------
(1) All ISOs granted in January, 1995 to any employee carried an exercise
price of $23.61 per share. ISOs and NQSOs were granted in December, 1995,
each with an exercise price of $26.875 per share. The option prices in all
events reflected the fair market value of CBI Common Stock on the date of
the grant. The Options granted in January 1995 were for calendar year
1994. The Options granted in December 1995 were for calendar year 1995.
(2) Applicable Securities and Exchange Regulations require disclosure of the
potential appreciation in Options granted to executive officers, assuming
annualized rates of stock price appreciation of 5% and 10% over the term
of the Option, with appreciation to be determined as of the expiration
date of the Option. The figures disclosed above assume such rates of
appreciation on an annual basis, with annual compounding of the
appreciation rate, beginning with the original option prices of $23.610
and $26.875 per share, respectively.
STOCK OPTION EXERCISES
The following table sets forth all Options exercised by each executive
officer of CBI during 1995, the number of shares acquired on exercise, the
value realized by the executive officer upon exercise, the number of
exercisable and un-exercisable Options outstanding for each executive officer
as of December 31, 1995, and the value of those Options as of December 31,
1995:
12
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) (/1/) VALUE REALIZED ($) (/1/) UNEXERCISABLE (/2/) UNEXERCISABLE (/2/,/3/)
---- --------------------- ------------------------ ------------------- -----------------------
<S> <C> <C> <C> <C>
Thomas L. Miller........ -0- -0- 13,366/14,434 160,275/28,425
Ernest L. Lowe.......... -0- -0- 7,699/6,801 91,579/13,053
</TABLE>
- - - --------
(1) Neither Mr. Miller nor Mr. Lowe have exercised any Options.
(2) All Options granted through December 31, 1995 are reported. Exercisable
Options are fully vested. Options to vest in the future are reported as
unexercisable.
(3) The dollar values set forth above were calculated by determining the
difference between the closing trading price of CBI Common Stock at
December 31, 1995, which was $27.25 per share, and the option price of
each Option as of December 31, 1995.
PENSION PLAN
CBI and its subsidiaries maintain a pension plan for their employees. An
employee becomes a participant in the pension plan on January 1 or July 1
after completion of one year of service (12 continuous months) and attainment
of the age of 21 years. The cost of the pension is actuarially determined and
paid by the CBI subsidiary with whom the employee is employed. The amount of
monthly pension is equal to 1.15% of average monthly pay up to $650, plus .60%
of average monthly pay in excess of $650, multiplied by the number of years of
service completed by an employee. The years of service for the additional
portion are limited to a maximum of 37. Average monthly pay is based upon the
5 consecutive plan years of highest pay preceding retirement. The maximum
amount of annual compensation used in determining retirement benefits is
$150,000. A participant is eligible for early retirement after attainment of
the age of 60 years and the completion of five years of service. The early
retirement benefit is the actuarial equivalent of the pension accrued to the
date of early retirement. As of December 31, 1995, Thomas L. Miller has been
credited with 37 years of service and Ernest L. Lowe has been credited with 11
years of service under the Pension Plan.
The amount shown on the following table assumes an annual retirement benefit
for an employee who chose a straight life annuity and who will retire at the
age of 65 years.
13
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
RENUMERATION YEARS OF SERVICE
------------ -----------------------------------------------------
15 20 25 30 35 40
-- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
35,000 $ 8,486 $ 11,314 $ 14,143 $ 16,971 $ 19,800 $ 22,138
55,000 $ 13,736 $ 18,314 $ 22,893 $ 27,471 $ 32,050 $ 35,778
75,000 $ 18,986 $ 25,314 $ 31,643 $ 37,971 $ 44,300 $ 49,418
95,000 $ 24,236 $ 32,314 $ 40,393 $ 48,471 $ 56,550 $ 63,058
115,000 $ 29,486 $ 39,314 $ 49,143 $ 58,971 $ 68,800 $ 76,698
135,000 $ 34,736 $ 46,314 $ 57,893 $ 69,471 $ 81,050 $ 90,338
150,000 $ 38,673 $ 51,564 $ 64,455 $ 77,346 $ 90,237 $100,568
175,000 $ 38,673 $ 51,564 $ 64,455 $ 77,346 $ 90,237 $100,568
200,000 $ 38,673 $ 51,564 $ 64,455 $ 77,346 $ 90,237 $100,568
225,000 $ 38,673 $ 51,564 $ 64,455 $ 77,346 $ 90,237 $110,568
</TABLE>
SUPPLEMENTAL PENSION BENEFITS AGREEMENT/THOMAS L. MILLER
On August 2, 1994, CBI and Thomas L. Miller entered into a Supplemental
Pension Benefits Agreement. The Agreement provides a benefit to Mr. Miller
upon termination of employment for any reason on or after his retirement date.
Mr. Miller's early and normal retirement dates are defined by the CBI Pension
Plan. At normal retirement, Mr. Miller will receive a supplemental pension
benefit equal to the lesser of (i) the portion of pension benefits which Mr.
Miller would normally have received pursuant to the CBI Pension Plan but which
will not accrue for his benefit due to the annual limitations on compensation
provided in Section 401(a)(17) of the Internal Revenue Code of 1986, as
amended and (ii) Twenty-four Thousand ($24,000) Dollars per year. This amount
would be adjusted for early or late retirement in the same manner as the CBI
Pension Plan. Section 401(a)(17) of the Internal Revenue Code precludes
compensation in excess of One Hundred Fifty Thousand ($150,000) Dollars per
annum from being used in computing benefits under the Pension Plan. As of
December 31, 1995, Mr. Miller's annual pension benefit would be reduced by
approximately Nine Thousand ($9,000) Dollars per year because of the limits
imposed by the Internal Revenue Code. The impact of these rules is expected to
increase in future years. The Agreement is a non-qualified and non-funded
contractual obligation of CBI. CBI has recognized an appropriate present value
accrual through 1995.
COMMUNITY BANKS, N.A. EXECUTIVE SURVIVOR INCOME AGREEMENTS
On June 1, 1994, Community Banks, N.A. entered into Survivor Income
Agreements with Thomas L. Miller, Robert W. Lawley, Ernest L. Lowe, Terry L.
Burrows, Lewis C. Bogle, and David E. Hawley. In these Agreements, CBNA
promised to pay to each executive employee's designated beneficiary a survivor
income benefit. The survivor's income benefit is payable only if the executive
employee dies before terminating employment with CBNA and only to the extent
that CBNA owns life insurance policies on the executive employee's life at the
time of his or her death. The base death benefit is equal to the lesser of (i)
three times the executive employee's base salary as established by the Board
of Directors for the calendar year in which the executive's death occurs, or
(ii) the amount of life insurance proceeds received by CBNA due to the
executive's death. The base death benefit, however, will be increased by an
amount equal to the death benefit multiplied by CBI's projected highest
marginal federal income tax rate for the year in which the executive's death
occurs. The survivor's income benefit will be paid in a lump sum within 60
days after the executive employee's death. These Agreements are funded by life
insurance policies on each executive employee's life. The life insurance
policies are owned by CNBA, and are in lieu of each executive employee's
participation in CBNA's group life insurance plan. A split dollar insurance
agreement goes into effect after the executive employee attains the age of 65
provided he has completed ten (10) years of service. Pursuant to the terms of
the split dollar agreement the executive employee has the right to designate
the beneficiary of the death proceeds of the policy to the extent the proceeds
exceed the cost surrender value of the policy on the date before the executive
employee's death.
14
<PAGE>
DIRECTORS' COMPENSATION
In 1995, each director of CBI was paid a quarterly fee of $600, plus each
outside director received a fee of $200 for each Board meeting attended. Each
director who was not an executive officer also received $150 for each
Committee meeting attended.
COMPLIANCE WITH SECTION 16(A) OF SECURITIES EXCHANGE ACT
In 1995, to the knowledge of CBI, all Executive Officers and directors
timely filed all reports with the Securities Exchange Commission, except for
Terry L. Burrows, who filed on Form 4 in an untimely manner.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
During 1995, CBNA has had, and expects to have in the future, banking
transactions in the ordinary course of business with directors, officers and
principal shareholders of CBI and their associates on the same terms,
including interest rates and collateral on loans as those prevailing at the
time for comparable transactions with other persons. Such loans present, in
the opinion of management, no more than the normal risk of collectibility, or
present other unfavorable features.
Allen Shaffer, a director of CBI, is an attorney practicing in Harrisburg
and Millersburg, Pennsylvania, who has been retained in the last fiscal year
by CBI and who CBI proposes to retain in the current fiscal year. James A.
Ulsh, a director of CBI, is a shareholder/employee of the law firm of Mette,
Evans & Woodside, Harrisburg, Pennsylvania, which CBI has retained in the last
fiscal year and proposes to retain in the current fiscal year. Thomas J.
Carlyon, a director of CBNA, is a partner in the law firm of Carlyon &
McNelis, Hazleton, Pennsylvania, which CBI has retained in the last fiscal
year and proposes to retain in the current fiscal year.
COMMITTEES OF THE BOARD OF DIRECTORS OF CBI
The Board of Directors of CBI has established three (3) committees of the
Board: the Executive Committee, the Dividend Reinvestment Committee, and the
Audit Committee. CBI does not have a nomination committee but provides for the
nomination of directors as described under "ELECTION OF DIRECTORS OF CBI."
The total number of CBI's Board of Directors' meetings during 1995 was five
(5) and no director attended fewer than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all committees of the Board on which he served, except Samuel Cooper
who attended 71% of such meetings, and Leon Kocher who attended 57% of such
meetings.
AUDIT COMMITTEE
Members of the Audit Committee are Kenneth L. Deibler, Samuel E. Cooper,
Ronald Boyer, Ray N. Leidich, and Leon E. Kocher. The Committee met twice
during 1995. The Audit Committee supervises and recommends to the Board of
Directors all changes in audit procedures, recommends to the Board the hiring
of the outside auditors, reviews the complete audit of the books and financial
statements of CBI and its subsidiaries, and upon receipt and review of the
internal auditor's report and certified public accountants' audit report, the
Committee brings to the Board of Directors its recommendations concerning the
audit. The Committee also reviews the examination reports by the Comptroller
of the Currency and reviews all insurance of CBI and its subsidiaries on an
annual basis.
EXECUTIVE COMMITTEE
Members of the Executive Committee are Robert W. Rissinger, William C.
Troutman, Peter DeSoto, Allen Shaffer, James A. Ulsh and Donald L. Miller. The
Committee met four times during 1995. The Committee meets when called by the
Chairman and acts for the Board of Directors. It reviews salaries and
remuneration, policies, and other items that would come before the Board of
Directors of CBI.
15
<PAGE>
RATIFICATION OF MERGER OF CITIZENS NATIONAL BANK OF ASHLAND
WITH AND INTO COMMUNITY BANKS, N.A.
On January 12, 1996, Citizens merged into CBNA, the wholly-owned banking
subsidiary of CBI, pursuant to the terms of the Agreement and Plan of Merger
dated as of July 5, 1995 (the "Merger Agreement") by and among Citizens, CBNA,
and CBI. All regulatory approvals required pursuant to applicable provisions
of the National Bank Act ("NBA"), all approvals of the Board of Directors of
CBI and CBNA, and Citizens required under the terms of each institution's
articles of incorporation, articles of association, and bylaws or required by
Pennsylvania law were obtained, and all other conditions precedent required by
the terms of the Merger Agreement were met. In addition thereto, at a special
meeting held November 30, 1995, the shareholders of Citizens approved the
Merger. The shares of CBI Common Stock issued in connection with the Merger
were registered under the Securities Act of 1993. However, CBI did not obtain
the prior approval of its shareholders pursuant to the rules of the NASDAQ
National Market System and, therefore, effective February 4, 1996 shares of
CBI's Common Stock began trading on the NASDAQ small cap market. The Board of
Directors of CBI has determined that it may be advantageous to apply to list
CBI's Common Stock on either the NASDAQ National Market System or the American
Stock Exchange in the future. To facilitate such application, the Board of
Directors of CBI has decided to ask CBI's shareholders to ratify the Citizens'
merger. The ratification of CBI's shareholders will have no effect on the
Citizens' merger or its legality. Moreover, no assurance can be given that if
CBI's shareholders ratify the Citizens' Merger, CBI will apply to list its
securities on any securities exchange or national market system or that
ratification will assure approval of any such application.
The following is a description of the Merger. This description is not
intended to be a complete description of all facts regarding the Merger and is
qualified in all respects by reference to the Merger Agreement attached hereto
as Appendix A.
INTRODUCTION; BACKGROUND OF THE MERGER
CITIZENS
Prior to the effective date of the Merger, Citizens was a banking
corporation organized on June 24, 1875 under the national banking laws and
headquartered in Ashland, Pennsylvania. Citizens engaged in commercial banking
authorized under the National Bank Act ("NBA"). Citizens accepted demand, time
and savings deposits and granted loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Citizens had no subsidiaries.
As of December 31, 1995, Citizens had three banking offices and total assets
of approximately $61.4 million. Its principal executive office was located at
735 Center Street, Ashland, Pennsylvania 17921, and the telephone number was
(717) 875-3221. Citizens was not dependent on any one customer, and loss of
any customer or a few customers would not have had a material adverse effect
upon it.
Citizens Common Stock was not listed on the NASDAQ National Market, the
NASDAQ Small-Cap Market or any stock exchange, and Citizens was not subject to
the reporting requirements of the Exchange Act. There was no market maker
holding an inventory position in Citizens Common Stock, and the trading market
for Citizens Common Stock was extremely thin.
CBI
CBI is a Pennsylvania business corporation which was organized in 1982 and
became a bank holding company through the acquisition of all of the
outstanding stock of Community Banks, N.A. (formerly Upper Dauphin National
Bank) at that time. CBI currently has one wholly-owned banking subsidiary,
CBNA, and two non-banking subsidiaries, Community Banks Life Insurance Company
and Community Bank Investments, Inc.
16
<PAGE>
As of June 30, 1995, CBI had total assets of approximately $317.5 million.
Community Banks Life Insurance Company was incorporated on November 12, 1986
under the laws of the State of Arizona for the purpose of re-insuring credit
life and accident insurance risks. Community Bank Investments, Inc. is a
Delaware corporation formed for the purpose of investing in and holding
securities. As a bank holding company, CBI is registered with the Federal
Reserve Board in accordance with the requirements of the Federal Bank Holding
Company Act of 1956, as amended, and is subject to regulation by the Federal
Reserve Board. Community's common stock is listed for quotation on the NASDAQ
Small-Cap Market under the symbol "CBKI".
CBNA
CBNA was established as a national banking institution in 1867 under the
name "The First National Bank of Millersburg." CBNA engages in full service
banking and trust business, including accepting time and demand deposits,
making secured and unsecured commercial and consumer loans, financing
commercial transactions, making construction and mortgage loans and performing
corporate and personal trust services. As of December 31, 1995, CBNA had total
assets of approximately $315 million. CBNA provides banking services at its
main office in Millersburg, Pennsylvania, and 18 branch offices in Dauphin,
Northumberland, Schuylkill and Luzerne Counties, Pennsylvania. Both CBI's and
CBNA's principal executive offices are located at 150 Market Square, P.O. Box
350, Millersburg, Pennsylvania 17061. CBNA's telephone number is (717) 692-
4781.
REASONS FOR THE MERGER
Citizens, CBI, and CBNA engaged in an arms-length negotiation of the terms
of the Merger. All parties concluded that the Merger was in the best interests
of CBI and Citizens. CBI's strategy is to pursue the expansion of its banking
markets in Dauphin, Northumberland, Schuylkill, and Luzerne Counties. CBI also
intends to expand into contiguous markets where possible, through the
acquisition of financially strong institutions and new branch banks. This will
allow CBI to grow in assets, deposits, and loans. CBI's Board of Directors
concluded that Citizens was a financially sound institution within CBI's
existing geographic market. The Board concluded that CBI could grow by
achieving expense savings and by attracting additional opportunities for
revenue enhancement by offering additional banking products to existing
Citizens' customers and citizens of the Ashland community.
CBI's Board of Directors and management conducted a due diligence review of
Citizens' business, its historical financial results, and Citizens' current
and prospective economic and competitive environment. The Board and management
also considered the impact of the proposed merger on CBNA's depositors,
employees, customers, and the communities it serves.
In reaching its determination that the Merger and the Merger Agreement were
in the best interests of CBI and its shareholders, the Board of Directors of
CBI consulted with its legal and financial advisors, and considered a number
of factors, including without limitation the following:
. Citizens' business, operations, earnings, prospects and financial
condition;
. the enhanced opportunities for operating efficiencies (particularly in
terms of integration of operations and support functions) that could
result from the merger, the enhanced opportunities for growth that the
merger would make possible and the respective contributions the parties
would bring to the combined institution;
. the financial strength of CBNA and the composition of its business;
. the geographical location of Citizens and CBNA;
. review of alternatives to the Merger (including the establishment of a
branch banking facility in the Citizens' market.
CBI's Board of Directors did not assign any specific or relative weight to
the factors in their consideration.
17
<PAGE>
THE BOARD OF DIRECTORS OF CBI AND CBNA UNANIMOUSLY APPROVED THE MERGER AND
THE MERGER AGREEMENT.
TERMS OF THE MERGER
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement
and incorporated by reference herein.
Closing Effective Date
The Effective Date of the Merger was 3:00 p.m. Friday, January 12, 1996.
Effect of the Merger
Pursuant to the Merger Agreement, Citizens was merged with and into CBNA,
with CBNA as the surviving entity. The shares of common stock of CBNA issued
and outstanding immediately prior to the effective date remain outstanding and
unchanged after the Merger, and constitute all of the issued and outstanding
capital stock of CBNA. The articles of association and the bylaws of CBNA as
in effect immediately prior to the merger remain in effect as the articles of
association and the bylaws of CBNA. The directors and officers of CBNA
immediately prior to the Merger remain in office as the directors and officers
of CBNA; provided, however, that Dean N. Paul, the former Cashier of Citizens,
was appointed to the Board of Directors of CBNA and CBNA's Schuylkill Advisory
Board. Mr. Paul will hold such office until the 1996 annual meeting of the
shareholders of CBNA. In addition, John P. Bane and A. James Gruber, former
members of the Citizens Board of Directors, have been appointed to CBNA's
Schuylkill Advisory Board.
Merger Consideration; Conversion Factor
In connection with the Merger, each share of Citizens' Common Stock issued
and outstanding as of the Effective Date was converted into and became a right
to receive 28.904 shares of CBI Common Stock, par value $5.00 per share (the
"Conversion Factor"). The Conversion Factor was determined by dividing the
Market Value Per Share (as defined below) of CBI Common Stock as of the close
of business on the fifth trading date preceding the Merger (the "Calculation
Date") into $770. The Merger Agreement defines the term "Market Value Per
Share" to mean the average of the closing sales price of CBI Common Stock as
reported on the NASDAQ National Market for the 30 consecutive trading days
ending on and including the Calculation Date. Pursuant to the Joint
Certificate of Calculation executed by the president and chief executive
officer of CBI and the cashier of Citizens, the Market Value Per Share of CBI
Common Stock as of the Calculation Date was $26.63 per share. As set forth
above, the exchange ratio was 28.904.
Representations and Warranties
Citizens and CBI (with respect to itself, and where applicable, CBNA and
other CBI subsidiaries) made certain representations and warranties in the
Merger Agreement. These representations and warranties survive the Effective
Date of the Merger. The representations and warranties relate to, among other
things, proper organization; articles of association, bylaws and minute books;
powers and qualifications of each corporation; subsidiaries; capital
structures; leases; litigation; insurance; compliance with environmental laws;
material contracts and agreements; classified loans; employee benefit plans;
no material adverse change in financial condition; title to real property and
other assets; the adequacy of the provision for current taxes payable and
other tax matters; authorization of the Merger Agreement; absence of conflict
with other agreements and the consents and approvals that was for the
consummation of the Merger; adequacy of financial statements; brokerage and
other fees; the absence of false or misleading statements in certain financial
statements, proxy statements, reports, documents or other written material;
and the delivery and filing of certain tax returns and reports. Citizens has
made additional representations concerning certain of its investment
securities.
18
<PAGE>
Citizens and CBI both concluded that all representations and warranties set
forth in the Merger Agreement and all agreements with respect to the conduct
of their respective businesses and all other conditions precedent to the
consummation of the Merger as set forth in the Merger Agreement were satisfied
or waived including, but not limited to, (a) approval of the Merger by the
Board of Directors of CBI and CBNA, (b) approval of the Merger by the Office
of the Comptroller of the Currency, (c) approval of the Merger by Citizens'
shareholders at the special meeting of Citizens' shareholders duly convened on
November 30, 1995, (d) certificates received by each of the respective parties
from the other party as to matters specifically enumerated in the Merger
Agreement and the Opinion of Counsel as required therein, (e) the
effectiveness of the CBI Registration Statement, (f) receipt of a letter from
Coopers & Lybrand, L.L.P. dated the effective date of the CBI Registration
Statement as required by the Merger Agreement, subject to satisfaction of the
requirements of Statement on Auditing Standards No. 72 of the American
Institute of Certified Public Accountants, (g) the receipt of an opinion of
Mette, Evans & Woodside, special counsel to CBI, as to certain tax matters,
and (h) a determination that the Merger can be accounted for under the pooling
of interests method of accounting.
CONTINUED EMPLOYMENT OF CITIZENS' EMPLOYEES
Pursuant to the terms of the Merger Agreement, CBI has agreed, in good
faith, to endeavor to place as employees with CBNA or its subsidiaries,
persons who were employees of Citizens immediately prior to the Effective Date
on terms and conditions (including salaries and benefits) comparable to those
made available to employees of CBI, CBNA and its other subsidiaries holding
similar positions. Persons employed by CBI or CBNA after the Effective Date
shall have such titles as are appropriate and consistent with CBI's then
existing personnel structure. CBI has also agreed to continue the compensation
of Citizens' employees at the same levels in effect on the Effective Date
through December 31, 1996, subject to CBI's right to terminate any employee of
Citizens for cause after the Effective Date.
INTEREST OF CITIZENS' OFFICERS AND DIRECTORS IN THE MERGER; INDEMNIFICATION OF
CITIZENS' OFFICERS AND DIRECTORS; INSURANCE
As of the Effective Date, directors and officers of Citizens may be deemed
to be beneficial owners of 3.255 shares of Citizens' Common Stock or 16.275%
of the outstanding shares of Citizens' Common Stock. In the Merger Agreement,
CBI has agreed to indemnify and hold harmless, for a period of six years
following the Effective Date, each present director and officer of Citizens
determined as of the Effective Date (the "Indemnified Parties") against any
costs and expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, the "Costs") incurred in
connection with any claim, action, suit, proceedings or investigation, whether
civil, criminal, administrative or investigative, arising out of an
Indemnified Matter as hereinafter defined. Pursuant to the Merger Agreement,
an "Indemnified Matter" includes any matter directly or indirectly involving
transactions contemplated by or required in connection with the Merger
Agreement, as well as any matter existing or occurring at or prior to the
Effective Date, whether asserted or claimed prior to, at or after the
Effective Date, to the fullest extent to which such persons were entitled to
be indemnified under Citizens' articles of association or bylaws in effect as
of the date of the Merger Agreement, but only to the extent permitted by
applicable law (and CBI and CBNA shall also advance expenses as incurred to
the fullest extent to which such persons were entitled under Citizens'
articles of association and bylaws as in effect on the date of the Merger
Agreement (to the fullest extent permitted under applicable law), provided the
person to whom expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not entitled to
indemnification). An Indemnified Matter does not include any action or
omission by an Indemnified Party resulting from such person's gross negligence
or deliberate misconduct, or any action by the Office of the Comptroller of
the Currency (the "OCC") resulting in civil money penalties or other
determination by the OCC of a breach of duties. CBI has also agreed, for a
period of two years after the Effective Date, to use its reasonable efforts to
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Citizens; provided, however, that
CBI or CBNA may substitute therefor policies of comparable coverage; and
provided further that in no event shall CBI or CBNA be obligated to expend any
amount per annum in excess of 110% of the total amount of annual premiums paid
as
19
<PAGE>
of the date of the Merger Agreement by Citizens for such insurance (the
"Maximum Amount"). If the amount of the annual premiums necessary to maintain
or procure such insurance coverage exceeds the Maximum Amount, CBI has agreed
to use its reasonable efforts to maintain the most advantageous policies of
directors' and officers' insurance obtainable for an annual premium equal to
the Maximum Amount.
EXCHANGE PROCEDURE
Prior to the Effective Date, CBI appointed American Stock Transfer and Trust
Company as Exchange Agent for the purpose of exchanging certificates
representing shares of CBI Common Stock. CBI issued and delivered to the
Exchange Agent shares of CBI Common Stock and paid to the Exchange Agent the
cash required to be delivered to the holders of shares of Citizens Common
Stock who were entitled to cash in lieu of fractional shares. Any CBI common
stock and any amounts of cash delivered to the Exchange Agent and unclaimed at
the end of two years from the Effective Date will be repaid to CBI, in which
event the persons entitled thereto shall only look to CBI for payment thereof.
REGULATORY APPROVALS
The Merger required the approval of the OCC under the federal Bank Merger
Act. On January 11, 1996, the OCC issued its certificate of approval of the
Merger. The certificate reflects only the OCC's view that the transaction does
not contravene applicable competitive standards imposed by law in that the
transaction is consistent with regulatory policies relating to safety and
soundness. It does not represent an opinion by the OCC that the transaction
was favorable to the shareholders of either Citizens or CBI from a financial
point of view or that the OCC has considered the adequacy of the terms of the
transaction. It is not an endorsement or recommendation by the OCC of the
Merger. The certificate also authorizes CBNA to operate the former head office
of Citizens and the Citizens' branch offices as branches of CBI.
In addition thereto, the Pennsylvania Department of Banking was notified of
the pendency and consummation of the Merger.
ACCOUNTING TREATMENT
The Citizens' Merger will be treated as a pooling of interest for accounting
purposes.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
No shareholder of Citizens exercised the right to seek an appraisal and be
paid the "value" in cash of such shareholder's Citizens' Common Stock on the
Effective Date pursuant to (S)215a(b) of Title 12 of the United States Code.
20
<PAGE>
REGULATORY MATTERS
GENERAL
CBI is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). As a bank holding company, CBI is
subject to the regulation and supervision of the Federal Reserve Board. Under
the BHCA, bank holding companies may not directly or indirectly acquire
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any company, including a bank, without the prior approval of
the Federal Reserve Board. Additionally, bank holding companies are generally
prohibited by the BHCA from engaging in nonbanking activities, subject to
certain exceptions.
Prior to the Merger Effective Date, Citizens and CBNA were both national
banking associations subject to the regulation and supervision of the OCC.
Citizens and CBNA were also both "insured depository institutions" as defined
in the Federal Deposit Insurance Act, as amended (the "FDIA"), and are members
of the Federal Reserve System. Citizens and CBNA were also subject to various
requirements and restrictions under federal law, including requirements to
maintain reserves against deposits, restrictions on the types and amounts of
loans that may be granted and the interest that may be charged thereon and
limitations on the types of investments that may be made and the types of
services that may be offered. Various consumer laws and regulations also
affected the operations of Citizens and CBNA. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy.
PAYMENT OF DIVIDENDS
CBI is a Pennsylvania business corporation, and as such, is subject to the
provisions of the Pennsylvania Business Corporation Law ("PBCL"). The PBCL
provides that a corporation is generally permitted to pay dividends unless,
after giving effect thereto, the corporation would be unable to pay its debts
as they become due in the usual course of business or the total assets of the
corporation would be less than the sum of its total liabilities plus the
amount that would be needed upon dissolution to satisfy the preferential
rights of shareholders whose preferential rights on dissolution are superior
to those receiving the dividends.
It is important to note that CBI is also a legal entity separate and
distinct from its banking and other subsidiaries. The principal source of cash
flow of CBI, including cash flow to pay dividends on CBI's Common Stock, is
dividends from CBNA and CBI's other subsidiaries. As discussed below, there
are statutory and regulatory limitations on the payment of dividends by CBNA.
Citizens and CBNA are both national banking associations. Federal law
imposes both capital and earning limitations on the payment of dividends by
national banking associations.
Capital Limitations
Generally, federal law prohibits national banks from withdrawing, or
permitting to be withdrawn, either in the form of dividends or otherwise, any
portion of its capital. Federal law also provides that if losses are sustained
at any time by a national bank equal to or exceeding its undivided profits
then on hand (as defined and interpreted by regulation), no dividend may be
made. Additionally, no dividend may be made by a national bank while it
continues its banking operations, in an amount greater than its net profits
then on hand (as defined and interpreted by regulation), less its losses and
bad debts (as defined and interpreted by regulation). These capital
limitations do not apply to a national bank's preferred stock dividends (if
any); however, if the undivided profits of a national bank are not sufficient
to cover a proposed dividend on its preferred stock, the proposed dividend
will constitute a reduction in capital under federal regulations.
21
<PAGE>
Earnings Limitations
Federal law also provides that a national bank may declare a dividend equal
to a certain amount of its net profits (as defined and interpreted by
regulation) as it judges expedient, except that until its respective surplus
fund equals its common capital, no dividends may be declared unless not less
than one-tenth part of its net profits of the preceding half year (in the case
of quarterly or semiannual dividends) or not less than one-tenth part of its
net profits of the preceding two consecutive half years (in the case of annual
dividends) has been carried to the surplus fund.
Under federal laws, national banks are also required to receive the approval
of the OCC before declaring a dividend if the amount of all dividends (common
and preferred), including the proposed dividend, declared by it in any
calendar year exceeds the total of its net profits of that year to date,
combined with its retained net profits of the preceding two years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. National banks are also required to receive the prior approval of the
OCC for the payment of dividends if the total of all dividends declared by its
board of directors in any year will exceed the total of its net profits (as
defined and interpreted by regulation) for that year, combined with its
retained net profits (as defined and interpreted by regulation) for the
preceding two years, less any required transfers to surplus or to a fund for
the retirement of any preferred stock. These earning limitations also apply to
dividends on national bank preferred stock (if any).
Other Limitations
Federal law also provides that if a national bank has preferred stock, no
dividends may be declared or paid on its common stock until all cumulative
dividends on its preferred stock have been paid in full.
Additionally, the OCC has indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvements
Act of 1991 ("FDICIA"), an insured bank may not pay any dividend if payment
would cause it to become undercapitalized. In addition, no dividend payments
are permitted once an insured bank is undercapitalized. See "REGULATORY
MATTERS--Federal Deposit Insurance Corporation Improvement Act of 1991."
Moreover, the Federal Reserve Board, the OCC and the FDIC have issued policy
statements which provided that bank holding companies and FDIC insured banks
should generally only pay dividends out of current operating earnings.
HOLDING COMPANY STRUCTURE
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to make
capital injections into a troubled subsidiary bank, and the Federal Reserve
Board may charge the bank holding company with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank when required.
A required capital injection may be called for at a time when the holding
company does not have the resources to provide it. Any capital loans by a
holding company to its subsidiary bank would be subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In addition, under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), depository institutions insured by the
FDIC can be held liable for any losses incurred by, or reasonably anticipated
to be incurred by, the FDIC after August 9, 1989 in connection with: (a) the
default of a commonly controlled FDIC-insured depository institution; or (b)
any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or a receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance.
Accordingly, in the event that any insured depository institution of CBI
causes a loss to the FDIC, other insured subsidiaries of CBI could be required
to compensate the FDIC by reimbursing it for the estimated amount of such
loss.
22
<PAGE>
For a description of certain other requirements relating to capital
distributions between depository institutions and bank holding companies and
the potential obligation of a bank holding company to guarantee the capital
restoration plans of any of its undercapitalized depository institution
subsidiaries, see "REGULATORY MATTERS--Federal Deposit Insurance Corporation
Improvement Act of 1991."
CAPITAL ADEQUACY
Bank holding companies are required to comply with risk-based capital
guidelines established by the Federal Reserve Board. The guidelines, which
were fully phased in at the end of 1992, establish a framework that is
intended to make regulatory capital requirements more sensitive to differences
in risk profiles among banking organizations and take off-balance sheet
exposures into explicit account in assessing capital adequacy. The risk-based
ratios are determined by allocating assets and specified off-balance sheet
commitments into four risk-weight categories, with higher levels of capital
being required for categories perceived as representing greater risk. As
national banks, Citizens and CBI are subject to substantially similar capital
requirements pursuant to OCC regulations.
Generally, under applicable guidelines, a banking organization's capital is
divided into two tiers. "Tier 1", or core capital, includes common equity,
noncumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles, subject to certain exceptions. "Tier 2", or
supplementary capital, includes, among other things, cumulative perpetual
preferred stock (subject to certain exceptions), hybrid capital instruments,
qualifying subordinated debt, and the allowance for loan and lease losses,
subject to certain limitations and less required deductions. "Total capital"
is the sum of Tier 1 and Tier 2 capital. The Tier 1 component must comprise at
least 50% of the qualifying total capital.
Banking organizations that are subject to the guidelines are required to
maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and
a ratio of total capital to risk-weighted assets of at least 8%. The
appropriate regulatory authority may set higher capital requirements when an
organization's particular circumstances warrant. For example, under the OCC's
regulations, higher capital ratios may be appropriate for a bank that: (a) is
newly chartered; (b) is receiving special supervisory attention; (c) has, or
is expected to have, losses resulting in capital inadequacy; (d) has
significant exposure due to interest rate risk, the risks from concentrations
of credit and certain other risks; (e) has exposure due to fiduciary or
operational risk; (f) is exposed to a high degree of asset depreciation or a
low level of liquid assets in relation to short term liabilities; (g) has
exposure to a high volume of, or particularly severe, loans; (h) is growing
rapidly, either internally or through rapid acquisitions; or (i) may be
adversely affected by the activities or condition of its holding company,
affiliates or other persons or institutions with which it has significant
relationships.
The Federal Reserve Board, the FDIC and the OCC have also adopted leverage
capital guidelines to which CBI, CBNA and Citizens are subject. The guidelines
provide for a minimum leverage ratio (Tier 1 capital to adjusted total assets)
of 3% for financial institutions that have the highest regulatory examination
ratings and are not experiencing or anticipating significant growth. Financial
institutions not meeting these criteria are required to maintain leverage
ratios of at least one to two percentage points higher.
On August 9, 1995, the federal banking agencies issued a Final Rule and
Policy Statement ("Final Rule") revising risk-based capital rules to take
account of interest rate risk. The Final Rule offers alternative approaches
for determining the additional amount of capital, if any, that a bank may be
required to have for interest rate risk. The first approach is to reduce a
bank's risk-based capital ratios by an amount based on its measured exposure
to interest rate risk in excess of a specified threshold. The second approach
is to assess the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
Citizens cannot assess, at this point, the impact that the Final Rule will
have on its capital requirements.
On December 23, 1994, the federal banking agencies issued a Final Rule on
respective risk-based capital requirements that explicitly identifies
concentration of credit risk with certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an individual's overall
23
<PAGE>
capital adequacy. The Final Rule does not, however, mandate any specific
adjustments to the risk-based capital calculations as a result of such
factors.
On December 31, 1994, the Federal Reserve Board amended its risk-based
capital standards to increase the amount of capital required under such
standards for long-dated interest rate and exchange rate contracts and for
derivative contracts based on equity securities and indexes, precious metals
(other than gold) and other commodities. The amendment permits banking
institutions to recognize the effect of bilateral netting arrangements in
calculating their exposure to derivative contracts for risk-based capital
purposes. CBI does not expect this amendment to have a material effect on its
financial condition or results of operations.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority
of a capital directive to increase capital, and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "REGULATORY MATTERS--Federal Deposit Insurance
Corporation Improvement Act of 1991" below, as applicable to undercapitalized
institutions.
The following table sets forth, as of December 31, 1995, the capital ratios
of Citizens, CBI, and CBNA:
<TABLE>
<CAPTION>
CITIZENS COMMUNITY CBNA REQUIRED
-------- --------- ---- --------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital ratio............ 37.8% 15.3% 14.1% 4%
Total risk-based capital ratio............. 39.0% 17.1% 15.2% 8%
Leverage Ratio............................. 14.8% 10.6% 9.9% 3-5%
</TABLE>
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December, 1991, Congress enacted FDICIA which substantially revised the
bank regulatory and funding provisions of the FDIA and made significant
revisions to several other federal banking statutes. FDICIA provides for,
among other things: (a) a recapitalization of the Bank Insurance Fund of the
FDIC (the "BIF") by increasing the FDIC's borrowing authority and providing
for adjustments in its assessment rates; (b) annual on-site examinations of
federally-insured depository institutions by banking regulators; (c) publicly
available annual financial and management reports for financial institutions,
including audits by independent accountants; (d) the establishment of uniform
accounting standards by federal banking agencies; (e) the establishment of a
"prompt corrective action" system of regulatory supervision and intervention,
based on capitalization levels, with more scrutiny and restrictions placed on
depository institutions with lower levels of capital; (f) additional grounds
for the appointment of a conservator or receiver; (g) a requirement that the
FDIC use the least-cost method of resolving cases of troubled institutions in
order to keep the costs to insurance funds at a minimum; (h) more
comprehensive regulation and examination of foreign banks; (i) consumer
protection provisions including a Truth-in-Savings Act; (j) a requirement that
the FDIC establish a risk-based deposit insurance assessment system; (k)
restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements; and (l)
certain additional limits on deposit insurance coverage.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. Pursuant to
FDICIA, the federal bank regulatory authorities have adopted regulations
setting forth a five-tiered system for measuring the capital adequacy of the
depository institutions that they supervise. Under these regulations, a
depository institution is classified in one of the following capital
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." A
depository institution is "well capitalized" if it has: (i) total risk-based
capital ratio or 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6%
or greater; (iii) a leverage ratio of 5% or greater; and (iv) is not subject
to any order, regulatory agreement or written directive to meet and maintain a
specific capital level for any capital measure. An "adequately capitalized"
institution is defined as one that has: (a) a total risk-based capital ratio
of
24
<PAGE>
8% or greater; (b) a Tier 1 capital ratio of 4% or greater; and (c) a leverage
ratio of 4% or greater (or 3% or greater in the case of a bank with a
composite CAMEL rating of 1). A depository institution is considered: (i)
"under-capitalized" if it has (a) a total risk-based capital ratio of less
than 8%; (b) a Tier 1 risk-based capital ratio of less than 4%; or (c) a
leverage ratio of less than 4% (or 3% in the case of an institution with a
CAMEL rating of 1); (ii) "significantly undercapitalized" if it has: (a) a
total risk-based capital ratio of less than 6%; (b) a Tier 1 risk-based
capital ratio of less than 3%; or (c) a leverage ratio of less than 3%; and
(iii) "critically undercapitalized" if it has a ratio of tangible equity to
total assets equal to or less than 2%. An institution may be deemed by
regulators to be in a capitalization category that is lower than is indicated
by its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
growth limitations and are required to submit capital restoration plans. The
federal banking agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the
parent holding company in respect of any capital restoration plan is limited
to the lesser of: (a) an amount equal to 5% of the depository institution's
total assets at the time it became under capitalized; and (b) the amount which
is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock in order to become adequately capitalized,
requirements to reduce total assets and orders to stop accepting deposits from
correspondent banks. Critically undercapitalized institutions are subject to
the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically undercapitalized.
FDICIA also provides for increased funding of the FDIC insurance funds. The
FDIC has adopted final rules implementing, for assessment periods commencing
January 1, 1994, risk-based insurance premiums. Under the assessment system,
each depository institution is assigned to one of nine risk classifications
based upon certain capital and supervisory measures and, depending upon its
classification, will be assessed premiums ranging from .23% to .31% of
domestic deposits. In adopting the risk-based assessment system, the FDIC
indicated that, if future conditions so warrant, it may reconsider certain
aspects of the rate schedules and of the risk classification categories. In
addition, the FDIC has authority to impose special assessments from time to
time.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply
with capital or other standards. Such action may include the termination of
deposit insurance or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies will be eliminated effective on September
29, 1995. The law will also permit interstate branching by banks effective as
of June 1, 1997, subject to the ability of states to opt-out completely or to
set an earlier effective date.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical financial
information for Citizens and certain selected consolidated historical
financial information for Community. This data is derived from and should be
read in conjunction with, and is qualified in its entirety by, the financial
statements of Citizens and the consolidated financial statements of Community,
including the notes thereto, incorporated by reference or appearing elsewhere
in this Proxy Statement.
THE CITIZENS' NATIONAL BANK OF ASHLAND
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets............ $61,441 $61,576 $61,237 $62,318 $61,472 $58,281
Loans (net of unearned
income and
allowance for loan
losses)................ 26,359 26,323 25,817 26,796 28,981 30,095
Deposits................ 51,256 51,861 51,975 53,363 52,958 49,795
Shareholders' Equity.... 9,407 9,131 8,709 8,272 7,827 7,728
EARNINGS DATA:
Net interest income..... $ 2,499 $ 2,641 $ 2,715 $ 2,803 $ 2,397 $ 2,172
Provision for loan loss-
es..................... 16 50 230 175 470 25
Other income............ 200 142 134 129 142 139
Other expense........... 2,181 1,727 1,682 1,702 1,481 1,400
Net income.............. 389 832 847 845 489 738
PER SHARE DATA:
Net income.............. $ 19.45 $ 41.60 $ 42.35 $ 42.25 $ 24.45 $ 36.90
Cash dividends.......... 20.50 20.50 20.50 20.00 19.50 19.50
Book value.............. 470 457 435 414 391 386
Average shares outstand-
ing.................... 20,000 20,000 20,000 20,000 20,000 20,000
OTHER DATA:*
Return on equity (net
income divided by aver-
age equity)............ 4.36% 9.17% 9.73% 10.44% 6.24% 13.25%
Return on assets (net
income divided by aver-
age total assets)...... .62% 1.34% 1.36% 1.36% 0.82% 1.26%
Equity-to-assets ratio
(average equity divided
by average total as-
sets).................. 14.29% 14.62% 13.94% 13.26% 12.84% 12.84%
Dividend payout ratio
(dividends declared di-
vided by net income)... 105.51% 49.28% 48.41% 47.34% 79.75% 52.84%
</TABLE>
- - - --------
* Average balances for the years ended December 31, 1995, 1994 and 1993, are
based on daily average account balances. Average balances for the years
ended December 31, 1992, 1991 and 1990 are based on quarterly average
account balances.
26
<PAGE>
COMMUNITY BANKS, INC.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income......... $ 24,379 $ 21,399 $ 20,684 $ 21,051 $ 22,145 $ 20,949
Interest expense........ 10,198 8,489 9,009 10,053 12,392 12,473
Net interest income..... 14,181 12,910 11,675 10,998 9,753 8,476
Provision for credit
losses................. 712 462 702 683 737 662
Net interest income af-
ter provision for
credit losses.......... 13,469 12,448 10,973 10,315 9,016 7,814
--------- --------- --------- --------- --------- ---------
Other operating income.. 2,510 2,282 2,688 2,158 1,468 1,353
Other operating ex-
penses................. 10,076 9,280 8,456 7,803 7,281 6,301
Income (loss) before in-
come taxes and cumula-
tive effect of account-
ing changes............ 5,903 5,450 5,205 4,670 3,203 2,866
Applicable income tax-
es..................... 1,478 1,288 1,289 1,179 674 676
--------- --------- --------- --------- --------- ---------
Income (loss) before cu-
mulative effect of ac-
counting changes....... 4,425 4,162 3,916 3,491 2,529 2,190
--------- --------- --------- --------- --------- ---------
Cumulative effect of ac-
counting change for
post-retirement bene-
fits................... -- -- -- -- -- --
Cumulative effect of ac-
counting change for in-
come taxes............. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)....... $ 4,425 $ 4,162 $ 3,916 $ 3,491 $ 2,529 $ 2,190
========= ========= ========= ========= ========= =========
PER SHARE DATA
Income (loss) before cu-
mulative effect of ac-
counting changes....... $ 2.15 $ 2.03 $ 1.92 $ 1.73 $ 1.27 $ 1.09
Cumulative effect of ac-
counting change for
post-retirement bene-
fits................... -- -- -- -- -- --
Cumulative effect of ac-
counting change for in-
come taxes............. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)....... $ 2.15 $ 2.03 $ 1.92 $ 1.73 $ 1.27 $ 1.09
========= ========= ========= ========= ========= =========
Dividends paid.......... $ .80 $ .70 $ .62 $ .54 $ .44 $ .44
Book value.............. 18.03 14.99 14.64 13.33 12.11 11.22
Shares outstanding...... 2,029,421 2,025,267 1,679,583 1,669,396 1,325,186 1,325,186
OTHER DATA
Total assets............ $ 320,381 $ 307,121 $ 284,723 $ 272,297 $ 246,560 $ 233,578
Total deposits.......... 272,841 256,112 243,292 235,597 218,157 205,869
Total loans-net......... 202,705 180,201 158,195 149,052 150,111 144,790
Total equity............ 36,593 30,352 29,503 26,703 24,261 22,472
KEY RATIOS
Return (loss) on average
shareholders' equity... 13.10% 13.63% 13.85% 13.61% 10.81% 9.90%
Return on average total
assets................. 1.41 1.40 1.41 1.36 1.05 1.00
Dividends declared to
net income (loss)...... 36.68 34.24 32.10 30.88 34.91 40.32
Average shareholders'
equity to average total
assets................. 10.76 10.23 10.16 10.01 9.70 10.14
</TABLE>
27
<PAGE>
UNAUDITED PRO FORMA SELECTED FINANCIAL DATA
The following table sets forth unaudited pro forma selected financial data
for Citizens and Community which gives effect to the Merger, accounted for as a
pooling of interest, as if it had been consummated as of the beginning of each
period presented. The pro forma selected data is not necessarily indicative of
the results that would have been achieved had the transaction been consummated
on such date and should not be construed as representative of future
operations. This presentation is subject to the assumptions set forth in the
notes to the Unaudited Pro Forma Condensed Financial Information appearing
elsewhere in this Proxy Statement/Prospectus. The information presented should
be read in conjunction with such pro forma financial statements, and the notes
thereto, and the historical financial statements, including the notes thereto,
of Citizens and Community incorporated by reference in this Proxy
Statement/Prospectus or appearing elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1995 1994 1993
------------ ----------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Total interest income.................... $ 28,712 $ 25,630 $ 25,159
Total interest expense................... 12,032 10,079 10,769
------------ ----------- -----------
Net interest income before provision for
loan losses............................. 16,680 15,551 14,390
Provision for loan losses................ 728 512 932
------------ ----------- -----------
Net interest income after provision for
loan losses............................. 15,952 15,039 13,458
Total non-interest income................ 2,710 2,424 2,822
Total non-interest expense............... 12,257 11,007 10,138
------------ ----------- -----------
Income before income taxes............... 6,405 6,456 6,142
Provision for income taxes............... 1,591 1,462 1,454
------------ ----------- -----------
Income before effective accounting
change.................................. 4,814 4,994 4,688
Cumulative Effect of Change in accounting
principal............................... -- -- 75
Net Income............................... $ 4,814 $ 4,994 $ 4,763
============ =========== ===========
PER SHARE DATA
Earnings Per Share....................... $ 1.83 $ 1.90 $ 1.82
============ =========== ===========
Weighted average number of shares out-
standing................................ $ 2,632,903 2,631,556 2,618,992
============ =========== ===========
OTHER DATA
Total Assets............................. $ 381,822
Total Deposits........................... 324,097
Total Loans-net.......................... 229,064
Short-term borrowings.................... 1,016
Total shareholders' equity............... 46,000
</TABLE>
28
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Community
and Citizens and unaudited pro forma combined per share data of Community and
Citizens, based on the assumption that the Merger was effective at the
beginning of each period. Such pro forma data is not necessarily indicative of
results that would have been achieved had the Merger been consummated on such
date.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993 1992
------ ------- -------- -------
<S> <C> <C> <C> <C>
COMMUNITY HISTORICAL
Income per common share..................... $ 2.15 $ 2.03 $ 1.92 $ 1.72
Dividends declared per common share......... .80 0.70 0.62 0.54
Book value per common share................. 18.03 14.99 14.64 13.29
CITIZENS HISTORICAL
Income per common share..................... $19.43 $ 41.60 $ 42.35 $ 42.11
Dividends declared per common share......... 20.50 20.50 20.50 19.93
Book value per common share................. 470.35 457.00 435.00 412.63
PRO FORMA PER COMMUNITY COMMON SHARE
Income per common share..................... $ 1.83 $ 1.90 $ 1.82 $ 1.65
Dividends declared per common share......... .77 0.70 .64 .54
Book value per common share................. -- -- -- --
PRO FORMA EQUIVALENT PER CITIZENS COMMON SHARE
(1)
Income per common share..................... $52.89 $ 54.92 $ 52.61 $ 47.69
Dividends declared per common share......... 22.26 20.23 18.50 15.61
Book value per common share................. -- -- -- --
</TABLE>
- - - --------
(1) Pro Forma Equivalent amounts per share were calculated by taking the
corresponding pro forma per share amounts for Community and multiplying
that by the Conversion Factor of 28.904 shares of Community Common Stock
for each 1 share of Citizens Common Stock. As explained in more detail
herein, this Conversion Factor may be subject to adjustment.
29
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
assume a business combination between Community and Citizens that qualifies as
a pooling of interests for financial reporting purposes. Under this method of
accounting, the recorded assets and liabilities of Community and Citizens are
carried forward to Community at their recorded amounts, income of Community
includes income of Community and Citizens for the entire 1996 fiscal year, and
the reported income of Community and Citizens for prior periods is combined
and restated as income of Community. The pro forma combined condensed
financial statements are based upon the respective historical consolidated
financial statements of Community and Citizens and should be read in
conjunction with such historical financial statements and the notes thereto,
which are incorporated by reference in this Proxy Statement. The unaudited pro
forma combined condensed balance sheet data are presented as if the Merger
occurred on the date thereof. The unaudited pro forma combined condensed
statements of earnings data are presented as if the Merger occurred at the
beginning of the earliest period presented.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
at the beginning of the earliest period presented with respect to the
unaudited pro forma combined condensed statements of income or with respect to
the pro forma combined condensed balance sheets, nor is it necessarily
indicative of the future operating results or financial position of Community.
The pro forma information does not give effect to any synergies that may occur
due to the integration of Community's and Citizens' operations. Additionally,
the unaudited pro forma financial information excludes nonrecurring costs and
expenses associated with integrating the operations of the businesses.
Certain material, nonrecurring adjustments may be recorded in conjunction
with the Merger, but the amounts of these adjustments cannot be determined
until Community reviews all facilities, operations and systems of Citizens and
finalizes its plans with respect to integrating the businesses. The aggregate
amount of these adjustments will include costs associated with consolidating
operations and systems, severance pay for involuntary termination, early
retirement and related employee benefits; conforming accounting practices; and
expenses incurred in connection with the Merger. Community has not yet
quantified any of these adjustments. The impact of these adjustments, except
for conforming accounting principles, are expected to be recorded in 1996.
30
<PAGE>
COMMUNITY AND CITIZENS
PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR DECEMBER 31, 1995
-----------------------------------------
PRO FORMA PRO FORMA
COMMUNITY CITIZENS ADJUSTMENTS COMBINED
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total interest income................ $ 24,379 $4,333 $ 28,712
Total interest expense............... 10,198 1,834 12,032
---------- ------ ------- ---------
Net interest income before
provision for loan losses......... 14,181 2,499 16,680
Provision for loan losses............ 712 16 728
---------- ------ ------- ---------
Net interest income after provision
for loan losses................... 13,469 2,483 15,952
Total non-interest income............ 2,510 200 2,710
Total non-interest expense........... 10,076 2,181 12,257
---------- ------ ------- ---------
Income before income taxes......... 5,903 502 6,405
Provision for income taxes........... 1,478 113 1,591
---------- ------ ------- ---------
Net Income......................... $ 4,425 $ 389 $ 4,814
========== ====== ======= =========
Earnings per share................... $ 2.15 $19.45 $ 1.83
========== ====== ======= =========
Weighted average number of shares
outstanding......................... $2,054,822 20,000 558,081 2,632,903
========== ====== ======= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR DECEMBER 31, 1994
----------------------------------------
PRO FORMA PRO FORMA
COMMUNITY CITIZENS ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total interest income................. $ 21,399 $4,231 $ 25,630
Total interest expense................ $ 8,489 1,590 10,079
--------- ------ ------- ---------
Net interest income before provision
for loan losses.................... 12,910 2,641 0 15,551
Provision for loan losses............. 462 50 512
--------- ------ ------- ---------
Net interest income after provision
for loan losses.................... 12,448 2,591 0 15,039
Total non-interest income............. 2,282 142 2,424
Total non-interest expense............ 9,280 1,727 11,007
--------- ------ ------- ---------
Income before income taxes.......... 5,450 1,006 0 6,456
Provision for income taxes............ 1,288 174 1,462
--------- ------ ------- ---------
Net Income.......................... $ 4,162 $ 832 $ 0 $ 4,994
========= ====== ======= =========
Earnings per share.................... $ 2.03 $41.60 $ 1.90
========= ====== ======= =========
Weighted average number of shares out-
standing............................. 2,053,475 20,000 558,081 2,631,556
========= ====== ======= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR DECEMBER 31, 1993
----------------------------------------
PRO FORMA PRO FORMA
COMMUNITY CITIZENS ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Total interest income................. $ 20,684 $4,475 $ 25,159
Total interest expense................ 9,009 1,760 10,769
--------- ------ -------- ---------
Net interest income before provision
for loan losses.................... 11,675 2,715 0 14,390
Provision for loan losses............. 702 230 932
--------- ------ -------- ---------
Net interest income after provision
for loan losses.................... 10,973 2,485 0 13,458
Total non-interest income............. 2,688 134 2,822
Total non-interest expense............ 8,456 1,682 10,138
--------- ------ -------- ---------
Income before income taxes.......... 5,205 937 0 6,142
Provision for income taxes............ 1,289 165 1,454
--------- ------ -------- ---------
Income before effect of accounting
change............................. 3,916 772 0 4,688
Cumulative effect of change in ac-
counting principle................... 75 75
--------- ------ -------- ---------
Net Income.......................... $ 3,916 $ 847 $ 0 $ 4,763
========= ====== ======== =========
Earnings per share.................... $ 1.92 $42.35 $ 1.82
========= ====== ======== =========
Weighted average number of shares out-
standing............................. 2,040,911 20,000 $558,081 2,618,992
========= ====== ======== =========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
31
<PAGE>
COMMUNITY AND CITIZENS
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMMUNITY CITIZENS ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks............... $ 13,419 $ 1,885 $ 15,304
Investment securities, held to maturi-
ty................................... -- -- --
Investment securities, available for
sale................................. 87,539 29,887 117,426
Loans, net............................ 202,705 26,358 229,063
Premises and equipment, net........... 7,333 324 7,657
Goodwill.............................. 1,388 -- 1,3888
Other real estate owned............... 302 -- 302
Loans held for sale................... 2,206 -- 2,206
Federal Funds Sold.................... -- 2,215 2,215
Accrued interest receivable and other
assets............................... 5,489 772 $ 6,261
-------- ------- ------ --------
Total Assets........................ $320,381 $61,441 $ 0 $381,822
======== ======= ====== ========
LIABILITIES
Deposits.............................. 272,841 51,256 324,097
Short-term borrowings................. 1,016 -- 1,016
Long-term debt and capital notes...... 7,000 -- 7,000
Accrued interest payable and other li-
abilities............................ 2,931 778 3,709
-------- ------- ------ --------
Total Liabilities................... $283,788 $52,034 $ 0 $335,822
======== ======= ====== ========
STOCKHOLDERS' EQUITY
Preferred stock no par value.......... -- -- --
Common stock.......................... 10,160 400 (400)B
2,878 B 13,038
Surplus............................... 9,878 1,000 (1,000)B
(1,478)B 8,400
Retained Earnings..................... 15,241 7,710 22,951
Net unrealized loss on investment se-
curities available
for sale............................. 1,367 297 1,664
Less: Treasury stock at cost.......... (53) -- (53)
-------- ------- ------ --------
Total Stockholders' Equity.......... $ 36,593 $ 9,407 $ 0 $ 46,000
-------- ------- ------ --------
Total Liabilities and Stockholders'
Equity............................. $320,381 $61,441 $ 0 $381,822
======== ======= ====== ========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
32
<PAGE>
COMMUNITY AND CITIZENS
UNAUDITED
PRO FORMA CAPITAL SCHEDULE
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNITY CITIZENS PRO FORMA PRO FORMA
DEC. 31, 1995 DEC. 31, 1995 ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Short-term borrowings....... $ 1,016 $ 1,016
Long-term debt and capital
notes...................... 7,000 7,000
Preferred stock, no par val-
ue.........................
Common stock................ 10,160 400 (400)B
2,878 B 13,038
Surplus..................... 9,878 1,000 (1,000)B
(1,478)B 8,400
Retained Earnings........... 15,241 7,710 22,951
Net unrealized gain on in-
vestment securities avail-
able for sale.............. 1,367 297 1,664
Less: Treasury stock at
cost....................... (53) (53)
------- ------ ------ -------
Total stockholders'
equity................... $36,593 $9,407 $ 0 $46,000
======= ====== ====== =======
</TABLE>
See accompanying notes to unaudited pro forma financial information.
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1. BASIS OF PRESENTATION
Pursuant to the Merger, each share of Citizens Common Stock outstanding at
the effective time was converted into 28.904 shares of Community Common Stock.
The Merger was be accounted for under the pooling of interests method.
Accordingly, recorded assets and liabilities are carried forward to the
combined company at their historical values.
The unaudited pro forma financial information does not give effect to any
synergies that are expected to occur due to the integration of Citizens and
Community operations. Additionally, the unaudited pro forma financial
information, and the nonrecurring costs and expenses associated with
integrating the operations of the businesses.
Certain material, nonrecurring adjustments may be recorded in conjunction
with the Merger, but the amounts of these adjustments cannot be determined
until Community reviews all facilities, operations and systems of Citizens and
finalizes its plans with respect to integrating the businesses. The aggregate
amount of these adjustments may include costs associated with consolidating
operations and systems; severance pay for involuntary termination, early
retirement and related employee benefits; conforming accounting practices; and
expenses incurred in connection with the Merger. Community has not yet
quantified any of these adjustments. The impact of these adjustments, if any,
is expected to be recorded in 1996.
For consistency of presentation, certain amounts in the historical financial
statements have been reclassified in the unaudited pro forma combined
condensed financial statements.
NOTE 2. PRO FORMA ADJUSTMENTS
A. Per Share Data
The average number of shares of Community Common Stock outstanding during
the periods presented and per common share and net earnings per common share
have been adjusted for each period presented by multiplying the applicable
number of shares of Citizens Common Stock by 28.904.
B. Stockholder's equity
The combined equity account of Community reflected the combination of the
equity accounts for Community and Citizens. Shares of Community Common Stock
have a par value of $5.00. Based on the exchange ratio discussed in Note 1
above, Community exchanged 578,081 shares of Community Common Stock and paid
cash in lieu of the issuance of fractual shares for 20,000 of Citizens Common
Stock.
34
<PAGE>
CITIZENS' MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages of this Proxy Statement/Prospectus present management's
discussion and analysis of the Citizens' National Bank of Ashland for 1993,
1994, and 1995.
RESULTS OF OPERATIONS
Net Interest Income
The largest source of Citizens' operating revenue is net interest income. For
purposes of management's discussion and analysis, net interest income is
adjusted to a tax equivalent basis. For purposes of calculating yields on tax
exempt income, the taxable equivalent adjustment equates tax exempt interest
rates to taxable interest rates as noted in Table 1.
Net interest income is the income which remains after deducting from total
income generated by earning assets the interest income attributive to the
acquisition of funds required to support earning assets. Income from earning
assets includes income from loans, investment securities and income from short
term investments. The amount of interest income is dependent upon many factors
including the volume of earning assets, general level of interest rates, the
dynamics of the change of interest rates, and the volume of non-conforming
loans. The cost of funds varies with the amount of funds necessary to support
earning assets, the rates paid to attract and hold deposits, rates paid on
borrowed funds, and the levels of non-interest bearing demand deposits and
equity capital.
Table 1
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
INCOME AND RATES ON A TAX EQUIVALENT BASIS FOR THE YEARS ENDED DECEMBER 31,
1995, 1994, AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
INTEREST RATES INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold..... 2,824 157 5.56% 1,963 98 4.99% 4,101 120 2.93%
Investment securities:
Taxable................ 21,948 1,348 6.14% 21,747 1,249 5.74% 20,010 1,228 6.14%
Non-taxable (1)........ 8,549 755 8.83% 9,323 845 9.06% 8,786 830 9.45%
Loans.................. 26,081 2,330 8.93% 26,017 2,325 8.94% 26,363 2,578 9.78%
------- ------ ----- ------- ------ ---- ------- ------ ----
Total earning assets.. $59,402 $4,590 7.73% $59,050 $4,517 7.65% $59,260 $4,756 8.03%
======= ====== ===== ======= ====== ==== ======= ====== ====
Liabilities:
Deposits:
Savings................ 22,282 537 2.41% 22,786 532 2.33% 22,682 564 2.49%
Time................... 25,730 1,297 5.04% 25,017 1,058 4.23% 25,887 1,196 4.62%
------- ------ ----- ------- ------ ---- ------- ------ ----
Total Interest bearing
liabilities.......... $48,012 $1,834 3.82% $47,803 $1,590 3.33% $48,569 $1,760 3.62%
======= ====== ===== ======= ====== ==== ======= ====== ====
Net interest
income/average earning
assets................ $2,756 4.64 % $2,927 4.96% $2,996 5.06%
====== ===== ====== ==== ====== ====
</TABLE>
- - - --------
(1) For purposes of calculating yields on non-taxable investments, interest
income has been adjusted to its taxable equivalent basis using a marginal
tax rate at 34%.
35
<PAGE>
Net interest income for the year ended December 31, 1995 was $2,499,000
compared to $2,641,000 for the year ended December 31, 1994, a decrease of
5.4%. Also, net interest income for 1994 decreased approximately 2.7% compared
to 1993. As shown in Table 1, the net interest margin has remained above 4.64%
for the past three years, having decreased from 5.06% in 1993 to 4.64% for the
year ended December 31, 1995. For the year ended December 31, 1995, average
earning assets rose to $59,402,000 a 0.6% increase over 1994. This increase
consisted of increases in federal funds sold of 43.9% or $861,000 and net
loans of 0.2% or $64,000, offset by a decrease in investments of 1.9% or
$573,000. For the year 1994 as compared to 1993, average earning assets
decreased 0.4% or $210,000 to $59,050,000. This decrease resulted from
decreases in federal funds sold of 52.1% or $2,138,000 and net loans of 1.3%
or $346,000, offset by a 7.9% or $2,274,000 increase in investments. The yield
on earning assets was 7.73%, 7.65%, and 8.03% for the years ended 1995, 1994,
and 1993, respectively.
Interest bearing liabilities averaged $48,012,000, $47,803,000, and
$48,569,000 for the years 1995, 1994, and 1993, respectively. The weighted
average cost of funds for the years 1995, 1994, and 1993 was 3.82%, 3.33%, and
3.62%, respectively. The net interest margin was 4.64%, 4.96%, and 5.06% for
the years 1995, 1994, and 1993. The decline from 1993 to 1994 was principally
attributable to rate changes with rates on earning assets decreasing more than
rates on interest bearing liabilities. For the year ended December 31, 1995
compared to the year ended December 31, 1994, effective rates on interest
earning assets increased to 7.73% from 7.65% while the cost of funds increased
from approximately 3.33% to approximately 3.82% resulting in a decrease in the
net interest margin of 0.32%.
Table 2
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993 AND
RATE/VOLUME ANALYSIS 1992
- - - -------------------- ----------------------------------------------------------
1995 VS. 1994 1994 VS. 1993 1993 VS. 1992
------------------ ------------------ ------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ----- ------ ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income:
Loans.................. 8 ( 3) 5 ( 34) (219) (253) (286) (103) (389)
Investment securities
Taxable................ 12 87 99 106 ( 85) 21 90 (253) (163)
Non-Taxable............ (69) ( 21) ( 90) 50 ( 35) 15 104 ( 60) 44
Federal funds sold..... 47 12 59 ( 63) 41 ( 22) ( 27) ( 22) ( 49)
--- ---- ---- ---- ---- ---- ---- ---- ----
Total................. ( 2) 75 73 59 (298) (239) (119) (438) (557)
--- ---- ---- ---- ---- ---- ---- ---- ----
Increase (decrease) in
interest expense:
Deposits
Savings and interest
bearing deposits...... (12) 17 5 3 ( 35) ( 32) 9 (168) (159)
Time................... 31 208 239 ( 40) ( 98) (138) ( 52) (272) (324)
--- ---- ---- ---- ---- ---- ---- ---- ----
Total deposits........ 19 225 244 ( 37) (133) (170) ( 43) (440) (483)
Increase (decrease) in
effective interest
differential........... (21) (150) (171) 96 (165) ( 69) ( 76) 2 ( 74)
=== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1995, 1994 and 1993. The effect of a
change in average volume has been determined by applying the average yield or
rate in the earlier period to the change in average volume during the period.
The effect of a change in rate has been determined by applying the change in
rate during the period to the average volume of the prior period.
Table 2 illustrates the effect on the effective interest differential from
volume and rate changes. The table shows that the increase in the interest
income for 1995 compared to 1994 was principally due to higher interest rates
while the decreases for 1994 compared to 1993 and 1993 compared to 1992 were
principally due to lower interest rates. Non-taxable investment securities
have been adjusted to a tax equivalent basis using a tax rate of 34%. The
change in interest expense for 1995 compared to 1994 was principally
attributable to higher rates while the changes from 1993 to 1994 and 1992 to
1993 were attributable to lower interest rates.
36
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Citizens' provision for loan losses is based on management's ongoing review
and analysis of the loan portfolio. The purpose of the review is to assess loan
quality, analyze delinquencies, ascertain loan growth, evaluate potential
charge-offs and recoveries, and assess general economic conditions in its
market. In addition, consideration is also given to examinations performed by
the regulatory authorities and outside third parties.
Table 3
RECONCILIATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at Beginning of period....................... 277 $ 283 $ 302
------- ------- -------
Charge-offs:
Real Estate loans.................................. 10 69 7
Commercial loans
Consumer loans
(installment loans)................................ 70 97 356
Other.............................................. -- 20 --
------- ------- -------
Total charge-offs................................ $ 80 $ 186 $ 363
Recoveries: 81 130 112
------- ------- -------
Real Estate loans.................................. 2
Commercial loans
Consumer loans
(installment loans)................................ 81 130 112
------- ------- -------
Total recoveries................................. $ 81 $ 130 $ 114
Net charge-offs...................................... $ (1) $ 56 $ 249
Provision for possible loan losses................... 16 50 230
------- ------- -------
Balance at end of period............................. $ 294 $ 277 $ 283
======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period......... -0- 0.22% 0.94%
======= ======= =======
</TABLE>
The provision for loan losses was $16,000 in 1995 compared to $50,000 in 1994
and $230,000 in 1993. Also, net charge-offs decreased from $249,000 in 1993 to
$56,000 in 1994 and a net recovery of $1,000 in 1995. The ratio of net charge-
offs in 1995, 1994, and 1993 to average loans outstanding approximated 0%,
.22%, and .94% respectively. The allowance for loan losses at December 31,
1995, 1994, and 1993 was $294,000, $277,000, and $283,000, respectively.
37
<PAGE>
Table 4
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans:
Past due 90 or more days as to interest or
principal:
Residential real estate........................ $ 311 $ 388 $ 398
Commercial real estate......................... -- 25 37
------- ------- -------
Total non-performing loans................... 311 413 435
Other real estate owned............................ -- -- 15
------- ------- -------
Total non-performing assets........................ $ 311 $ 413 $ 450
======= ======= =======
Past due 90 days or more as to interest or princi-
pal and still accruing interest................... $ 452 $ 493 $ 518
======= ======= =======
Non-performing assets and loans past due 90 days or
more and still accruing interest.................. $ 763 $ 906 $ 968
======= ======= =======
Non-performing assets as a percentage of total as-
sets.............................................. 0.51% 0.67% 0.73%
Non-performing loans as a percentage of total
loans............................................. 1.18% 1.57% 1.68%
Allowance for possible loan losses as a percentage
of total non-performing loans..................... 94.53% 67.07% 65.06%
Allowance for possible loan losses as a percentage
of total loans.................................... 1.12% 1.05% 1.10%
</TABLE>
Table 4 illustrates the level of non-performing assets along with loans
contractually past 90 days and still accruing interest as of December 31, 1995,
1994 and 1993. The total non-performing assets at December 31, 1995 was
$311,000 as compared to $413,000 and $450,000 as of December 31, 1994 and 1993,
respectively. Non-performing loans as a percentage of total loans decreased to
1.18% as of December 31, 1995 and the allowance for loan losses as a percentage
of total loans approximated 1.12% as compared to 1.05% and 1.10% as of December
31, 1994 and 1993, respectively. Loans past due 90 days or more and still
accruing interest totaled $452,000, $493,000 and $518,000 at December 31, 1995,
1994 and 1993 respectively.
Table 5
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential and real estate
loans........................... $155 52.72% $138 49.82% $147 51.94%
Commercial real estate and indus-
trial loans..................... 26 8.84% 24 8.66% 32 11.31%
Consumer (installment) loans..... 113 38.44% 113 40.79% 92 32.51%
Other loans...................... 2 0.72% 12 4.24%
---- ------ ---- ------ ---- ------
$294 100.00% $277 100.00% $283 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
38
<PAGE>
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior to
foreclosure, the recorded amount of the loans is written down, if necessary,
to the appraised value of the real estate to be acquired by charging the
allowance for possible loan losses. Subsequent to foreclosure, gains and
losses on the sale of real estate acquired through foreclosure are reported in
operating income and any devaluation determined as a result of periodic
evaluations is charged to operating expense.
OTHER INCOME
Non-interest income, recorded as other income, consists principally of
service charges on deposit accounts, commissions, fees and other miscellaneous
income. Other income as a percentage of net interest income and other income
was 7.4%, 5.1%, and 4.7% for the years 1995, 1994, and 1993, respectively.
Service charges on deposit accounts increased approximately 3.1% and 9.7% for
the years 1995 compared to 1994 and 1994 compared to 1993. Service charges
rose as the result of increased volumes in non-interest bearing accounts. A
significant component of the increase in other income in 1995 was an increase
in the cash surrender value of life insurance.
OTHER EXPENSE
Non-interest expense is categorized into four groupings: salary and employee
benefits, occupancy expenses, furniture and equipment and other expenses.
Salary and employee benefits increased 13.4% in 1995 compared to 1994 and 7.7%
in 1994 compared to 1993. Net occupancy expense increased 66.3% while
furniture and equipment expense decreased 12.1% in 1995. Other expense
increased 44.0% in 1995. Much of the increases in net occupancy expense and
other expenses were attributable to costs associated with the merger with
Community Banks, Inc.
Salary and employee benefits increased 7.7% and 5.6% in 1994 and 1993
respectively. The increases were principally attributable to annual salary
increases and increases in benefit costs along with the hiring of new
employees. Other expenses decreased 7.5% from 1992 and 1993 and 2.8% from 1993
to 1994.
INCOME TAXES
For the years ended December 31, 1995, 1994 and 1993, the effective tax rate
was approximately 22.5%, 17.3% and 17.6%, respectively. The change in the
effective tax rate reflects the level of tax-exempt interest income in
relation to income before income taxes and a significant reduction in pre-tax
income realized in 1995.
In the first quarter of 1993 Citizens adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) and
recognized the effect as a change in accounting in the statement of income.
Under SFAS 109, Citizens recognizes deferred tax liabilities for taxable
temporary differences and deferred tax assets for deductible temporary
differences. Management believes that deferred tax assets recognized at
December 31, 1995 will be realized in future tax returns. While the ultimate
realization of tax assets is dependent on future taxable income, taxable
income in prior carry-back years and future reversals of existing taxable
temporary differences are sufficient to offset future reversals of deductible
differences without implementing any tax strategies or assuming future taxable
income.
Financial Condition
INVESTMENT SECURITIES
Effective January 1, 1994, Citizens adopted statement of financial
accounting standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). This statement requires the segregation of
investment securities into three categories, each having distinct accounting
treatment; held to
39
<PAGE>
maturity, available for sale and held for sale. Citizens classified all of the
investments as held to maturity at January 1, 1994. At December 31, 1995,
Citizens reclassified all investment securities from held to maturity to
available for sale resulting in an increase in shareholders' equity of $297,000
net of applicable income taxes. Citizens does not engage in trading activities.
Citizens' investment policy is to purchase only high quality securities.
Strategies employed address liquidity, capital adequacy and net interest margin
considerations. Table 6 illustrates the maturities of these securities and
their weighted average yields based upon amortized costs as of December 31,
1995. At December 31, 1995 Citizens held no securities of one issuer, other
than U.S. Government obligations, where the aggregate book value exceeded 10%
of stockholders' equity.
Table 6
Citizens National Bank of Ashland Maturity Distribution of Investments as of
December 31, 1995
<TABLE>
<CAPTION>
WITHIN 1 1-5 5-10 WEIGHTED
YEAR YEARS YEARS AFTER 10 YEARS TOTAL AVG. MAT AVG. YIELD
-------- ------- ------ -------------- ------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $3,510 $ 9,679 -- -- $13,189 1 year 8 months 6.419%
U.S. Government
Agencies............... 1,775 6,554 -- -- 8,329 2 years 6 months 6.337%
State and political
subdivisions........... -- 2,090 $5,273 275 7,638 6 years 3 months 5.835%
Other................... 208 523 -- -- 731 2 years 2 months 7.40%
------ ------- ------ ---- -------
$5,493 $18,846 $5,273 $275 $29,887 3 years 3 months 6.27%
====== ======= ====== ==== =======
Percentage of total..... 18.38% 63.06% 17.64% .92% 100.00%
Weighted average yield.. 5.50% 6.65% 5.70% 6.51% 6.27%
</TABLE>
LOANS
Table 7 presents the loans outstanding, by type of loan, as of December 31,
1995, 1994 and 1993. Loans receivable, net of unearned income on installment
loans, increased $52,000 or 0.2% in 1995 and $501,000 or 1.9% in 1994. Real
estate mortgage loans increased $226,000 or 1.1% in 1995 and $1,225,000 or
6.2%, in 1994. The increases in real estate mortgages were offset by decreases
in installment loans from 1993 through 1995 as management significantly reduced
its acceptance of indirect paper from a local automobile dealer. Commercial and
industrial loans increased $45,000 or 10.4% and $152,000 or 54.3% in 1995 and
1994, respectively.
Table 7
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans............. $21,199 80.42% $20,973 79.67% $19,748 76.49%
Commercial and industrial..... 477 1.81% 432 1.64% 280 1.08%
Installment................... 5,502 20.87% 5,611 21.32% 6,584 25.50%
Other......................... 78 .30% 204 0.77% 221 0.86%
------- ------- -------
Total loans................. $27,256 $27,220 $26,833
Unearned income............... 603 -2.29% 619 -2.35% 733 -2.84%
Allowance for possible loan
losses....................... 294 -1.11% 277 -1.05% 283 -1.10%
------- ------ ------- ------ ------- ------
Net loan receivable........... $26,359 100.00% $26,324 100.00% $25,817 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
40
<PAGE>
DEPOSITS
Table 8 presents a breakdown of the deposit portfolio composition as of
December 31, 1995, 1994 and 1993. Citizens' deposit base is consumer oriented,
consisting of savings accounts, money market accounts, time deposits, interest
bearing demand accounts and non-interest bearing demand deposits. Citizens'
deposit composition has historically consisted of time deposits, primarily
certificates of deposits of various terms, and savings accounts. Total deposits
decreased by $605,000 or 1.2% in 1995 and $114,000 or 0.2% in 1994. Time
deposits have historically approximately 48% to 50% of the total portfolio
while savings deposits have approximated 22% to 24% of the portfolio.
Table 8
DEPOSIT PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
% OF % OF % OF
BALANCE DEPOSITS BALANCE DEPOSITS BALANCE DEPOSITS
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts............. $11,275 22.00% $12,301 23.72% $11,606 22.33%
Money market................. 4,482 8.75% 4,803 9.26% 5,387 10.36%
Regular checking............. 4,379 8.54% 4,313 8.32% 4,549 8.75%
Checking with interest....... 5,429 10.59% 5,313 10.24% 5,289 10.18%
Time......................... 25,691 50.12% 25,131 48.46% 25,144 48.38%
------- ------ ------- ------ ------- ------
Total deposits............. $51,256 100.00% $51,861 100.00% $51,975 100.00%
</TABLE>
Asset/Liability Management
Liquidity and interest rate sensitivity are the key aspects of Citizens'
asset/liability management strategy. The maintenance of adequate liquidity, the
ability to meet the cash requirements of their customers and other financial
commitments, is the fundamental aspect of Citizens' strategy. Citizens' policy
is to diversify its funding resources to allow it to avoid undue concentration
in any single financial market and also to avoid heavy funding requirements
within a short period of time.
Closely related to the management of liquidity is management of rate
sensitivity which focuses on maintaining stability in the net interest margin.
Interest rate sensitivity is the matching or mismatching of the maturity and
rate structure of the interest bearing assets and liabilities. It is the
objective of management to control the difference of the timing and rate
changes for these assets and liabilities to preserve a satisfactory net
interest margin.
41
<PAGE>
Table 9
GAP ANALYSIS AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
LESS THAN 3 MONTHS- 1--5 OVER 5
3 MONTHS 1 YEAR YEARS YEARS TOTAL
--------- --------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans...................... 2,426 $ 238 $ 3,861 $19,833 $26,358
Overnight deposits......... 2,215 2,215
Investments................ 1,353 4,462 18,524 5,548 29,887
-------- -------- -------- ------- -------
Total interest-earning
assets.................. 5,994 4,700 22,385 25,381 58,460
Non-interest-earning
assets.................. -- -- -- 2,981 2,981
-------- -------- -------- ------- -------
Total Assets............. $ 5,994 $ 4,700 $ 22,385 $28,362 $61,441
======== ======== ======== ======= =======
Interest-bearing liabilities:
Deposits:
Savings and now............ $ 25,565 -- -- -- $25,565
Time....................... 6,041 9,333 8,195 2,122 25,691
-------- -------- -------- ------- -------
Total deposits........... 31,606 9,333 8,195 2,122 51,256
Total interest-bearing
liabilities............. 31,606 9,333 8,195 2,122 51,256
-------- -------- -------- ------- -------
Non-interest-bearing liabili-
ties........................ -- -- -- 778 778
Stockholders' equity......... -- -- -- 9,407 9,407
Total liabilities and
stockholders' equity......... 31,606 9,333 8,195 12,307 $61,441
-------- -------- -------- ------- -------
Excess assets (liabilities).. $(25,612) $ (4,633) $ 14,190 $25,462 $ 9,407
======== ======== ======== ======= =======
Total assets
Cumulative excess assets (li-
abilities).................. $(25,612) $(30,245) $(16,055) $ 9,407
======== ======== ======== ======= =======
Total assets
Cumulative ratio of interest-
earning
assets/interest-bearing lia-
bilities.................... 18.96% 26.12% 67.32% 114.05%
</TABLE>
Table 9 illustrates Citizens' estimated interest rate sensitivity and
periodic and cumulative gap positions as calculated as of December 31, 1995.
An institution with more assets repricing than liabilities over a given
timeframe is considered asset sensitive, and one with more liabilities
repricing is considered liability sensitive. An asset sensitive institution
will generally benefit from rising rates, and a liability institution will
generally benefit from declining rates.
CAPITAL ADEQUACY
At December 31, 1992, risk-adjusted capital requirements became fully
implemented. The risk capital ratios, based upon guidelines adopted by bank
regulators in 1989, focus on credit risk. Assets and certain off balance sheet
items are segmented into 1 of 4 broad risk categories weighted to relative
percentage of credit risk assigned by the regulatory authorities. Off balance
sheet instruments are converted into a balance sheet credit equivalent before
being assigned to 1 of the 4 risk-weighted categories.
Capital elements are segmented into 2 tiers. Tier 1 capital represents
shareholders equity reduced by excludable tangibles, while total capital
represents Tier 1 capital plus the allowable portion of the allowance for loan
losses. As of December 31, 1995, required Tier 1 capital, total capital and
leverage ratios were 4%, 8% and 3-5%, respectively. As of December 31, 1995,
1994, and 1993, Citizens was in excess of these requirements.
42
<PAGE>
BUSINESS OF CITIZENS
DESCRIPTION OF BUSINESS
Citizens was a banking corporation organized in 1875 under the national
banking laws and headquartered in Ashland, Pennsylvania. Citizens engaged in
commercial banking authorized by the NBA. This involved accepting demand, time
and savings deposits and granting loans (consumer, commercial, real estate and
business) to individuals, corporations, partnerships, associations and
municipalities and other governmental bodies. Citizens owned no subsidiaries.
Citizens was not dependent on any one customer, and the loss of any customer
or a few customers would not have had a material adverse effect upon it.
PROPERTIES
As of December 31, 1995, Citizens had three banking offices. Its principal
executive office, which it owned, was located at 735 Center Street, Ashland,
Pennsylvania 17921, and the telephone number at such address was (717) 875-
3221. Its other two branch offices were located at Hobart Street, Gordon,
Pennsylvania 17936, and Main Street, Lavelle, Pennsylvania 17943.
LEGAL PROCEEDINGS
On the effective date of the merger, there were no material proceedings to
which Citizens or any of its directors or officers were a party. All legal
proceedings then pending against Citizens involved routine litigation
incidental to the business of Citizens and were either not material in respect
to the amount in controversy or were fully covered by insurance.
EXPERTS
COMMUNITY
The consolidated balance sheets of Community as of December 31, 1995 and 1994
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995, incorporated by reference in this Proxy Statement, have been
incorporated herein in reliance on the report of Coopers & Lybrand, L.L.P.,
independent accountants to Community, given on the authority of that firm as
experts in auditing and accounting.
CITIZENS
The balance sheets of Citizens as of December 31, 1995 and 1994 and the
related statements of income, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995 included in
this Proxy Statement/Prospectus, have been included herein in reliance on the
report of Coopers & Lybrand, L.L.P., independent accountants to Citizens, given
on the authority of said firm as experts in auditing and accounting.
LEGAL OPINIONS
The legality of the Community Common Stock issued in connection with the
Merger and the tax consequence of the Merger were passed upon by Mette, Evans &
Woodside, Harrisburg, Pennsylvania, Legal Counsel to Community. Certain legal
matters relating to Citizens were passed upon at the effective time of the
Merger by Morgan, Lewis & Bockius LLP, Harrisburg, Pennsylvania, special
counsel to Citizens.
43
<PAGE>
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has selected the firm of Coopers & Lybrand LLP,
Harrisburg, Pennsylvania, as independent certified public accountants to audit
the books, records and accounts of CBI and its subsidiaries for 1996. This firm
audited CBI for 1995, has no material relationship with CBI or its subsidiaries
and is considered to be well qualified. A representative of the firm is
expected to be at the Annual Meeting of Shareholders. If the shareholders do
not ratify the selection of this firm, the selection of another firm of
independent certified public accountants will be considered by the Board of
Directors.
OTHER BUSINESS
To transact any other matters connected with and incidental to the election
of directors that may properly come before the Annual Meeting of Shareholders.
Management, at present, knows of no other business except those items
explained herein that may require the vote of the shareholders to be presented
by or on behalf of CBI or its management at the meeting.
FORM 10-K ANNUAL REPORT
SECURITIES AND EXCHANGE COMMISSION FORM 10-K ANNUAL REPORT IS AVAILABLE FREE
OF CHARGE. IF YOU DESIRE A COPY OF THIS REPORT, FORWARD YOUR REQUEST TO:
TERRY L. BURROWS, EVP/CFO
COMMUNITY BANKS, INC.
P.O. BOX 350
MILLERSBURG, PENNSYLVANIA 17061
RETURN OF PROXY
YOU ARE URGED TO SIGN, DATE AND RETURN THE ACCOMPANYING PROXY AS PROMPTLY AS
POSSIBLE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO
ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY.
BY ORDER OF THE BOARD OF DIRECTORS
Patricia E. Hoch
Secretary
Millersburg, Pennsylvania
March 18, 1996
44
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
OF
THE CITIZENS' NATIONAL BANK OF ASHLAND
WITH AND INTO
COMMUNITY BANKS, NATIONAL ASSOCIATION,
A WHOLLY OWNED SUBSIDIARY OF
COMMUNITY BANKS, INC.
THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), made and entered into this
5th day of July, 1995, by and among THE CITIZENS' NATIONAL BANK OF ASHLAND
("Citizens"), a national banking association having its headquarters at 735
Center Street, Ashland, Pennsylvania 17921; COMMUNITY BANKS, NATIONAL
ASSOCIATION ("CBNA"), a national banking association having its headquarters
at 150 Market Square, Millersburg, Pennsylvania 17061, and COMMUNITY BANKS,
INC. ("Community"), a Pennsylvania business corporation having its corporate
headquarters at 150 Market Square, Millersburg, Pennsylvania 17061.
WHEREAS, the Boards of Directors of Citizens, CBNA, and Community deem it
advisable and in the reasonable best interest of their respective shareholders
that under and pursuant to the terms and conditions herein set forth Citizens
be merged with and into CBNA (the "Merger"); and
WHEREAS, this Agreement has been approved by the Board of Directors of each
party hereto; and
WHEREAS, the parties hereto desire to adopt this Agreement as a Plan of
Reorganization and to consummate the Merger in accordance with the provisions
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, acting pursuant to resolutions of their respective Boards of
Directors, and in accordance with the provisions of the National Bank Act and
the laws of the Commonwealth of Pennsylvania, Citizens, CBNA, and Community do
hereby agree as follows:
ARTICLE I
The Merger
1.1 Citizens shall be merged into CBNA upon the terms and provisions of this
Agreement and under the Articles of Association and By-Laws of CBNA (subject
to future alteration, amendment or repeal). The Merger shall be pursuant to
the provisions of, and with the effect provided in, the National Bank Act and
shall be expressly conditioned upon receipt of all necessary regulatory and
corporate approvals.
1.2 The name of the surviving national association shall be COMMUNITY BANKS,
N.A. The Articles of Association and the Bylaws of the surviving national
association shall be the Articles of Association and the Bylaws of CBNA in
effect immediately prior to the Merger.
1.3 The business of the surviving national association after the Effective
Date of the Merger shall be a national banking association which shall be
conducted by CBNA at its main office as then located and at its legally
established branches including all branches and the main office of Citizens
immediately prior to the Merger.
1.4 At the Effective Date of the Merger, the separate existence of Citizens
shall cease and CBNA, as the surviving entity, shall continue unaffected and
unimpaired by the Merger and shall be liable for all of the liabilities of
Citizens existing at the Effective Date.
A-1
<PAGE>
1.5 All assets, rights, privileges, immunities, powers, franchises and
interests of Citizens in and to every type of property (real, personal and
mixed) and chooses in action, as they exist as of the Effective Date, shall
pass and be transferred to and vest in CBNA by virtue of the Merger on the
Effective Date without any deed, conveyance or other transfer; the separate
existence of Citizens shall cease and the existence of CBNA as the surviving
national association and as a national association organized under the
National Bank Act shall continue unaffected and unimpaired by the Merger; and
CBNA shall be deemed to be the same Association as Citizens and shall be
subject to all of its duties and liabilities of every kind and description.
CBNA, upon the Merger and without any order of other action on the part of
any court or otherwise, shall possess, hold and enjoy all rights, privileges,
immunities, franchises and interests, both as a public nature and as a private
nature, in the same manner and to the same extent as such rights, privileges,
immunities, franchises and interests were possessed, held or enjoyed by
Citizens as of the Effective Date. All property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares and all
other chooses in action, and all and every other interest, of or belonging to
or due to Citizens, shall be taken and deemed to be transferred to and vested
in CBNA without further act or deed. The title to any real estate, or any
interest therein, vested in Citizens shall not revert or be in any way
impaired by reason of the Merger.
1.6 CBNA shall be responsible and liable for all the liabilities and
obligations of Citizens and any claim existing or action or proceeding pending
by or against Citizens may be prosecuted as if the Merger had not taken place,
or CBNA may be substituted in its place. Neither the rights of creditors nor
any liens upon the property of Citizens shall be impaired by reason of the
Merger.
1.7 The shares of capital stock of CBNA issued and outstanding immediately
prior to the Effective Date shall at the Effective Date continue to be issued
and outstanding.
ARTICLE II
Conversion and Exchange of Citizens Common Stock
2.1 At the Effective Date of the Merger, by virtue of the Merger and without
any action on the part of any holder thereof:
(a) Each share of Citizens' Common Stock issued and outstanding
immediately prior to the Effective Date of the Merger, except for (i)
Perfected Dissenting Shares (as defined in Section 2.4) and (ii) shares of
Citizens' Common Stock held and beneficially owned by Community or any
Community subsidiary (other than shares of Citizens' Common Stock held in a
fiduciary or similar capacity on behalf of others) which shall be canceled
by virtue of the Merger, shall automatically be converted into 29.333
shares (the "Conversion Factor") of common stock, $5.00 par value, of
Community ("Community Common Stock"), subject to the following adjustments:
(1) If the Market Value Per Share of Community (as defined below) as
of the close of business on the fifth (5th) trading date preceding the
Effective Date of the Merger is less than $26.25 per share, then the
Conversion Factor shall be increased to the number obtained by dividing
$770.00 by the Market Value Per Share of Community; provided, however,
that in no event shall the Conversion Factor be greater than 31.206.
(2) If the Market Value Per Share of Community (as defined below) as
of the close of business on the fifth (5th) trading date preceding the
Effective Date of the Merger is more than $26.25 per share, then the
Conversion Factor shall be decreased to the number obtained by dividing
$770.00 by the Market Value Per Share of Community; provided, however,
that in no event shall the Conversion Factor be less than 27.673.
A-2
<PAGE>
For purposes of this Agreement, "Market Value Per Share" shall mean with
respect to a calculation date the average of the closing sales price of
Community Common Stock as reported by the NASDAQ NMS for the thirty (30)
consecutive trading days ending on and including the date as of which the
Market Value Per Share is to be calculated. In addition, if the sum of the
total number of shares of Citizens' Common Stock outstanding at the
Effective Date exceeds 20,000, then the Conversion Factor shall be reduced
to the number obtained by multiplying the Conversion Factor times a
fraction the numerator of which shall be 20,000 and the denominator of
which shall be the total number of shares of Citizens' Common Stock
outstanding at the Effective Date.
(b) Each share of Citizens Common Stock which, immediately prior to the
Effective Date of the Merger, was issued and held in the treasury of
Citizens, if any, will be canceled and retired.
(c) No Perfected Dissenting Shares will be converted into Community
Common Stock under this Section 2.1, but such Perfected Dissenting Shares
will be subject to the provisions of Section 2.4.
(d) Each authorized but unissued share of Citizens' Common Stock will
cease to exist.
(e) Each share of Community Common Stock issued and outstanding shall
remain issued and outstanding.
2.2 Neither certificates nor scrip for fractional interests in Community
Common Stock will be issued, but in lieu thereof each holder of shares of
Citizens Common Stock who would otherwise have been entitled to a fraction of
a share of Community Common Stock will be paid an amount in cash equal to such
fraction multiplied by the Market Value Per Share of Community as of the close
of business of the fifth (5th) trading date preceding the Effective Date of
the Merger.
2.3 As soon as practicable after the Effective Date of the Merger, holders
of shares of Citizens' Common Stock shall be furnished a form letter of
transmittal for the tender of their shares to an Exchange Agent appointed by
Community, to be exchanged for new certificates for the appropriate number of
shares of Community Common Stock. Community shall be required to issue
Community Common Stock only upon the actual surrender of Citizens shares and
will require an indemnity agreement or a bond from any Citizens' shareholder
who is unable to surrender his or her certificate by reason of loss, theft or
destruction of the certificate.
2.4 Each outstanding share of Citizens' Common Stock, the holder of which
has timely made a written request to CBNA accompanied by the surrender of his
stock certificates pursuant to Section 215a(b) of the National Bank Act (12
U.S.C. (S)215a(b)), is herein called a "Dissenting Share." Dissenting Shares,
the holders of which have not effectively withdrawn or lost (for failure to
timely file a demand for appraisal of their shares or otherwise) their
dissenters' rights under Section 215a of the National Bank Act ("Perfected
Dissenting Shares"), shall not be converted pursuant to Section 2.1 hereof,
but the holders thereof shall be entitled only to such rights as are granted
by Section 215a of the National Bank Act. Each holder of Dissenting Shares who
becomes entitled to payment for his Citizens Common Stock pursuant to the
provisions of Section 215a of the National Bank Act shall receive payment
therefor from Community but only after the amount thereof shall have been
agreed upon or finally determined pursuant to such provisions.
2.5(a) As of the Effective Date of the Merger, Community will issue and will
deliver to the Exchange Agent certificates representing a sufficient number of
shares of Community Common Stock issuable in the Merger and a sufficient
amount of cash in lieu of fractional shares payable in the Merger.
(b) Upon surrender for cancellation to the Exchange Agent of one or more
certificates for shares of Citizens' Common Stock ("Old Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall, promptly after the Effective Date of the Merger, deliver
to each holder of such surrendered Old Certificates new certificates
representing the appropriate number of shares of Community Common Stock ("New
Certificates") together with checks for payment of cash in lieu of fractional
interests to be issued in respect of the Old Certificates.
A-3
<PAGE>
(c) Until Old Certificates have been surrendered and exchanged as herein
provided for New Certificates, each outstanding Old Certificate shall be
deemed, for all corporate purposes of Community, to be the number of whole
shares of Community Common Stock into which the number of shares of Citizens'
Common Stock shown thereon have been converted. At the option of Community, no
dividends or other distributions which are declared on Community Common Stock
will be paid to persons otherwise entitled to receive the same until the Old
Certificates have been surrendered in exchange for New Certificates in the
manner herein provided, but upon such surrender, such dividends or other
distributions, from and after the Effective Date of the Merger, will be paid
to such persons in accordance with the terms of such Community Common Stock.
In no event shall the persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions.
2.6 The Conversion Factor shall be subject to adjustment (in addition to any
adjustment required by Section 2.1(a) hereof) from time to time as follows:
(a) Whenever, subsequent to the date hereof but prior to the Effective
Date of the Merger, (i) a record date occurs for the purpose of determining
the holders of Community Common Stock entitled to receive a dividend
declared payable in shares of Community Common Stock, (ii) Community
subdivides the outstanding shares of Community Common Stock, (iii)
Community combines the outstanding shares of Community Common Stock into a
smaller number of shares, or (iv) Community issues by reclassification of
its shares of Community Common Stock any shares of stock of Community (all
shares so issued being included in the "Community Common Stock" as used in
this Section 2.6), the Conversion Factor shall be adjusted so that each
share of Citizens' Common Stock shall under Section 2.1(a) thereafter be
convertible into and exchangeable for the number of shares of Community
Common Stock which the shares of Citizens' Common Stock would have
represented had such shares of Citizens' Common Stock been converted into
and exchanged for shares of Community Common Stock prior to the happening
of such event and such Community Common Stock had been entitled to the
benefit of the happening of such event.
ARTICLE III
Board of Directors and Officers of
Community and CBNA
3.1 From and after the Effective Date, the Board of Directors of Community
and CBNA shall consist of the persons who were then members of the Board of
Directors of Community and CBNA and Dean N. Paul, who will be appointed to the
Board of Directors of CBNA and the Schuylkill Advisory Board to hold office
until the next annual meeting of the shareholders of CBNA.
In addition thereto CBNA shall appoint two (2) additional members of
Citizens' Board of Directors to CBNA's Schuylkill Advisory Board.
3.2 From and after the Effective Date, the officers of CBNA shall be those
persons who were then officers of Community and CBNA and such other officers
as the Community or CBNA Board of Directors may appoint. Such officers shall
hold office until such time as their successors have been elected or appointed
and have qualified, unless sooner removed, resigned, disqualified or deceased.
ARTICLE IV
Amendment and Waiver
4.1 This Agreement may be amended by the parties hereto, by action taken by
or on behalf of their respective Boards of Directors, at any time before or
after approval of the Merger by the shareholders of Citizens; provided,
however, that after such approval by the shareholders of Citizens no such
amendment, without further
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shareholder approval, shall reduce the amount or change the form of the
consideration to be delivered to the shareholders of Citizens as contemplated
by this Agreement or alter or change any of the terms or conditions of this
Agreement if such alteration or change would materially adversely affect the
shareholders of Citizens. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
4.2 Any of the terms or conditions of this Agreement may be waived at any
time by whichever of the parties is, or the shareholders of which are,
entitled to the benefit thereof, in the case of a party, by action taken by
the Board of Directors of such party. The failure of any party at any time or
times to require performance of any provision hereof shall in no manner affect
such party's right at a later time to enforce the same. No waiver by any party
of any condition, or of the breach of any term, covenant, representation or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or waiver of any other
condition or of the breach of any other term, covenant, representation or
warranty.
ARTICLE V
Representations and Warranties
5.1 Representations and Warranties of Citizens. Citizens represents and
warrants to Community that:
(a) Citizens is a national banking association that is duly organized,
validly existing and in good standing under the laws of the United States.
Citizens is an "insured depository institution" as defined in the Federal
Deposit Insurance Act, as amended ("FDIA"), and is a member of the Federal
Reserve System.
(b) The copies of the Articles of Association and the Bylaws of Citizens
delivered to Community and which are included in Schedule I attached hereto
and made a part hereof by reference thereto are complete and accurate copies
thereof as in effect on the date hereof. The minute books of Citizens which
have been made available for inspection by Community contain a complete and
accurate record of all meetings of Citizens.
(c) Citizens (i) has corporate power to own its properties and to conduct
its business as currently conducted, (ii) has substantially complied with, and
is not in default in any material respect under, any laws, regulations,
ordinances, orders or decrees applicable to the conduct of its business and
the ownership of its properties, including regulatory minimum capital
requirements, the non-compliance with which or the default under which in the
aggregate would materially adversely affect the business of Citizens, (iii)
has not failed to file with the proper federal, state, local or other
authorities any material report or other document required to be so filed, and
(iv) has all approvals, authorizations, consents, licenses, clearances and
orders of, and has currently effective all registrations with, all
governmental and regulatory authorities, which are necessary to the business
or operations of Citizens, the non-receipt of which would in the aggregate
materially adversely affect the business of Citizens.
(d) The authorized capital stock of Citizens consists of 20,000 shares of
Citizens Common Stock, par value $20.00 per share, of which 20,000 shares are
validly authorized, issued and outstanding, fully paid and nonassessable as of
the date of this Agreement. As of the date hereof there are outstanding no
subscriptions, options, warrants, calls or rights or other agreements or
commitments of any kind obligating Citizens to issue or dispose of any
securities of Citizens or securities of Citizens convertible into any shares
of Citizens' Common Stock. From December 31, 1994 to the date hereof, no
dividends or other distributions (including, without limitation, any stock
dividend or distribution) have been declared, set aside or paid to the holders
of Citizens Common Stock except those permitted under Section 6.2(a)(3) below.
(e) Except as disclosed in Schedule I, Citizens does not own, directly or
indirectly, any equity interest in any bank, corporation, general partnership,
limited partnership or other equity, except in a fiduciary capacity.
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(f) (1) Citizens has delivered to Community a copy of the following
financial statements, each of which (including any related notes and
schedules) is included in Schedule I and presents fairly the consolidated
financial condition and results of operations of Citizens, at the dates and
for the periods covered by such statements in accordance with generally
accepted accounting principles consistently applied throughout the periods
covered by such statements. (It being understood that Citizens' interim
financial statements are not audited and are not prepared with related notes
but reflect all adjustments which are, in the opinion of Citizens, necessary
for a fair presentation of such financial statements:
(A) Balance Sheet (the "Citizens' 1994 Balance Sheet"), Statement of
Income, Statement of Stockholders' Equity and Statement of Cash Flows,
together with notes thereto, at December 31, 1994, and for the twelve
months then ended, certified by Coopers & Lybrand;
(B) Balance Sheets, Statements of Income, Statements of Stockholders'
Equity and Statements of Cash Flows, together with notes thereto, at
December 31, 1993 and 1992, and for the years then ended, certified by
Coopers & Lybrand.
(2) Citizens has provided Community with copies of all financial statements,
proxy statements, reports and other documents issued to its shareholders after
December 31, 1994 which are included in Schedule I and will provide Community
with copies of such statements, reports, and documents issued after the date
hereof, but on or prior to the Effective Date, and all reports and other
documents filed by it with any federal and or state authority during such
period, and Citizens shall make available for inspection by officials or
representatives of Community all financial statements prepared by Citizens and
examined by Coopers & Lybrand.
(i) (1) Citizens has delivered to Community copies of:
(A) its Annual Report to Shareholders for the years ended December
31, 1994 and 1993;
(B) all other periodic reports filed by Citizens with the Federal
Reserve Board, the FDIC, or the Comptroller of the Currency since
January 1, 1994; and
(C) all proxy statements and other written materials furnished to
Citizens' shareholders since January 1, 1993;
true and correct copies of which are included in Schedule I.
(2) No statement contained in any of the documents referred to in Section
5.1(h)(1), or to be contained in any financial statement, proxy statement,
report, document or other written materials provided or to be provided to
Community as required by Section 5.1(g), as of the date of such document or
other materials, contained, or as to documents or other materials to be
delivered after the date hereof will contain, any untrue statement of material
fact, or, at the date thereof, omitted or will omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which such statements are or will be made, not misleading;
provided, however, that information as of a later date shall be deemed to
modify information as of any earlier date.
(j) (1) Citizens has timely filed all federal, state, county and local
returns in respect of taxes, including, without limitation, estimated tax
returns, employer's withholding tax returns, other withholding tax returns and
Federal Unemployment Tax Act returns, and all other reports or other
information required or requested to be filed by it, and each such return,
report or other information is complete and accurate in all material respects.
Citizens has paid the amounts shown as owing on such returns (collectively,
"Taxes"). No waivers of statutes of limitations, and no agreement relating to
assessment or collection, are in effect in respect of any Taxes. Except as
disclosed in Schedule I, there are no claims pending against Citizens for the
alleged deficiency in the payment of any Taxes, and Citizens does not know of
any pending or threatened audits, investigations or claims for unpaid Taxes or
relating to any liability in respect of Taxes.
(2) Citizens has heretofore delivered to Community copies of its United
States federal and Pennsylvania tax returns for the fiscal years ended
December 31, 1994 and 1993, true and correct copies of which are included in
Schedule I.
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(3) To the extent required by generally accepted accounting principles, the
provision for current taxes payable reflected in "Other Liabilities" in the
Citizens' 1994 Balance Sheet, as of the date hereof and as of the Effective
Date, is and will be adequate to cover (A) all or substantially all accrued
and unpaid taxes of Citizens, whether or not disputed, for the period ended
December 31, 1994, and for all prior periods, and (B) all or substantially all
Taxes that may become due and payable by Citizens in future periods (i) in
respect of transactions, sales or services occurring or performed on or prior
to December 31, 1994, which by virtue of tax or accounting treatment will not
be included in income until subsequent to such date, or (ii) in respect of
deductions, costs or other allowances taken for federal income tax purposes
which Citizens' auditors have reason to believe are likely to be disallowed by
the Internal Revenue Service if audited by such Service. The provision for
applicable taxes stated on the consolidated books of Citizens as of the date
hereof and as of the Effective Date, is and will be adequate to cover (A) all
accrued and unpaid federal, state, county and local taxes of Citizens, whether
or not disputed, for the period ended on the date hereof or on the Effective
Date, as the case may be, and for all prior periods, and (B) all federal,
state, county and local Taxes that may become due and payable by Citizens in
future periods (i) in respect of such transactions, sales or services
occurring or performed on or prior to the date hereof or the Effective Date,
as the case may be, which by virtue of tax or accounting treatment will not be
included in income until subsequent to such dates, or (ii) in respect of
deductions, costs or other allowances taken for federal income tax purposes
which Citizens' auditors have reason to believe are likely to be disallowed by
the Internal Revenue Service if audited by such Service.
(4) No consent has been filed relating to Citizens pursuant to Section
341(f) of the Internal Revenue Code of 1986, as amended (the "Code").
(k) Since December 31, 1994, (1) there has been no material adverse change
in the business or financial condition of Citizens, and (2) except as set
forth in Schedule I, no event described in Section 6.2(a) has occurred.
(l) (1) Except as disclosed in Schedule I, Citizens has good and marketable
title, free and clear of all liens and encumbrances, and the right of
possession subject to existing leaseholds, to all real properties and good
title to all other property and assets, tangible and intangible, reflected in
Citizens' 1994 Balance Sheet or purported to have been acquired by it since
the date thereof (except property held as lessee under leases and disclosed in
writing prior to the date hereof and except real or personal property sold or
otherwise disposed of since December 31, 1994, in the Ordinary Course of
Business (as defined in Section 6.2(a)(5) hereof), except liens for taxes or
assessments not delinquent, pledges to secure deposits, repurchase agreements
in the Ordinary Course of Business and such other liens and encumbrances and
imperfections of title as do not materially affect the value of such property
or as reflected in Citizens' 1994 Balance Sheet or as currently shown on the
books and records of it and which do not interfere with or impair its present
and continued use. All real properties owned or leased by Citizens which are
material to the business, operations or financial condition of Citizens are in
substantially good operating condition and repair (ordinary wear and tear
expected).
(2) All properties held by Citizens under leases are held by it under valid,
binding and enforceable leases (subject to applicable bankruptcy, insolvency
and similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity), with such exceptions as are
not material and do not interfere with the conduct of its business, as the
case may be, and it enjoys quiet and peaceful possession of such leased
properties. Citizens is not in default in any material respect under any
material lease, agreement or obligation regarding its properties to which it
is a party or by which it is bound.
(m) Except as specifically disclosed in Schedule I, and other than loans in
the Ordinary Course of Business, time deposits and leases of less than two
years duration on which less than $5,000 in annual rental is payable, Citizens
is not a party to or bound by any contract or other agreement made in the
Ordinary Course of Business which involves aggregate future payments by it or
more than $25,000 and which is made for a fixed period expiring more than one
year from the date hereof, and Citizens is not a party to or bound by any
agreement not made in the Ordinary Course of Business which is to be performed
at or after the date hereof. Each of the contracts and agreements disclosed in
Schedule I pursuant to this Section 5.1(m) are valid, binding and enforceable
(subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally
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and subject, as to enforceability, to general principles of equity) and no
breach or default (and no condition which, with notice or passage of time,
could become a breach or default) exists with respect thereto, except such as
in the aggregate are not material to the business or financial condition of
Citizens.
(n) Except as specifically disclosed in Schedule I, as of December 31, 1994,
there are no commercial, commercial real estate or residential real estate
loans of Citizens in excess of $25,000 that have been classified by any
financial institution examiner as "Other Loans Especially Mentioned," "Special
Mention," "Substandard," "Doubtful" or "Loss" or internally classified in a
similar or comparable category. Except as specifically disclosed in Schedule
I, as of December 31, 1994, there are no consumer loans that are delinquent
more than thirty (30) days as to payment of principal and interest. Except as
specifically disclosed in Schedule I, as of December 31, 1994, the reserve for
loan losses in Citizens' 1994 Balance Sheet is adequate under the requirements
of generally accepted accounting principles and standard banking practice to
provide for possible losses on outstanding loans, net of recoveries. Except as
disclosed in the notes to the Audited Consolidated Financial Statements for
the year ended December 31, 1994, or as disclosed in Schedule I, there are no
loans or loan commitments outstanding to executive officers or directors of
Citizens, including their immediate families and entities with which they are
associated. All such loans and commitments to loan were made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons and do not involve
more than the normal risk of collectibility or present other unfavorable
features and, except as disclosed in Schedule I, none of such loans and
commitments to related parties disclosed in said Audited Financial Statements
or in writing to Community are delinquent in payment of principal or interest.
(o) Except for pledges to secure public and trust deposits, repurchase
agreements in the Ordinary Course of Business, and other pledges required by
laws, none of the investments reflected in Citizens' 1994 Balance Sheet under
the heading "Investment Securities," and none of the investments made since
December 31, 1994, is subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Citizens freely to dispose
of such investment at any time.
(p) Except as otherwise identified and disclosed in Schedule I, Citizens has
no pension, retirement, stock purchase, stock bonus, savings, or profit
sharing plan, any deferred compensation, consultant, bonus, life insurance,
death or survivor benefit health insurance, sickness, disability, medical,
surgical, hospital, severance, layoff, or vacation plan or group insurance
contract, or any other incentive, welfare, or employee benefit plan or
arrangement ("Benefit Plans"). With respect to each qualified retirement plan
and other Benefit Plans, included in Schedule I is an accurate and complete
copy of (a) the most recent plan documents, (b) the most recent annual report
filed with the United States Department of Labor and the Internal Revenue
Service, (c) the most recent financial and actuarial reports, (d) the most
recently issued Internal Revenue Service rulings or determination letters, and
(e) all notices to the Pension Benefit Guaranty Corporation of "Reportable
Events" as defined in the Employee Retirement Income Security Act of 1974
("ERISA"). As of January 1, 1995, all accrued contributions and other payments
to be made under each qualified retirement plan for such purpose have been set
aside therefor. Citizens has no contracts or other agreements with any member
of management or any management or consultation agreement not terminable at
will by it without liability, and no such contract or agreement has been
requested by or is under discussion by management with any group or employees,
any member of management or any other person.
(q) Except as specifically disclosed in Schedule I, there are no actions,
suits, investigations or proceedings instituted, pending or, to the knowledge
of Citizens, threatened against Citizens before any court, any arbitrator of
any kind or any government agency (including any bank regulatory authority),
and Citizens is not subject to any potential adverse claim, the outcome of
which could involve the payment by Citizens of an amount in excess of $25,000
or, which could materially affect Citizens or its business or property or the
transactions contemplated hereby. Citizens has no knowledge of any pending or
threatened claims or charges under the Community Reinvestment Act or before
the Equal Employment Opportunity Commission, the Office of Federal Contract
Compliance, any Human Relations Commission or any other federal, state or
local government agency.
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(r) (1) The execution and delivery of this Agreement has been duly
authorized by the Board of Directors of Citizens and, when the Merger has been
duly approved by the affirmative vote of the shareholders of Citizens owning
at least two-thirds ( 2/3) of its capital stock outstanding at a meeting of
shareholders duly called and held in accordance with the provisions of Section
215(a) of the National Bank Act, this Agreement shall be duly and validly
authorized by all necessary action on the part of Citizens.
(2) This Agreement has been duly executed and delivered by Citizens and
(assuming due execution and delivery by Community) constitutes, and, upon its
execution and delivery shall constitute, a valid, binding and enforceable
obligation of Citizens, subject to (i) bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or other similar laws from time
to time in effect relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of National Banking Associations,
(ii) laws relating to the safety and soundness of depository institutions and
their holding companies, and (iii) general principles of equity, and except
that the availability of equitable remedies or injunctive relief is within the
discretion of the appropriate court.
(3) The execution and delivery by Citizens of this Agreement and the
consummation of the transactions herein contemplated do not violate any
provision of the Articles of Association or Bylaws of Citizens, any provisions
of federal or state law or any governmental rule or regulation (assuming the
receipt of the Government Approvals, the receipt of the requisite Citizens
shareholder approval referred to in Section 5.1(r)(1), and the accuracy of the
representations of Community set forth in Sections 5.2(f) and (g)), and do not
require any consent of any person under, conflict with or result in a breach
of or accelerate the performance required by any of the terms of, any material
debt instrument, lease, license, covenant, agreement or understanding to which
Citizens is a party or by which it is bound or any order, ruling, decree,
judgment, arbitration award or stipulation to which it is subject, or
constitute a default thereunder or result in the creation of any lien, claim,
security interest, encumbrance, charge, restriction or right of any third
party of any kind whatsoever upon any of its properties or assets.
(s) Except for Berwind Financial Group, L.P., which will be entitled to a
fee to be paid by Citizens for rendering a fairness opinion and for other
services related to the Merger, no broker, agent, finder, consultant or other
party (other than legal and accounting advisors) has been retained by Citizens
or is entitled to be paid based upon any agreements, arrangements or
understandings made by Citizens in connection with any of the transactions
contemplated by this Agreement.
(t) Citizens is, and continuously since at least January 1, 1992 has been,
insured with reputable insurers against all risks normally insured against by
financial institutions, and all of the insurance policies or bonds maintained
by it are in full force and effect. Citizens is not in default thereunder and
all material claims thereunder have been filed in due and timely fashion.
(u) Citizens is not in violation of, and has not received notice of a
potential of actual violation of, any applicable federal, state or local laws,
statutes, rules, regulations or ordinances relating to public health, safety
or the environment, including, without limitation, relating to releases,
discharges, emissions or disposals to air, water, land or ground water, to the
withdrawal or use of ground water, to the use, handling or disposal of
polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde, to the
treatment, storage, disposal or management of hazardous substances (including,
without limitation, petroleum, crude oil or any fraction thereof, or other
hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or
other controlled, prohibited or regulated substances which violation could
have a material adverse effect on the business, properties or financial
condition of Citizens.
Except as disclosed in Schedule I improvements on any real estate owned or
leased by Citizens do not contain friable asbestos or substances containing
asbestos and deemed hazardous by any federal, state or local laws, regulations
or orders respecting such materials. Citizens does not know of any liability
or class of liability of Citizens under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
Section 9601 et seq.), or the Resource Conservation and Recovery Act of 1976,
as amended (42 U.S.C. Section 6901 et seq.).
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(v) The information pertaining to Citizens, which has been or will be
furnished to Community by or on behalf of Citizens for inclusion in the
Community Registration Statement, the Prospectus or the Proxy Statement (each
as hereinafter defined in Section 7.1 hereof), or in the applications to be
filed to obtain the Government Approvals (the "Applications"), will contain no
untrue statement of any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading; provided, however, that information
as of a later date shall be deemed to modify the information as of an earlier
date. All financial statements of Citizens included in the Prospectus or the
Proxy Statement will present fairly the consolidated financial condition and
results of operations of Citizens at the dates and for the periods covered by
such statements in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such statements.
Citizens shall promptly advise Community in writing if prior to the Effective
Date it shall obtain knowledge of any facts that would make it necessary to
amend the Community Registration Statement, the Proxy Statement or any
Application, or to supplement the Prospectus, in order to make the statements
therein not misleading or to comply with applicable law.
(w) No representation or warranty by Citizens and no statement by Citizens
in any certificate, agreement, schedule or other document furnished in
connection with the transactions contemplated by this Agreement, shall contain
any untrue statement of a material fact or omit to state any material fact
necessary to make such representation, warranty or statement not misleading to
Community; provided, however, that information as of a later date shall be
deemed to modify information as of an earlier date.
5.2 Representations, Warranties and Covenants of Community. Community, for
itself and on behalf of each of its bank and non-bank subsidiaries, represents
and warrants to Citizens that:
(a) Community is a corporation duly incorporated, validly existing and in
good standing under the Pennsylvania Business Corporation Law (BCL), and is
a registered bank holding company under the Bank Holding Company Act of
1956 as amended (the "BHC Act"). Community has corporate power to own its
properties and to conduct its business as currently conducted, and
Community has corporate power to enter into this Agreement and to carry out
all of the terms and provisions hereof to be carried out by it, subject to
receipt of Government Approvals. As of the date hereof, the authorized
capital stock of Community consists of 5,000,000 shares of Community Common
Stock, $5.00 par value, of which 2,028,985 shares are validly authorized,
issued and outstanding, fully paid and nonassessable, and 2,651 shares were
held as treasury shares, and 500,000 shares of preferred stock of which no
shares have been issued. The outstanding Community Common Stock has been
duly and validly registered pursuant to Section 12(g) of the 1934 Act,
which registration is in full force and effect. As of the date hereof,
there are outstanding no subscriptions, options, warrants, calls or rights
or other agreements or commitments of any kind obligating Community to
issue or dispose of any securities of Community or securities of Community
convertible into any shares of Community Common Stock or preferred stock,
other than options to purchase shares pursuant to the Community Long Term
Incentive Plan as amended and the Community Dividend Reinvestment Plan.
(b) Community Banks, Inc. owns 100% of the issued and outstanding shares
of the following corporations: Community Banks, N.A.; Community Banks Life
Insurance Company, Inc.; and Community Bank Investments, Inc. UDNB
Investments, Inc. is a direct subsidiary of Community Banks, N.A. Community
Banks, Inc. owns 100% of the issued and outstanding shares of Community
Banks, N.A., Community Banks Life Insurance Company, Inc., and Community
Bank Investment, Inc., and Community Banks, N.A. owns 100% of the issued
and outstanding shares of UDNB Investments, Inc. free and clear of any
liens, claims, security interests, encumbrances, charges, restrictions, or
rights of third parties of any kind whatsoever. Community Bank Investments,
Inc.; Community Banks, N.A.; UDNB Investments, Inc.; and Community Banks
Life Insurance Company, Inc. are collectively referred to herein as the
"Subsidiaries".
(c) CBNA is a national banking association that is duly organized,
validly existing, and in good standing under the laws of the United States.
Community Banks, N.A. is an "Insured Depository Institution" as defined in
the Federal Deposit Insurance Act, as amended ("FDIA"), and is a member of
the Federal Reserve System. Community Banks Life Insurance Company, Inc. is
a corporation duly organized, validly existing, and in good standing under
the laws of the State of Arizona. Community Bank
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Investment, Inc., and UDNB Investments, Inc. are corporation duly
organized, validly existing, and in good standing under the laws of the
State of Delaware.
(d) The copies of the Articles of Incorporation, Articles of Association,
and By-Laws of Community and its subsidiaries heretofore delivered to
Citizens and which are included in Schedule II attached hereto and made a
part hereof and incorporated herein by reference thereto are complete and
accurate copies thereof as in effect on the date hereof. The minute books
of Community and its subsidiaries which have been made available for
inspection by Citizens contain a complete and accurate record of all
meetings of said corporations.
(e) Community and its subsidiaries (i) have corporate power to own their
respective properties and to conduct their respective businesses as
currently conducted, (ii) have substantially complied with, and are not in
default in any material respect under, any laws, regulations, ordinances,
orders or decrees applicable to the conduct of their businesses and the
ownership of their respective properties, the non-compliance with which or
the default under which in the aggregate would materially adversely affect
their businesses on a consolidated basis, (iii) have not failed to file
with the proper federal, state, local or other authorities any material
report or other document required to be so filed, and (iv) have all
approvals, authorizations, consents, licenses, clearances and orders of,
and have currently effective all registrations with, all governmental and
regulatory authorities, which are necessary to the business or operations
of Community and its subsidiaries as they are now being conducted.
(f) Except as disclosed in Schedule II and except for the Subsidiaries,
neither Community Banks, Inc. nor the Subsidiaries own, directly or
indirectly, any equity interest in any bank, corporation, general
partnership, limited partnership, or other equity, except in a fiduciary
capacity.
(g) Community has delivered to Citizens a copy of the following
consolidated financial statements, each of which (including any related
notes and schedules) is included in Schedule II and presents fairly the
consolidated financial condition and results of operations of Community and
its consolidated subsidiaries at the dates and for the periods covered by
such statements in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such statements (it
being understood that Community's interim financial statements are not
audited and are not prepared with related notes but reflect all adjustments
which are, in the opinion of Community, necessary for a fair presentation
of such financial statements):
(A) Consolidated Balance Sheet (the "Community 1994 Balance Sheet"),
Consolidated Statement of Income, Consolidated Statement of
Stockholders' Equity and Consolidated Statement of Cash Flows, together
with the notes thereto, at December 31, 1994, and for the twelve months
then ended, certified by Coopers & Lybrand; and
(B) Consolidated Balance Sheets, Consolidated Statements of Income,
Consolidated Statements of Stockholders' Equity, and Consolidated
Statements of Cash Flows, together with the notes thereto, at December
31, 1993 and 1992 and for the years then ended, certified by Coopers &
Lybrand.
(2) Community has delivered to Citizens a copy of consolidating balance
sheets, consolidating statements of income, consolidating statements of
stockholders' equity, and consolidating statements of cash flows (the
"Consolidating Statements") for Community and the subsidiaries as of
December 31, 1994 and 1993 and for the 12-month periods ending December 31,
1994 and 1993 as the case may be, which are included in Schedule II, each
of which presents fairly the separate financial condition and results of
operations of Community and the subsidiaries at the dates and for the
periods covered by such statements.
(3) Community has provided Citizens with copies of all financial
statements, proxy statements, reports and other documents issued to its
shareholders after December 31, 1994, and will provide Citizens with copies
of such statements, reports, and documents issued after the date hereof and
on or prior to the Effective Date. Community has delivered to Citizens
copies of:
(a) its annual report to shareholders for the years ending December
31, 1994 and 1993;
(b) its annual report to the Securities and Exchange Commission (the
"SEC") on Form 10-K for the years ending December 31, 1994 and 1993;
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(c) Community Banks, N.A.'s annual report to the Comptroller of the
Currency for the years ending December 31, 1994 and 1993;
(d) all other periodic reports filed by Community or the subsidiaries
with the SEC (including all quarterly reports on Form 10-Q and all
current reports on Forms 8-K, the Federal Reserve Board, the Office of
the Comptroller of the Currency since January 1, 1993;
(e) all proxy statements and other written materials furnished to
Community shareholders since January 1, 1993.
True and correct copies of which are included in Schedule II. No statement
contained in any of such documents, or to be contained in any financial
statement, proxy statement, report, document or other written materials to
be provided to Citizens as required above, as of the date of such document
or other materials, contained, or as to documents or other materials to be
delivered after the date hereof will contain, any untrue statement of
material fact, or, at the date thereof, omitted or will omit to state a
material fact necessary in order to make the statements contained therein,
in light of the circumstances under which such statements are or will be
made, not misleading; provided, however, that information as of a later
date shall be deemed to modify information as of any earlier date.
(h) Except as specifically disclosed in Schedule II and other than loans
by any of the Subsidiaries in the Ordinary course of Business, time
deposits and leases of less than two years' duration on which less than
$25,000 in annual rental is payable, neither Community nor any of the
Subsidiaries is a party to or bound by any contract or other agreement made
in the Ordinary Course of Business which involves aggregate future payments
by it of more than $100,000 and which is made for a fixed period expiring
more than one year from the date hereof, and neither Community nor any of
the Subsidiaries is a party to or bound by any agreement not made in the
Ordinary Course of Business which is to be performed at or after the date
hereof. Each of the contracts and agreements disclosed in Schedule II
pursuant to this Section 5.2(g) are valid, binding and enforceable (subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles
of equity) and no breach or default (and no condition which, with notice or
passage of time, could become a breach or default) exists with respect
thereto, except such as in the aggregate are not material to the business
or financial condition of Community and its Subsidiaries taken as a whole.
(i) Except as specifically disclosed in Schedule II, as of December 31,
1994, there are no commercial, commercial real estate or residential real
estate loans of Community or the Subsidiaries in excess of $25,000 that
have been classified by any financial institution examiner as "Other Loans
Especially Mentioned," "Special Mention," "Substandard," "Doubtful" or
"loss" or internally classified in a similar or comparable category. Except
as specifically disclosed in Schedule II, as of December 31, 1994, there
are no consumer loans that are delinquent more than thirty (30) days as to
payment of principal and interest. Except as specifically disclosed in
Schedule II, as of December 31, 1994, the reserve for loan losses in the
Community 1994 Balance Sheet is adequate under the requirements of
generally accepted accounting principles and standard banking practice to
provide for possible losses on outstanding loans, net of recoveries. Except
as disclosed in the notes to the Audited Consolidated Financial Statements
for the year ended December 31, 1994, or as disclosed in Schedule II, there
are no loans or loan commitments outstanding to executive officers or
directors of Community or the Subsidiaries, including their immediate
families and entities with which they are associated. All such loans and
commitments to loan were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features and,
except as disclosed in Schedule II, none of such loans and commitments to
related parties disclosed in said Audited Consolidated Financial Statements
or in writing to Citizens are delinquent in payment of principal or
interest.
(j) Except for (i) Community Defined Benefit Pension Plan which covers
eligible employees of Community and its Subsidiaries, (ii) Community Long
Term Incentive Plan, (iii) the Community Banks, N.A. Survivor Income
Agreement, and (iv) as otherwise identified and disclosed in Schedule II,
neither
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Community nor any of the Subsidiaries has any pension, retirement, stock
purchase, stock bonus, savings, or profit sharing plan, any deferred
compensation, consultant, bonus, life insurance, death or survivor benefit
health insurance, sickness, disability, medical, surgical, hospital,
severance, layoff, or vacation plan or group insurance contract, or any
other incentive, welfare, or employee benefit plan or arrangement ("Benefit
Plans"). With respect to each qualified retirement plan and other Benefit
Plans, including but not limited to the Defined Benefit Pension Plan,
included in Schedule II is an accurate and complete copy of (a) the most
recent plan documents, (b) the most recent annual report filed with the
United States Department of Labor and the Internal Revenue Service, (c) the
most recent financial and actuarial reports, (d) the most recently issued
Internal Revenue Service rulings or determination letters, and (e) all
notices to the Pension Benefit Guaranty Corporation of "Reportable Events"
as defined in the Employee Retirement Income Security Act of 1974
("ERISA"). As of January 1, 1995, all accrued contributions and other
payments to be made under the Defined Benefit Group Pension Plan have been
made or reserves adequate for such purpose have been set aside therefor. As
of the date hereof, there was no unfunded liability and no funding
deficiency existing with regard to the Defined Benefit Pension Plan.
Neither Community nor any of the Subsidiaries has any union or collective
bargaining agreements, any contracts or other agreements with any labor
organization or, except as specifically disclosed in Schedule II, any
contracts or other agreements with any member of management or any
management or consultation agreement not terminable at will by it without
liability, and no such contract or agreement has been requested by or is
under discussion by management with any group of employees, any member of
management or any other person.
(k) Except as disclosed in Schedule II, since December 31, 1994, (i)
Community has not incurred any material liability or obligation, accrued or
contingent and whether due or to become due, other than as a result of
operations in the ordinary course of business, and (ii) there has been no
material adverse change in the business or financial condition of Community
and its subsidiaries on a consolidated basis.
(l) Except as disclosed in Schedule II, neither Community nor any of its
subsidiaries is engaged in, or a party to, or threatened with, any legal
action or other proceeding before any court, any arbitrator of any kind or
any government agency (including any bank regulatory authority), and
neither Community nor any of its subsidiaries is subject to any potential
adverse claim, the outcome of which could involve the payment by Community
or any of its subsidiaries of an amount in excess of $50,000 or which could
materially affect Community and its subsidiaries on a consolidated basis or
its business or property or the transactions contemplated hereby. Community
has no knowledge of any pending or threatened claims or charges under the
Community Reinvestment Act or before the Equal Employment Opportunity
Commission, the Office of Federal Contract Compliance, any Human Relations
Commission or any other federal, state or local government agency. There is
no labor strike, dispute, slow-down or stoppage pending or, to the best
knowledge of Community, threatened against Community or any of its
subsidiaries. There are no outstanding orders, rulings, decrees, judgements
or stipulations, to which Community is a party or by which it is bound, by
or with any court, arbitrator, or government agency, involving an amount in
excess of $50,000.
(m) (1) The execution and delivery of this Agreement has been duly and
validly authorized by the Board of Directors of Community, and the Merger
and this Agreement have been duly and validly authorized by all necessary
corporate action on the part of Community.
(2) This Agreement has been duly executed and delivered by Community and
(assuming due execution and delivery by Citizens) constitutes, and, upon
its execution and delivery this Agreement shall constitute a valid, binding
and enforceable obligation of Community, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally, and
subject, as to enforceability, to general principles of equity.
(3) The execution and delivery of this Agreement by Community and the
consummation of the transactions herein contemplated (A) do not violate any
provisions of the Articles of Incorporation or Bylaws of Community or the
Articles of Association and Bylaws of CBNA, any provisions of federal or
state law or any governmental rule or regulation (assuming (i) receipt of
the Government Approvals, (ii) the
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due registration of the offering of the Community Common Stock under the
Securities Act of 1933, as amended (the "1933 Act"), (iii) the receipt of
appropriate permits or approvals under the state securities or "blue sky"
laws, (iv) the receipt of the requisite CBNA shareholders' approval, (v)
the accuracy of the representations of Citizens set forth in Sections
5.1(v) and (w)), and (B) do not require any consent of any person under,
conflict with or result in a breach of or accelerate the performance
required by any of the terms of, any material debt instrument, lease,
license, covenant, agreement or understanding to which Community, CBNA, or
any of its other subsidiaries is a party or by which it is bound or any
order, ruling, decree, judgment, arbitration award or stipulation to which
Community or CBNA is subject, or constitute a default thereunder or result
in the creation of any lien, claim, security interest, encumbrance, change,
restriction, or right of any third party of any kind whatsoever upon any of
their properties or assets.
(n) Neither Community nor any Subsidiary is in violation of, or has
received notice of a potential or actual violation of, any applicable
federal, state, or local laws, statutes, rules, regulations, or ordinances
relating to public health, safety, or the environment, including, without
limitation, relating to releases, discharges, emissions, or disposals to
air, water, land, or ground water to the withdrawal or use of ground water,
to the use, handling, or disposal of polychlorinated biphenyls ("PCB's"),
asbestos, or urea formaldehyde, to the treatment, storage, disposal or
management of hazardous substances (including, without limitation,
petroleum, crude oil or any fraction thereof, or other hydrocarbons),
pollutants or contaminants, to exposure to toxic, hazardous or other
controlled, prohibited or regulated substances which violation could have a
material adverse effect on the business, properties or financial condition
of Community and the Subsidiaries on a consolidated basis. To the best
knowledge of Community, any improvements or other real estate owned or
leased by Community or any Subsidiary do not contain friable asbestos or
substances containing asbestos and deemed hazardous by any federal, state,
or local laws, regulations, or orders respecting such materials. Neither
Community nor any of the Subsidiaries knows of any liability or class of
liability of Community or any of the Subsidiaries under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(42 U.S.C. Section 9601 et seq) or the Resource Conservation and Recovery
Act of 1976, as amended (42 U.S.C. Section 6901 et seq).
(o) The information pertaining to Community and its subsidiaries which
will appear in the Community Registration Statement, the Prospectus or the
Proxy Statement, in the form filed with the SEC, or in the applications to
be filed to obtain the Government Approvals, will contain no untrue
statement of any material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they are made, not misleading;
provided, however, that information as of a later date shall be deemed to
modify information as of an earlier date. All financial statements of
Community included in the Prospectus or the Proxy Statement will present
fairly the consolidated financial condition and results of operations of
Community and its consolidated subsidiaries at the dates and for the
periods covered by such statements in accordance with generally accepted
accounting principles consistently applied throughout the periods covered
by such statements (it being understood that Community's interim financial
statements are not audited and are not prepared with related notes but
reflect all adjustments which are, in the opinion of Community, necessary
for a fair presentation of such financial statements).
(p) (1) Community, CBNA, and each of its other subsidiaries has timely
filed all federal, state, county and local returns in respect of taxes,
including, without limitation, estimated tax returns, employer's
withholding tax returns, other withholding tax returns and Federal
Unemployment Tax Act returns, and all other reports or other information
required or requested to be filed by it, and each such return, report or
other information is complete and accurate in all material respects.
Community and each of its subsidiaries has paid the amounts shown as owing
on such returns (collectively, "Taxes"). No waivers of statutes of
limitations, and no agreement relating to assessment or collection, are in
effect in respect of any Taxes. Except as disclosed in Schedule II, there
are no claims pending against Community or its subsidiaries for the alleged
deficiency in the payment of any Taxes, and neither Community nor its
subsidiaries know of any pending or threatened audits, investigations or
claims for unpaid Taxes or relating to any liability in respect of Taxes.
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(2) Community has heretofore delivered to Citizens copies of its
consolidated United States federal and Pennsylvania corporate tax returns
for the fiscal years ended December 31, 1994, 1993, 1992, 1991 and 1990,
true and correct copies of which are included in Schedule II.
(3) The consolidated provision for current taxes payable reflected in
"Other Liabilities" in the Community 1994 Balance Sheet, as of the date
hereof and as of the Effective Date, is and will be adequate to cover (A)
all or substantially all accrued and unpaid Taxes of Community and its
subsidiaries, whether or not disputed, for the period ended December 31,
1994, and for all prior periods, and (B) all or substantially all Taxes
that may become due and payable by Community and its subsidiaries in future
periods (i) in respect of transactions, sales or services occurring or
performed on or prior to December 31, 1994, which by virtue of tax or
accounting treatment will not be included in income until subsequent to
such date, or (ii) in respect of deductions, costs or other allowances
taken for federal income tax purposes which Community's auditors have
reason to believe are likely to be disallowed by the Internal Revenue
Service if audited by such Service. The provision for applicable taxes
stated on the consolidated books of Community as of the date hereof and as
of the Effective Date, is and will be adequate to cover (A) all accrued and
unpaid federal, state, county, and local taxes of Community and its
subsidiaries, whether or not disputed, for the period ended on the date
hereof or on the Effective Date, as the case may be, and for all prior
periods, and (B) all federal, state, county and local Taxes that may become
due and payable by Community and its subsidiaries in future periods (i) in
respect of such transactions, sales or services occurring or performed on
or prior to the date hereof or the Effective Date, as the case may be,
which by virtue of tax or accounting treatment will not be included in
income until subsequent to such dates, or (ii) in respect of deductions,
costs or other allowances taken for federal income tax purposes which
Community's auditors have reason to believe are likely to be disallowed by
the Internal Revenue Service if audited by such Service.
(4) No consent has been filed relating to Community or its subsidiaries
pursuant to Section 341(f) of the Code.
(q) (1) Each of Community and its subsidiaries has good and marketable
title, free and clear of all liens and encumbrances, and the right of
possession subject to existing leaseholds, to all real properties and good
title to all other property and assets, tangible and intangible, reflected
in the Community 1994 Balance Sheet or purported to have been acquired by
it since the date thereof (except property held as lessee under leases and
disclosed in writing prior to the date hereof and except real or personal
property sold or otherwise disposed of since December 31, 1994, in the
Ordinary Course of Business), except liens for taxes or assessments not
delinquent, pledges to secure deposits, repurchase agreements in the
Ordinary Course of Business and such other liens and encumbrances and
imperfections of title as do not materially affect the value of such
property or as reflected in the Community 1994 Balance Sheet or as
currently shown on the books and records of it and which do not interfere
with or impair its present and continued use. All real properties owned or
leased by Community which are material to the business, operations or
financial condition of Community are in substantially good operating
condition and repair (ordinary wear and tear expected).
(2) All properties held by Community or any of its subsidiaries under
leases are held by it under valid, binding and enforceable leases (subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles
of equity), with such exceptions as are not material and do not interfere
with the conduct of its business, as the case may be, and it enjoys quiet
and peaceful possession of such leased properties. Neither Community nor
any of its subsidiaries is in default in any material respect under any
material lease, agreement, or obligation regarding its properties to which
it is a party or by which it is bound.
(r) Each of Community and its subsidiaries is, and continuously since at
least January 1, 1992 has been, insured with reputable insurers against all
risks normally insured against by companies of the same type and in the
same line of business, and all of the insurance policies or bonds
maintained by it are in full force and effect. Neither Community nor any of
its subsidiaries is in default thereunder and all material claims
thereunder have been filed in due and timely fashion.
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(s) No representation or warranty by Community and no statement by
Community in any certificate, agreement, schedule or other document
furnished in connection with the transactions contemplated by this
Agreement, shall contain any untrue statement of a material fact or omit to
state any material fact necessary to make such representation, warranty or
statement not misleading to Citizens; provided, however, that information
as of a later date shall be deemed to modify information as of an earlier
date.
(t) No broker, agent, finder, consultant or other party (other than legal
accounting or financial advisors) has been retained by Community or is
entitled to be paid based upon any agreements, arrangements or
understandings made by Community in connection with any of the transactions
contemplated by this Agreement.
ARTICLE VI
Agreements of Community, CBNA, and Citizens
6.1 Agreements of Community and CBNA.
(a) Community and/or CBNA has or will promptly following the execution of
this Agreement, use its reasonable best efforts in good faith to take as
promptly as practicable all such steps as shall be necessary in order to cause
the Merger to be consummated as expeditiously as possible.
(b) As the sole shareholder of CBNA, Community shall be unanimous
shareholder action ratify and confirm the merger of Citizens into CBNA and
cause the Board of Directors of CBNA to approve the Merger.
(c) Community shall issue shares of Community Common Stock in accordance
with the Conversion Factor, as it may be adjusted in accordance with this
Agreement, which shares will, then issued and delivered pursuant to this
Agreement, be duly authorized and legally and validly issued, fully paid and
nonassessable.
(d) Prior to the Effective Date, Community shall appoint American Stock
Transfer and Trust Company as Exchange Agent for the purpose of exchanging
certificates representing shares of Community Common Stock for certificates
representing shares of Citizens Common Stock, and thereafter Community shall
issue and deliver to the Exchange Agent certificates representing shares of
Community Common Stock, and shall pay to the Exchange Agent such amounts of
cash as shall be required to be delivered to holders of shares of Citizens
Common Stock entitled to cash in lieu of a fractional share pursuant to
Article II of this Agreement. Any Community Common Stock and any amounts of
cash delivered to the Exchange Agent and unclaimed at the end of two years
from the Effective Date shall be repaid to Community, in which event the
persons entitled thereto shall look only to Community for payment thereof;
provided, however, that if Community shall, as required by law, pay to the
Commonwealth of Pennsylvania any unclaimed Community Common Stock or monies so
repaid to Community, said persons shall thereafter look only to the
Commonwealth of Pennsylvania for payment thereof.
(e) Prior to the Effective Date, Community, separately and jointly with
Citizens, shall use its reasonable best efforts in good faith to take or cause
to be taken as promptly as practicable all such steps as shall be necessary to
obtain (i) the prior approval of the Merger by the Office of the Comptroller
of the Currency ("OCC") and the Pennsylvania Department of Banking, and ((ii)
all other consents and approvals of government agencies as are required by law
or otherwise (such approvals referred to in clauses (i) and (ii) of this
Section 6.1(e) herein referred to as the "Government Approvals"), and shall do
any and all acts and things deemed by Community to be necessary or appropriate
in order to cause the Merger of Citizens with and into CBNA to be consummated
on the terms provided in this Agreement as promptly as practicable. Community
shall provide Citizens and its representatives with the right to review and
approve in advance all information relating to Citizens which will appear in
any filing to be made with, or written material to be submitted to, any third
party or governmental body in connection with the transactions contemplated by
this Agreement. Community shall provide Citizens and its counsel with a copy
of all applications and other written material filed with or provided to any
such third party or governmental body, together with a copy of all
correspondence to or from any such third party or governmental body, in each
case promptly following the filing, submission or receipt of such materials.
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(f) Community shall promptly give written notice to Citizens upon becoming
aware of the impending or threatened occurrence of any event which would cause
or constitute a breach of any of the agreements, representations and
warranties of Community contained or referred to in this Agreement and shall
use its reasonable best efforts to prevent the same or remedy the same
promptly.
(g) Prior to the Effective Date, Community and each of its subsidiaries
shall give Citizens and its counsel, financial advisor and accountants full
access, during normal business hours and upon reasonable request, to its
properties, books, contracts, commitments and records, and shall furnish
Citizens during such period with all such information concerning its affairs
as Citizens may reasonably request. The availability or actual delivery of
information about Community or its subsidiaries to Citizens shall not affect
the covenants, representations and warranties of Community contained in this
Agreement. Citizens shall treat as confidential all such information in the
same manner as Citizens treats similar confidential information of its own,
and if this Agreement is terminated, Citizens shall continue to treat all such
information as confidential and cause its employees and agents to keep all
such information confidential and shall return such documents theretofore
delivered by Community as Community shall request.
(h) Community shall, in good faith, endeavor to place as employees with CBNA
or its other subsidiaries, persons who are employees of Citizens immediately
prior to the Effective Date on terms and conditions, including salaries and
benefits, comparable to those made available to employees of Community, CBNA,
and its other subsidiaries holding similar positions. Such persons as are so
employed after the Effective Date shall have such titles as are appropriate
and consistent with Community's then existing personnel structure. Community
shall continue the compensation of Citizens' employees at the same levels in
effect on the Effective Date through December 31, 1996 subject to Community's
right to terminate any employee of Citizens for cause after the Effective
Date.
(i) Prior to the Effective Date, Community and each of its Subsidiaries
shall conduct its respective business in the ordinary course as heretofore
conducted and shall use its reasonable best efforts (i) to preserve its
respective business and business organization intact, (ii) to preserve the
good will of its customers and others having business relations with it, (iii)
to maintain its properties in customary repair, working order and condition
(reasonable wear and tear expected), (iv) to comply with all laws applicable
to it and the conduct of its business, (v) to keep in force at not less than
their present limits all policies of insurance (including deposit insurance of
the FDIC with respect to CBNA), (vi) to file in a due and timely manner all
reports, tax returns and other documents required to be filed with federal,
state, local and other authorities, and (vii) unless it is contesting the same
in good faith and has established reasonable reserves therefor, to pay when
required to be paid all Taxes (as hereinafter defined) indicated by tax
returns so filed or otherwise lawfully levied or assessed upon it or any of
its properties and to withhold or collect and pay to the proper governmental
authorities or hold in separate bank accounts for such payment all Taxes and
other assessment which it believes in good faith to be required by law to be
so withheld or collected.
(j) Community will not take any actions or engage in any transaction
following the Merger that would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code or fail to
qualify for pooling of interests accounting treatment. Consummation of the
transactions contemplated by this Agreement shall be conditioned upon the
Merger being accounted for under the pooling of interests method of
accounting.
6.2 Agreement of Citizens.
(a) At or after the date hereof and on or prior to the Effective Date,
except with the prior written consent of Community, or as otherwise provided
in this Agreement, Citizens shall not:
(1) Amend its Articles of Association or Bylaws; enter into any
shareholder agreement, understanding or commitment relating to the right to
vote its shares of capital stock; purchase, redeem, retire or otherwise
acquire any share of, or any security convertible into shares of, its
capital stock or other equity security; or agree to do any of the
foregoing;
(2) Issue, deliver or sell shares of capital stock or securities
convertible into any such shares, or issue or grant any right, option or
other commitment for the issuance, delivery or sale of any such shares or
such securities;
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(3) Declare, set aside or pay any dividend or other distribution in
respect of its capital stock (including, without limitation, any stock
dividend or distribution) other than regular quarterly cash dividends
payable in accordance with customary dividend policy, which shall mean cash
dividends payable with respect to Citizens' Common Stock at an annual rate
on a calendar year basis not in excess of $20.50 per share.
(4) Enter into or amend, or increase the contribution to or obligation
under, any employment contract or any bonus, stock option, profit sharing,
pension, retirement, savings, incentive, deferral or similar employee
benefit program or arrangement, or authorize the creation of any new or
replacement job classifications or staff positions, pay bonuses or other
extraordinary compensation, or grant any salary or wage increase except
normal individual increases in compensation to employees in accordance with
established employee procedures of Citizens.
(5) Authorize or make any material change in its business or operations,
other than in the Ordinary Course of Business as hereinafter defined; incur
any material direct or contingent liabilities or commitments other than in
the Ordinary Course of Business; sell or dispose of any shares of its
capital stock, or lease, sell or dispose of any other material part of its
assets, in each case except in the Ordinary Course of Business and for
adequate value; establish any new branch banking offices, loan production
offices, or other offices, or make any capital expenditures in excess in
the aggregate of $20,000 (except for ordinary repairs, renewals or
replacements); waive or release any right or cancel or compromise any of
its debts or claims except in the Ordinary Course of Business; or otherwise
enter into any material contract, transaction or commitment on its behalf,
except in the Ordinary Course of Business. For purposes of this Agreement,
the Ordinary Course of Business shall consist of the banking business as
presently conducted by Citizens and not prohibited by the National Bank Act
(herein referred to as the "Ordinary Course of Business"); or
(6) Citizens agrees that neither it nor any of its officers and directors
shall (and Citizens shall direct and use its reasonable best efforts to
cause its employees, agents and representatives including, without
limitation, any investment banker, attorney or accountant retained by it
not to) initiate, solicit or encourage, directly or indirectly, any
inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to stockholders of Citizens but excluding
the transactions contemplated by this Agreement) with respect to a merger,
consolidation or similar transaction involving, or any purchase of all or
any significant portion of the assets or any equity securities of, Citizens
(any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or, except to the extent legally required for the
discharge by the Board of Directors of its fiduciary duties as advised in
writing by such board's counsel, engage in any negotiations concerning, or
provide any confidential information or data to, or have any discussions
with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition
Proposal. Citizens will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. Citizens will take the
necessary steps to inform the appropriate individuals or entities referred
to in the first sentence hereof of the obligations undertaken in this
Section 6.2(a)(6). Citizens will notify Community immediately if any such
inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with or on behalf of any corporation, partnership, person or
other entity or group other than Community with respect to any Acquisition
Proposal.
(b) Prior to the Effective Date, Citizens shall conduct its business in the
ordinary course as heretofore conducted and shall use its reasonable best
efforts (i) to preserve its respective business and business organization
intact, (ii) to keep available to Community the services of its present
officers (provided, however, that it shall have the right to terminate the
employment of any such officer for cause in accordance with its established
employee procedures), (iii) to preserve the good will of its customers and
others having business relations with it, (iv) to consult with Community as to
the making of any decisions or the taking of any actions in matters other than
in the Ordinary Course of Business, (v) to maintain its properties in
customary repair, working order and condition (reasonable wear and tear
expected), (vi) to comply with all laws applicable to it and the conduct of
its business, (vii) to keep in force at not less than their present limits all
policies of insurance (including deposit
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insurance of the FDIC with respect to Citizens), (viii) to make no material
change in the general terms, policies and conditions upon which it presently
does business other than in the Ordinary Course of Business, (ix) to file in a
due and timely manner all reports, tax returns and other documents required to
be filed with federal, state, local and other authorities, and (x) unless it
is contesting the same in good faith and has established reasonable reserves
therefor, to pay when required to be paid all Taxes (as hereinafter defined)
indicated by tax returns so filed or otherwise lawfully levied or assessed
upon it or any of its properties and to withhold or collect and pay to the
proper governmental authorities or hold in separate bank accounts for such
payment all Taxes and other assessments which it believes in good faith to be
required by law to be so withheld or collected.
(c) Charge-offs and charge-downs of loans will be taken against Citizens'
allowance for loan losses in the Ordinary Course of Business when the
potential loss has been quantified by the executive officers of Citizens.
(d) Prior to the Effective Date, Citizens shall give Community and its
counsel, financial advisors, and accountants full access, during normal
business hours and upon reasonable request, to its properties, books,
contracts, commitments and records, and shall furnish Community during such
period with all such information concerning its affairs as Community may
reasonably request. The availability or actual delivery of information about
Citizens to Community shall not affect the covenants, representations and
warranties of Citizens contained in this Agreement. Community shall treat as
confidential all such information in the same manner as Community treats
similar confidential information of its own, and if this Agreement is
terminated, Community shall continue to treat all such information as
confidential and cause its employees and agents to keep all such information
confidential and shall return such documents theretofore delivered by Citizens
as Citizens shall request.
(e) Citizens shall use its reasonable best efforts to cause the Merger and
this Agreement to be submitted promptly for the approval of its shareholders
at a meeting to be called and held in accordance with the National Bank Act.
Except as required by applicable fiduciary duties, in the opinion of counsel
to Citizens, the Board of Directors of Citizens agrees to recommend in
Citizens' Proxy Statement that the Merger and this Agreement be approved,
which recommendation shall not be withdrawn.
(f) After execution hereof, Citizens shall deliver to Community a correct
and complete list of holders of the outstanding Citizens Common Stock of
record with addresses.
(g) Citizens, separately and jointly with Community, shall use its
reasonable best efforts in good faith to take or cause to be taken as promptly
as practicable all such steps as shall be necessary to obtain the Government
Approvals, and shall do any and all acts and things deemed by Citizens or
Community to be necessary or appropriate in order to cause the Merger to be
consummated on the terms provided in this Agreement.
(h) Citizens shall promptly give written notice to Community upon becoming
aware of the impending or threatened occurrence of any event which would cause
or constitute a breach of any of the arrangements, representations and
warranties of Citizens contained or referred to in this Agreement, and shall
use its reasonable best efforts to prevent the same or remedy the same
promptly.
(i) From and after the date hereof until the Effective Date of the Merger,
Citizens shall not take any actions with respect to its business or operations
that in the reasonable judgment of Community or its accountants would cause
the Merger or any related transaction contemplated by this Agreement to fail
to meet the relevant criteria for pooling of interest accounting treatment.
(j) From and after the date the Merger is approved by the shareholders of
Citizens until the Effective Date of the Merger, Citizens will consider
recommendations of Community and its accountants with respect to adjustments
to its balance sheet, statement of income, statement of stockholders' equity,
and statement of cash flows at December 31, 1995 and for the 12 months then
ending.
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6.3 Agreements of Community and Citizens.
(a) Each party hereto shall, and shall cause its directors, officers,
attorneys and advisors, to maintain, unless otherwise required by applicable
law, the confidentiality of all information obtained in connection with this
Agreement, including the negotiation and performance thereof, which is not
otherwise publicly disclosed by the other party or publicly available, said
agreement with respect to confidentiality to survive any termination of this
Agreement pursuant to Section 11.1.
(b) Community and Citizens shall agree with each other as to the form and
substance of any press release related to this Agreement or the transactions
contemplated hereby, and shall consult each other as to form and substance of
other public disclosures related thereto.
ARTICLE VII
Securities Act of 1933;
Exchange Act of 1934
7.1 Community shall promptly prepare and file with the SEC a registration
statement on Form S-4 (the "Community Registration Statement") under and
pursuant to the provisions of the 1933 Act for the purpose of registering the
offering of Community Common Stock. Citizens in cooperation with Community
shall promptly prepare for inclusion in the Community Registration Statement a
proxy statement (the "Proxy Statement") for the purpose of submitting this
Agreement to the shareholders of Citizens for approval. The Proxy Statement in
definitive form will serve as a portion of the prospectus (the "Prospectus")
to be included in the Community Registration Statement. Community and Citizens
shall each provide promptly to the other such information concerning its
business and financial condition and affairs as may be required or appropriate
for inclusion in the Community Registration Statement, the Prospectus or the
Proxy Statement, and shall cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Community's
Registration Statement, the Prospectus and the Proxy Statement.
7.2 Community and Citizens shall use their reasonable best efforts to have
the Community Registration Statement declared effective under the 1933 Act as
soon as may be practicable, and thereafter Citizens shall distribute the Proxy
Statement to its shareholders in accordance with applicable law and its
Articles of Association and Bylaws, not less than twenty (20) business days
prior to the date upon which the Merger and this Agreement are submitted to
its shareholders for approval. Citizens shall not mail or otherwise furnish
the Proxy Statement to its shareholders unless and until Community shall have
received a letter from Coopers & Lybrand dated the effective date of the
Community Registration Statement, to the effect set forth in Section 8.1(j).
7.3 Community shall not be required to maintain the effectiveness of the
Community Registration Statement for the purpose of sale or resale of
Community Common Stock by any person; provided, however, that Community shall
file all periodic reports which are required under the 1934 Act in order for
Community to satisfy the current public information requirement of Rule
144(c), as promulgated under the 1933 Act, as amended.
7.4 Securities representing shares of the Common Stock issued to Affiliates
(as hereinafter defined in Section 8.1(m) hereof) pursuant to this Agreement
may be subject to stop transfer orders and may bear a restrictive legend in
substantially the following form:
"The shares represented by this Certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Act"), applies and may be sold or otherwise transferred only in
compliance with the limitations of such Rule 145, or upon receipt by
Community of any opinion of counsel acceptable to it that some other
exemption from registration under the Act is available, or pursuant to a
registration statement under the Act."
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Should an opinion of counsel indicate that the legend and any stop transfer
order then in effect with respect to the shares may be removed, Community will
upon request substitute unlegended securities and remove any stop transfer
orders.
7.5 Indemnification; Insurance. (a) From and after the Effective Date
through the sixth anniversary of the Effective Date, Community and CBNA agree
to indemnify and hold harmless each present and former director and officer of
Citizens determined as of the Effective Date (the "Indemnified Parties"),
against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities (collective, "Costs")
incurred in connection with any claim, action, suit, proceedings or
investigation whether civil, criminal, administrative or investigative,
arising out of an Indemnified Matter (as hereinafter defined). An Indemnified
Matter shall include any matter directly or indirectly involving transactions
contemplated by or required in connection with this Agreement as well as any
matter existing or occurring at or prior to the Effective Date, whether
asserted or claimed prior to, at or after the Effective Date, to the fullest
extent to which such persons were entitled to be indemnified under Citizens'
Articles of Association or Bylaws in effect on the date hereof, but only to
the extent permitted under applicable law, (and Community and CBNA shall also
advance expenses as incurred to the fullest extent to which such persons were
entitled under Citizens' Articles of Incorporation or Articles of Association
and Bylaws as in effect on the date hereof (to the extent permitted under
applicable law), provided the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
person is not entitled to indemnification). An Indemnified matter shall not
include any action or omission by an Indemnified Party resulting from such
person's gross negligence or deliberate misconduct, or any action by the OCC
resulting in civil money penalties or other determination by the OCC of a
breach of duties.
(b) For a period of two years after the Effective Date, Community shall use
reasonable efforts to cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by Citizens (provided
that Community or CBNA may substitute therefor policies of comparable
coverage); provided, however, that in no event shall Community or CBNA be
obligated to expend, in order to maintain or provide insurance coverage
pursuant to this subsection, any amount per annum in excess of 110% of the
total amount of the annual premiums paid as of the date hereof by Citizens for
such insurance (the "Maximum Amount"). If the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, Community shall use reasonable efforts to maintain the most
advantageous policies of directors' and officers' insurance obtainable for an
annual premium equal to the Maximum Amount.
ARTICLE VIII
Conditions
8.1 Conditions to the Obligations of Community. The obligations of Community
under this Agreement are, at its option (subject to the provisions of Section
11.1(a)), subject to fulfillment on or prior to the Effective Date of each of
the following conditions:
(a) Except as affected by the transactions contemplated by this
Agreement, the representations and warranties of Citizens in Section 5.1
shall be true and correct in all material respects on and as of the
Effective Date.
(b) Citizens shall have performed and complied in all material respects
with all terms of this Agreement required to be performed or complied with
by it on or prior to the Effective Date.
(c) No material adverse change shall have occurred since December 31,
1994 in the business or financial condition of Citizens, and Citizens shall
not be engaged in, or a party to or threatened with, any legal action or
other proceeding before any court, any arbitrator of any kind or any
government agency if, in the reasonable judgment of Community, such legal
action or proceeding could materially adversely affect the business or
financial condition of Citizens.
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(d) This Agreement shall have been duly approved by the affirmative vote
of the shareholders of Citizens owning at least two-thirds (2/3) of its
capital stock outstanding at a meeting of shareholders duly called and held
after distributing the Proxy Statement to all shareholders entitled to vote
at such meeting as required by Section 6.2(e).
(e) Community shall have received a certificate, dated the Effective
Date, signed on behalf of Citizens by its President certifying the
fulfillment of the conditions stated in paragraphs (a), (b), (c) and (e) of
this Section 8.1 by Citizens.
(f) Citizens shall have delivered to Community such documents as may
reasonably be requested by Community to evidence compliance by Citizens
with the provisions of this Agreement including an opinion of its counsel
substantially in the form attached hereto as Exhibit "C". Citizens shall
also have delivered to Community on the Effective Date, a letter of its
litigation counsel setting forth pending litigation involving Citizens
which was not previously disclosed in writing to Community.
(g) The Community Registration Statement shall have become effective
under the 1933 Act, no stop order suspending the effectiveness of such
Registration Statement shall be in effect and no proceedings for such
purpose shall have been initiated or threatened by or before the SEC. All
state securities and "blue sky" permits or approvals required (in the
opinion of Community) to consummate the transactions contemplated by this
Agreement shall have been received.
(h) All Government Approvals shall be in effect, all conditions or
requirements prescribed by law or by any such Approval shall have been
satisfied, and all required waiting periods shall have expired; provided,
however, that no approval shall be deemed to have been received if it shall
require the divestiture or cessation of any of the present businesses or
operations conducted by either of the parties hereto or of a subsidiary of
or shall impose any other nonstandard condition or requirement, which
divestiture, cessation, condition or requirement Community reasonably and
in good faith determines would (i) have a material adverse effect on the
business or financial condition of Community and its subsidiaries on a
consolidated basis or (ii) otherwise materially impair the value of
Citizens to Community (in which case Community shall promptly notify
Citizens).
(i) Community shall have received a ruling from the Internal Revenue
Service or an opinion of its counsel, Mette, Evans & Woodside,
substantially to the effect that, under the provisions of the Code:
(1) the Merger of Citizens with and into CBNA upon the terms and
conditions of this Agreement will not result in any recognized gain or
loss to Community, CBNA, or Citizens;
(2) except for any cash received in lieu of any fractional share, no
gain or loss will be recognized by holders of Citizens Common Stock who
receive Community Common Stock in exchange for the shares of Citizens
Common Stock which they hold;
(3) the holding period of Community Common Stock received in exchange
for Citizens Common Stock will include the holding period of Citizens
Common Stock for which it is exchanged, assuming the shares of Citizens
Common Stock are capital assets in the hands of the holder thereof on
the Effective Date; and
(4) the basis of Community Common Stock received in exchange for
Citizens Common Stock will be the basis of Citizens Common Stock for
which it is exchanged, less any basis attributable to fractional shares
for which cash is received.
Such opinion or ruling shall be given or received, subject to the receipt,
and the accuracy on the Effective Date of:
(1) representations by Community satisfactory to such counsel; and
(2) representations by Citizens satisfactory to such counsel.
(j) Subject to satisfaction of the requirements of Statement on Auditing
Standards No. 72 of the American Institute of Certified Public Accounts if
applicable, Community and its directors and officers shall have received a
letter from Coopers & Lybrand dated the effective date of the Community
Registration Statement to be in form and substance satisfactory to
Community, to the effect that:
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(1) In their opinion, the consolidated financial statements of
Citizens examined by them and included in the Community Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder; and
(2) On the basis of limited procedures, not constituting an audit,
including a limited review of the unaudited financial statements
referred to below, a limited review of the latest available unaudited
consolidated interim financial statements of Citizens, inspection of
the minute book of Citizens since December 31, 1994, inquiries of
officials of Citizens responsible for financial and accounting matters
and such other inquiries and procedures as may be specified in such
letter, nothing came to their attention that caused them to believe
that:
(A) any unaudited Balanced Sheets, Statements of Income,
Statements of Stockholders' Equity and Statements of Cash Flows of
Citizens included in the Community Registration Statement are not in
conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial
statements covered by their report included in the Community
Registration Statement;
(B) as of a specified date not more than five days prior to the
date of delivery of such letter, there have been any changes in the
capital stock, decreases in capital surplus or increases in debt of
Citizens as compared with amounts shown in the balance sheet as of
December 31, 1994 included in the Community Registration Statement,
except in each case for such changes, increases or decreases which
the Community Registration Statement discloses have occurred or may
occur and except for such changes, decreases or increases as
aforesaid which are immaterial; and
(C) for the period from January 1, 1995 to such specified date,
there were any decreases in the total or per share amounts of income
before securities gains or losses or net income of Citizens as
compared with the comparable period of the preceding year, except in
each case for decreases which the Community Registration Statement
discloses have occurred or may occur, and except for such decreases
which are immaterial.
(k) The aggregate number of shares of Citizens Common Stock held by
persons who have taken all of the steps required prior to the Effective
Date to perfect their right (if any) to be paid the fair value of such
shares under the National Bank Act ("Dissenting Shares") shall not be more
as to prevent Community from meeting the continuity of business enterprise
requirement of Section 368(a)(1)(A) of the Code with respect to the
Citizens acquisition, and the number of Dissenting Shares, the number of
shares owned by Community or its affiliates, together with the aggregate
number of fractional shares with respect to which persons will receive cash
in lieu of Community Common Stock pursuant to this Agreement, shall be less
than ten (10%) percent of the number of outstanding shares of Citizens
Common Stock or such number, if less, which will allow Community to account
for the Merger as a "pooling of interest".
(m) Community shall have received from each of the persons who, in the
opinion of counsel, might be deemed to be affiliates of Citizens under Rule
145 of the Rules and Regulations under the 1933 Act (the "Affiliates"), a
signed undertaking satisfactory to Counsel for Community, acknowledging and
agreeing to abide by the limitations imposed by law in respect of the sale
or other disposition of the Community Common Stock received by such person
pursuant to the Merger. Citizens agrees to use its reasonable best efforts
to have each Affiliate enter into the undertakings referred to in this
Section 8.1(m) on or prior to the Effective Date.
8.2 Conditions to the Obligations of Citizens. The obligations of Citizens
under this Agreement are, at its option (subject to the provisions of Section
11.1(a)), subject to the fulfillment on or prior to the Effective Date of each
of the following conditions:
(a) Except as affected by the transactions contemplated by this Agreement
and as affected by events occurring or arising after the date first above
written in the ordinary course of the business of Community
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which do not materially adversely affect the business of Community, the
representations and warranties of Community in Section 5.2 shall be true
and correct in all material respects on and as of the Effective Date,
except as to any representation or warranty which specifically relates to
an earlier date.
(b) Community shall have performed and complied in all material respects
with all terms of this Agreement required to be performed or complied with
by it on or prior to the Effective Date. Community as the sole shareholder
of CBNA shall have approved the merger of Citizens into CBNA.
(c) No material adverse change shall have occurred since December 31,
1994 in the business or financial condition of Community and its
subsidiaries on a consolidated basis, and neither Community nor any of its
subsidiaries shall be engaged in, or a party to or threatened with, any
legal action or other proceeding before any court, any arbitrator of any
kind or any government agency if, in the reasonable judgment of Citizens,
such legal action or proceeding could materially adversely affect the
business or financial condition of Community and its subsidiaries,
considered as a whole. For purposes of this section, any change in the
business or financial condition of Community on a consolidated basis which
results from any changes occurring after the date hereof in any federal or
state law, rule or regulation, in generally accepted accounting principles
or in market rates of interest, which change affects banks or their holding
companies generally, shall not be deemed to be a material adverse change.
(d) This Agreement shall have been duly approved by the affirmative vote
of Citizens' shareholders owning at least two-thirds ( 2/3) of its capital
stock outstanding.
(e) Citizens shall have received a certificate, dated the Effective Date,
signed on behalf of Community by its Chairman and Chief Executive Officer
or President, certifying the fulfillment of the conditions stated in
paragraphs (a), (b), (c), (d) and (h) of this Section 8.2.
(f) Community shall have delivered to Citizens such documents as may
reasonably be requested by Citizens to evidence compliance by Community
with the provisions of this Agreement including an opinion of its counsel
substantially in the form attached hereto as Exhibit "D".
(g) The Community Registration Statement shall have become effective
under the 1933 Act, no stop order suspending the effectiveness of the
Community Registration Statement shall be in effect and no proceedings for
such purpose shall have been initiated or threatened by or before the SEC.
All state securities and "blue sky" permits or approvals required (in the
opinion of Community) to consummate the transactions contemplated by this
Agreement shall have been received.
(h) Community shall have listed the stock to be issued in connection with
the Merger with NASDAQ.
(i) All Government Approvals shall have been received and shall be in
effect, all conditions or requirements prescribed by law or by any such
Approval shall have been satisfied, and all required waiting periods shall
have expired.
(j) Citizens shall have received the opinion of Community's counsel
referred to in Section 8.1(j).
(k) Citizens shall have received an opinion from Berwind Financial Group
L.P. dated as of a date within five business days of the date of the
Citizens' Proxy Statement, to the effect that the consideration to be
received by the holders of Citizens' common stock pursuant to the Merger is
fair, from a financial point of view, to such shareholders.
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ARTICLE IX
Closing
9.1 The transactions contemplated by this Agreement and the Bank Merger
Agreement shall be consummated at a closing (the "Closing") to be held at the
executive offices of Community at 10:00 a.m. on a date to be designated by
Community, which date shall not be later than ten (10) business days following
the date on which all conditions precedent to such Closing contained in
Article VIII hereof have been satisfied or duly waived or such later date
within thirty (30) days thereafter as may be specified by Community, with the
Merger to be consummated in such order and after such intermediate steps as
the parties hereto may agree. The Closing Date shall (unless otherwise
provided) be the Effective Date.
9.2 At the Closing, the opinions, certificates and other documents required
to be delivered by this Agreement shall be delivered.
9.3 At the Closing, Community and Citizens shall instruct their respective
representatives to make or confirm such filings as shall be required in the
opinion of counsel to Community to give effect to the Merger.
ARTICLE X
Expenses
10.1 Except to the extent provided in Section 10.2 each of the parties
hereto agrees to pay, without right of reimbursement from the other party and
whether or not the transactions contemplated by this Agreement shall be
consummated, the costs incurred by it incident to the performance of its
obligations under this Agreement, including, without limitation, costs
incident to the preparation of this Agreement, the Community Registration
Statement, the Prospectus and the Proxy Statement (including the audited
financial statements of the parties contained therein) and to the consummation
of the Merger and of the other transactions contemplated herein, including the
fees and disbursements of counsel, accountants and consultants employed by
such party in connection therewith; except that in the event that the
transactions contemplated in this Agreement are not consummated for any reason
(other than as provided in Section 10.2), Community and Citizens shall each
pay one-half of (a) the aggregate costs theretofore incurred in printing the
Community Registration Statement, the Prospectus and the Proxy Statement, (b)
the registration fee for the Community Registration Statement, and (c) the
fees for filing applications for Government Approvals.
10.2 If Citizens fails to complete the transactions contemplated herein by
reason of an Acquisition Proposal, Citizens shall reimburse Community for its
Expenses; provided, further, that such Expenses shall be for purposes hereof
agreed to be $200,000. An Acquisition Proposal shall mean:
(i) the making, other than by Community of any of its subsidiaries or
affiliates, of a tender of exchange offer for at least 19.9% of the
outstanding Shares of Citizens.
(ii) the acquisition, by any person or group of persons other than
Community or any of its subsidiaries or affiliates of beneficiary ownership
or the right to acquire beneficial ownership of 19.9% or more of the
outstanding Shares of Citizens (the terms "group" and "beneficial
ownership" having the meanings assigned thereto in Section 13(d) of the
Exchange Act of 1934, as amended, and the regulations promulgated
thereunder).
(iii) the making by any person, other than Community or any of its
subsidiaries or affiliates, by public announcement or communication to
Citizens, of a firm proposal to: (a) acquire Citizens, by merger,
consolidation, purchase of all or substantially all of its assets or other
similar transactions; or (b) to make any such tender or exchange offer as
is described in (i) above.
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(iv) the failure of Citizens shareholders to approve the Merger at a
meeting called for such purpose if at the time of such meeting there has
been an announcement by a person (other than Community) of an offer or
proposal to acquire 19.9% or more of the outstanding shares of Citizens, or
to acquire, merge, or consolidate with Citizens, or to purchase all or
substantially all of Citizens assets.
10.3 The payment of Expenses by any party is not an exclusive remedy of any
other party, but is in addition to any rights or remedies available to the
parties hereto at law or in equity and notwithstanding anything to the
contrary contained herein, no party shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provisions of
this Agreement.
ARTICLE XI
Termination
11.1 This Agreement may be terminated as follows:
(a) By the mutual consent of the Board of Directors of both Community and
Citizens at any time prior to the consummation of the Merger;
(b) By the Board of Directors of Community on or after May 31, 1996, if
(i) any of the conditions in Section 8.1 to which the obligations of
Community are subject have not been fulfilled, or (ii) such conditions have
been fulfilled or waived by Community but Citizens shall have failed to
complete the Merger.
(c) By the Board of Directors of Community if, in its reasonable opinion,
(i) it has become aware of any material facts or circumstances existing on
or after December 31, 1994 affecting Citizens of which it was not aware as
of the date hereof, (ii) a material adverse change shall have occurred
since December 31, 1994, in the business or financial condition of
Citizens, or (iii) there has been failure or prospective failure on the
part of Citizens to comply with its obligations under this Agreement, or
any failure or prospective failure to comply with any condition set forth
in Section 8.1.
(d) By the Board of Directors of Citizens if, in its reasonable opinion,
(i) it has become aware of any material facts or circumstances existing on
or after December 31, 1994 affecting Community of which it was not aware as
of the date hereof, (ii) a material adverse change shall have occurred
since December 31, 1994, in the business or financial condition of
Community, or (iii) there has been failure or prospective failure on the
part of Community to comply with its obligations under this Agreement, or
any failure or prospective failure to comply with any condition set forth
in Section 8.2.
(e) By the Board of Directors of either party if there shall be pending
or threatened any material action, proceeding or investigation before any
court or administrative agency by any governmental agency or any other
person challenging, or seeking material damages in connection with, the
Merger.
(f) By the Board of Directors of Citizens on or after May 31, 1996, if
(i) any of the conditions contained in Section 8.2 to which the obligations
of Citizens are subject have not been fulfilled (provided, however, that if
Community is engaged at the time in litigation or an appeal procedure
relating to an attempt to obtain one or more of the Government Approvals,
such non-fulfillment shall not give Citizens the right to terminate this
Agreement for an additional period of six months); or (ii) such conditions
have been fulfilled or waived but Community shall have failed to complete
the Merger.
(g) By the Board of Directors of Citizens if the Merger and this
Agreement are not approved by the affirmative vote of Citizens shareholders
owning at least two-thirds ( 2/3rds) of its capital stock outstanding at
the shareholders meeting, including any adjournment thereof, called
pursuant to Section 6.2(e) of this Agreement; provided, that Community and
Citizens may mutually agree to keep this Agreement in effect and to call an
additional meeting of the shareholders of Citizens to obtain such
shareholder approval.
(h) By the Board of Directors of Citizens if the Market Value Per Share
(as defined in Section 2.1(a) hereof) of Community on the fifth trading
date preceding the Effective Date of the Merger (or, if such date is not a
trading day, on the immediately preceding trading day) is less than $22.31
per share; provided,
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however, that in the event Citizens elects to terminate under this Section
11.1(f) both parties hereto agree to a twenty (20) day standstill period
from the date of such termination, during which period the parties hereto
shall attempt in good faith to renegotiate the Conversion Factor and, if
required by law, resubmit the Merger for approval by Citizens' shareholders
at a special meeting duly called for such purpose. Citizens also agrees
that during such twenty (20) day period, it shall not merge or consolidate
with any other bank, corporation or other entity, acquire any stock (except
in a fiduciary capacity), solicit any offers for any of its capital stock
or substantially all of its assets, effect any reorganization or
recapitalization, or, except in the Ordinary Course of Business, acquire
any assets of any other person, corporation or business organization, or
enter into discussions with any person concerning, or agree to do, any of
the foregoing and all other terms of this Agreement shall remain in effect.
(i) By the Board of Directors of Community if the Market Value Per Share
(as defined in Section 2.1(a) hereof) of Community on the fifth (5th)
trading date preceding the Effective Date of the Merger (or, if such date
is not a trading day, on the immediately preceding trading day) is more
than $30.19; provided, however, that in the event Community elects to
terminate under this Section 11.1(g), both parties agree to a twenty (20)
day standstill period from the date of such termination, during which
period the parties hereto shall attempt in good faith to renegotiate the
Conversion Factor and, if required by law, resubmit the Merger for approval
by Citizens' shareholders at a special meeting duly called for such
purpose. Citizens also agrees that during such twenty (20) day period, it
shall not merge or consolidate with any other bank, corporation or other
entity, acquire any stock (except in a fiduciary capacity), solicit any
offers for any of its capital stock or substantially all of its assets,
effect any reorganization or recapitalization, or, except in the Ordinary
Course of Business, acquire any assets of any other person, corporation, or
business organization, or enter into discussions with any person
concerning, or agree to do, any of the foregoing and all other terms of
this Agreement shall remain in effect.
The power of termination hereunder may be exercised by Community and
Citizens, as the case may be, only by giving written notice, signed on behalf
of such party by its Chairman (or President) and Chief Executive Officer, to
the other party.
11.2 Termination of this Agreement shall not terminate or affect the
obligations of the parties to pay expenses as provided in Section 10 and shall
not affect any agreement after such termination.
ARTICLE XII
Miscellaneous
12.1 Any notice or other communication required or permitted under this
Agreement or the Bank Merger Agreement shall be effective only if it is in
writing and delivered personally or sent by registered or certified mail,
postage prepaid, or by recognized overnight delivery service guaranteeing next
day delivery, addressed as follows:
If to Community:
Community Banks, N.A.
150 Market Square
Millersburg, PA 17061
Attention: Thomas L. Miller, CEO
With a copy to:
James A. Ulsh, Esquire
Mette, Evans & Woodside
3401 North Front Street
P.O. Box 5950
Harrisburg, PA 17110-0950
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If to Citizens:
The Citizens' National Bank of Ashland
735 Center Street
Ashland, PA 17921
Attention: Dean N. Paul, CEO
With a copy to:
Charles L. O'Brien, Esquire
Morgan, Lewis & Bockius LLP
417 Walnut Street
Harrisburg, PA 17101
or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon receipt.
12.2 Community and any of its wholly-owned banking subsidiaries may, prior
to the Effective Date of the Merger, consolidate with or merge with or into
one or more other banks or bank holding companies so long as Community and its
wholly-owned banking subsidiaries are the surviving corporations. The terms
and conditions of this Agreement shall not be affected by such merger or
consolidation, and the shareholders of Citizens shall receive the common stock
of the surviving bank holding company, unless the provisions of Section 8.2(c)
hereof should apply.
12.3 This Agreement is binding upon and is for the benefit of Community and
Citizens and their respective successors and permitted assigns. This Agreement
is not made for the benefit of any person, firm, corporation or association
not a party hereof and no other person, firm, corporation or association shall
acquire or have any right under or by virtue of this Agreement.
12.4 Except for the agreements of Community set forth herein, the
representations, warranties and agreements of Community and Citizens contained
in this Agreement shall not survive the consummation of the Merger; provided,
however, that in the event of the consummation of the Merger, no such
representations, warranties or agreements shall be deemed to be terminated so
as to deprive Community and Citizens (or any director, officer or controlling
person of Community and Citizens) of any defense in law or in equity which
otherwise would be available against the claims of any persons, including
shareholders.
12.5 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
12.6 This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
A-28
<PAGE>
IN WITNESS WHEREOF, Community and Citizens have each caused this Agreement to
be signed by its Chief Executive Officer and its corporate seal to be hereunto
affixed and attested by the signature of its Secretary, assistant Secretary, a
Vice President or its Clerk, all as of the day and year first above written.
ATTEST: COMMUNITY BANKS, N.A.
/s/ Patricia E. Hoch By; /s/ Thomas Miller
- - - ------------------------------- -------------------------------
Secretary Chairman of the Board and
Chief Executive Officer
(SEAL)
COMMUNITY BANKS, INC.
ATTEST:
By: /s/ Thomas Miller
/s/ Patricia E. Hoch -------------------------------
- - - ------------------------------- Chairman of the Board and
Secretary Chief Executive Officer
(SEAL) THE CITIZENS' NATIONAL BANK OF
ASHLAND
ATTEST:
By: /s/ Harry Strouse
/s/ Dean N. Paul -------------------------------
- - - ------------------------------- President
Secretary
(SEAL)
A-29
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................................ 1
Financial Statements:
Balance Sheets as of December 31, 1995 and 1994........................ 2
Statements of Income for the years ended December 31, 1995, 1994, and
1993.................................................................. 3
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1995, 1994, and 1993..................................... 4
Statements of Cash Flows for the years ended December 31, 1995, 1994,
and 1993.............................................................. 5
Notes to Financial Statements.......................................... 6-14
</TABLE>
<PAGE>
(ART)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Citizens' National Bank of Ashland:
We have audited the accompanying balance sheets of The Citizens' National
Bank of Ashland (Bank) as of December 31, 1995 and 1994 and the related
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Citizens' National
Bank of Ashland as of December 31, 1995 and 1994, and the results of its
operations and cash flows for the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As described in Notes 2 and 9 to the financial statements, The Citizens'
National Bank of Ashland has adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994, and Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," effective January 1, 1993.
(ART)
Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
January 13, 1996
F-1
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 1,885,010 $ 2,138,498
----------- -----------
Federal funds sold.................................... 2,215,000 815,000
----------- -----------
Investment securities, held-to-maturity (market value
of $30,389,492 at December 31, 1994)................. -- 31,059,669
----------- -----------
Investment securities, available-for-sale (amortized
cost of $29,436,570 at December 31, 1995)............ 29,886,570 --
----------- -----------
Loans................................................. 27,255,690 27,220,141
Less:
Unearned income..................................... 603,527 619,265
Allowance for loan losses........................... 293,623 277,408
----------- -----------
Net loans....................................... 26,358,540 26,323,468
----------- -----------
Premises and equipment, net........................... 324,046 407,949
Accrued interest receivable and other assets.......... 772,167 831,208
----------- -----------
Total assets.................................... $61,441,333 $61,575,792
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing............................... 4,378,678 4,313,280
Savings........................................... 21,185,988 22,416,162
Time.............................................. 25,691,802 25,131,455
----------- -----------
Total deposits.................................. 51,256,468 51,860,897
Accrued interest payable............................ 335,295 309,687
Accrued taxes and other liabilities................. 442,968 274,167
----------- -----------
Total liabilities............................... 52,034,731 52,444,751
----------- -----------
Shareholders' equity:
Common stock, par value $20; 20,000 shares
authorized, issued and outstanding................. 400,000 400,000
Surplus............................................. 1,000,000 1,000,000
Net unrealized gain on available for sale
securities......................................... 297,000
Retained earnings................................... 7,709,602 7,731,041
----------- -----------
Total shareholders' equity...................... 9,406,602 9,131,041
----------- -----------
Total liabilities and shareholders' equity...... $61,441,333 $61,575,792
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.................. $2,329,567 $2,325,328 $2,578,474
Interest on investment securities:
Taxable................................... 1,348,462 1,249,379 1,228,212
Tax-exempt................................ 497,586 557,742 547,789
Interest on federal funds sold.............. 157,162 98,356 120,498
---------- ---------- ----------
Total interest income................... 4,332,777 4,230,805 4,474,973
---------- ---------- ----------
Interest expense:
Savings deposits............................ 537,341 532,060 563,578
Time deposits............................... 1,296,587 1,058,188 1,196,398
---------- ---------- ----------
Total interest expense.................. 1,833,928 1,590,248 1,759,976
---------- ---------- ----------
Net interest income before provision for
loan losses............................ 2,498,849 2,640,557 2,714,997
Provision for loan losses..................... 16,093 50,000 230,000
---------- ---------- ----------
Net interest income after provision for
loan losses............................ 2,482,756 2,590,557 2,484,997
---------- ---------- ----------
Other operating income:
Service charges on deposit accounts......... 76,529 74,259 67,665
Other service charges, commissions and
fees....................................... 55,024 61,406 56,884
Other income................................ 68,474 6,413 8,880
---------- ---------- ----------
Total other operating income............ 200,027 142,078 133,429
---------- ---------- ----------
Other operating expenses:
Salaries and employee benefits.............. 987,143 870,861 808,950
Net occupancy............................... 156,077 93,865 86,432
Furniture and equipment..................... 92,468 105,153 108,878
Other expenses.............................. 945,534 656,602 676,983
---------- ---------- ----------
Total other operating expenses.......... 2,181,222 1,726,481 1,681,243
---------- ---------- ----------
Income before income taxes.................... 501,561 1,006,154 937,183
Income tax provision.......................... 113,000 174,000 165,000
---------- ---------- ----------
Income before cumulative effect of
change in accounting principle......... 388,561 832,154 772,183
Cumulative effect of change in accounting
principle.................................... 74,811
---------- ---------- ----------
Net income.............................. $ 388,561 $ 832,154 $ 846,994
========== ========== ==========
Weighted average number of shares outstand-
ing.......................................... 20,000 20,000 20,000
========== ========== ==========
Per share amounts:
Income before cumulative effect of change in
accounting principle....................... $ 19.00 $ 41.61 $ 38.61
========== ========== ==========
Cumulative effect of change in accounting
principle.................................. $ 3.74
========== ========== ==========
Net income per share........................ $ 19.43 $ 41.61 $ 42.35
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<S> <C>
Balance, December 31, 1992.......................................... $8,271,893
Net income........................................................ 846,994
Cash dividends ($20.50 per share)................................. (410,000)
----------
Balance, December 31, 1993.......................................... 8,708,887
Net income........................................................ 832,154
Cash dividends ($20.50 per share)................................. (410,000)
----------
Balance, December 31, 1994.......................................... 9,131,041
Net income........................................................ 388,561
Net unrealized gain on available-for-sale securities.............. 297,000
Cash dividends ($20.50 per share)................................. (410,000)
----------
Balance, December 31, 1995.......................................... $9,406,602
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income before cumulative effect
of change in accounting principle... $ 388,561 $ 832,154 $ 772,183
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation....................... 42,922 55,695 67,004
Loss on disposal of property, plant
and equipment..................... 65,904
Gain on sale of investments........ (3,500) (700) (1,250)
Effect of change in accounting
principle......................... 74,811
Amortization of bond (discount)
premiums, net..................... (32,430) 68,024 70,367
Provision for loan losses.......... 16,093 50,000 230,000
Deferred tax provision (benefit)... (49,844) 7,905 (35,526)
(Increase) decrease in accrued in-
terest receivable and other as-
sets.............................. (44,115) (79,305) 149,822
(Decrease) increase in accrued in-
terest payable.................... 25,608 (7,400) (60,207)
Increase (decrease) in accrued
taxes and other liabilities....... 168,801 37,961 (70,497)
----------- ----------- ------------
Net cash provided by operating
activities...................... 578,000 964,334 1,196,707
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from maturities of avail-
able-for-sale securities............ 8,592,746 6,705,761 7,930,000
Purchases of available-for-sale secu-
rities.............................. (6,933,717) (8,187,595) (10,346,514)
Net (increase) decrease in loans..... (51,165) (556,541) 665,517
Purchases of premises and equipment.. (24,923) (67,747) (74,436)
----------- ----------- ------------
Net cash provided by (used in)
investing activities............ 1,582,941 (2,106,122) (1,825,433)
----------- ----------- ------------
Cash flows from financing activities:
Net increase (decrease) in noninter-
est-bearing deposits................ 65,398 (236,064) 73,202
Net increase (decrease) in savings
deposits............................ (1,230,174) 134,622 (480,234)
Net increase (decrease) in certifi-
cates of deposit.................... 560,347 (12,858) (980,936)
Cash dividends....................... (410,000) (410,000) (410,000)
----------- ----------- ------------
Net cash used in financing activ-
ities........................... (1,014,429) (524,300) (1,797,968)
----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents................ 1,146,512 (1,666,088) (2,426,694)
Cash and cash equivalents at beginning
of year............................... 2,953,498 4,619,586 7,046,280
----------- ----------- ------------
Cash and cash equivalents at end of
year.................................. $ 4,100,010 $ 2,953,498 $ 4,619,586
=========== =========== ============
Cash and cash equivalents at end of
year consist of the following:
Cash and due from banks.............. 1,885,010 2,138,498 1,904,586
Federal funds sold................... 2,215,000 815,000 2,715,000
----------- ----------- ------------
$ 4,100,010 $ 2,953,498 $ 4,619,586
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
The Citizens' National Bank of Ashland (Bank) operates in Ashland, Gordon
and Lavelle, Pennsylvania. The Bank's primary source of revenue is derived
from loans to customers who are predominantly middle-income individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies of the Bank are as follows:
Investment Securities:
Effective January 1, 1994, the Bank adopted Financial Accounting Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). Under SFAS 115 all affected debt and marketable
equity securities must be classified as held-to-maturity, trading, or
available-for-sale. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity
when the Bank has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost, adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Securities bought and held
primarily for the purpose of selling in the near term are classified as
trading and recorded at fair value. Changes in unrealized gains and losses on
trading securities are recognized as income. No securities have been
classified as trading. Debt securities not classified as held-to-maturity or
trading and equity securities are classified as available-for-sale. Available-
for-sale securities are carried at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of shareholders' equity.
At December 31, 1995, the Bank elected to reclassify all investments from
"held-to-maturity" to "available-for-sale" and accordingly recognized the net
unrealized gain on investments available for sale of $297,000, net of
applicable income taxes of $153,000, as a separate component of shareholders'
equity.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Gains or losses on dispositions of premises and
equipment are included in income in the period of disposition.
Provision for Loan Losses:
The Bank maintains an allowance for loan losses at an amount which, in
management's judgment, should be adequate to absorb losses on existing loans
that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans. These evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, current economic conditions that
may affect the borrowers' ability to pay, overall portfolio quality and review
of specific problem loans.
Income Taxes:
Effective January 1, 1993, the Bank adopted Statement of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
(SFAS 109). In accordance with SFAS 109, deferred income taxes are accounted
for by the liability method, wherein deferred tax assets or liabilities are
calculated on the differences between the bases of assets and liabilities for
financial statement purposes versus tax purposes
F-6
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(temporary differences) using enacted tax rates in effect for the year in
which the differences are expected to reverse. Tax expense in the statements
of income is equal to the sum of taxes currently payable, including the effect
of the alternative minimum tax, if any, plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to period-end temporary
differences at prevailing tax rates. (See Note 9).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of
interest has ceased and where all previously accrued and unpaid interest is
reversed. Loans are placed on nonaccrual status when principal or interest is
past due 180 days or more and the collateral may be inadequate to recover
principal and interest, or immediately, if in the opinion of management, full
collection is doubtful. Interest accrued but not collected as of the date of
placement on nonaccrual status is reversed and charged against current income.
Subsequent cash payments received are either applied to the outstanding
principal balance or recorded as interest income, depending upon management's
assessment of the ultimate collectibility of principal and interest.
Real Estate Owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior to
foreclosure, the recorded amount of the loan is written down, if necessary, to
the appraised value of the real estate to be acquired by charging the
allowance for loan losses. During 1995 and 1994 there were no non-cash
transactions related to real estate acquired through foreclosure. During 1993
noncash transactions related to real estate acquired through foreclosure
totaled $83,702.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are credited
or charged to noninterest expense. Costs of maintaining and operating
foreclosed property are expensed as incurred. Expenditures to improve
foreclosed properties are capitalized only if expected to be recovered;
otherwise, they are expensed.
Statements of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. During 1995, 1994, and 1993
the Bank paid income taxes of $161,000, $158,529, and $172,585 and paid
interest to depositors of $1,808,320, $1,597,648, and $1,820,183,
respectively.
Accounting for Loan Fees:
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loans' yields. The Bank is amortizing these amounts over the
contractual life of the related loans.
Net Income Per Share:
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during each period presented.
F-7
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. INVESTMENT SECURITIES:
The amortized cost and estimated market values of investments in debt
securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1995 COST GAINS LOSSES VALUE
---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities..... $12,986,826 $208,117 $ 5,947 $13,188,996
U.S. Government agencies..... 8,287,500 55,592 14,895 8,328,197
State and political subdivi-
sions....................... 7,687,560 215,423 10,606 7,892,377
Other securities............. 474,684 3,143 827 477,000
----------- -------- -------- -----------
$29,436,570 $482,275 $ 32,275 $29,886,570
=========== ======== ======== ===========
<CAPTION>
HELD-TO-MATURITY
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1994 COST GAINS LOSSES VALUE
---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities..... $13,985,190 $ 4,198 $394,701 $13,594,687
U.S. Government agencies..... 7,137,160 33,240 279,576 6,890,824
State and political subdivi-
sions....................... 9,242,532 133,820 154,477 9,221,875
Other securities............. 694,787 4,724 17,405 682,106
----------- -------- -------- -----------
$31,059,669 $175,982 $846,159 $30,389,492
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-----------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................. $ 5,811,161 $ 5,814,737
Due after one year through five years............... 18,228,149 18,523,945
Due after five years through ten years.............. 5,131,428 5,272,739
Due after ten years................................. 265,832 275,149
----------- -----------
$29,436,570 $29,886,570
=========== ===========
</TABLE>
Proceeds from maturities of investments in debt securities (including sales)
during 1995, 1994, and 1993 were $8,592,746, $6,705,761, and $7,930,000,
respectively. Gross gains of $3,500, $700, and $1,250 were realized in 1995,
1994, and 1993, respectively.
F-8
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT SECURITIES--(CONTINUED)
Investment securities aggregating $2,030,000 and $1,767,000 at December 31,
1995 and 1994, were pledged to collateralize public deposits and other funds
as provided by law.
At December 31, 1995, the Bank had no investments of any one issuer (other
than the U.S. Government and its agencies) with an aggregate book value in
excess of ten percent of shareholders' equity.
Interest earned on investment securities for the years ended December 31,
1995, 1994, and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Taxable:
U.S. Treasury............................ $ 816,654 $ 756,149 $ 735,651
U.S. Government agencies................. 501,087 433,322 383,726
Other securities......................... 30,721 59,908 108,835
---------- ---------- ----------
Total taxable.......................... $1,348,462 $1,249,379 $1,228,212
========== ========== ==========
Tax-exempt:
State and municipal...................... $ 497,586 $ 557,742 $ 547,789
========== ========== ==========
</TABLE>
4. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Cash Equivalents:
The carrying amounts reported in the balance sheets for cash and short-term
instruments approximate those assets' fair values.
Investment Securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values of fixed-
rate residential mortgage loans, consumer loans, commercial, and commercial
real estate loans are estimated by discounting the future cash flows using
comparable current rates at which similar loans would be made to borrowers at
similar credit risk. The carrying value of accrued interest adjusted for
credit risk equals its fair value. The fair value of loans held for sale is
based on quoted market prices for similar loans sold in securitization
transactions.
Deposit Liabilities:
The fair values of demand and savings deposits equal their carrying values,
without adjusting such fair value for any value from retaining those deposit
relationships in the future. That value, known as a deposit intangible, is not
considered in the value disclosed nor is it recorded in the balance sheets.
The carrying values for variable rate money market accounts approximate their
fair values at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using rates currently offered for similar deposits.
F-9
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
Off-Balance-Sheet Instruments:
Fair values for the Bank's off-balance-sheet instruments (guarantees and
commitments) are based on fees currently charged to enter similar agreements
and the counterparties' credit standing.
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and federal funds
sold.................... $ 4,100,010 $ 4,100,010 $ 2,953,498 $ 2,953,498
----------- ----------- ----------- -----------
Investment securities.... 29,886,570 29,886,570 31,059,669 30,389,492
----------- ----------- ----------- -----------
Loans, net of unearned
income.................. 26,652,163 25,951,122 26,600,876 25,912,360
Less: Allowance for loan
losses.................. 293,623 277,408
----------- ----------- ----------- -----------
Net loans.............. 26,358,540 25,951,122 26,323,468 25,912,360
----------- ----------- ----------- -----------
Total.................. $60,345,120 $59,937,702 $60,336,635 $59,255,350
=========== =========== =========== ===========
Financial liabilities:
Deposits................. 51,256,468 51,171,911 51,860,897 51,437,680
----------- ----------- ----------- -----------
Total.................. $51,256,468 $51,171,911 $51,860,897 $51,437,680
=========== =========== =========== ===========
Off-balance-sheet financial
instruments:
Commitments to originate
loans................... $ 198,000 $ 198,000 $ 300,000 $ 300,000
=========== =========== =========== ===========
</TABLE>
5. LOANS:
The composition of loans outstanding at December 31, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Commercial and industrial........................... $ 477,055 $ 431,827
Real estate--mortgage............................... 21,199,028 20,973,144
Installment......................................... 5,579,607 5,611,383
Other............................................... 203,787
----------- -----------
$27,255,690 $27,220,141
=========== ===========
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES:
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995, 1994, and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Balance, January 1........................... $277,408 $ 283,384 $ 302,290
Provision.................................... 16,093 50,000 230,000
Recoveries................................... 81,050 129,622 113,520
Loans charged-off............................ (80,928) (185,598) (362,426)
-------- --------- ---------
Balance, December 31......................... $293,623 $ 277,408 $ 283,384
======== ========= =========
</TABLE>
F-10
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. BANK PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Land................................................ $ 10,700 $ 10,700
Buildings and improvements.......................... 560,594 542,160
Furniture and equipment............................. 795,389 788,900
----------- ----------
1,366,683 1,341,760
Less accumulated depreciation....................... (1,042,637) (999,715)
----------- ----------
324,046 342,045
Construction in process............................. 65,904
----------- ----------
$ 324,046 $ 407,949
=========== ==========
</TABLE>
Depreciation expense charged to operations amounted to $42,922, $55,695, and
$67,004 for the years ended December 31, 1995, 1994, and 1993, respectively.
8. TIME CERTIFICATES OF DEPOSIT OVER $100,000:
The aggregate amounts of time certificates of deposit of $100,000 or more
included in time deposits at December 31, 1995, 1994, and 1993 were
approximately $1,144,000, $976,000, and $661,000, respectively. Interest
expense on these deposits was approximately $60,000, $37,000, and $40,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
9. INCOME TAXES:
The provision for income taxes for the years ended December 31, 1995, 1994,
and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current......................................... $162,844 $166,095 $200,526
Deferred........................................ (49,844) 7,905 (35,526)
-------- -------- --------
$113,000 $174,000 $165,000
======== ======== ========
</TABLE>
As discussed in Note 2, the Bank adopted the provisions of SFAS 109
effective January 1, 1993. The effect of this change is reflected in the
statement of income as an accounting change. The cumulative effect of this
change as of January 1, 1993 increased net income by $74,811.
F-11
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
The components of the net deferred tax asset as of December 31, 1995, 1994,
and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Loan loss provision........................... $ 56,868 $ 46,755 $ 48,787
Non-accrual loan interest income.............. 21,662 19,449 17,466
Loan origination fees......................... 35,546 32,146 55,896
Deferred compensation......................... 81,327 68,069 57,735
Alternative minimum tax credit................ 61,166 46,374 39,811
-------- -------- --------
Total deferred tax assets................... 256,569 212,793 219,695
-------- -------- --------
Deferred tax liabilities:
Depreciation.................................. 41,497 40,781 44,181
Accretion of discount......................... 7,508 5,116 4,371
Unrealized gain on investments available-for-
sale......................................... 153,000
Miscellaneous................................. 18,980 24,043 20,385
-------- -------- --------
Total deferred tax liability................ 220,985 69,940 68,937
-------- -------- --------
Net deferred asset.......................... $ 35,584 $142,853 $150,758
======== ======== ========
</TABLE>
The Bank has recorded a net deferred tax asset of $35,584 for 1995
reflecting the benefit of temporary differences. Realization is dependent on
taxable income in the carryback period and generating sufficient future
taxable income. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of taxable income are reduced.
The significant components of the deferred tax expense (benefit) in 1995,
1994, and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Loan loss provision, net of charge-offs........ $(10,113) $ 2,032 $ 6,428
Accelerated depreciation....................... 716 (3,400) (3,195)
Deferred compensation.......................... (13,258) (10,333) (10,182)
Loan origination fees.......................... (3,400) 28,815 (26,520)
Alternative minimum tax credit................. (14,792) (6,563)
Other, net..................................... (8,997) (2,646) (2,057)
-------- -------- --------
$(49,844) $ 7,905 $(35,526)
======== ======== ========
</TABLE>
The provision for income taxes differed from the amounts derived from
applying the statutory graduated federal tax rates as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Computed statutory tax provision.......... $ 170,531 $ 342,092 $ 344,078
Effect of tax-exempt municipal bond and
loan interest, net of interest offset.... (153,303) (173,793) (170,852)
Nondeductible expense related to acquisi-
tion..................................... 99,120
Other..................................... (3,348) 5,701 (8,226)
--------- --------- ---------
$ 113,000 $ 174,000 $ 165,000
========= ========= =========
</TABLE>
F-12
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PROFIT-SHARING AND DEFERRED COMPENSATION PLANS:
The Bank's noncontributory profit-sharing plan covers substantially all
employees. The plan provides that the Bank contribute an amount not to exceed
the amount deductible for federal income tax purposes, such amount to be fixed
by appropriate action of the Board of Directors. For each of the years ended
December 31, 1995, 1994, and 1993 the Bank provided $72,000, $32,000, and
$32,000, respectively.
In addition to the noncontributory profit-sharing plan described previously,
the Bank also maintains a contributory, nonqualified deferred compensation
plan for members of the Board of Directors. Under the terms of this plan,
members may elect to defer 100% of their fees for the lesser of five years
from the inception of the plan or when their Board membership terminates,
after which the deferred income will be paid over a ten-year period to the
director or the director's beneficiary. For the years ended December 31, 1995,
1994, and 1993, total expense for this plan was $49,584, $40,980, and $40,536,
respectively.
11. RELATED PARTY TRANSACTIONS:
Certain directors and their business affiliates, executive officers and
their families are indebted to the Bank. At December 31, 1995, 1994, and 1993
loans to these persons and their business affiliates amounted to approximately
$88,000, $99,000, and $88,000, respectively. In the opinion of management,
such loans are consistent with sound banking practices and are within
applicable regulatory bank lending limitations.
12. DIVIDEND RESTRICTIONS:
The Bank is subject to legal limitations as to the amount of dividends that
can be paid to its shareholders. The approval of certain banking regulatory
authorities is required if the total of all dividends declared by the Bank
exceeds limits as defined by the regulatory authorities. The Bank could
declare dividends in 1996 without regulatory approval of approximately
$401,000 plus an additional amount equal to the Bank's retained net profits in
1995 up to the date of any dividend declaration.
13. CREDIT AND INTEREST RATE RISK:
The Bank grants commercial, consumer and residential loans to customers
primarily in the Ashland area, Pennsylvania. Although the Bank has a
diversified loan portfolio, its debtors' ability to honor their contracts is
substantially dependent upon the general economic conditions of the region.
The Bank's assets mature or reprice over a longer term than the liabilities
which fund the assets. Therefore, during times of rising interest rates, net
interest income will be reduced. For the year ended December 31, 1995, the
Bank had average interest earning assets of $59.4 million having a weighted
average effective yield of 7.73% and average interest-bearing liabilities of
$48.0 million having a weighted average effective interest rate of 3.82%. Net
interest income will fluctuate based on changes in interest rates and changes
in the levels of interest sensitive assets and liabilities.
14. SUBSEQUENT EVENT:
On January 12, 1996, the merger (Merger) among the Bank, Community Banks,
Inc. (Community) and Community Banks, N.A. (CBNA), a national bank subsidiary
of Community, was completed. Community and CBNA are headquartered in
Millersburg, Pennsylvania. CBNA operates offices in Dauphin, Luzerne,
Northumberland and Schuylkill Counties, Pennsylvania.
In connection with the Merger, each share of the Bank's common stock, issued
and outstanding as of January 12, 1996, has been converted into and became a
right to receive shares of Community's common stock, par value $5 per share,
having a market value as defined in the Merger Agreement dated July 5, 1995 of
$770.
F-13
<PAGE>
THE CITIZENS' NATIONAL BANK OF ASHLAND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $1,039 $1,080 $1,116 $1,098 $1,046 $1,073 $1,042 $1,070
Interest expense........ 424 459 510 441 388 392 401 409
------ ------ ------ ------ ------ ------ ------ ------
Net interest income.... 615 621 606 657 658 681 641 661
Provision for loan loss-
es..................... 16 25 25
------ ------ ------ ------ ------ ------ ------ ------
Net interest income
after provision for
loan losses........... 615 621 606 641 633 681 616 661
Other income............ 40 51 43 66 35 41 34 32
Other expense........... 400 430 502 849 383 385 403 556
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 255 242 147 (142) 285 337 247 137
Income taxes............ 48 46 22 (3) 57 72 43 2
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 207 $ 196 $ 125 $ (139) $ 228 $ 265 $ 204 $ 135
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share...... $10.35 $ 9.80 $ 6.25 $(6.95) $11.40 $13.25 $10.20 $ 6.75
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-14
<PAGE>
PROXY
COMMUNITY BANKS, INC.
P.O. Box 350
Millersburg, PA 17061
Telephone: (717) 692-4781
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF COMMUNITY BANKS, INC.
The undersigned hereby appoints Kathy A. Mull, Thomas H. Bishof, and
Christopher A. Barr, as Proxies, each with the power to appoint his substitute,
and authorizes them to represent and vote, as designated below, all the shares
of Common Stock of Community Banks, Inc. held on record by the undersigned on
February 9, 1996 at the Annual Meeting of Shareholders to be held on April 16,
1996 or any adjournments thereof.
1. ELECTION OF DIRECTORS:
For all Nominees Listed Below [_] Withhold Authority [_]
(except as indicated below)
CLASS A
Thomas L. Miller
James A. Ulsh
Ronald E. Boyer
Peter DeSoto
INSTRUCTION: To withhold authority to vote for any individual nominee(s),
write that nominee's name(s) in the space immediately below.
-----------------------
2. RATIFICATION OF MERGER OF THE CITIZENS NATIONAL BANK OF ASHLAND INTO
COMMUNITY BANKS, N.A., WHICH MERGER BECAME EFFECTIVE JANUARY 12, 1996.
FOR ____ AGAINST ____ ABSTAIN ____
3. APPROVAL OF THE SELECTION OF COOPERS & LYBRAND AS INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS FOR 1996.
FOR ____ AGAINST ____ ABSTAIN ____
4. OTHER BUSINESS: Take action on other business which may properly come
before the meeting.
FOR ____ AGAINST ____ ABSTAIN ____
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED, IF NO
SPECIFICATION OR DIRECTION IS MADE, THEY WILL BE VOTED FOR THE ELECTION OF EACH
CLASS A DIRECTOR, IN FAVOR OF THE RATIFICATION OF THE CITIZENS' MERGER AND THE
APPROVAL OF COOPERS & LYBRAND AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
FOR ANY OTHER BUSINESS IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT,
THIS PROXY MAY BE REVOKED PRIOR TO ITS EXERCISE. PLEASE RETURN THIS PROXY AS
SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PAID ENVELOPE.
Dated the day of , 1996 (SEAL)
----------------------------
Signature
(SEAL)
----------------------------
Signature
Please date and sign exactly as your
name appears hereon. When signing as
an Attorney, Executor, Administrator,
Trustee or Guardian, please give full
title. If more than one Trustee, all
must sign. All joint owners must sign.
