<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION , 1997
REGISTRATION NO.: 33-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COMMUNITY BANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 6022 23-2251762
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
150 MARKET SQUARE, MILLERSBURG, PENNSYLVANIA 17061 (717) 692-4781
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ERNEST L. LOWE
C.O.O. AND PRESIDENT
COMMUNITY BANKS, INC.
150 MARKET SQUARE
MILLERSBURG, PENNSYLVANIA 17061 (717) 692-4781
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
JAMES A. ULSH, ESQUIRE PAUL G. MATTAINI, ESQUIRE
METTE, EVANS & WOODSIDE BARLEY, SNYDER, SENFT & COHEN, LLP
3401 NORTH FRONT STREET 126 EAST KING STREET
P.O. BOX 5950 LANCASTER, PENNSYLVANIA 17602-2893
HARRISBURG, PENNSYLVANIA 17110-0950
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
PUBLIC: As soon as practicable after the effective date of this Registration
Statement, and upon consummation of the merger of Peoples State Bank with and
into PSB Interim Bank, a subsidiary of the Registrant, as described in the
enclosed Joint Proxy Statement/Prospectus.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock Par value
$5.00 per share....... 1,410,500 $35.56 $55,786,563.56 $16,905.02
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee and
calculated in accordance with Rule 457(f)(1) on the basis of the average
of the bid and ask prices for common stock of The Peoples State Bank on
the NASD Bulletin Board December 12, 1997 of $35.56 and the estimated
maximum of 1,568,801 shares of such stock to be converted in the merger
described herein into Common Stock of the Registrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION
ACTING PURSUANT TO SUCH SECTION 8(A) MAY DETERMINE.
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<PAGE>
[PEOPLES' LETTERHEAD]
January , 1998
Dear Shareholder:
We invite you to attend a Special Meeting (the "Meeting") of Shareholders of
The Peoples State Bank ("Peoples"), to be held at the East Berlin Community
Center, North and 4th Streets, East Berlin, Pennsylvania, on February 10, 1998
at 9:00 a.m., local time.
At the Meeting, the shareholders will be asked to consider and vote upon:
(a) a proposal to approve the Agreement and Plan of Reorganization dated as of
October 28, 1997 (the "Merger Agreement") between Peoples and Community Banks,
Inc. ("Community"), as well as the merger (the "Merger") of Peoples with and
into PSB Interim Bank, a newly formed, wholly-owned subsidiary of Community as
contemplated therein; (b) a proposal (the "Adjournment Proposal") to postpone
or adjourn the Meeting to another time and/or place for the purpose of
soliciting additional proxies in the event that there are not sufficient votes
at the time of the Meeting to approve the Merger and the Merger Agreement; and
(c) such other business as may properly come before the Meeting or any
adjournment thereof.
In connection with the Merger, each share of Peoples Common Stock issued and
outstanding as of the effective time of the Merger will be converted into and
become a right to receive .889 shares of Community Common Stock, par value
$5.00 per share (the "Community Common Stock"), subject to adjustment as
described more fully in the accompanying Joint Proxy Statement/Prospectus.
Your attention is directed to the attached Joint Proxy Statement/Prospectus
which contains a more complete description of the terms of the Merger and
provides detailed financial, business and other information concerning
Peoples, Community and PSB Interim Bank.
After careful consideration of the terms of the Merger Agreement, the Board
of Directors of Peoples has determined that the Merger is in the best
interests of Peoples and its shareholders. ACCORDINGLY, YOUR BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND THE MERGER
AGREEMENT.
It is very important that your shares be represented at the Meeting, whether
or not you plan to attend in person. The affirmative vote of the holders of
two-thirds of all outstanding shares of Peoples Common Stock is required to
approve the Merger and the Merger Agreement. WE URGE YOU TO EXECUTE, DATE AND
RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON
AS POSSIBLE TO ASSURE THAT YOUR SHARES WILL BE VOTED AT THE MEETING. On behalf
of the Board of Directors, we thank you for your support and urge you to vote
"FOR" approval of the Merger and the Merger Agreement.
Sincerely,
Eddie L. Dunklebarger
President and Chief Executive
Officer
<PAGE>
[COMMUNITY LETTERHEAD]
, 1998
Dear Shareholder:
We invite you to attend a Special Meeting (the "Meeting") of Shareholders of
Community Banks, Inc. ("Community"), to be held at 150 Market Street,
Millersburg, Pennsylvania, on February 10, 1998 at 9:00 a.m., local time.
At the Meeting, the shareholders will be asked to consider and vote upon:
(a) a proposal to approve the Agreement and Plan of Reorganization dated as of
October 28, 1997 (the "Merger Agreement") between The Peoples State Bank
("Peoples") and Community, as well as the merger (the "Merger") of Peoples
with and into PSB Interim Bank, a newly formed, wholly-owned subsidiary of
Community as contemplated therein; (b) a proposal (the "Adjournment Proposal")
to postpone or adjourn the Meeting to another time and/or place for the
purpose of soliciting additional proxies in the event that there are not
sufficient votes at the time of the Meeting to approve the Merger and the
Merger Agreement; (c) in conjunction with the Merger, a proposal to amend the
Community Articles of Incorporation to increase the authorized shares of
Community Common Stock from 5,000,000 shares to 20,000,000 shares (the
"Amendment"); and (d) such other business as may properly come before the
Meeting or any adjournment thereof.
In connection with the Merger, each share of Peoples Common Stock issued and
outstanding as of the effective time of the Merger will be converted into and
become a right to receive .889 shares of Community Common Stock, par value
$5.00 per share (the "Community Common Stock"), subject to adjustment as
described more fully in the accompanying Joint Proxy Statement/Prospectus.
Your attention is directed to the attached Joint Proxy Statement/Prospectus
which contains a more complete description of the terms of the Merger and
provides detailed financial, business and other information concerning
Peoples, Community and PSB Interim Bank.
After careful consideration of the terms of the Merger Agreement, the Board
of Directors of Community has determined that the Merger is in the best
interests of Community and its shareholders. ACCORDINGLY, YOUR BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND THE MERGER
AGREEMENT, AS WELL AS THE AMENDMENT.
It is very important that your shares be represented at the Meeting, whether
or not you plan to attend in person. The affirmative vote of the holders of 66
2/3% of all outstanding shares of Community Common Stock is required to
approve the Merger, the Merger Agreement and the Amendment. WE URGE YOU TO
EXECUTE, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID
ENVELOPE AS SOON AS POSSIBLE TO ASSURE THAT YOUR SHARES WILL BE VOTED AT THE
MEETING. On behalf of the Board of Directors, we thank you for your support
and urge you to vote "FOR" approval of the Merger, the Merger Agreement and
the Amendment.
Sincerely,
Ernest L. Lowe
President
<PAGE>
THE PEOPLES STATE BANK
100 EAST KING STREET
EAST BERLIN, PENNSYLVANIA 17316
(717) 259-9510
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 10, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Meeting") of The Peoples State Bank ("Peoples") will be held at the East
Berlin Community Center, North and 4th Streets, East Berlin, Pennsylvania, on
February 10, 1998 at 9:00 a.m., local time. A Proxy Card and a Proxy Statement
for the Meeting are enclosed. The Meeting is for the purpose of considering
and acting upon:
1. Approval of the Agreement and Plan of Reorganization dated as of
October 28, 1997 (the "Merger Agreement") between Peoples and Community, as
well as the merger (the "Merger") of Peoples with and into PSB Interim
Bank, a newly formed, wholly-owned subsidiary of Community as contemplated
therein. Pursuant to the Merger Agreement and as more fully described in
the accompanying Joint Proxy Statement/Prospectus, each share of Peoples
Common Stock issued and outstanding as of the effective time of the Merger
will be converted into and become a right to receive .889 shares of
Community Common Stock, par value $5.00 per share (the "Community Common
Stock"), subject to adjustment as more fully described in the accompanying
Joint Proxy Statement/Prospectus;
2. Postponement or adjournment of the Meeting to another time and/or
place for the purpose of soliciting additional proxies in the event that
there are not sufficient votes at the time of the Meeting to approve the
Merger and the Merger Agreement (the "Adjournment Proposal"); and
3. Such other matters as may properly come before the Meeting or any
adjournment thereof.
Any action may be taken on any one of the foregoing proposals at the Meeting
on the date specified above, or on any date or dates to which, by original or
later adjournment, the Meeting may be adjourned. Only shareholders of record
at the close of business on December 26, 1997, shall be entitled to notice of
and to vote at the Meeting or any adjournments or postponements thereof.
As required by the Pennsylvania Banking Code ("PBC"), and the Pennsylvania
Business Corporation Law ("BCL"), to which the PBC refers, any shareholder of
Peoples who has voted against the Merger and the Merger Agreement at the
Meeting or has given notice to Peoples in writing at or prior to the Peoples
Special Meeting that such shareholder dissents from the Merger, shall be
entitled to receive the "fair value" of the shares held by that shareholder at
the time the Merger Agreement has been approved by the Pennsylvania Department
of Banking ("PDOB"), the Federal Reserve Board and the FDIC, upon written
request made to Community at any time within 30 days following the Effective
Date, accompanied by the surrender of such shareholder's stock certificates.
The relevant portions of the statutory dissenters procedures are attached to
this Joint Proxy Statement/Prospectus as Appendix D.
You are requested to complete, sign and date the enclosed Proxy Card, which
is solicited by the Board of Directors, and to promptly mail it in the
enclosed envelope. The giving of such proxy does not affect your right to vote
in person in the event you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Eddie L. Dunklebarger
President and Chief Executive Officer
East Berlin, Pennsylvania
, 1998
IMPORTANT: PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY. THE PROMPT
RETURN OF PROXIES WILL SAVE PEOPLES THE EXPENSE OF FURTHER REQUESTS FOR
PROXIES TO ENSURE A QUORUM. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE>
COMMUNITY BANKS, INC.
150 MARKET SQUARE
MILLERSBURG, PENNSYLVANIA 17061
(717) 692-4781
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 10, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Meeting") of Community Banks, Inc. ("Community") will be held at 150 Market
Street, Millersburg, Pennsylvania, on February 10, 1998 at 9:00 a.m., local
time. A Proxy Card and a Proxy Statement for the Meeting are enclosed. The
Meeting is for the purpose of considering and acting upon:
1. Approval of the Agreement and Plan of Reorganization dated as of
October 28, 1997 (the "Merger Agreement") between The Peoples State Bank
("Peoples") and Community, as well as the merger (the "Merger") of Peoples
with and into PSB Interim Bank, a newly formed, wholly-owned subsidiary of
Community as contemplated therein. Pursuant to the Merger Agreement and as
more fully described in the accompanying Joint Proxy Statement/Prospectus,
each share of Peoples Common Stock issued and outstanding as of the
effective time of the Merger will be converted into and become a right to
receive .889 shares of Community Common Stock, par value $5.00 per share
(the "Community Common Stock"), subject to adjustment as more fully
described in the accompanying Joint Proxy Statement/Prospectus.
2. Postponement or adjournment of the Meeting to another time and/or
place for the purpose of soliciting additional proxies in the event that
there are not sufficient votes at the time of the Meeting to approve the
Merger and the Merger Agreement (the "Adjournment Proposal").
3. In conjunction with the Merger, a proposal to amend the Community
Articles of Incorporation to increase the authorized shares of Community
Common Stock from 5,000,000 shares to 20,000,000 shares (the "Amendment").
4. Such other matters as may properly come before the Meeting or any
adjournment thereof.
Any action may be taken on any one of the foregoing proposals at the Meeting
on the date specified above, or on any date or dates to which, by original or
later adjournment, the Meeting may be adjourned. Only shareholders of record
at the close of business on December 26, 1997, shall be entitled to notice of
and to vote at the Meeting or any adjournments or postponements thereof.
You are requested to complete, sign and date the enclosed Proxy Card, which
is solicited by the Board of Directors, and to promptly mail it in the
enclosed envelope. The giving of such proxy does not affect your right to vote
in person in the event you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Thomas L. Miller
Chairman
Millersburg, Pennsylvania
, 1998
IMPORTANT: PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY. THE PROMPT
RETURN OF PROXIES WILL SAVE COMMUNITY THE EXPENSE OF FURTHER REQUESTS FOR
PROXIES TO ENSURE A QUORUM. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
COMMUNITY BANKS, INC.
150 MARKET SQUARE
MILLERSBURG, PENNSYLVANIA 17061
AND
THE PEOPLES STATE BANK
100 EAST KING STREET
EAST BERLIN, PENNSYLVANIA 17316
UP TO 1,410,500 SHARES OF COMMON STOCK
PAR VALUE $5.00 PER SHARE, ISSUABLE IN PROPOSED
MERGER OF
THE PEOPLES STATE BANK
WITH AND INTO
PSB INTERIM BANK
This Joint Proxy Statement/Prospectus is being furnished to the shareholders
of Community Banks, Inc. ("Community") and The Peoples State Bank ("Peoples")
in connection with the solicitation of proxies by their respective Boards of
Directors for use at a Special Meeting of Shareholders of Community and a
Special Meeting of Shareholders of Peoples, each to be held on February 10,
1998. The shareholders of Community and Peoples will be asked to consider and
vote upon: (a) a proposal to approve the Agreement and Plan of Reorganization
dated as of October 28, 1997 (the "Merger Agreement") between Peoples and
Community, as well as the merger (the "Merger") of Peoples with and into PSB
Interim Bank, a newly formed, wholly-owned subsidiary of Community as
contemplated therein; (b) a proposal (the "Adjournment Proposal") to postpone
or adjourn the Meeting to another time and/or place for the purpose of
soliciting additional proxies in the event that there are not sufficient votes
at the time of the Meeting to approve the Merger and the Merger Agreement; and
(c) such other business as may properly come before the Meeting or any
adjournment thereof. Additionally, in conjunction with the Merger, the
shareholders of Community will be asked to consider and vote upon a proposal
to amend the Community Articles of Incorporation to increase the authorized
shares of Community Common Stock from 5,000,000 shares to 20,000,000 shares
(the "Amendment").
In connection with the Merger, each share of Peoples Common Stock issued and
outstanding as of the effective time of the Merger will be converted into and
become a right to receive .889 shares of Community Common Stock, par value
$5.00 per share (the "Community Common Stock"), subject to adjustment as
described more fully herein.
As required by the Pennsylvania Banking Code ("PBC"), and the Pennsylvania
Business Corporation Law ("BCL"), to which the PBC refers, any shareholder of
Peoples who has voted against the Merger and the Merger Agreement at the
Meeting or has given notice to Peoples in writing at or prior to the Peoples
Special Meeting that such shareholder dissents from the Merger, shall be
entitled to receive the "fair value" of the shares held by that shareholder at
the time the Merger Agreement has been approved by the Pennsylvania Department
of Banking ("PDOB"), the Federal Reserve Board and the FDIC, upon written
request made to Community at any time within 30 days following the Effective
Date, accompanied by the surrender of such shareholder's stock certificates.
The relevant portions of the statutory dissenters procedures are attached to
this Joint Proxy Statement/Prospectus as Appendix D.
Community Common Stock is traded, and the Community Common Stock to be
issued pursuant to the Merger Agreement will be traded on the American Stock
Exchange ("AMEX"). Peoples Common Stock is quoted on the NASD Bulletin Board.
<PAGE>
This Joint Proxy Statement/Prospectus constitutes a prospectus of Community
appearing as a part of a registration statement filed with the Securities and
Exchange Commission relating to the 1,410,500 shares of Community Common Stock
issuable pursuant to the Merger Agreement. All information in this Joint Proxy
Statement/Prospectus relating to Community has been supplied by Community and
all information relating to Peoples has been supplied by Peoples.
This Joint Proxy Statement/Prospectus and the accompanying Proxy Card and
Notice of Special Meeting are first being mailed to shareholders of Peoples
and Community on or about January 9, 1998.
THE SHARES OF COMMUNITY COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF COMMUNITY COMMON STOCK ISSUABLE IN THE MERGER ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR DEPOSITORY INSTITUTION
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PEOPLES
OR COMMUNITY. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY TO OR FROM ANY PERSON IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO MAKE SUCH PROXY SOLICITATION. THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION ABOUT PEOPLES OR
COMMUNITY CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
Community is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed with the Commission are available for inspection and
copying at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and
at the Commission's Regional Offices located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and at Seven
World Trade Center, New York, New York 10048. Copies of such documents may
also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed
rates. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
Registrants such as Community that file electronically with the Commission.
The address of the Commissions's site is http;//www.sec.gov. Community Common
Stock is authorized for quotation on the American Stock Exchange. Such
materials and other information concerning Community, therefore, can also be
inspected at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006-1881.
Peoples is also subject to the informational requirements of the Exchange
Act. However, Peoples files reports, proxy statements and other information
with the Federal Deposit Insurance Corporation (the "FDIC"), as an FDIC
insured banking institution. Such reports, proxy statements and other
information filed with the FDIC are available for inspection and copying at
the Disclosure Group, FDIC, 550 17th Street N.W., Room F-518, Washington, DC
20429.
<PAGE>
Community has filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act") a Registration Statement on Form S-4 (including
all amendments and exhibits thereto (the "Registration Statement") with
respect to the Community Common Stock issuable pursuant to the Merger
Agreement. This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
The Registration Statement, including any amendments and exhibits thereto, is
available for inspection and copying as set forth above. Statements contained
in this Joint Proxy Statement/Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO COMMUNITY AND PEOPLES WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS THERETO, UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE
WITHOUT CHARGE TO ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST DIRECTED TO TERRY L. BURROWS,
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, COMMUNITY BANKS, INC., P.O.
BOX 350, MILLERSBURG, PA 17061. IN ORDER TO INSURE TIMELY DELIVERY OF THE
DOCUMENTS IN ADVANCE OF THE MEETING TO WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS RELATES, ANY REQUEST SHOULD BE MADE NO LATER FEBRUARY 3,
1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
COMMUNITY
The following documents and information are hereby incorporated by reference
into this Joint Proxy Statement/Prospectus:
1. Community's annual report on Form 10-K for the year December 31, 1996;
2. Community's quarterly reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and
3. Community's current report on Form 8-K filed November 8, 1997.
All documents filed by Community pursuant to Sections 13(a), 13(c), 14, or
15(d) of the 1934 Act after the date of this Joint Proxy Statement/Prospectus
and prior to the Special Meetings of Peoples and Community are hereby
incorporated by reference into this Joint Proxy Statement/Prospectus and shall
be deemed a part hereof from the dated of filing of each such document. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which is also incorporated by reference
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Joint Proxy Statement/Prospectus.
PEOPLES
The following documents and information are hereby incorporated by reference
into this Joint Proxy Statement/Prospectus:
1. Peoples' annual report on Form F-2 for the year December 31, 1996;
2. Peoples' quarterly reports on Form F-4 for the quarters ended March
31, 1997, June 30, 1997 and September 30, 1997; and
3. Peoples' current report on Form F-3 dated November 10, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
SUMMARY................................................................ 1
The Parties............................................................ 1
Peoples.............................................................. 1
Community............................................................ 1
PSB Interim Bank..................................................... 2
The Special Meetings................................................... 2
Date, Place and Time of the Meetings................................. 2
Matters to be Considered at the Meetings............................. 2
Record Date; Shares Outstanding; Quorum; Vote Required............... 2
Terms of the Merger.................................................. 3
Exchange Procedure................................................... 3
Opinions of Financial Advisors....................................... 3
Recommendation of the Boards of Directors............................ 4
Conditions to the Merger............................................. 4
Closing; Effective Date.............................................. 4
Termination; Waiver; Amendment....................................... 4
Fees and Expenses.................................................... 5
Stock Option Agreement............................................... 5
Dissenters Rights.................................................... 5
Certain Federal Income Tax Consequences of the Merger................ 5
Accounting Treatment................................................. 6
Interests of Certain Persons in the Merger........................... 6
Comparison of Shareholder Rights..................................... 6
Adjournment of the Meeting........................................... 7
Market Price Data.................................................... 7
Selected Historical and Pro Forma Financial Data..................... 9
Peoples State Bank................................................. 9
Community Banks, Inc. ............................................. 10
Unaudited Pro Forma Selected Financial Data.......................... 11
Comparative Per Share Data........................................... 12
THE MEETINGS........................................................... 13
General.............................................................. 13
Date, Place and Time of the Meetings................................. 13
Matters to be Considered at the Meetings............................. 13
Record Date; Shares Outstanding; Quorum.............................. 14
Votes Required....................................................... 14
Effect of Abstentions and Broker Nonvotes............................ 15
Voting, Revocation and Solicitation of Proxies....................... 15
Recommendation of the Boards of Directors............................ 15
THE MERGER............................................................. 16
Introduction; Background of the Merger............................... 16
Peoples............................................................ 16
Community.......................................................... 16
PSB Interim Bank................................................... 17
Reasons for the Merger; Recommendation of the Board of Directors..... 17
Voting Agreements.................................................... 19
Opinions of Financial Advisors....................................... 19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
Terms of the Merger................................................. 25
Effect of the Merger.............................................. 25
Merger Consideration; Conversion Factor........................... 25
Closing; Effective Date........................................... 26
Representations and Warranties.................................... 26
Conduct of Business Pending the Merger............................ 26
Certain Other Agreements.......................................... 27
Conditions Precedent.............................................. 29
Waiver; Amendment................................................. 29
Termination....................................................... 30
Expenses............................................................ 30
Stock Option Agreement; No Solicitation; Pursuit of Other
Transactions....................................................... 31
Continued Employment of Peoples' Employees.......................... 31
Indemnification of Peoples' Officers and Directors; Insurance....... 32
PSB Interim Bank Shareholder Approval............................... 32
Listing............................................................. 32
Exchange Procedure.................................................. 33
Appointment of Exchange Agent..................................... 33
Procedure......................................................... 33
Regulatory Approvals................................................ 33
Interests of Certain Persons in the Merger.......................... 34
Management of Community and PSB Interim Bank After Merger........... 36
Preservation of Independence of Peoples............................. 37
Accounting Treatment................................................ 37
Certain Federal Income Tax Consequences............................. 37
Rights of Dissenting Shareholders................................... 38
REGULATORY MATTERS.................................................... 38
General............................................................. 38
Restrictions on Resales by Affiliates............................... 39
Payment of Dividends................................................ 39
Capital Limitations............................................... 39
Earnings Limitations.............................................. 40
Other Limitations................................................. 40
Holding Company Structure........................................... 40
Capital Adequacy.................................................... 41
Federal Deposit Insurance Corporation Improvement Act of 1991....... 42
COMPARISON OF SHAREHOLDERS' RIGHTS.................................... 43
Introduction........................................................ 43
Dividends........................................................... 43
Peoples........................................................... 43
Community......................................................... 44
Voting Rights Generally............................................. 44
Peoples........................................................... 44
Community......................................................... 44
Classified Board of Directors....................................... 44
Peoples........................................................... 44
Community......................................................... 44
Number of Directors; Term........................................... 45
Peoples........................................................... 45
Community......................................................... 45
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Removal of Directors............................................... 45
Peoples.......................................................... 45
Community........................................................ 45
Qualifications of Directors........................................ 45
Peoples.......................................................... 45
Community........................................................ 46
Filling Vacancies on the Board of Directors........................ 46
Call of Special Shareholders' Meeting.............................. 46
Peoples.......................................................... 46
Community........................................................ 46
Notice of Shareholders' Meetings................................... 46
Peoples.......................................................... 46
Community........................................................ 46
Quorum Requirements and Adjournment of Meetings.................... 46
Dissenters Rights.................................................. 47
Peoples.......................................................... 47
Community........................................................ 47
Limitations on Directors' Liability................................ 47
Indemnification.................................................... 47
Peoples.......................................................... 47
Community........................................................ 47
Peoples and Community............................................ 48
Anti-Takeover Law Provisions....................................... 49
Peoples.......................................................... 49
Community........................................................ 49
Amendment of Articles of Incorporation............................. 50
Peoples.......................................................... 50
Community........................................................ 50
Amendment of Bylaws................................................ 50
Peoples.......................................................... 50
Community........................................................ 50
UNAUDITED PRO FORMA FINANCIAL STATEMENTS............................. 52
BUSINESS OF PEOPLES.................................................. 59
Description of Business............................................ 59
Properties......................................................... 59
Legal Proceedings.................................................. 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
PEOPLES............................................................. 60
ADJOURNMENT OF THE MEETING........................................... 61
EXPERTS.............................................................. 61
LEGAL OPINIONS....................................................... 61
OTHER BUSINESS....................................................... 61
APPENDIX A--MERGER AGREEMENT......................................... A-1
APPENDIX B--OPINION OF THE BERWIND FINANCIAL GROUP, L.P. ............ B-1
APPENDIX C--OPINION OF SANDLER O'NEILL & PARTNERS, L.P. ............. C-1
APPENDIX D--STATUTORY PROVISIONS CONCERNING DISSENTERS' RIGHTS FOR
SHAREHOLDERS OF PEOPLES............................................. D-1
APPENDIX E--STOCK OPTION AGREEMENT................................... E-1
</TABLE>
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<PAGE>
APPENDIX A--MERGER AGREEMENT
AGREEMENT AND PLAN OF REORGANIZATION
OF
THE PEOPLES STATE BANK
AND
COMMUNITY BANKS, INC.
PROVIDING FOR THE MERGER OF
THE PEOPLES STATE BANK
WITH AND INTO
PSB INTERIM BANK,
A WHOLLY-OWNED SUBSIDIARY OF
COMMUNITY BANKS, INC.
This Agreement and Plan of Reorganization ("Agreement"), made and entered
into this 28th day of October, 1997, by and among The Peoples State Bank
("Peoples"), a Pennsylvania state chartered banking institution, having its
headquarters at 100 East King Street, East Berlin, Pennsylvania 17316; 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 Peoples and Community deem it advisable
and in the best interest of their respective shareholders that under and
pursuant to the terms and conditions herein set forth Peoples be merged with
and into a Pennsylvania state chartered banking institution ("Interim Bank")
to be organized as a wholly-owned subsidiary of Community specifically for the
purpose of merging Peoples with and into the Interim Bank (the "Merger"); and
Whereas, this Agreement has been approved by the Board of Directors of
Peoples and Community; 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.
Whereas, Community and Peoples have entered into a Stock Option Agreement of
even date herewith, attached hereto as Exhibit "A" (the "Stock Option
Agreement") pursuant to which Peoples has granted to Community the option to
purchase certain authorized but unissued shares of the common stock, par value
$1.00 per share, of Peoples ("Peoples Common Stock").
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 laws of the
Commonwealth of Pennsylvania, Peoples and Community do hereby agree as
follows:
ARTICLE I
The Merger
1.1 Community shall promptly cause Interim Bank to be duly organized as a
Pennsylvania state chartered banking institution under the name of PSB Interim
Bank. Interim Bank will be wholly owned by Community.
1.2 Community shall not permit Interim Bank to conduct any business
operations which would impair or adversely affect the consummation of the
Merger contemplated by this Agreement.
1.3 Prior to consummation of the Merger, Community shall cause Interim Bank
to take all necessary and proper action to ratify, approve, adopt, and join in
this Agreement; to undertake the performance of all of the
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<PAGE>
terms and conditions of this Agreement to be performed by Interim Bank; and to
execute and adopt Articles of Merger by and among Community, Peoples, and
Interim Bank for the purposes of consummating the merger contemplated hereby
and which shall be consistent with the terms of this Agreement and the
provisions of the Pennsylvania Banking Code.
1.4 Peoples shall be merged into Interim Bank upon the terms and provisions
of this Agreement and under the Articles of Incorporation and By-Laws of
Interim Bank (subject to future alteration, amendment or repeal). The Merger
shall be pursuant to the provisions of, and with the effect provided in, the
Pennsylvania Banking Code.
1.5 On the Effective Date, the name of the Interim Bank as the surviving
banking institution shall be changed to The Peoples State Bank.
1.6 At the Effective Date of the Merger, the separate existence of Peoples
shall cease and Interim Bank, as the surviving entity, shall continue
unaffected and unimpaired by the Merger and shall be liable for all of the
liabilities of Peoples existing at the Effective Date.
1.7 All assets, rights, privileges, immunities, powers, franchises and
interests of Peoples in and to every type of property (real, personal and
mixed) and choses in action, as they exist as of the Effective Date, shall
pass and be transferred to and vest in Interim Bank by virtue of the Merger on
the Effective Date without any deed, conveyance or other transfer; the
separate existence of Peoples shall cease and the existence of Interim Bank as
the surviving banking institution and as a banking institution organized under
the Pennsylvania Banking Code shall continue unaffected and unimpaired by the
Merger; and Interim Bank shall be deemed to be the same banking institution as
Peoples and shall be subject to all of its duties and liabilities of every
kind and description.
Interim Bank, upon the Merger and without any order or 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 Peoples 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 choses in action, and all and every other interest, of or
belonging to or due to Peoples, shall be taken and deemed to be transferred to
and vested in Interim Bank without further act or deed. The title to any real
estate, or any interest therein, vested in Peoples shall not revert or be in
any way impaired by reason of the Merger.
1.8 Interim Bank shall be responsible and liable for all the liabilities and
obligations of Peoples and any claim existing or action or proceeding pending
by or against Peoples may be prosecuted as if the Merger had not taken place,
or Interim Bank may be substituted in its place. Neither the rights of
creditors nor any liens upon the property of Peoples shall be impaired by
reason of the Merger.
1.9 The shares of capital stock of Interim Bank 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 Peoples 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 Peoples' 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
Peoples' Common Stock held and beneficially owned by Community or any
Community subsidiary (other than shares of Peoples' Common Stock held in a
fiduciary or similar capacity on behalf of others) which
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<PAGE>
shall be canceled by virtue of the Merger, shall automatically be converted
into .889 shares (as adjusted pursuant to Section 2.6 herein the
"Conversion Factor") of common stock, $5.00 par value, of Community
("Community Common Stock")
(b) Each share of Peoples' Common Stock which, immediately prior to the
Effective Date of the Merger, was issued and held in the treasury of
Peoples, 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 Peoples' 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
Peoples 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 average of the closing sales price of Community
Common Stock as reported on the American Stock Exchange for fifteen (15)
consecutive trading days prior to and including the fifteen trading days
preceding the Effective Date of the Merger.
2.3 As soon as practicable after the Effective Date of the Merger, holders
of shares of Peoples' 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 Peoples shares and
will require an indemnity agreement or a bond from any Peoples' 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 Peoples' Common Stock, the holder of which has
timely filed a written notice of intention to demand appraisal for his shares
pursuant to the Pennsylvania Banking Code and Subchapter D of the Pennsylvania
Business Corporation Law of 1988 as amended (the "BCL") 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 the BCL
("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 Subchapter D of the BCL. Each holder of Dissenting Shares who
becomes entitled to payment for his Peoples Common Stock pursuant to the
provisions of Subchapter D of the BCL 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 Peoples' 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.
(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 Peoples'
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
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<PAGE>
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 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 Peoples' 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 Peoples' Common Stock would have
represented had such shares of Peoples' 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.
2.7
(a) Each option to purchase shares of Peoples Common Stock pursuant to the
Peoples Stock Option Plan and the Peoples Directors Stock Option Plan
(collectively, the "Option Plans"), which is outstanding and unexercised
immediately prior thereto (each, an "Outstanding Option"), shall be converted
as to each whole share subject to such Outstanding Option into, at the
Effective Date, an option (each, an "Exchange Option") to purchase such number
of shares of Community Common Stock at such exercise price as is determined as
provided below (and otherwise having the same duration and other terms as the
original option):
(A) the number of shares of Community Common Stock to be subject to the
Exchange Option shall be equal to the product of (A) the number of shares
of the Peoples Common Stock subject to the original option multiplied by
the Conversion Factor (as may be adjusted as provided in paragraph 2.6),
the product being rounded, if necessary, up or down, to the nearest whole
share;
(B) the exercise price per share of Community Common Stock under the new
option shall be equal to (I) the aggregate exercise price for the shares of
Peoples Common Stock subject to the Outstanding Option, divided by (II) the
number of shares of Community Common Stock for which the Exchange Option is
exercisable as determined pursuant to clause (A) above, the result being
rounded, if necessary, up or down, to the nearest cent.
(C) the duration and other terms of such Outstanding Options shall be
unchanged except that all references to Peoples shall be deemed references
to Community, and that each such Exchange Option shall be fully exercisable
as of the Effective Date, and shall remain exercisable at least until the
stated expiration date of the corresponding Outstanding Option; and
(D) to the extent Outstanding Options qualify as "incentive stock
options" under Section 422 of the Code, the Exchange Options exchanged
therefor shall also so qualify.
(b) The adjustments provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with Section 424(a) of the Code.
(c) The Exchange Options with respect to Outstanding Options shall be
delivered by Community at the Effective Date. Prior to the Effective Date,
Community shall reserve for issuance, and if not previously registered
pursuant to the Securities Act of 1933, as amended, register, a sufficient
number of Community Common Stock to satisfy Community's obligations with
respect to the issuance of the Community Common Stock pursuant to the exercise
of Exchange Options.
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<PAGE>
The intention of the foregoing provisions of this Section 2.7 is to place
the holders of the Outstanding Options in the same economic position, taking
into consideration the Conversion Factor, with respect to the Exchange Options
after the Effective Date as they were with respect to Outstanding Options
prior to the Effective Date.
ARTICLE III
Board of Directors and Officers of Community and Interim Bank
3.1 On the Effective Date, the Board of Directors of Community shall consist
of the following:
(a) The 15 persons who were then members of the Board of Directors of
Community;
(b) Four (4) of Peoples current Directors (designated by vote of Peoples
Board of Directors prior to the Effective Date, which designation shall
include the class to which such Director shall be appointed provided only
one (1) such designee shall be an employee of Peoples immediately prior to
the Effective Date). On the Effective Date, in accordance with Community's
current classification of directors and the designation of Peoples Board of
Directors, Community shall appoint:
(1) one such Peoples Director as a Class A Director, to continue in
office until 2000;
(2) one such Peoples Director as a Class B Director, to continue in
office until 2001;
(3) one such Peoples Director as a Class C Director, to continue in
office until 1998; provided, that if the Effective Date occurs prior to
Community's 1998 Annual Meeting of Shareholders, this Director must
stand for election at the 1998 Annual Meeting. If the Effective Date
occurs after Community's 1998 Annual Meeting of Shareholders, this
Director shall continue in office until 2002;
(4) one such Peoples Director as a Class D Director, to continue in
office until 1999.
If, during his or her respective term of office, any of the Directors
appointed as set forth in 3.1(b) above shall cease to serve as a Community
Director, the current Peoples Directors who are then serving as directors
of Interim Bank shall have the right to designate one other person then
serving on the Board of Interim Bank (or any successor thereto) to serve as
a Community Director (subject to the reasonable concurrence of Community as
to the person designated).
(c) The Board of Directors shall nominate for reelection each former
Peoples Director whose term as a Community Director expires on or before
the date of the 2001 annual meeting of Community Shareholders.
3.2 The Executive Committee of Community shall consist of the 7 persons who
are members of the Executive Committee as of the Effective Date plus three (3)
additional members who are members of Community's Board of Directors and
former non-employee Directors of Peoples. The members of the Executive
Committee shall serve until the 1998 reorganization meeting of Community's
Board of Directors; provided, however, that it is the intent of Community and
its directors to maintain such ratio of Community/Peoples represented on the
Executive Committee for a reasonable period thereafter.
3.3 From and after the Effective Date, the officers of Community shall be
those persons who were the officers and directors of Community provided,
however, that Eddie L. Dunklebarger, the chief executive officer of Peoples,
shall become the chief executive officer of Community and Ernest L. Lowe,
President of Community, shall become the Chairman of the Board of Community.
The officers of Community shall also consist of such other officers as the
Community 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. On the
date hereof the Board of Directors of Community shall enter into employment
agreements, which shall be conditioned upon consummation of the Merger and
shall become effective on the Effective Date, with (a) Eddie L. Dunklebarger
pursuant to which he shall become the President and CEO of Community and the
Interim Bank on the Effective Date, (b) Anthony E. Leo pursuant to which he
shall become
A-5
<PAGE>
an executive vice-president of Community and the Interim Bank on the Effective
Date and (c) Jeffrey M. Seibert, pursuant to which he shall become an
executive vice-president of Community and an executive vice-president and
chief lending officer of the Interim Bank on the Effective Date (the
"Employment Agreements"). The Employment Agreements shall be in the form
attached hereto as Exhibits "B 1, 2, and 3".
3.4 On the Effective Date, Community shall appoint the other members of the
Board of Directors of Peoples to the Board of Directors of Interim Bank and
the acting Directors of the Interim Bank shall resign so that the Board of
Directors of Interim Bank shall be and consist of those persons who were then
members of the Board of Directors of Peoples. From and after the Effective
Date, the officers of the Interim Bank shall be and consist of those persons
who were then officers of Peoples. Such officers shall hold office until such
time as their successors have been duly elected or appointed and have
qualified, unless sooner removed, resigned, disqualified, or deceased.
3.5 (a) Community believes in a community bank approach to banking. It is
Community's intention to (i) preserve the business structure of Interim Bank
as a separate subsidiary and/or the present name of Peoples (either to
identify the separate subsidiary or the former branches of Peoples following a
merger of Interim Bank with another banking subsidiary of Community) and (ii)
continue in office the present directors of Peoples who indicate their desire
to serve (the "Peoples Continuing Directors") on the Board of Interim Bank,
provided that (A) each non-employee Peoples Continuing Director shall continue
to receive fees from Interim Bank on the same basis as prior to the Merger and
as he was receiving from Peoples prior to the Effective Date, and (B) each
Peoples Continuing Director who has reached the age of 72 as of the Effective
Date, or who reaches such age within three (3) years thereafter, shall be
permitted to serve for a period of three (3) years after the Effective Date
before becoming subject to Community's mandatory retirement rules for
directors. In the event Interim Bank and another bank subsidiary of Community
merge in the future, representatives from the Peoples Continuing Directors (or
their successors) shall be included on the Board of the surviving bank and
such representatives shall have significant input and authority on lending
decisions relating to the current markets of Peoples.
(b) Notwithstanding anything herein to the contrary, the Peoples Continuing
Directors, in their exercise of their fiduciary duty as to the best interests
of Peoples and Community, may, by a majority vote of such directors, modify or
waive any or all of the foregoing provisions in subsection (a) of this Section
3.5.
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 Peoples and Community;
provided, however, that after such approval by the shareholders of Peoples and
Community no such amendment, without further shareholder approval, shall
reduce the amount or change the form of the consideration to be delivered to
the shareholders of Peoples 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 Peoples and
Community. 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.
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ARTICLE V
Representations and Warranties
5.1 Representations and Warranties of Peoples. Peoples represents and
warrants to Community that:
(a) Peoples is a Pennsylvania state chartered banking institution that is
duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Peoples is an "insured depository
institution" as defined in the Federal Deposit Insurance Act, as amended
("FDIA").
(b) The copies of the Articles of Incorporation and the Bylaws of Peoples
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 Peoples
which have been made available for inspection by Community contain a
complete and accurate record of all meetings of Peoples.
(c) Peoples (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 Peoples,
(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 Peoples, the non-receipt of which would in the
aggregate materially adversely affect the business of Peoples.
(d) The authorized capital stock of Peoples consists of 20,000,000 shares
of Peoples Common Stock, par value $1.00 per share and 2,000,000 shares of
Preferred Stock, of which 1,480,794 shares of Common Stock were validly
authorized, issued and outstanding, fully paid and nonassessable, and no
shares of Preferred Stock were outstanding, as of June 30, 1997. Other than
options (for an aggregate of 88,007 shares) issued pursuant to the Stock
Option Plan, the Directors' Stock Option Plan, the Employee Stock Option
Plan, and the options granted to Community pursuant to the Stock Option
Agreement of even date herewith and shares issued from time to time under
Peoples Dividend Reinvestment Plan and the 401(k) Plan, as of the date
hereof there are outstanding no subscriptions, options, warrants, calls or
rights or other agreements or commitments of any kind obligating Peoples to
issue or dispose of any securities of Peoples or securities of Peoples
convertible into any shares of Peoples' Common Stock. From December 31,
1996 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 Peoples Common Stock except those
permitted under Section 6.2(a)(3) below.
(e) Except as disclosed in Schedule I, Peoples 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.
(f) (1) Peoples 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 financial
condition and results of operations of Peoples, 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 Peoples' interim financial
statements are not audited and are not prepared with related notes but
reflect all adjustments which are, in the opinion of Peoples, necessary for
a fair presentation of such financial statements:
(A) Balance Sheet (the "Peoples' 1996 Balance Sheet"), Statement of
Income, Statement of Stockholders' Equity and Statement of Cash Flows,
together with notes thereto, at December 31, 1996 and for the twelve
months then ended, certified by Stambaugh Ness, P.C.;
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(B) Balance Sheets, Statements of Income, Statements of Stockholders'
Equity and Statements of Cash Flows, together with notes thereto, at
December 31, 1995 and 1994, and for the years then ended, certified by
Stambaugh Ness, P.C.
(C) Interim Balance Sheets (the "Peoples June 30, 1997 Balance
Sheet"), Statements of Income, Statements of Stockholders' Equity and
Statements of Cash Flows at June 30, 1997, and for the six months then
ended.
(2) Peoples has provided Community with copies of all financial
statements, proxy statements, reports and other documents issued to its
shareholders after December 31, 1996 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 or
state authority during such period, and Peoples shall make available for
inspection by officials or representatives of Community all financial
statements prepared by Peoples and examined by Stambaugh Ness, P.C.
(g) (1) Peoples has delivered to Community copies of:
(A) its Annual Report to Shareholders for the years ended December
31, 1996 and 1995;
(B) Peoples' Annual Report to the Pennsylvania Department of Banking,
and the FDIC under Section 13 of the Securities Exchange Act of 1934,
for the years ended December 31, 1996 and 1995;
(C) all other periodic reports filed by Peoples with the Pennsylvania
Department of Banking, and the FDIC including all quarterly reports on
Form F-4 under Section 13 of the Securities Exchange Act of 1934 since
January 1, 1995; and
(D) all proxy statements and other written materials furnished to
Peoples' shareholders since January 1, 1995;
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(g)(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(f), 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) (1) Peoples 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. Peoples 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 Peoples for the alleged deficiency in the payment of any Taxes, and
Peoples 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) Peoples has heretofore delivered to Community copies of its United
States federal and Pennsylvania tax returns for the fiscal years ended
December 31, 1995 and 1996, true and correct copies of which are included
in Schedule I.
(3) To the extent required by generally accepted accounting principles,
the provision for current taxes payable reflected in "Other Liabilities" in
the Peoples' 1996 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 Peoples, whether or not disputed, for the
period ended December 31, 1996, and for all prior periods, and (B) all or
substantially all Taxes that may become due and payable by Peoples in
future periods (i) in respect of transactions, sales or services occurring
or performed on or prior to December 31, 1996, which by virtue
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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 Peoples' 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 Peoples 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 Peoples, 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 Peoples 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
Peoples' 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 Peoples pursuant to Section
341(f) of the Internal Revenue Code of 1986, as amended (the "Code").
(i) Since June 30, 1997, (1) there has been no material adverse change in
the business or financial condition of Peoples, and (2) except as set forth
in Schedule I, no event described in Section 6.2(a) has occurred.
(j) (1) Except as disclosed in Schedule I, Peoples 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 Peoples' 1996 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, 1996, 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 Peoples'
1996 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 Peoples which are material to the
business, operations or financial condition of Peoples are in substantially
good operating condition and repair (ordinary wear and tear excepted).
(2) All properties held by Peoples 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. Peoples 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.
(k) 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,
Peoples 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 of more than $25,000 and which is made for a fixed period expiring
more than one year from the date hereof, and Peoples 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(k) 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 as to Peoples with respect
thereto, except such as in the aggregate are not material to the business
or financial condition of Peoples.
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(l) Except as specifically disclosed in Schedule I, as of June 30, 1997,
there are no commercial, commercial real estate or residential real estate
loans of Peoples 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 June 30, 1997, 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 June
30, 1997, the reserve for loan losses in Peoples' June 30, 1997 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, 1996, or as disclosed in Schedule I, there are no loans or loan
commitments outstanding to executive officers or directors of Peoples,
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.
(m) Except for pledges to secure public and trust deposits, repurchase
agreements in the Ordinary Course of Business, and other pledges required
by law, none of the investments reflected in Peoples' June 30, 1997 Balance
Sheet under the heading "Investment Securities," and none of the
investments made since June 30, 1997, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability of
Peoples freely to dispose of such investment at any time.
(n) Except as otherwise identified and disclosed in Schedule I, Peoples
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, 1997, all accrued
contributions and other payments to be made under each qualified retirement
plan for such purpose have been set aside therefor. Except as specifically
disclosed and identified in Schedule I, Peoples 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 of employees, any member of management or any
other person.
(o) Except as specifically disclosed in Schedule I, there are no actions,
suits, investigations or proceedings instituted, pending or, to the
knowledge of Peoples, threatened against Peoples before any court, any
arbitrator of any kind or any government agency (including any bank
regulatory authority), and Peoples is not subject to any potential adverse
claim, the outcome of which could involve the payment by Peoples of an
amount in excess of $25,000 or, which could materially affect Peoples or
its business or property or the transactions contemplated hereby. Peoples
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.
(p) (1) The execution and delivery of this Agreement has been duly
authorized by the Board of Directors of Peoples and, when the Merger has
been duly approved by the affirmative vote of the shareholders of Peoples
owning at least two-thirds ( 2/3) of its capital stock outstanding at a
meeting of
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shareholders duly called and held in accordance with the provisions of
Pennsylvania law, this Agreement shall be duly and validly authorized by
all necessary action on the part of Peoples.
(2) This Agreement has been duly executed and delivered by Peoples and
(assuming due execution and delivery by Community) constitutes, and, upon
its execution and delivery shall constitute, a valid, binding and
enforceable obligation of Peoples, 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 Pennsylvania
state chartered banking institutions, (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 Peoples of this Agreement and the
consummation of the transactions herein contemplated do not violate any
provision of the Articles of Incorporation or Bylaws of Peoples, any
provisions of federal or state law or any governmental rule or regulation
(assuming the organization of Interim Bank and its adoption of this
Agreement, the appropriate filing of the Articles of Merger with the
Pennsylvania Department of Banking, the receipt of the Government
Approvals, the receipt of the requisite Peoples shareholder approval
referred to in Section 5.1(p)(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 Peoples 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.
(q) Except for Berwind Financial Group, L.P., which will be entitled to a
fee to be paid by Peoples 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
Peoples or is entitled to be paid based upon any agreements, arrangements
or understandings made by Peoples in connection with any of the
transactions contemplated by this Agreement.
(r) Peoples is, and continuously since at least January 1, 1996 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. Peoples is not in default
thereunder and all material claims thereunder have been filed in due and
timely fashion.
(s) Peoples is not in violation of, and has not 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
Peoples.
To the best knowledge of Peoples, improvements on any real estate owned or
leased by Peoples 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. Peoples does not know of any liability or
class of liability of Peoples 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.).
(t) The information pertaining to Peoples, which has been or will be
furnished to Community by or on behalf of Peoples for inclusion in the
Community Registration Statement, the Prospectus or the Proxy
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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 Peoples included in the Prospectus or the Proxy Statement
will present fairly the consolidated financial condition and results of
operations of Peoples 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.
Peoples 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.
(u) No representation or warranty by Peoples and no statement by Peoples
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 Peoples 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 3,016,247 shares are validly authorized,
issued and outstanding, fully paid and nonassessable, and 43,868 shares are
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, and is validly listed on
the American Stock Exchange. 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 (an aggregate of 258,604 shares) 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. ("CBNA"); 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.
CBNA 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 Investment, Inc., and UDNB
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Investments, Inc. are corporations 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
Peoples 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 Peoples 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) (1) Community has delivered to Peoples 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 1996 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, 1996, and for the year then
ended, audited by Coopers & Lybrand, L.L.P.; 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, 1995 and 1994 and for the years then ended, audited by Coopers &
Lybrand, L.L.P.
(C) Consolidated Balance Sheets (the "Community June 30, 1997 Balance
Sheet"), Consolidated Statements of Income, Consolidated Statements of
Stockholders' Equity, and Consolidated Statements of Cash Flows, at
June 30, 1997 and for the six months then ended.
(2) Community has delivered to Peoples 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, 1996 and 1995 and for the 12-month periods then ending, and
such interim statements as of June 30, 1997 and for the six months then
ending, 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 Peoples with copies of all financial
statements, proxy statements, reports and other documents issued to its
shareholders after December 31, 1996, and will provide Community with
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copies of such statements, reports, and documents issued after the date
hereof and on or prior to the Effective Date. Community has delivered to
Peoples copies of:
(a) its annual report to shareholders for the years ending December
31, 1996 and 1995;
(b) its annual report to the Securities and Exchange Commission (the
"SEC") on Form 10-K for the years ending December 31, 1996 and 1995;
(c) Community Banks, N.A.'s annual report to the Comptroller of the
Currency for the years ending December 31, 1996 and 1995;
(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, 1995;
(e) all proxy statements and other written materials furnished to
Community shareholders since January 1, 1995.
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 Peoples 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(h) 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 June 30, 1997,
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, 1996, 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, 1996 the reserve for loan losses in the
Community 1996 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, 1996, 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
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commitments to related parties disclosed in said Audited Consolidated
Financial Statements or in writing to Peoples 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) the Community Banks, N.A. Supplemental Pension Benefits
Agreement dated August 2, 1994 with Thomas L. Miller, (v) the Deferred
Compensation Plan between Thomas L. Miller and CBNA dated December 13,
1996, (vi) as otherwise identified and disclosed in Schedule II, neither
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, 1997, 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 June 30, 1997, (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, judgments
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 (subject to approval of
Community's shareholders in accordance with Community's Articles of
Incorporation and the existing requirements of the American Stock
Exchange).
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(2) This Agreement has been duly executed and delivered by Community and
(assuming due execution and delivery by Peoples) 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) the
organization of Interim Bank and its adoption of this Agreement, (ii) the
appropriate filing of the Articles of Merger with the Pennsylvania
Department of Banking, (iii) receipt of the Government Approvals, (iv) the
due registration of the offering of the Community Common Stock under the
Securities Act of 1933, as amended (the "1933 Act"), (v) the receipt of
appropriate permits or approvals under state securities or "blue sky" laws,
(vi) the receipt of the requisite Community and Interim Bank shareholders'
approval, (vii) the accuracy of the representations of Peoples set forth in
Sections 5.1(t) and (u)), 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, Interim
Bank, 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 Interim Bank 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 on 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).
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(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.
(2) Community has heretofore delivered to Peoples copies of its
consolidated United States federal and Pennsylvania corporate tax returns
for the fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992,
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 1996 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,
1996, 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, 1996, 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 1996 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, 1996, 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 1996 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 excepted).
(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
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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, 1996 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.
(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 Peoples; provided, however, that information as
of a later date shall be deemed to modify information as of an earlier
date.
(t) Other than Sandler O'Neill & Partners, L.P., 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.
(u) 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 Community's 1996 Balance
Sheet under the heading "Investment Securities," and none of the
investments made since December 31, 1996, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability of
Community freely to dispose of such investment at any time.
ARTICLE VI
Agreements of Community and Peoples
6.1 Agreements of Community.
(a) Community will promptly following the execution of this Agreement, use
its best efforts in good faith to take as promptly as practicable all such
steps as shall be necessary in order to cause the formation and organization
of Interim Bank as a Pennsylvania state chartered banking institution and
wholly-owned subsidiary of Community to cause the Interim Bank to ratify,
approve, adopt, and join in this Agreement and cause the Merger to be
consummated as expeditiously as possible.
(b) As the sole shareholder of Interim Bank, Community shall by unanimous
shareholder action ratify and confirm the merger of Peoples into Interim Bank
and cause the Board of Directors of Interim Bank to approve the Merger.
(c) Prior to the Effective Date, Community shall take appropriate action to
reserve a sufficient number of authorized but unissued shares of Community
Common Stock to be issued in accordance with this Agreement. 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, when 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 an Exchange Agent
for the purpose of exchanging certificates representing shares of Community
Common Stock for certificates representing shares of Peoples 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
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required to be delivered to holders of shares of Peoples 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. All costs and expenses associated with the foregoing
surrender and exchange procedure shall be borne by Community.
(e) Prior to the Effective Date, Community, separately and jointly with
Peoples, shall use its best efforts in good faith to take or cause to be taken
as promptly as practicable all such steps as shall be necessary to (1) form
and organize Interim Bank as a duly organized and validly existing
Pennsylvania state chartered banking institution under the Pennsylvania
Banking Code, and (2) obtain (i) the prior approval of the Merger by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board") and
the Pennsylvania Department of Banking ("PA DOB"), (ii) the prior approval of
the Federal Deposit Insurance Corporation ("FDIC"), and (iii) all other
consents and approvals of government agencies as are required by law or
otherwise (such approvals referred to in clauses (i), (ii) and (iii) 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 Peoples with and into Interim Bank to be
consummated on the terms provided in this Agreement as promptly as
practicable. Community shall provide Peoples and its representatives with the
right to review in advance 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 Peoples
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.
(f) Community shall promptly give written notice to Peoples 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 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 Peoples 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
Peoples during such period with all such information concerning its affairs as
Peoples may reasonably request. The availability or actual delivery of
information about Community or its subsidiaries to Peoples shall not affect
the covenants, representations and warranties of Community contained in this
Agreement. Peoples shall treat as confidential all such information in the
same manner as Peoples treats similar confidential information of its own, and
if this Agreement is terminated, Peoples 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 cause Interim Bank to employ as employees of Interim
Bank persons who are employees of Peoples immediately prior to the Effective
Date to pay compensation to each such person that is at least equal to the
aggregate compensation that such person was receiving from Peoples prior to
the Effective Date and use its reasonable best efforts to provide employee
benefits to each such employee that are substantially equivalent in the
aggregate to the Employee Benefits which Peoples' employees received prior to
the Effective Date of the Merger and are no less favorable than employee
benefits afforded to similarly situated employees of Community and its
subsidiaries (Community will consider in good faith the implementation of a
401(k) plan on or shortly after the Effective Date). It is understood and
agreed that Peoples ESOP and 401(k) Plan will be terminated as of the
Effective Date of the Merger. For vesting and eligibility purposes for
employee benefits, former Peoples employees shall receive credit for years of
service with Peoples. With respect to any welfare benefit plans to which such
employees may become eligible, Community and its subsidiaries shall cause such
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plans to provide credit for any co-payments or deductibles by such employees
and waive all pre-existing condition exclusions and waiting periods. Such
persons as are so employed after the Effective Date shall have such titles and
duties as are appropriate and consistent with People's existing personnel
structure, and in the case of Mssrs. Dunklebarger, Leo and Seibert, the
Employment Agreements. On the Closing Date, Community and Interim Bank, as the
case may be, shall enter into the Employment Agreements with Eddie L.
Dunklebarger, Anthony E. Leo, and Jeffrey M. Seibert, attached hereto as
Exhibits B 1, 2, and 3.
In the event Interim Bank terminates the employment (other than as a result
of unsatisfactory performance of their respective duties) of any officers or
employees of Peoples as of the Effective Date within one year of the Effective
Date, Community shall cause the Interim Bank to pay severance benefits to such
employee in accordance with such severance policy as Peoples may from time to
time adopt and modify with the reasonable consent of Community.
(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 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 excepted), (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 assessments 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.
(k) Community shall cause the issues of shares of Community common stock in
connection with 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 Community's Articles of Incorporation and Bylaws, the BCL, the Rules of
the American Stock Exchange and other applicable laws.
(l) Community, with the cooperation and assistance of Peoples and its
counsel and accountants, shall promptly take all such actions as may be
necessary or appropriate in order to list the shares of Community Common Stock
to be issued in the Merger on the American Stock Exchange.
(m) Community shall not adopt any amendments to its charter or bylaws or
other organizational documents that would alter the terms of Community's
Common Stock or could reasonably be expected to have a material adverse effect
on the ability of Community to perform its obligations under this Agreement.
(n) Community shall take no action which would have the effect of causing
the Merger not to qualify for pooling-of-interests accounting treatment or
reorganization tax treatment.
6.2 Agreements of Peoples.
(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, Peoples shall not:
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(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 (other than as a result of the exercise of
stock options or shares issued pursuant to Peoples ESOP, 401(k) Plan, and
Dividend Reinvestment Plan consistent with past practice), or issue or
grant any right, option or other commitment for the issuance, delivery or
sale of any such shares or such securities (other than pursuant to
subsection (4) below);
(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 Peoples' Common Stock at a quarterly rate
not in excess of $.14 per share for the fourth quarter of 1997 and for each
quarter thereafter at a quarterly rate not greater than Community's
dividend rate multiplied by .889.
(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 Peoples, as the case may be. Peoples may
issue options to employees and Directors (not to exceed 25,000 shares to
employees and 5500 shares to Directors) in the ordinary course of business
consistent with past practice at the fair market value of Peoples Common
Stock as of the date of the grant (as defined in Peoples Stock Option
Plan).
(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 (other than pursuant to the exercise of stock options) or
Peoples ESOP, 401(k) Plan, and Dividend Reinvestment Plan, 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 $5,000 (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 Peoples and
not prohibited by the Pennsylvania Banking Code (herein referred to as the
"Ordinary Course of Business"); or
(6) Except to the extent which the Board of Directors in good faith
believes it is required to discharge its fiduciary duties after
consultation with its legal counsel, Peoples agrees that neither it nor any
of its officers and directors shall (and Peoples shall direct and use its
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 Peoples 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, Peoples
(any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or, 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. Peoples 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
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foregoing. Peoples 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). Peoples 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, Peoples shall conduct its business in the
ordinary course as heretofore conducted and shall use its 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 excepted), (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 insurance of the FDIC with respect to Peoples),
(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 Peoples'
allowance for loan losses in the Ordinary Course of Business when the
potential loss has been quantified by the executive officers of Peoples.
(d) Prior to the Effective Date, Peoples 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
Peoples to Community shall not affect the covenants, representations and
warranties of Peoples 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 Peoples
as Peoples shall request.
(e) Peoples shall 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 Pennsylvania Banking Code and the BCL. Except as
required by applicable fiduciary duties, in the opinion of counsel to Peoples,
the Board of Directors of Peoples shall recommend in Peoples' Proxy Statement
that the Merger and this Agreement be approved, which recommendation shall not
be withdrawn. In addition thereto, concurrently with the execution of this
Agreement, each member of Peoples Board of Directors shall execute and deliver
to Community the Directors Letter attached hereto and made a part hereof as
Exhibit "C".
(f) After execution hereof, Peoples shall deliver to Community a correct and
complete list of holders of the outstanding Peoples Common Stock of record
with addresses.
(g) Peoples, separately and jointly with Community, shall use its 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 Peoples or Community to be
necessary or appropriate in order to cause the Merger to be consummated on the
terms provided in this Agreement.
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(h) Peoples 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 agreements, representations and
warranties of Peoples contained or referred to in this Agreement, and shall
use its 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,
Peoples 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 interests accounting treatment.
6.3 Agreements of Community and Peoples.
(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 Peoples 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; Securities 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. Peoples 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 Community and Peoples for approval. The Proxy
Statement in definitive form will serve as the prospectus (the "Prospectus")
to be included in the Community Registration Statement. Community and Peoples
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 Peoples shall use their best efforts to have the Community
Registration Statement declared effective under the 1933 Act as soon as may be
practicable, and thereafter Peoples shall distribute the Proxy Statement to
its shareholders in accordance with applicable law and its Articles of
Incorporation 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. Peoples shall not mail or otherwise furnish the
Proxy Statement to its shareholders unless and until Community shall have
received letters from Coopers & Lybrand, L.L.P. and Stambaugh and Ness, P.C.
dated the effective date of the Community Registration Statement, to the
effect set forth in Section 8.1(j)and 8.2(l).
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.
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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 an 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."
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.
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 Peoples in Section 5.1
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) Peoples 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 June 30, 1997 in
the business or financial condition of Peoples, and Peoples 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 Peoples. For purposes of this section, any change in the
business or financial condition of Peoples 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 the shareholders of Peoples 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 Peoples by its President certifying the
fulfillment of the conditions stated in paragraphs (a), (b), (c) and (e) of
this Section 8.1 by Peoples.
(f) Peoples shall have delivered to Community such documents as may
reasonably be requested by Community to evidence compliance by Peoples with
the provisions of this Agreement including an opinion of its counsel
confirming its representations as set forth in Subsections (a), (c) (l),
(o), and (p) of Section 5.1 (subject to appropriate assumptions and
qualifications), and setting forth counsel's opinion that the Merger has
been approved by all necessary corporate action of Peoples, including the
Peoples shareholders. Peoples shall also have delivered to Community on the
Effective Date, a letter of its litigation counsel setting forth pending
litigation involving Peoples which was not previously disclosed in writing
to Community.
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(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 Peoples
to Community (in which case Community shall promptly notify Peoples).
(i) Community shall have received an opinion of its counsel, Mette, Evans
& Woodside, substantially to the effect that, under the provisions of the
Code:
(1) the Merger of Peoples with and into Interim Bank upon the terms
and conditions of this Agreement will constitute a reorganization
within the meaning of Section 368 of the Code and will not result in
any recognized gain or loss to Community, Interim Bank, or Peoples;
(2) except for any cash received in lieu of any fractional share, no
gain or loss will be recognized by holders of Peoples Common Stock who
receive Community Common Stock in exchange for the shares of Peoples
Common Stock which they hold. A holder of Peoples Common Stock who
receives cash in lieu of a fractional share of Community Common Stock
will be treated as if he received a fractional share of Community
Common Stock pursuant to the reorganization and Community then redeemed
such fractional share for the cash. The holder of Peoples Common Stock
will recognize capital gain or loss on the constructive redemption of
the fractional share in an amount equal to the difference between the
cash received and the adjusted basis of the fractional share;
(3) the holding period of Community Common Stock received in exchange
for Peoples Common Stock will include the holding period of Peoples
Common Stock for which it is exchanged, assuming the shares of Peoples
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
Peoples Common Stock will be the basis of Peoples Common Stock for
which it is exchanged, less any basis attributable to fractional shares
for which cash is received.
Such opinion shall be given, subject to the receipt, and the accuracy on
the Effective Date of:
(1) representations by Community satisfactory to such counsel; and
(2) representations by Peoples 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 Accountants
if applicable, Community and its directors and officers shall have received
a letter from Stambaugh Ness, P.C. dated the effective date of the
Community Registration Statement, to be in form and substance satisfactory
to Community, to the effect that:
(1) In their opinion, the consolidated financial statements of
Peoples 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 Peoples, inspection of the
minute book of Peoples since
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December 31, 1996, inquiries of officials of Peoples 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 Balance Sheets, Statements of Income, Statements
of Stockholders' Equity and Statements of Cash Flows of Peoples
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
Peoples as compared with amounts shown in the balance sheet as of
December 31, 1996 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, 1997 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 Peoples 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 Peoples 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 BCL ("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 Peoples 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 Peoples Common
Stock or such number, if less, which will allow Community to account for
the Merger as a "pooling of interest".
(l) Community shall have received from each of the persons who, in the
opinion of counsel for Community, might be deemed to be affiliates of
Peoples 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. Peoples agrees to use its
best efforts to have each Affiliate enter into the undertakings referred to
in this Section 8.1(l) on or prior to the Effective Date.
(m) This Agreement and the issuance of Community Common Stock in
connection with the Merger shall have been duly approved by the affirmative
vote of a sixty-six and two-thirds (66 and 2/3) percent majority of
Community's Common Stock outstanding at a duly called meeting of the
shareholders of Community.
(n) Community and Interim Bank, as the case may be, shall have entered
into the Employment Agreements with Eddie L. Dunklebarger, Anthony E. Leo,
and Jeffrey M. Seibert, attached hereto and made a part hereof, which
Employment Agreements shall be the valid and enforceable obligations of the
parties thereto.
(o) Community shall have received an opinion from Sandler O'Neill &
Partners, L.P. dated as of a date within five (5) business days of the date
of the Community Proxy Statement to the effect that the consideration to be
paid by Community to the holders of Peoples Common Stock is fair from a
financial point of view to the Community shareholders.
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8.2 Conditions to the Obligations of Peoples. The obligations of Peoples
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 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 Interim Bank shall have approved the merger of Peoples into Interim
Bank.
(c) No material adverse change shall have occurred since June 30, 1997 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 Peoples, 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 (i) Peoples shareholders owning at least two-thirds ( 2/3) of its
capital stock outstanding and (ii) Community's shareholders pursuant to
Community's Articles of Incorporation and the listing requirements of the
American Stock Exchange.
(e) Peoples 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 Peoples such documents as may
reasonably be requested by Peoples to evidence compliance by Community with
the provisions of this Agreement including an opinion of its counsel
confirming its representation set forth in Subsections (a), (e), (i), (l),
and (m) of Section 5.2 and to the effect that the shares to be issued in
the Merger are duly and validly authorized and issued.
(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 Peoples) to consummate the transactions contemplated by this
Agreement shall have been received.
(h) 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.
(i) Peoples shall have received the opinion of Community's counsel
referred to in Section 8.1(i).
(j) the Employment Agreements shall become effective.
(k) Peoples shall have received an opinion from Berwind Financial Group
dated as of a date within five (5) days of the date of the Peoples Proxy
Statement to the effect that the consideration to be received by the
holders of Peoples common stock pursuant to the Merger is fair from a
financial point of view to Peoples shareholders.
(l) Subject to satisfaction of the requirements of Statement on Auditing
Standards No. 72 of the American Institute of Certified Public Accountants
if applicable, Peoples and its directors and officers shall
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have received a letter from Coopers & Lybrand, L.L.P. dated the effective
date of the Community Registration Statement, to be in form and substance
satisfactory to Peoples, to the effect that:
(1) In their opinion, the consolidated financial statements of
Community 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 Community, inspection of
the minute book of Community since December 31, 1996, inquiries of
officials of Community 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 Balance Sheets, Statements of Income, Statements
of Stockholders' Equity and Statements of Cash Flows of Community
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
Community as compared with amounts shown in the balance sheet as of
December 31, 1996 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, 1997 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 Community 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 material.
(m) The shares of Community Common Stock to be issued in the Merger shall
have been authorized for listing on the American Stock Exchange.
(n) Community and Peoples shall have been advised in writing by Coopers &
Lybrand, L.L.P. on the Effective Date that the Merger should be treated as
a pooling transaction for financial accounting purposes.
(o) The election of the officers and directors of Peoples to the
positions with Community set forth in Sections 3.1 and 3.2 shall become
effective.
(p) Peoples shall not have the right to terminate this Agreement pursuant
to Section 12.1(i).
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 thirty (30) days after the
receipt of all required Governmental Approvals and Shareholder approvals and
after the expiration of all applicable waiting periods 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.
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9.3 At the Closing, Community and Peoples 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 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, Community and Peoples 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.
ARTICLE XI
Indemnification; Directors' and Officers' Insurance
11.1 From and after the Effective Date, Interim Bank agrees to indemnify and
hold harmless each present and former director and officer of Peoples and each
officer or employee of Peoples that is serving or has served as a director or
trustee of another entity expressly at Peoples request or direction (the
"Indemnified Parties"), against any and all costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively, "Costs") incurred in connection with any and all
claims, actions, suits, proceedings or investigations, whether civil,
criminal, administrative or investigative, arising out of or pertaining to
matters arising out of or in connection with such party's position as, or
actions taken as, a director or officer of Peoples or a subsidiary or director
or trustee of another entity at the request or direction of Peoples, at or
prior to the Effective Date, whether asserted or claimed prior to, at or after
the Effective Date, to the fullest extent permitted by applicable law (and
also advance expenses incurred to the fullest extent permitted by applicable
law); provided, however, that Interim Bank shall not have any obligation
hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that the indemnification of such Indemnified
Party in the manner contemplated hereby is prohibited by applicable law. If
such indemnity is determined not to be available as a matter of law with
respect to any Indemnified Party, then Interim Bank and the Indemnified Party
shall contribute to the amount payable in such proportion as is appropriate to
reflect relative faults and benefits and other relevant equitable
considerations.
11.2 Any Indemnified Party wishing to claim indemnification under Section
11.1, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Interim Bank thereof, but the failure to
so notify shall not relieve Interim Bank of any liability it may have to such
Indemnified Party if such failure does not materially prejudice Community. In
the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Date): (i) Interim Bank shall
have the right to assume the defense thereof and Interim Bank shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if Community elects not to
assume such defense, or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between Interim Bank and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory
to them, and Interim Bank shall pay the reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received; (ii) the
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Indemnified Parties will cooperate in the defense of any such matter; and
(iii) Interim Bank shall not be liable for any settlement effected without its
prior written consent which shall not be unreasonably withheld.
11.3 For a period of six years after the Effective Date, Interim Bank shall
use all reasonable efforts to cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by Peoples
(provided that Interim Bank may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are
substantially no less advantageous to such directors and officers) with
respect to claims arising from facts or events which occurred before the
Effective Date; provided, however, that in no event shall Interim Bank be
obligated to expend, in order to maintain or provide insurance coverage
pursuant to this Section 11.3, any amount per annum in excess of one hundred
fifty percent (150%) of the amount of the annual premiums paid as of the date
hereof by Peoples 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 all reasonable efforts to
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Amount.
ARTICLE XII
Termination
12.1 This Agreement may be terminated as follows:
(a) By the mutual consent of the Board of Directors of both Community and
Peoples at any time prior to the consummation of the Merger;
(b) By the Board of Directors of Community on or after June 30, 1998, 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 Peoples shall have failed to
complete the Merger.
(c) By the Board of Directors of Community if, in its reasonable opinion,
(i) a material adverse change shall have occurred since June 30, 1997, in
the business or financial condition of Peoples, or (ii) there has been
failure on the part of Peoples to comply with its obligations under this
Agreement, or any failure to comply with any condition set forth in Section
8.1.
(d) By the Board of Directors of Community if the Merger and this
Agreement are not approved by the affirmative vote of Community as required
by the listing standards of the American Stock Exchange or the sixty-six
and two-thirds (66 and 2/3) percent majority vote of Community's
shareholders as required by Community's Articles of Incorporation;
(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 Peoples on or after June 30, 1998, if
(i) any of the conditions contained in Section 8.2 to which the obligations
of Peoples 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 Peoples the right to terminate this
Agreement for an additional period of three 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 Peoples if, in its reasonable opinion,
(i) a material adverse change shall have occurred since June 30, 1997, in
the business or financial condition of Community or (ii) there has been a
failure on the part of Community to comply with its obligations under this
Agreement, or any failure to comply with any condition set forth in Section
8.2.
(h) By the Board of Directors of Peoples if the Merger and this Agreement
are not approved by the affirmative vote of Peoples shareholders having at
least two-thirds ( 2/3) its capital stock, called pursuant to Section
6.2(e) of this Agreement; provided, that Community and Peoples may mutually
agree to keep this
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Agreement in effect and to call an additional meeting of the shareholders
of Peoples to obtain such shareholder approval.
(i) By the Board of Directors of Peoples if, prior to the Effective Date,
(i) a Change of Control (as defined in the Employment Agreement) of
Community occurs, (ii) Community enters into an agreement to effect a
Change of Control or (iii) Community enters into any agreement relating to
a transaction which would require the approval of its shareholders under
the BCL or the listing standards of the American Stock Exchange.
The power of termination hereunder may be exercised by Community and
Peoples, 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.
12.2 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 XIII
Miscellaneous
13.1 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, Inc.
150 Market Square
Millersburg, PA 17061
Attention: Ernest L. Lowe, President and CEO
With a copy to:
Mette, Evans & Woodside
3401 North Front Street
P. O. Box 5950
Harrisburg, PA 17110-0950
Attention: James A. Ulsh, Esquire
If to Peoples:
Peoples State Bank of East Berlin
100 East King Street
East Berlin, PA 17316
Attention: Eddie L. Dunklebarger, CEO
With a copy to:
Barley, Snyder, Senft & Cohen, LLP
126 East King Street
Lancaster, PA 17602-2893
Attention: Paul G. Mattaini, Esquire
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.
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13.2 Subject to Section 8.2(j) herein, 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
Peoples shall receive the common stock of the surviving bank holding company,
unless the provisions of Section 8.2(g)or (j) hereof should apply.
13.3 This Agreement is binding upon and is for the benefit of Community and
Peoples 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 hereto and no other person, firm, corporation or association shall
acquire or have any right under or by virtue of this Agreement.
13.4 Except for the agreements of Community set forth herein, the
representations, warranties and agreements of Community and Peoples 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 Peoples (or any director, officer or controlling
person of Community and Peoples) of any defense in law or in equity which
otherwise would be available against the claims of any persons, including
shareholders.
13.5 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
13.6 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.
In Witness Whereof, Community and Peoples 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.
Community Banks, Inc.
By:
- ------------------------------------- -----------------------------------
Secretary Chairman of the Board and Chief
Executive Officer
The Peoples State Bank
By:
- ------------------------------------- ----------------------------------
Secretary President and Chief Executive
Officer
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APPENDIX B--OPINION OF THE BERWIND FINANCIAL GROUP, L.P.
[DATE]
Board of Directors
The Peoples State Bank
100 East King Street
East Berlin, PA 17316
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of The Peoples State Bank ("Peoples") of the
financial terms of the proposed merger by and between Peoples and Community
Banks, Inc. ("Community"). The terms of the proposed merger (the "Proposed
Merger") by and between Peoples and Community are set forth in the Agreement
and Plan of Merger dated October 28, 1997 (the "Merger Agreement") and provide
that each outstanding share of Peoples common stock will be converted into the
right to receive .889 shares of Community common stock as defined in the
Merger Agreement.
Berwind Financial, L.P., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements and valuations for various other
purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of Peoples and Community, (ii) reviewed the Merger Agreement, (iii)
reviewed and analyzed the stock market performance of Peoples and Community,
(iv) studies and analyzed the consolidated financial and operating data of
Peoples and Community, (v) considered the terms and conditions of the Proposed
Merger between Peoples and Community as compared with the terms and conditions
of comparable bank and bank holding company mergers and acquisitions, (vi) met
and/or communicated with certain members of Peoples and Community's senior
management to discuss their respective operations, historical financial
statements and future prospects, and (vii) reviewed this Joint Proxy
Statement/Prospectus, and (viii) conducted such other financial analyses,
studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Peoples and Community, and their respective officers, directors,
auditors, counsel and other agents, and on filing, releases and other
information issued by Peoples and Community including financial statements,
financial projections, and stock price data as well as certain information
from recognized independent sources. We have not independently verified the
information concerning Peoples and Community nor other data which we have
considered in our review and, for purpose of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data. Additionally, we assume that the Proposed Merger is, in
all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Peoples, we have assumed that such information has been
reasonably prepared and reflects the best currently available estimates and
judgment of the management of Peoples as to its most likely future
performance. In rendering our opinion, we have assumed that in the course of
obtaining the necessary regulatory approvals for the Proposed Merger no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Proposal Merger to Peoples.
Our opinion is based upon information provided to us by the management of
Peoples, as well as market, economic, financial and other conditions as they
exist and can be evaluated only as of the date hereof and speaks
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to no other period. Our opinion pertains only to the financial consideration
of the Proposed Merger and does not constitute a recommendation to the Board
of Peoples and does not constitute a recommendation to Peoples shareholders as
to how such shareholders should vote on the Proposed Merger.
Based on the foregoing, it is our opinion that, as of the date hereof, the
financial terms of the Proposed Merger by and between Peoples and Community
are fair, from a financial point of view, to the shareholders of Peoples.
Sincerely,
BERWIND FINANCIAL, L.P.
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APPENDIX C--OPINION OF SANDLER O'NEILL & PARTNERS, L.P.
October 28, 1997
Board of Directors
Community Banks, Inc.
150 Market Square
Millersburg, PA 17061
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to Community Banks, Inc. ("Community") of the consideration to be paid
by Community pursuant to the terms of the Agreement and Plan of
Reorganization, dated as of October 28, 1997 (the "Agreement"), by and between
Community and The Peoples State Bank ("Peoples"). Pursuant to the terms of the
Agreement, Peoples will be merged with and into a wholly-owned subsidiary of
Community to be organized in connection with the merger (the "Merger"), and
each share of common stock of Peoples, par value $1.00 per share (the "Peoples
Common Stock"), issued and outstanding immediately prior to the effective time
of the Merger, other than certain shares specified in the Agreement, will be
converted into the right to receive .889 of a share (the "Exchange Ratio") of
the common stock, par value $5.00 per share, of Community (the "Community
Common Stock"). The terms and conditions of the Merger are more fully set
froth in the Agreement.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other
corporate transactions. In connection with this opinion we have reviewed,
among other things: (i) the Agreement and exhibits thereto; (ii) the Stock
Option Agreement, dated as of October 28, 1997, by and between Community and
Peoples; (iii) Community's audited consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations contained in its annual report to shareholders for the year ended
December 31, 1996; (iv) People's audited consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations contained in its annual report to shareholders for the year ended
December 31, 1996; (v) Community's unaudited consolidated financial statements
and management's discussion and analysis of financial condition and results of
operations contained in its Quarterly Report on Form 10-Q for the quarters
ended March 31, June 30 and September 30, 1997, respectively; (vi) People's
unaudited consolidated financial statements and management's discussion and
analysis of financial condition and results of operations contained in its
Quarterly Report on Form F-4 for the waters ended March 31, June 30 and
September 30, 1997, respectively; (vii) certain financial analyses and
forecasts of Community prepared by and reviewed with management of Community
and the views of senior management of Community regarding Community's past and
current business operations, results thereof, financial condition and future
prospects; (viii) certain financial analyses and forecasts of Peoples prepared
by and reviewed with management of Peoples and the views of senior management
of Peoples regarding Peoples's past and current business operations, results
thereof, financial condition and future prospects; (ix) the pro forma impact
of the Merger; (x) the publicly reported historical price and trading activity
for the Peoples Common Stock and the Community Common Stock, including a
comparison of certain financial and stock market information for Peoples and
Community with similar publicly available information for certain other
companies the securities of which are publicly traded; (xi) the financial
terms of recent business combinations in the banking industry, to the extent
publicly available; (xii) the current market environment generally and the
banking environment in particular; and (xiii) such other information,
financial studies, analyses and investigations and financial, economic and
market criteria as we considered relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information that was publicly available or
furnished otherwise to, reviewed by or discussed with us, and we do not assume
any responsibility or liability
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thereof. We did not make an independent evaluation or appraisal of the
specific assets, the collateral securing assets or the liabilities of
Community or Peoples or any of their subsidiaries, or the collectibility of
any such assets, nor have we been furnished with any such evaluations or
appraisals (relying, where relevant, on the analyses and estimates of
Community and Peoples). With respect to the financial projections reviewed
with management, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of
Community and Peoples and that such performances will be achieved. We have
also assumed that there has been no material change in Community's or People's
assets, financial condition, results of operations, business or prospects
since the date of the last financial statements noted above. We have assumed
that the Merger will be accounted for as a pooling of interests, that
Community and Peoples will remain as going concerns for all periods relevant
to our analyses and that the conditions precedent in the Agreement are not
waived.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof. Events occurring after the date hereof could materially
affect his opinion. We have not undertaken to update, revise or reaffirm this
opinion or otherwise comment upon events occurring after the date hereof. We
are expressing no opinion herein as to what the value of Community Common
Stock will be when issued to Peoples's shareholders pursuant to the Agreement
or the prices at which Community Common Stock or Peoples common Stock will
trade at any time.
We have acted as Community's financial advisor in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon consummation of the Merger. We will also receive a fee for
rendering this opinion. In the past, we have also provided, and may in the
future provide, certain other investment banking services for Community and
have received, and will receive, our customary compensation for such services.
In the ordinary course of business, we may actively trade the equity
securities of Community and Peoples for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this opinion is for the information of the Board of
Directors of Community in connection with its consideration of the Merger and
does not constitute a recommendation to any shareholder of Community as to how
such shareholder should vote on the proposed issuance of Community Common
Stock in connection with the Merger. Our opinion is not to be quoted or
referred to, in whole or in part, in a registration statement, prospectus,
proxy statement or in any other document, nor shall this opinion be used for
any other purposes, without Sandler O'Neill's prior written consent; provided,
however, that we hereby consent to the inclusion of this opinion as an
Appendix to the Joint Proxy Statement/Prospectus of Community and Peoples
dated the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to Community from a financial point of
view.
Very truly yours,
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APPENDIX D--DISSENTERS' RIGHTS
SUBCHAPTER 15D OF THE PENNSYLVANIA BUSINESS CORPORATION LAW
(S) 1571. Application and effect of subchapter
(a) General rule.--Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from,
and to obtain payment of the fair value of his shares in the event of, any
corporate action, or to otherwise obtain fair value for his shares, where this
part expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--
(1) Except as otherwise provided in paragraph (2), the holders of the shares
of any class or series of shares that, at the record date fixed to determine
the shareholders entitled to notice of and to vote at the meeting at which a
plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be
voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such
shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or solely
into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of the class
to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the
votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation
and with or without the intervention of another corporation or other person,
shall not be entitled to the rights and remedies of dissenting shareholders
provided in this subchapter regardless of the fact, if it be the case, that
the acquisition was accomplished by the issuance of voting shares of the
corporation to be outstanding immediately after the acquisition sufficient to
elect a majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
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(d) Notice of dissenters rights.--Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S) 1572. Definitions
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation
for the purposes of this subchapter. The successor corporation in a
division shall have sole responsibility for payments to dissenters and
other liabilities under this subchapter except as otherwise provided in the
plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed
every act required up to the time involved for the assertion of those
rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all
the circumstances, taking into account all relevant factors, including the
average rate currently paid by the corporation on its principal bank loans.
(S) 1573. Record and beneficial holders and owners
(a) Record holders of shares.--A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of
the same class or series beneficially owned by any one person and discloses
the name and address of the person or persons on whose behalf he dissents. In
that event, his rights shall be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the
corporation not later than the time of the assertion of dissenters rights a
written consent of the record holder. A beneficial owner may not dissent with
respect to some but less than all shares of the same class or series owned by
the owner, whether or not the shares so owned by him are registered in his
name.
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(S) 1574. Notice of intention to dissent
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect
no change in the beneficial ownership of his shares from the date of such
filing continuously through the effective date of the proposed action and must
refrain from voting his shares in approval of such action. A dissenter who
fails in any respect shall not acquire any right to payment of the fair value
of his shares under this subchapter. Neither a proxy nor a vote against the
proposed corporate action shall constitute the written notice required by this
section.
(S) 1575. Notice to demand payment
(a) General rule.--If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice
of intention to demand payment of the fair value of their shares and who
refrained from voting in favor of the proposed action. If the proposed
corporate action is to be taken without a vote of shareholders, the
corporation shall send to all shareholders who are entitled to dissent and
demand payment of the fair value of their shares a notice of the adoption of
the plan or other corporate action. In either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.--A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575
(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
(S) 1577. Release of restrictions or payment for shares
(a) Failure to effectuate corporate action.--Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares
from any transfer restrictions imposed by reason of the demand for payment.
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(b) Renewal of notice to demand payment.--When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming
to the requirements of section 1575 (relating to notice to demand payment),
with like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that the
corporation estimates to be the fair value of the shares, or give written
notice that no remittance under this section will be made. The remittance or
notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such
certificate or on the records of the corporation relating to any such
uncertificated shares that such demand has been made. If shares with respect
to which notation has been so made shall be transferred, each new certificate
issued therefor or the records relating to any transferred uncertificated
shares shall bear a similar notation, together with the name of the original
dissenting holder or owner of such shares. A transferee of such shares shall
not acquire by such transfer any rights in the corporation other than those
that the original dissenter had after making demand for payment of their fair
value.
(S) 1578. Estimate by dissenter of fair value of shares
(a) General rule.--If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the
fair value of the shares, which shall be deemed a demand for payment of the
amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the
corporation.
(S) 1579. Valuation proceedings generally
(a) General rule.--Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578 (relating to
estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application
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shall be served on each such dissenter. If a dissenter is a nonresident, the
copy may be served on him in the manner provided or prescribed by or pursuant
to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction and interstate and
international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found
to exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the
corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file
an application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not
previously remitted.
(S) 1580. Costs and expenses of valuation proceedings
(a) General rule.--The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner
in respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefited.
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APPENDIX E--STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Stock Option Agreement") is made and
entered into as of , 1997, by and between The Peoples State Bank
("Seller") and Community Banks, Inc. ("Buyer").
Witnesseth:
Whereas, Buyer and Seller propose to enter into an Agreement and Plan of
Reorganization (the "Plan") of even date herewith, providing for, among other
things, the merger of Seller with and into a wholly-owned banking subsidiary
of Buyer (the "Merger"), pursuant to which each then outstanding share of
Seller Common Stock, par value $1.00 per share (the "Shares"), would be
converted into .889 of a share of Buyer Common Stock, par value $5.00 per
share, subject to conditions in the Plan; and
Whereas, to induce Buyer to enter into the Plan, Seller has agreed to grant
Buyer the option set forth herein to purchase authorized but unissued shares
of Seller Common Stock on the terms and subject to the conditions of this
Stock Option Agreement.
Now, Therefore, in consideration of the premises and of the mutual
agreements and provisions contained herein, the parties hereto agree as
follows:
1. Grant of Option. Seller hereby grants to Buyer an irrevocable option (the
"Option") to purchase up to that number of shares of authorized but unissued
shares of Seller Common Stock, which, when added to the number of shares of
Seller Common Stock owned by Buyer at the time of the exercise of the option
will represent 19.9% of the issued and outstanding shares of Seller Common
Stock after exercise of the option, at a purchase price of $23.50 per share.
Notwithstanding anything else in this Stock Option Agreement to the contrary,
the number of shares of Seller Common Stock subject to the Option shall be
reduced to such lesser number, if any, as may from time to time be necessary,
but only for so long as may be necessary, to (a) cause Buyer not to (i) effect
a control share acquisition as such term is defined for the purposes of
Chapter 25, Subchapters G and I of the Pennsylvania Business Corporation Law
of 1988, as amended (the "PBCL"), or (ii) become a controlling person for
purposes of Chapter 25, Subchapter E of the PBCL, (b) cause Buyer not to
violate applicable provisions of the Bank Holding Company Act of 1956 and the
rules and regulations promulgated thereunder (the "BHCA") or the Pennsylvania
Banking Code of 1965 and the rules and regulations promulgated thereunder (the
"Banking Code"), and (c) cause Buyer's percentage not to be affected by any
increase in authorized capital as a result of the subsequent exercise of any
subsequent stock options. So long as the option is outstanding and
unexercised, Seller shall at all times maintain and reserve, free from
preemptive rights, such number of authorized but unissued shares of Common
Stock as may be necessary so that the option may be exercised, without any
additional authorization of common stock, after giving effect to all other
options, warrants, convertible securities and other rights to acquire shares
of common stock.
2. Exercise of Options.
(a) Subject to Subparagraph (b) hereof, the Option may be exercised by
Buyer, in whole or in part, at any time or from time to time; provided that to
the extent the Option shall not have been exercised, it shall terminate and be
of no further force and effect on the earlier of (i) on the Effective Date of
the Merger, (ii) the time of termination of the Plan in accordance with its
terms (other than a termination resulting from a willful breach by Seller of
any representation, warranty or covenant contained therein or, following the
occurrence of an event set forth in Subparagraph (b) hereof, failure of
Seller's shareholders to approve the Merger by the vote required under
applicable law), (iii) six (6) months after termination of the Plan due to a
willful breach by Seller of any representation, warranty or covenant contained
therein or (iv) six (6) months after the failure of Seller's shareholders to
approve the Merger by the vote required under applicable law following the
occurrence of an event set forth in Subparagraph (b) hereof; and provided
further that any such exercise shall be subject to
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compliance with applicable provisions of law. In the event Buyer wishes to
exercise the Option, Buyer shall give written notice (the "Notice") to Seller
specifying the number of Shares it will purchase pursuant to said Notice and a
place and date not later than 30 days from the date such Notice is given to
Seller for the closing of such purchase; provided that, if prior notification
to or approval of any federal or state regulatory agency is required in
connection with all or part of such purchase, Buyer shall promptly file the
required notice or application for approval and shall expeditiously process
the same and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
period has expired or been terminated or such approval has been obtained and
any requisite waiting period shall have passed. Notwithstanding the
termination of the Option, Buyer shall be entitled to purchase Shares with
respect to which it have given a Notice in accordance with the terms hereof
prior to the termination of the Option. The rights of Buyer set forth in
Section 5 hereof shall not terminate when the rights to exercise the Option
terminates as set forth herein, but shall extend to such time as provided in
Section 5.
(b) The Option may be exercised if any of the following events shall have
occurred and be continuing:
(i) the making, other than by Buyer of any of its subsidiaries or
affiliates, of a tender or exchange offer for at least 19.9% of the
outstanding Shares.
(ii) the acquisition, by any person or group of persons other than Buyer
or any of its subsidiaries of affiliates or any presently existing
shareholders of Seller (other than for bona fide arbitrage purposes), of
beneficial ownership or the right to acquire beneficial ownership of 19.9%
or more of the outstanding Shares (the terms "group" and "beneficial
ownership" having the meanings assigned thereto in Section 13(d) of the
Securities Exchange Act of 1934, as amended, and the regulations
promulgated thereunder).
(iii) the making by any person, other than Buyer or any of its
subsidiaries or affiliates, by public announcement or communication to
Seller, of a firm proposal to: (a) acquire Seller, 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.
(iv) the failure of Seller's 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 Buyer) of an offer or proposal
to acquire 19.9% or more of the Common Stock (before giving effect to any
exercise of the Option), or to acquire, merge, or consolidate with Seller,
or to purchase all or substantially all of Seller's assets.
(c) Seller shall give prompt written notice to Buyer upon becoming aware of
any of the events described in paragraphs (b)(i)(ii)(iii) or (iv) of this
Section 2. Prior to termination of this Option, Seller will not take, and will
refrain from taking, any action which would have the effect of preventing or
disabling Seller from delivering shares of Seller Common Stock to Buyer upon
any exercise of the Option or otherwise performing its obligations under this
Agreement.
3. Payment of Purchase Price and Delivery of Certificates for Shares. At any
closing hereunder, (a) Buyer shall make payment to Seller of the aggregate
price for the Shares so purchased in immediately available funds by wire
transfer to a bank designated in writing by Seller in an amount equal to the
price per share set forth in Section 1 hereof times the number of shares to be
purchased at such closing and (b) Seller will deliver to Buyer a duly executed
certificate or certificates representing the number of Shares so purchased
duly endorsed, or accompanied by a duly executed stock power, to Buyer or its
designee.
4. Representations and Warranties of Seller. Seller hereby represents and
warrants to Buyer as follows:
(a) Seller is a Pennsylvania state chartered banking institution duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania.
(b) The execution and delivery of this Stock Option Agreement has been
authorized by the Board of Directors of Seller and by all other necessary
corporate action on the part of Seller. This Stock Option Agreement has
been duly executed and delivered by Seller.
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(c) Seller has taken all necessary corporate action to authorize and
reserve for issuance upon exercise of the Option, and, at all times from
the date hereof until the obligation to deliver any shares of Seller Common
Stock upon exercise of the Option terminates, will have reserved for
issuance authorized but unissued Shares of Seller Common Stock necessary
for Buyer to exercise the Option in full.
(d) The Shares to be issued upon due exercise, in whole or in part, of
the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and non-assessable.
(e) Neither the execution and delivery of this Stock Option Agreement nor
the consummation of the transactions contemplated hereby will result in a
breach or violation of, conflict with or constitute a default under,
Seller's Articles of Incorporation or By-Laws, or any of the provisions of
any indenture, agreement or other instrument to which Seller is a party or
by which Seller is bound.
5. Registration Rights. If sale or disposition of Seller's stock is subject
to registration under the Securities Act of 1983 as amended, Seller shall, if
requested by Buyer, as expeditiously as possible prepare and file a
registration statement under the Securities Act of 1933, as amended, and shall
use its best efforts to qualify under any applicable state securities laws if
necessary in order to permit the sale or other disposition of any or all of
the Shares that have been acquired upon exercise of the Option in accordance
with the intended method of sale or other disposition stated by Buyer at any
time within one (1) year of the exercise of the Option. Seller shall use its
best efforts to cause such registration statement to become effective, to
obtain all consents or waivers of other parties which are required therefor
and to keep such registration effective for a period of not less than 270 days
from the day such registration statement first becomes effective unless, in
the written opinion of counsel to Seller, addressed to Buyer and which shall
be satisfactory in form and substance to Buyer and its counsel, registration
is not required for such proposed disposition by Buyer.
6. Duties of the Corporation upon Registration. If and whenever Seller is
required by the provisions of Paragraph 5 of this Agreement to effect the
registration of any of the Securities under the Securities Act, Seller shall:
(a) prepare and file with the Securities and Exchange Commission (the
"SEC") such amendments to the Registration Statement and supplements to the
prospectus contained therein as may be necessary to keep the Registration
Statement effective and current for the maximum period required under
Paragraph 5 above;
(b) furnish to Buyer and to the underwriters of the Securities being
registered such reasonable number of copies of the Registration Statement,
the preliminary prospectus and final prospectus contained therein, and such
other documents as Buyer or such underwriters may reasonably request in
order to facilitate the public offering of the Securities;
(c) use its best efforts to register or qualify the Securities covered by
the Registration Statement under the state securities or blue sky laws of
such jurisdictions as Buyer or such underwriters may reasonably request,
provided, that Seller shall not be required hereunder to submit to the
jurisdiction of any state in which it has not previously been required to
qualify to do business;
(d) notify Buyer, promptly after Seller shall receive notice thereof, of
the time when the Registration Statement has become effective or any
supplement or amendment to any prospectus forming a part of the
Registration Statement has been filed;
(e) notify Buyer promptly of any request by the SEC for the amending or
supplementing of the Registration Statement or the prospectus contained
therein or for additional information;
(f) prepare and file with the SEC, promptly upon the request of Buyer,
any amendments or supplements to the Registration Statement or the
prospectus contained therein which, in the joint opinion of counsel for
Seller and counsel for Buyer, are required under the Securities Act or the
rules and regulations promulgated by the SEC thereunder in connection with
the sale or other distribution of the Securities by Buyer;
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(g) prepare and promptly file with the SEC such amendments of or
supplements to the Registration Statement or the prospectus contained
therein as may be necessary to correct any statements or omissions if, at
the time when a prospectus relating to such Securities is required to be
delivered under the Securities Act, any event shall have occurred as the
result of which such prospectus as then in effect would include an untrue
statement of a material fact or would omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(h) advise Buyer promptly after Seller shall receive notice or obtain
knowledge of the issuance of any stop order by the SEC suspending the
effectiveness of the Registration Statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best
efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(i) at the request of Buyer, furnish on the date or dates provided for in
the underwriting agreement: (i) an opinion or opinions of counsel for
Seller for the purposes of such registration, addressed to the underwriters
and to Buyer, covering such matters as such underwriters and Buyer may
reasonably request and as are customarily covered by issuer's counsel at
that time; and (ii) a letter or letters from the independent certified
public accountants for Seller, addressed to the underwriters and to Buyer,
covering such matters as such underwriters or Buyer may reasonably request,
in which letters such accountants shall state (without limiting the
generality of the foregoing) that they are independent certified public
accountants within the meaning of the Securities Act and that, in the
opinion of such accountants, the financial statements and other financial
data of Seller included in the Registration Statement or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act.
7. Expenses of Registration. With respect to the registration requested
pursuant to Paragraph 5 of this Agreement, (a) Seller shall bear all
registration, filing and NASD fees, printing and engraving expenses, fees and
disbursements of its counsel and accountants and all legal fees and
disbursements and other expenses of Seller to comply with state securities or
blue sky laws of any jurisdiction in which the Securities to be offered are to
be registered or qualified; and (b) Buyer shall bear all fees and
disbursements of its counsel and accountants, underwriting discounts and
commissions, transfer taxes for Buyer and any other expenses incurred by
Buyer.
8. Indemnification. In connection with any Registration Statement or any
amendment or supplement thereto:
(a) Seller shall indemnify and hold harmless Buyer, any underwriter (as
defined in the Securities Act) for Buyer, and each person, if any, who
controls Buyer or such underwriter (within the meaning of the Securities
Act) from and against any and all loss, danger, liability, cost or expense
to which Buyer or any such underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such loss,
damage, liability, cost or expense arises out of or is caused by any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any prospectus or preliminary prospectus contained
therein or any amendment or supplement thereto, or arises out of or is
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that Seller will not be liable in
any such case to the extent that any such loss, damage, liability, cost or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by Buyer, such underwriter or such controlling person
in writing specifically for use in the preparation thereof.
(b) Buyer shall indemnify and hold harmless Seller, any underwriter (as
defined in the Securities Act), and each person, if any, who controls
Seller or such underwriter (within the meaning of the Securities Act) from
and against any and all loss, damage, liability, cost or expense to which
Seller or any such underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such loss, damage,
liability, cost or expense arises out of or is caused by any untrue or
alleged untrue statement of
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any material fact contained in the Registration Statement, any prospectus
or preliminary prospectus contained therein or any amendment or supplement
thereto, or arises out of or is based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance
upon and in conformity with written information furnished by Buyer
specifically for use in the preparation thereof.
(c) Promptly after receipt by any party which is entitled to be
indemnified, pursuant to the provisions of subparagraph (a) or (b) of this
Paragraph 8 of any claim in writing or of notice of the commencement of any
action involving the subject matter of the foregoing indemnity provisions,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party pursuant to the provisions of subparagraph
(a) and (b) of this Paragraph 8, promptly notify the indemnifying party of
the receipt of such claim or notice of the commencement of such action, but
the omission to so notify the indemnifying party will not relieve it from
any liability which it may otherwise have to any indemnified party
hereunder. In case any such action is brought against any indemnified party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party shall have the right to participate in and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, that if the
defendants in any action include both the indemnified party or parties and
the indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing any
indemnified party, such indemnified party shall have the right to select
separate counsel to participate in the defense of such indemnified party.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party, pursuant to the provisions of
subparagraph (a) or (b) of this Paragraph 8, for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof, other than reasonable costs of investigation, unless
(i) such indemnified party shall have employed separate counsel in
accordance with the provisions of the preceding sentence, (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after the notice of the commencement of the action, or (iii) the
indemnifying party had authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(d) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as specified therein, any party
entitled to indemnification by the terms thereof shall be entitled to
obtain contribution with respect to its liabilities and expenses, except to
the extent that contribution is not permitted under Section 11(f) of the
Securities Act. In determining the amount of contribution to which the
respective parties are entitled there shall be considered the parties'
relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and/or
prevent any statement or omission, and any other equitable considerations
appropriate under the circumstances. Buyer and Seller agree that it would
not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation even if the underwriters and Buyer as a group
were considered a single entity for such purpose.
9. Adjustment Upon Changes in Capitalization. In the event of any change in
Seller Common Stock by reason of stock dividends, split-ups, recapitalization,
mergers, combinations, conversions, exchanges of shares or other changes in
the corporate or capital structure of Seller which could have the effect of
diluting Buyer's rights hereunder, the number and kind of shares or securities
subject to the Option and the purchase price therefor shall be adjusted
appropriately and proportionately so as to eliminate the dilutive effect on
Buyer's rights hereunder.
10. Representations of Buyer. Buyer represents and warrants to Seller as
follows:
(a) Buyer is acquiring the Option, and any shares of Seller Common Stock
which it may acquire upon exercise of the Option, for investment only and
not with a view to distribution thereof; Buyer understands that the Option
has not been, and such Shares may not be, registered under the Securities
Act and that such
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Option and, if not so registered, such Shares may not be sold except in
accordance with, or pursuant to an exemption under, such Act, subject,
however, to Buyer's registration rights pursuant to Section 5 hereof.
(b) This Stock Option agreement has been duly authorized by all necessary
corporate action on the part of Buyer and has been duly executed and
delivered by Buyer.
(c) Buyer is a corporation in good standing under the laws of the
Commonwealth of Pennsylvania and has the requisite corporate power to enter
into this Stock Option Agreement.
11. Compliance With Laws. Nothing contained in this Stock Option agreement
shall require Seller to take any action which would violate any statute, rule
or regulation; provided, however, that except as otherwise specifically
provided herein, Seller shall take all actions necessary or appropriate to
permit it to comply (if compliance is feasible) with all applicable legal
requirements necessary to perform this Stock Option Agreement is accordance
with its terms.
12. Severability. If any term, provisions, covenant or restriction contained
in this Stock Option Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Stock Option Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If
for any reason such court or regulatory agency determined that the Option will
not permit the holder to acquire the full number of shares of Seller Common
Stock provided in Section 1 hereof (as adjusted pursuant to Section 9 hereof),
it is the express intention of Seller to allow the holder to acquire such
lesser number of shares as may be permissible according to such court or
regulatory agency, without any amendment or modification hereof.
13. Agreement as to Voting. Buyer agrees that prior to the termination of
the Plan in accordance with its terms, Buyer will vote any Shares acquired
upon exercise of this Option in favor of the Plan.
14. Listing; Filings and Consents. Upon exercise of the Option in whole or
in part, Seller will use its best efforts promptly to have the shares of
Seller Common Stock issued pursuant thereto authorized for quotation on the
National Association of Securities Dealers Automated Quotation system, or, if
at the time the Option is exercised the Seller Common Stock is listed on any
stock exchange, to list such shares on such exchange, effective upon official
notice of issuance. Buyer and Seller each will use its best efforts to make
all filings with, and to obtain consent of, all third parties and government
authorities necessary to the consummation of the transactions contemplated by
this Stock Option Agreement.
15. Assignment. Neither of the parties hereto may assign any of its rights
or obligations hereunder to any person without the prior written consent of
the other party, except that, in the event the Option becomes exercisable,
Buyer may assign in whole or in part its rights and obligations hereunder to a
wholly owned subsidiary of Buyer, which shall be likewise bound. Subject to
the preceding sentence, this Stock Option Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
16. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given (and shall be deemed to
have been duly received if so given) if personally delivered, telecopied (with
confirmation) or sent by registered or certified mail, postage prepaid,
addressed to the respective parties as follows:
If to Seller:
The Peoples State Bank
100 East King Street
East Berlin, PA 17316
Attention: Eddie L. Dunklebarger, CEO
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If to Buyer:
Community Banks, Inc.
150 Market Square
Millersburg, PA 17061
Attention: Ernest L. Lowe, President
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
17. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
18. Specific Performance. The parties hereto acknowledge that money damages
are an inadequate remedy for breach of this Agreement because of the
difficulty of ascertaining the amount of damage that will be suffered by Buyer
in the event this Agreement is breached. Therefore, Seller agrees that Buyer
may obtain specific performance of this Agreement and injunctive relief
against any breach hereof.
19. Counterparts. This Stock Option Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same agreement.
20. Definitions. Capitalized terms defined in the Plan and used herein shall
have the same meanings as the Plan.
In Witness Whereof, this Stock Option Agreement has been executed by duly
authorized officers of each of the parties hereto all as of the day and year
first above written.
SELLER:
THE PEOPLES STATE BANK
By:
- ------------------------------------- ----------------------------------
Witness
BUYER:
COMMUNITY BANKS, INC.
By:
- ------------------------------------- ----------------------------------
Witness
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of 1988,
as amended (the "BCL") provide that a business corporation may indemnify
directors and officers against liability they may incur as such provided that
the particular person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation
and, with respect to any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful. In the case of actions against a
director or officer by or in the right of the Corporation, the power to
indemnify extends only to expenses (not judgments and amounts paid in the
settlement) and such power generally does not exist if the person otherwise
entitled to indemnification shall have been adjudged to be liable to the
Corporation unless it is judicially determined that, despite the adjudication
of liability but in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnification for specified expenses.
Under Section 1743 of the BCL, the Corporation is required to indemnify
directors and officers against expenses they may incur in defending actions
against them in such capacities if they are successful on the merits or
otherwise in the defense of such actions. Under Section 1745 of the BCL, a
corporation may pay the expenses of a director or officer incurred in
defending an action or proceeding in advance of the final amounts advanced
unless it is ultimately determined that such person is entitled to
indemnification from the corporation. Article 12 of Community's Articles of
Incorporation and Article 20 of Community's Bylaws provide indemnification of
directors, officers and other agents of Community and advancement of expenses
to the extent otherwise permitted by the BCL.
Section 1746 of the BCL grants a corporation broad authority to indemnify is
directors, officers and other agents for liabilities and expenses incurred in
such capacity, except in circumstances where the act or failure to act giving
rise to the claim for indemnification is determined by a court to have
constituted wilful misconduct or recklessness. Article 12 of Community's
Articles of Incorporation provides that the Corporation indemnify any and all
persons whom it shall have the power to indemnify for and against any and all
expenses, liabilities or other matters for which indemnification is permitted
by applicable laws.
Article 20 of Community's Bylaws conditions any indemnification or
advancement of expenses upon a determination, made in accordance with the
procedures specified in Section 1744 of the BCL, by Community's directors or
shareholders that indemnification or advancement of expenses is proper because
the director or officer met the standard of conduct set forth in Section 1741
or 1742 of the BCL, as applicable.
As authorized by Section 1747 of the BCL and Article XIV, Community
maintains, on behalf of its directors and officers, insurance protection
against certain liabilities arising out of the discharge of their duties, as
well as insurance covering Community for indemnification payments made to its
directors and officers for certain liabilities. The premiums for such
insurance are paid by Community.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
(2) Agreement and Plan of Reorganization, dated October 28, 1997,
between Community and Peoples is Appendix A to the Joint Proxy
Statement/Prospectus included in Part I of this Registration
Statement.
(3)(a) Articles of Incorporation of Community--Incorporated by reference to
Exhibit 3(a) and of Community's Form S-2 (Amendment 2) dated May 13,
1987 (Registration No. 2-0-8732).
(3)(b) Bylaws of Community--Incorporated by reference to Exhibit 3(b) and
of Community's Form S-2 (Amendment 2) dated May 13, 1987
(Registration No. 2-0-8732).
</TABLE>
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<TABLE>
<C> <S>
(5) Opinion re Legality--Opinion of Mette, Evans & Woodside
(8) Opinion re Tax Matters--Opinion of Mette, Evans & Woodside
(13) Community's Annual Report on Form 10-K for the year ended December
31, 1996--Incorporated by reference in the Joint Proxy
Statement/Prospectus included in Part I of this Registration
Statement.
(23)(a) Consent of Mette, Evans & Woodside (included in its opinions filed
as Exhibits (5) and (8))
(23)(b) Consent of Coopers & Lybrand, LLP
(23)(c) Consent of Stambaugh Ness, P.C.
(23)(d) Consent of Berwind Financial Group, Inc.
(23)(e) Consent of Sandler O'Neill & Partners, LP
(24) Power of Attorney (included in "SIGNATURES" in Part II of this
Registration Statement)
(99)(a) Form of Proxy--Community
(99)(b) Form of Proxy--Peoples
(99)(c) Employment Agreement dated as of October 29, 1997 between Community
and Eddie L. Dunklebarger.
(99)(d) Employment Agreement dated as of October 29, 1997 between Community
and Jeffrey M. Seibert.
(99)(e) Employment Agreement dated as of October 29, 1997 between Community
and Anthony N. Leo.
(99)(f) Peoples' Annual Report on Form F-2 for the year December 31, 1996.
(99)(g) Peoples' quarterly reports on Form F-4 for the quarters ended March
31, 1997, June 30, 1997, and September 30, 1997.
(99)(h) Peoples' current report on Form F-3 filed November 10, 1997.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES.
None.
(c) OPINIONS OF FINANCIAL ADVISORS.
Furnished as Appendices B and C to the Joint Proxy Statement/Prospectus
included in Part I of this Registration Statement.
ITEM 22. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes as follows:
(a) to file, during any period in which offers or sales are being made, a
post effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
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(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the
date of responding to the request.
3. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
4. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
6. The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of a registration statement
as permitted by Rule 430A and contained in the form of prospectus to be filed
by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration statement at the
time it was declared effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MILLERSBURG,
PENNSYLVANIA, ON , 1997.
Community Banks, Inc.
By: /s/ Thomas L. Miller
----------------------------------
THOMAS L. MILLER CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS
BELOW IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS THOMAS L. MILLER AND
ERNEST L. LOWE, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL ATTORNEY-
IN-FACT, WITH FULL POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL CAPACITIES,
TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ANY OR ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION
STATEMENT, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH,
AND HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS
SUBSTITUTE OR SUBSTITUTES MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Chairman and Chief , 1997
- ------------------------------------- Executive Officer
THOMAS L. MILLER and a Director
/s/ President and Chief , 1997
- ------------------------------------- Operations Officer
ERNEST L. LOWE and a Director
/s/ Executive Vice- , 1997
- ------------------------------------- President and Chief
TERRY L. BURROWS Financial Officer
/s/ Director , 1997
- -------------------------------------
RONALD E. BOYER
/s/ Director , 1997
- -------------------------------------
SAMUEL E. COOPER
/s/ Director , 1997
- -------------------------------------
KENNETH L. DEIBLER
/s/ Director , 1997
- -------------------------------------
PETER DESOTO
II-4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Director , 1997
- -------------------------------------
LEON E. KOCHER
/s/ Director , 1997
- -------------------------------------
RAY N. LEIDICH
/s/ Director , 1997
- -------------------------------------
THOMAS W. LONG
/s/ Director , 1997
- -------------------------------------
DONALD L. MILLER
/s/ Director , 1997
- -------------------------------------
SUSAN K. NENSTIEL
/s/ Director , 1997
- -------------------------------------
ROBERT W. RISSINGER
/s/ Director , 1997
- -------------------------------------
ALLEN SHAFFER
/s/ Director , 1997
- -------------------------------------
WILLIAM C. TROUTMAN
/s/ Director , 1997
- -------------------------------------
JAMES A. ULSH
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT INDEX
------- -------------
<C> <S>
(2) Agreement and Plan of Reorganization, dated October 28, 1997, between
Community and Peoples is Appendix A to the Joint Proxy
Statement/Prospectus included in Part I of this Registration
Statement.
(3)(a) Articles of Incorporation of Community--Incorporated by reference to
Exhibit 3(a) and of Community's Form S-2 (Amendment 2) dated May 13,
1987 (Registration No. 2-0-8732).
(3)(b) Bylaws of Community--Incorporated by reference to Exhibit 3(b) and of
Community's Form S-2 (Amendment 2) dated May 13, 1987 (Registration
No. 2-0-8732).
(5) Opinion re Legality--Opinion of Mette, Evans & Woodside
(8) Opinion re Tax Matters--Opinion of Mette, Evans & Woodside
(13) Community's Annual Report on Form 10-K for the year ended December 31,
1996-- Incorporated by reference in the Joint Proxy Statement/
Prospectus included in Part I of this Registration Statement.
(23)(a) Consent of Mette, Evans & Woodside (included in its opinions filed as
Exhibits (5) and (8))
(23)(b) Consent of Coopers & Lybrand, LLP
(23)(c) Consent of Stambaugh Ness, P.C.
(23)(d) Consent of Berwind Financial Group, Inc.
(23)(e) Consent of Sandler O'Neill & Partners, LP
(24) Power of Attorney (included in "SIGNATURES" in Part II of this
Registration Statement)
(99)(a) Form of Proxy--Community
(99)(b) Form of Proxy--Peoples
(99)(c) Employment Agreement dated as of October 29, 1997 between Community
and Eddie L. Dunklebarger.
(99)(d) Employment Agreement dated as of October 29, 1997 between Community
and Jeffrey M. Seibert.
(99)(e) Employment Agreement dated as of October 29, 1997 between Community
and Anthony N. Leo.
(99)(f) Peoples' Annual Report on Form F-2 for the year December 31, 1996.
(99)(g) Peoples' quarterly reports on Form F-4 for the quarters ended March
31, 1997, June 30, 1997, and September 30, 1997.
(99)(h) Peoples' current report on Form F-3 filed November 10, 1997.
</TABLE>
<PAGE>
EXHIBIT 5
December , 1997
Community Banks, Inc.
150 Market Square
P.O. Box 350
Millersburg, PA 17061
Re: Community Banks, Inc.
Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to Community Banks, Inc., a Pennsylvania
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-4, as amended (the "Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), relating to the public offering of up to 1,410,500
shares of the Company's common stock, par value $5.00 per share (the "Common
Stock"). The Company will offer such shares in connection with the merger (the
"Merger") provided for in that Agreement and Plan of Reorganization dated
October 28, 1997 among the Company, PSB Interim Bank, and Peoples State Bank
(the "Agreement"). In this connection we have reviewed (a) the Registration
Statement, (b) the Company's Articles of Incorporation and By-laws, (c) a copy
of the Agreement, and (d) certain records of the Company's corporate
proceedings. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original of all documents submitted to us as copies
thereof.
Our opinion set forth below is limited to the Pennsylvania Business
Corporation Law of 1988, as amended.
In our opinion, the shares of Common Stock to be issued by the Company in
connection with the Merger, when issued by the Company in connection with the
Merger pursuant to the Agreement, will be legally issued, fully paid and non-
assessable.
We hereby consent to the use of this opinion as Exhibit 5 to the
Registration Statement. In giving such opinion, we do not thereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Act or the rules or regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
James A. Ulsh
JAU:mk
<PAGE>
EXHIBIT 8
December , 1997
Board of Directors
Community Banks, Inc.
150 Market Square
P.O. Box 350
Millersburg, PA 17061
Board of Directors
The Peoples State Bank
100 East King Street
East Berlin, PA 17316
Re: Agreement and Plan of Reorganization of
The Peoples State Bank with and into
PSB Interim Bank,
A Wholly Owned Subsidiary of
Community Banks, Inc.
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of a proposed reorganization involving Community Banks, Inc.
("Community"), a Pennsylvania corporation; PSB Interim Bank ("Interim Bank"), a
newly formed Pennsylvania state chartered banking institution and wholly-owned
subsidiary of Community; and The Peoples State Bank ("Peoples"). The
reorganization is described in the Joint Proxy Statement/Prospectus dated
______________________, 199____ and in the Agreement and Plan of Reorganization
dated October 28, 1997 (the "Reorganization Agreement"). Community has one
class of stock outstanding, which is voting common stock. Peoples has only
voting common stock outstanding.
Pursuant to and in accordance with the Pennsylvania Banking Code, Peoples
will be merged into Interim Bank (the "Merger") and the resulting entity will
continue under the name "Peoples State Bank". As a result of the Merger,
Interim Bank will succeed to all of the assets of Peoples, subject to all of the
liabilities of Peoples.
Each share of common stock of Peoples will be exchanged for shares of
common stock of Community determined in accordance with the exchange ratio
provided in the Merger Agreement, except for shares of Peoples held by
shareholders who exercise their dissenters rights. Dissenting shareholders may
surrender their Peoples stock to Community and receive cash payments
representing the fair market value of such stock, subject to the provisions of
The Pennsylvania Banking Code.
Shareholders of Peoples who would have otherwise 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" as defined in
the Merger Agreement for one (1) whole share of Community common stock. The
cash received by dissenting shareholders and by shareholders who receive cash in
lieu of fractional shares will be provided by Community.
<PAGE>
In connection with the proposed Merger and related transactions you have
made the following representations to us:
1. Original documents (including signatures) are authentic; documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the date of the Merger) due execution and delivery of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof.
2. The Merger will be effective under The Pennsylvania Banking Code.
3. The total fair market value of the Community common stock and cash
received by Peoples shareholders will be approximately equal to the fair market
value of the Peoples common stock surrendered in the Merger.
4. To the best knowledge of Peoples management, there is no plan or
intention on the part of Peoples shareholders to sell, exchange, or otherwise
dispose of a number of shares of Community common stock received in the Merger
that would reduce Peoples' shareholders' ownership of Community common stock to
a number of shares having a value, as of the date of the Merger of less than
eighty (80%) percent of the value of all of the formerly outstanding Peoples
stock as of the same date. For this purpose, shares of Peoples common stock
exchanged for cash in exercise of dissenters' rights or in lieu of fractional
shares of Community common stock are treated as outstanding Peoples stock on the
date of the Merger. Moreover, Peoples stock and Community stock held by Peoples
shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to
the transaction have been taken into account in making this representation.
5. Community has no plan or intention to reacquire any of its stock issued
in the Merger or make any extraordinary distribution in respect of its stock.
6. Interim Bank has no plan or intention to sell or otherwise dispose of
any of its assets or the assets of Peoples acquired in the Merger, except for
dispositions made in the ordinary course of business.
7. The liabilities of Peoples were incurred by Peoples in the ordinary
course of its business.
8. Following the Merger, Interim Bank will continue its historic business
or use a significant portion of its historic business assets in a business.
9. Community, Peoples, and the Peoples shareholders will pay their
respective expenses, if any, incurred in connection with the transaction (other
than expenses of Peoples assumed by Interim Bank pursuant to the Merger).
10. There is no intercorporate indebtedness existing between Peoples and
Community or its subsidiaries that was issued, acquired, or will be settled at a
discount.
11. Neither Community nor Interim Bank is an investment company as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986 as
amended (the "Code").
12. Neither Community nor Peoples is under the jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
<PAGE>
13. Peoples shareholders will receive and retain a meaningful continuing
equity ownership in Community that is sufficient to satisfy the continuity of
interest requirement as specified in Treas. Reg. (S)1.368-1(b) and as
interpreted in certain Internal Revenue Service rulings and federal judicial
decisions.
14. After the Merger, Interim Bank will continue to hold "substantially
all" of Peoples' properties acquired in the Merger within the meaning of Section
368(a)(2)(E) of the Code and the regulations promulgated thereunder.
15. None of the compensation to be received by any Peoples shareholder-
employee pursuant to any employment agreement or any covenants not to compete
will be separate consideration for, or allocable to, any of their shares of
Community stock; the compensation to be paid to any Peoples shareholder-
employees will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services.
16. No distributions will have been made by Peoples with respect to its
stock preceding the proposed transaction other than distributions consistent in
amount and in effect with prior dividend policy.
17. The issuance of cash in lieu of fractional shares merely represents
the mechanical rounding off of the fractional share interests. It is undertaken
solely for the purpose of saving Community the expense and inconvenience of
issuing and transferring fractional shares, and is not separately bargained for
consideration. The aggregate amount of cash to be issued in lieu of fractional
shares is anticipated to be less than one (1%) percent of the total value of
Community common stock received by Peoples shareholders.
18. Peoples has not redeemed any of its capital stock within the last
three (3) years.
19. The common stock of Community to be received by the shareholders of
Peoples is not subject to put or call options.
Based on our understanding of the pertinent facts as set forth above and
applicable law, as enacted and construed on the date hereof, it is our opinion
that:
(i) the Merger of Peoples with and into Interim Bank in accordance with
the Reorganization Agreement will constitute a reorganization
within the meaning of Section 368(a) of the Code, and each of
Peoples, Interim Bank, and Community will be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by Peoples, Interim Bank, or
Community as a result of the Merger;
(iii) except for cash received in lieu of fractional shares, no gain or
loss will be recognized by the shareholders of Peoples who receive
solely Community common stock upon the exchange of their shares of
Peoples common stock for shares of Community common stock;
(iv) the basis of the Community common stock to be received by the
Peoples shareholders will be, in each instance, the same as the
basis of the Peoples common stock surrendered in exchange therefor;
<PAGE>
(v) to the extent that Peoples stock is held as capital asset, the
holding period of the Community common stock received by the
shareholders of Peoples receiving Community common stock will
include the period during which the Peoples common stock
surrendered in exchange therefor was held;
(vi) to the extent that they hold their Peoples common stock as capital
assets, cash received by Peoples shareholders in lieu of a
fractional share interest in Community common stock will be treated
as having been received as a distribution in full payment for such
fractional share interest in Community common stock, subject to the
provisions of Section 302(a) of the Code.
We are pleased to offer this opinion based on the federal income tax laws
as of this date. No assurances can be provided as to future changes in
administrative or judicial interpretations of these laws. No opinion is
expressed with respect to state and local taxes, federal, or state securities
law and other federal or state law not expressly referred herein.
We hereby consent to the filing of this opinion as an Exhibit to the
aforementioned Registration Statement. In giving this opinion, we do not
thereby admit that we are acting within the category of persons whose consent is
required under Section 7 of the Act or the rules or regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
James A. Ulsh
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND, LLP
We consent to the incorporation by reference in this Registration Statement of
Community Banks, Inc. on Form S-4 of our report, which includes an explanatory
paragraph regarding the adoption of Statement of Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
dated January 13, 1997, on our audits of the consolidated financial statements
of Community Banks, Inc. as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994. We also consent to the reference to our
firm under the caption "Experts."
/s/ COOPERS & LYBRAND, LLP
One South Market Square
Harrisburg, PA 17110-9916
<PAGE>
EXHIBIT 23(d)
CONSENT OF BERWIND FINANCIAL GROUP, INC.
We consent to the inclusion of our Fairness Opinion issued to The Peoples
State Bank in this registration statement on Form S-4. We also consent to
the reference to our firm under the caption "Experts".
Berwind Financial Group, L.P.
By: /s/ Michael J. Hughes
----------------------------------------------
Title: Senior Vice President
-------------------------------------------
<PAGE>
EXHIBIT 23(e)
CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the inclusion of our opinion letter to the Board
of Directors of Community Banks, Inc. (the "Company") as Appendix C to the Joint
Proxy Statement/Prospectus relating to the proposed merger of The Peoples State
Bank with and into a wholly-owned subsidiary of the Company contained in the
Registration Statement on Form S-4 as filed with the Securities and Exchange
Commission on the date hereof, and to the references to our firm and such
opinion in such Joint Proxy Statement/Prospectus. In giving such consent, we do
not admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended (the "Act"), or the
rules and regulations of the Securities and Exchange Commission thereunder (the
"Regulations"), nor do we admit that we are experts with respect to any part of
such Registration Statement within the meaning of the term "experts" as used in
the Act or the Regulations.
_____________________________, 1997
<PAGE>
EXHIBIT 99(a)
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 Paul W. Latsha, Earl A. Buffington, and Norwood
D. Hoover, 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
December 26, 1997 at the Special Meeting of Shareholders to be held on February
10, 1998 or any adjournments thereof.
1. APPROVAL, RATIFICATION AND CONFIRMATION OF THE AGREEMENT AND PLAN OF
REORGANIZATION, DATED OCTOBER 28, 1997, BETWEEN COMMUNITY BANKS, INC.
("COMMUNITY") AND THE PEOPLES STATE BANK ("PEOPLES") PROVIDING FOR THE MERGER
OF PEOPLES WITH AND INTO PSB INTERIM BANK, A NEWLY FORMED STATE CHARTERED
BANKING SUBSIDIARY OF COMMUNITY.
FOR AGAINST ABSTAIN
----- ----- -----
2. APPROVAL OF A PROPOSAL TO POSTPONE OR ADJOURN THE SPECIAL MEETING TO ANOTHER
TIME AND/OR PLACE FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES IN THE
EVENT THAT THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE SPECIAL MEETING
TO APPROVE THE MERGER AND THE AGREEMENT AND PLAN OF REORGANIZATION.
FOR AGAINST ABSTAIN
----- ----- -----
3. APPROVAL OF THE AMENDMENT OF THE COMMUNITY ARTICLES OF INCORPORATION TO
INCREASE THE AUTHORIZED SHARES OF COMMUNITY COMMON STOCK FROM 5,000,000
SHARES TO 20,000,000 SHARES.
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 EACH OF THE PROPOSALS
LISTED ABOVE. 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 , 1998.
(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.
<PAGE>
EXHIBIT 99(b)
PROXY
THE PEOPLES STATE BANK
100 E. King Street
P.O. Box 1000
East Berlin, PA 17316
Telephone: (717) 295-9510
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF THE PEOPLES STATE BANK
The undersigned hereby appoints ____________________, ____________________, and
____________________, 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 The Peoples State Bank held on record by the undersigned on
December 26, 1997 at the Special Meeting of Shareholders to be held on February
10, 1998 or any adjournments thereof.
1. APPROVAL, RATIFICATION AND CONFIRMATION OF THE AGREEMENT AND PLAN OF
REORGANIZATION, DATED OCTOBER 28, 1997, BETWEEN COMMUNITY BANKS, INC.
("COMMUNITY") AND THE PEOPLES STATE BANK ("PEOPLES") PROVIDING FOR THE MERGER
OF PEOPLES WITH AND INTO PSB INTERIM BANK, A NEWLY FORMED STATE CHARTERED
BANKING SUBSIDIARY OF COMMUNITY.
FOR AGAINST ABSTAIN
----- ----- -----
2. APPROVAL OF A PROPOSAL TO POSTPONE OR ADJOURN THE SPECIAL MEETING TO ANOTHER
TIME AND/OR PLACE FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES IN THE
EVENT THAT THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE SPECIAL MEETING
TO APPROVE THE MERGER AND THE AGREEMENT AND PLAN OF REORGANIZATION.
FOR AGAINST ABSTAIN
----- ----- -----
3. 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 EACH OF THE PROPOSALS
LISTED ABOVE. 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 , 1998.
(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.
<PAGE>
EXHIBIT 99(c)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 29th day of October, 1997, by and between COMMUNITY
----
BANKS, INC., a Pennsylvania corporation, ("Community"), THE PEOPLES STATE BANK,
a Pennsylvania state chartered banking institution ("Peoples") and EDDIE L.
DUNKLEBARGER, an adult individual (hereinafter referred to as "Executive").
W I T N E S S E T H:
WHEREAS, Executive is currently employed by Peoples, as the President and
Chief Executive Officer of Peoples, pursuant to a certain Executive Employment
Agreement between Peoples and Executive, dated May 14, 1993; and
WHEREAS, Community and Peoples have entered into a certain Agreement and
Plan of Reorganization of even date (the "Merger Agreement") whereby Peoples
will be merged with and into PSB Interim Bank, a Pennsylvania state chartered
financial institution, as of the Effective Date of the Merger (as defined
therein) and PSB Interim Bank will, as of the Effective Date of the Merger,
change its name to The Peoples State Bank; and
WHEREAS, as of the Effective Date of the Merger, Peoples will be a wholly-
owned subsidiary of Community; and
WHEREAS, the Company wishes to employ Executive and Executive wishes to be
employed by Company, as the President and Chief Executive Officer of the
Company, upon the terms set forth below, as of the Effective Date of the Merger;
and
WHEREAS, for purposes of the Agreement, Community and Peoples are referred
to collectively as the "Company."
NOW, THEREFORE, in consideration of the agreements hereinafter contained,
and intending to be legally bound hereby, the parties agree as follows:
1. Duties as Executive. Company shall employ Executive and Executive
-------------------
shall serve Community and Peoples as President and Chief Executive Officer of
Company and shall nominate and support for reelection Executive as a member of
Company's Board of Directors and a non-voting member of the Executive Committee.
During his employment by Company, Executive shall serve Company under the
direction of, and in a manner satisfactory to, the Board of Directors of
Company, provided that any duties prescribed by the Board of Directors are
consistent with Executive's position as President and Chief Executive Officer of
Company, which shall be the usual and customary duties of a president and chief
executive officer of a bank holding company and a bank. He shall perform his
duties faithfully, diligently, and to the best of his ability and shall devote
his full time and best efforts to the affairs of Community and Peoples. He
shall report to the Chairman of the Board of Directors and the Board of
Directors of Company and shall have supervision and control over, and
responsibility for, the general management and operations of Company.
2. Compensation.
------------
a. Annual Direct Salary. As compensation for services rendered to
--------------------
Company under this Agreement, the Executive shall be entitled to receive from
Company an annual direct salary of One Hundred Ninety
<PAGE>
Thousand Dollars ($190,000.00) per year, as increased hereunder, (the "Annual
Direct Salary"), payable in substantially equal monthly installments (or such
other more frequent intervals as may be determined by the Board of Directors of
Company as payroll policy for senior executive officers) prorated for any
partial employment period. The Annual Direct Salary shall be reviewed by the
Executive Committee of Company on each anniversary of this Agreement and shall
be increased at the discretion of the Board of Directors upon the recommendation
of the Executive Committee. In no event shall the Annual Direct Salary be
decreased.
b. Incentive Compensation. For a period of two (2) years
----------------------
commencing with calendar year 1998, Executive shall be paid a bonus equal to the
greater of (i) $50,000.00 per year; or (ii) any bonus to which Executive would
be entitled as a participant of Company's existing executive bonus program.
Such bonus shall be paid within 30 days following the end of the calendar year
to which such bonus relates. Following such two-year period, Executive shall
participate in Company's existing executive bonus program.
3. Fringe Benefits, Vacation, Expenses, and Perquisites. It is agreed
----------------------------------------------------
that nothing paid to the Executive under any of the below-described benefit
plans or arrangements shall be deemed to be in lieu of compensation to the
Executive hereunder. Executive shall be entitled to:
a. Employee Benefits Plans. Executive shall be entitled to
-----------------------
participate in or receive benefits under all Company employment benefit plans,
including but not limited to any profit-sharing plan, pension plan, savings
plan, stock option plan, supplemental executive retirement plan, major medical,
hospitalization and health-and-accident plan or arrangement made available by
Company to its executives and key management employees, subject to and on a
basis consistent with terms, conditions and overall administration of such plans
and arrangements. With respect to Company's stock option plan, for each
calendar year during the term of this Agreement beginning with 1998, Company
shall grant to Executive options under its existing stock option plan for at
least 6,000 shares of Company's stock. It is understood and agreed that any
major medical, hospitalization and health-and-accident plan shall cover the
Executive, his wife and children under standard coverage provisions. Executive
shall also be entitled to the following benefits, at minimum:
i. Life Insurance: Company shall provide and maintain life
--------------
insurance for the Executive if he qualifies therefor on a standard underwriting
basis. Such life insurance shall at all times be maintained at an amount equal
to the sum of $100,000 and shall name as beneficiary such person(s) as the
Executive shall designate in writing. In the event of failure of the Executive
to designate a beneficiary of such policy, the estate of the Executive shall be
the beneficiary of such policy.
ii. Survivor Income. Company and Executive shall enter into a
---------------
certain Survivor Income Agreement, in substantially the form attached hereto as
Exhibit "A", whereby Executive shall participate in a survivor income insurance
program provided by Company to its executive officers.
iii. Disability Insurance: Company shall make available
--------------------
disability insurance coverage for the Executive at Company's expense, provided
the Executive qualifies as a medically acceptable risk to the issuing company on
a standard underwriting basis, which shall provide that, in the event the
Executive is unable to perform his duties hereunder as a result of incapacity
due to physical or mental illness, he shall be entitled to receive not less than
an amount equal to seventy percent (70%) of his then Annual Direct Salary, until
he reaches the age of sixty-five (65) or dies, whichever occurs first. Company
shall continue to pay to the Executive his Annual Direct Salary during any
applicable "elimination (waiting) period," but not to exceed six (6) months.
b. Other Perquisites and Benefits. Executive shall be entitled to
------------------------------
receive other perquisites and fringe benefits as the Board of Directors of
Company deems appropriate, in its sole discretion.
c. Relocation. Company shall not, without the prior consent of
----------
Executive transfer or relocate the office in which Executive performs the bulk
of his duties to any location which is further in actual driving mileage
<PAGE>
than the driving mileage from Peoples' headquarters in East Berlin, Pennsylvania
to Millersburg, Pennsylvania. Company shall not require Executive to move from
his residence.
d. Company Car. Company recognizes Executive's need for an
-----------
automobile for business purposes and shall provide Executive with an automobile,
including all related maintenance, repairs, insurance and other costs. In lieu
of providing Executive with an automobile, Company may provide Executive with a
reasonable allowance on a monthly basis, which allowance shall cover Executive's
costs associated with an automobile, including without limitation, lease or
installment payments, maintenance, repairs, insurance and other costs.
4. Reimbursement of Expenses. Company shall reimburse Executive within
-------------------------
thirty (30) days from billing date for necessary and properly documented travel
and business expenses, not otherwise reimbursed, incurred by Executive on behalf
of Company.
5. Term of Employment. Company employs the Executive and the Executive
------------------
accepts employment with Company for a period of five (5) years beginning on the
Effective Date of the Merger (as defined in the Merger Agreement) and ending on
the date which is five (5) years after the Effective Date of the Merger,
subject, however, to prior termination of this Agreement as set forth in
paragraph 6 below. Upon the expiration of the third year within said five-year
period, and upon the expiration of each additional year of employment (each such
period being referred to herein as "the Expiration Date"), this Agreement and
the period of Executive's employment hereunder will be automatically extended
for an additional year (resulting in successive three-year terms) unless, no
later than ninety (90) days prior to the Expiration Date, either the Board of
Directors of Company or Executive gives written notification to the other of his
or its intention not to renew the Agreement or Executive's employment. Notice
of intent not to renew that is properly given under this paragraph will have the
effect of causing the Agreement to terminate two (2) years after the Expiration
Date (unless terminated prior thereto in accordance with paragraph 6 below).
6. Termination.
-----------
a. Death. Executive's employment hereunder shall terminate upon his
-----
death.
b. Disability. If the Executive becomes permanently disabled (as
----------
certified by a licensed physician chosen by Company and the Executive or in the
event Company and the Executive cannot agree upon a physician, each shall
designate a licensed physician, and the licensed physicians so designated shall
appoint a third physician whose decision shall be binding upon the parties)
because of sickness, physical or mental disability, or any other reason, and is
unable to perform or complete his duties under this Agreement for a period of
ninety (90) consecutive days (or time equal to the elimination period under any
disability insurance program provided by Company to the Executive), Company
shall have the option to terminate this Agreement by giving written notice of
termination to the Executive. Such termination shall be without prejudice to
any right the Executive has under any disability insurance program maintained by
Company.
c. Cause. Company may terminate this Agreement and the Executive's
-----
employment hereunder for Cause at any time. For the purposes of this Agreement,
Company shall have "Cause" to terminate the Executive's employment upon (1) the
failure by the Executive to substantially perform his duties hereunder, other
than any such failure resulting from the Executive's incapacity due to physical
or mental illness (after Company's notice to Executive and Executive's failure
to cure same within thirty (30) days of such notice); (2) the engaging by the
Executive in willful misconduct materially injurious to Company; (3) gross
negligence, malfeasance, or dishonesty of the Executive in the performance of
his duties (after Company's notice to Executive and Executive's failure to cure
same within thirty (30) days of such notice); (4) the commission by Executive of
an act constituting a felony or the conviction of Executive of a misdemeanor
based on dishonesty; (5) the willful and material breach by Executive of any of
his other obligations under this Agreement (after Company's notice to Executive
and Executive's failure to cure same within thirty (30) days of such notice);
(6) the refusal or failure of Executive to carry out reasonable directives of
the Board (after Company's notice to Executive and Executive's failure to cure
same within thirty (30)
<PAGE>
days of such notice); (7) receipt of a final written directive or order of any
governmental body or entity having jurisdiction over Company requiring
termination or removal of the Executive as Chief Executive Officer, President or
Director of Company; (8) repeated and consistent failure of Executive to be
present and work during normal business hours unless the absence is due to
disability described in Section 7(a) below (after Company's notice to Executive
and Executive's failure to cure same within thirty (30) days of such notice); or
(9) insubordinate, gross incompetence or misconduct in the performance of, or
gross neglect of, Executive's duties hereunder (after Company's notice to
Executive and Executive's failure to cure same within thirty (30) days of such
notice).
d. Health and Good Reason. Executive may terminate his employment
----------------------
hereunder (1) if his health should become impaired to an extent that it makes
continued performance of his duties hereunder hazardous to his physical or
mental health or his life, or (2) for Good Reason. The term "Good Reason" shall
mean (i) any assignment to Executive, without his consent, of any duties other
than those contemplated by Section 1 hereof, or any reduction in Executive's
duties or responsibilities for Company; (ii) any removal of Executive from or
any failure to nominate and support for re-election Executive to any of the
positions indicated in Section 1 hereof, except in connection with termination
of Executive's employment for Cause; (iii) a reduction of Executive's Annual
Direct Salary; (iv) breach by Company of its obligations under Section 3 hereof
(after Executive's notice to Company and Company's failure to cure such breach
within thirty (30) days of such notice); (v) any other willful and material
breach by Company of this Agreement (after Executive's notice to Company and
Company's failure to cure such breach within thirty (30) days of such notice);
(vi) any Change of Control (as defined herein); or (vii) any violation by
Company of the provisions of Section 3(c) above (pertaining to relocation).
e. Voluntary Termination by Executive. Executive may terminate his
----------------------------------
employment with Company at anytime for a reason other than a reason of the type
described in Section 6(d) above on one hundred eighty (180) days prior written
notice to Company.
7. Payments Upon Termination.
-------------------------
a. Death, Disability or for Cause. If Executive's employment shall
------------------------------
be terminated because of death, disability or for Cause, or, in the event
Executive terminates his employment with Company pursuant to Section 6(e) above,
Company shall pay Executive his full Annual Direct Salary through the date of
termination at the rate in effect at the time of termination, and other amounts
owing to Executive at the date of termination and Company shall have no further
obligations to Executive under this Agreement. In the event Executive
terminates his employment hereunder pursuant to Section 6(d)(1) as a result of
disability, Executive shall be entitled to the benefits referenced in Section
3(a)(iii) above.
b. Unilateral and Good Reason Termination. If Executive's
--------------------------------------
employment is terminated by Company (other than pursuant to Sections 6(a), (b)
or (c) hereof or as a result of nonrenewal of this Agreement), or if Executive
shall terminate his employment for Good Reason (except for a termination by
Executive due to a Change in Control as defined herein), then Company shall pay
Executive one hundred twenty percent (120%) of his full Annual Direct Salary
from the date of termination for the remaining term of this Agreement. Company
shall not be required to maintain employee benefit plans and programs to which
Executive was entitled prior to the date of termination. The parties
acknowledge that twenty percent (20%) of such Annual Direct Salary payment
referenced above represents the parties' best estimation of the value of such
other benefits to which Executive had been entitled prior to termination of his
employment pursuant to this Section. In the event that Executive were to
terminate his employment due to any Change in Control (as defined herein),
Executive shall be entitled (as his sole remedy) to a lump sum payment in an
amount equal to his full Annual Direct Salary then in effect for the remaining
term of this Agreement in cash within thirty (30) days from the date on which
Executive ceases to be employed by Company. The parties acknowledge and agree
that a termination by Executive for health reasons pursuant to Section 6(d)(1)
above shall not trigger the payments set forth in this Section 7(b).
c. Voluntary Termination by Executive. If Executive shall terminate
----------------------------------
his employment with Company pursuant to Section 6(e) above, Company shall pay
Executive his full Annual Direct Salary through the
<PAGE>
date of termination and other amounts owing to Executive at the date of
termination and Company shall have no further obligations to Executive under
this Agreement.
8. Section 280G. Notwithstanding any other provisions of this Agreement
------------
or any other agreement entered into by Executive and Company, except any
agreement which expressly modifies this Section 8 ("Other Agreement"), and
notwithstanding any formal or informal plan or other arrangement heretofore or
hereafter adopted by the Company for the direct or indirect provision of
compensation to Executive (including groups of participants or beneficiaries of
which Executive is a member), whether or not such compensation is deferred, is
in cash, or is in the form of a benefit to or for Executive (a "Benefit Plan"),
Executive shall not have any right to receive any payment or other benefit under
this Agreement, any Other Agreement, or any Benefit Plan if such payment or
benefit, taking into account all other payments or benefits to or for Executive
under this Agreement, all Other Agreements, and all Benefit Plans, would cause
any payment to Executive under this Agreement to be considered a "parachute
payment" within the meaning of Section 280G of the Internal Revenue Code as then
in effect (a "Parachute Payment"). In the event that the receipt of any such
payment or benefit under this Agreement, any Other Agreement, or any Benefit
Plan would cause Executive to be considered to have received a Parachute Payment
under this Agreement, then Executive shall have the right, in Executive's sole
discretion, to designate those payments or benefits under this Agreement, any
Other Agreements and/or any Benefit Plans, which should be reduced or eliminated
so as to avoid having the payment to Executive under this Agreement to be deemed
to be a Parachute Payment.
9. Definition of Change of Control. For purposes of this Agreement, the
-------------------------------
term "Change of Control" shall mean:
a. An acquisition by any "person" or "group" (as those terms are
defined or used in Section 13(d) of the Exchange Act, as enacted and in force on
the date hereof) of "beneficial ownership" (within the meaning of Rule 13d-3
under the Exchange Act, as enacted and in force on the date hereof) of
securities of Company representing 24.99% or more of the combined voting power
of Company's securities then outstanding;
b. A merger, consolidation or other reorganization of Company,
except where the resulting entity is controlled, directly or indirectly, by
Company;
c. A merger, consolidation or other reorganization of Company,
except where shareholders of Company immediately prior to consummation of any
such transaction continue to hold as least a majority of the voting power of the
outstanding voting securities of the legal entity resulting from or existing
after any transaction and a majority of the members of the Board of Directors of
the legal entity resulting from or existing after a transaction are former
members of Company's Board of Directors;
d. A sale, exchange, transfer or other disposition of substantially
all of the assets of Company to another entity, except to an entity controlled,
directly or indirectly, by Company or a corporate division involving Company;
e. A contested proxy solicitation of Company's shareholders that
results in the contesting party obtaining the ability to cast twenty-five
percent (25%) or more of the votes entitled to be cast in an election of
directors of Company.
f. During any period of two (2) consecutive years during the term of
this Agreement and any renewal hereof, individuals who at the beginning of such
period constitute the Board of Directors of Company cease for any reason (other
than for health, disability or other medical incapacity or voluntary retirement)
to constitute at least a majority thereof.
10. Definition of Date of Change of Control. For purposes of this
---------------------------------------
Agreement, the date of Change of Control shall mean the earlier of:
<PAGE>
a. the first day on which a "person" or "group" (as those terms are
defined or used in Section 13(d) of the Exchange Act, as enacted and in force on
the date hereof) acquire the "beneficial ownership" (within the meaning of Rule
13d-3 under the Exchange Act, as enacted and in force on the date hereof) of
24.99% or more of the combined voting power of Company's securities then
outstanding,
b. the date of the transfer of all or substantially all of Company's
assets,
c. the date on which a merger, consolidation or combination is
consummated, as applicable, or
d. the date on which a contesting party in a contested proxy
solicitation of Company's shareholders obtains the ability to cast twenty-five
percent (25%) or more of the votes entitled to be cast in an election of
directors of Company.
e. the date on which there is a change in the majority of the
members of the Board during any two (2) consecutive years during the term of
this Agreement and any renewal hereof, for reasons other than health, disability
or other medical incapacity or voluntary retirement.
11. Damages for Breach of Contract. In the event of a breach of this
------------------------------
Agreement by either the Company or Executive resulting in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.
12. No Assignment. The right of Executive or any other person to the
-------------
payment of deferred compensation or other benefits under this Agreement shall
not be assigned, transferred, pledged, or encumbered except by will or by the
laws of the dissent and distribution.
13. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of Company, it successors and assigns and Executive and his heirs,
executors, administrators, and legal representatives.
14. Governing Law. This Agreement shall be construed in accordance with
-------------
and governed by the laws of the Commonwealth of Pennsylvania.
15. Severability. If any provision of this Agreement shall be found by
------------
any court of competent jurisdiction to be unenforceable, the parties hereby
waive such provision to the extent that it is found to be unenforceable. Such
provision may be modified by such court so that it becomes enforceable, and, as
modified, will be enforced as any other provision hereof, all other provisions
continuing in full force and effect.
16. Indemnification. Company shall indemnify Executive, to the fullest
---------------
extent permitted by Pennsylvania law, with respect to any threatened, pending or
completed action, suit or proceeding brought against him by reason of the fact
that he is or was a director, officer, employee or agent of Company or is or was
serving at the request of Company as a director, officer, employee or agent of
another person or entity. To the fullest extent permitted by Pennsylvania law,
Company shall in advance of final disposition pay any and all expenses
(including, without limitation, attorney's fees) incurred by Executive in
connection with any threatened, pending or completed action, suit or proceeding
with respect to which Executive may be entitled to indemnification hereunder;
provided, however, that Executive agrees to reimburse Company all such monies
- -----------------
advanced if the presiding court finds that he breached or failed to perform his
duties as a director of officer, as the case may be, of Company and that the
breach or failure constituted self-dealing, willful misconduct or recklessness.
Executive's right to indemnification provided herein is not exclusive of any
other rights of indemnification to which Executive may be entitled under any
bylaw, agreement, vote of shareholders or otherwise, and shall continue beyond
the term of this Agreement. Company shall use its best efforts to obtain
insurance coverage for Executive under an insurance policy covering officers and
directors of Company against lawsuits, arbitrations or other proceedings;
however, nothing herein shall be construed to require Company to obtain such
insurance, if the Board of Directors of Company determines that such coverage
cannot be obtained at a commercially reasonable price.
<PAGE>
17. Noncompetition. Executive shall not, while employed by Company and,
--------------
only if Executive terminates his employment with Company pursuant to Section
6(e), for a period of one (1) year after such termination, Compete (as
hereinafter defined). The term "Compete" shall mean employment by, or direct or
indirect participation in (as an owner, shareholder, director, general or
limited partner, officer, manager, consultant or agent, or otherwise), any
business, firm, corporation, partnership or other entity or person which is
engaged in commercial banking within any county in which Community's
subsidiaries have offices or branches prior to termination of Executive's
employment. In the event Executive terminates his employment with Company
pursuant to Section 6(e) above, Executive agrees, for a period of one (1) year
following such termination (i) not to solicit any Company employees or officers
to leave Company to accept employment by Executive or his new employer; and (ii)
not to solicit or encourage any Company customers to cease doing business with
the Company and/or to transfer any or all of their business relationships to any
institution which Executive may found or to Executive's new employer.
18. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Executive: Eddie L. Dunklebarger
960 Sunnyside Road
York, PA 17404
If to Company: Community Banks, Inc.
150 Market Square
Millersburg, PA 17061
Attention: Ernest L. Lowe
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
19. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
20. Amendment. This Agreement may be amended or canceled only by mutual
---------
agreement of the parties in writing. So long as Executive lives, no person
other than the parties hereto shall have any rights under or interest in this
Agreement or the subject matter hereof.
21. Attorney's Fees and Costs. If any action at law or in equity is
-------------------------
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs, and necessary
disbursements in addition to any other relief that may be proper.
22. Entire Agreement. As of the Effective Date of the Merger, this
----------------
Agreement and a certain Salary Continuation Agreement between Executive and
Peoples shall constitute the entire agreement between the parties and no prior
promises, agreements or warranties, verbal or written, shall be of any force
unless embodied herein. No modification of this Agreement shall be of any force
or effect unless reduced to writing and signed by both parties. As of the
Effective Date of the Merger, the existing Executive Employment Agreement
between Peoples and Executive shall be terminated, with no further rights or
obligations thereunder due to or from either party. This Agreement shall
supersede that certain Executive Employment Agreement between Peoples and
Executive, dated May 14, 1993.
IN WITNESS WHEREOF, Company has caused this Agreement to be executed by its
duly authorized officers
<PAGE>
and Executive has hereunto set his hand and seal as of the date first above
written.
ATTEST: COMMUNITY BANKS, INC.
____________________ By:____________________________________
THE PEOPLES STATE BANK
____________________ By:____________________________________
WITNESS: EXECUTIVE:
____________________ ____________________________________
Eddie L. Dunklebarger
<PAGE>
EXHIBIT 99(d)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this day of October, 1997, by and between COMMUNITY
BANKS, INC., a Pennsylvania corporation, ("Community"), THE PEOPLES STATE BANK,
a Pennsylvania state chartered banking institution ("Peoples") and JEFFREY M.
SEIBERT, an adult individual (hereinafter referred to as "Executive").
W I T N E S S E T H:
WHEREAS, Executive is currently employed by Peoples, as Peoples' Chief
Lending Officer, pursuant to a certain Employment Agreement between Peoples and
Executive, dated May 2, 1994; and
WHEREAS, Community and Peoples have entered into a certain Agreement and
Plan of Reorganization of even date (the "Merger Agreement") whereby Peoples
will be merged with and into PSB Interim Bank, a Pennsylvania state chartered
banking institution, as of the Effective Date of the Merger (as defined therein)
and, upon the Effective Date of the Merger, PSB Interim Bank shall change its
name to The Peoples State Bank; and
WHEREAS, as of the Effective Date of the Merger, Peoples will be a wholly-
owned subsidiary of Community; and
WHEREAS, for purposes of the Agreement, Community and Peoples are referred
to collectively as the "Company."
WHEREAS, the Company wishes to employ Executive and Executive wishes to be
employed by Company, as an Executive Vice President and the Chief Lending
Officer of Peoples, upon the terms set forth below, as of the Effective Date of
the Merger; and
NOW, THEREFORE, in consideration of the agreements hereinafter contained,
and intending to be legally bound hereby, the parties agree as follows:
a. Length of Employment. Company agrees to employ Executive for a
--------------------
rolling term of two (2) years commencing on the Effective Date of the Merger.
On each anniversary date of the Effective Date of the Merger, the term of this
Agreement shall automatically renew and extend for an additional one (1) year
period unless either party shall have provided notice of its intent not to renew
within sixty (60) days prior to such anniversary date. Upon the date of any
Change in Control (as defined in Paragraph 8) should occur, the term of this
Agreement shall automatically renew and be extended for two (2) years from such
date.
b. Position and Responsibilities. During the course of his
-----------------------------
employment, Executive shall (i) perform the duties and responsibilities of an
Executive Vice President of Company and Chief Lending Officer of Peoples, (ii)
perform such other senior management duties and responsibilities as the Board of
Directors and CEO may direct, and (iii) shall be afforded the title and
privileges associated with being at least an Executive Vice President of the
Company.
c. Performance of Responsibilities, Loyalty.
----------------------------------------
i. Executive shall devote his full time to the performance of
his responsibilities hereunder. Executive shall at all times faithfully,
industriously and to the best of his abilities perform all duties necessary
to carry out his responsibilities.
<PAGE>
ii. Throughout the term hereof, Executive shall not at any time
or place, either directly or indirectly engage in any business or activity
in competition with or adverse to the interests of Company.
d. Compensation.
------------
i. During the initial calendar year of the term of this
Agreement, Company shall pay to Executive a base salary of not less than
$90,000.00. During successive calendar years, the Company may, in its
discretion, adjust the base salary; provided that it shall at no point be
reduced below the initial base salary. This salary shall be paid in
regular, substantially equal installments in accordance with the regular
payroll practices of the Company, less any and all applicable deductions
for taxes, medical benefits, etc.
ii. In addition to base salary, during the term of this
Agreement, Company shall provide Executive with an automobile, including
all related maintenance, repairs, insurance and other costs. In lieu of
providing Executive with an automobile, Company may provide Executive with
a reasonable allowance on a monthly basis, which allowance shall cover
Executive's costs associated with an automobile, including without
limitation, lease or installment payments, maintenance, repairs, insurance
and other costs.
e. Benefits.
--------
i. Executive shall receive employee benefits from Company no
less favorable than the employee benefits he received as an employee of
Peoples and, in addition, shall be eligible to participate in all
employee benefit plans generally available to executive officers of
Company, including without limitation, health and dental insurance plans,
group life insurance plans, retirement plans, incentive compensation
plans, supplemental executive retirement plans and stock option, grant or
appreciation rights plans. The participation of Executive in each benefit
plan described in this paragraph shall be subject to the terms of the
applicable plan and to procedures generally applicable to Company officers;
provided, however, that Executive shall receive credit for years of service
with Peoples for vesting purposes only. Nothing in this paragraph shall
obligate the Company to offer any such plans.
ii. Executive shall be provided holiday pay, personal days, sick
leave, short-term disability and long-term disability in accordance with
Company policy for officers of similar position per forming similar
duties. Executive shall be entitled to at least four (4) weeks paid
vacation each calendar year.
iii. The Company shall pay the reasonable costs of Executive
attending continuing education seminars and banking conventions and
meetings.
f. Relocation. Company shall not, without the prior consent of
----------
Executive, transfer or relocate the office in which Executive performs the bulk
of his duties to any location more than thirty (30) miles from East Berlin,
Pennsylvania without an increase in duties and responsibilities and commensurate
compensation. In the event Executive is so transferred or relocated, Company
shall pay all reasonable out-of-pocket expenses incurred by Executive in
connection with such relocation. Company shall not require Executive to move
from his residence.
g. Termination of Employment. This Agreement may be terminated
-------------------------
during the term hereof as follows:
i. (1) At any time by mutual agreement of Executive and
Company.
<PAGE>
(2) If this Agreement is terminated pursuant to subparagraph
(a)(1) of this Paragraph 7, neither party shall have further obligation or
liability to the other hereunder, except that Executive shall be entitled
to accrued and unpaid salary.
ii. (1) By Company, at any time for Cause. "Cause" shall
include Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty involving personal profit, incompetence, intentional failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or offenses not involving moral turpitude),
final cease and desist order of any government agency having jurisdiction
over Company, or material breach of this Agreement, following Company's
notice thereof to Executive and Executive's failure to cure same within
thirty (30) days of such notice.
(2) If this Agreement is terminated pursuant to subparagraph
(b)(1) of this Paragraph 7, Company shall have no further obligation or
liability to Executive hereunder, except that Executive shall be entitled
to accrued and unpaid salary.
iii. (1) Automatically, if Executive is removed and/or
permanently prohibited from participating in the conduct of Company's
affairs by an order issued by an appropriate regulatory agency under
Section 8(e) of the Federal Deposit Insurance Act, as amended, or any
similar state or federal law.
(2) If this Agreement is terminated pursuant to subparagraph
(c)(1) of this Paragraph 7, Company shall have no further obligation or
liability hereunder, except that Executive shall be entitled to accrued and
unpaid salary.
iv. (1) By Company at any time, if in its sole judgment and
discretion the continued employment of Executive would no longer be
beneficial or desirable.
(2) In the event that Executive's employment is terminated
pursuant to this subparagraph (d)(1) of this Paragraph 7, Executive shall
not be obligated to perform any services on behalf of Company and Company
shall be obligated to continue Executive's salary and those benefits set
forth in Paragraph 5(a) hereof for the remaining term of this Agreement;
provided, however, that in no event shall this provision obligate Company
to make any further increase to Executive's salary above his salary on the
date of such termination, or continue Executive's participation in any
incentive compensation plan, or stock option, grant or appreciation rights
plan, or any similar incentive based compensation plan.
(3) Notwithstanding the provisions of subparagraph (d)(2) of
this Paragraph, in the event that Executive's employment is terminated
pursuant to subparagraph (d)(1) of this Paragraph 7 subsequent to a Change
in Control, or the Company shall breach any provision of this Agreement
subsequent to a Change in Control, Executive may elect, which election may
be made in Executive's sole discretion, to receive from Company a single
payment upon such termination amounting to any salary to which Executive
would be entitled pursuant to subparagraph (d)(2), such single payment
being in lieu of the payments and benefits set forth in subparagraph
(d)(2). As used in this paragraph, "Change in Control" shall have the
meaning defined in Paragraph 8 hereof.
v. (1) By Executive upon a Change in Control.
(2) In the event that Executive terminates his employment
pursuant to subparagraph (e)(i) of this Paragraph 7, Executive may elect,
which election may be made in Executive's sole discretion, to receive from
Company a single payment upon such termination amounting to any salary to
which Executive would be entitled pursuant to subparagraph (d)(2) of this
Paragraph 7, such single payment being in lieu of the payments and benefits
set forth in subparagraph (d)(2) of this Paragraph 7.
vi. By Executive at any time, upon thirty (30) days prior notice
to Company; provided, however, that if this Agreement shall be terminated
pursuant to this subparagraph (f) of this
<PAGE>
Paragraph 7, Company shall not be further obligated or liable under this
Agreement, except for the payment of accrued and unpaid salary.
h. Definition of Change of Control. For purposes of this Agreement,
-------------------------------
the term "Change of Control" shall mean:
i. An acquisition by any "person" or "group" (as those terms
are defined or used in Section 13(d) of the Exchange Act, as enacted and in
force on the date hereof) of "beneficial ownership" (within the meaning of
Rule 13d-3 under the Exchange Act, as enacted and in force on the date
hereof) of securities of Company representing 24.99% or more of the
combined voting power of Company's securities then outstanding;
ii. A merger, consolidation or other reorganization of Company,
except where the resulting entity is controlled, directly or indirectly, by
Company;
iii. A merger, consolidation or other reorganization of Company,
except where shareholders of Company immediately prior to consummation of
any such transaction continue to hold as least a majority of the voting
power of the outstanding voting securities of the legal entity resulting
from or existing after any transaction and a majority of the members of the
Board of Directors of the legal entity resulting from or existing after a
transaction are former members of Company's Board of Directors;
iv. A sale, exchange, transfer or other disposition of
substantially all of the assets of Company to another entity, except to an
entity controlled, directly or indirectly, by Company or a corporate
division involving Company;
v. A contested proxy solicitation of Company's shareholders
that results in the contesting party obtaining the ability to cast twenty-
five percent (25%) or more of the votes entitled to be cast in an election
of directors of Company.
vi. During any period of two (2) consecutive years during the
term of this Agreement and any renewal hereof, individuals who at the
beginning of such period constitute the Board of Directors of Company cease
for any reason (other than for health, disability or other medical
incapacity or voluntary retirement) to constitute at least a majority
thereof.
vii. The termination of employment of the Chief Executive Officer
of Company, other than for Cause pursuant to Section 6(c) or voluntary
termination under Section 6(e) of a certain Employment Agreement between
Eddie L. Dunklebarger and Company, of even date, during the period
commencing on the Effective Date of the Merger and ending two (2) years
thereafter.
i. Suspension. If Executive is suspended and/or temporarily
----------
prohibited from participating in the conduct of the Company's affairs by a
notice served in accordance with law by an appropriate regulatory agency, the
Company's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, Company shall (i) pay Executive all of the compensation withheld
while its contract obligations were suspended and (ii) reinstate any of its
obligations which were suspended.
j. Death or Disability. In the event that Executive is rendered
-------------------
unable to complete the terms of this Agreement due to death or disability
continuing in excess of ninety (90) days, this Agreement shall be terminated and
Company shall have no further liability, obligations or responsibilities
hereunder except as set forth in Paragraph 5(b) hereof.
k. Covenant Not to Compete. In the event Executive terminates his
-----------------------
employment with Company pursuant to Paragraph 7(f), he agrees that, for a period
of one (1) year following such termination, he shall
<PAGE>
not (i) solicit any Company employees or officers to leave Company to accept
employment by Executive or his new employer; and (ii) solicit or encourage any
Company customers to cease doing business with the Company and/or to transfer
any or all of their business relationships to any institution which Executive
may found or to Executive's new employer.
l. Entire Agreement. As of the Effective Date of the Merger, this
----------------
Agreement and a certain Salary Continuation Agreement between Executive and
Peoples shall constitute the entire agreement between the parties and no prior
promises, agreements or warranties, verbal or written, shall be of any force
unless embodied herein. No modification of this Agreement shall be of any force
or effect unless reduced to writing and signed by both parties. As of the
Effective Date of the Merger, the existing Employment Agreement between Peoples
and Executive shall be terminated, with no further rights or obligations
thereunder due to or from either party, and this Agreement shall supersede same.
m. Miscellaneous.
-------------
i. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, successors and
assigns.
ii. This Agreement shall not be modified or changed in any way
except by a written agreement signed by the parties hereto.
iii. No waiver by any party hereto of any provision of this
Agreement shall be deemed a waiver of said provision or any other
provisions of this Agreement.
iv. This Agreement shall be interpreted, construed and governed
in accordance with the laws of the Commonwealth of Pennsylvania. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have set their hands and seals.
ATTEST: COMMUNITY BANKS, INC.
___________________________ By:__________________________________
THE PEOPLES STATE BANK
___________________________ By:__________________________________
WITNESS: EXECUTIVE:
___________________________ __________________________________
Jeffrey M. Seibert
<PAGE>
EXHIBIT 99(e)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this day of October, 1997, by and between
COMMUNITY BANKS, INC., a Pennsylvania corporation, ("Community"), THE PEOPLES
STATE BANK, a Pennsylvania state chartered banking institution ("Peoples") and
ANTHONY N. LEO, an adult individual (hereinafter referred to as "Executive").
W I T N E S S E T H:
WHEREAS, Executive is currently employed by Peoples, as Peoples' Chief
General Counsel, pursuant to a certain Employment Agreement between Peoples and
Executive, dated May 3, 1994; and
WHEREAS, Community and Peoples have entered into a certain Agreement and
Plan of Reorganization of even date (the "Merger Agreement") whereby Peoples
will be merged with and into PSB Interim Bank, a Pennsylvania state chartered
banking institution, as of the Effective Date of the Merger (as defined therein)
and, upon the Effective Date of the Merger, PSB Interim Bank shall change its
name to The Peoples State Bank; and
WHEREAS, as of the Effective Date of the Merger, Peoples will be a wholly-
owned subsidiary of Community; and
WHEREAS, for purposes of the Agreement, Community and Peoples are referred
to collectively as the "Company."
WHEREAS, the Company wishes to employ Executive and Executive wishes to be
employed by Company, as an Executive Vice President and the Chief Administrative
Officer of Peoples, upon the terms set forth below, as of the Effective Date of
the Merger; and
NOW, THEREFORE, in consideration of the agreements hereinafter contained,
and intending to be legally bound hereby, the parties agree as follows:
n. Length of Employment. Company agrees to employ Executive for a
--------------------
rolling term of two (2) years commencing on the Effective Date of the Merger.
On each anniversary date of the Effective Date of the Merger, the term of this
Agreement shall automatically renew and extend for an additional one (1) year
period unless either party shall have provided notice of its intent not to renew
within sixty (60) days prior to such anniversary date. Upon the date of any
Change in Control (as defined in Paragraph 8) should occur, the term of this
Agreement shall automatically renew and be extended for two (2) years from such
date.
o. Position and Responsibilities. During the course of his
-----------------------------
employment, Executive shall (i) perform the duties and responsibilities of an
Executive Vice President of Company and Chief Administrative Officer of Peoples,
(ii) perform such other senior management duties and responsibilities as the
Board of Directors and CEO may direct, and (iii) shall be afforded the title and
privileges associated with being at least an Executive Vice President of the
Company.
<PAGE>
p. Performance of Responsibilities, Loyalty.
----------------------------------------
i. Executive shall devote his full time to the performance of
his responsibilities hereunder. Executive shall at all times faithfully,
industriously and to the best of his abilities perform all duties necessary
to carry out his responsibilities.
ii. Throughout the term hereof, Executive shall not at any
time or place, either directly or indirectly engage in any business or
activity in competition with or adverse to the interests of Company.
q. Compensation.
------------
i. During the initial calendar year of the term of this
Agreement, Company shall pay to Executive a base salary of not less than
$90,000.00. During successive calendar years, the Company may, in its
discretion, adjust the base salary; provided that it shall at no point be
reduced below the initial base salary. This salary shall be paid in
regular, substantially equal installments in accordance with the regular
payroll practices of the Company, less any and all applicable deductions
for taxes, medical benefits, etc.
ii. In addition to base salary, during the term of this
Agreement, Company shall provide Executive with an automobile, including
all related maintenance, repairs, insurance and other costs. In lieu of
providing Executive with an automobile, Company may provide Executive with
a reasonable allowance on a monthly basis, which allowance shall cover
Executive's costs associated with an automobile, including without
limitation, lease or installment payments, maintenance, repairs, insurance
and other costs.
r. Benefits.
--------
i. Executive shall receive employee benefits from Company no
less favorable than the employee benefits he received as an employee of
Peoples and, in addition, shall be eligible to participate in all
employee benefit plans generally available to executive officers of
Company, including without limitation, health and dental insurance plans,
group life insurance plans, retirement plans, incentive compensation
plans, supplemental executive retirement plans and stock option, grant or
appreciation rights plans. The participation of Executive in each benefit
plan described in this paragraph shall be subject to the terms of the
applicable plan and to procedures generally applicable to Company officers;
provided, however, that Executive shall receive credit for years of service
with Peoples for vesting purposes only. Nothing in this paragraph shall
obligate the Company to offer any such plans.
ii. Executive shall be provided holiday pay, personal days, sick
leave, short-term disability and long-term disability in accordance with
Company policy for officers of similar position per forming similar
duties. Executive shall be entitled to at least four (4) weeks paid
vacation each calendar year.
iii. The Company shall pay the reasonable costs of Executive
attending continuing education seminars and banking conventions and
meetings.
s. Relocation. Company shall not, without the prior consent of
----------
Executive, transfer or relocate the office in which Executive performs the bulk
of his duties to any location more than thirty (30) miles from East Berlin,
Pennsylvania without an increase in duties and responsibilities and commensurate
compensation. In the event Executive is so transferred or relocated, Company
shall pay all reasonable out-of-pocket expenses incurred by Executive in
connection with such relocation. Company shall not require Executive to move
from his residence.
<PAGE>
t. Termination of Employment. This Agreement may be terminated
-------------------------
during the term hereof as follows:
i. (1) At any time by mutual agreement of Executive and
Company.
(2) If this Agreement is terminated pursuant to subparagraph
(a)(1) of this Paragraph 7, neither party shall have further obligation or
liability to the other hereunder, except that Executive shall be entitled
to accrued and unpaid salary.
ii. (1) By Company, at any time for Cause. "Cause" shall
include Executive's personal dishonesty, willful misconduct, breach of
fiduciary duty involving personal profit, incompetence, intentional failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or offenses not involving moral turpitude),
final cease and desist order of any government agency having jurisdiction
over Company, or material breach of this Agreement, following Company's
notice thereof to Executive and Executive's failure to cure same within
thirty (30) days of such notice.
(2) If this Agreement is terminated pursuant to subparagraph
(b)(1) of this Paragraph 7, Company shall have no further obligation or
liability to Executive hereunder, except that Executive shall be entitled
to accrued and unpaid salary.
iii. (1) Automatically, if Executive is removed and/or
permanently prohibited from participating in the conduct of Company's
affairs by an order issued by an appropriate regulatory agency under
Section 8(e) of the Federal Deposit Insurance Act, as amended, or any
similar state or federal law.
(2) If this Agreement is terminated pursuant to subparagraph
(c)(1) of this Paragraph 7, Company shall have no further obligation or
liability hereunder, except that Executive shall be entitled to accrued and
unpaid salary.
iv. (1) By Company at any time, if in its sole judgment and
discretion the continued employment of Executive would no longer be
beneficial or desirable.
(2) In the event that Executive's employment is terminated
pursuant to this subparagraph (d)(1) of this Paragraph 7, Executive shall
not be obligated to perform any services on behalf of Company and Company
shall be obligated to continue Executive's salary and those benefits set
forth in Paragraph 5(a) hereof for the remaining term of this Agreement;
provided, however, that in no event shall this provision obligate Company
to make any further increase to Executive's salary above his salary on the
date of such termination, or continue Executive's participation in any
incentive compensation plan, or stock option, grant or appreciation rights
plan, or any similar incentive based compensation plan.
(3) Notwithstanding the provisions of subparagraph (d)(2) of
this Paragraph, in the event that Executive's employment is terminated
pursuant to subparagraph (d)(1) of this Paragraph 7 subsequent to a Change
in Control, or the Company shall breach any provision of this Agreement
subsequent to a Change in Control, Executive may elect, which election may
be made in Executive's sole discretion, to receive from Company a single
payment upon such termination amounting to any salary to which Executive
would be entitled pursuant to subparagraph (d)(2), such single payment
being in lieu of the payments and benefits set forth in subparagraph
(d)(2). As used in this paragraph, "Change in Control" shall have the
meaning defined in Paragraph 8 hereof.
v. (1) By Executive upon a Change in Control.
(2) In the event that Executive terminates his employment
pursuant to subparagraph (e)(i) of this Paragraph 7, Executive may elect,
which election may be made in Executive's
<PAGE>
sole discretion, to receive from Company a single payment upon such
termination amounting to any salary to which Executive would be entitled
pursuant to subparagraph (d)(2) of this Paragraph 7, such single payment
being in lieu of the payments and benefits set forth in subparagraph (d)(2)
of this Paragraph 7.
vi. By Executive at any time, upon thirty (30) days prior notice
to Company; provided, however, that if this Agreement shall be terminated
pursuant to this subparagraph (f) of this Paragraph 7, Company shall not be
further obligated or liable under this Agreement, except for the payment of
accrued and unpaid salary.
u. Definition of Change of Control. For purposes of this Agreement,
-------------------------------
the term "Change of Control" shall mean:
i. An acquisition by any "person" or "group" (as those terms
are defined or used in Section 13(d) of the Exchange Act, as enacted and in
force on the date hereof) of "beneficial ownership" (within the meaning of
Rule 13d-3 under the Exchange Act, as enacted and in force on the date
hereof) of securities of Company representing 24.99% or more of the
combined voting power of Company's securities then outstanding;
ii. A merger, consolidation or other reorganization of Company,
except where the resulting entity is controlled, directly or indirectly, by
Company;
iii. A merger, consolidation or other reorganization of Company,
except where shareholders of Company immediately prior to consummation of
any such transaction continue to hold as least a majority of the voting
power of the outstanding voting securities of the legal entity resulting
from or existing after any transaction and a majority of the members of the
Board of Directors of the legal entity resulting from or existing after a
transaction are former members of Company's Board of Directors;
iv. A sale, exchange, transfer or other disposition of
substantially all of the assets of Company to another entity, except to an
entity controlled, directly or indirectly, by Company or a corporate
division involving Company;
v. A contested proxy solicitation of Company's shareholders
that results in the contesting party obtaining the ability to cast twenty-
five percent (25%) or more of the votes entitled to be cast in an election
of directors of Company.
vi. During any period of two (2) consecutive years during the
term of this Agreement and any renewal hereof, individuals who at the
beginning of such period constitute the Board of Directors of Company cease
for any reason (other than for health, disability or other medical
incapacity or voluntary retirement) to constitute at least a majority
thereof.
vii. The termination of employment of the Chief Executive Officer
of Company, other than for Cause pursuant to Section 6(c) or voluntary
termination under Section 6(e) of a certain Employment Agreement between
Eddie L. Dunklebarger and Company of even date, during the period
commencing on the Effective Date of the Merger and ending two (2) years
thereafter.
v. Suspension. If Executive is suspended and/or temporarily
----------
prohibited from participating in the conduct of the Company's affairs by a
notice served in accordance with law by an appropriate regulatory agency, the
Company's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, Company shall (i) pay Executive all of the compensation withheld
while its contract obligations were suspended and (ii) reinstate any of its
obligations which were suspended.
<PAGE>
w. Death or Disability. In the event that Executive is rendered
-------------------
unable to complete the terms of this Agreement due to death or disability
continuing in excess of ninety (90) days, this Agreement shall be terminated and
Company shall have no further liability, obligations or responsibilities
hereunder except as set forth in Paragraph 5(b) hereof.
x. Covenant Not to Compete. In the event Executive terminates his
-----------------------
employment with Company pursuant to Paragraph 7(f), he agrees that, for a period
of one (1) year following such termination, he shall not (i) solicit any Company
employees or officers to leave Company to accept employment by Executive or his
new employer; and (ii) solicit or encourage any Company customers to cease doing
business with the Company and/or to transfer any or all of their business
relationships to any institution which Executive may found or to Executive's new
employer.
y. Entire Agreement. As of the Effective Date of the Merger, this
----------------
Agreement and a certain Salary Continuation Agreement between Executive and
Peoples shall constitute the entire agreement between the parties and no prior
promises, agreements or warranties, verbal or written, shall be of any force
unless embodied herein. No modification of this Agreement shall be of any force
or effect unless reduced to writing and signed by both parties. As of the
Effective Date of the Merger, the existing Employment Agreement between Peoples
and Executive shall be terminated, with no further rights or obligations
thereunder due to or from either party, and this Agreement shall supersede same.
z. Miscellaneous.
-------------
i. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, successors and
assigns.
ii. This Agreement shall not be modified or changed in any way
except by a written agreement signed by the parties hereto.
iii. No waiver by any party hereto of any provision of this
Agreement shall be deemed a waiver of said provision or any other
provisions of this Agreement.
iv. This Agreement shall be interpreted, construed and governed
in accordance with the laws of the Commonwealth of Pennsylvania. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have set their hands and seals.
ATTEST: COMMUNITY BANKS, INC.
__________________________ By:___________________________________
THE PEOPLES STATE BANK
__________________________ By:___________________________________
WITNESS: EXECUTIVE:
__________________________ ___________________________________
Anthony N. Leo
<PAGE>
Exhibit 99F
[LOGO OF PEOPLES STATE BANK APPEARS HERE]
------------------
1996 ANNUAL REPORT
<PAGE>
Contents
<TABLE>
<S> <C>
Consolidated Financial Highlights............................................IFC
Letter to Shareholders....................................................... 1
Selected Consolidated Financial Data......................................... 4
Quarterly Consolidated Results of Operations (Unaudited)..................... 5
Consolidated Balance Sheets.................................................. 6
Consolidated Statements of Income............................................ 7
Consolidated Statements of Shareholders' Equity.............................. 8
Consolidated Statements of Cash Flows........................................ 9
Notes to Consolidated Financial Statements................................... 10
Report of Independent Certified Public Accountants........................... 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 21
Supplemental Financial Data.................................................. 29
Information for Shareholders................................................. 34
Directors, Officers and Banking Locations.................................... 35
</TABLE>
Consolidated Financial Highlights
<TABLE>
<CAPTION>
%
1996 1995 Change
- ----------------------------------------------------------------------------------------------
INCOME FOR THE YEAR (in 000's, except per share data)
<S> <C> <C> <C>
Total interest income $ 14,682 $ 12,432 18.1%
Total interest expense 7,981 6,731 18.6%
Net interest income 6,701 5,701 17.5%
Net income 1,352 905 49.4%
CONDITION AT YEAR-END
Total assets $ 219,055 $ 171,503 27.7%
Total deposits 179,346 149,948 19.6%
Loans, net 155,468 120,481 29.0%
Shareholders' equity 16,340 13,596 20.2%
FINANCIAL RATIOS
Return on average assets 0.71% 0.56% 26.8%
Return on average shareholders' equity 9.21% 7.23% 27.4%
Net interest margin 3.66% 3.71% (1.3)%
Shareholders' equity to total assets 7.46% 7.93% (5.9)%
Total loans to deposits 88.23% 81.94% 7.7%
Reserve for loan losses to total loans outstanding 1.75 1.94 (9.8)%
Non-performing loans to total loans outstanding 1.37 1.56 (12.2)%
PER SHARE DATA
Net income $ 1.05 $ 0.75 40.4%
Cash dividends paid 0.35 0.31 13.5%
Book value 12.00 11.02 8.9%
Book value excluding net unrealized gain (loss) 12.07 10.95 10.2%
Weighted average shares outstanding 1,286,321 1,208,677 6.4%
</TABLE>
<PAGE>
A Message to Our Shareholders from the President
-------------- * --------------
Dear Shareholders, Customers & Friends:
[PHOTO OF EDDIE L.
DUNKLEBARGER APPEARS HERE]
This January, PSB reported record 1996 earnings of nearly $1.4 million, a
dramatic increase of 49.4% over 1995 earnings of $.9 million. Concurrently,
total assets reached a record level of $219.1 million or 27.7% over 1995 total
assets of $171.5 million. These results certainly confirm that PSB has entered a
new era of growth and profitability. We believe it is clear that PSB's
remarkable success in 1996 can be attributed directly to its community banking
approach and reputation for customer service. Our strategic plan capitalizes on
PSB's position as a locally owned, locally operated community bank.
Understanding and responding to our customers' needs is our highest priority.
This simple concept is fundamental to our approach to banking and is the
indisputable foundation of our success. Certainly, no plan for long range growth
and profitability could be based upon a more secure foundation.
In 1996 PSB achieved record levels of both net income and total assets.
However, we truly believe the achievements of the past year are merely a
foreshadow of even better results in the years to come. Over the past few years
I have described in some detail PSB's strategy to become a leading provider of
community banking services in the York/Adams area. Now I will report our
accomplishments in 1996 towards making those plans reality and, more
importantly, the favorable prospects for continued growth and increasing
profitability in the future.
During 1996, PSB opened its fourth full service office in Manchester,
Pennsylvania, a growing nearby community not previously served by a locally
operated community bank. We are pleased with the growth of the office and
acceptance of PSB by the local Manchester community.
Our fifth office, a Bank and Loan Center located on Carlisle Street in Hanover,
opened in January 1997. The Bank and Loan Center is PSB's second office in
Hanover and combines the Bank's expanded residential mortgage division, a
consumer loan office and a full array of retail banking services. A third
Hanover office is planned to open in summer of 1997 at the corner of Baltimore
Street and Grandview Road. Also during 1996, PSB expanded to 13 the number of
ATM's it operates in convenience stores in York and Adams Counties. In addition
to the new facilities and ATM's, PSB introduced the Eagle VISA Debit Card and
implemented PSB Touch Tone Banking during the year. These new services and
facilities are designed to provide our customers the convenience necessary to
build new banking relationships.
As the new offices open, our deposit base is growing to support the increasing
loan demand PSB has experienced in recent years. Driven in large measure by a
team of caring and committed loan officers developed by PSB, net loans in 1996
increased by $35.0 million or 29.0%. Substantial growth occurred in all loan
categories. Encouraged and refreshed by our friendly and simplified lending
style, businesses and consumers alike come to PSB in increasing numbers to
discuss their needs with loan officers empowered to make decisions.
The formula for community banking developed by PSB has not only gained wide
acceptance by a growing customer base, but has also proliferated interest in our
company among potential investors. Taking full advantage of PSB's unique ability
to issue capital securities with
1996 Annual Report -- 1
<PAGE>
minimal regulatory burden, we successfully completed a $1.4 million limited
common stock offering in 1996. In addition to supplying needed capital for the
Bank's substantial growth, the limited offering introduced PSB to a new group of
investors and friends. As a result of the offering, the strong earnings in 1996
and the continued success of our dividend reinvestment plan, shareholders'
equity grew by $2.7 million or 20.2% in 1996. Plus, the total dividends paid to
our shareholders increased by $91,000 or 24.3% in 1996.
Even as PSB begins to capitalize upon the foundation for growth and
profitability established over the past few years, the groundwork for future
growth is being laid. To that end, PSB is enhancing its capabilities in all loan
areas. First, the new Bank and Loan Center at Carlisle Street in Hanover now
houses PSB's expanded residential mortgage loan department. In conjunction with
the opening of this new facility, PSB is developing the capacity to offer new
products, including government sponsored loan programs, designed to make our
residential mortgages available to a wider segment of the market. To promote
these new programs. PSB has retained experienced mortgage originators with
meaningful contracts among the realty and legal communities.
Secondly, PSB is dedicating additional personnel to service our growing volume
of dealer originated auto loans and consumer loans. The Bank initiated its
dealer loan program early in 1995 and, by year end 1996, total direct and
indirect consumer loans outstanding amounted to an astounding $40.9 million. Our
success in obtaining quality dealer paper has compelled us to expand the
resources dedicated to this profitable source of loans.
================================================================================
We get to know our customers, understand
their financing needs and react to them in a
swift and decisive manner.
================================================================================
Meanwhile, the Bank's reputation for customer service is leading business after
business to utilize PSB for both loan and deposit services. Feeling displaced by
consolidations within the local banking industry, area businesses seek the type
of personalized service from PSB which out of town banks simply cannot provide.
We get to know our customers, understand their financing needs and react to them
in a swift and decisive manner. Likewise, our low service charges on most
business accounts and simplified cash management programs for investment of
excess funds attract businesses weary of the red tape, item counts and excessive
fees associated with large banks. For this reason, in 1997 PSB will double the
number of commercial loan officers which serve our growing number of business
customers.
PSB's growing reputation for personalized service could not be developing at a
more fortuitous time. A new wave of bank mergers and acquisitions is occurring
in our marketplace and, with each, more and more displaced customers are seeking
preferable alternatives. Each day, as new customers come to us, we hear similar
stories. Consumers and businesses alike resound the idea. They want the
prerogative of speaking to someone who can make a decision. When policies and
credit decisions are made in a glass tower in another city, customers feel their
personal character and reputation become unimportant. We believe knowing our
customer is the single best way to make a valid decision.
For this formula of community banking to be entirely successful, however, it is
essential that our people have the highest level of training possible. We cannot
ask our community office personnel to make important decisions without a
complete understanding as to all implications of their actions. The highly
trained associate will be better able to assess a customer's overall
circumstances and employ the most flexible approach, while still protecting the
legitimate interests of the Bank and its shareholders. Moreover, training which
focuses on teaching our associates to understand better a potential customer's
needs increases sales opportunities while making the customer realize that we
genuinely care about his business. For this reason, we have begun making
2 -- Peoples State Bank
<PAGE>
additional investments in both the sales and operational training of our
personnel.
Together with the investment in training of our associates, we continue to
evaluate potential quality candidates from other institutions interested in
joining our growing team. The ongoing consolidation within the industry has made
highly skilled individuals available from other organizations seeking a return
to the community banking environment. Each brings not only new customers, but
also a cadre of new ideas of how to serve our community better. These new ideas,
if consistent with our vision of community banking, are incorporated into PSB's
corporate philosophy. This approach keeps the institution progressive and
dynamic.
Most importantly, our new associates introduce a whole new set of potential
customers to the Bank. When the talents of quality personnel are brought into
the community banking environment that PSB has established, a formidable
combination to attract new customers is created. And the results are remarkable.
In 1996, deposit accounts grew by 19.6% and loans grew by 29.0%.
This new business, while providing the drive for PSB's renewed growth and
profitability, has placed increasing demands upon our data processing
capabilities. For this reason, during 1997 we will evaluate the technological
challenges brought about by our substantial growth. We fully anticipate this
evaluation will result in the acquisition of a new data processing system
designed to support a dynamic rapidly growing institution such as PSB. We expect
that enhanced data processing capabilities will create efficiencies that offset,
in large measure, our investment in the new technology. Likewise, we are certain
that our increased capabilities will further enhance the level and quality of
services for which we have become known.
Our evaluation of PSB's data processing capabilities is just a part of our on-
going assessment of our products and services, human resources, facilities and
overall strategic plan. The objective of this on-going assessment is simple. We
want to bring the finest level of community banking to the York/Adams area. I am
now more certain than ever that our strategy is resulting in the development of
a magnificent banking institution of which our shareholders, employees and
community can all be proud.
/s/ Eddie L. Dunklebarger
Eddie L. Dunklebarger
President & Chief Executive Officer
[PHOTO OF JOHN R. WISLER APPEARS HERE]
This 1996 Annual Report is dedicated to Director John R. Wisler, who is this
year celebrating his 50th year in banking. Mr. Wisler began his distinguished
career with the Bank in February 1947, holding numerous positions throughout his
tenure, including serving as the Bank's Executive Vice President and Chief
Executive Officer from 1973 to 1983. He was elected to the Board of Directors
in January 1967 and has served as a PSB Director since that time. The Board of
Directors and Management of PSB salute Mr. Wisler on this occasion and offer our
sincerest gratitude for his years of service to PSB and the East Berlin
community.
1996 Annual Report -- 3
<PAGE>
Selected Consolidated Financial Data
-------------- * --------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA ($ in 000's except per share data)
Net interest income $ 6,701 $ 5,701 $ 5,078 $ 5,398 $ 5,532
Provision for loan losses (525) (350) (1,400) (4,500) (3,416)
Net interest income after provision for loan losses 6,176 5,351 3,678 898 2,116
Other income (1) 417 80 963 374 518
Other expense (4,517) (4,046) (4,100) (3,446) (2,539)
Income tax (provision) benefit (724) (480) (140) 995 192
Net income (loss) $ 1,352 $ 905 $ 401 $ (1,179) $ 287
PER SHARE DATA (2)
Net income (loss) $ 1.05 $ 0.75 $ 0.37 $ (1.16) $ 0.38
Cash dividends paid $ 0.35 $ 0.31 $ 0.26 $ 0.46 $ 0.45
Book value $ 12.00 $ 11.02 $ 9.80 $ 9.76 $ 11.23
Book value excluding net unrealized gain (loss) $ 12.07 $ 10.95 $ 10.40 $ 9.76 $ 11.23
Weighted average shares outstanding 1,286,321 1,208,677 1,072,556 1,015,510 741,412
BALANCE SHEET DATA
Investment securities $ 48,557 $ 38,250 $ 45,971 $ 45,086 $ 20,920
Loans, net 155,468 120,481 100,289 105,831 131,281
Total assets 219,055 171,503 158,169 163,832 166,393
Total deposits 179,346 149,948 135,543 149,606 154,106
Shareholders' equity 16,340 13,596 11,648 10,038 11,280
Total average assets 190,747 162,929 154,675 165,896 150,815
Total average shareholders' equity 14,683 12,511 10,558 11,546 8,732
PROFITABILITY RATIOS
Return on average assets 0.71% 0.56% 0.26% (0.71%) 0.19%
Return on average shareholders' equity 9.21% 7.23% 3.80% (10.21%) 3.29%
Net interest margin (3) 3.66% 3.71% 3.55% 3.60% 3.89%
CAPITAL & LIQUIDITY RATIOS
Shareholder's equity to total assets 7.46% 7.93% 7.36% 6.13% 6.78%
Total loans to deposits 88.23 81.94 75.51 72.22 87.66
ASSET QUALITY RATIOS
Net charge-offs to average loans 0.10% 0.03% 2.00% 4.51% 0.28%
Reserve for loan losses to total loans outstanding 1.75 1.94 2.01 2.50 2.78
Reserve For loan losses to non-performing loans 127.80 124.33 101.88 68.50 755.56
Non-performing loans to total loans outstanding (4) 1.37 1.56 2.00 3.66 0.37
Non-performing assets to total assets 1 .23 1 .47 2.23 2.96 0.30
</TABLE>
(1) Included in 1992 is a one-time income adjustment of $200,000 for the
cumulative effect of a change in accounting principle.
(2) Per share data have
been restated for a seven percent stock dividend paid May 10, 1996.
(3) Net interest margin is computed by dividing taxable equivalent net interest
income by average interest earning assets.
(4) Non-performing loans include restructured loans, loans which have been
placed on non-accrual status and loans where principal or interest becomes
90 days or more past due. Non-performing loans are charged down and/or
reserved to the expected recoverable amounts.
4 -- Peoples State Bank
<PAGE>
Quarterly Consolidated Results of Operations (unaudited)
-------------- * --------------
The following is a summary of the quarterly consolidated results of operations
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996
Three months ended
December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------------
(in 000's except per shame data)
<S> <C> <C> <C> <C>
Interest income $ 4,015 $ 3,815 $ 3,509 $ 3,343
Net interest income 1,808 1,732 1,614 1,547
Provision for loan losses 75 150 150 150
Other income (loss) 62 83 101 171
Other expenses 1,073 1,148 1,170 1,126
Income before income taxes 722 517 395 442
Net income 438 340 293 281
Net income per common share (1) $ 0.33 $ 0.26 $ 0.24 $ 0.22
Book value per share $ 12.00 $ 11.69 $ 11.04 $ 11.08
Dividends per share $ 0.12 $ 0.08 $ 0.08 $ 0.07
<CAPTION>
1995
Three months ended
December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------------
(in 000's except per shame data)
<S> <C> <C> <C> <C>
Interest income $ 3,364 $ 3,161 $ 3,027 $ 2,880
Net interest income 1,564 1,356 1,371 1,330
Provision for loan losses 100 30 105 115
Other income (46) 39 69 18
Other expenses 1,032 985 1,052 977
Income before income taxes 386 460 283 256
Net income 206 255 247 197
Net income per common share (1) $ 0.17 $ 0.21 $ 0.21 $ 0.16
Book value per share $ 11.02 $ 10.55 $ 10.36 $ 10.07
Dividends per share $ 0.09 $ 0.08 $ 0.07 $ 0.07
</TABLE>
(1) Per share data have been restated for the seven percent stock dividend paid
May 10, 1996.
1996 Annual Report -- 5
<PAGE>
Consolidated Balance Sheets
-------------- * --------------
<TABLE>
<CAPTION>
December 31,
1996 1995
(S in 000's)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,152 $ 3,904
Short-term investments 109 1,756
Investment securities at market value 48,557 38,250
Loans:
Total loans 158,231 122,862
Less reserve for loan losses (2,763) (2,381)
------------------------------------------
Net loans 155,468 120,481
Premises and equipment 4,120 3,770
Other real estate owned 532 599
Other assets 3,117 2,743
------------------------------------------
TOTAL ASSETS $ 219,055 $ 171,503
==========================================
LIABILITIES
Deposits:
Non-interest bearing $ 9,887 $ 8,057
Interest bearing 169,459 141,891
------------------------------------------
Total deposits 179,346 149,948
Short-term borrowings 5,283 1,378
Long-term debt 15,881 5,470
Accrual for investment security purchases 1,000 248
Other liabilities 1,205 863
------------------------------------------
TOTAL LIABILITIES 202,715 157,907
SHAREHOLDERS' EQUITY
Common stock, par value SI per share; 20,000,000 shares authorized,
1,361,099 and 1,153,523 issued and outstanding at December 31,
1996 and December 31, 1995, respectively 1,361 1,154
Surplus 13,061 9,906
Retained earnings 2,013 2,458
Net unrealized gain (loss) on investments available-for-sale (95) 78
------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 16,340 13,596
------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 219,055 $ 171,503
==========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6 -- Peoples State Bank
<PAGE>
Consolidated Statements of Income
-------------- * --------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME ($ in 000's, except per share data)
Interest and Fees on loans $ 12,152 $ 9,527 $ 8,073
Interest on short-term investments 220 147 122
Investment securities:
Taxable 2,233 2,619 1,857
Exempt from federal income tax 77 139 332
---------------------------------------------------
2,310 2,758 2,189
---------------------------------------------------
TOTAL INTEREST INCOME 14,682 12,432 10,384
INTEREST EXPENSE
Deposits 7,449 6,481 5,181
Interest on borrowed funds 532 250 125
---------------------------------------------------
TOTAL INTEREST EXPENSE 7,981 6,731 5,306
---------------------------------------------------
NET INTEREST INCOME 6,701 5,701 5,078
PROVISION FOR LOAN LOSSES 525 350 1,400
---------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,176 5,351 3,678
OTHER INCOME
Service charges on deposit accounts 215 196 172
Gain (loss) on sale of loans and securities 18 (220) 304
Insurance claim recovery 416
Other income 184 104 71
---------------------------------------------------
TOTAL OTHER INCOME 417 80 963
OTHER EXPENSES
Salaries and employee benefits 2,493 2,059 1,820
Occupancy expenses 285 207 195
Furniture and equipment 433 315 345
(Gain) loss on sale or other real estate owned (42) 69 358
Repossession and collection costs 122 114 142
Other 1,226 1,282 1,240
---------------------------------------------------
TOTAL OTHER EXPENSES 4,517 4,046 4,100
---------------------------------------------------
INCOME BEFORE INCOME TAXES 2,076 1,385 541
PROVISION FOR INCOME TAXES 724 480 140
---------------------------------------------------
NET INCOME $ 1,352 $ 905 $ 401
===================================================
PER SHARE DATA
Net income $ 1.05 $ 0.75 $ 0.37
Dividends paid 0.35 0.31 0.26
Book value 12.00 11.02 9.80
Book value {excluding net unrealized
gain (loss)} 12.07 10.95 10.40
</TABLE>
The accompanying notes are an integral part of these financial statements.
1996 Annual Report - 7
<PAGE>
Consolidated Statements of Shareholders' Equity
-------------- * --------------
<TABLE>
<CAPTION>
Common Retained Unrealized
Shares Stock Surplus Earnings Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------------------
($ in 000's, except number of shares)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 961,555 $962 $7,261 $1,815 $0
Stock issuance 127,769 128 1,748
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 20,600 20 302
Net income 401
Net unrealized loss on investments available-for-sale (700)
Cash dividends (289)
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 1,109,924 1,110 9,311 1,927 (700)
Stock issuance 16,163 16 212
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 27,436 28 383
Net income 905
Net unrealized gain on investments available-for-sale 778
Cash dividends (374)
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,153,523 1,154 9,906 2,458 78
Stock dividend 81,392 81 1,251 (1,332)
Stock issuance 99,431 99 1,492
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 26,754 27 412
Net Income 1,352
Net unrealized loss on investments available-for-sale (173)
Cash dividends (465)
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,361,100 $1,361 $13,061 $2,013 ($95)
=================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
8 -- Peoples State Bank
<PAGE>
Consolidated Statements of Cash Flows
-------------- * --------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($ in 000's)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income for the year $ 1,352 $ 905 $ 401
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Depreciation and amortization 331 234 206
Provision for loan losses 525 350 1,400
(Gain) loss on sale of loans and investments (18) 220 (304)
Net amortization (accretion) on investments 112 167 243
Deferred income taxes 226 151 257
Net loss (gain) on sale of other real estate owned (42) 69 358
Change in other assets and liabilities 394 (1,657) (3,925)
--------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,880 439 (1,364)
INVESTING ACTIVITIES
Investment security purchases (36,205) (13,141) (19,896)
Proceeds from investment sales 11,777 18,189 12,606
Proceeds from investment maturities 13,517 3,463 5,766
Proceeds from loan sales 533
Net (increase) decrease in loans (35,353) (20,484) 3,60l
Capital expenditures (240) (787) (97)
Proceeds on sale of other real estate owned 491 1,201 1,356
--------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (46,013) (11,559) 3,869
FINANCING ACTIVITIES
Net increase (decrease) in deposits 29,398 14,405 (14,063)
Net increase (decrease) in borrowed funds 13,891 (3,206) 9,582
Dividends paid (465) (374) (289)
Proceeds from issuance of common stock 1,910 464 2,198
--------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 44,734 11,289 (2,572)
--------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,601 169 (67)
Cash and cash equivalents at beginning of year 5,660 5,491 5,558
--------------------------------------------
Cash and cash equivalents at end of year $ 7,261 $ 5,660 $ 5,491
============================================
</TABLE>
The accompanying notes are an integral part of these financial statements
1996 Annual Report -- 9
<PAGE>
Notes to Consolidated Financial Statements
---------- * --------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by The Peoples State Bank conform
with generally accepted accounting principles and with general practice within
the banking industry.
The significant policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of The Peoples State
Bank and its wholly owned subsidiary PSB Realty Company. All material
intercompany transactions have been eliminated.
Basis of Financial Statements
Income and expenses are recorded on the accrual basis of accounting except for
certain fees which are recorded principally on the cash basis, which does not
differ materially from the accrual basis.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates, that are particularly susceptible to significant change,
relate to the determination of allowance for losses on loans and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for losses on loans
and foreclosed real estate, management obtains independent appraisals for
significant properties. While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to allowances may
be necessary based on changes in local economic conditions.
Investment Securities
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Bank has the ability at the
time of purchase to hold securities until maturity or on a long-term basis, they
are classified as held-to-maturity investments and carried at amortized
historical cost. Securities to be held for indefinite periods of time and not
intended to be held to maturity or on a long-term basis are classified as
available-for-sale and carried at fair value. Securities held for indefinite
periods of time include securities that management intends to use as part of its
asset and liability management strategy and that may be sold in response to
changes in interest rates and changes in various other factors.
Revenue Recognition
Interest on commercial and real estate mortgage loans is accrued and credited to
operations based upon the principal amount outstanding. Interest on consumer
loans is recognized on the accrual basis using the Rule of 78 method or the
simple interest method. Origination fees and costs for commercial and real
estate mortgage loans are deferred and recognized as an adjustment to yield.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or market value,
determined using the individual loan basis, adjusted for unamortized origination
fees and costs.
Reserve for Loan Losses
The reserve for loan losses is based on management's periodic evaluation of the
effects on the loan portfolio of current economic conditions and other pertinent
indicators, and reflects an amount that, in management's opinion, is adequate to
absorb losses in the existing portfolio. Additions to the reserve arise from the
provision charged to operations or form the recovery of amounts previously
charged-off. Loan charge-offs reduce the reserve. Loans are charged-off when
there has been permanent impairment of the related carrying values.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated allowances for
depreciation and amortization. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 10 to 40 years for buildings and 3 to 20 years for
equipment. Maintenance, repairs and minor renewals are charged to expense as
incurred. Expenditures for improvements and major renewals are capitalized and
depreciated over their estimated useful lives. Gains and losses on dispositions
are charged to current operations.
10 -- Peoples State Bank
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------- * --------------
NOTE A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Real Estate Owned (OREO)
OREO comprises real and personal properties acquired in partial or total
satisfaction of problem loans. The properties are recorded at the lower of cost
or fair market value at the date acquired. Losses arising at the time of the
acquisition of such properties are charged against the reserve for loan losses.
Subsequent declines in the value of OREO assets, net operating expenses and the
gain or loss on sale of OREO assets are charged directly to other expenses.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences
relate primarily to loan origination fees and costs (deferred for financial
statement purposes but not for income tax purposes), the reserve for loan losses
(deductible for financial statement purposes but not for income tax purposes),
and depreciable assets (use of different depreciation methods and lives for
financial statement and income tax purposes). The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
cash items, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods.
Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
No. 125. "Accounting for Transfer and Servicing Financial Assets and
Extinguishment of Liabilities." The statement provides accounting and reporting
standards for distinguishing transfers of financial assets that are sales from
transfer that are secured borrowings. It also established accounting
requirements for all servicing assets and liabilities. The Standard was to be
effective beginning January 1, 1997: however, the FASB issued Statement No.
127 which delays certain provisions of the Statement until January 1, 1998. The
Bank does not anticipate any material impact to earnings upon applying this
Standard.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentations.
NOTE B -- INVESTMENT SECURITIES
The Bank adopted the provisions of Financial Accounting Standards Board
Statement No. 115. "Accounting for Certain Investments in Debt and Equity
Securities" on January 1, 1994.
Concurrent with the Bank's initial adoption of the FASB "Guide to Implementation
of Statement No. 115 on Accounting for Certain Investments in Debts and Equity
Securities", management reassessed the appropriateness of the classification of
all securities held. On December 1, 1995, the Bank transferred investment
securities held-to-maturity with an amortized cost of $32,774,000 and unrealized
losses of $255,000 to available-for-sale classification. The following is a
summary of the investment portfolio by the respective security category (in
000's):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Available-For-Sale Securities Cost Gains Losses Market value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury securities and obligations of the
U.S. Government and its agencies $ 43,165 $ 154 $ (178) $ 43,141
Obligations of states and political subdivisions 648 0 (5) 643
U.S. Government agency-backed collateralized
mortgage obligations 3,570 0 (114) 3,456
Corporate notes 84 1 0 85
Other debt securities 237 0 (1) 236
-----------------------------------------------------
Total debt securities 47,704 155 (298) 47,561
Common stocks 996 996
-----------------------------------------------------
Total available-for-sale securities $ 48,700 $ 155 $ (298) $ 48,557
=====================================================
</TABLE>
1996 Annual Report - 11
<PAGE>
Notes to Consolidated Financial Statements
-------------- * --------------
NOTE B -- INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Available-For-Sale Securities Cost Gains Losses Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995
U.S Treasury securities and obligations of the
U.S. Government and its agencies $ 27,785 $ 181 $ (58) $ 27,908
Obligations of states and political subdivisions 3,288 105 (11) 3,382
U.S. Government agency-backed collateralized
mortgage obligations 5,531 8 (110) 5,429
Corporate notes 110 2 112
Other debt securities 318 1 319
------------------------------------------------------------
Total debt securities 37,032 297 (179) 37,150
Common stocks 1,100 1,100
------------------------------------------------------------
Total available-for-sale securities $ 38,132 $ 297 $ (179) $ 38,250
============================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996, 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. (In 000's):
<TABLE>
<CAPTION>
Estimated
Amortized Market
Available-For-Sale Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 66 $ 66
Due after one year through five years 17,473 17,416
Due after five years through ten years 15,975 15,923
Due after ten years 10,620 10,700
Mortgage-backed securities and collateralized mortgage obligations 3,570 3,456
---------------------------------------------
Total available-for-sale securities $ 47,704 $ 47,561
=============================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1995, by contractual maturity, are shown below (in 000's). 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>
Estimated
Amortized Market
Available-For-Sale Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,277 $ 1,290
Due after one year through five years 11,352 11,393
Due after five years through ten years 5,630 5,658
Due after ten years 13,242 13,380
Mortgage-backed securities and collateralized mortgage obligations 5,531 5,429
------------------------------------------
Total available-for-sale securities $ 37,032 $ 37,150
==========================================
</TABLE>
Proceeds from the sales of investment securities available-for-sale during 1996,
1995 and 1994 were $11,777,000 and $18,189,000, and $12,606,000, respectively.
Gross gains and losses realized on sales during 1996 were $106,000, and
$88,000, respectively. Gross gains and losses realized on sales during 1995
were $51,000 and $271,000, respectively. Gross gains and losses realized on
sales during 1994 were $338,000 and $34,000, respectively.
Net unrealized gains (losses) on securities available-for-sale, included as a
separate component of shareholders' equity, was ($95,000) in 1996 and $78,000 in
1995.
Securities, having a carrying value of $24,886,000 at December 31, 1996, and
$13,935,000 at December 31, 1995, were pledged to secure public deposits.
repurchase agreements and other purposes required by law. Market values were
$24,818,000 and $14,058,000, respectively.
12 - Peoples State Bank
<PAGE>
Notes to Consolidated Financial Statements
-------------- * --------------
NOTE C -- LOANS
The following is a summary of loan categories at December 31 (in 000's):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 25,481 $ 17,779
Commercial mortgages 18,304 12,721
Real estate mortgages 73,542 70,452
Consumer 40,904 21,910
--------------------------------
Total loans $ 158,231 $ 122,862
================================
</TABLE>
The Bank did not sell mortgage loans in 1996 or 1995. The balance of the
mortgages sold portfolio serviced by the Bank as of December 31, 1996 and 1995
was $2,214,000 and $2,956,000, respectively.
NOTE D -- RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses are summarized for the year as
follows (in 000,s):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,381 $ 2,061 $ 2,712
Provision charged to operating expenses 525 350 1,400
Recoveries of loans previously charged-off 528 415 231
Loans charged-off (671) (445) (2,282)
------------------------------------
Balance at end of year $ 2,763 $ 2,381 $ 2,061
====================================
</TABLE>
NOTE E -- NON-PERFORMING ASSETS
The following summary presents information regarding non-performing assets at
December 31 (in 000's):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans:
Mortgages $ 1,741 $ 1,101 $ 1,097
Commercial 68 164 416
Consumer 35 153 144
------------------------------------
Total non-accrual loans 1,844 1,418 1,657
Restructured loans 277 494 366
Accruing loans past due 90 days or more 41 3
------------------------------------
Total non-performing assets 2,162 1,915 2,025
Other real estate owned 532 599 1,508
------------------------------------
Total non-performing assets $ 2,694 $ 2,514 $ 3,531
====================================
</TABLE>
Non-accrual loans are those on which the collectibility of the full amount of
interest is in question, but management deems the principal to be substantially
collectible. As such, interest is recognized only as received or when the loan
is removed from non-accrual status. If interest due on nonaccrual loans had
been accrued at the original contract rates, it is estimated that income before
taxes would have been greater by $146,000, $94,000, and $107,000 at December 31,
1996, 1995, and 1994, respectively. These amounts are exclusive of amounts which
would have been accrued on nonperforming loans charged off during the year.
Restructured loans are those whereby a debtor was granted a concession in the
interest rate or a concession in other terms of the original loan agreement due
to the financial difficulties of the debtor.
1996 Annual Report -- 15
<PAGE>
Notes to Consolidated Financial Statements
--------------- * ----------------
NOTE F -- LOANS TO RELATED PARTIES
In the ordinary course of business, the Bank makes loans to its directors and
executive officers and expects to continue making such loans in the future.
These loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility. At
December 31, 1996 and 1995, certain directors and executive officers, and
companies in which they have 10% or more beneficial ownership, were indebted to
the Bank in the aggregate amount of $1,073,000 and $1,140,000, respectively.
During 1996, $343,000 of new loans were granted and repayments totalled
$410,000.
NOTE G -- PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following as of December 31
(in 000's):
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,012 $ 1,012
Buildings and improvements 2,680 2,325
Furniture and equipment 1,140 946
Computer equipment 744 536
Construction in progress 21 102
------------------------------------------
5,597 4,921
Less accumulated depreciation 1,477 1,151
------------------------------------------
Total premises and equipment $ 4,120 $ 3,770
==========================================
<CAPTION>
NOTE H -- DEPOSITS
The following is a summary of deposit categories at December 31 (in 000's):
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing:
Demand deposits $ 9,887 $ 8,057
Interest bearing:
NOW accounts 17,179 17,705
Savings accounts 45,564 21,421
Time deposits 106,716 102,765
------------------------------------------
Total interest bearing 169,459 141,891
------------------------------------------
Total deposits $ 179,346 $ 149,948
==========================================
</TABLE>
For the year ended December 31, 1996, 1995 and 1994, cash payments for interest
amounted to $7,887,000, $6,682,000 and $5,326,000, respectively,
At December 31, 1996 and 1995, certificates of deposit of $100,000 or more
totaled $16,008,000 and $11 726,000. respectively. Interest expense on
certificates of deposit of $100,000 or more amounted to $718,000 in 1996 and
$625,000 in 1995. The remaining maturity on certificates of deposit of $100,000
or more as of December 31 is presented below (in 000's):
<TABLE>
<CAPTION>
MATURING IN: 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3 months or less $ 3,971 $ 3,074
Over 3 through 6 months 2,729 1,532
Over 6 through 12 months 5,684 2,615
Over 12 months 3,624 4,505
------------------------------------------
$ 16,008 $11,726
==========================================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
-------------- * --------------
NOTE I -- SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (in 000's):
<TABLE>
<CAPTION>
Weighted Average Weighted Average
1996 Interest Rate 1995 Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities solo under agreements to repurchase $1,450 4.52% $1,239 5.19%
Federal Home Loan Bank 3,305 6.75%
Treasury tax and loan notes 528 5.09% 139 5.30%
--------------------------------------------------------------------
$5,283 $1,378
====================================================================
</TABLE>
At December 31, 1996 and 1995, short-term borrowings were collateralized by
investment securities with carrying values and market values of $7,731,000 and
$7,682,000, and $5,080,000 and $4,817,000, respectively.
NOTE J -- LONG-TERM DEBT
Long-term debt as of December 31 consists of the following (in 000's):
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FHLB Advance -- 6.04% fixed rate, unsecured note. Monthly payments of interest
only: maturing in 1998. $ 5,000 $ 5,000
FHLB Convertible Select Advance -- 5.72% fixed until October 1998, then
callable quarterly or rate floats to LIBOR + .07%, Monthly payments of interest
only: maturing October 2001. 5,000
FHLB Convertible Select Advance -- 4.97% fixed until March 1997, then rate
may float quarterly to three month LIBOR + .08% at FHLB discretion or putable
at Bank's discretion. Monthly payments of interest only; maturity December 2001. 5,000
8.375% mortgage note payable to bank. Monthly payments of $4,060: maturing in 2015. 461 470
8.375% mortgage note payable to bank. Monthly payments of $3,655: maturing in 2016. 420
--------------------------------
$ 15,881 $ 5,470
================================
</TABLE>
Aggregate maturities of long-term debt for subsequent years are as follows (in
000's):
<TABLE>
<S> <C>
1997 $ 20
1998 5,021
1999 23
2000 25
2001 10,027
Subsequent to 2001 765
</TABLE>
NOTE K -- INCOME TAXES
As of December 31, 1996 and 1995 total deferred tax assets recognized for
deductible temporary differences amounted to $570,000 and $776,000, while total
deferred tax liabilities recognized for taxable temporary differences amounted
to $127,000 and $107,000, respectively.
The components of income tax expense were as follows (in 000's):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable (receivable) $ 498 $ 329 $ (108)
Deferred charge 226 151 248
------------------------------------------------
$ 724 $ 480 $ 140
================================================
</TABLE>
1996 Annual Report -- 15
<PAGE>
Notes to Consolidated Financial Statements
----------- * ----------
NOTE K -- INCOME TAXES (continued)
For the year ended December 31, 1996, 1995 and 1994, cash payments for income
taxes amounted to $301,000, $285,000, and $0, respectively.
The reasons for the difference between the provision for income taxes and the
amount computed by applying the statutory Federal income tax rate are as follows
(in 000's):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate of 34% $ 706 $ 471 $ 184
Increase (reduction) in taxes resulting from:
State income taxes 4
Interest expense exclusion 4 7 14
Tax exempt earnings (51) (59) (125)
Other 61 61 67
--------------------------------------------------
Provision for income taxes $ 724 $ 480 $ 140
=================================================
</TABLE>
NOTE L -- STOCK OPTIONS
During 1995, the Bank adopted a Stock Option Plan. Under the plan, the Bank may
grant incentive and non-qualified stock options to officers and key employees.
The plan provides for the granting of a maximum of 160,500 stock options
adjusted to give effect for stock dividends, splits and similar circumstances.
Incentive stock options are granted at the fair market value at dates of grant
and the maximum term of an option may not exceed ten years. They are fully
vested at the end of four years. The option price per share for non-qualified
stock options may not be less than the lower of fair market value of a share on
the date the option is granted or fair market value of the Bank's common stock
as of January 1 of the year the option is granted, and the maximum term of an
option may not exceed ten years. Incentive stock options and non-qualified stock
options become exercisable at such times and such installments as set by the
Compensation Committee of the Board.
In 1996, the Bank adopted a Directors Stock Option Plan. Under the plan, the
Bank may grant non-qualified stock options to all non-employee directors of the
Bank. The plan provides for granting of a maximum of 50,000 non-qualified stock
options, adjusted to give effect for stock dividends, splits and similar
circumstances. These options are granted at the fair market value at the dates
of the grant and the maximum term of an option may not exceed ten years. The
current plan is structured such that these options are exercisable over a three
year vesting period, and is subject to any modifications as set by the
Compensation Committee of the Board.
A summary of the status of the Bank's Stock Option Plan as of December 31, and
changes during the years ending on those dates is presented below.
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding January 1 26,750 $ 13.08 0 $ 0
Granted 31,750 15.38 26,750 13.08
Exercised 40 13.08 0
Options outstanding December 31 58,460 14.33 26,750 13.08
Options exercisable at December 31 6,647 13.08 0 0
Options available for grant at December 31 152,000 133,750
Weighted-average fair value of options
granted during the year 11.16 9.68
</TABLE>
The following information applies to options outstanding at December 31, 1996:
Number outstanding 58,460
Range of exercise prices $13.08--$16.38
Weighted-average exercise price $14.33
Weighted-average remaining contractual life 8.8 years
16 -- Peoples State Bank
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------- * --------------
NOTE L -- STOCK OPTIONS (continued)
On January 1, 1996, the Bank elected to continue to follow current accounting
rules for these stock option plans under APB Opinion 25 and related
Interpretations. Since the exercise price of each option equals the market price
of the Bank's stock on the date of grant, no compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
based on the fair value of the options at the grant dates consistent with the
method of Statement of Financial Accounting Standards 123, Accounting for Stock-
Based Compensation, the Bank's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (000's) As reported $1.352 $ 905
Pro forma 1,118 734
Earnings per share As reported 1.05 .75
Pro forma .87 .61
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996, and 1995: dividend payments of $.32 for all
years: expected volatility of 24.35 and 24.85 percent; risk-free interest rates
of 5.9 and 6.7 percent; and expected lives of 10 years.
NOTE M -- RETIREMENT PLANS
The Bank provides a defined contribution profit sharing and 401(K) plan to
employees who meet the eligibility requirements. The discretionary profit
sharing contribution rate is determined annually by the Board of Directors.
Under the 401 (K) plan, the Bank contributes a matching percentage to employee
salary deferral contributions. For the year ended December 31, 1996, 1995 and
1994, total expense charged to operations amounted to $86,000, $66,000 and
$55,000. respectively.
As of January 1, 1995, the Bank established an Employee Stock Ownership Plan
(ESOP) covering all employees who meet the minimum age and length of service
requirements. The discretionary ESOP contribution is determined annually by the
Board of Directors. For the year ended December 31, 1996 and 1995 total ESOP
retirement plan expense charged to operations amounted to $42,000 and $29,200.
respectively.
The Bank maintains supplemental executive retirement plans providing for key man
life insurance upon the lives of certain executives of the Bank, as well as
salary continuation retirement benefits for those executives. Pursuant to the
Plans, on December 31, 1996 the Bank purchased key man life insurance policies
providing for death benefits payable to the Bank in the event that any such
executive shall die in the course of his employment with the Bank. Each
insurance policy is funded by a single premium payment and accumulates cash
surrender value tax deferred. The policies contain no surrender charge. Each
year the Bank will accrue for the respective executives' salary continuation
benefits. As of December 31, 1996 the aggregate cash surrender value of the
policies was $995.000.
NOTE N -- COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk
The Bank is involved in financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit and financial guarantees which involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The Bank's
approximate exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit and financial guarantees written as of December 31 is shown
below (in 000's).
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $ 14,593 $ 10.109
Standby letters of credit and financial guarantees written 1,109 1,816
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained if deemed necessary
by the Bank upon extension of credit is based on management's credit evaluation
of the creditor. The type of collateral may vary, however, a significant portion
of these financial instruments are secured through real estate.
1996 Annual Report - 17
<PAGE>
Notes to Consolidated Financial Statements
-------------- * --------------
NOTE N - COMMITMENTS AND CONTINGENCIES (continued)
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Litigation
The Bank is involved in litigation of a routine nature arising in the ordinary
course of business. It is the opinion of management and counsel that the
ultimate resolution of the matters will not have a material effect on the Bank's
financial position.
Concentration of credit risk
The Bank grants residential, commercial and consumer loans to customers in
surrounding communities of their East Berlin, Hanover, Dover, and Manchester,
Pennsylvania offices. Although the Bank has a diversified loan portfolio, their
debtors' ability to honor their contracts is dependent upon various economic
factors.
NOTE O - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107. "Disclosures about Fair
Value of Financial Instruments," requires that the Bank disclose estimated fair
values for its financial instruments. The estimated fair value amounts have
been determined by the Bank using available market information and appropriate
valuation methodologies. However, considerable judgement is required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Bank could realize in a current market exchange. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments (in 000's):
Cash and short-term investments
For cash and short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment securities
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair value is based on dealer quotes.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
mortgages, real estate mortgages and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
Fair value approximates carrying amount for adjustable rate loans.
The fair value of fixed rate loans is estimated based on present values using
applicable risk-adjusted spreads to the U.S. Treasury curve to approximate
current rates offered for loans.
Deposit Liabilities
Under Statement 107, the fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand as of December
31, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. The
fair estimates do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Long-term debt
Rates currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
18 - Peoples State Bank
<PAGE>
Notes To Consolidated Financial Statements
---------- * ------------
NOTE O -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Commitments to extend credit, standby letters of credit, and financial
guarantees written
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet items as of December 31, 1996 and 1995 which
total $15,702 and $11,925, respectively; as these instruments are generally
priced at market at the time of funding.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 7,261 $ 7,261 $ 5,660 $ 5,660
Investment securities 48,557 48,557 38,250 38,250
Net loans 155,468 157,860 120,481 123,280
Financial liabilities;
Deposits 179,346 179,447 149,948 150,657
Short-term borrowings 5,283 5,283 1,378 1,378
Long-term debt 15,881 15,353 5,470 5,555
</TABLE>
NOTE P -- PER SHARE DATA AND DIVIDEND RESTRICTIONS
Net income per share is computed based on the weighted average number of shares
of stock outstanding during each year, giving retroactive effect to a 7% stock
dividend issued May 10, 1996. The weighted average shares outstanding for the
years ended December 31, 1996, 1995 and 1994, were 1,286,677, 1,208,677 and
1,072,556, respectively.
The Pennsylvania Banking Code restricts the availability of surplus for dividend
purposes. At December 31, 1996, 1995 and 1994, $13,061,000, $9,906,000 and
$9,311,000, respectively, was not available for dividends.
NOTE Q -- NONCASH TRANSACTIONS
During 1996, the Bank acquired land and building improvements in noncash
transactions through the issuance of $120,000 in common stock and assuming a
$425,000 mortgage note. During 1995, the Bank acquired land and building
improvements in a noncash transaction through issuance of $175,000 in common
stock and assuming a $472,000 mortgage note.
<PAGE>
Report of Independent Certified Public Accountants
--------------*-------------
THE BOARD OF DIRECTORS
PEOPLES STATE BANK
We have audited the accompanying consolidated balance sheet of The Peoples State
Bank as of December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
financial statements of The Peoples State Bank as of December 31, 1996, and for
each of the two years in the period ended December 31, 1996, were audited by
Harry Ness and Company whose report dated January 21, 1997, expressed an
unqualified opinion on these statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
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 our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above, present fairly,
in all material respects, the financial position of The Peoples State Bank as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Stambaugh * Ness, P.C.
(Successor to Harry Ness & Company)
York, Pennsylvania
January 21, 1997
20 - Peoples State Bank
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
-------------- * --------------
The purpose of this discussion is to focus on the financial information, trends,
and statistical data of The Peoples State Bank. Reference should be made to the
financial statements and the selected financial data presented elsewhere in this
report for a complete understanding of the following discussion and analysis.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
The record results for 1996 reflect the continued resurgence of the Bank's
profitability and growth as the Bank's net income for 1996 was $1,352,000
compared to $905.000 in 1995 and $401,000 in 1994. This represents increases of
49.4% and 125.7%, respectively. Earnings per share were $1.05, $.75 and $.37 for
1996, 1995 and 1994, respectively.
Record asset levels were reached in 1996 with total year end assets at
$219,055,000 compared to $171,503,000 for the prior year or an increase of
27.7%.
Enabling this exceptional growth was the comparable growth in total
shareholders' equity which increased $2,744,000 or 20.2% in 1996 compared to
$1,948,000 or 16.7% in 1995. Excluding the unrealized gains and losses on
securities available-for-sale, shareholders' equity increased $2,917,000 or
21.6% in 1996 and $1,170,000 or 9.5% in 1995 due to increased earnings and
issuance of new capital via private placements.
Strengthening the balance sheet also entailed maintaining a conservative loan
loss reserve relative to the declining balance of nonperforming loans. Overall,
the asset quality has continued to improve to the point of comparing favorably
to the Bank's peer group. As of year end 1996, the Bank had over 127% loan loss
reserve coverage of its non-performing loans compared to 124% at yearend 1995.
The ratio of total non-performing loans to total loans at yearend 1996 was
1.37 % versus 1.56% at the end of 1995. Net loan change offs were $143,000 in
1996 compared to $30,000 in 1995 and provision for loan losses was $525,000 and
$350,000 in 1996 and 1995, respectively.
The following discussion outlines the more important factors and trends
affecting the results of operations of the Bank for the three years ended 1996
as presented in the financial statements of The Peoples State Bank.
Net Interest Income
Net interest income represents the difference between interest income and
interest expense. Net interest income is an effective measurement of how well
management has balanced the Bank's interest rate sensitive assets and
liabilities while maintaining appropriate interest margins. The following table
sets forth for the periods indicated a summary of the changes in interest earned
and interest paid resulting from changes in volume and changes in rates.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to: (1) Due to: (1)
- ------------------------------------------------------------------------------------------------------------------------------------
($ in 000's)
INTEREST EARNED ON Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 2,747 ($ 122) $ 2,625 $ 608 $ 846 $ 1,454
Investments: taxable (408) 22 (386) 247 515 762
tax exempt (49) (13) (62) (220) 27 (193)
Short-term investments 95 (22) 73 (24) 49 25
-------------------------------------------------------------------------------------------
TOTAL $ 2,385 ($ 135) $ 2,250 $ 611 $ 1,437 $ 2,048
===========================================================================================
INTEREST PAID ON
- ------------------------------------------------------------------------------------------------------------------------------------
Savings deposits $ 546 $ 208 $ 754 ($ 127) $ 25 ($ 102)
Time deposits 77 136 213 395 1,007 1,402
Short term borrowings (40) (22) (62) 11 28 39
Long term debt 348 (3) 345 0 86 86
-------------------------------------------------------------------------------------------
TOTAL $ 931 $ 319 $ 1,250 $ 279 $ 1,146 $ 1,425
===========================================================================================
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of each.
1996 Annual Report - 21
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
----------- * -----------
FINANCIAL SUMMARY (continued)
Total interest income increased $2,250,000 or 18.1% in 1996 and $2,048,000 or
19.7% in 1995 and decreased $1,271,000 or 10.9% in 1994. Total interest expense
increased $1,250,000 or 18.6% in 1996 and $1,425,000 or 26.9% in 1995 and
decreased $951,000 or 15.2% in 1994. Net interest income increased $1,000,000 or
17.5% in 1996 and $623,000 or 12.3% in 1995 compared to decrease of $320,000 or
5.9% in 1994. The increase in 1996 and 1995 reflect the substantial growth in
loans and deposits in new markets. Hanover and Manchester, and the successful
marketing efforts of the Bank's products in well established markets, East
Berlin and Dover, Pennsylvania.
The decreases in 1994 reflect the sharp decline in rates as well as the decline
in loan volume resulting from loan sales, pay-offs and charge-offs.
Additionally, 1994 was impacted by the charge-off of $258,000 of interest income
on loans placed on nonaccrual including the continuing nonaccrual of $107,000 on
outstanding nonperforming loans at yearend 1994. At yearend 1996 and 1995, the
amount of interest income in nonaccrual status was approximately $146,000 and
$94,000, respectively.
Management has been closely monitoring the level of high cost deposits purchased
in the last several years and is carefully investing excess funds with increased
emphasis on asset/liability and interest margin management. As a result, the net
interest margin continued to improve in 1996 and 1995.
Provision For Loan Losses
The provision for loan losses which is charged to operations is based on the
trends in the outstanding loan portfolio, the historical amount of net loan
losses incurred, and management's estimation of potential future losses based on
an evaluation of portfolio risk and economic conditions. The provision for loan
losses was $525,000 in 1996, $350,000 in 1995, and $1,400,00 in 1994. The
increase of 1996 over 1995 was a direct result of the notable increase in loans
outstanding versus an indication of any further credit deterioration of the loan
portfolio. Net chargeoffs were $143,00 or .10% of average total loans
outstanding in 1996. The significant reduction in 1995 was justified by the low
net chargeoffs during the year of $30,000 or .03% of average total loans
outstanding, and reflected a return to normalcy with respect to problem loans.
The substantial loan loss provisions in 1994 resulted from the resolution of
loans adversely classified by prior regulatory examinations. 1994 marked the
completion of the asset resolution plans developed in prior years. Significant
classified loans were identified and charged off or a sufficient reserve
established for any expected uncollectible or questionable balances. As a
result, the net charge-offs for 1994 were $2,051,000 or 2.00% of average total
loans outstanding. As a percentage of total loans outstanding, the reserve for
loan losses was 1.75% at the end of 1996, 1.94% at the end of 1995 and 2.01% at
the end of 1994. Most importantly, the reserve for loan losses to non-performing
loans was 127.8% at yearend 1996 versus 124.3% at yearend 1995, indicating full
loss reserve coverage of non-performing loans.
Additional information on the provision and reserve for loan losses is contained
in the supplemental financial data section of the Annual Report.
Other Income and Other Expenses
The analysis below sets forth in comparative form the percentage of other
income, other expenses and net expenses to total average assets for the three
years ended December 31.
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income to average assets .22% .05% .62%
Less: Other expenses to average assets 2.37% 2.48% 2.65%
--------------------------------
Net expenses to average assets 2.15% 2.43% 2.03%
================================
</TABLE>
Other Income
Other income is comprised of service charges, mortgage servicing fees, gains on
sales of loans and securities, safe deposit box rents and other miscellaneous
fees. During 1996 other income increased $337,000 due to $220,000 in the
security losses in 1995 versus gains of $18,000 in 1996. The remaining $99,000
or 33.0% increase in other income in 1996 is primarily attributed to the
increased penetration of credit life and accident and health insurance on loan
products. During 1995, other income decreased $883,000 due to a restructure of
the investment portfolio in 1995 which resulted in security losses of $220,000
versus securities gains in 1994 of $304,000. Also during 1994, the Bank settled
a fidelity bond claim with its bonding insurance company relating to certain
transactions of its former chief lending and executive officer. The claim
resulted in a non-recurring lump sum payment to the Bank in the amount of
$416,000 in 1994. Excluding the security losses and the settlement payment,
other income increased $57,000 over 1994 or 23.4% in 1995.
22 -- Peoples State Bank
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
----------- * -----------
FINANCIAL SUMMARY (continued)
Other Expenses
Other expenses are defined as those expenses other than interest expense, the
provision for loan losses and the provision for federal income taxes. For 1996,
total other expenses increased $471,000 or 11.6% compared to a decrease of
$54,000 or 1.3% in 1995 and an increase of $654,000 or 19.0% in 1994. The
following addresses the changes in the components of other expenses.
Salaries and Employee Benefits
This is the most significant non-interest expense category, representing 55.2%,
50.9%, and 44.4% of the total other expenses for 1996, 1995 and 1994,
respectively. The increases in personnel expenses of 21.1% in 1996, 13.1% in
1995, and 15.0% in 1994 reflect the growth in staff due to the growth in assets,
including the recent doubling of the Bank's retail offices from two to four
locations, as well as competitive salary pressures and rapidly rising health
care and benefit costs. These increases were also impacted by the necessity to
acquire additional banking expertise and strengthen management at all levels in
recent years. These additions were needed to comply with regulatory mandates to
restructure the Bank, to enable safe and sound management of the Bank, and to
enable it to continue to grow on a profitable basis.
Occupancy and Furniture and Equipment
These combined categories increased 37.7% in 1996, decreased 3.3% in 1995, and
increased 13.5% in 1994. The expenses for 1996 reflect the annualized
depreciation on capital expenditures, real estate taxes and maintenance of a new
branch office in Hanover and the majority of a year's related costs on the
Manchester office.
Loss and sale of other real estate and repossession and collection costs
combined totalled $80,000 in 1996, $183,000 in 1995 and $500,000 in 1994. These
costs represent writedowns on other real estate subsequent to foreclosure,
losses on sale of these assets and related liquidation costs.
Other expenses decreased $56,000 or 4.4% in 1996. These expenses declined
primarily due to the further decrease in FDIC insurance costs of over $178,000
and a reduction in the legal and professional costs. These declines were
partially offset by notable increased costs related to the new offices, the
expanded ATM network and the strong balance sheet growth in 1996. Other expenses
increased $42,000 in 1995 or 3.4% despite a notable decline in FDIC insurance
premiums of $221,000 in 1995. Offsetting this decline were increases in:
marketing and promotional costs of approximately $101,000, increased legal,
professional and examination costs of $33,000, increased educational and
employee related costs of $23,000 and other expenses of approximately $106,000,
most of which are attributable to expanding the branch network in Hanover and
Manchester and developing the ATM network with the Rutter's Farm Stores and
overall new business development costs. Other expenses decreased $72,000 or 5.5%
as management established firm controls on these expenses in 1994 due to the
excessive losses on foreclosed assets.
Income before income taxes was $2,076,000, $1,385,000 and $541,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Provision For Income Taxes
For the three year period ended December 31, 1996, the provision for income
taxes was $724,000 in 1996, $480,000 in 1995 and $140,000 in 1994.
Net Income
Net income was $1,352,00 or $1.05 per share, $905,000 or $.75 per share and
$401,000 or $.37 per share for the years ended December 31, 1196, 1995 and 1994,
respectively. In summary, the sharp increases in net income for 1996 and 1995
were due to the strong growth in net interest income and a dramatic reduction in
the required loan loss provision. Although the bank reported net income in 1994,
results of operations were impacted significantly by non-performing assets, loan
loss provisions and collection costs.
FINANCIAL CONDITION
The Peoples State Bank functions as a financial intermediary and, as such, its
financial condition can be examined in terms of developing trends in its sources
and uses of funds. These trends are the result of both external environmental
factors such as changing economic conditions, regulatory changes and
competition. Also, internal environmental factors such as management's
evaluation as to the best use of funds under these changing conditions.
1996 Annual Report -- 25
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
--------------------------------
FINANCIAL CONDITION (continued)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Daily Daily Daily
Average Increase Average Increase Average
Balance (Decrease) % Balance (Decrease) % Balance
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDING SOURCES (in 000's)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits and borrowed funds:
Deposits:
Non-interest bearing $ 8,680 $ 2,003 30.0% $ 6,677 $ 633 10.5% $ 6,044
Interest bearing 157,398 18,559 13.4% 138,839 4,064 3.0% 134,775
---------------------------------------------------------------------------------
Total deposits 166,078 20,562 14.1% 145,516 4,697 3.3% 140,819
Short-term borrowings 2,086 (768) (26.9%) 2,854 224 8.5% 2,650
Long-term debt 6,971 5,630 419.8% 1,341 1,341
---------------------------------------------------------------------------------
Total deposits and borrowed funds 175,135 25,424 17.0% 149,711 6,262 4.4% 143,449
Other liabilities 929 222 31.4% 707 39 5.8% 668
Shareholders' equity 14,683 2,172 17.4% 12,511 1,953 18.5% 10,558
---------------------------------------------------------------------------------
TOTAL SOURCES $190,747 $ 27,818 17.1% $162,929 $ 8,254 5.3% $154,675
=================================================================================
FUNDING USES
Interest earning assets:
Short-term investments $ 4,233 $ 1,781 72.6% $ 2,452 ($ 518) (17.4%) $ 2,970
Investment securities 36,721 (7,294) (16.6%) 44,015 1,136 2.6% 42,879
Total loans and loans held-for-sale 142,116 32,110 29.2% 110,006 7,414 7.2% 102,592
---------------------------------------------------------------------------------
Total interest earning assets 183,070 26,597 17.0% 156,473 8,032 5.4% 148,441
Other assets 7,677 1,221 18.9% 6,456 222 3.6% 6,234
---------------------------------------------------------------------------------
TOTAL USES $190,747 $ 27,818 17.1% $162,929 $ 8,254 5.3% $154,675
=================================================================================
</TABLE>
FUNDING SOURCES
Deposits and Borrowed Funds
The primary source of funds, total average deposits increased $20.6 million or
14.1 % compared to a increase of $4.7 million or 3.3% in 1995. These increases
are directly attributed to aggressive marketing efforts for core deposit
relationships and competitive money marker savings deposit pricing in both
existing and new office locations, As reflected in the funding sources section
of the above table, the composition of the change in 1996 consisted of a $18.6
million or 13.4% increase in interest bearing deposits and a $2.0 million or
30.0 % increase in non-interest bearing deposits. Whereas. the composition of
the change in 1995 was a $4.1 million or 3.0 % increase in interest bearing
deposits and 5.6 million or 10.5% increase in non-interest bearing deposits. The
notable increase in non-interest bearing deposits in recent years reflects the
declining interest rate environment and the Banks increasing share of local
business relationships. Also, The Bank has marketed and promoted customer
relationship accounts. ie. New Adventures Club, MegaBuckS Kids Club and
Celebrity Money Market Accounts which offer low or no minimum balance checking
accounts. However, most notable about the deposit composition was the $17.1
million or 47.2% increase in savings deposit balances compared to a $1.4 million
or 1.4% decrease in time deposit balances in 1 996. This dramatic change in
deposit composition toward a lower cost of funds base will prove to be very
beneficial to the Bank's future earnings.
Of the $4.1 million increase in average interest bearing deposits in I 995.
approximately $8.6 million were time deposits which was offset by a reduction in
average other interest bearing deposits of $4.5 million.
24 -- Peoples State Bank
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
-------------------------
FUNDING SOURCES (continued)
Comparison of yearend deposits indicates an increase in non-interest bearing
deposits of $1.8 million or 22.7% at yearend 1996 and $1.9 million or 30.2% at
yearend 1995 over the previous yearend balances. Similarly, interest bearing
deposits at yearend 1996 were up $27.6 million or 19.4% over yearend 1995 and
1995 yearend interest bearing deposits were up $12.5 million or 9.7% over the
prior year. Total yearend deposits increased $29.4 million or 19.6% and $14.4
million or 10.6% at yearend 1996 and 1995, respectively. Both years' increases
reflect the resurgence of solid growth for the Bank as it expands its branch
network and develops these new market areas.
Average short-term borrowings decreased $8 million in 1996 compared to an
increase of $2 million in 1995. Short-term borrowings are used as an alternate
source of funds in periods of high loan demand or low liquidity. In mid 1995,
the Bank joined the Federal Home Loan Bank (FHLB) which enabled the Bank to
borrow short and long term funds collateralized with the Bank's assets. Prior to
then the Bank used collateralized repurchase agreements with a major brokerage
firm.
Average long-term debt increased $5.6 million in 1996 as the Bank took advantage
of lower cost long term borrowings from the Federal Home Loan Bank (FHLB) which
totalled $15.0 million at yearend 1996 versus $5.0 million at yearend 1995. Most
of the increase in funds were invested in investment securities resulting in
additional net interest spread for the future. In addition to the financing of
the Hanover office in 1995, the Bank also financed the Manchester office in the
amount of $.4 million. At yearend 1996 and 1995, total short and long term
borrowed funds were $21.2 million, respectively.
Other Liabilities
Average other liabilities increased by 51.4% to $.9 million compared to an
increase of 5.8% to $.7 million in 1995. Other liabilities include accrued
interest payable on deposit accounts and accrued expenses. Yearend 1996 and 1995
other liabilities included an accrual of approximately $1.0 million and $.3
million, respectively, for investments purchased prior to yearend, but not
settled as of that date.
Shareholders' Equity
Average shareholders' equity increased $2.2 million or 17.4% compared to an
increase of $2.0 million or 18.5% during 1995. The growth in 1996 is primarily a
result of a stock issuance of $1.6 million in the third quarter as well as new
capital raised via the Bank's Dividend Reinvestment Plan. Likewise, the increase
in average shareholders' equity in 1995 reflects the stock issuance in the
fourth quarter of 1994 of $1.9 million. Yearend 1996 shareholders' equity is
$2.7 million or 20.2% over 1995. A further discussion of shareholders' equity is
contained in the Capital Resources section of this Management's Discussion.
FUNDING USES
Short-Term Investments
Average short-term investments, primarily federal funds sold, increased $1.8
million or 72.6% and decreased $.5 million or 17.4% in 1996 and 1995,
respectively. Short-term investments fluctuate throughout the year based on
cashflow at any given time. These investments represent an immediate liquidity
position which is important given the strong loan demand in recent years.
Investment Securities
The average investment portfolio decreased $7.3 million or 16.6% in 1996 versus
an increase of $1.1 million or 2.6% in 1995. The 1996 decrease and small
increase in 1995 average investment portfolio reflects strong loan
demand and the necessity to maintain more liquidity in the balance sheet.
However, as reflected in the investment portfolio table in the supplemental
financial data section of this annual report, yearend 1996 investment securities
increased $10.3 million or 30.0% as a result of fourth quarter investment of
FHLB borrowings.
Loans
Average total loans including loans held for sale increased $32.1 million or
29.2% in 1996 compared to a $7.4 million or 7.2% increase in 1995. As reflected
in the loan portfolio analysis table in the supplemental financial data section
of this annual report, yearend 1996 total loans increased $35.4 million or 28.8%
from the 1995 yearend amount and yearend 1995 total loans increased $20.5
million or 20.0%. The trend of increased loans outstanding can be directly
associated with the strong increases net interest income in 1996 and 1995.
The ratio of total loans (including loans held for sale) as a percentage of
deposits in a common measure of the Bank's loan demand. The average and yearend
ratios were 85.6% and 88.2% in 1996, 75.6% and 81.9% in 1995, and 72.9% and
75.5% in 1994, respectively.
With the increased funds availability from FHLB, the average and yearend ratios
indicate the Bank has adequate liquidity. Management's policy is to ensure that
the balance sheet maintains adequate liquidity with a ratio of loans to deposits
of below 90%.
1996 Annual Report -- 25
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
-------------- * --------------
FUNDING USES (continued)
Other Assets
Total average other assets increased $1.2 million or 18.9% compared to a $.2
million or 3.6% increase in 1995. The change in 1996 was primarily the result
of the investment in two new offices in Hanover and Manchester. Other real
estate owned as of yearend 1996 was $.5 million compared to $.6 as of yearend
1995. These balances have been written down to levels deemed to be realizable
upon sale of the property.
In summary, total average assets increased $27.8 million or 17.1% in 1996 and
$8.3 million or 5.3% in 1995. Having completed the restructure of the Bank in
1994, the Bank's strategic plan turned to initiating steady growth into new
market areas which occurred during 1995 and gained notable momentum in 1996.
The yearend 1996 assets at $219.1 million were up $47.6 million or 27.7% from
the yearend 1995 assets of $171.5 million.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary functions of asset/liability management are to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive
earning assets and liabilities. Liquidity management involves the ability to
meet the cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs.
Management seeks to avoid fluctuating net interest margins and to enhance growth
of net interest income through periods of changing interest rates. The
management of liquidity and interest rate sensitivity must be coordinated since
decisions involving one may influence the other.
Marketable investment securities maturing in one year or less and other liquid
assets such as cash and due from banks, federal funds sold, and mortgage
inventory held for sale totalled $7.3 million at December 31, 1996 compared to
$5.7 million at December 31, 1995. Maturing loans and loan repayments are also
sources of liquidity. An average of over $2.4 million in loans is scheduled to
mature or be repaid each month in 1997 compared to $1.4 million reported in the
prior year.
A major source of liquidity results from the Bank's access to customers who
provide core deposits. Core deposits consist of retail demand deposits,
interest bearing checking accounts, savings deposits and small denomination
certificates of deposit. To the extent that rates paid on these deposits are
competitive, they remain a reliable source of funds. The Banks also has the
option to borrow funds from correspondent banks and can borrow from various
sources using the investment portfolio as collateral. In addition, the Bank has
significant borrowing ability from the Federal Home Loan Bank. The ability to
utilize these various funding sources depends on the Bank's strength, asset
portfolio, diversity of depositors and types of deposit instruments offered. As
of the third quarter, the most recent FHLB reporting period, the Bank had
borrowing capacity in excess of $76.7 million assuming additional purchases of
FHLB stock of approximately $4.3 million.
Interest rate sensitivity varies with different types of interest earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to the prime rate differ considerably from
long-term investment securities and fixed rate loans. Similarly, time deposits
over $100,000, the FDIC insured money market, supernow accounts and short-term
certificates of deposit are much more rate sensitive than passbook savings
accounts and long-term certificates of deposit. The shorter term interest rate
sensitivities are the key to measurement of the interest sensitivity gap or
excess interest bearing liabilities over interest earning assets.
The following table shows the approximate interest sensitivity gaps for two
different time intervals as of December 31, 1996 and 1995 taking into
consideration the estimated paybacks on loans. The total excess of interest
bearing liabilities over earning assets, based on a one year time period was
approximately $27.1 million or 13.2% of yearend 1996 earning assets.
<TABLE>
<CAPTION>
% of
Total Ending
0-180 181-365 0-365 Earning
Asset and Liability Gap Analysis Days Days Days Assets
- ---------------------------------------------------------------------------------------
(in 000's)
<S> <C> <C> <C> <C>
Interest earning assets $ 55,680 $ 33,150 $ 88,830 43.4%
Interest bearing liabilities 87,307 28,641 115,948 56.6%
-----------------------------------------------
Interest sensitivity gap,
December 31, 1996 $(31,627) $ 4,509 $(27,118) (13.2%)
-----------------------------------------------
Interest sensitivity gap,
December 31, 1995 $(15,038) $ 6,037 $ (9,001) (5.6%)
===============================================
</TABLE>
26 -- Peoples State Bank
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
--------- * ---------
LIQUIDITY AND INTEREST RATE SENSITIVITY (continued)
This analysis indicates a significant widening in the negative gap position
which has occurred primarily as a result of the rapid growth of the Bank's money
market fund. For purposes of this analysis, those funds are assumed to be
totally rate sensitive. However, management analyses indicate that these funds
and other savings accounts are not totally rate sensitive and minimizing
interest rate risk for the total negative position indicated is not warranted.
As required by recently issued regulatory guidelines. Management is analyzing
and establishing procedures to better measure the true interest rate risk
position of the Bank. This will ensure a stable earnings pattern for our
shareholders by minimizing the effect of volatile interest rates.
CAPITAL RESOURCES
Shareholders' Equity and Dividends
Shareholders' equity at December 31, 1996 was $16.3 million compared to $13.6
million at December 31, 1995. This increase of $2.7 million was a result of new
capital raised via a private placement of common stock of $1.4 million and the
issuance of $.2 million in connection with the construction of the new
Manchester office; net income of $1.4 million less dividends paid of $.5
million; plus new capital generated via the Dividend Reinvestment and Stock
Purchase Plan of $.4 million. due to the yearend 1996 rising rate environment
the market value of the investment portfolio declined by $.2 million from
yearend 1995 resulting in an accounting charge to shareholders' equity for net
unrealized loss on investments available-for-sale. Growth in shareholders'
equity in 1995 was $2.0 million or 16.7%. Shareholders have elected to reinvest
cash dividends and voluntarily purchase additional shares of the Bank's common
stock totaling $1.8 million since the inception of the Plan in 1990.
With capital resources being provided by common stock, surplus and retained
earnings, the Bank's objective is to place an emphasis on current and future
capital needs based upon anticipated growth. For the three year period ended
December 31, 1996, the return on average assets was .71%, .56%, and .26% and the
return on average equity was 9.21%, 7.23%, and 3.80%.
Total dividend payments in 1995 were $465,000 or 34.4% of net earnings compared
to $374,000 or 41.3% of 1995 net earnings. The Bank's ongoing goal as
established in its capital and dividend policy is to maintain a payout ratio
below 40% of net income, except in unusual situations.
REGULATORY CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC).
Failure to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material effect on the Bank's financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines involving quantitative measures of its assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total risk-based
capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), and Tier 1 capital to adjusted total assets (as defined),
Management believes, as of December 31, 1996, that the Bank meets all the
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC indicated
the Bank was categorized as well-capitalized under the regulatory Framework for
prompt corrective action. There are no conditions or events since the most
recent notification that management believes have changed the Bank's prompt
corrective action category.
1996 Annual Report -- 27
<PAGE>
Management's Discussion & Analysis Of Financial Condition
And Results Of Operations
----------- * -----------
REGULATORY CAPITAL MATTERS (continued)
The following table presents the Bank's capital ratios:
<TABLE>
<CAPTION>
Actual Required
- --------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1996:
Tier 1 Leverage Capital Ratio (1) 7.50% 4.00%
Tier 1 Risk-Based Capital Ratio (2) 11.96% 4.00%
Total Risk-Based Capital Ratio (3) 13.22% 8.00%
As of December 31, 1995:
Tier 1 Leverage Capital Ratio (1) 7.88% 4.00%
Tier 1 Risk-Based Capital Ratio (2) 12.66% 4.00%
Total Risk-Based Capital Ratio (3) 13.91% 8.00%
</TABLE>
(1) Tier 1 leverage capital ratio is defined as the ratio of total tier 1
capital to total tangible assets.
(2) Tier 1 risk-based capital ratio is defined as the ratio of total tier 1
capital to total risk-weighted assets.
(3) Total risk-based capital is defined as the ratio of total risk-based
capital to total risk-weighted assets.
The Bank's ability to maintain the required levels of regulatory capital is
substantially dependent upon the success of the Bank's Capital and Funding
Plans, the impact of future economic events of the Bank's loan customers, and
the Bank's ability to manage its interest rate and control its growth and other
operating expenses.
28 -- Peoples State Bank
<PAGE>
Supplemental Financial Data
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND
INTEREST DIFFERENTIAL
The financial and statistical data presented in the following pages provided a
detailed review of the Bank's business activities, The following table shows an
analysis of the composition of net interest income for the last three years. ($
in 000's)
<TABLE>
<CAPTION>
December 51,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) $ 142,116 $ 12,152 8.55% $ 110,006 $ 9,527 8.66% $ 102,592 $ 8,073 7.87%
Investments: taxable 35,394 2,233 6.31% 41,870 2,619 6.26% 37,298 1,857 4.98%
tax-exempt 1,327 77 5.80% 2,145 139 6.48% 5,581 332 5.95%
Short-term investments 4,233 220 5.20% 2,452 147 6.00% 2,970 122 4.11%
----------------------------------------------------------------------------------------------------
Total 183,070 14,682 8.02% 156,473 12,432 7.95% 148,441 10,384 7.00%
Tax-exempt adjustment 55 101 189
----------------------------------------------------------------------------------------------------
Tax equivalent yield 14,737 8.05% 12,533 8.01 % 10,573 7.12%
Non-interest earning assets:
Cash and due from banks 3,169 2,299 2,151
Premises and equipment 4,083 3,008 2,700
Other assets 2,968 3,407 3,976
Less reserve for losses (2,543) (2,258) (2,593)
----------------------------------------------------------------------------------------------------
Total $ 190,747 $ 162,929 $ 154,675
====================================================================================================
LIABILITIES &
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 53,398 $ 1,778 3.33% $ 36,273 $ 1,024 2.82% $ 40,806 $ 1,126 2.76%
Time deposits 104,000 5,670 5.45% 102,566 5,457 5.32% 93,969 4,055 4.32%
Short-term borrowings 2,086 102 4.89% 2,854 164 5.75% 2,630 125 4.75%
Long-term debt 6,971 431 6.18% 1,341 86 6.41% 0 0 0%
----------------------------------------------------------------------------------------------------
Total 166,455 7,981 4.79% 143,034 6,731 4.71 % 137,405 5,306 3.86%
Non-interest bearing
liabilities ri es:
Demand deposits 8,680 6,677 6,044
Other 929 707 668
Shareholders equity 14,683 12,511 10,558
---------- --------- ---------
Total $ 190,747 $ 162,929 S 154,675
---------- --------- ---------
Net interest earnings $ 6,701 $ 5,701 $ 5,078
-------- -------- --------
Net yield on earning assets 5.66% 3.64% 3.42%
--------- -------- -------
Tax equivalent yield $ 6,756 3.69% $ 5,802 3.71 % $ 5,267 3.55%
-------- --------- ------- -------- ------- -------
</TABLE>
(1) For the purposes of these computations non-accruing loans are included in
the daily average loan amounts outstanding. This balance also incluses
average mortgage inventory held for sale.
<PAGE>
Investment Securities Portfolio
-------------- * --------------
The following table sets forth the book value of investment securities at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
($ in 000's)
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies and corporations $ 43,141 $ 27,908 $ 35,165
States and political subdivisions 643 3,382 2,674
Collateralized mortgage obligations 3,456 5,429 7,566
Other securities 321 431 546
Common stocks 996 1,100 20
-------------------------------------------
Total $ 48,557 $ 38,250 $ 45,971
-------------------------------------------
</TABLE>
Maturity Distribution
The following table sets forth the maturities of investment securities at
December 31, 1996, the weighted average yields of such securities (calculated by
dividing annualized interest income, including the accretion of discounts and
the amortization of premiums, by the book value of securities) and the tax
equivalent adjustment used in calculating the yields.
<TABLE>
<CAPTION>
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other ($ in 000's)
U.S. Government agencies
and corporations $ 66 9.00% $ 17,416 6.35% $ 15,645 6.94% $ 10,014 6.53%
States and political subdivisions 643 8.14%
Other securities 278 7.40% 43 9.25%
Collateralized mortgage obligations 3,456 5.85%
Common and preferred stocks 996 9.38%
---------------------------------------------------------------------------------------------
$ 66 9.00% $ 17.416 6.35% $ 15,923 6.95% $ 15,152 6.64%
=============================================================================================
Tax equivalent adjustment
for calculation of yield $ 0 $ 0 $ 0 $ 18
========= ======== ======== ==========
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax equivalent basis assuming a tax rate of 34 percent.
Loan Portfolio
The following table shows the Bank's loan distribution at the end of each of the
last five years.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
($ in 000's)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 25,481 $ 17,779 $ 12,686 $ 15,894 $ 21,442
Commercial mortgages 18,304 12,721 11,090 7,335 4,777
Real estate mortgages 73,542 70,452 68,780 74,513 95,741
Consumer 40,904 21,910 9,794 10,301 13,129
---------------------------------------------------------------------
Total $ 158,231 $ 122,862 $ 102,350 $ 108,043 $ 135,089
=====================================================================
</TABLE>
50 -- Peoples State Bank
<PAGE>
Loan Portfolio
-------------- * --------------
The following table shows the amounts of loans outstanding as of December 31,
1996 which, based on the remaining scheduled repayments of principal, are due in
the periods indicated. Also, the amounts due after one year are classified
according to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Within After One But After
One Year Within Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------------
MATURING: ($ in 000's)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 16,064 $ 5,538 $ 3,879 $ 25,481
Commercial mortgages 1,148 3,529 13,627 18,304
Real estate mortgages 1,850 10,173 61,519 73,542
Consumer 9,075 23,497 8,332 40,904
----------------------------------------------------------------------
Total $ 28,137 $ 42,737 $ 87,357 $158,231
======================================================================
INTEREST SENSITIVITY:
Loans maturing after one year with:
Fixed interest rates $ 31,170 $ 17,880
Variable interest rates 11,567 69,477
-------------------------------
Total $ 42,737 $ 87,357
===============================
</TABLE>
The following table presents information concerning the aggregate amount of
non-performing loans for the past five years. Non-performing loans comprise (a)
loans accounted for on a non-accrual basis; (b) loans contractually past due
ninety days or more as to interest or principal payments (but not included in
the non-accrual loans in (a) above); and (c) other loans whose terms have been
restructured from the original loan agreement because of a deterioration in the
financial position of the borrower (exclusive of loans in (a) or (b) above).
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
($ in 000's)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $1,844 $1,418 $1,657 $2,664 $ 326
Accruing loans past due 90 days or more 41 3 0 1,003 422
Loans whose terms have been restructured to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower (1) (2) 277 494 366 292 178
---------------------------------------------------------------------
Total non-performing loans $2,162 $1,915 $2,023 $3,959 $ 926
=====================================================================
</TABLE>
(1) Excludes loans accounted for on a non-accrual basis and 1oans contractually
past due ninety days or more as to interest or principal payments.
(2) Restructured loans are classified as such only until such time as the terms
are substantially equivalent to terms on which new loans with comparable
risks are being made. For purposes of this summary, loans renewed on market
terms existing at the date of renewal are not considered restructured
loans.
Additional information with respect to non-performing loans at December 31,
1996, 1995 and 1994 is reflected in Footnote E to the financial statements
contained herein.
1996 Annual Report -- 31
<PAGE>
Summary of Loan Loss Experience
---------- * -----------
The following table summarizes loan balances at the end of each year and daily
averages; changes in the reserve for loan losses arising from loans charged-off
and recoveries on loans previously charged-off, by loan category; and additions
to the reserve wnich have been charged to expense.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
($ in 000s)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of year $158,231 $122,862 $102,350 $108,043 $135,089
==============================================================================
Daily average total loans $142,116 $110,006 $102,592 $124,190 $130,374
==============================================================================
Balance of reserve for loan losses
at beginning of year $ 2,381 $ 2,061 $ 2,712 $ 3,808 $ 751
Loans charged-off:
Commercial, financial and agricultural 148 135 762 2,270 2
Commercial mortgages 63 0 336 2,890 273
Real estate mortgages 185 183 871 0 0
Consumer 275 127 313 787 96
------------------------------------------------------------------------------
Total loans charged-off 671 445 2,282 5,947 371
Recoveries of loans previously charged-off;
Commercial, financial and agricultural 330 234 63 15 0
Commercial mortgages 38 30 5 304 0
Real estate mortgages 65 77 81 0 0
Consumer 95 74 82 32 12
------------------------------------------------------------------------------
Total recoveries 528 415 231 351 12
------------------------------------------------------------------------------
Net loans charged-off 143 30 2,051 5,596 359
Additions to reserve charged to expense (1) 525 350 1,400 4,500 3,416
------------------------------------------------------------------------------
Balance at end of year $ 2,763 $ 2,381 $ 2,061 $ 2,712 $ 3,808
==============================================================================
Ratio of net charge-offs to average
total loans outstanding 0.10% 0.03% 2.00% 4.51% 0.28%
</TABLE>
(1) The reserve for loan losses is based on management's evaluation of
historical and anticipated net loan charge-offs, analysis of non-performing
loans, prevailing and anticipated economic conditions, and bank industry
standards. In the opinion of management, the reserve is adequate based upon
its evaluation of the various factors affecting the collectibility of
loans. The reserve is increased by provisions charged to operating expense
and reduced by net charge-offs.
The reserve for loan losses has been allocated according to the amount deemed to
be reasonably necessary to provide for the possibility of losses being incurred
within the following cacegories. The allocation is judgmental and is subject to
wide variations depending upon the effect and changes in economic and financial
market conditions upon specific loan customers, and does not necessarily reflect
the expected future charge-offs applicable to each category.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
($ in 000's)
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 768 16.30% $ 768 14.42% $ 628 12.39% $ 769 14.71% $ 1,675 15.87%
Commercial mortgages 142 11.55% 145 10.35% 97 10.84% 85 6.79% 121 3.54%
Real estate mortgages 1,141 46.27% 974 57.35% 1,159 67.20% 1,642 68.97% 1,658 70.87%
Consumer 345 25.88% 240 17.88% 118 9.57% 101 9.53% 230 9.72%
Not allocated 367 N/A 254 N/A 59 0% 115 N/A 124 N/A
---------------------------------------------------------------------------------------------------------
$2,763 100.00% $ 2,381 100.00% $2,061 100.00% $2,712 100.00% $3,808 100.00%
=========================================================================================================
</TABLE>
32 - Peoples State Bank
<PAGE>
DEPOSITS
-------------- * --------------
The average daily amount of deposits is summarized for the periods indicated in
the following table:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
($ in 000's)
<S> <C> <C> <C>
Demand deposits:
Non-interest bearing $ 8,680 $ 6,677 $ 6,044
Interest bearing 17,347 19,008 22,341
Savings 36,051 17,266 18,465
Time deposits 104,000 102,565 93,969
--------------------------------------
TOTAL $166,078 $145,516 $140,819
======================================
</TABLE>
Maturities of time certificates of deposit of $ 100,000 or more outstanding at
December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
($ in 000's)
<S> <C> <C> <C>
3 months or less $ 3,971 $ 3,074 $ 1,437
Over 3 through 6 months 2,729 1,532 2,451
Over 6 through 12 months 5,684 2,615 1,427
Over 12 months 3,624 4,505 2,205
-----------------------------------
TOTAL $16,008 $11,726 $ 7,520
===================================
</TABLE>
1996 Annual Report - 33
<PAGE>
Information for Shareholders
-------------- * --------------
DIVIDEND CALENDAR
Dividends on the Bank's common stock are customarily payable at the end of each
quarter. Payments for voluntary purchases under the Dividend Reinvestment and
Stock Purchase Plan should be received by the transfer agent at least one week
preceding these dividend payment dates.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Investors in The Peoples State Bank common stock, through the Dividend
Reinvestment and Stock Purchase Plan, may reinvest their dividends and make
voluntary payments from $100 up to $3,000 per quarter to purchase additional
common stock of the Bank without service charges or brokerage fees.
Shareholders not yet enrolled, may receive a descriptive brochure and
authorization card for the plan by writing to: Shareholder Relations, The
Peoples State Bank, P.O. Box 1000, East Berlin, PA 17316.
COMMON STOCK
The following firms make a market in The Peoples State Bank common stock.
Inquiries concerning PSB common stock transactions should be directed to: Hopper
Soliday & Co., Inc.; F.J. Morrissey & Co., Inc.; Janney, Montgomery Scott, Inc.;
Ryan Beck & Co.; and W.H. Newbolds & Sons.
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Bank's common stock is traded under the symbol "PSEB". At December 31, 1996,
there were 1,091 shareholders of the Bank's common stock.
Quarter-end high and low stock quotations and dividends paid for the last two
years were:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------
Cash Cash
Stock Price Dividends Stock Price Dividends
Range Paid Range Paid
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED
March 31 $ 15.89 $ 14.95 $ .075 $ 13.08 $ 12.15 $ .065
June 30 17.25 15.50 .080 14.72 12.15 .075
September 30 16.50 15.75 .080 14.95 14.02 .075
December 31 17.25 15.75 .120 15.65 14.02 .094
</TABLE>
The Bank expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements and financial condition.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Bank's common stock is:
Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016
SHAREHOLDERS' MEETING
The Annual Meeting of Shareholders will be held at 2:00 p.m on Tuesday, May 13,
1997 at the East Berlin Community Center, East Berlin, PA.
FORM F-2
Additional copies of the Bank's Annual Report and Form F-2 may be obtained
without charge by written request to Carole Parr, Shareholder Relations, The
Peoples State Bank, P.O. Box 1000, East Berlin, PA 17316.
34 -- Peoples State Bank
<PAGE>
--------------------
PSB DIRECTORS
Carlton L. Jacobs Earl L. Mummert
Chairman
Wayne H. Mummert
Eddie L. Dunklebarger Vice Chairman
Todd E. Elgin Harry B. Nell
John H. Haar Alan J. Stock
J. Raymond Miller John R. Wisler
Sharon E. Myers Advisory Director/Recording Secretary
PSB CORPORATE OFFICERS
Eddie L. Dunklebarger Gary G. Screvig
President Vice President
Chief Executive Officer Operations Division Manager
Anthony N. Leo Danny A Myers
Senior Vice President Vice President
Corporate & Retail Administration Retail Lending Supervisor
Jeffrey M. Seibert Georgia A. Bear
Senior Vice President Vice President
Chief Lending Officer Marketing & Collection Manager
Barry C. Dillman Jane L. Scull
Vice president Vice President
Credit Administration Commercial Services
Sally J. Leas Jeffrey A. Livingston
Vice President Assistant Vice President
Human Resources Loan Operations Manager
Edward P. Williams Christine M. Orndorff
Assistant Vice President Assistant Compliance Officer
Controller Legal Assistant
Facilities Manager
Darla L. Border
Barbara A. Stern Security Officer
Chief Auditor
--------------------
<PAGE>
Our Banking Locations
-----------------------------
PSB FULL SERVICE OFFICES
1-800-PSB-9868
MAIN OFFICE -- EAST BERLIN OFFICE
100 East King Street
East Berlin, PA 17316
717-259-9510
Vickie L. Hoffheins Mary L. Crabill
Assistant Vice President Assistant Vice president
Branch Manager Consumer Loan Officer
June A. Trimmer
Operations Manager
DOVER OFFICE
3421 Carlisle Road
Dover, PA 17315
717-292-9605
Sharon B. Buzynski Sandra V. Sheaffer
Assistant Vice President Assistant Vice President
Branch Manager Assistant Branch Manager
NORTH HANOVER OFFICE
1191 Eichelberger Street
Hanover, PA 17331
717-633-6555
Linda A. Sanders Merle J. Zehr
Assistant Vice President Assistant Vice President
Branch Manager Commercial Loan Officer
Susan L. Behm Terri A. Schuchart
Assistant Branch Manager Operations Manager
MANCHESTER OFFICE
155 Glen Drive
Manchester, PA 17345
717-266-9868
Tammy M. Gemmill Shan H. Patterson
Operations Manager Commercial Loan Officer
--------------------
<PAGE>
Our Banking Locations
-------------- * --------------
CARLISLE STREET OFFICE -- MORTGAGE OFFICE
600 Carlisle Street
Hanover, PA 17331
717-633-5118
Donna A. Auchey Anne S. Mummert
Assistant Vice President Consumer Loan Officer
Mortgage Officer
Timothy E. Sneeringer
Operations Manager
PSB REMOTE ATM LOCATIONS
Rutter's Farm Stores
2251 North George Street -- York, PA 17402
791 Delta Road -- Red Lion, PA 17356
Route 616 -- York New Salem, PA 17404
2210 Old Trail Road -- Etters, PA 17319
420 North Main Street -- Spring Grove, PA 17362
5305 Susquehanna Trail -- York, PA 17402
2878 East Prospect Street -- York, PA 17402
4430 West Market Street -- York, PA 17404
1450 Mt. Zion Road -- York, PA 17402
1099 Haines Road -- York, PA 17402
1520 Pennsylvania Avenue -- York, PA 17404
129 Leaders Heights Road -- York, PA 17403
CR's Friendly Market
250 Ridge Road -- York Springs, PA 17372
-------------- * --------------
<PAGE>
PEOPLES STATE BANK
-------------- * --------------
1-800-PSB-9868
East Berlin, PA 17316 - 717-259-9510
Dover, PA 17315 - 717-292-9605
Hanover, PA 17331 (Eichelberger Street) - 717-633-6555
Hanover, PA 17331 (Carlisle Street) - 717-633-5118
Manchester, PA 17345 - 717-266-9868
<PAGE>
Exhibit 99G
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-4
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934 for the
Quarter Ended March 31, 1997.
FDIC Insurance Certificate Number 12984.
THE PEOPLES STATE BANK
(Exact name of bank as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-0962860
(I.R.S. Employer Identification No.)
100 East King Street, Post Office Box 1000
East Berlin, Pennsylvania
(Address of principal executive offices)
17316
(Zip Code)
Bank's telephone number including area code (717) 259-9510
Not Applicable
(Form name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the bank was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicated the number of shares outstanding of each of the bank's
classes of common stock, as of the latest practicable date 1,472,048, as of
April 9, 1997.
Page 1 of 15 Pages
(Including Appendices)
<PAGE>
THE PEOPLES STATE BANK
FORM F-4
For the Quarter Ended March 31, 1997
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Balance Sheets - March 31, 1997 and
December 31, 1996 3
Statements of Income - Three months ended
March 31, 1997 and 1996 4
Statements of Cash Flows - Three months ended
March 31, 1997 and 1996 5
Statements of Shareholders' Equity 6
Notes to Financial Statements
March 31, 1997 7
Supplemental Information 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
March 31, 1997 vs. March 31, 1996 9
<CAPTION>
PART II OTHER INFORMATION
- --------------------------
<S> <C>
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form F-3 13
Exhibit 11. Computation of Earnings per Common Share 14
SIGNATURES 15
- ----------
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------- ---------------------
<S> <C> <C>
ASSETS ($ in 000's)
Cash and due from banks $4,830 $7,152
Federal funds sold 1,085 109
Investment securities (market value--
March 31, 1997 - $54,582
December 31, 1996 - $48,557) 54,582 48,557
Loans:
Total loans 164,092 158,231
Less reserve for loan losses (2,995) (2,763)
------------------- ---------------------
Net loans 161,097 155,468
Premises and equipment 4,397 4,120
Recoverable federal income taxes
Other real estate owned 295 532
Other assets 4,099 3,117
------------------- ---------------------
TOTAL ASSETS $230,385 $219,055
=================== =====================
LIABILITIES
Deposits:
Non-interest bearing $11,236 $9,887
Interest bearing 176,597 169,459
------------------- ---------------------
Total deposits 187,833 179,346
Short-term borrowings 2,459 5,283
Long-term debt 20,876 15,881
Accrual for investment security purchases 1,000
Other liabilities 1,200 1,205
------------------- ---------------------
TOTAL LIABILITIES 212,368 202,715
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share;
20,000,000 shares authorized, 1,471,833 and
1,361,099 issued and outstanding at March 31,
1997 and December 31, 1996, respectively 1,472 1,361
Surplus 14,745 13,061
Retained earnings 2,369 2,013
Net unrealized gain(loss) on investments
available-for-sale (569) (95)
------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY 18,017 16,340
------------------- ---------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $230,385 $219,055
=================== =====================
</TABLE>
-3-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
1997 1996
---- ----
(in 000's, except per share data)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,409 $2,738
Interest on federal funds sold 62 22
Investment securities:
Taxable 762 545
Exempt from federal income tax 46 38
--------------- --------------
808 583
--------------- --------------
TOTAL INTEREST INCOME 4,279 3,343
INTEREST EXPENSE
Deposits 2,050 1,689
Interest on borrowed funds 316 107
--------------- --------------
TOTAL INTEREST EXPENSE 2,366 1,796
--------------- --------------
NET INTEREST INCOME 1,913 1,547
PROVISION FOR LOAN LOSSES 150 150
--------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,763 1,397
OTHER INCOME
Service charges on deposit accounts 58 42
Gain (loss) on sale of
loans and securities 77 61
Other income 100 68
--------------- --------------
TOTAL OTHER INCOME 235 171
OTHER EXPENSES
Salaries and employee benefits 696 616
Occupancy expenses 74 70
Furniture and equipment 137 105
Loss(gain) on sale of other real estate owned (12) (20)
Repossession and collection costs 1 48
Other 365 307
--------------- --------------
1,261 1,126
--------------- --------------
INCOME BEFORE INCOME TAXES 737 442
PROVISION FOR INCOME TAXES 258 161
--------------- --------------
NET INCOME $479 $281
=============== ==============
PER SHARE DATA (Restated for the seven percent stock dividend paid May 10, 1996).
Net income $0.35 $0.22
Dividends paid 0.09 0.07
Book value 12.24 11.08
</TABLE>
-4-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
------------------- ---------------------
(in 000's)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES
Net income (loss) for the year $ 479 $ 281
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 87 70
Provision for loan losses 150 150
(Gain) loss on sale of loans and investments (77) (60)
Net amortization (accretion) on investments 37 33
Net loss(gain) on sale of other real estate owned (12) (20)
Change in other assets and liabilities (2,302) (815)
------------------- ---------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,638) (361)
INVESTING ACTIVITIES
Net (increase) decrease in investment securities (6,459) (1,565)
Net (increase) decrease in loans (5,779) (8,773)
Capital expenditures 200 370
------------------- ---------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (12,038) (9,968)
FINANCING ACTIVITIES
Net increase(decrease) in deposits 8,487 6,232
Net increase(decrease) in borrowed funds 2,171 1,310
Dividends paid (123) (93)
Proceeds from issuance of common stock 1,795 177
------------------- ---------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 12,330 7,626
------------------- ---------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,346) (2,703)
Cash and cash equivalents at beginning of year 7,261 5,660
------------------- ---------------------
Cash and cash equivalents at end of year $ 5,915 $ 2,957
=================== =====================
</TABLE>
-5-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Common Retained Unrealized
Shares Stock Surplus Earnings Loss
------ ----- ------- -------- ----
($ in 000's, except number of shares)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 1,153,523 1,154 9,906 2,458 78
Stock dividend 81,392 81 1,251 (1,332)
Stock issuance 99,431 99 1,492
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 26,754 27 412
Net income 1,352
Net unrealized gain(loss) on investments
available-for-sale (173)
Cash dividends (465)
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,361,100 1,361 13,061 2,013 (95)
Stock issuance 104,527 105 1,588
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 6,206 6 96
Net income 479
Net unrealized gain(loss) on investments
available-for-sale (474)
Cash dividends (123)
-------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 1,471,833 $1,472 $14,745 $2,369 ($569)
=========================================================================
</TABLE>
-6-
<PAGE>
THE PEOPLES STATE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997
NOTE A--BASIS OF PRESENTATION
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report for the
year ended December 31, 1996.
The Bank paid interest and income taxes of $2,055,000 and $110,000 for the first
three months of 1997; $1,730,000 and $43,873 the first three months of 1996,
respectively.
NOTE B--NON-PERFORMING LOANS (in 000's)
Information with respect to non-accrual loans, other loans contractually past
due ninety days or more as to interest or principal payments and restructured
loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Non-accrual loans $2,072 $1,844
Accruing loans past due
90 days or more 23 41
Restructured loans 279 277
------ ------
Total non-performing loans 2,374 2,162
Other real estate owned 295 532
------ ------
Total non-performing assets $ 2,669 $ 2,694
====== ======
</TABLE>
Non-accrual loans are those on which the collectibility of the full amount of
principal or interest is in doubt, or when the payment of principal or interest
has become contractually 90 days past due unless the obligation is both well
secured and in the process of collection. The non-accrual amounts are net of
charge downs of $173,000 and $157,000 as of March 31, 1997 and December 31,
1996, respectively. Interest on non-accrual loans is recognized only as
received or at a reduced rate.
-7-
<PAGE>
SUPPLEMENTAL INFORMATION-UNAUDITED
AVERAGE BALANCE SHEETS, INTEREST, AND INTEREST RATES
($ IN 000'S)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, 1997 March 31, 1996
-------------------------------------- -----------------------------------
Average Yield/ Average Yield/
Interest earning assets: Balance Interest Rate Balance Interest Rate
-------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans $159,921 $3,409 8.53% $126,163 $2,738 8.68%
Investments: Taxable 46,759 762 6.52% 34,817 545 6.26%
Tax Exempt 3,124 46 5.89% 2,569 38 5.92%
Short-term Investments 4,741 62 5.23% 1,786 22 4.93%
--------- --------- ------ --------- ------- -------
Total 214,545 4,279 7.98% 165,335 3,343 8.09%
Tax Exempt Adjustment 31 31
--------- -------
4,310 8.04% 3,374 8.16%
Non-Interest earning assets:
Cash and Due from Banks 3,799 2,632
Premises and equipment 4,275 4,124
Other assets 3,733 2,757
Less Reserve for losses (2,849) (2,425)
--------- ---------
Total $223,503 $172,423
======== ========
Interest Bearing Liabilities:
Savings deposits $66,437 $588 3.54% $42,900 $314 2.93%
Time deposits 106,852 1,461 5.47% 100,381 1,375 5.48%
Short-term borrowings 2,215 24 4.33% 1,659 22 5.30%
Long-term debt 20,729 293 5.65% 5,469 85 6.22%
--------- --------- ------ --------- ------- -------
Total 196,233 2,366 4.82% 150,409 1,796 4.78%
Non-interest bearing deposits:
Demand deposits 9,462 7,421
Other 1,165 493
Shareholders' equity 16,843 14,100
--------- ---------
$223,503 $172,423
======== ========
Net Interest Earnings $1,913 $1,547
====== ======
Net Annualized Yield On Earning Assets 3.57% 3.74%
===== =====
Tax Equivalent Yield On Earning Assets $1,944 3.62% $1,578 3.82%
====== ===== ====== =====
<CAPTION>
Year ended
December 31,1996
--------------------------------------
Average Yield/
Interest earning assets: Balance Interest Rate
-------- --------- -----
<S> <C> <C> <C>
Loans $142,116 $12,152 8.55%
Investments: Taxable 35,394 2,233 6.31%
Tax Exempt 1,327 77 5.80%
Short-term Investments 4,233 220 5.20%
--------- --------- ---------
Total 183,070 14,682 8.02%
Tax Exempt Adjustment 55
---------
14,737 8.05%
Non-Interest earning assets:
Cash and Due from Banks 3,169
Premises and equipment 4,083
Other assets 2,968
Less Reserve for losses (2,543)
---------
Total $190,747
========
Interest Bearing Liabilities:
Savings deposits $53,398 $1,778 3.33%
Time deposits 104,000 5,670 5.45%
Short-term borrowings 2,086 102 4.89%
Long-term debt 6,971 431 6.18%
--------- --------- ---------
Total 166,455 7,981 4.79%
Non-interest bearing deposits:
Demand deposits 8,680
Other 929
Shareholders' equity 14,683
---------
$190,747
========
Net Interest Earnings $6,701
======
Net Annualized Yield On Earning Assets 3.66%
=====
Tax Equivalent Yield On Earning Assets $6,756 3.69%
====== =====
</TABLE>
-8-
<PAGE>
Restructured loans are those whereby a debtor was granted a concession in the
interest rate or a concession in other terms of the original loan agreement due
to the financial difficulties of the debtor.
Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Bank's financial condition can be examined in terms of developing trends in
its sources and uses of funds. These trends are the result of both external
environmental factors, such as changing economic conditions, regulatory changes
and competition, and internal environmental factors such as Management's
evaluation as to the best use of funds under these changing conditions.
<TABLE>
<CAPTION>
Balance Increase (Decrease)
March 31, 1997 since December 31, 1996
--------------- -------------------------
(in 000's)
FUNDING SOURCES: Amount %
------ ---
<S> <C> <C> <C>
Deposits and borrowed funds:
Non-interest bearing $ 11,236 $ 1,349 13.6
Interest bearing 176,597 7,138 4.2
-------- -------
Total deposits 187,833 8,487 4.7
Borrowed funds 23,335 2,171 10.3
Other liabilities 1,200 (1,005) (45.6)
Shareholders' equity 18,017 1,677 10.3
-------- ------- -----
TOTAL SOURCES $230,385 $11,330 5.2
======== ======= =====
FUNDING USES:
Interest earning assets:
Federal Funds sold $ 1,085 $ 976 n/a
Investment securities 54,582 6,025 12.4
Loans, and mortgage loans held
for sale 164,092 5,861 3.7
-------- -------
Total interest earning assets 219,759 12,862 6.2
Other assets 10,626 (1,532) (14.4)
-------- -------
TOTAL USES $230,385 $11,330 5.2
======== ======= =====
</TABLE>
FUNDING SOURCES
Total deposits increased $8.5 million or 4.7% for the first three months of 1997
as a result of an aggressive money market savings deposit campaign and
certificates of deposit promotions to fund the bank's strong loan demand and a
municipal bond buy program. Also, due to the strong loan demand, borrowed funds
increased $2.2 million or 10.3% since yearend 1996.
-9-
<PAGE>
Other liabilities declined $1.0 million or 45.6% from the yearend 1996
balances as a result of the accrual for investment purchases at yearend 1996.
The increase in shareholders' equity of $1.7 million or 10.3% is a result of the
three months earnings of $.5 million and an unrealized loss on investments
available-for-sale of $.5 million. In addition, a private placement of 100,000
shares of common stock was completed in the first quarter of 1997 which raised
$1.6 million in new capital.
FUNDING USES
Federal funds sold increased $1.0 million and investment securities increased
$6.0 million or 12.4% from yearend 1996 due to the municipal bond buy program.
Loans and mortgage loans held-for-sale increased $5.9 million or 3.7% in the
first quarter of 1997. Other assets decreased $1.5 million or 14.4% over the
yearend 1996 balances which included a decrease of $2.3 million in cash and due
from banks.
In summary, total assets increased $11.3 million or 5.2% in the first three
months of 1997. Although this represents annualized growth in excess of 20.8%
per year, it is not expected that the bank will maintain this rate of growth
throughout 1997.
RESULTS OF OPERATIONS FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Total interest income increased $936,000 or 28.0% for the first quarter of 1997
compared to the same period in 1996 while total interest expense increased
$570,000 or 31.7% for the comparable period. The resulting increase in net
interest income was $366,000 or 23.7% for the quarter ending March 31, 1997
compared to the same quarter in 1996.
Interest and fees on loans increased $671,000 or 24.5% as a result of the
substantial increase in outstanding loan balances. Interest income on
investment securities increased $225,000 or 38.6% due to the increase in average
outstanding balances thereon. The provision for loan losses remained at
$150,000 for the first quarter of 1997 compared to the first quarter of 1996.
Management's loan review procedures continue to assess the adequacy of the loan
loss reserve balance which considers the status of all non-performing loans.
The ratio of loan loss reserve balance to loans was at 1.83% at March 31, 1997
versus 1.75% at year end 1996. The ratio of loan loss reserves balance to
nonperforming loans was at 126.2% versus 127.8% at yearend 1996.
Net interest income after provision for loan losses increased $366,000 or 26.2%
in the first quarter of 1997 compared to the same period in 1996.
Other income increased $64,000 or 37.4% due primarily to increased credit
insurance commissions and fee income on mortgage loans sold to the secondary
market.
Total other expenses increased $135,000 or 12.0% in the first quarter of 1997
compared to the first quarter of 1996. The primary components of the changes
were increased salaries and employee benefits of $80,000 or 13.0%, increased
-10-
<PAGE>
occupancy and furniture and fixtures of $36,000 due to additional branch
locations, decreased gains on sale of other real estate owned of $8,000 and
repossession and collection costs and other expenses of $11,000.
Income before income taxes increased $295,000 or 66.7% for the first quarter
ended 1997 compared to 1996.
The provision for income taxes increased $97,000 as a direct result of the
increased pre-tax income in the first quarter of 1996.
Net income increased $198,000 or 70.5% to $479,000 versus $281,000 for the first
quarter 1997 and 1996 respectively, and earnings per share was $.35 and $.22 or
an increase of 59.1% for the respective periods.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
- --------------------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Liquidity management involves the ability to meet the
cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to avoid fluctuating net interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
Marketable investment securities maturing in one year or less and other liquid
assets such as cash and due from banks and federal funds amounted to $11.5
million at March 31,1997 compared to $7.3 million at yearend 1996. Maturing
loans and repayments are also sources of liquidity.
Historically, the overall liquidity of the Bank has been enhanced by a large
concentration of core deposits and a very stable economic environment in the
market in which the Bank operates. In recent years, there has been a
significant change in the deposit base in that less stable short-term funding
sources, such as money market funds and money market certificates, have been
used more extensively. Although the average balance of large denomination time
deposits, brokered certificates of deposit and short-term borrowings has leveled
off in recent years, maintaining an ability to acquire these funds in volatile
financial markets is key to assuring liquidity. In addition, as a member of the
Federal Home Loan Bank (FHLB), the bank had borrowing capacity, as of yearend
1996, in excess of $76.7 million assuming additional purchases of FHLB stock of
approximately $4.3 million.
Interest rate sensitivity varies with different types of interest earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to the prime rate differ considerably from long-
term investment securities and fixed rate loans. Similarly, time deposits over
$100,000, the FDIC-insured super NOW funds and money market certificates are
much more interest sensitive than passbook savings accounts and long-term
certificates of deposits. The shorter term interest rate sensitivities are the
key to measurement of the interest
-11-
<PAGE>
sensitivity gap, or excess interest bearing liabilities over interest earning
assets.
The following table shows the approximate interest sensitivity gaps for several
different time intervals on a static basis as of March 31, 1997, taking into
consideration the estimated paybacks on loans. As of the most recent quarter-
end, interest earning liabilities repricing in the first year exceeded interest
bearing assets by $38 million or 17.5% of total earning assets.
<TABLE>
<CAPTION>
PSB Static Gap Analysis
% of
Total Ending
0-180 181-365 0-365 Earning
Days Days Days Assets
----- -------- ----- -------
($ in millions)
<S> <C> <C> <C> <C>
Interest earning assets $ 57 $ 30 $ 87 40.1%
Interest bearing liabilities 85 40 125 57.6
--- ---- ---- -----
Interest sensitivity gap,
March 31, 1996 $ (28) $ (10) $ (38) (17.5)%
=== ==== ==== =====
Interest sensitivity gap,
March 31, 1995 $ (17) $ 5 $ (12) (7.1)%
=== ==== ==== =====
Interest sensitivity gap,
December 31, 1995 $ (32) $ 5 $ (27) (13.2)%
=== ==== ==== =====
</TABLE>
Using this static gap analysis and adjusting for a correlation factor that
considers for any given rate change, the extent of a related rate change (by
balance sheet category), the adjusted gap position as of March 31, 1997 is $12.9
million negative.
This analysis indicates that Management closely monitors interest rate risk in
the asset and liability portfolios. Given the current volatile interest rate
environment, a near-balanced gap position is desirable. This enhances a strong
earnings pattern for our shareholders with minimal effect of volatile interest
rates. Minimizing this gap is a continual challenge in a changing interest rate
environment and is one of the primary objectives of the Bank's asset/liability
management strategy.
CAPITAL RESOURCES
- -----------------
Management closely monitors capital adequacy of Bank. Total assets increased
$11,330,000 or 5.2% in the first three months of 1997. Shareholders' equity
increased $1,677,000 or 10.3% in the first three months of 1997. Shareholders'
equity to total assets was 7.82% at March 31, 1997 and 7.50% December 31, 1996.
The Bank's capital position is well above the risk based capital mandate of
4.0%.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM F-3
(a) Exhibits:
Exhibit 11 - Computation of Earnings per Common Share
(b) Reports on Form F-3:
On March 17, 1997, The Peoples State Bank (the "Bank") began a limited
offering of up to 100,000 shares of its $1.00 par value common stock at a price
of $16.25 per share.
The offering was made on a best efforts basis by the executive officers of
the Bank, who will receive no commission or other compensation in connection
with the offering. The Bank sought assistance from a limited number of brokers
for the purpose of identifying investors who meet the qualifications to purchase
shares of common stock in the offering.
The offering was limited to not more than thirty-five investors. Each
investor was required to represent to the Bank that he has experience investing
in stocks of banks and bank holding companies, or has retained an attorney,
accountant, financial advisor or consultant as a purchaser representative.
Further, each investor was required to meet or substantially meet the
qualifications of an "accredited investor" within the meaning of Regulation D
promulgated by the Securities and Exchange Commission. The offering was planned
to continue until the earlier of the date on which subscriptions for 100,000
shares of common stock have been accepted by the Bank or April 30, 1997.
On March 31, 1997, the Bank concluded the offering after receiving
subscriptions for 100,000 shares to eight investors. The proceeds of the
offering will be used for general corporate purposes and will increase the
Bank's regulatory capital.
-13-
<PAGE>
Exhibit 11 - Computation of Earnings per Common Share (Unaudited)
<TABLE>
<CAPTION>
THE PEOPLES STATE BANK
Three
Months Ended
March 31
------------
1997 1996
---- ----
(in 000's except per share data)
<S> <C> <C>
PRIMARY
Income applicable to
common shares $ 479 $ 281
====== ======
Shares
Weighted average number of
common shares outstanding 1,364 1,240
====== ======
Primary earnings per common
share $ .35 $ .22
====== ======
</TABLE>
-14-
<PAGE>
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE PEOPLES STATE BANK
Date: April 21 , 1997 /s/ Eddie L. Dunklebarger
--------------- ---- --------------------------------
Eddie L. Dunklebarger, President
Date: April 21 , 1997 /s/ Edward P. Williams
--------------- ---- --------------------------------
Edward P. Williams, Controller
-15-
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-4
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934 for the
Quarter Ended June 30, 1997.
FDIC Insurance Certificate Number 12984.
THE PEOPLES STATE BANK
(Exact name of bank as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-0962860
(I.R.S. Employer Identification No.)
100 East King Street, Post Office Box 1000
East Berlin, Pennsylvania
(Address of principal executive offices)
17316
(Zip Code)
Bank's telephone number including area code (717) 259-9510
Not Applicable
(Form name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the bank was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicated the number of shares outstanding of each of the bank's
classes of common stock, as of the latest practicable date 1,480,794, as of June
30, 1997.
Page 1 of 16 Pages
(Including Appendices)
<PAGE>
THE PEOPLES STATE BANK
FORM F-4
For the Quarter Ended June 30, 1997
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and
December 31, 1996 3
Statements of Income - Six months ended
June 30, 1997 and 1996 4
Statements of Cash Flows - Six months ended
June 30, 1997 and 1996 5
Statements of Shareholders' Equity 6
Notes to Financial Statements
June 30, 1997 7
Supplemental Information 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1997 vs. June 30, 1996 9
PART II OTHER INFORMATION
- --------------------------
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form F-3 14
Exhibit 11. Computation of Earnings per Common Share 15
SIGNATURES 16
- ----------
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------ -----------------
<S> <C> <C>
ASSETS ($ in 000's)
Cash and due from banks $4,394 $7,152
Short term investments 8,291 109
Investment securities (market value--
June 30, 1997 - $53,655
December 31, 1996 - $48,557) 53,655 48,557
Mortgage loans held for sale 4,134
Loans:
Total loans 164,693 158,231
Less reserve for loan losses (3,007) (2,763)
----------- -----------
Net loans 161,686 155,468
Premises and equipment 4,552 4,120
Other real estate owned 617 532
Other assets 3,357 3,117
----------- -----------
TOTAL ASSETS $240,686 $219,055
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $13,395 $9,887
Interest bearing 181,724 169,459
----------- -----------
Total deposits 195,119 179,346
Short-term borrowings 3,561 5,283
Long-term debt 20,871 15,881
Accrual for investment security purchases 799 1,000
Other liabilities 1,111 1,205
----------- -----------
TOTAL LIABILITIES 221,461 202,715
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share;
20,000,000 shares authorized, 1,480,794
and 1,361,099 issued and outstanding at June 30,
1997 and December 31, 1996, respectively 1,481 1,361
Surplus 14,901 13,061
Retained earnings 2,750 2,013
Net unrealized gain(loss) on investments
available-for-sale 93 (95)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 19,225 16,340
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $240,686 $219,055
=========== ===========
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
($ in 000's, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,571 $2,932 $6,980 $5,670
Interest on short term investments 62 45 124 67
Investment securities:
Taxable 700 507 1,462 1,052
Exempt from federal income tax 180 25 226 63
------------- ------------- ------------- -------------
880 532 1688 1115
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 4,513 3,509 8,792 6,852
INTEREST EXPENSE
Deposits 2,118 1,788 4,168 3,477
Interest on borrowed funds 329 107 645 214
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 2,447 1,895 4,813 3,691
------------- ------------- ------------- -------------
NET INTEREST INCOME 2,066 1,614 3,979 3,161
PROVISION FOR LOAN LOSSES 150 150 300 300
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,916 1,464 3,679 2,861
OTHER INCOME
Service charges on deposit accounts 82 55 140 97
Gain (loss) on sale of loans and securities (19) (3) 58 58
Other income 96 49 196 117
------------- ------------- ------------- -------------
TOTAL OTHER INCOME 159 101 394 272
OTHER EXPENSES
Salaries and employee benefits 733 623 1,429 1,239
Occupancy expenses 76 72 150 142
Furniture and equipment 152 113 289 218
Loss (gain) on sale of other real estate (3) (12) (23)
Repossession and collection costs 16 15 17 63
Other 374 350 739 657
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES 1,351 1,170 2,612 2,296
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 724 395 1,461 837
PROVISION FOR INCOME TAXES 210 102 468 263
------------- ------------- ------------- -------------
NET INCOME $514 $293 $993 $574
============= ============= ============= =============
PER SHARE DATA (Restated for the seven percent
stock dividend paid May 10,1996)
Net income $0.35 $0.24 $0.70 $0.46
Dividends paid 0.09 0.08 0.18 0.15
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1996
---------------- ---------------
(in 000's)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES
Net income (loss) for the year $993 $281
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 226 70
Provision for loan losses 150 150
(Gain) loss on sale of loans and investments (58) (60)
Net amortization (accretion) on investments 38 33
Net loss(gain) on sale of other real estate owned (12) (20)
Change in other assets and liabilities (2,073) (815)
---------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (736) (361)
INVESTING ACTIVITIES
Net (increase) decrease in investment securities (4,890) (1,565)
Net (increase) decrease in loans (10,502) (8,773)
Capital expenditures 807 370
---------------- ---------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (14,585) (9,968)
FINANCING ACTIVITIES
Net increase(decrease) in deposits 15,773 6,232
Net increase(decrease) in borrowed funds 3,268 1,310
Dividends paid (256) (93)
Proceeds from issuance of common stock 1,960 177
---------------- ---------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 20,745 7,626
---------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,424 (2,703)
Cash and cash equivalents at beginning of year 7,261 5,660
---------------- ---------------
Cash and cash equivalents at end of period $12,685 $2,957
================ ===============
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Common Retained Unrealized
Shares Stock Surplus Earnings Loss
------ ----- ------- -------- ----
($ in 000's, except number of shares)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 1,153,523 1,154 9,906 2,458 78
Stock dividend 81,392 81 1,251 (1,332)
Stock issuance 99,431 99 1,492
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 26,754 27 412
Net income 1,352
Net unrealized gain(loss) on investments
available-for-sale (173)
Cash dividends (465)
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,361,100 1,361 13,061 2,013 (95)
Stock issuance 106,377 106 1,618
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 13,317 14 222
Net income 993
Net unrealized gain(loss) on investments
available-for-sale 188
Cash dividends (256)
--------------------------------------------------------------
BALANCE AT JUNE 30, 1997 1,480,794 $1,481 $14,901 $2,750 $93
==============================================================
</TABLE>
<PAGE>
THE PEOPLES STATE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
NOTE A--BASIS OF PRESENTATION
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report for the
year ended December 31, 1996.
The Bank paid interest and income taxes of $4,122,000 and $550,000 for the first
six months of 1997; $3,527,000 and $120,000 the first six months of 1996,
respectively.
NOTE B--NON-PERFORMING LOANS (in 000's)
Information with respect to non-accrual loans, other loans contractually past
due ninety days or more as to interest or principal payments and restructured
loans are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Non-accrual loans $ 1,827 $ 1,844
Accruing loans past due
90 days or more 18 41
Restructured loans 330 277
------ ------
Total non-performing loans 2,175 2,162
Other real estate owned 617 532
------ ------
Total non-performing assets $ 2,792 $ 2,694
===== =====
</TABLE>
Non-accrual loans are those on which the collectibility of the full amount of
principal or interest is in doubt, or when the payment of principal or interest
has become contractually 90 days past due unless the obligation is both well
secured and in the process of collection. The non-accrual amounts are net of
charge downs of $278,000 and $157,000 as of June 30, 1997 and December 31, 1996,
respectively. Interest on non-accrual loans is recognized only as received or
at a reduced rate.
<PAGE>
SUPPLEMENTAL INFORMATION-UNAUDITED 10qdist2
AVERAGE BALANCE SHEETS, INTEREST, AND INTEREST RATES
($ IN 000'S)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
June 30, 1997 June 30, 1996
--------------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Interest earning assets: Balance Interest Rate Balance Interest Rate
-------- --------- ------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans $166,542 $3,571 8.58% $138,150 $2,932 8.49%
Investments: Taxable 41,571 700 6.74% 33,250 507 6.10%
Tax Exempt 12,372 180 5.82% 1,772 25 5.64%
Short-term Investments 4,567 62 5.43% 3,483 45 5.17%
--------- --------- ------ --------- -------- ---------
Total 225,052 4,513 8.02% 176,655 3,509 7.95%
Tax Exempt Adjustment 104 23
--------- --------
4,617 8.21% 3,532 8.00%
Non-Interest earning assets:
Cash and Due from Banks 3,795 3,020
Premises and equipment 4,457 4,124
Other assets 4,382 3,239
Less Reserve for losses (3,042) (2,537)
--------- ---------
Total $234,644 $184,501
======== ========
Interest Bearing Liabilities:
Savings deposits $68,600 $560 3.27% $51,409 $411 3.20%
Time deposits 112,590 1,559 5.54% 102,030 1,376 5.39%
Short-term borrowings 2,354 29 4.93% 1,741 19 4.37%
Long-term debt 20,874 299 5.73% 5,751 89 6.19%
--------- --------- ------ --------- -------- ---------
Total 204,418 2,447 4.79% 160,931 1,895 4.71%
Non-interest bearing liabilities:
Demand deposits 10,678 8,770
Other 1,180 839
Shareholders' equity 18,368 13,961
--------- ---------
$234,644 $184,501
======== ========
Net Interest Earnings $2,066 $1,614
====== ======
Net Annualized Yield On Earning Assets 3.67% 3.65%
===== =====
Tax Equivalent Yield On Earning Assets $2,170 3.86% $1,637 3.71%
====== ===== ====== =====
<CAPTION>
Year ended
December 31, 1996
----------------------------------------------
Average Yield/
Interest earning assets: Balance Interest Rate
-------- --------- ---------
<S> <C> <C> <C>
Loans $142,116 $12,152 8.55%
Investments: Taxable 35,394 2,233 6.31%
Tax Exempt 1,327 77 5.80%
Short-term Investments 4,233 220 5.20%
--------- --------- ---------
Total 183,070 14,682 8.02%
Tax Exempt Adjustment 55
---------
14,737 8.05%
Non-Interest earning assets:
Cash and Due from Banks 3,169
Premises and equipment 4,083
Other assets 2,968
Less Reserve for losses (2,543)
---------
Total $190,747
========
Interest Bearing Liabilities:
Savings deposits $53,398 $1,778 3.33%
Time deposits 104,000 5,670 5.45%
Short-term borrowings 2,086 102 4.89%
Long-term debt 6,971 431 6.18%
--------- --------- ---------
Total 166,455 7,981 4.79%
Non-interest bearing liabilities:
Demand deposits 8,680
Other 929
Shareholders' equity 14,683
---------
$190,747
========
Net Interest Earnings $6,701
======
Net Annualized Yield On Earning Assets 3.66%
=====
Tax Equivalent Yield On Earning Assets $6,756 3.69%
====== =====
</TABLE>
-8-
<PAGE>
Restructured loans are those whereby a debtor was granted a concession in the
interest rate or a concession in other terms of the original loan agreement due
to the financial difficulties of the debtor.
Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Bank's financial condition can be examined in terms of developing trends in
its sources and uses of funds. These trends are the result of both external
environmental factors, such as changing economic conditions, regulatory changes
and competition, and internal environmental factors such as Management's
evaluation as to the best use of funds under these changing conditions.
<TABLE>
<CAPTION>
Balance Increase (Decrease)
June 30, 1997 since December 31, 1996
-------------- -------------------------
(in 000's)
FUNDING SOURCES: Amount %
------------- ----------
<S> <C> <C> <C>
Deposits and borrowed funds:
Non-interest bearing $ 13,395 $ 3,508 35.5%
Interest bearing 181,724 12,265 7.2
-------- -------
Total deposits 195,119 15,773 8.8
Borrowed funds 24,432 3,268 15.4
Other liabilities 1,910 (295) (13.4)
Shareholders' equity 19,225 2,885 17.7
-------- ------- -----
TOTAL SOURCES $240,686 $21,631 9.9%
======== ======= =====
FUNDING USES:
Interest earning assets:
Short term investments $ 8,291 $ 8,182 n/a
Investment securities 53,655 5,098 10.5%
Loans, and mortgage loans held
for sale 168,827 10,596 6.7
-------- -------
Total interest earning assets 230,773 23,876 11.5
Other assets 9,913 (2,245) (18.5)
-------- ------- -----
TOTAL USES $240,686 $21,631 9.9%
======== ======= =====
</TABLE>
FUNDING SOURCES
Total deposits increased $15.8 million or 8.8% for the first six months of 1997
as a result of an aggressive money market savings deposit campaign and
certificates of deposit promotions to fund the bank's strong loan demand and a
municipal bond buying program. Also, due to the strong loan demand, borrowed
funds increased $3.3 million or 15.4% since yearend 1996.
-9-
<PAGE>
Other liabilities declined $.3 million or 13.4% from the yearend 1996 balances
as a result of the reduced accrual for investment purchases at June 30, 1997
versus yearend 1996. The increase in shareholders' equity of $2.9 million or
17.7% is a result of the six months earnings of $1.0 million and an unrealized
gain on investments available-for-sale of $.2 million. In addition, a private
placement of 100,000 shares of common stock was completed in the first quarter
of 1997 which raised $1.7 million in new capital and dividends paid equalled
dividends reinvested into new shares of PSB stock for the first six months of
1997.
FUNDING USES
Short term investments increased $8.2 million resulting from desired liquidity
to fund loan demand. Investment securities increased $5.1 million or 10.5% from
yearend 1996 due to a municipal bond buying program implemented in 1997.
Loans and mortgage loans held-for-sale increased $10.6 million or 6.7% for the
quarter ended June 1997. Other assets decreased $2.2 million or 18.5% from the
yearend 1996 balances which included a decrease of $2.8 million in cash and due
from banks.
In summary, total assets increased $21.6 million or 9.9% in the first six months
of 1997. Although this represents annualized growth in nearly 19.8% per year,
it is not expected that the bank will maintain this rate of growth throughout
1997.
RESULTS OF OPERATIONS
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Total interest income increased $1,004,000 or 28.6% for the second quarter of
1997 compared to the same period in 1996 while total interest expense increased
$552,000 or 29.1% for the comparable period. The resulting increase in net
interest income was $452,000 or 28.0% for the quarter ending June 30, 1997
compared to the same quarter in 1996.
Interest and fees on loans increased $639,000 or 21.8% as a result of the
substantial increase in outstanding loan balances. Interest income on
investment securities increased $348,000 or 65.4% due to the increase in average
outstanding balances thereon. The provision for loan losses remained at
$150,000 for the second quarter of 1997 compared to the second quarter of 1996.
Management's loan review procedures continue to assess the adequacy of the loan
loss reserve balance which considers the status of all non-performing loans.
The ratio of loan loss reserve balance to loans was at 1.78% at June 30, 1997
versus 1.75% at year end 1996. The ratio of loan loss reserves balance to
nonperforming loans was at 138.3% versus 127.8% at yearend 1996.
Net interest income after provision for loan losses increased $452,000 or 30.9%
in the second quarter of 1997 compared to the same period in 1996.
Other income increased $58,000 or 57.4% due primarily to increased credit
insurance commissions and gross fees on debit card and automated teller
-10-
<PAGE>
machines (ATM's).
Total other expenses increased $181,000 or 15.5% in the second quarter of 1997
compared to the second quarter of 1996. The primary components of the changes
were increased salaries and employee benefits of $110,000 or 17.7%, increased
occupancy and furniture and fixtures of $43,000 due to additional branch
locations, and other expenses of $28,000.
Income before income taxes increased $329,000 or 83.3% for the second quarter
ended 1997 compared to 1996.
The provision for income taxes increased $108,000 as a direct result of the
increased pre-tax income in the second quarter of 1996.
Net income increased $221,000 or 75.4% to $514,000 versus $293,000 for the
second quarter 1997 and 1996 respectively, and earnings per share was $.35 and
$.24 or an increase of 45.8% for the respective periods.
FIRST SIX MONTHS 1997 COMPARED TO FIRST SIX MONTHS 1996
- -------------------------------------------------------
Total interest income increased $1,940,000 or 28.3% for the first six months of
1997 compared to the same period in 1996. Total interest expense increased
$1,122,000 or 30.4% for the same comparable periods. The resulting increase in
net interest income was $818,000 or 25.9%.
Interest and fees on loans increased $1,310,000 or 23.1% as a result of the 6.7%
year to date increase in loan outstandings and improved loan yields compared to
the first six months of 1996. Interest on investment securities increased
$573,000 or 51.4% as a direct result of higher average investment balances
primarily due to the tax-free municipal bond buying program. The increase in
interest expense is also attributable to the overall higher deposit levels.
The provision for loan losses remained at $300,000 in the first six months of
1996 and 1995 as a result of Management's continued loan review and reserving
procedures. As of June 30, 1997, the Bank had net chargeoffs of $56,000 versus
net charge-offs of $143,000 for all of 1996.
Net interest income after provision for loan losses increased $818,000 or 25.9%
for the first six months of 1997 compared to the same period in 1996.
Other income increased $122,000 or 44.9%. Other income increased $79,000 or
67.5% due to the credit insurance commissions, gross revenues on debit card and
ATM machines and mortgage fee income on sold loans. Service fees on deposit
accounts increased $43,000 or 44.3% due to the overall increase in transaction
accounts.
Total other expenses increased $316,000 or 13.8% for the first six months of
1997 compared to the first six months of 1996. The primary component of the
changes were salaries and employee benefits of $190,000 or 15.3% due to
increased lending personnel and new staff at new branch locations.
-11-
<PAGE>
Occupancy and furniture and fixtures (combined) increased $79,000 or 21.9% due
to the new branch office locations. Net expenses relating to losses (gains) on
other real estate and repossession and collection costs (combined) decreased
$35,000 or 87.5% for the first six months of 1997 versus 1996. Other expenses
increased $82,000 or 12.5% for the respective periods.
The provision for income taxes increased $205,000 as a direct result of the
$624,000 or 74.6% increase in pre-tax income for the first six months of 1996
versus 1995.
Net income was $993,000 or 70 cents per share and $574,000 or 46 cents per share
or an increase of 52.2% for the first six months of 1997 and 1996, respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
- --------------------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Liquidity management involves the ability to meet the
cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to avoid fluctuating net interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
Marketable investment securities, maturing in one year or less, and other liquid
assets such as cash and due from banks, federal funds sold and mortgage loans
held for sale total $17.4 million versus $7.3 million at year end 1996.
Maturing loans and repayments are also sources of liquidity.
Historically, the overall liquidity of the Bank has been enhanced by a large
concentration of core deposits and a very stable economic environment in the
market in which the Bank operates. In recent years, there has been a
significant change in the deposit base in that less stable short-term funding
sources, such as money market funds and money market certificates, have been
used more extensively. However, the Bank maintains the ability to acquire
large denomination time deposits and short term borrowings in volatile financial
markets, a key to assuring liquidity. In addition, as a member of the Federal
Home Loan Bank (FHLB), the bank had borrowing capacity, as of yearend 1996, of
approximately $66 million assuming additional purchases of FHLB stock of
approximately $4.3 million. This is another significant source of long and
short-term liquidity.
Interest rate sensitivity varies with different types of interest earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to the prime rate differ considerably from long-
term investment securities and fixed rate loans. Similarly, time deposits over
$100,000, the FDIC-insured super NOW funds and money market certificates are
much more interest sensitive than passbook
savings accounts and long-term certificates of deposits. The shorter term
-12-
<PAGE>
interest rate sensitivities are the key to measurement of the interest
sensitivity gap, or excess interest bearing liabilities over interest earning
assets.
The following table shows the approximate interest sensitivity gaps for several
different time intervals taking into consideration the estimated paybacks on
loans. As of the most recent quarter-end, interest earning liabilities
repricing in the first year exceeded interest bearing assets by $28 million or
12.2% of total earning assets.
<TABLE>
<CAPTION>
PSB Static Gap Analysis
% of
Total Ending
0-180 181-365 0-365 Earning
Days Days Days Assets
------ -------- ------ -------
<S> <C> <C> <C> <C>
($ in millions)
Interest earning assets $ 68 $ 34 $ 102 44.6%
Interest bearing liabilities 91 39 130 56.8
---- ----- ----- ------
Interest sensitivity gap,
June 30, 1997 $ (23) $ (5) $ (28) (12.2)%
===== ===== ====== ======
Interest sensitivity gap,
June 30, 1996 $ (25) $ 9 $ (16) (8.8)%
===== ===== ====== ======
Interest sensitivity gap,
December 31, 1996 $ (32) $ 5 $ (27) (13.2)%
==== ===== ====== ======
</TABLE>
Using this static gap analysis and adjusting for a correlation factor that
considers for any given rate change, the extent of a related rate change (by
balance sheet category), the adjusted gap position in the one year time period
as of June 30, 1997 is $3.2 million negative.
This analysis indicates that Management closely monitors interest rate risk in
the asset and liability portfolios. Given the current volatile interest rate
environment, a near-balanced gap position is desirable. This enhances a strong
earnings pattern for our shareholders with minimal effect of volatile interest
rates. Minimizing this gap is a continual challenge in a changing interest rate
environment and is one of the primary objectives of the Bank's asset/liability
management strategy.
CAPITAL RESOURCES
- -----------------
Management closely monitors capital adequacy of Bank. Total assets increased
$21,631,000 or 9.9% in the first six months of 1997. Shareholders' equity
increased $2,885,000 or 17.7% in the first six months of 1997. Shareholders'
equity to total assets was 7.99% at June 30, 1997 and 7.46% December 31, 1996.
The Bank's capital position is well above the risk based capital mandate of
4.0%.
-13-
<PAGE>
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM F-3
(a) Exhibits:
Exhibit 11 - Computation of Earnings per Common Share
(b) Reports on Form F-3:
There were no reports on Form F-3 for the quarter ended June 30, 1997.
-14-
<PAGE>
THE PEOPLES STATE BANK
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30 June 30
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in 000's except per share data)
PRIMARY
Income applicable to
common shares $ 514 $ 293 $ 993 $ 574
===== ===== ===== =====
Shares
Weighted average number of
common shares outstanding(1) 1,483 1,251 1,428 1,246
===== ===== ===== =====
Primary earnings per common
share $ .35 $ .24 $ .70 $ .46
===== ===== ===== =====
</TABLE>
(1) Restated to reflect the seven percent stock dividend paid May 10, 1996.
-15-
<PAGE>
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
THE PEOPLES STATE BANK
Date: July 16 , 1997 /s/ Eddie L. Dunklebarger
--------------- ---- ---------------------------------
Eddie L. Dunklebarger, President
Date: July 16 , 1997 /s/ Edward P. Williams
--------------- ---- ---------------------------------
Edward P. Williams, Controller
-16-
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM F-4
Quarterly Report Under Section 13 of the Securities Exchange Act of 1934 for the
Quarter Ended September 30, 1997.
FDIC Insurance Certificate Number 12984.
THE PEOPLES STATE BANK
(Exact name of bank as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-0962860
(I.R.S. Employer Identification No.)
100 East King Street, Post Office Box 1000
East Berlin, Pennsylvania
(Address of principal executive offices)
17316
(Zip Code)
Bank's telephone number including area code (717) 259-9510
Not Applicable
(Form name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the bank was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicated the number of shares outstanding of each of the bank's
classes of common stock, as of the latest practicable date 1,489,518, as of
September 30, 1997.
Page 1 of 17 Pages
(Including Appendices)
<PAGE>
FORM F-4
For the Quarter Ended September 30, 1997
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Balance Sheets - September 30, 1997 and
December 31, 1996 3
Statements of Income - Nine months ended
September 30, 1997 and 1996 4
Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 5
Statements of Shareholders' Equity 6
Notes to Financial Statements
September 30, 1997 7
Supplemental Information 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1997 vs. September 30, 1996 9
PART II OTHER INFORMATION
- --------------------------
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form F-3 15
Exhibit 11. Computation of Earnings per Common Share 16
SIGNATURES 17
- ----------
</TABLE>
-2-
<PAGE>
THE PEOPLES STATE BANK
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS ($ in 000's)
Cash and due from banks $4,737 $7,152
Short term investments 55 109
Investment securities (market value--
September 30, 1997 - $60,184
December 31, 1996 - $48,557) 60,184 48,557
Loans:
Total loans 172,757 158,231
Less reserve for loan losses (3,291) (2,763)
------------- ------------
Net loans 169,466 155,468
Premises and equipment 4,790 4,120
Other real estate owned 731 532
Other assets 4,824 3,117
------------- ------------
TOTAL ASSETS $244,787 $219,055
============= ============
LIABILITIES
Deposits:
Non-interest bearing $13,462 $9,887
Interest bearing 181,532 169,459
------------- ------------
Total deposits 194,994 179,346
Short-term borrowings 5,708 5,283
Long-term debt 21,289 15,881
Accrual for investment security purchases 1,209 1,000
Other liabilities 1,412 1,205
------------- ------------
TOTAL LIABILITIES 224,612 202,715
SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share; 2,000,000
shares authorized, none issued and outstanding
Common stock, par value $1 per share;
20,000,000 shares authorized, 1,489,518
and 1,361,099 issued and outstanding at September 30,
1997 and December 31, 1996, respectively 1,490 1,361
Surplus 15,067 13,061
Retained earnings 3,250 2,013
Net unrealized gain(loss) on investments
available-for-sale 368 (95)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 20,175 16,340
------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $244,787 $219,055
============= ============
</TABLE>
-3-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
($ in 000's, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,719 $3,191 $10,699 $8,861
Interest on short term investments 47 76 171 143
Investment securities:
Taxable 665 536 2,127 1,588
Exempt from federal income tax 282 12 508 75
------------- ------------- ------------- -------------
947 548 2635 1663
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 4,713 3,815 13,505 10,667
INTEREST EXPENSE
Deposits 2,137 1,962 6,305 5,439
Interest on borrowed funds 347 121 992 335
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 2,484 2,083 7,297 5,774
------------- ------------- ------------- -------------
NET INTEREST INCOME 2,229 1,732 6,208 4,893
PROVISION FOR LOAN LOSSES 200 150 500 450
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,029 1,582 5,708 4,443
OTHER INCOME
Service charges on deposit accounts 82 49 222 146
Gain (loss) on sale of loans and securities 86 (23) 144 35
Other income 158 57 354 174
------------- ------------- ------------- -------------
TOTAL OTHER INCOME 326 83 720 355
OTHER EXPENSES
Salaries and employee benefits 755 623 2,184 1,862
Occupancy expenses 85 76 235 218
Furniture and equipment 144 107 433 325
Loss (gain) on sale of other real estate (43) (14) (55) (37)
Repossession and collection costs 47 40 64 103
Other 417 316 1,156 973
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES 1,405 1,148 4,017 3,444
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 950 517 2,411 1,354
PROVISION FOR INCOME TAXES 301 177 769 440
------------- ------------- ------------- -------------
NET INCOME $649 $340 $1,642 $914
============= ============= ============= =============
PER SHARE DATA (Restated for the seven percent stock dividend paid May 10,1996)
Net income $0.43 $0.26 $1.13 $0.72
Dividends paid 0.10 0.08 0.28 0.23
</TABLE>
-4-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
-------------- ---------------
(in 000's)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES
Net income (loss) for the year $1,642 $914
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 345 237
Provision for loan losses 200 450
(Gain) loss on sale of loans and investments (86) (35)
Net amortization (accretion) on investments 25 85
Net loss(gain) on sale of other real estate owned (43) 66
Change in other assets and liabilities (3,625) (55)
-------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,542) 1,662
INVESTING ACTIVITIES
Net (increase) decrease in investment securities (11,103) 99
Net (increase) decrease in loans (14,198) (29,344)
Capital expenditures 1,163 647
-------------- ---------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (24,138) (28,598)
FINANCING ACTIVITIES
Net increase(decrease) in deposits 15,648 24,973
Net increase(decrease) in borrowed funds 5,833 1,672
Dividends paid (405) (303)
Proceeds from issuance of common stock 2,135 1,928
-------------- ---------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 23,211 28,270
-------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,469) 1,334
Cash and cash equivalents at beginning of year 7,261 5,660
-------------- ---------------
Cash and cash equivalents at end of period $4,792 $6,994
============== ===============
</TABLE>
-5-
<PAGE>
THE PEOPLES STATE BANK
STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Common Retained Unrealized
Shares Stock Surplus Earnings Loss
------ ----- ------- -------- ----
($ in 000's, except number of shares)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 1,153,523 1,154 9,906 2,458 78
Stock dividend 81,392 81 1,251 (1,332)
Stock issuance 99,431 99 1,492
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 26,754 27 412
Net income 1,352
Net unrealized gain(loss) on investments
available-for-sale (173)
Cash dividends (465)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,361,100 1,361 13,061 2,013 (95)
Stock issuance 107,752 108 1,643
Stock issued through Dividend
Reinvestment and Stock Purchase Plan 20,666 21 363
Net income 1,642
Net unrealized gain(loss) on investments
available-for-sale 463
Cash dividends (405)
---------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 1,489,518 $1,490 $15,067 $3,250 $368
===========================================================================
</TABLE>
-6-
<PAGE>
THE PEOPLES STATE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
NOTE A--BASIS OF PRESENTATION
In the opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report for the
year ended December 31, 1996.
The Bank paid interest and income taxes of $6,299,000 and $750,000 for the first
nine months of 1997; $4,920,000 and $235,000 the first nine months of 1996,
respectively.
NOTE B--NON-PERFORMING LOANS (in 000's)
Information with respect to non-accrual loans, other loans contractually past
due ninety days or more as to interest or principal payments and restructured
loans are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Non-accrual loans $1,857 $1,844
Accruing loans past due
90 days or more - 41
Restructured loans 527 277
------ ------
Total non-performing loans 2,384 2,162
Other real estate owned 731 532
------ ------
Total non-performing assets $3,115 $2,694
===== =====
</TABLE>
Non-accrual loans are those on which the collectibility of the full amount of
principal or interest is in doubt, or when the payment of principal or interest
has become contractually 90 days past due unless the obligation is both well
secured and in the process of collection. The non-accrual amounts are net of
charge downs of $190,000 and $157,000 as of September 30, 1997 and December 31,
1996, respectively. Interest on non-accrual loans is recognized only as
received or at a reduced rate.
Restructured loans are those whereby a debtor was granted a concession in the
interest rate or a concession in other terms of the original loan agreement due
to the financial difficulties of the debtor.
-7-
<PAGE>
SUPPLEMENTAL INFORMATION-UNAUDITED
AVERAGE BALANCE SHEETS, INTEREST, AND INTEREST RATES
($ IN 000'S)
<TABLE>
<CAPTION>
Quarter ended Quarter ended
September 30, 1997 September 30, 1996
------------------------------------------ ----------------------------------
Average Yield/ Average Yield/
Interest earning assets: Balance Interest Rate Balance Interest Rate
-------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans $167,246 $3,719 8.89% $149,471 $3,191 8.54%
Investments: Taxable 39,223 665 6.78% 33,457 536 6.41%
Tax Exempt 19,555 282 5.77% 819 12 5.86%
Short-term Investments 3,392 47 5.54% 5,829 76 5.22%
--------- --------- -------- --------- ------- -------
Total 229,416 4,713 8.22% 189,576 3,815 8.05%
Tax Exempt Adjustment 153 13
--------- -------
4,866 8.48% 3,828 8.08%
Non-Interest earning assets:
Cash and Due from Banks 4,401 3,576
Premises and equipment 4,689 4,201
Other assets 4,575 2,886
Less Reserve for losses (3,102) (2,564)
--------- ---------
Total $239,979 $197,675
======== ========
Interest Bearing Liabilities:
Savings deposits $71,040 $579 3.26% $57,804 $495 3.43%
Time deposits 111,876 1,558 5.57% 106,982 1,467 5.49%
Short-term borrowings 3,254 41 5.04% 2,254 27 4.79%
Long-term debt 21,016 306 5.82% 5,888 94 6.39%
--------- --------- -------- --------- ------- -------
Total 207,186 2,484 4.80% 172,928 2,083 4.82%
Non-interest bearing deposits:
Demand deposits 11,753 9,080
Other 1,462 1,145
Shareholders' equity 19,578 14,522
--------- ---------
$239,979 $197,675
======== ========
Net Interest Earnings $2,229 $1,732
====== ======
Net Annualized Yield On Earning Assets 3.89% 3.65%
===== =====
Tax Equivalent Yield $2,382 4.15% $1,745 3.68%
====== ===== ====== =====
<CAPTION>
Year ended
December 31,1996
----------------------------------------
Average Yield/
Interest earning assets: Balance Interest Rate
-------- --------- ----
<S> <C> <C> <C>
Loans $142,116 $12,152 8.55%
Investments: Taxable 35,394 2,233 6.31%
Tax Exempt 1,327 77 5.80%
Short-term Investments 4,233 220 5.20%
-------- --------- ----------
Total 183,070 14,682 8.02%
Tax Exempt Adjustment 55
---------
14,737 8.05%
Non-Interest earning assets:
Cash and Due from Banks 3,169
Premises and equipment 4,083
Other assets 2,968
Less Reserve for losses (2,543)
--------
Total $190,747
========
Interest Bearing Liabilities:
Savings deposits $53,398 $1,778 3.33%
Time deposits 104,000 5,670 5.45%
Short-term borrowings 2,086 102 4.89%
Long-term debt 6,971 431 6.18%
-------- --------- ----------
Total 166,455 7,981 4.79%
Non-interest bearing deposits:
Demand deposits 8,680
Other 929
Shareholders' equity 14,683
--------
$190,747
========
Net Interest Earnings $6,701
======
Net Annualized Yield On Earning Assets 3.66%
=====
Tax Equivalent Yield $6,756 3.69%
====== =====
</TABLE>
-8-
<PAGE>
Part I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Bank's financial condition can be examined in terms of developing trends in
its sources and uses of funds. These trends are the result of both external
environmental factors, such as changing economic conditions, regulatory changes
and competition, and internal environmental factors such as Management's
evaluation as to the best use of funds under these changing conditions.
<TABLE>
<CAPTION>
Balance Increase (Decrease)
September 30, 1997 since December 31, 1996
------------------ -----------------------
(in 000's)
FUNDING SOURCES: Amount %
------ -
<S> <C> <C> <C>
Deposits and borrowed funds:
Non-interest bearing $ 13,462 $ 3,575 36.2%
Interest bearing 181,532 12,073 7.1
-------- -------
Total deposits 194,994 15,648 8.7
Borrowed funds 26,997 5,833 27.6
Other liabilities 2,621 416 18.9
Shareholders' equity 20,175 3,835 23.5
-------- ------- -----
TOTAL SOURCES $244,787 $25,732 11.8%
======== ======= =====
FUNDING USES:
Interest earning assets:
Short term investments $ 55 $ (54) (49.5)
Investment securities 60,184 11,627 23.9%
Loans, and mortgage loans held
for sale 172,757 14,526 9.2
-------- -------
Total interest earning assets 232,996 26,099 12.6
Other assets 11,791 (367) (3.0)
-------- ------- -----
TOTAL USES $244,787 $25,732 11.8%
======== ======= =====
</TABLE>
FUNDING SOURCES
Total deposits increased $15.7 million or 8.7% for the first nine months of 1997
as a result of an aggressive money market savings deposit campaign and
certificates of deposit promotions to fund the bank's strong loan demand and a
municipal bond buying program. Also, due to the strong loan demand, borrowed
funds increased $5.8 million or 27.6% since yearend 1996.
Other liabilities increased $.4 million or 18.9% from the yearend 1996 balances
as a result of the reduced accrual for investment purchases at June 30, 1997
versus yearend 1996. The increase in shareholders' equity of $3.8 million or
23.5% is a result of the nine months earnings of $1.6 million and
-9-
<PAGE>
an unrealized gain on investments available-for-sale of $.5 million. In
addition, a private placement of 100,000 shares of common stock was completed in
the first quarter of 1997 which raised $1.7 million in new capital and dividends
paid equalled dividends reinvested into new shares of PSB stock for the first
nine months of 1997.
FUNDING USES
Short term investments remained at a low level to due the municipal buying
program and strong loan demand. Investment securities increased $11.6 million
or 23.9% from yearend 1996 due to a municipal bond buying program implemented in
1997.
Loans and mortgage loans held-for-sale increased $14.5 million or 9.2% for the
quarter ended September 1997. This gain was net of a $4.2 million seasoned
mortgage loan sale during the third quarter. Other assets decreased $.4 million
or 3.0% from the yearend 1996 balances which included a decrease of $2.4 million
in cash and due from banks.
In summary, total assets increased $25.7 million or 11.8% in the first nine
months of 1997. This represents annualized growth of nearly 15.7% per year and
it is expected that the bank will maintain this rate of growth for the remainder
of 1997.
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Total interest income increased $898,000 or 23.5% for the third quarter of 1997
compared to the same period in 1996 while total interest expense increased
$401,000 or 19.3% for the same period. The resulting increase in net interest
income was $497,000 or 28.7% for the quarter ending September 30, 1997 compared
to the same quarter in 1996.
Interest and fees on loans increased $528,000 or 16.6% as a result of the
substantial increase in outstanding loan balances. Interest income on
investment securities increased $399,000 or 72.8% due to the increase in average
outstanding balances thereon. The provision for loan losses was $200,000 for
the third quarter of 1997 compared to $150,000 for the third quarter of 1996.
Management's loan review procedures continue to assess the adequacy of the loan
loss reserve balance which considers the status of all non-performing loans.
The ratio of loan loss reserve balance to loans was at 1.90% at September 30,
1997 versus 1.75% at year end 1996. The ratio of loan loss reserves balance to
nonperforming loans was at 138.0% versus 127.8% at yearend 1996.
Net interest income after provision for loan losses increased $447,000 or 28.3%
in the third quarter of 1997 compared to the same period in 1996.
Other income exclusive of security gains (losses) increased $134,000 or 126.4%
due primarily to increased credit insurance commissions and gross fees on debit
card and automated teller machines (ATM's). Gains on sale of loans and
securities was $109,000 greater for the quarter ended September 1997 due
-10-
<PAGE>
to a seasoned mortgage loan sale of approximately $4.2 million in outstanding
balances.
Total other expenses increased $257,000 or 22.4% in the third quarter of 1997
compared to the third quarter of 1996. The primary components of the changes
were increased salaries and employee benefits of $132,000 or 21.2%, increased
occupancy and furniture and fixtures of $46,000 and other expenses of $108,000.
The primary reason for these increases is directly attributed to the annualized
effect of the new office locations and increased expenses relating to the ATM
network.
Income before income taxes increased $433,000 or 83.8% for the third quarter
ended 1997 compared to 1996.
The provision for income taxes increased $124,000 as a direct result of the
increased pre-tax income in the third quarter of 1996.
Net income increased $309,000 or 90.9% to $649,000 versus $340,000 for the third
quarter 1997 and 1996 respectively, and earnings per share was $.43 and $.26 or
an increase of 65.4% for the respective periods.
FIRST NINE MONTHS 1997 COMPARED TO FIRST NINE MONTHS 1996
- ---------------------------------------------------------
Total interest income increased $2,838,000 or 26.6% for the first nine months of
1997 compared to the same period in 1996. Total interest expense increased
$1,523,000 or 26.4% for the same comparable periods. The resulting increase in
net interest income was $1,315,000 or 26.9%.
Interest and fees on loans increased $1,838,000 or 20.7% as a result of the 9.2%
year to date increase in loan outstandings and improved loan yields compared to
the first nine months of 1996. Interest on investment securities increased
$972,000 or 58.5% as a direct result of higher average investment balances
primarily due to the tax-free municipal bond buying program. The increase in
interest expense is also attributable to the overall higher deposit levels.
The provision for loan losses increased to $500,000 from $450,000 in the first
nine months of 1997 and 1996 as a result of Management's continued loan review
and reserving procedures. As of June 30, 1997, the Bank had net recoveries of
$28,000 versus net charge-offs of $143,000 for all of 1996. As a result the
reserve for loan losses increased $528,000 to $3,291,000.
Net interest income after provision for loan losses increased $1,265,000 or
28.5% for the first nine months of 1997 compared to the same period in 1996.
Other income exclusive of gains on loans and security sales increased $256,000
or 80.0%. Other income increased $180,000 or 103.5% due to the credit insurance
commissions, gross revenues on debit cards and ATM machines and mortgage fee
income on sold loans. Service fees on deposit accounts increased $76,000 or
52.1% primarily due to the overall increase in the number of transaction
accounts.
Total other expenses increased $573,000 or 16.6% for the first nine months of
-11-
<PAGE>
1997 compared to the first nine months of 1996. The primary component of the
changes were salaries and employee benefits of $322,000 or 17.3% due to
increased lending personnel and new staff at new branch locations.
Occupancy and furniture and fixtures (combined) increased $125,000 or 23.0% due
to the new branch office locations. Net expenses relating to losses (gains) on
other real estate and repossession and collection costs (combined) decreased
$57,000 or 86.4% for the first nine months of 1997 versus 1996. Other expenses
increased $183,000 or 18.8% for the respective periods.
The provision for income taxes increased $329,000 or 74.8% as a direct result of
the $1,057,000 or 78.1% increase in pre-tax income for the first nine months of
1996 versus 1995.
Net income was $1,642,000 or $1.13 per share and $914,000 or $.72 per share or
an increase of 56.9% for the first nine months of 1997 and 1996, respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
- --------------------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Liquidity management involves the ability to meet the
cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to avoid fluctuating net interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
Marketable investment securities, maturing in one year or less, and other liquid
assets such as cash and due from banks, federal funds sold and mortgage loans
held for sale total $4.8 million versus $7.3 million at year end 1996. Maturing
loans and repayments are also sources of liquidity.
Historically, the overall liquidity of the Bank has been enhanced by a large
concentration of core deposits and a very stable economic environment in the
market in which the Bank operates. In recent years, there has been a
significant change in the deposit base in that less stable short-term funding
sources, such as money market funds and money market certificates, have been
used more extensively. However, the Bank maintains the ability to acquire
large denomination time deposits and short term borrowings in volatile financial
markets, a key to assuring liquidity. In addition, as a member of the Federal
Home Loan Bank (FHLB), the bank had borrowing capacity, as of June 1997 of
approximately $62.5 million assuming additional purchases of FHLB stock of
approximately $3.0 million. This is another significant source of long and
short-term liquidity.
Interest rate sensitivity varies with different types of interest earning assets
and interest bearing liabilities. Overnight federal funds on which rates change
daily and loans which are tied to the prime rate differ considerably from long-
term investment securities and fixed rate loans. Similarly, time deposits over
$100,000, the FDIC-insured super NOW funds and
-12-
<PAGE>
money market certificates are much more interest sensitive than passbook
savings accounts and long-term certificates of deposits. The shorter term
interest rate sensitivities are the key to measurement of the interest
sensitivity gap, or excess interest bearing liabilities over interest earning
assets.
The following table shows the approximate interest sensitivity gaps for several
different time intervals taking into consideration the estimated paybacks on
loans. As of the most recent quarter-end, interest earning liabilities
repricing in the first year exceeded interest bearing assets by $40 million or
17.3% of total earning assets.
PSB Static Gap Analysis
<TABLE>
<CAPTION>
% of
Total Ending
0-180 181-365 0-365 Earning
Days Days Days Assets
------ -------- ------ -------
($ in millions)
<S> <C> <C> <C> <C>
Interest earning assets $ 60 $ 36 $ 96 41.6%
Interest bearing liabilities 106 30 136 58.9
------ ----- ------ ------
Interest sensitivity gap,
September 30, 1997 $ (46) $ 6 $ (40) (17.3)%
====== ===== ====== ======
Interest sensitivity gap,
September 30, 1996 $ (25) $ 11 $ (14) (4.4)%
====== ===== ====== ======
Interest sensitivity gap,
December 31, 1996 $ (32) $ 5 $ (27) (13.2)%
====== ===== ====== ======
</TABLE>
Using this static gap analysis and adjusting for a correlation factor that
considers for any given rate change, the extent of a related rate change (by
balance sheet category), the adjusted gap position in the one year time period
as of September 30, 1997 is $11.6 million negative, well within acceptable
levels.
This analysis indicates that Management closely monitors interest rate risk in
the asset and liability portfolios. Given the current volatile interest rate
environment, a near-balanced gap position is desirable. This enhances a strong
earnings pattern for our shareholders with minimal effect of volatile interest
rates. Minimizing this gap is a continual challenge in a changing interest rate
environment and is one of the primary objectives of the Bank's asset/liability
management strategy.
-13-
<PAGE>
CAPITAL RESOURCES
- -----------------
Management closely monitors capital adequacy of Bank. Total assets increased
$25,732,000 or 11.8% in the first nine months of 1997. Shareholders' equity
increased $3,835,000 or 23.5% in the first nine months of 1997. Shareholders'
equity to total assets was 8.24% at June 30, 1997 and 7.46% December 31, 1996.
The Bank's capital position is well above the risk based capital mandate of
4.0%.
-14-
<PAGE>
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM F-3
(a) Exhibits:
Exhibit 11 - Computation of Earnings per Common Share
(b) Reports on Form F-3:
There were no reports on Form F-3 for the quarter ended September 30, 1997.
-15-
<PAGE>
Exhibit 11 - Computation of Earnings per Common Share (Unaudited)
THE PEOPLES STATE BANK
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
(in 000's except per share data)
<S> <C> <C> <C> <C>
PRIMARY
Income applicable to
common shares $ 649 $ 340 $1,642 $ 914
===== ===== ===== =====
Shares
Weighted average number of
common shares outstanding(1) 1,495 1,290 1,454 1,261
===== ===== ===== =====
Primary earnings per common
share $ .43 $ .26 $ 1.13 $ .72
===== ===== ===== =====
</TABLE>
(1) Restated to reflect the seven percent stock dividend paid May 10, 1996.
-16-
<PAGE>
Exhibit 99h
EXHIBIT 99(h)
FEDERAL DEPOSIT INSURANCE CORPORATION
FORM F-3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the month of October, 1997
THE PEOPLES STATE BANK
------------------------------------------------
(Exact Name of Bank as specified in its charter)
<PAGE>
Item 12. Other Events
- ----------------------
(a) On October 28, 1997, Community Banks, Inc. ("CBI") and The Peoples State
Bank ("PSB") entered into an Agreement and Plan of Reorganization (the
"Agreement"), under the terms of which: (i) CBI will organize a Pennsylvania
bank ("PSB Interim Bank") as a wholly-owned subsidiary of CBI and cause PSB
Interim Bank to become a party to the Agreement, (ii) PSB will be merged with
and into PSB Interim Bank (the "Merger"), (iii) PSB Interim Bank will survive
the Merger and operate as a wholly-owned subsidiary of CBI under the name "The
Peoples State Bank", and (iv) all of the outstanding shares of the common stock
of PSB ("PSB Common Stock") will be converted into shares of the common stock of
CBI ("CBI Common Stock"). CBI has total assets of approximately $460 million,
and PSB has total assets of approximately $245 million. Assuming that the Merger
is consummated, PSB, a Pennsylvania bank, will become a wholly-owned subsidiary
of CBI.
Under the terms of the Agreement, shares of PSB Common Stock will be
exchanged for shares of CBI Common Stock on the effective date of the Merger
based on a conversion ratio of .889 shares of CBI Common Stock for each share of
PSB Common Stock outstanding. There are 1,489,518 shares of PSB Common Stock
outstanding. By separate Stock Option Agreement, CBI will have the right to
acquire 19.9% of the outstanding PSB Common Stock under certain conditions.
Prior to the announcement of the Merger, PSB Common Stock (NASDAQ:PSED) had
been infrequently traded in the local over-the-counter market. The closing
price for CBI Common Stock (AMEX:CTY) was $42.25 on October 27, 1997 (the day
prior to the public announcement of the Merger).
Consummation of the Agreement is subject to various conditions, including,
among others, (i) the approval of the Merger by the Federal Reserve Board, the
Federal Deposit Insurance Corporation and the Pennsylvania Banking Department,
(ii) the approval of the Merger by the shareholders of PSB and CBI, and (iii)
the absence of any material adverse change in the financial condition or
operating results of PSB or CBI.
Assuming that all conditions are satisfied without unexpected delay, it is
anticipated that the effective date of the Merger will occur during the second
quarter of 1998. The transaction will be accounted for as a pooling-of-
interests for financial reporting purposes.
The press release dated October 28, 1997 announcing execution of the
Agreement and the letter to PSB's shareholders dated November 5, 1997 providing
further details with respect to the Agreement are attached to this Current
Report as Exhibits 1 and 2 and are incorporated herein by reference.
Item 13. Financial Statement and Exhibits.
- ------------------------------------------
The following exhibits are attached to this Current Report.
1. Press Release dated October 28, 1997;
2. Agreement and Plan of Reorganization between Community Banks, Inc. and
The Peoples State Bank dated as of October 28, 1997;
3. Stock Option Agreement between Community Banks, Inc. and The Peoples
State Bank dated as of October 28, 1997; and
4. Letter to PSB shareholders dated November 5, 1997.
<PAGE>
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the Bank has
caused this report to be signed on its behalf by the undersigned, hereunto fully
authorized.
THE PEOPLES STATE BANK
By:
-----------------------------------------
Eddie L. Dunklebarger,
President and Chief Executive
Officer
Date: November _____, 1997
