<PAGE>
Filed Pursuant To 424(B)(3)
File No. 333-65801
[LOGO OMITTED] COMMUNITY FIRST
BANKING COMPANY
November 6, 1998
Dear Shareholder:
We invite you to attend a Special Meeting of Shareholders of Community
First Banking Company ("CFBC"), to be held on December 9, 1998, at 4:00 p.m. at
CFBC's headquarters located at 76 Gilbert St., West, Tinton Falls, New Jersey
07701.
The meeting has been called to vote on a Merger Agreement pursuant to
which CFBC will merge with Commerce Bancorp, Inc. ("CBH"). CBH is a multi-bank
holding company headquartered in Cherry Hill, New Jersey with $4.4 billion in
total assets as of June 30, 1998.
On completion of the merger, each outstanding share of CFBC Common Stock
will be converted into a number of shares of CBH Common Stock (the "Exchange
Ratio"), with cash paid in lieu of fractional shares. The Exchange Ratio will
be calculated by dividing $28.00 by the average of the closing sale prices for
CBH Common Stock during a five business day period ending shortly before the
merger is consummated (the "Average Price"). However, a minimum Exchange Ratio
of .613 will apply if the Average Price is above $45.6875, and a maximum
Exchange Ratio of .706 will apply if the Average Price is below $39.6875. Your
Board of Directors will have the right to terminate the Merger Agreement if the
Average Price is below $32.00.
It is expected that the merger generally will be tax free to CFBC's
shareholders for federal income tax purposes.
The merger requires approval by CFBC's shareholders and by bank regulatory
authorities.
We urge you to read carefully the accompanying Proxy Statement-Prospectus,
including the Annexes thereto, which contain important information about the
proposed merger.
Whether or not you personally attend the meeting, please complete, sign
and date the enclosed proxy card and return it in the enclosed prepaid
envelope, as soon as possible. This action will not limit your right to attend
the meeting and vote in person.
Your Board of Directors has unanimously approved the Merger Agreement and
unanimously recommends that you vote "FOR" approval of the Merger Agreement.
Sincerely,
/s/ GERALD F. MURPHY
---------------------------
GERALD F. MURPHY
Chairman
656 Shrewsbury Ave., Tinton Falls, NJ 07701 (732) 747-5252
<PAGE>
COMMUNITY FIRST BANKING COMPANY
656 Shrewsbury Avenue
Tinton Falls, New Jersey 07701
-----------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 9, 1998
-----------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Community
First Banking Company ("CFBC") will be held on December 9, 1998, at 4:00 p.m.
at CFBC's headquarters located at 76 Gilbert St., West, Tinton Falls, New
Jersey 07701, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Amended
Agreement and Plan of Reorganization and a related Agreement and Plan of
Merger, each dated as of August 12, 1998 (collectively, the "Merger
Agreement"), between CFBC and Commerce Bancorp, Inc. ("CBH"), pursuant to
which (i) CFBC would merge with CBH and (ii) each outstanding share of
CFBC Common Stock would be converted into a number of shares of CBH Common
Stock (the "Exchange Ratio"), with cash paid in lieu of fractional shares.
The Exchange Ratio will be calculated by dividing $28.00 by the average of
the closing sale prices for CBH Common Stock as quoted on the New York
Stock Exchange for the five business day period ending on and excluding
the second business day before the merger is consummated (the "Average
Price"). However, a minimum Exchange Ratio of .613 will apply if the
Average Price is above $45.6875, and a maximum Exchange Ratio of .706 will
apply if the Average Price is below $39.6875. Consummation of the merger
is subject to the terms and conditions contained in the Merger Agreement.
2. To consider and vote upon such other business as may properly come
before the meeting or any adjournment thereof.
A copy of the Merger Agreement is set forth in Annex A and Annex B to the
accompanying Proxy Statement-Prospectus. Only holders of record of CFBC Common
Stock as of the close of business on November 6, 1998, are entitled to notice
of, and to vote at, the meeting and any adjournments or postponements thereof.
The CFBC Board of Directors has unanimously approved the Merger Agreement
and unanimously recommends that CFBC shareholders vote "FOR" approval of the
Merger Agreement.
By Order of the Board of Directors
COMMUNITY FIRST BANKING COMPANY
/s/ GERALD F. MURPHY
--------------------------------------
GERALD F. MURPHY
Chairman
- --------------------------------------------------------------------------------
Whether or not you plan to attend the meeting in person, you are urged to
date, sign and return promptly the enclosed proxy in the accompanying
envelope. You may revoke such proxy at any time prior to its exercise in the
manner provided in the accompanying Proxy Statement-Prospectus.
- --------------------------------------------------------------------------------
<PAGE>
Proxy Statement
COMMUNITY FIRST BANKING COMPANY
Prospectus
COMMERCE BANCORP, INC.
1,661,000 Shares Common Stock
The Board of Directors of Commerce Bancorp, Inc. and Community First
Banking Company have approved the acquisition of Community First Banking
Company through a merger.
If the merger is completed, each share of Community First Banking Company
common stock will be converted into a number of shares of Commerce Bancorp,
Inc. common stock (the "Exchange Ratio"), with cash being paid in lieu of any
fractional share interest. The Exchange Ratio will be calculated by dividing
$28.00 by the average of the closing sale prices for Commerce Bancorp, Inc.
common stock as quoted on the New York Stock Exchange for the five business day
period ending on and excluding the second business day before the merger is
consummated, with a minimum Exchange Ratio of .613 and a maximum Exchange Ratio
of .706.
The merger cannot be completed unless the shareholders of Community First
Banking Company approve it. Community First Banking Company has scheduled a
special meeting for its shareholders to vote on the merger.
Whether or not you plan to attend the special meeting of shareholders of
Community First Banking Company, please vote by completing and mailing the
enclosed proxy card.
The special meeting of shareholders of Community First Banking Company is
scheduled for:
December 9, 1998
4:00 p.m.
76 Gilbert St., West, Tinton Falls, New Jersey 07701
Commerce Bancorp, Inc. common stock trades on the New York Stock Exchange
under the symbol "CBH". Community First Banking Company trades on the
Over-the-Counter Bulletin Board under the symbol "CFST".
Neither the securities of Commerce Bancorp, Inc. nor those of Community
First Banking Company are savings accounts, deposits or other obligations of a
bank or savings association and are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Proxy Statement-Prospectus. Any representation to
the contrary is a criminal offense.
This Proxy Statement-Prospectus is dated November 6, 1998, and is first
being mailed to Community First Banking Company shareholders on November 10,
1998.
<PAGE>
TABLE OF CONTENTS
Page
-----
SUMMARY .............................................. 3
Parties to the Merger ........................... 3
The Merger ...................................... 4
CFBC's Reasons for the Merger ................... 5
The Meeting ..................................... 5
Approval of the Merger .......................... 5
Recommendation of the CFBC Board of
Directors to Shareholders .................... 5
Ownership of CBH Following the Merger ........... 5
Effective Date .................................. 5
Opinion of Financial Advisor .................... 6
Interests of Certain Persons .................... 6
Certain Federal Income Tax Considerations ....... 6
Regulatory Approvals ............................ 6
Conditions to Consummation ...................... 7
Termination ..................................... 7
Resale of CBH Common Stock ...................... 7
No Appraisal Rights ............................. 7
Accounting Treatment ............................ 7
Certain Differences in the Rights of CFBC and
CBH Shareholders ............................. 7
Listing of CBH Common Stock ..................... 7
SUMMARY SELECTED HISTORICAL CON-
SOLIDATED FINANCIAL INFORMATION OF
CBH ............................................... 8
SUMMARY SELECTED HISTORICAL CON-
SOLIDATED FINANCIAL INFORMATION OF
CFBC .............................................. 9
RECENT DEVELOPMENTS .................................. 10
COMPARATIVE PER SHARE DATA ........................... 12
SPECIAL MEETING OF CFBC SHAREHOLDERS 14
General ......................................... 14
Purposes ........................................ 14
Voting Rights; Votes Required for Approval ...... 14
Voting and Revocation of Proxies ................ 14
Solicitation of Proxies ......................... 15
Other Matters ................................... 15
THE MERGER ........................................... 16
Certain Terms of the Merger Agreement ........... 16
Background of Merger ............................ 18
Recommendation of the CFBC Board; CFBC's
Reasons for the Merger ....................... 18
CBH's Reasons for the Merger .................... 20
Opinion of CFBC's Financial Advisor ............. 20
Interests of Certain Persons .................... 23
Certain Federal Income Tax Consequences of
the Merger ................................... 25
Business Pending Consummation and Related
Matters ...................................... 26
<PAGE>
Page
---
Commitments with Respect to Other Offers ........ 26
Regulatory Approvals ............................ 26
Conditions to Consummation ...................... 26
Termination ..................................... 27
Resale of CBH Common Stock ...................... 27
No Dissenters' Appraisal Rights ................. 28
Accounting Treatment ............................ 28
Certain Effects of the Merger ................... 28
New York Stock Exchange Listing ................. 28
Waiver; Amendment ............................... 28
COMPARATIVE PER SHARE MARKET PRICE
AND DIVIDEND INFORMATION .......................... 29
FORWARD-LOOKING STATEMENTS ........................... 30
BUSINESS OF CFBC ..................................... 31
General ......................................... 31
History and Business ............................ 31
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CFBC ................. 32
BUSINESS OF CBH ...................................... 44
General ......................................... 44
History and Business ............................ 44
DESCRIPTION OF CBH CAPITAL STOCK ..................... 45
Authorized Capital .............................. 45
CBH Common Stock ................................ 45
CBH Preferred Stock ............................. 45
"Anti-Takeover" Provisions and
Management Implications ...................... 46
Payment of Dividends ............................ 47
CERTAIN DIFFERENCES IN THE RIGHTS OF
CFBC AND CBH SHAREHOLDERS ......................... 49
General ......................................... 49
Authorized Capital .............................. 49
CFBC Common Stock ............................... 49
Director Nominations ............................ 49
LEGAL MATTERS ........................................ 50
EXPERTS .............................................. 50
WHERE YOU CAN FIND MORE
INFORMATION ....................................... 51
CONSOLIDATED FINANCIAL STATEMENTS OF
CFBC .............................................. F-1
ANNEX A -- Amended Agreement and Plan of
Reorganization (excluding exhibits and
schedules) ........................................ A-1
ANNEX B -- Agreement and Plan of Merger .............. B-1
ANNEX C -- Opinion of Berwind Financial, L.P.......... C-1
HOW TO GET COPIES OF RELATED DOCUMENTS
This Proxy Statement-Prospectus incorporates important business and
financial information about Commerce Bancorp, Inc. that is not included in or
delivered with this Proxy Statement-Prospectus. The information is available
without charge to Community First Banking Company shareholders upon written or
oral request to: Commerce Bancorp, Inc., 1701 Route 70 East, Cherry Hill, New
Jersey 08034-5400, Attention: C. Edward Jordan, Jr., Executive Vice President,
(telephone number (609) 751-9000). Responses to any request will be made within
one business day by sending the requested documents by first class mail or
equally prompt means. In order to ensure timely delivery of such documents, any
request should be made by December 2, 1998.
<PAGE>
SUMMARY
This summary highlights selected information from this Proxy
Statement-Prospectus and may not contain all of the information that is
important to you. To understand the Merger fully, and for more complete
descriptions of the legal terms of the Merger, you should read carefully this
entire Proxy Statement-Prospectus, the Annexes hereto and the documents we have
referred you to. See "WHERE YOU CAN FIND MORE INFORMATION." As used in this
Proxy Statement-Prospectus, the terms "CBH" and "CFBC" refer to such
organizations, respectively, and, unless the context otherwise requires, to
their respective consolidated subsidiaries. All information contained in this
Proxy Statement-Prospectus has been adjusted to reflect common stock dividends
paid through November 6, 1998.
Parties to the Merger
CBH
Commerce Bancorp, Inc. ("CBH") is a multi-bank holding company
headquartered in Cherry Hill, New Jersey which operates three nationally
chartered bank subsidiaries: Commerce Bank, N.A., Cherry Hill, New Jersey
("Commerce NJ"), Commerce Bank/Pennsylvania, N.A., Devon, Pennsylvania
("Commerce PA"), Commerce Bank/Shore, N.A., Toms River, New Jersey ("Commerce
Shore"), and one state chartered bank subsidiary, Commerce Bank/North, Ramsey,
New Jersey ("Commerce North"). These four bank subsidiaries have 64 retail
branch offices in New Jersey, and 17 retail branch offices in Metropolitan
Philadelphia. CBH operates one nonbank subsidiary, Commerce Capital Markets,
Inc., Philadelphia, Pennsylvania ("CCMI"), which engages in certain securities
activities permitted to bank holding company subsidiaries under Section 20 of
the Glass-Steagall Act. In addition, CBH, through Commerce National Insurance
Services, Inc., a nonbank subsidiary of Commerce North ("Commerce National"),
operates an insurance brokerage firm concentrating on commercial property,
casualty and surety as well as personal lines of insurance for clients in
multiple states, primarily Delaware, New Jersey and Pennsylvania. As of June
30, 1998, CBH, on a consolidated basis, had total assets of approximately $4.4
billion, total deposits of approximately $3.9 billion and total shareholders'
equity of approximately $282.0 million.
CBH, through its four bank subsidiaries, provides a full range of retail
and commercial banking services for consumers and small and mid-sized
companies. Lending services are focused on commercial real estate, commercial
and consumer loans to local borrowers. CBH's lending and investment activities
are funded principally by retail deposits gathered through its retail branch
office network.
CBH maintains its executive offices at 1701 Route 70 East, Cherry Hill,
New Jersey, 08034-5400; telephone (609) 751-9000.
See "COMPARATIVE PER SHARE DATA" and "SUMMARY SELECTED HISTORICAL
CONSOLIDATED FINANCIAL INFORMATION OF CBH", "RECENT DEVELOPMENTS", "THE MERGER
- -- Business Pending Consummation and Related Matters" and "BUSINESS OF CBH --
History and Business."
CFBC
Community First Banking Company ("CFBC") is a one-bank holding company
headquartered in Tinton Falls, New Jersey. As of June 30, 1998, CFBC had total
consolidated assets of $186.7 million, total deposits of $172.5 million, and
total shareholders' equity of $13.0 million.
CFBC has one bank subsidiary, Tinton Falls State Bank ("Tinton Falls"),
which is a New Jersey chartered commercial bank. Tinton Falls currently
accounts for substantially all of the total assets and the net income of CFBC.
Tinton Falls engages in a full service commercial and retail banking
business from seven offices in Monmouth County, New Jersey. These commercial
and retail banking services are provided by Tinton Falls primarily to consumers
and small to mid-size companies within its primary service area (i.e.,
3
<PAGE>
Monmouth County, New Jersey). Lending services are focused on commercial real
estate and commercial and consumer lending to local borrowers. Tinton Falls'
lending and investing activities are funded principally by deposits gathered
through its retail branch offices.
CFBC maintains its executive offices at 656 Shrewsbury Avenue, Tinton
Falls, New Jersey 07701; telephone (732) 747-5252.
See "COMPARATIVE PER SHARE DATA" and "SUMMARY SELECTED HISTORICAL
CONSOLIDATED FINANCIAL INFORMATION OF CFBC", "THE MERGER -- Business Pending
Consummation and Related Matters" and "BUSINESS OF CFBC -- History and
Business."
The Merger
Under the terms of the Amended Agreement and Plan of Reorganization and a
related Agreement and Plan of Merger each dated as of August 12, 1998
(collectively, the "Merger Agreement"), attached as Annex A and Annex B, CFBC
will merge (the "Merger") with and into CBH. As a result of the Merger, each
share of CFBC Common Stock ("CFBC Common Stock") will be converted into a
number of shares of CBH Common Stock ("CBH Common Stock") (the "Exchange
Ratio"), with cash paid in lieu of fractional shares. The Exchange Ratio will
be calculated by dividing $28.00 by the average of the closing sale prices for
CBH Common Stock as quoted on the New York Stock Exchange ("NYSE") for the five
business day period ending on and excluding the second business day before the
Merger is consummated (the "Average Price"). However, a minimum Exchange Ratio
of .613 will apply if the Average Price is above $45.6875, and a maximum
Exchange Ratio of .706 will apply if the Average Price is below $39.6875. The
Board of Directors of CFBC (the "CFBC Board") will have the right to terminate
the Merger Agreement if the Average Price is below $32.00 (a "Termination
Event"). The CFBC Board has not made any determination whether they would elect
to terminate the Merger Agreement if a Termination Event occurred, and you
should not assume that the CFBC Board would exercise such right if the Average
Price is below $32.00.
The effects of the above provisions on the Exchange Ratio may be
illustrated as follows:
Average Price of CBH Common Stock Exchange Ratio
- ----------------------------------- -------------------------------------------
Greater than $45.6875 ............. 0.613
Between $39.6875 and $45.6875 ..... $28.00 divided by the Average Price
Less than $39.6875 ................ 0.706
Less than $32.00 .................. 0.706; provided, however, that the CFBC
Board will have the right to terminate the
Merger Agreement
For illustrative purposes, if, hypothetically, the Average Price of CBH
Common Stock were $39.72, the Exchange Ratio would be 0.705 ($28.00 divided by
$39.72), and the holder of 100 shares of CFBC Common Stock would receive 70
shares of CBH Common Stock and $19.86 (0.50 x $39.72) with respect to the
fractional share interest.
Options to purchase CFBC Common Stock will become vested (to the extent
unvested) as a result of the Merger and will be converted into options to
purchase CBH Common Stock.
Upon the consummation of the Merger, CBH intends to merge Tinton Falls
with and into Commerce Shore.
4
<PAGE>
CFBC's Reasons For The Merger
The CFBC Board unanimously approved the Merger and believes that the
Merger is in the best interests of the CFBC shareholders. In reaching its
determination that the Merger is fair to, and in the best interests of, CFBC
and its shareholders, the CFBC Board considered a number of factors, including,
but not limited to: the relative liquidity offered by CBH Common Stock; the
historical financial results of CBH; the tax free nature of the transaction to
the CFBC shareholders and the compatibility of the respective business and
management philosophies of CBH and CFBC.
See "THE MERGER -- Background of Merger" and "-- Recommendation of the
CFBC Board; CFBC's Reasons for the Merger."
The Meeting
The Special Meeting of Shareholders of CFBC (the "Meeting") will be held
on December 9, 1998, at 4:00 p.m. at CFBC's headquarters located at 76 Gilbert
St., West, Tinton Falls, New Jersey 07701. The purpose of the Meeting is to
consider and vote upon a proposal to approve the Merger Agreement.
Only holders of record of CFBC Common Stock as of the close of business on
November 6, 1998 (the "Record Date") are entitled to notice of, and to vote at,
the Meeting.
See "SPECIAL MEETING OF CFBC SHAREHOLDERS."
Approval of the Merger
The affirmative vote, in person or by proxy, of a majority of the votes
cast at the Meeting by the holders of shares of CFBC Common Stock entitled to
vote thereon is required to approve the Merger. For purposes of determining the
votes cast with respect to any matter presented for consideration at the
Meeting, only those votes cast "FOR" or "AGAINST" are included; abstentions
will be counted solely for the purpose of determining whether a quorum is
present.
Recommendation of the CFBC Board of Directors to Shareholders
The CFBC Board believes that the Merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve the Merger
Agreement.
Ownership of CBH Following the Merger
CBH will issue approximately 1.5 million shares of CBH Common Stock to
CFBC shareholders in the Merger, assuming that none of the 226,936 options to
purchase CFBC Common Stock that currently are outstanding is exercised prior to
the Merger. Based on that number, the shares of CBH Common Stock issued to CFBC
shareholders in the Merger will constitute approximately 6.2% of the
outstanding Common Stock of CBH after the Merger.
Effective Date
The effective date of the Merger (the "Effective Date") will occur as soon
as practicable after certain conditions to consummation of the Merger, relating
to approval of the Merger Agreement by CFBC shareholders, receipt of the
requisite regulatory approvals and required consents of third parties to the
Merger and the listing on the NYSE of the shares of CBH Common Stock have been
satisfied or waived, or such other date as shall be mutually agreed upon by the
parties to the Merger Agreement. Subject to the foregoing, we anticipate that
the Effective Date will occur in January 1999.
5
<PAGE>
Opinion of Financial Advisor
In deciding to approve the Merger, CFBC's Board considered the opinion of
its financial advisor, Berwind Financial, L.P. ("Berwind") dated August 12,
1998, that the Merger was fair, from a financial point of view, to the
shareholders of CFBC as of that date. That opinion was updated as of November
5, 1998, and is attached as Annex C to this Proxy Statement-Prospectus. We
encourage you to read this opinion.
In connection with delivering its opinion, Berwind performed a variety of
analyses. The analyses included comparing CFBC's and CBH's relative
contributions to the combined company with respect to various revenue,
earnings, balance sheet and market value data; estimating and analyzing the pro
forma effect of the Merger on earnings per share; estimating the present value
of CFBC Common Stock using a discounted dividend methodology; comparing CBH's
and CFBC's historical share prices and operating and financial ratios with
other publicly-traded companies' comparable data; comparing the terms of the
Merger with those of other selected transactions; and comparing the amount paid
in the Merger with multiples paid in other selected transactions. See "THE
MERGER -- Opinion of CFBC's Financial Advisor" and Annex C.
Interests of Certain Persons
In considering the CFBC Board's recommendations that you vote in favor of
the Merger, you should be aware that Barry B. Davall (who is also a director)
and two other Tinton Falls' officers, Michael J. Gormley and James A. Kinghorn,
have change in control agreements that provide them with interests in the
Merger that are different from, or in addition to, yours. In addition, upon the
consummation of the Merger, Mr. Davall will be offered a one year employment
agreement with CBH. Moreover, there are provisions in the Merger Agreement
relating to indemnification, directors' and officers' liability insurance, and
certain employee benefits that provide certain members of CFBC's management and
of the CFBC Board with interests in the Merger that are different from, or in
addition to, yours. See "THE MERGER -- Interests of Certain Persons" and "--
Resale of CBH Common Stock."
Certain Federal Income Tax Considerations
The Merger has been structured so that neither CBH, CFBC nor the
shareholders will recognize any gain or loss for federal income tax purposes in
the Merger, other than with respect to any cash received in lieu of fractional
share interests. Each of CBH and CFBC have conditioned the Merger on its
receipt of an opinion of counsel that such is the case.
As certain tax consequences may vary depending upon the particular
circumstances of each of you as CFBC shareholders, it is recommended that you
consult your own tax advisor concerning the federal (and any state, local and
foreign) tax consequences of the Merger in your particular circumstances.
See "THE MERGER -- Certain Federal Income Tax Consequences of the Merger."
Regulatory Approvals
The Merger is subject to the prior approval of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the BHCA. In
addition, the Merger requires approval of the New Jersey Department of Banking
and Insurance and the merger of Tinton Falls with and into Commerce Shore
requires approval of the Office of the Comptroller of the Currency (the "OCC").
Applications have been filed with the Federal Reserve Board, the New Jersey
Department of Banking and Insurance and the OCC. Approval by bank regulators
does not constitute an endorsement of the Merger or a determination by such
regulators that the terms of the Merger are fair to the CFBC shareholders. We
cannot assure you that any necessary regulatory approval will be obtained or as
to the timing or conditions of such approvals. See "THE MERGER -- Regulatory
Approvals."
6
<PAGE>
Conditions to Consummation
The completion of the Merger depends upon satisfaction of a number of
conditions, including the continued accuracy of each party's representations
and warranties, the performance by each party of its obligations under the
Merger Agreement, and the absence of any events or changes with respect to
either having, or which reasonably could be expected to have, an adverse effect
on that party. Each of these conditions is subject to a "materiality" standard.
In addition, the approval of the CFBC shareholders and certain regulatory
authorities as discussed elsewhere in this Proxy Statement-Prospectus is
required in order to consummate the Merger. Certain of the conditions to the
Merger may be waived by the company entitled to assert the condition.
Termination
We can agree to terminate the Merger Agreement without completing the
Merger, and either of us can terminate the Merger Agreement under various
circumstances, including if (i) the Merger is not completed by March 31, 1999,
for instance, because the conditions summarized above are not met, or (ii) the
required approval of either the CFBC shareholders or the regulatory authorities
(including the Federal Reserve Board) are not obtained. In addition, the CFBC
Board may terminate the Merger Agreement if the Average Price is below $32.00.
See "THE MERGER -- Termination."
Resale of CBH Common Stock
The shares of CBH Common Stock into which shares of CFBC Common Stock are
converted on the Effective Date, will be freely transferable by the holders of
such shares, except for those shares held by those holders who may be deemed to
be "affiliates" of CFBC or CBH under applicable federal securities laws.
In addition to the foregoing, consummation of the Merger is conditioned
upon "affiliates" of CFBC having agreed not to sell or otherwise dispose of any
CBH Common Stock or CFBC Common Stock beneficially owned by them during a
period commencing 30 days prior to the Effective Date and ending upon
publication by CBH of combined financial statements covering at least 30 days
of the combined entities' operations after the Merger and except as permitted
by SEC Rule 145.
No Appraisal Rights
Under the New Jersey Business Corporation Act, as amended, (the "NJBCA"),
CFBC shareholders do not have the right to dissent from the Merger and receive
the appraised value of their shares in cash in connection with the Merger.
Accounting Treatment
CBH expects the Merger to qualify as a pooling of interests, which means
that CBH will treat CBH and CFBC as if they had always been combined for
accounting and financial reporting purposes. See "THE MERGER -- Accounting
Treatment."
Certain Differences in the Rights of CFBC and CBH Shareholders
The rights of shareholders of CFBC currently are determined by reference
to the NJBCA, CFBC's Certificate of Incorporation (as amended, the "CFBC
Certificate") and CFBC's Bylaws. On the Effective Date, shareholders of CFBC
will become shareholders of CBH, and their rights as shareholders of CBH will
continue to be determined by the NJBCA and by CBH's Restated Certificate of
Incorporation (as amended, the "CBH Certificate") and CBH's Bylaws. See
"DESCRIPTION OF CBH CAPITAL STOCK" and "CERTAIN DIFFERENCES IN THE RIGHTS OF
CFBC AND CBH SHAREHOLDERS."
Listing of CBH Common Stock
The shares of CBH Common Stock issued in connection with the Merger will
be listed on the NYSE.
7
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CBH
(In thousands, except per share data)
CBH is providing the following summary financial information with respect
to CBH to aid you in your analysis of the financial aspects of the Merger. This
information was derived from CBH's historical financial statements (and related
notes) contained in the annual reports and other information that CBH has filed
with the SEC and should be read in conjunction with that information. See
"WHERE YOU CAN FIND MORE INFORMATION." The historical financial statements for
the full years were audited; those for interim periods were not audited. The
unaudited financial information reflects all adjustments (consisting only of
normal recurring accruals) which are considered necessary to present fairly the
financial information for such periods. The following historical financial
information has been adjusted to reflect CBH's declaration of a five-for-four
stock split in the form of a twenty-five percent stock dividend on its Common
Stock paid on July 24, 1998 to CBH shareholders of record as of July 13, 1998.
The results of operations for any interim period are not necessarily indicative
of results for a full year, and historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------------
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Income Statement Data:
Net interest income ..................... $ 82,662 $ 70,920
Provision for loan losses ............... 2,779 2,952
Noninterest income ...................... 40,600 26,520
Noninterest expense ..................... 84,009 64,313
Income before income taxes .............. 36,474 30,175
Net income .............................. 23,594 19,468
Balance Sheet Data:
Total assets ............................ $ 4,449,697 $ 3,597,979
Loans (net) ............................. 1,638,276 1,341,513
Securities available for sale ........... 1,304,742 939,782
Securities held to maturity ............. 1,039,730 934,687
Trading securities ...................... 35,098 25,677
Federal funds sold ...................... -- --
Deposits ................................ 3,862,590 3,187,279
Long-term debt .......................... 24,795 25,821
Trust preferred securities .............. 57,500 57,500
Stockholders' equity .................... 282,023 221,652
Per Share Data:
Net income-basic ........................ $ 1.06 $ 0.92
Net income-diluted ...................... 1.00 0.86
Cash dividends .......................... 0.37 0.30
Book value .............................. 12.52 10.32
Average Shares Outstanding:
Basic .................................. 22,260 20,929
Diluted ................................ 23,574 22,422
Selected Ratios (unaudited):
Performance:
Return on average assets ................ 1.14% 1.17%
Return on average equity ................ 17.57 18.71
Net interest margin ..................... 4.40 4.70
Liquidity and Capital:
Average loans to average deposits ....... 40.65% 43.30%
Dividend payout ratio ................... 35.37 32.45
Stockholders' equity to total assets..... 6.34 6.16
Risk-based capital:
Tier 1 ................................. 14.83 15.58
Total .................................. 16.93 17.99
Leverage capital ........................ 7.68 8.14
Asset Quality:
Non-performing assets to total
period-end assets ...................... 0.30% 0.48%
Net charge-offs to average loans
outstanding ............................ 0.09 0.08
Non-performing loans to total
period-end loans ....................... 0.46 0.76
Allowance for loan losses to total
period-end loans ....................... 1.40 1.50
Allowance for loan losses to non-
performing loans ....................... 305.34 197.70
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income ..................... $ 147,140 $ 125,413 $ 109,899 $ 102,997 $ 81,432
Provision for loan losses ............... 4,668 4,857 2,774 5,224 8,616
Noninterest income ...................... 57,374 32,776 23,623 19,591 20,677
Noninterest expense ..................... 137,929 109,031 89,316 82,734 68,785
Income before income taxes .............. 61,917 44,301 41,432 34,630 24,708
Net income .............................. 40,325 28,250 26,652 22,145 15,824
Balance Sheet Data:
Total assets ............................ $ 3,938,967 $ 3,232,152 $ 2,738,587 $ 2,571,704 $ 2,291,545
Loans (net) ............................. 1,390,028 1,248,880 1,032,801 916,437 811,580
Securities available for sale ........... 1,315,120 767,487 571,553 126,437 191,881
Securities held to maturity ............. 874,032 837,512 772,999 1,257,551 1,001,040
Trading securities ...................... 7,911 15,327 8,843 -- --
Federal funds sold ...................... -- 26,975 42,370 18,300 23,675
Deposits ................................ 3,369,404 2,919,670 2,529,186 2,099,247 1,989,598
Long-term debt .......................... 25,308 26,333 27,359 28,385 28,954
Trust preferred securities .............. 57,500 -- -- -- --
Stockholders' equity .................... 250,760 203,964 179,695 126,582 112,810
Per Share Data:
Net income-basic ........................ $ 1.89 $ 1.45 $ 1.38 $ 1.27 $ 0.89
Net income-diluted ...................... 1.78 1.33 1.30 1.18 0.87
Cash dividends .......................... 0.60 0.50 0.44 0.41 0.31
Book value .............................. 11.47 9.68 9.36 7.29 6.15
Average Shares Outstanding:
Basic .................................. 21,055 18,875 18,511 16,215 15,313
Diluted ................................ 22,599 21,197 20,367 18,588 17,928
Selected Ratios (unaudited):
Performance:
Return on average assets ................ 1.13% 0.96% 1.01% 0.89% 0.79%
Return on average equity ................ 18.18 15.43 16.57 18.54 15.55
Net interest margin ..................... 4.55 4.72 4.58 4.51 4.50
Liquidity and Capital:
Average loans to average deposits ....... 42.42% 42.84% 41.92% 43.24% 44.23%
Dividend payout ratio ................... 31.89 34.57 32.19 32.15 34.64
Stockholders' equity to total assets..... 6.37 6.31 6.56 4.92 4.92
Risk-based capital:
Tier 1 ................................. 15.66 12.57 12.64 10.04 9.13
Total .................................. 17.73 15.09 15.49 13.08 12.20
Leverage capital ........................ 7.81 6.46 6.43 4.93 4.59
Asset Quality:
Non-performing assets to total
period-end assets ...................... 0.44% 0.60% 0.81% 1.05% 1.48%
Net charge-offs to average loans
outstanding ............................ 0.10 0.25 0.14 0.35 1.19
Non-performing loans to total
period-end loans ....................... 0.82 0.89 0.97 1.64 1.44
Allowance for loan losses to total
period-end loans ....................... 1.51 1.42 1.53 1.58 1.52
Allowance for loan losses to non-
performing loans ....................... 183.46 159.88 156.72 96.26 105.53
</TABLE>
8
<PAGE>
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CFBC
(In thousands, except per share data)
CFBC is providing the following summary financial information with respect
to CFBC to aid you in your analysis of the financial aspects of the Merger.
This information was derived from CFBC's audited historical financial
statements (and related notes) for the years ended December 31, 1993 through
1997 and unaudited financial statements for the six months ended June 30, 1997
and 1998. See "CONSOLIDATED FINANCIAL STATEMENTS OF CFBC." The unaudited
financial information reflects all adjustments (consisting only of normal
recurring accruals) which are considered necessary to present fairly the
financial information for such periods. The following historical financial
information has been restated to give retroactive effect to stock dividends and
stock splits through November 6, 1998, and selected ratios for the six months
ended June 30, 1997 and 1998 have been annualized for comparability with year
ended results. The results of operations for any interim period are not
necessarily indicative of results for a full year, and historical results are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------------
1998 1997
-------------- --------------
(unaudited)
<S> <C> <C>
Income Statement Data:
Net interest income ..................... $ 5,754 $ 4,185
Provision for loan losses ............... 246 172
Noninterest income ...................... 706 558
Noninterest expense ..................... 4,415 3,294
Income before income taxes .............. 1,799 1,277
Net income .............................. 1,088 788
Balance Sheet Data:
Total assets ............................ $ 186,730 $ 151,458
Loans (net) ............................. 124,462 98,256
Securities available for sale ........... 13,798 18,877
Securities held to maturity ............. 16,241 15,139
Trading securities ...................... -- --
Federal funds sold ...................... 8,000 2,100
Deposits ................................ 172,499 139,337
Long-term debt .......................... -- --
Trust preferred securities .............. -- --
Stockholders' equity .................... 13,021 10,958
Per Share Data:
Net income-basic ........................ $ 0.51 $ 0.39
Net income-diluted ...................... 0.50 0.38
Cash dividends .......................... 0.05 0.05
Book value .............................. 6.16 5.45
Average Shares Outstanding:
Basic .................................. 2,113 2,010
Diluted ................................ 2,188 2,052
Selected Ratios (unaudited):
Performance:
Return on average assets ................ 1.31% 1.12%
Return on average equity ................ 17.61 14.82
Net interest margin ..................... 7.13 6.45
Liquidity and Capital:
Average loans to average deposits ....... 78.40% 74.10%
Dividend payout ratio ................... 9.80 12.82
Stockholders' equity to total assets..... 6.97 7.24
Risk-based capital:
Tier 1 ................................. 10.02% 10.86%
Total .................................. 11.02 11.84
Leverage capital ........................ 6.97 7.24
Asset Quality:
Non-performing assets to total
period-end assets ...................... 0.34% 0.41%
Net charge-offs to average loans
outstanding ............................ 0.00 0.02
Non-performing loans to total
period-end loans ....................... 0.50 0.53
Allowance for loan losses to total
period-end loans ....................... 1.03 0.99
Allowance for loan losses to non-
performing loans ....................... 206.68 157.78
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income ..................... $ 8,874 $ 6,929 $ 5,410 $ 4,564 $ 4,236
Provision for loan losses ............... 392 425 329 92 173
Noninterest income ...................... 1,250 963 771 624 567
Noninterest expense ..................... 6,801 5,407 4,422 3,889 3,803
Income before income taxes .............. 2,931 2,060 1,430 1,207 827
Net income .............................. 1,816 1,268 887 717 509
Balance Sheet Data:
Total assets ............................ $ 165,297 $ 131,303 $ 106,596 $ 84,456 $ 72,916
Loans (net) ............................. 109,516 93,292 74,160 57,069 42,808
Securities available for sale ........... 15,564 12,143 11,937 10,278 10,868
Securities held to maturity ............. 16,826 12,763 8,739 10,852 9,467
Trading securities ...................... -- -- -- -- --
Federal funds sold ...................... 4,500 700 1,450 -- 2,700
Deposits ................................ 152,016 119,599 96,381 78,000 66,903
Long-term debt .......................... -- -- -- -- --
Trust preferred securities .............. -- -- -- -- --
Stockholders' equity .................... 12,015 10,221 9,204 6,001 5,541
Per Share Data:
Net income-basic ........................ $ 0.86 $ 0.60 $ 0.47 $ 0.44 $ 0.32
Net income-diluted ...................... 0.84 0.60 0.47 0.44 0.32
Cash dividends .......................... 0.10 0.09 -- -- --
Book value .............................. 5.69 4.84 4.89 3.72 3.48
Average Shares Outstanding:
Basic .................................. 2,111 2,110 1,884 1,612 1,592
Diluted ................................ 2,161 2,124 1,894 1,613 1,592
Selected Ratios (unaudited):
Performance:
Return on average assets ................ 1.22% 1.05% 0.89% 0.93% 0.76%
Return on average equity ................ 16.55 13.59 11.59 12.27 9.56
Net interest margin ..................... 6.42 6.16 5.97 5.76 6.91
Liquidity and Capital:
Average loans to average deposits ....... 74.91% 80.69% 78.56% 73.87% 67.70%
Dividend payout ratio ................... 11.63 15.00 -- -- --
Stockholders' equity to total assets..... 7.27 7.78 8.63 7.11 7.60
Risk-based capital:
Tier 1 ................................. 10.41% 11.17% 12.47% 10.62% 12.90%
Total .................................. 11.32 12.02 13.26 11.45 13.80
Leverage capital ........................ 7.63 7.97 8.63 7.10 7.60
Asset Quality:
Non-performing assets to total
period-end assets ...................... 0.25% 0.21% 0.38% 0.32% 0.11%
Net charge-offs to average loans
outstanding ............................ 0.17 0.30 0.34 0.06 0.23
Non-performing loans to total
period-end loans ....................... 0.38 0.29 0.54 0.47 0.19
Allowance for loan losses to total
period-end loans ....................... 0.95 0.88 0.78 0.82 0.93
Allowance for loan losses to non-
performing loans ....................... 250.24 307.41 143.21 174.44 498.77
</TABLE>
9
<PAGE>
RECENT DEVELOPMENTS
On August 14, 1998, CBH completed the acquisition of J. A. Montgomery,
Inc., Wilmington, Delaware ("Montgomery"), an insurance brokerage firm, and
merged Montgomery with and into Commerce National. The acquisition was
completed by the issuance of CBH Common Stock totaling approximately 191,905
shares. The transaction was accounted for as a pooling of interests. The
financial statements of CBH for the periods prior to the acquisition have not
been restated, as the changes, in the aggregate, would be immaterial.
On September 17, 1998, CBH reached an agreement in principle to acquire
Prestige Financial Corp., Flemington, New Jersey. The acquisition will be
completed by the issuance of CBH Common Stock totaling approximately 1.8
million shares. This acquisition, like the Merger, is intended to be a tax-free
reorganization under appropriate provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and will be accounted for by CBH under the
pooling-of-interests method. Subject to stockholder and required governmental
approvals, the acquisition is expected to close during the first quarter of
1999. Unaudited pro forma combined financial information for CBH and Prestige
Financial Corp. at or for the year ended December 31, 1997, includes the
following (dollars in thousands):
Assets ............................... $ 4,223,000
Deposits ............................. 3,632,000
Stockholders' equity ................. 270,000
Net interest income .................. 158,000
Net income ........................... 43,000
Pro forma diluted net income per common share will not differ materially from
the $1.78 historical net income per common share reported by CBH for 1997 after
adjusting for the 5-for-4 stock split in the form of a 25% stock dividend paid
on July 24, 1998.
A new national banking association subsidiary of CBH, Commerce
Bank/Delaware, N.A., is expected to open in the first quarter of 1999.
On October 14, 1998, CBH publicly released unaudited consolidated
condensed financial information as of and for the nine months ended September
30, 1998. The following table sets forth certain consolidated condensed
financial information with respect to CBH:
Nine Months Ended
September 30,
(In thousands, except per
share data)
-------------------------------
1998 1997
-------------- --------------
(unaudited)
Income Statement Data:
Net income ....................... $ 36,153 $ 29,845
Per Share Data:
Net income -- diluted(1) ......... $ 1.53 $ 1.32
Balance Sheet Data:
Total assets ..................... $4,579,894 $3,845,175
Loans (net) ...................... 1,735,997 1,370,454
Total deposits ................... 4,133,495 3,325,214
Stockholders' equity ............. 294,587 236,826
Performance Ratios:
Return on average assets ......... 1.13% 1.14%
Return on average equity ......... 17.61 18.51
- ------------
(1) Adjusted for a five-for-four stock split in the form of a twenty-five
percent stock dividend on CBH Common Stock payable on July 24, 1998 to
stockholders of record as of July 13, 1998.
10
<PAGE>
On October 28, 1998, CFBC publicly released unaudited consolidated
condensed financial information as of and for the nine months ended September
30, 1998. The following table sets forth certain consolidated condensed
financial information with respect to CFBC:
Nine Months Ended
September 30,
(In thousands, except per
share data)
--------------------------
1998 1997
------------ -----------
(unaudited)
Income Statement Data:
Net income ....................... $ 1,782 $ 1,276
Per Share Data:
Net income -- diluted ............ $ 0.81 $ 0.59
Balance Sheet Data:
Total assets ..................... $189,334 $157,150
Loans (net) ...................... 129,988 100,374
Total deposits ................... 174,068 144,249
Stockholders' equity ............. 13,759 11,524
Performance Ratios:
Return on average assets ......... 1.35% 1.18%
Return on average equity ......... 18.18 15.53
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following unaudited information, adjusted for any past stock dividends
and stock splits, sets forth certain comparative per share data related to book
value, cash dividends paid, net income and market value: (i) on a historical
basis for CBH and CFBC; (ii) on a pro forma combined basis per share of CBH
Common Stock reflecting consummation of the Merger; and (iii) on an equivalent
pro forma basis per share CFBC Common Stock reflecting consummation of the
Merger. Such information has been prepared (i) assuming a .705 Exchange Ratio
(assuming an Average Price of $39.72) and (ii) giving effect to the Merger on a
pooling of interests accounting basis as if the Merger had been consummated at
the beginning of the earliest period presented. See "THE MERGER -- Accounting
Treatment."
The information set forth below should be read in conjunction with, and is
qualified in its entirety by, the Summary Selected Historical Consolidated
Financial Information of CBH and CFBC and the Consolidated Financial Statements
of CFBC, including notes thereto, appearing elsewhere in this Proxy Statement-
Prospectus and the Consolidated Financial Statements of CBH included in
documents incorporated by reference in this Proxy Statement-Prospectus. See
"WHERE YOU CAN FIND MORE INFORMATION" and "CONSOLIDATED FINANCIAL STATEMENTS OF
CFBC."
Book Value per Share
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -------------
<S> <C> <C>
Historical book value per share of:
CBH Common Stock ..................................................... $ 12.52 $ 11.47
CFBC Common Stock .................................................... 6.16 5.69
Pro forma combined book value per share of CBH Common Stock (1) ......... 12.23 11.42
Equivalent pro forma book value per share of CFBC Common Stock (2) . .... 8.62 8.05
</TABLE>
- ------------
(1) The pro forma combined book value per share of CBH Common Stock amounts
represent the sum of the pro forma combined common shareholders' equity
amounts, divided by the pro forma combined period-end number of shares of
common stock outstanding.
(2) The equivalent pro forma book value per share of CFBC Common Stock amounts
represent the pro forma combined book value per share of CBH Common Stock
amounts, multiplied by a .705 Exchange Ratio.
Cash Dividends Paid per Share
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
---------------- --------------------------------------
1998 1997 1996 1995
---------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Historical cash dividends paid per share of:
CBH Common Stock ...................................... $ 0.37 $ 0.60 $ 0.50 $ 0.44
CFBC Common Stock ..................................... 0.05 0.10 0.09 --
Pro forma combined cash dividends paid per share of CBH
Common Stock (1):
CBH and CFBC .......................................... 0.35 0.53 0.42 0.33
Equivalent pro forma cash dividends paid per share of CFBC
Common Stock (2):
CBH and CFBC .......................................... 0.25 0.38 0.30 0.23
</TABLE>
- ------------
(1) The pro forma combined cash dividends paid per share of CBH Common Stock
amounts represent the pro forma combined cash dividends paid on shares of
CBH Common Stock outstanding, divided by the pro forma combined average
number of shares of CBH Common Stock outstanding, rounded to the nearest
cent.
(2) The equivalent pro forma cash dividends paid per share of CFBC Common Stock
amounts represent the pro forma combined dividends paid per share of CBH
Common Stock amounts, multiplied by a .705 Exchange Ratio, rounded to the
nearest cent. The current annualized dividend rate per share of CBH Common
Stock, based upon the most recently declared quarterly dividend rate of
$0.195 per share of CBH Common Stock payable on October 20, 1998, would be
$0.78 (excluding the one-time special cash dividend of $0.20 per share
declared on June 29, 1998). On an equivalent pro forma basis, such current
annualized CBH dividend per share of CFBC Common Stock would be $0.55,
based on a .705 Exchange Ratio, rounded down to the nearest cent. No
assurances can be given as to future dividend rates. Future CBH and CFBC
dividends will be dependent upon the respective earnings and financial
conditions of CBH and CFBC, as well as government regulations and policies
and other factors.
12
<PAGE>
Net Income per Share applicable to Common Shareholders
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
----------------- ---------------------------------------
1998 1997 1996 1995
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Historical net income per share of:
CBH Common Stock (basic) ............................ $1.06 $1.89 $1.45 $1.38
CBH Common Stock (diluted) .......................... 1.00 1.78 1.33 1.30
CFBC Common Stock (basic) ........................... 0.51 0.86 0.60 0.47
CFBC Common Stock (diluted) ......................... 0.50 0.84 0.60 0.47
Pro forma net income per share of CBH Common Stock (1):
CBH and CFBC (basic) ................................ 1.03 1.84 1.40 1.31
CBH and CFBC (diluted) .............................. 0.98 1.74 1.29 1.25
Equivalent pro forma net income per share of CFBC Common
Stock (2):
CBH and CFBC (basic) ................................ 0.73 1.30 0.99 0.92
CBH and CFBC (diluted) .............................. 0.69 1.23 0.91 0.88
</TABLE>
- ------------
(1) The pro forma combined net income per share of CBH Common Stock amounts
represent the pro forma combined net income applicable to holders of CBH
Common Stock, divided by the pro forma combined average number of shares
of CBH Common Stock outstanding.
(2) The equivalent pro forma net income per share of CFBC Common Stock amounts
represent the pro forma combined net income per share of CBH Common Stock
amounts, multiplied by a .705 Exchange Ratio.
Market Value per Share
August 12, 1998
----------------
Historical market value per share of:
CBH Common Stock ...................................... $41.69
CFBC Common Stock ..................................... 24.00
Equivalent pro forma market value per share of CFBC Common
Stock (1) ............................................... 29.38
- ------------
(1) The equivalent pro forma market values per share of CFBC Common Stock
represent the historical market values per share of CBH Common Stock,
multiplied by a .705 Exchange Ratio, rounded down to the nearest
one-sixteenth. The CBH and CFBC historical market values per share
represent the last reported sales price per share of CBH Common Stock on
the NYSE and CFBC Common Stock on the Over-the-Counter Bulletin Board
("OTC BB"), respectively, on August 12, 1998, the last trading day
preceding public announcement of the execution of the Merger Agreement.
See "COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION."
Because the market price of CBH Common Stock is subject to fluctuation,
the Exchange Ratio assumed herein may increase or decrease (subject, however,
to the limitations placed on the Average Price and the resulting minimum and
maximum Exchange Ratio as discussed elsewhere in this Proxy
Statement-Prospectus) prior to, as well as after, the receipt of such shares
following the Effective Date. CFBC shareholders are urged to obtain current
market quotations for CBH Common Stock and CFBC Common Stock. We cannot assure
you of the market prices of CBH Common Stock or CFBC Common Stock at any time
before the Effective Date or as to the market price of CBH Common Stock
thereafter.
CFBC Common Stock is not listed for trading on any securities exchange or
any automated dealer quotation system. There is no established market for CFBC
Common Stock; its trading has been extremely limited and CFBC does not regard
the information that it receives with respect to particular transactions in
CFBC Common Stock as being indicative of the market price which would exist
were the CFBC Common Stock more heavily traded. As of the Record Date, there
were approximately 348 holders of record of CFBC Common Stock.
13
<PAGE>
SPECIAL MEETING OF CFBC SHAREHOLDERS
General
We are sending you this Proxy Statement-Prospectus in order to provide you
with important information regarding the Merger and to solicit your proxy for
use at the Meeting (and any adjournments or postponements thereof). The Meeting
is scheduled to be held on December 9, 1998, at 4:00 p.m. at CFBC's
headquarters located at 76 Gilbert St., West, Tinton Falls, New Jersey 07701,
and this document also serves as the official notice of such meeting. CFBC has
established November 6, 1998, as the Record Date for its meeting. Only
shareholders of record of CFBC Common Stock on the Record Date are entitled to
attend and vote at the special meetings.
Purposes
At the Meeting (and any adjournments or postponements thereof), the
shareholders of CFBC will be asked (a) to approve the Merger Agreement and (b)
to consider such other business as may properly be presented at the Meeting.
Each copy of this Proxy Statement-Prospectus that is being sent to
shareholders is accompanied by an appropriate proxy card.
Voting Rights; Votes Required for Approval
On the Record Date, there were approximately 2,114,621 shares of CFBC
Common Stock outstanding and entitled to vote at the Meeting, held by
approximately 348 shareholders of record, including participants in security
position listing. Each of these holders is entitled to cast one vote per share.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares is necessary to constitute a quorum at the Meeting. Pursuant
to the NJBCA, abstentions and broker non-votes (which may occur if a beneficial
owner of CFBC Common Stock where shares are held in a brokerage or bank account
fails to provide the broker or bank voting instructions as to such shares) will
be counted solely for the purpose of determining whether a quorum is present.
The affirmative vote, in person or by proxy, of a majority of the votes cast at
the Meeting by the holders of shares of CFBC Common Stock entitled to vote
thereon is required to approve the Merger Agreement. For purposes of
determining the votes cast with respect to any matter presented for
consideration at the Meeting, only those votes cast "FOR" or "AGAINST" are
included; abstentions will be counted solely for the purpose of determining
whether a quorum is present.
As of the Record Date, the directors and executive officers of CFBC
beneficially owned, in the aggregate, 493,029 shares of CFBC Common Stock,
representing approximately 23.3 percent of the votes entitled to be cast at the
Meeting by the holders of CFBC Common Stock.
As of the Record Date, each of the directors of CFBC have agreed in
writing to vote all shares of CFBC Common Stock which they own or, subject to
their fiduciary duties, are entitled to vote, representing 470,919 shares in
the aggregate, in favor of the Merger Agreement.
Voting and Revocation of Proxies
All shares of CFBC Common Stock represented at the Meeting by properly
executed proxies will be voted in accordance with the instructions indicated in
such proxies, except to the extent such proxies are revoked in advance of a
vote. If a stockholder signs and returns a proxy without voting instructions,
and the proxy is not revoked, the proxy will be voted for the approval of the
Merger Agreement.
A stockholder may revoke his or her proxy at any time in advance of a vote
by delivering to the Secretary of CFBC, a signed notice of revocation or a
later-dated signed proxy or by attending the applicable special meeting and
voting in person. All written notices of revocation and other communications
with respect to revocation of CFBC proxies should be addressed to: Community
First Banking Company, 656 Shrewsbury Avenue, Tinton Falls, New Jersey 07701,
Attn: Corporate Secretary. Attendance at the Meeting will not, in and of
itself, constitute the revocation of a proxy.
14
<PAGE>
Solicitation of Proxies
CFBC will bear the expenses of soliciting proxies from the CFBC
shareholders for the Meeting. In addition to solicitation by use of the mails,
CFBC's directors, officers and employees may solicit proxies in person or by
telephone, telegram or by any other means of communication. These individuals
will not receive any special compensation for soliciting proxies, but they will
be reimbursed for their out-of-pocket expenses.
Other Matters
In the event that insufficient votes in favor of the Merger are received
prior to the scheduled meeting date, CFBC may decide to postpone or adjourn the
Meeting, in which event the proxies that have been received that either have
been voted for the Merger or contain no instructions will be voted for
adjournment. CFBC is not aware of any business to be brought before the Meeting
other than that described herein. If, however, other matters are properly
brought before the Meeting or any adjournments or postponements thereof, the
persons appointed as proxies will have discretionary authority to vote the
shares represented by properly executed proxies in accordance with their
discretion and judgment as to the best interests of CFBC.
15
<PAGE>
THE MERGER
Certain Terms of the Merger Agreement
The following is a brief summary of certain terms of the Merger Agreement.
This summary is qualified in its entirety by reference to the Merger Agreement,
which is incorporated herein and attached hereto as Annex A and Annex B. You
are urged to read the Merger Agreement in its entirety.
Effect of the Merger
On the Effective Date, CFBC will merge with and into CBH. CBH will be the
surviving corporation and CFBC shareholders will automatically become
shareholders of CBH. Upon consummation of the Merger, CBH intends to merge
Tinton Falls with and into Commerce Shore.
Conversion of Shares
As a result of the Merger, each share of CFBC Common Stock will be
converted into a number of shares of CBH Common Stock (the "Exchange Ratio"),
with cash paid in lieu of fractional shares. The Exchange Ratio will be
calculated by dividing $28.00 by the Average Price. However, a minimum Exchange
Ratio of .613 will apply if the Average Price is above $45.6875, and a maximum
Exchange Ratio of .706 will apply if the Average Price is below $39.6875. The
CFBC Board will have the right to terminate the Merger Agreement if the Average
Price is below $32.00 (a "Termination Event"). The CFBC Board has not made any
determination whether they would elect to terminate the Merger Agreement if a
Termination Event occurred, and you should not assume that the Board would
exercise such right if the Average Price is below $32.00. See "-- Termination."
The effects of the above provisions on the Exchange Ratio may be
illustrated as follows:
Average Price of CBH Common Stock Exchange Ratio
- ------------------------------------ ------------------------------------------
Greater than $45.6875............ 0.613
Between $39.6875 and $45.6875 ... $28.00 divided by the Average Price
Less than $39.6875............... 0.706
Less than $32.00 ................ 0.706; provided, however, that the CFBC
Board will have the right to terminate the
Merger Agreement
For illustrative purposes, if, hypothetically, the Average Price of CBH
Common Stock were $39.72, the Exchange Ratio would be 0.705 ($28.00 divided by
$39.72), and the holder of 100 shares of CFBC Common Stock would receive 70
shares of CBH Common Stock and $19.86 (0.50 x $39.72) with respect to the
fractional share interest.
The calculation of the Exchange Ratio called for the by Merger Agreement
was intended by CBH and CFBC to result in shareholders of CFBC receiving in the
Merger CBH Common Stock with a value of $28.00 for each share of CFBC Common
Stock, provided that the Average price of CBH Common Stock is between $39.6875
and $45.6875. However, there can be no assurance that the Average Price will
fall between $39.6875 and $45.6875 or, even if it does, that the number of
shares of CBH Common Stock issued in exchange per share of CFBC Common Stock in
the Merger will have a value of $28.00 on the Effective Time or on the day when
certificates representing such shares of CBH Common Stock are issued or
delivered to CFBC shareholders.
If, prior to the Effective Date, CBH Common Stock undergoes a stock split,
stock dividend, recapitalization or similar transaction, the Average Price, and
therefore the Exchange Ratio, will be proportionately adjusted.
Effective Date
The Effective Date will occur as soon as practicable after certain
conditions to consummation of the Merger, relating to approval of the Merger
Agreement by CFBC shareholders, receipt of the requisite regulatory approvals
and required consents of third parties to the Merger and the listing on the
NYSE of the
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shares of CBH Common Stock to be issued in the Merger, have been satisfied or
waived, or such other date as shall be mutually agreed upon by the parties to
the Merger Agreement. Subject to the foregoing, we currently anticipate that
the Effective Date will occur in January 1999.
CFBC Stock Certificates; Fractional Shares
As promptly as practicable after the Effective Date, CBH will cause
Chase/Mellon Shareholder Services, LLC (the "Exchange Agent") to send to each
holder of record of CFBC Common Stock on the Effective Date, transmittal
materials for use in exchanging all of the holder's certificates representing
CFBC Common Stock for a certificate or certificates representing the CBH Common
Stock to which the holder is entitled, and a check for the holder's fractional
share interest, if any. The transmittal materials will contain information and
instructions with respect to the surrender and exchange of such certificates.
Holders of CFBC Common Stock should not send in their certificates until
they receive the letter of transmittal and instructions. Certificates should
not be returned with proxy cards.
Upon surrender of all of the certificates for CFBC Common Stock registered
in the name of a holder of such certificates (or indemnity satisfactory of CBH
and the Exchange Agent if any of such certificates are lost, stolen or
destroyed), in accordance with the letter of transmittal, the Exchange Agent
will mail to the holder a certificate or certificates representing the number
of shares of CBH Common Stock to which the holder is entitled, together with
all undelivered dividends or distributions in respect of such shares and, where
applicable, a check for any fractional share interest (in each case, without
interest).
All shares of CBH Common Stock into which shares of CFBC Common Stock are
converted on the Effective Date, will be deemed issued as of the Effective
Date. After the Effective Date, former holders of record of CFBC Common Stock
will be entitled to vote at any meeting of holders of CBH Common Stock the
number of whole shares of CBH Common Stock into which their shares of CFBC
Common Stock have been converted, regardless of whether they have surrendered
their CFBC Common Stock certificates. CBH dividends having a record date on or
after the Effective Date will include dividends on shares of CBH Common Stock
issued in the Merger, but no dividend or other distribution payable to the
holders of record of shares of CBH Common Stock after 30 days after the
Effective Date will be distributed to the holder of any CBH Common Stock
certificates until such holder physically surrenders all of the certificates
for such shares of CFBC Common Stock as herein-described above. Promptly after
such surrender, all undelivered dividends and other distributions and, where
applicable, a check for any fractional share interest, will be delivered to
such holder (in each case, without interest). As of the Effective Date, the
stock transfer books of CFBC will be closed, and there will be no transfers on
the transfer books of CFBC of the shares of CFBC Common Stock that were
outstanding immediately prior to the Effective Date.
Treatment of CFBC Stock Options
On the Effective Date, each outstanding unexpired option to purchase
shares of CFBC Common Stock (a "CFBC Stock Option") will become vested (to the
extent unvested) and will be converted into options to purchase CBH Common
Stock ("CBH Stock Options"). Each holder of CFBC Stock Options will receive an
option to purchase the number of shares of CBH Common Stock equal to the
product of (i) the number of shares of CFBC Common Stock issuable upon the
exercise of such holder's CFBC Options and (ii) the Exchange Ratio; provided,
however that any fractional shares of CBH Common Stock resulting from such
multiplication will be rounded down to the nearest whole share. The exercise
price for the CBH Stock Options will be equal to (i) the exercise price of the
CFBC Stock Option for which the CBH Stock Option is being converted and issued
in place thereof divided by (ii) the Exchange Ratio; provided, however, that
such exercise price will be rounded down to the nearest whole cent. The
duration and certain other terms of each CBH Stock Option shall be
substantially the same as that of each CFBC Stock Option exchanged therefor.
CBH has reserved for issuance a sufficient number of shares of CBH Common
Stock for delivery upon exercise of the CBH Stock Options exchanged for CFBC
Stock Options in accordance with the Merger Agreement.
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Background of Merger
In October 1997, Barry B. Davall, the President of CFBC, and Gerald F.
Murphy, the Chairman of CFBC, met with Vernon W. Hill, II, the Chairman and
President of CBH. A meeting took place at which Mr. Hill raised the prospect of
an acquisition of CFBC by CBH. After some preliminary discussions, the matter
was dropped without resolution and without any formal offer made by CBH.
In connection with the late 1997 discussions, CFBC engaged Berwind as its
financial advisor, and from time to time the CFBC Board and management has
sought and received advice from Berwind regarding a potential transaction with
CBH and other strategic options CFBC might consider. During November 1997,
Berwind first conducted due diligence on CFBC and Tinton Falls and presented
the CFBC Board with Berwind's financial analysis of CFBC and of the initial
expression of interest from CBH.
In late July 1998, CBH contacted CFBC and sought to reopen discussions
about a possible business combination. On July 29, 1998, Mr. Hill sent a letter
to Mr. Murphy suggesting a transaction with a value in the "range" of $25.00
per share of CFBC Common Stock. The CFBC Board met on July 29, 1998. The CFBC
Board received advice at the meeting from CFBC's outside legal advisors
regarding the fiduciary considerations involved in considering the approach by
CBH. The CFBC Board received advice and a formal presentation from Berwind
regarding the short and long-term value of CFBC, the financial aspects of a
potential transaction with CBH, and the strategic alternatives available to
CFBC. At the July 29 meeting, the CFBC Board tentatively determined that there
might be interest in a transaction with CBH if the value of the consideration
were not less than $28.00 per share of CFBC Common Stock. The CFBC Board
directed Mr. Murphy to respond to Mr. Hill in light of that determination.
Messrs. Murphy and Hill had further discussions and Mr. Murphy reported
back to the CFBC Board that Mr. Hill had indicated a willingness on the part of
CBH to provide approximately $26.50 in value to CFBC shareholders and that, if
CBH were permitted to conduct preliminary due diligence on CFBC, CBH might find
sufficient justification for providing $28.00 in value. The CFBC Board
determined to authorize the requested due diligence and directed CFBC's outside
counsel to prepare a confidentiality letter, which CBH executed and delivered
as a condition to obtaining due diligence information from CFBC.
At the CFBC Board's direction, a number of CFBC senior executive officers
met off-site with representatives of CBH on August 7, 1998, and provided them
with certain information about CFBC and Tinton Falls. Later that day, Mr. Hill
proposed to Mr. Murphy a transaction valued at $28.00 per share of CFBC Common
Stock.
Negotiations regarding the specific terms and conditions of the Merger
Agreement were conducted during the following days, and on August 11, 1998,
representatives of CFBC conducted formal due diligence on CBH. On August 12,
1998, the CFBC Board of Directors met and reviewed the proposed transaction,
and received advice from its outside legal and financial advisors. The CFBC
Board reviewed with its management and advisors the terms and conditions
contained in the draft Merger Agreement presented to the CFBC Board. At the
CFBC Board's request CFBC's counsel telephoned CBH's counsel during the course
of the meeting and negotiated certain changes to the draft agreement to make it
acceptable to the CFBC Board. At the conclusion of the meeting the CFBC Board
unanimously approved the Merger Agreement and the Merger Agreement was executed
and delivered by CFBC and CBH.
Recommendation of the CFBC Board; CFBC's Reasons for the Merger
The CFBC Board unanimously approved the Merger and believes that the
Merger is in the best interests of the shareholders of CFBC.
In reaching its determination that the Merger is fair to, and in the best
interests of, CFBC and its shareholders, the CFBC Board considered a number of
factors, both from a short-term and longer-term perspective, including, but not
limited to, the following:
i) the historical trading prices for CFBC Common Stock and CBH Common
Stock, the relative liquidity offered by CBH Common Stock, which is traded on
the NYSE, compared with CFBC Common
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Stock, which is thinly traded on the OTC BB, and the likelihood that the CBH
Common Stock to be received by CFBC shareholders in the Merger would constitute
a favorable premium compared to expected future values of CFBC Common Stock
under a variety of circumstances and assumptions;
ii) the historical financial results of CBH, information furnished to
the CFBC Board regarding CBH's business, operations, financial condition and
future prospects, and the results of the due diligence investigation conducted
by CFBC's management and advisors;
iii) the advice of Berwind, the detailed financial analyses, pro forma
results and other information presented by Berwind to the CFBC Board, including
a comparison on the value of the consideration to be paid in the Merger to that
paid in other comparable financial institution mergers, and Berwind's opinion
that, as of August 12, 1998, the consideration to be received by the
shareholders of CFBC was fair from a financial point of view. See " -- Opinion
of CFBC's Financial Advisor";
iv) the tax free nature of the transaction to CFBC shareholders;
v) the CFBC Board's familiarity with and review of the business,
financial condition, results of operations and future prospects of CFBC,
including the potential growth, development, productivity and profitability of
CFBC;
vi) the current and prospective environment in which CFBC operates,
including economic conditions, the competitive environment for banks and
financial institutions generally, the trend toward consolidation in the
financial services industry, and the likely effect of those factors on CFBC's
potential growth, development and profitability;
vii) the compatibility of the respective business and management
philosophies of CBH and CFBC, CBH's growing franchise in New Jersey, the
likelihood that the combined company would be more likely than CFBC alone to
possess the financial and technological resources to compete more effectively
in the rapidly changing marketplace for banking and financial services, and the
expectation that CBH will continue to provide quality service to the
communities and customers served by CFBC;
viii) CFBC's possible alternatives to the Merger, including the range of
possible values of those alternatives and the timing and likelihood of success
in soliciting, negotiating, and actually receiving those values;
ix) the review by the CFBC Board with its legal and financial advisors
of the provisions of the Merger Agreement;
x) the price protection afforded to CFBC's shareholders in the Merger
due to the method of calculation of the Exchange Ratio and the ability of the
CFBC Board to terminate the Merger Agreement if the Average Price of CBH Common
Stock is less than $32.00 per share;
xi) the "fiduciary out" provisions in the Merger Agreement and the
absence of any "lock-up" stock option;
xii) the impact the Merger would be likely to have on the various
constituencies served by CFBC, including its shareholders, employees, customers
and community;
xiii) the provisions of the Merger Agreement on a variety of issues
affecting CFBC directors and officers, including covenants that CBH will
terminate and pay out in full CFBC's existing change in control agreements with
Barry B. Davall, Michael J. Gormley and James A. Kinghorn, that CBH will offer
a one year employment contract to Mr. Davall, and that CBH will appoint four
CFBC designees (including Gerard F. Murphy) to the Board of Directors of
Commerce Shore, with Mr. Murphy being appointed Vice Chairman of the Board of
Directors of Commerce Shore; and
xiv) the likelihood, based on CBH's prior acquisition history, the
non-overlapping nature of CFBC's and CBH's existing markets and discussions
between the respective Chairman of CBH and CFBC that CBH would be more inclined
than many other potential acquirors of CFBC to offer continued employment and,
in some cases, enhanced employment opportunities, to a large number of current
CFBC employees.
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<PAGE>
The foregoing does not purport to be a complete list of the matters
considered by the CFBC Board in approving the Merger. In approving the Merger,
the CFBC Board did not identify any one factor or group of factors as being
more important or significant than any other factor in the decision making
process.
Because the CFBC Board concluded that the long-term interests of CFBC and
the maximization of value for its shareholders would best be served by
combining with CBH under the terms and conditions set forth in the Merger
Agreement, CFBC's Board did not solicit or give substantial consideration to
any proposals other than the one made by CBH.
For the reasons described above, the CFBC Board has unanimously approved
the Merger Agreement and has determined that the Merger is fair to, and is in
the best interest of, CFBC and its shareholders. Accordingly, the CFBC Board
unanimously recommends that CFBC shareholders vote "FOR" the adoption and
approval of the Merger Agreement.
CBH's Reasons for the Merger
In reaching its conclusion to approve the Merger, the CBH Board consulted
with CBH's senior management, as well as with its legal advisors, and
considered various factors, including the following:
i) Consistency with CBH Strategy. The effectiveness of the Merger as a
method of implementing and accelerating CBH's strategy for long-term growth and
enhanced shareholder value. This included (a) increased revenue from the sale
of CBH products and services to CFBC customers, (b) the strong CFBC banking
franchise with a retail and middle-market focus in important markets in New
Jersey, (c) a bank with similar approaches to customer services, credit
quality, expense reduction, and growth and (d) opportunities to leverage
capacity in technology over a larger asset and customer base and to realize
other expense savings.
ii) Certain Financial Information. This information included, but was
not limited to, information with regard to respective recent and historical
stock performance, valuation analyses, pro forma analyses, comparative
financial data, and comparable merger and acquisition transactions as presented
by CBH's senior management. CBH senior management also commented on its due
diligence review.
iii) Certain Nonfinancial Information. Certain nonfinancial terms and
the structure of the Merger, including information about the terms of the
Merger Agreement.
iv) Regulatory Approvals. The likelihood of the Merger being approved
by the appropriate regulatory authorities. See "-- Regulatory Approvals."
The foregoing discussion of the information and factors considered by the
CBH Board is not intended to be exhaustive but includes all material factors
considered by the CBH Board. In reaching its determination to approve the
Merger, the CBH Board did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing weights to
different factors. After deliberating with respect to the Merger and the other
transactions contemplated by the Merger Agreement, and considering, among other
things, the matters discussed above, the CBH Board unanimously approved the
Merger Agreement and the transactions contemplated thereby, as being in the
best interests of CBH and its shareholders.
Opinion of CFBC's Financial Advisor
Since October 1997, Berwind Financial, L.P. ("Berwind") has formally acted
as financial advisor to CFBC on a contractual basis. Berwind was retained to
provide general financial advisory services to CFBC based on its
qualifications, expertise and experience. Berwind has knowledge of, and
experience with, New Jersey, Pennsylvania and surrounding banking markets as
well as banking organizations operating in those markets and was selected by
CFBC because of its knowledge of, experience with, and reputation in the
financial services industry. Berwind, as part of its investment banking
business, is engaged regularly in the valuation of assets, securities and
companies in connection with various types of asset and securities
transactions, including mergers, acquisitions, private placements, and
valuations for various other purposes and in the determination of adequate
consideration in such transactions.
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On August 12, 1998, CFBC's Board of Directors approved and executed the
Merger Agreement. On August 12, 1998, Berwind delivered its opinion (the
"August Opinion") to the CFBC Board stating that, as of such date, the
consideration to be received in the Merger was fair to the shareholders of CFBC
from a financial point of view. Berwind delivered an updated opinion to the
same effect as of November 5, 1998, and is attached as Annex C to this Proxy
Statement-Prospectus (the "Proxy Opinion").
The full text of the Proxy Opinion that sets forth assumptions made,
matters considered and limits on the review undertaken is attached hereto as
Annex C. No limitations were imposed by the CFBC Board upon Berwind with
respect to the investigations made or procedures followed by Berwind in
rendering its August Opinion or its Proxy Opinion. CFBC's shareholders are
urged to read both this section and the Proxy Opinion in their entirety.
Berwind's Proxy Opinion is directed to the consideration that will be received
in the Merger and does not constitute a recommendation to any holder of CFBC
Common Stock as to how such holder should vote at the Meeting. The summary of
the Proxy Opinion of Berwind set forth in this Proxy Statement-Prospectus is
qualified in its entirety by reference to the full text of the opinion itself
set forth as Annex C hereto.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of
CFBC and CBH; (ii) reviewed the Merger Agreement; (iii) reviewed and analyzed
the stock market performance of CFBC and CBH; (iv) studied and analyzed the
consolidated financial and operating data of CFBC and CBH; (v) considered the
terms and conditions of the proposed Merger 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 CFBC's and
CBH's senior management to discuss their respective operations, historical
financial statements, and future prospects; (vii) reviewed this Proxy
Statement-Prospectus, and (viii) conducted such other financial analyses,
studies and investigations as Berwind deemed appropriate.
In delivering its August Opinion and Proxy Opinion, Berwind assumed that
in the course of obtaining the necessary regulatory and governmental approvals
for the Merger, no restriction will be imposed on CBH or CFBC that would have a
material adverse effect on the contemplated benefits of the Merger. Berwind
also assumed that there will not occur any change in applicable law or
regulation that would cause a material adverse change in the prospects or
operations of CBH after the Merger.
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinions. With respect to CFBC's and
CBH's financial forecasts reviewed by Berwind in rendering its opinions,
Berwind assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of CFBC and CBH as to the future financial performance of CFBC and
CBH. Berwind did not make an independent evaluation or appraisal of the assets
(including loans) or liabilities of CFBC or CBH nor was it furnished with any
such appraisal. Berwind also did not independently verify and has relied on and
assumed that all allowances for loan and lease losses set forth in the balance
sheets of CFBC and CBH were adequate and complied fully with applicable law,
regulatory policy and sound banking practice as of the date of such financial
statements.
The following is a summary of selected analyses prepared by Berwind and
presented to the CFBC Board in connection with the August Opinion and analyzed
by Berwind in connection with the August and Proxy Opinions. In connection with
delivering its Proxy Opinion, Berwind updated certain analyses described above
to reflect current market conditions and events occurring since the date of the
August Opinion. Such reviews and updates led Berwind to conclude that it was
not necessary to change the conclusions it had reached in connection with
rendering the August Opinion.
Comparable Companies and Comparable Acquisition Transaction
Analyses. Berwind compared selected financial and operating data for CFBC with
those of a peer group of selected banks and bank holding companies with assets
between $155 million and $260 million, as of the most recent financial period
publicly available, headquartered in New Jersey. Berwind also compared selected
stock market data for CFBC with those of a peer group of selected banks and
bank holding companies with assets of less than $300 million, as of the most
recent financial period publicly available, headquartered in New Jersey.
Financial, operating and
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stock market data, ratios and multiples compared in the analysis of the CFBC
peer groups included but were not limited to: return on average assets, return
on average shareholders' equity, shareholders' equity to assets ratio, certain
asset quality ratios, price to book value, price to tangible book value, price
to earnings (latest twelve months) and dividend yield.
Berwind also compared selected financial, operating and stock market data
for CBH with those of a peer group of selected banks and bank holding companies
with assets between $2.7 billion and $7.0 billion, as of the most recent period
publicly available, headquartered in New Jersey and Pennsylvania. Financial,
operating and stock market data, ratios and multiples compared in the analysis
of the CBH peer group included but were not limited to: return on average
assets, return on average shareholders' equity, shareholders' equity to asset
ratios, certain asset quality ratios, price to book value, price to tangible
book value, price to earnings (latest twelve months, estimated 1998 and
estimated 1999) and dividend yield.
Berwind also compared the multiples of book value, tangible book value and
latest twelve months' earnings inherent to the Merger with the multiples paid
in recent acquisitions of banks and bank holding companies that Berwind deemed
comparable. The transactions deemed comparable by Berwind included both
interstate and intrastate acquisitions announced during the twelve months
preceding the date of the Proxy Opinion, in which the selling institution's
assets were between $100 million and $300 million as of the most recent period
publicly available prior to announcement. Berwind compared transactions located
throughout the country and analyzed those transactions in three groups: a
national group (68 banks), a regional group (5 banks), and a performance group
(12 banks). The national group included commercial banking institution
transactions throughout the United States; the regional group included
transactions involving commercial banking institutions located in New Jersey
and Pennsylvania; and the performance group included transactions involving
commercial banking institutions with return on average assets greater than or
equal to 1.0% and return on average shareholders' equity greater than or equal
to 12.0% and shareholders' equity as a percentage of total assets less than or
equal to 8.0%.
No company or transaction, however, used in this analysis is identical to
CFBC, CBH or the Merger. Accordingly, an analysis of the result of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that would affect the public trading values of
the companies or company to which they are being compared.
Discounted Dividend Analyses. Using discounted dividend analyses, Berwind
estimated the present value of CFBC's Common Stock after a five year period by
applying a range of earnings multiples to CFBC's terminal year earnings under
various growth assumptions. The range of multiples used reflected a variety of
scenarios regarding the growth and profitability prospects of CFBC. The
terminal values were then discounted to present value using discount rates,
reflecting different assumptions regarding the rates of return required by
holders or prospective buyers of CFBC's Common Stock.
Pro Forma Contribution Analysis. Berwind analyzed the changes in the
amount of earnings, book value and dividends represented by one share of CFBC
stock prior to the Merger and the number of shares of CBH stock after the
Merger resulting from the Exchange Ratio. The analysis considered, among other
things, the changes that the Merger would cause to CFBC's earnings per share,
book value per share and indicated dividends. In reviewing the pro forma
combined earnings, equity and assets of CBH based on the Merger with CFBC,
Berwind analyzed the contribution that CFBC would have made to the combined
company's earnings, equity and assets as of and for the most recent quarterly
period ended as of the date of the Proxy Opinion. Berwind also reviewed the
percentage ownership that CFBC shareholders would hold in the combined company.
In connection with rendering its August Opinion and Proxy Opinion, Berwind
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the consideration to be paid in
the Merger was to some extent a subjective one based on the experience and
judgment of Berwind and not merely the result of mathematical analysis of
financial data, Berwind principally relied on the previously discussed
financial valuation methodologies in its determinations. Berwind believes its
analyses must be considered as a whole and that selecting portions of such
analyses and factors considered by Berwind
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without considering all such analyses and factors could create an incomplete
view of the process underlying Berwind's opinions. In its analysis, Berwind
made numerous assumptions with respect to business, market, monetary and
economic conditions, industry performance and other matters, many of which are
beyond CFBC's and CBH's control. Any estimates contained in Berwind's analyses
are not necessarily indicative of future results or values, which may be
significantly more or less favorable than such estimates.
In reaching its opinion as to fairness, none of the analyses performed by
Berwind was assigned a greater or lesser weighting by Berwind than any other
analysis. As a result of its consideration of the aggregate of all factors
present and analyses performed, Berwind reached the conclusion, and opined,
that the consideration to be received in the Merger as set forth in the Merger
Agreement, is fair from a financial point of view to CFBC and its shareholders.
Berwind's Proxy Opinion was based solely upon the information available to
it and the economic, market and other circumstances as they existed as of the
date its Proxy Opinion was delivered; events occurring after the date of its
Proxy Opinion could materially affect the assumptions used in preparing its
Proxy Opinion. Berwind has not undertaken to reaffirm and revise its Proxy
Opinion or otherwise comment upon any events occurring after the date thereof.
Pursuant to the terms of its engagement, CFBC has agreed to pay Berwind a
fee (the "Berwind Fee") equal to .75% of the value of the Merger for serving as
financial advisor. The Berwind Fee was payable $100,000 upon the issuance of
the August Opinion and the remainder, less all previously paid fees, shall be
payable upon the consummation of the Merger. Whether or not the Merger is
consummated, CFBC has also agreed to indemnify Berwind and certain related
persons against certain liabilities relating to or arising out of its
engagement.
Berwind has filed a written consent with the SEC relating to the inclusion
of its fairness opinion and the references to such opinion and to Berwind in
the Registration Statement in which this Proxy Statement-Prospectus is
included. In giving such consent, Berwind did not admit that it comes within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations promulgated thereunder.
Interests of Certain Persons
In considering the recommendations of the CFBC Board with respect to the
Merger, shareholders of CFBC should be aware that certain members of the CFBC
Board and management of CFBC have certain interests in the Merger that may be
in addition to or different from the interests of shareholders of CFBC
generally. The CFBC Board was aware of these interests and considered them,
among other factors, in approving the Merger. These interests are summarized
below.
Change in Control Agreements with CFBC Senior Management. Three members of
CFBC's senior management, Barry B. Davall, Michael J. Gormley and James A.
Kinghorn, all have change in control agreements with CFBC providing them with
certain benefits in the event of a "Change in Control", as defined therein, of
CFBC or a termination of employment under certain circumstances. In general,
these benefits included the right to receive a payment by CFBC, upon either a
termination of employment by the employee for a "Good Reason", as defined
therein, or termination of employment by CFBC for other than for cause,
following a "Change in Control", as defined therein, in an amount equal to
three times, in the case of Mr. Davall, and twice, in the case of each of
Messrs. Gormley and Kinghorn, the highest annual compensation (including only
salary and cash bonus), paid to such employee during any of the three calendar
years immediately prior to the date of termination of such employee.
Each of the change in control agreements with Messrs. Davall, Gormley and
Kinghorn will be terminated and paid out in full in an amount equal to
approximately $585,000, $199,000 and $183,000, respectively, upon the
consummation of the Merger in addition to the receipt of certain benefits
specified therein. In addition, Mr. Davall will be offered a one year
employment agreement with CBH upon the consummation of the Merger under which
he will receive an annual base salary of $157,500.
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Designation of Gerard F. Murphy, CFBC's Chairman of the Board, Nicholas A.
D'Apolito, Frank J. Patock, Jr. and Duncan C. Thecker to the Commerce Shore
Board. In the Merger Agreement, CBH has agreed to have Messrs. Murphy,
D'Apolito, Patock and Thecker elected to the Board of Directors of Commerce
Shore effective upon completion of the Merger, with Mr. Murphy being appointed
as Vice Chairman of the Commerce Shore Board.
Indemnification; Directors' and Officers' Insurance. The Merger Agreement
provides that CBH will indemnify the past and present directors, officers and
employees of CFBC against certain liabilities (and will advance certain
expenses) following the Effective Date, to the fullest extent that such persons
would have been entitled to indemnification (or to advancement of certain
expenses) under the laws of the State of New Jersey and the CFBC Certificate
and Bylaws as in effect on the date of the Merger Agreement.
Employee Stock Options. CFBC has granted stock options to certain key
employees, including directors and officers who are also employees, under the
CFBC Stock Option Plan (as amended, the "CFBC Option Plan"). Options granted
pursuant to the CFBC Stock Option Plan are Incentive Stock Options within the
meaning of Section 422 of the Code, and vest in not more than five years from
the date of grant unless all or part are accelerated upon a "Change in
Control", as defined in the CFBC Option Plan. Unless terminated earlier by the
option's terms, the Incentive Stock Options under the CFBC Stock Option Plan
expire ten years after the date they are granted. Pursuant to the CFBC Option
Plan and as of the date of this Proxy Statement-Prospectus, options to purchase
37,363 shares of CFBC Common Stock are exercisable by their terms. Pursuant to
the terms of the CFBC Option Plan and the individual stock option agreements
with executive officers, directors and certain other employees, options to
purchase an additional 49,092 shares of CFBC Common Stock will become
exercisable upon a Change in Control. The consummation of the Merger Agreement
will constitute a "Change in Control" for purposes of the CFBC Option Plan.
Accordingly, currently unvested options issued pursuant to the CFBC Option Plan
will become vested and exercisable upon consummation of the Merger Agreement.
The following table sets forth with respect to Barry B. Davall (i) the
number of shares covered by options held by him, (ii) the number of shares
covered by options held by him that are currently exercisable, (iii) the number
of shares covered by options held by him that will become exercisable upon
consummation of the Merger Agreement, (iv) the weighted average exercise price
for such exercisable options held by him, and (v) the aggregate value of such
exercisable options based upon the per share value (i.e., stock price less
option exercise price of CFBC Common Stock on the Record Date).
<TABLE>
<CAPTION>
Options
Exercisable Weighted Average Aggregate
Options Upon Approval Exercise Price Per Value of
Currently of the Merger Share Exercisable Exercisable
Options Held Exercisable Agreement Option Options
-------------- ------------- --------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Davall, Barry B ......... 32,278 16,420 32,278 $ 6.32 $699,787
</TABLE>
Stock Options for Non-Employee Directors. CFBC has granted stock options
to certain non-employee directors under the CFBC 1996 Stock Option Plan for
Non-Employee Directors (the "CFBC Director Plan"). Options granted pursuant to
the CFBC Director Plan are NonQualified Stock Options under the Code and vest
in not more than five years from the date of grant unless all or part are
accelerated upon a "Change in Control" (as defined in the CFBC Director Plan).
Unless terminated earlier by the option's terms, the Non-Qualified Stock
Options under the CFBC Director Plan expire ten years after the date they are
granted. Pursuant to the terms of the individual stock option agreements with
directors, options to purchase 140,481 shares of CFBC Common Stock are
outstanding as of the Record Date, and all are fully vested.
The following table sets forth with respect to the named directors therein
and all non-employee directors as a group (collectively, the "Director Group"):
(i) the number of shares covered by options held by such persons; (ii) the
number of shares covered by options held by such persons that are currently
exercisable; (iii) the number of shares covered by options held by such persons
that will become exercisable upon consummation of the Merger Agreement; (iv)
the weighted average exercise price for such exercisable options held by such
persons; and (v) the aggregate value of such exercisable options based upon the
per share value (i.e., stock price less option exercise price of CFBC Common
Stock on the Record Date).
24
<PAGE>
<TABLE>
<CAPTION>
Options
Exercisable Weighted Average Aggregate
Options Upon Approval Exercise Price Per Value of
Currently of the Merger Share Exercisable Exercisable
Options Held Exercisable Agreement Option Options
-------------- ------------- --------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
D'Apolito, Nicholas A .......................... 15,609 15,609 15,609 $ 8.69 $ 301,433
Greca, Joseph G ................................ 15,609 15,609 15,609 8.69 301,433
Grossman, M.D., Robert B ....................... 15,609 15,609 15,609 8.69 301,433
James, Arthur E ................................ 15,609 15,609 15,609 8.69 301,433
Murphy, Gerald F ............................... 15,609 15,609 15,609 8.69 301,433
Patock, Jr., Frank J ........................... 15,609 15,609 15,609 8.69 301,433
Spadavecchia, Joanne ........................... 15,609 15,609 15,609 8.69 301,433
Spector, Gabriel E ............................. 15,609 15,609 15,609 8.69 301,433
Thecker, Duncan C .............................. 15,609 15,609 15,609 8.69 301,433
Director Group, including the nine direc-
tors named above (9 persons in total) ......... 140,481 140,481 140,481 $ 8.69 $2,712,895
</TABLE>
Certain Federal Income Tax Consequences of the Merger
The following is a summary of the anticipated material federal income tax
consequences of the Merger to CBH, CFBC and the shareholders of CFBC. The
discussion is based on current provisions of the Code, applicable Treasury
Regulations and the applicable judicial and administrative interpretations on
the date hereof, any of which is subject to change at any time. It is based
upon the parties' understanding of the federal income tax laws as currently
interpreted and does not address issues of state or local taxation. The summary
of the anticipated material federal income tax consequences of the Merger to
the shareholders of CFBC which follows is limited to those persons who hold
shares of CFBC Common Stock as "capital assets" (generally property held for
investment) within the meaning of Section 1221 of the Code. The following
discussion does not address all aspects of federal income taxation that may be
important to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the federal income tax laws
(including life insurance companies, foreign persons, tax-exempt entities,
holders who acquired their common stock pursuant to the exercise of employee
stock options or otherwise as compensation and persons who hold, directly or
indirectly, 10% or more of CFBC Common Stock or any class of CFBC Common Stock)
and does not address any aspect of state, local or foreign taxation. No rulings
have been or will be requested from the IRS with respect to any of the matters
discussed herein. There can be no assurance that future legislation,
regulations, administrative rulings or court decisions will not alter the tax
consequences set forth below.
It is a condition to the Merger that CBH and CFBC will receive an opinion
of counsel, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a)(1)(A) of the Code.
Tax Consequences to CBH and CFBC. No gain or loss will be recognized by
CBH or CFBC as a result of the Merger.
Receipt of CBH Common Stock in Exchange for CFBC Common Stock. A CFBC
shareholder who receives shares of CBH Common Stock in exchange for shares of
CFBC Common Stock will not recognize federal gain or loss upon receipt of such
shares of CBH Common Stock. The shareholder's tax basis in the stock received
will be the same as the shareholder's tax basis in the shares exchanged in the
Merger. The holding period of the CBH Common Stock received by the shareholders
of CFBC in the Merger will include the period during which the shares of CFBC
Common Stock was held as a capital asset as of the completion of the Merger.
Receipt of Cash in Lieu of CBH Fractional Shares. The receipt of cash by
CFBC shareholders in lieu of fractional shares will generally be treated as a
taxable distribution in redemption of their fractional interests. This payment
of cash in lieu of fractional shares will generally be treated as a sale or
exchange by a CFBC shareholder of such fractional shares provided that the cash
payment is being made solely for the purpose of avoiding the administrative
inconvenience related to issuing and transferring fractional share interests
and is not separately bargained for consideration. In that case, a CFBC
shareholder will generally recognize gain or loss, if any, for federal income
tax purposes in an amount equal to the difference between the cash received
25
<PAGE>
and the shareholder's tax basis in the fractional shares (which basis will
include a proportionate amount of a CFBC shareholder's tax basis in the CFBC
Common Stock relinquished in the Merger); such gain or loss will generally be
long-term capital gain or loss to the extent that the CFBC shareholder held
such shares as a capital asset for more than one year as of the date of the
Merger.
This federal income tax discussion is for general information only and may
not apply to all holders of CFBC Common Stock. Such holders are urged to
consult their tax advisors as to the specific tax consequences to them of the
Merger.
Business Pending Consummation and Related Matters
Pursuant to the Merger Agreement, each of CFBC and CBH has made certain
covenants, with respect to itself and its subsidiaries, relating to the conduct
of business pending consummation of the Merger. Among other things, CFBC agreed
(except as otherwise contemplated by the Merger Agreement or with the written
consent of CBH) not to: (i) conduct its business other than in the ordinary and
usual course; (ii) pay dividends above certain specified levels (i.e., $.10 per
share on an annualized basis) or redeem or otherwise acquire shares of its
capital stock, issue additional shares of its capital stock (except upon the
exercise of currently outstanding stock options) or give any person the right
to acquire any such shares; (iii) increase any salaries or employee benefits or
enter into or modify any employee benefit plans, except for certain increases
in the ordinary course of business and certain changes required by law or to
satisfy pre-existing contractual obligations; or (iv) dispose of any of its
material assets, business or property or acquire any material business or
property of any other entities.
Commitments with Respect to Other Offers
Under the Merger Agreement, CFBC has agreed that it will not, without the
prior written consent of CBH and subject to the fiduciary duties of its board
of directors, solicit or encourage inquiries or proposals with respect to, or
engage in negotiations concerning, or provide any confidential information to,
or have any discussions with, any third party relating to the acquisition of a
substantial equity interest in, or a substantial portion of the assets of,
CFBC.
Regulatory Approvals
The Merger is subject to prior approval by the Federal Reserve Board under
the BHCA. Under the BHCA, the Federal Reserve Board considers the financial and
managerial resources of the companies involved and whether the proposed
transaction can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or unsound banking
practices. In addition, the Federal Reserve Board has the authority to deny an
application if it concludes that the combined organization would have an
inadequate capital position or if the acquiring organization does not meet the
requirements of the Community Reinvestment Act of 1977.
The Merger is also subject to the approval of the New Jersey state bank
regulatory authority. In addition, the merger of Tinton Falls with and into
Commerce Shore requires approval of the OCC.
Applications have been filed by CBH with the Federal Reserve Board, the
New Jersey Department of Banking and Insurance and the OCC.
We cannot assure you that such regulatory approvals will be obtained or as
to the dates of any of such approvals, and we cannot consummate the Merger in
the absence of such regulatory approvals. Furthermore, we cannot assure you
that such approvals will not contain a condition or requirement which causes
such approvals to fail to satisfy the conditions contained in the Merger
Agreement. See "-- Conditions to Consummation." Likewise we cannot assure you
that the United States Department of Justice will not challenge the Merger, or,
if such challenge is made, as to the result thereof.
Conditions to Consummation
Under the Merger Agreement, various conditions are required to be
satisfied before the parties are obligated to complete the Merger. For the most
part these conditions are customary and include such items as
26
<PAGE>
the receipt of stockholder, regulatory, and NYSE listing approval, the receipt
of corporate and tax legal opinions. In addition, the obligations of the
parties are subject to the continued accuracy of the other party's
representations and warranties, the performance by the other party of its
obligations under the Merger Agreement, and the absence of any events or
changes with respect to the other party having, or which reasonably could be
expected to have, an adverse effect on the other party. Each of these three
conditions is subject to a "materiality" standard. The approval of the CFBC
shareholders and certain regulatory authorities as discussed elsewhere in this
Proxy Statement-Prospectus is also required in order to consummate the Merger.
Certain of the conditions to the Merger may be waived by the company entitled
to assert the condition.
Termination
The Merger Agreement may be terminated by mutual agreement of the CFBC
Board and the CBH Board. The Merger Agreement may also be terminated by either
the CFBC Board or the CBH Board (i) if the Merger does not occur on or before
March 31, 1999 or (ii) if the requisite approval of the CFBC shareholders or
the Federal Reserve Board are not obtained.
In addition, the Merger Agreement may be terminated by the CFBC Board, at
its sole option, if the Average Price is below $32.00 (a "Termination Event").
It is not possible to know whether a Termination Event will occur until
after the determination of the Average Price. The CFBC Board has not made any
determination as to whether it would exercise its right to terminate the Merger
Agreement if there is a Termination Event, and you should not assume that the
CFBC Board would exercise such right if the Average Price is below $32.00. In
considering whether to exercise its termination right in such situation, the
CFBC Board would, consistent with its fiduciary duties, take into account all
relevant facts and circumstances that exist at such time and would consult with
its financial advisors and legal counsel. Approval of the Merger Agreement by
the shareholders of CFBC at the Meeting will confer on the CFBC Board the
power, consistent with its fiduciary duties, to elect either to terminate the
Merger or to consummate the Merger in the event of a Termination Event and
without any further action by, or resolicitation of, the shareholders of CFBC.
If the CFBC Board elects to exercise its termination right, CFBC must give CBH
prompt notice of that decision.
The foregoing discussion is qualified in its entirety by reference to the
applicable provisions in the Merger Agreement (a copy of which is set forth as
Annex A and Annex B to this Proxy Statement-Prospectus) relating to a possible
Termination Event.
CFBC shareholders should be aware that the market price of CBH Common
Stock between the determination of the Average Price and the Effective Date, as
well as on the date certificates representing shares of CBH Common Stock are
delivered in exchange for shares of CFBC Common Stock following consummation of
the Merger, will fluctuate and possibly decline and the value of the CBH Common
Stock actually received by holders of CFBC Common Stock may be more or less
than (i) the Average Price, or (ii) the value of the CBH Common Stock on the
Effective Date resulting from the Exchange Ratio.
Resale of CBH Common Stock
The CBH Common Stock issued pursuant to the Merger will be freely
transferable under the Securities Act, except for shares issued to any CFBC
stockholder who is considered to be an "affiliate" of CBH or CFBC for purposes
of Rule 145 under the Securities Act or of CBH for purposes of Rule 144 under
the Securities Act. The definition of "affiliate" is complex and depends on the
specific facts, but generally encompasses directors, senior officers, 10%
shareholders and any other person with the power to direct the management and
policies of the issuer in question.
Shareholders who are affiliates of CBH or CFBC may not sell shares of CBH
Common Stock received in the Merger except (a) pursuant to an effective
registration under the Securities Act, (b) in compliance with an exemption from
the registration requirements of the Securities Act or (c) in compliance with
Rule 144 and Rule 145 of the Securities Act. Generally, those rules permit
resales of stock received in a registered offering by an affiliate of CBH or
CFBC as long as CBH has complied with certain reporting requirements and the
selling stockholder complies with certain volume and manner of sale
restrictions set forth in Rule 144 and Rule l45.
27
<PAGE>
In addition, the terms and conditions of the Merger Agreement require that
all of the affiliates of CBH and CFBC agree not to sell any CBH or CFBC
securities until the date on which financial results of the combined operations
of CFBC and CBH covering at least 30 days after the completion of the Merger
have been published (within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies) by CBH in an effective
registration statement, Annual Report on Form 10-K, Quarterly Report on Form
10-Q or Current Report on Form 8-K filed with the SEC, or any publicly
disclosed quarterly earnings report or press release or other authorized public
disclosure by CBH that includes the combined results of operation of CFBC and
CBH. These restrictions are intended to fulfill one of the requirements for
pooling accounting treatment for the Merger.
No Dissenters' Appraisal Rights
Under the NJBCA, CFBC shareholders do not have any right to dissent from
the Merger and receive the appraised value of their shares in cash in
connection with the Merger.
Accounting Treatment
It is expected that the Merger, if consummated, will qualify as a
transaction to be accounted for in accordance with the pooling of interests
method of accounting under Opinion No. 16, Business Combinations, of the
Accounting Principles Board of the American Institute of Certified Public
Accountants. Under this accounting method, the assets and liabilities of CFBC
will be carried forward to CBH at their historical recorded bases. The reported
balance sheet amounts and results of operations of the separate corporations
for prior periods will be combined, reclassified and conformed, as appropriate,
to reflect the combined financial position and results of operations for CBH.
Certain Effects of the Merger
The purpose of the Merger is to combine CBH and CFBC. This is being done
through the merger of CFBC with CBH. As a result of the Merger, the former
holders of CFBC Common Stock will receive CBH Common Stock and no longer have
any direct interest in CFBC or be able to vote with respect to the future
affairs of CFBC. Although former holders of CFBC Common Stock will no longer
enjoy the possibility of a direct interest in any future appreciation in their
equity interest in CFBC, after the Merger such former holders will enjoy the
possibility of future appreciation in their equity interest in CBH.
The current Certificate and Bylaws of CBH will continue as its certificate
and bylaws after the completion of the Merger and will govern the CBH Common
Stock and management of CBH thereafter. See "DESCRIPTION OF CBH CAPITAL STOCK"
and "CERTAIN DIFFERENCES IN THE RIGHTS OF CFBC AND CBH SHAREHOLDERS."
Following completion of the Merger, the CFBC Common Stock will be removed
from trading on the OTC BB. CFBC expects that the CFBC Common Stock will
continue to be listed and traded on the OTC BB until the consummation of the
Merger.
New York Stock Exchange Listing
The Merger Agreement requires CBH to file an application with the NYSE for
approval to list the shares of CBH Common Stock issued in the Merger on the New
York Stock Exchange, subject to official notice of issuance.
Waiver; Amendment
Prior to the Effective Date, any provision of the Merger Agreement may be:
(i) waived by the party benefitted by the provision; or (ii) amended or
modified at any time by an agreement in writing among the parties thereto,
approved by their respective Boards of Directors and executed in the same
manner as the Merger Agreement, provided that, after approval by the
shareholders of CFBC, such amendment, modification or waiver does not result in
the reduction in the Exchange Ratio or result in a materially adverse tax or
other effect to the holders of CFBC Common Stock.
28
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
CBH Common Stock is listed on the NYSE (and prior to September 26, 1996,
on the NASDAQ National Market) under the ticker symbol of "CBH". CFBC Common
Stock is listed on the OTC BB under the symbol "CFST".
The tables below set forth, for the calendar quarters indicated, the
reported high and low closing prices of CBH Common Stock and CFBC Common Stock
as reported on the NYSE and OTC BB, respectively, and in each case based on
published financial sources, and the dividends declared on such stock.
<TABLE>
<CAPTION>
CBH Common Stock CFBC Common Stock
-------------------------------------------- ----------------------------------------
Cash Cash
Market Price Market Price
-------------------------- Dividends --------------------------- Dividends
High Low Declared High Low Declared
----------- ------------ --------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996
First quarter .................. $16.59 $14.61 $0.12 $ (2) $ (2) $ --
Second quarter ................. 17.95 14.69 0.12 (2) (2) .04
Third quarter .................. 20.31 15.23 0.13 7.92 7.70 --
Fourth quarter ................. 24.03 18.69 0.13 8.58 7.86 .05
1997
First quarter .................. $24.38 $20.95 $0.15 $ 8.72 $ 7.93 --
Second quarter ................. 29.53 21.05 0.15 10.19 8.15 .05
Third quarter .................. 30.91 27.42 0.15 11.66 9.22 --
Fourth quarter ................. 39.23 28.63 0.15 11.76 9.80 .05
1998
First quarter .................. $44.05 $34.45 $0.18 $15.69 $11.76 --
Second quarter ................. 48.70 42.59 0.19 22.00 14.71 .05
Third quarter .................. 47.45 35.13 0.19(1) 26.75 20.50 --
Fourth quarter (through November
2, 1998) ...................... $41.75 $34.88 $0.20 $25.25 $22.50 --
</TABLE>
- ------------
(1) Excludes the one time special cash dividend of $0.20 per share declared on
June 29, 1998 and paid on July 24, 1998 to shareholders of record as of
July 13, 1998.
(2) CFBC became an active bank holding company for Tinton Falls on April 10,
1996. Prior to April 10, 1996, Tinton Falls' Common Stock was not traded
on any exchange, there was no established trading market for Tinton Falls'
Common Stock and trading was limited. Therefore, no reported high and low
closing prices were available and have been provided for the first and
second quarters of 1996.
On August 12, 1998, the last business day prior to public announcement of
the execution of the Merger Agreement, the last reported sale prices per share
of CBH Common Stock on the NYSE and CFBC Common Stock on the OTC BB were
$41.6875 and $24.00, respectively. On November 2, 1998, the last practicable
trading day prior to the mailing of this Proxy Statement-Prospectus, such
prices were $41.50 and $23.56, respectively.
CFBC and CBH shareholders are urged to obtain current market quotations
for CBH Common Stock and CFBC Common Stock prior to mailing any decision with
respect to the Merger. We cannot assure you of the market prices of CBH Common
Stock or CFBC Common Stock at any time before the Effective Date or as to the
market price of CBH Common Stock thereafter. CFBC Common Stock is not listed
for trading on any securities exchange or any automated dealer quotation
system. There is no established public trading market for CFBC Common Stock,
its trading has been extremely limited and CFBC does not regard the information
that it receives regarding particular transactions in CFBC Common Stock as
being indicative of the market price which would exist were the CFBC Common
Stock more heavily traded.
The Merger Agreement provides for the filing of a listing application with
the NYSE covering the shares of CBH Common Stock to be issued in the Merger. It
is a condition to consummation of the Merger that such shares be authorized for
listing on the NYSE, subject to official notice of issuance.
29
<PAGE>
FORWARD-LOOKING STATEMENTS
This Proxy Statement-Prospectus contains statements that may be
"forward-looking". In particular, some of the statements in "RECENT
DEVELOPMENTS", "THE MERGER -- CBH's Reasons for the Merger", "-- Recommendation
of the CFBC Board; CFBC's Reasons for the Merger", "-- Opinion of CFBC's
Financial Advisor" and in the summaries of these sections, may be
forward-looking. We want to caution you that given the recent developments in
the banking industry, it is difficult, if not impossible, to predict accurately
what will happen to CBH's and CFBC's businesses in the future. Some of these
developments are discussed or referred to in "RECENT DEVELOPMENTS", and we urge
you to read that information carefully. As a consequence of these
uncertainties, it could be that some of the assumptions that we made in
approving and recommending the Merger -- particularly with regard to how CBH
and CFBC are likely to perform relative to each other in the future -- could be
wrong and our actual results could differ materially. Errors in our assumptions
could mean that the Exchange Ratio was too high or too low, or possibly even
that the Merger was inadvisable.
While this certainly is not our expectation, as a result of our advising
you of this uncertainty the new "safe harbor" section of the Private Securities
Litigation Reform Act of 1995 provides certain protection for CBH, as a
reporting company under the Securities Exchange Act of 1934, as amended
(including the rules and regulations thereunder, the "Exchange Act"), for any
forward-looking statements that ultimately are proven inaccurate.
30
<PAGE>
BUSINESS OF CFBC
General
Financial and other information relating to CFBC is set forth in CFBC's
Consolidated Financial Statements which are included in this Proxy
Statement-Prospectus. See "CONSOLIDATED FINANCIAL STATEMENTS OF CFBC."
History and Business
Community First Banking Company ("CFBC") is a one-bank holding company
headquartered in Tinton Falls, New Jersey. CFBC has one bank subsidiary, Tinton
Falls State Bank ("Tinton Falls"), which is a New Jersey chartered commercial
bank. Tinton Falls currently accounts for substantially all of the total assets
and the net income of CFBC.
Tinton Falls engages in a full service commercial and retail banking
business from seven offices in Monmouth County, New Jersey. These commercial
and retail banking services are provided by Tinton Falls primarily to consumers
and small to mid-size companies within its primary service area (i.e., Monmouth
County, New Jersey). Lending services are focused on commercial real estate and
commercial and consumer lending to local borrowers. Tinton Falls' lending and
investing activities are funded principally by deposits gathered through its
retail branch offices.
Tinton Falls was incorporated in the State of New Jersey on August 22,
1988, and was subsequently granted a charter by the New Jersey Department of
Banking and commenced operations on February 18, 1989. Tinton Falls opened its
first two branch offices in 1991 and has continued to expand in its operating
area. In addition to its main office, Mortgage Division and Operations Center,
all in Tinton Falls, New Jersey, Tinton Falls has another branch in that
municipality, and one branch in each of Fair Haven, Middletown, Ocean, Red Bank
and West Long Branch, New Jersey.
In 1996, CFBC was formed as a holding company for Tinton Falls, and CFBC
continues to operate Tinton Falls as its primary operating subsidiary.
As of June 30, 1998, on a consolidated basis, CFBC had total assets of
approximately $186.7 million, total deposits of approximately $172.5 million,
and total shareholders' equity of approximately $13.0 million.
CFBC maintains its executive offices at 656 Shrewsbury Avenue, Tinton
Falls, New Jersey 07701; telephone (732) 747-5252.
For additional information regarding CFBC's business, see "CONSOLIDATED
FINANCIAL STATEMENTS OF CFBC."
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CFBC
Six Months Ended June 30, 1998 and 1997
Capital Resources
At June 30, 1998, stockholders' equity totaled $13.0 million or 6.97% of
total assets, compared to $12.0 million or 7.27% of total assets at December
31, 1997.
The table below presents CFBC's and Tinton Falls' risk-based and leverage
ratios as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
---------------------------------------------------------
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CFBC --
As of June 30, 1998 --
Risk based capital ratios:
Tier 1 $13,021,000 10.02% $ 5,196,000 4.00% $ 7,795,000 6.00%
Total capital 14,321,000 11.02 10,393,000 8.00 12,991,000 10.00
Leverage ratio 13,021,000 6.97 5,602,000 3.00 9,337,000 5.00
As of June 30, 1997
Risk based capital ratios:
Tier 1 $10,958,000 10.86% $ 4,036,000 4.00% $ 6,054,000 6.00%
Total capital 11,941,000 11.84 8,071,000 8.00 10,089,000 10.00
Leverage ratio 10,958,000 7.24 4,544,000 3.00 7,573,000 5.00
Tinton Falls --
As of June 30, 1998 --
Risk based capital ratios:
Tier 1 $12,935,000 9.96% $ 5,196,000 4.00% $ 7,795,000 6.00%
Total capital 14,235,000 10.96 10,393,000 8.00 12,991,000 10.00
Leverage ratio 12,935,000 6.93 5,602,000 3.00 9,337,000 5.00
As of June 30, 1997
Risk based capital ratios:
Tier 1 $10,948,000 10.85% $ 4,036,000 4.00% $ 6,054,000 6.00%
Total capital 11,931,000 11.83 8,071,000 8.00 10,089,000 10.00
Leverage ratio 10,948,000 7.23 4,544,000 3.00 7,573,000 5.00
</TABLE>
At June 30, 1998, CFBC's consolidated capital levels and each of CFBC's bank
subsidiaries met the regulatory definition of a "well capitalized" financial
institution, i.e., a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6%, and a total risk-based capital ratio exceeding 10%.
Management believes as of June 30, 1998, that CFBC and its subsidiaries meet
all capital adequacy requirements to which they are subject.
Deposits
Total deposits at June 30, 1998 were $172.5 million, up $33.2 million over
total deposits of $139.3 million at June 30, 1997, and up by $20.5 million or
13% from year end 1997. Deposit growth during the first six months of 1998
included core deposit growth in all categories as well as growth from the
public sector.
Interest Rate Sensitivity and Liquidity
Interest rate sensitivity is the relationship between market interest
rates and earnings volatility due to the repricing characteristics of assets
and liabilities. Through CFBC's Asset/Liability Policy, senior management
strives to maintain a consistent net interest rate differential by managing the
sensitivity and repricing of its assets and liabilities to interest rate
fluctuations. The process of executing interest rate risk management is
assisted by the Asset/Liability Management Committee.
32
<PAGE>
To account for repricing and earnings effects between market sensitive
assets and less rate sensitive core deposit accounts, management utilizes a
simulation model to project future levels of net interest income under various
interest rate environments and balance sheet structures. The "base case"
scenario uses the current balance sheet strategy and tests the income effects
with flat interest rates, rising rates of 3% and falling rates of 3% over a
twelve month period. Management has established guidelines to limit the amount
that net interest income can vary within these rate ranges. The guidelines
state that a movement in interest rates of +300b.p. or -300b.p. over a twelve
month period should not effect net interest income by more than 6%. As of June
30, 1998, CFBC was within the guidelines set forth.
A traditional form of asset/liability management is the static gap report.
This type of report categorizes interest bearing assets and liabilities by
repricing or maturity characteristics. On a cumulative basis, as of June 30,
1998, more of CFBC's liabilities than assets repriced in the three month, six
month and one year period. A liability sensitive gap may indicate an exposure
to earnings if interest rates increase. However, deposits that reprice within
one year are predominantly core savings, NOW and money market deposits that are
bank administered. Historically, these accounts have been much less volatile
than the prime and Federal funds rates, which to a large degree affect earning
asset yields. Therefore, management believes the gap position may overstate the
actual risk to earnings over the next twelve month period.
Liquidity management measures the ability to satisfy current and future
cash flow needs as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. Principal sources of liquidity are deposit generation and
maturities and repayment of loans and investment securities. In addition,
Tinton Falls has established lines of credit with the Federal Home Loan Bank,
two correspondent banks and other funding sources which further enhance
liquidity. There are approximately $14.0 million in lines of credit available
for general corporate purposes, with no outstandings at period ending June 30,
1998.
At June 30, 1998, CFBC had a total of $35.1 million or 19% of total assets
in cash and cash equivalents and marketable government and mortgage-backed
securities, available for sale. This compares to $31.3 million or 21% at June
30, 1997 and $30.8 million or 19% at December 31, 1997. Investment securities
provide cash flow through maturities and periodic repayments of principal.
Interest Earning Assets
For the six month period ended June 30, 1998, interest earning assets
increased $19.0 million from $151.8 million to $170.8 million. This increase
was entirely in the loan portfolio as described below.
Loans
During the first six months of 1998, loans increased $15.2 million from
$110.6 million to $125.8 million. Loans held for sale totaled $6.9 million on
June 30, 1998 as compared to $2.8 million on June 30, 1997 and $4.4 million on
December 31, 1997. At June 30, 1998, total loans represented 72.9% of total
deposits and 67.3% of total assets. The increase in the loan portfolio was due
primarily to commercial and mortgage loan originations.
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range, as of
June 30, 1998, are summarized in the following table.
33
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
Due Due after One but Due
within One Year within Five Years after Five Years Total
----------------- ------------------- ------------------ -----------
<S> <C> <C> <C> <C>
Types of Loans:
Commercial & Industrial $ 22,260 $ 19,385 $ 3,617 $ 45,262
Construction 2,641 -- -- 2,641
-------- -------- ------- --------
$ 24,901 $ 19,385 $ 3,617 $ 47,903
Amount of such loans with:
Predetermined rates $ 7,603 $ 15,154 $ 2,777 $ 25,534
Floating or adjustable rates 17,298 4,231 840 22,369
-------- -------- ------- --------
$ 24,901 $ 19,385 $ 3,617 $ 47,903
</TABLE>
Investments
In total, for the first six months of 1998, securities decreased $2.4
million from $32.4 million to $30.0 million. The available for sale portfolio
decreased $1.8 million to $13.8 million from $15.6 million at December 31,
1997, and the securities held to maturity portfolio decreased $600 thousand to
$16.2 million at June 30, 1998 from $16.8 million at December 31, 1997. At June
30, 1998, total securities represented 16.1% of total assets.
Net Income
Net income for the first six months of 1998 was $1.09 million, an increase
of $300 thousand or 38.1% over the $788 thousand for the first six months of
1997. On a per share basis, diluted net income for the first six months of 1998
was $.50 per share, up 31.6% over the $.38 per common share for the respective
1997 period.
Return on average assets (ROA) and return on average equity (ROE) for the
six months ended June 30, 1998 were 1.31% and 17.61%, respectively, compared to
1.12% and 14.82%, respectively, for the same 1997 period.
Net Interest Income
Net interest income totaled $5.8 million for the first six months of 1998,
an increase of $1.6 million or 38.1% from $4.2 million in the first six months
of 1997. The improvement in net interest income was due primarily to volume
increases in the loan portfolio.
Non Interest Income
Non interest income totaled $706 thousand for the first six months of
1998, an increase of $148 thousand or 26.5% from $558 thousand in the first six
months of 1997.
Non Interest Expense
For the first six months of 1998, non interest expense totaled $4.4
million, an increase of $1.1 million or 33.3% over the same period in 1997.
CFBC's operating efficiency ratio (non interest expense, less other real
estate expense, divided by net interest income plus non interest income
excluding non recurring gains) was 68.3% for the first six months of 1998 as
compared to 69.4% for the same 1997 period.
Loan and Asset Quality
Total non-performing assets (non-performing loans and other real estate,
excluding loans past due 90 days or more and still accruing interest) at June
30, 1998 were $629 thousand, or .34% of total assets compared to $420 thousand
or .25% of total assets at December 31, 1997 and $623 thousand or .41% of total
assets at June 30, 1997.
Total non-performing loans (non-accrual loans and restructured loans,
excluding loans past due 90 days or more and still accruing interest) at June
30, 1998 were $629 thousand or .50% of total loans compared to
34
<PAGE>
$518 thousand or .53% of total loans at June 30, 1997 and $420 thousand or .38%
of total loans at December 31, 1997. At June 30, 1998, loans past due 90 days
or more and still accruing interest amounted to $403 thousand compared to $174
thousand at June 30, 1997 and $1.0 million at December 31, 1997.
At June 30, 1998 and December 31, 1997, CFBC had no other real estate
owned (OREO) recorded, as compared to $105 thousand recorded on June 30, 1997.
The following summary presents information regarding CFBC's non-performing
loans and assets as of June 30, 1998 and the preceding four quarters (dollar
amounts in thousands):
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
1998 1998 1997 1997 1997
------------- ------------- -------------- --------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Commercial ............................. $ 15 $ 0 $ 0 $ 15 $ 0
Consumer ............................... 2 5 0 0 0
Real Estate:
Construction ......................... 0 0 0 0 0
Mortgage ............................. 583 504 381 674 518
-------- -------- -------- -------- --------
Total non-accrual loans ............. 600 509 381 689 518
-------- -------- -------- -------- --------
Restructured loans:
Commercial ............................. 0 0 0 0 0
Consumer ............................... 29 31 39 0 0
Real Estate:
Construction ......................... 0 0 0 0 0
Mortgage ............................. 0 0 0 0 0
-------- -------- -------- -------- --------
Total restructured loans ............ 29 31 39 0 0
-------- -------- -------- -------- --------
Total non-performing loans .............. 629 540 420 689 518
-------- -------- -------- -------- --------
Other real estate ....................... 0 0 0 105 105
-------- -------- -------- -------- --------
Total non-performing assets ............. 629 540 420 794 623
-------- -------- -------- -------- --------
Loans past due 90 days or more and still
accruing ............................... 403 256 1,037 267 174
-------- -------- -------- -------- --------
Total non-performing assets and loans
past due 90 days or more ............... $ 1,032 $ 796 $ 1,457 $ 1,061 $ 797
======== ======== ======== ======== ========
Total non-performing loans as a percent-
age of total period-end loans .......... 0.50% 0.46% 0.38% 0.68% 0.53%
Total non-performing assets as a percent-
age of total period-end assets ......... 0.34% 0.31% 0.25% 0.51% 0.41%
Total non-performing assets and loans
past due 90 days or more as a percent-
age of total period-end assets ......... 0.55% 0.45% 0.88% 0.68% 0.53%
Allowance for loan losses as a percentage
of total non-performing loans .......... 206.68% 216.11% 250.24% 155.01% 157.78%
Allowance for loan losses as a percentage
of total period-end loans .............. 1.03% 1.00% 0.95% 1.05% 0.99%
Total non-performing assets and loans
past due 90 days or more as a percent-
age of stockholders' equity and allow-
ance for loan losses ................... 7.21% 5.81% 11.15% 8.43% 6.67%
</TABLE>
35
<PAGE>
The following summary presents an analysis of CFBC's allowance for loan
losses and other related data for the six months ended June 30, 1998 and June
30, 1997 and for the fiscal year-ended December 31, 1997 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
------------------------ Year Ended
6/30/98 6/30/97 12/31/97
------------ --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance at beginning of period .................................... $1,051 $ 830 $ 830
Provisions charged to operating expenses .......................... 246 172 392
------ ------- -------
1,297 1,002 1,222
Recoveries on loans charged-off
Commercial ..................................................... 2 0 0
Consumer ....................................................... 2 2 4
Real Estate .................................................... 4 0 0
------ ------- -------
Total recoveries .................................................. 8 2 4
Loans charged-off
Commercial ..................................................... 0 0 45
Consumer ....................................................... 5 21 11
Real Estate .................................................... 0 0 119
------ ------- -------
Total charged-off ................................................. 5 21 175
------ ------- -------
Net (recoveries) charge-offs ...................................... (3) 19 171
------ ------- -------
Balance at end of period .......................................... $1,300 $ 983 $ 1,051
====== ======= =======
Net charged-offs as a percentage of average loans outstanding ..... 0.00% 0.02% 0.17%
</TABLE>
The following table details the allocation of the allowance for loan
losses to the various categories at June 30, 1998 (dollar amounts in
thousands). The allocation is made for analytical purposes and it is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.
Commercial ................... $ 919
Real Estate .................. 261
Installment .................. 120
------
Total ........................ $1,300
======
Year 2000
CFBC is aware of the issues associated with the programming code in
existing computer systems as the millennium ("year 2000") approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to
"00". The issue is whether computer systems will properly recognize data
sensitive information when the year changes to "2000". Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
CFBC is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. To
date, confirmations have been received from CFBC's primary processing vendors
that programming changes are being tested to address processing of transactions
in the year 2000. Upon consummation of the Merger, CFBC anticipates that the
primary account processing functions of CFBC will be integrated with that of
CBH and will thus fall under CBH's year 2000 compliance process. Management is
currently assessing the year 2000 compliance expense and related potential
effect on CFBC's earnings.
36
<PAGE>
Twelve Months Ended December 31, 1997 and 1996
Results of Operations
CFBC posted earnings for the year ended December 31, 1997, of $1,816,000
or $1.76 basic per share compared to $1,268,000 or $1.23 basic per share in
1996. The 43% increase in net earnings is primarily attributable to a
significant increase in net interest income of Tinton Falls. Tinton Falls' net
interest margin for 1997 was 6.42% up from the 1996 margin of 6.16%. The
favorable margin achieved by Tinton Falls is due primarily to our continued
high percentage of core deposits to total deposits and the solid returns
generated by earning assets.
Return on average shareholders' equity increased to 16.55% in 1997
compared to 13.59% in 1996 and 11.59% in 1995. Return on average assets
increased to 1.22% in 1997 compared to 1.05% in 1996 and .89% in 1995.
The major source of operating revenues is net interest income, which is
the difference between interest income on interest earning assets, consisting
primarily of loans and investments and interest expense on interest bearing
liabilities, consisting primarily of deposits and borrowings. CFBC's results
are also affected by the provision for loan losses, gains and losses on the
sales of securities, non-interest expense and income tax expense. Each of these
principal components of the CFBC's operating results are discussed below.
Table 1: Distribution of Average Assets, Liabilities, and Shareholders' Equity
- Interest Rates and Interest Differential
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------------------------------ -----------------------------------------
Average Average Average Average
Balance Rate Interest Balance Rate Interest
---------------- --------- ------------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short term investments ............ $ 3,221,000 5.59% $ 180,000 $ 1,646,000 5.41% $ 89,000
Securities available-for-sale ..... 17,083,000 6.47 1,106,000 13,011,000 6.69 871,000
Securities held-to-maturity ....... 14,890,000 6.27 933,000 11,527,000 6.39 737,000
------------ ----- ----------- ------------ ----- -----------
Total securities .................. 31,973,000 6.38% 2,039,000 24,538,000 6.55% 1,608,000
Loans ............................. 102,967,000 9.99 10,285,000 86,320,000 9.73 8,399,000
------------ ----- ----------- ------------ ----- -----------
Total earning assets .............. 138,161,000 9.05% 12,504,000 112,504,000 8.97% 10,096,000
------------ ----- ----------- ------------ ----- -----------
Allowance for possible loan
losses ........................... (976,000) (736,000)
All other non-earning assets 11,401,000 9,554,000
------------ ------------
Total Assets ...................... $148,586,000 $121,322,000
============ ============
Liabilities and Shareholders'
Equity
Deposits Savings .................. $ 23,201,000 2.85% $ 661,000 $ 18,689,000 2.85% $ 533,000
Prime asset funds ................. 12,998,000 3.01 391,000 10,072,000 2.93 295,000
Money market accounts ............. 518,000 2.51 13,000 486,000 2.47 12,000
Now accounts ...................... 23,723,000 2.35 557,000 19,326,000 2.44 471,000
Time .............................. 37,801,000 5.29 2,000,000 32,414,000 5.49 1,779,000
------------ ----- ----------- ------------ ----- -----------
Total interest bearing
deposits ......................... 98,241,000 3.69% 3,622,000 80,987,000 3.82% 3,090,000
Borrowed funds .................... 129,000 6.20 8,000 1,378,000 5.59 77,000
------------ ----- ----------- ------------ ----- -----------
Total interest bearing
liabilities ...................... 98,370,000 3.69% 3,630,000 82,365,000 3.85% 3,167,000
Demand deposits ................... 36,853,000 27,234,000
Other liabilities ................. 2,369,000 2,261,000
Shareholders' equity .............. 10,994,000 9,462,000
------------ ------------
Total liabilities and share-
holders equity ................... $148,586,000 $121,322,000
============ ============
Net interest earnings ............. $ 8,874,000 $ 6,929,000
=========== ===========
Net interest spread ............... 5.36% 5.12%
===== =====
Net interest margin ............... 6.42% 6.16%
===== =====
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
------------------------------------------
Average Average
Balance Rate Interest
--------------- ---------- -------------
<S> <C> <C> <C>
Assets
Short term investments ............ $ 4,374,000 5.88% $ 257,000
Securities available-for-sale ..... 10,684,000 6.30 673,000
Securities held-to-maturity ....... 9,593,000 6.12 587,000
----------- ----- ----------
Total securities .................. 20,277,000 6.21% 1,260,000
Loans ............................. 66,043,000 9.95 6,568,000
----------- ----- ----------
Total earning assets .............. 90,694,000 8.91% 8,085,000
----------- ----- ----------
Allowance for possible loan
losses ........................... (527,000)
All other non-earning assets 6,994,000
-----------
Total Assets ...................... $97,161,000
===========
Liabilities and Shareholders'
Equity
Deposits Savings .................. $16,239,000 2.85% $ 462,000
Prime asset funds ................. 8,438,000 2.93 247,000
Money market accounts ............. 792,000 2.53 20,000
Now accounts ...................... 15,755,000 2.56 403,000
Time .............................. 26,149,000 5.90 1,543,000
----------- ----- ----------
Total interest bearing
deposits ......................... 67,373,000 3.97% 2,675,000
Borrowed funds .................... 2,000 0.00 0
----------- ----- ----------
Total interest bearing
liabilities ...................... 67,375,000 3.97% 2,675,000
Demand deposits ................... 21,202,000
Other liabilities ................. 885,000
Shareholders' equity .............. 7,699,000
-----------
Total liabilities and share-
holders equity ................... $97,161,000
===========
Net interest earnings ............. $5,410,000
==========
Net interest spread ............... 4.94%
=====
Net interest margin ............... 5.97%
=====
</TABLE>
37
<PAGE>
Net Interest Income
Net interest income, CFBC's largest component of operating income, is the
difference between interest and fees earned on loans and other interest-earning
assets and interest paid on deposits and other interest-bearing liabilities.
The dynamics of the change in interest rates, as well as the mix and volume of
interest-earning assets and interest-bearing liabilities, combine to affect net
interest income.
Net interest income totaled $8,874,000 for 1997, an increase of 28% or
$1,945,000 over the $6,929,000 reported in 1996. The improvement was a result
of a 23% increase in interest-earning assets, offset by a 19% increase in
interest-bearing liabilities. Income on interest-earning assets increased
$2,408,000 or 24% to $12,504,000. This increase was due to the significant
increase in interest-earning assets, higher yields earned on the loan and
investment portfolios and an improved asset mix, as loans, which generally
carry higher yields than investment securities, increased as a percentage of
total interest-earning assets. In addition, the mortgage division of Tinton
Falls generated interest and fee income totaling $1,289,000 in 1997, as
compared to $751,000 in 1996. The modest increase in interest expense was
primarily due to the volume of interest bearing liabilities. Total interest on
deposit accounts increased by $463,000 to $3,630,000 in 1997. The net interest
margin in 1997 was 6.42%, an increase of 26 basis points from 6.16% in 1996.
Table 2: Changes in Net Interest Income
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
-------------------------------------------- -------------------------------------------
Avg. Avg. Total Avg. Avg. Total
Volume Rate Change Volume Rate Change
-------------- ------------ -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest
Income:
Short term investments ................. $ 85,161 $ 5,839 $ 91,000 $ (160,287) $ (7,713) $ (168,000)
Securities available-for-sale .......... 272,593 (37,593) 235,000 (46,251) 65,251 19,000
Securities held-to-maturity ............ 215,020 (19,020) 196,000 300,706 28,294 329,000
---------- --------- ---------- ---------- ---------- ----------
Total securities ....................... 487,613 (56,613) 431,000 254,455 93,545 348,000
Loans .................................. 1,619,765 266,235 1,886,000 2,016,555 (185,555) 1,831,000
---------- --------- ---------- ---------- ---------- ----------
Total interest-earning assets .......... 2,192,539 215,461 2,408,000 2,110,723 (99,723) 2,011,000
========== ========= ========== ========== ========== ==========
Interest Expense Deposits:
Savings ............................... 128,680 (680) 128,000 69,703 1,297 71,000
Prime asset funds ..................... 85,700 10,300 96,000 47,831 169 48,000
Money market accounts ................. 790 210 1,000 (7,727) (273) (8,000)
Now accounts .......................... 107,161 (21,161) 86,000 91,343 (23,343) 68,000
Time .................................. 295,658 (74,658) 221,000 369,685 (133,685) 236,000
Borrowed funds ......................... (69,792) 792 (69,000) 0 77,000 77,000
---------- --------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ..... 548,197 (85,197) 463,000 570,835 (78,835) 492,000
---------- --------- ---------- ---------- ---------- ----------
Net interest income .................... $1,644,342 $ 300,658 $1,945,000 $1,539,888 $ (20,888) $1,519,000
========== ========= ========== ========== ========== ==========
</TABLE>
Provision for Possible Loan Losses
Management utilizes a systematic and documented allowance adequacy
methodology for loan losses that requires allowance assessment for all loans.
This methodology assigns reserves based upon credit risk ratings for specific
loans and general reserves for all other loans. The allowance for possible loan
losses is maintained at a level considered by management to be adequate to
provide for potential losses.
Table 3 presents Provision and Allowance for Loan Losses which details
loan provision activity for 1997 and 1996. CFBC recorded a provision of
$392,000 in 1997 compared with $425,000 in 1996. The allowance for possible
loan losses at December 31, 1997, equaled $1,051,000 as compared to $830,000 in
1996. The
38
<PAGE>
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Charge-offs in 1997 amounted to $175,000 as
compared to $258,000 in 1996. In 1997, recoveries of loans previously charged
off totaled $4,000 compared to $83,000 in 1996.
Table 3: Provision and Allowance for Loan Losses
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Allowance for possible loan losses, January 1 ............ $ 830,000 $ 580,000
Loans charged-off:
Commercial ............................................ (45,000) (140,000)
Real estate ........................................... (119,000) (103,000)
Consumer .............................................. (11,000) (15,000)
Total charge-offs ........................................ (175,000) (258,000)
---------- ----------
Recoveries of loans previously charged-off:
Commercial ............................................ -- 83,000
Real estate ........................................... -- --
Consumer .............................................. 4,000 --
---------- ----------
Total recoveries ......................................... 4,000 83,000
Net charge-offs .......................................... (171,000) (175,000)
Provision charged to expense ............................. 392,000 425,000
---------- ----------
Allowance for possible loan losses, December 31 .......... $1,051,000 $ 830,000
========== ==========
</TABLE>
Table 4 details the allocation of the allowance for loan losses to the
various categories at December 31, 1997 (dollar amounts in thousands). The
allocation is made for analytical purposes and it is not necessarily indicative
of the categories in which future loan losses may occur. The total allowance is
available to absorb losses from any segment of loans.
Table 4: Allocation of the Allowance for Loan Losses
Commercial ................... $ 698
Real Estate .................. 234
Installment .................. 119
------
Total ...................... $1,051
======
Other Income
Non-interest income, recorded as other income, consists of service charges
on deposit accounts, income from safe deposit box rents, fees from the purchase
of official checks and service charges from ATM activity. Other income for 1997
totaled $1,250,000, an increase of 30% over the $963,000 reported in 1996. The
increase from 1996 to 1997 was largely a result of an increase in volume of
service charges on deposit accounts, as well as higher automated teller machine
usage.
Income from service charges on deposit accounts increased to $1,060,000 in
1997 from $836,000 in 1996, reflecting a 27% increase. Sales of investment
securities resulted in net gains of $10,000 in 1997, as compared to net losses
of $20,000 recorded in 1996.
Non Interest Expense
Total non-interest expense for 1997 increased 26% to $6,801,000 from
$5,407,000 in 1996. Tinton Falls has shown significant growth in assets since
its formation in 1989. As a result, expenses have increased in order to support
and properly service that asset growth, as well as our expanding branch
network. Salaries and related expenses increased 31% in 1997 to reach
$3,546,000 from $2,703,000 in 1996. The increase was due primarily to the
expansion in our branch system, as well as increased activity in our lending
area. Occupancy expenses increased $206,000 in 1997 to $545,000 as compared to
$339,000 in 1996. Expenses associated with the Chapel Hill and Ocean Township
branches, as well as technology initiatives throughout the organization,
contributed to this increase.
39
<PAGE>
The efficiency ratio measures a bank's gross operating expense as a
percentage of fully-taxable equivalent net interest income and other
non-interest income. In theory, the lower the percentage, the greater the
efficiency. Tinton Falls' efficiency ratio as of December 31, 1997 was 67.16%
as compared to 68.23% for 1996 and 67.66% for 1995.
Provision for Income Taxes
The total provision for income taxes equaled $1,115,000 for 1997,
reflecting an increase of $323,000 when compared to $792,000 in income tax
expense for 1996. The increase in 1997 was due to a higher level of pre-tax
income. The effective tax rate was 38% in both 1997 and 1996.
Financial Condition
The following is a discussion of material changes in CFBC's financial
condition from December 31, 1996 to December 31, 1997.
Investment Securities
CFBC follows the Financial Accounting Standards Board (FASB) SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that securities be classified according to three categories. Debt and
equity securities where CFBC or Tinton Falls has the positive intent and
ability to hold to maturity are classified as securities "held to maturity"
(HTM) and are reported at amortized cost. Debt and equity securities that are
bought and held principally to be sold in the near term are classified as "
trading securities" and reported at fair value, with unrealized gains and
losses included in earnings. CFBC and Tinton Falls do not employ a trading
strategy and consequently do not classify any securities in the trading
category. Debt and equity securities that do not fall into either of these
categories are classified as " available for sale" (AFS) and reported at fair
value, with unrealized gains and losses shown net of the potential tax effect,
as a separate component of shareholders' equity. These securities may be sold
in the future as part of CFBC's Asset/Liability strategy or for other
operational reasons.
At December 31, 1997, Tinton Falls' investment portfolio contained
securities classified as "available for sale" (at fair value) totaling
$15,564,000 as compared to $12,143,000 at year end 1996. Securities classified
as "held to maturity" ( at amortized cost) totaled $16,826,000 at year end 1997
and $12,763,000 in 1996. As part of portfolio diversification, roughly
$4,000,000 in U.S. Treasury securities were added in 1997.
Table 5: Investment Securities
<TABLE>
<CAPTION>
Mortgage After 1 year
Backed One Year Through 5
Securities or Less Years Total
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury
Market value $ -- $ -- $ 4,022,000 $ 4,022,000
Yield -- -- 6.22% 6.22%
U.S. Government agencies
Market value -- 4,003,000 -- 4,003,000
Yield -- 6.45% -- 6.45%
Mortgage-backed securities
Market value 7,066,000 -- -- 7,066,000
Yield 6.75% -- -- 6.75%
Other securities
Market value -- 473,000 -- 473,000
Yield -- 6.88% -- 6.88%
HELD-TO-MATURITY:
U.S. Government agencies
Book value $ -- $ 1,000,000 $ -- $ 1,000,000
Yield -- 6.03% -- 6.03%
Mortgaged-backed securities
Book value 14,281,000 -- -- 14,281,000
Yield 6.47% -- -- 6.47%
Other securities
Book value -- 1,545,000 1,545,000
Yield -- 3.91% 3.91%
</TABLE>
40
<PAGE>
Table 6: Amortized Cost and Market Value of Investment Securities
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- ------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ 3,993,000 $ 4,023,000 $ -- $ --
U.S. Government 3,999,000 4,002,000 2,999,000 3,014,000
Mortgage-backed securities 7,102,000 7,066,000 8,969,000 8,679,000
Other securities 473,000 473,000 450,000 450,000
----------- ----------- ----------- -----------
Total $15,567,000 $15,564,000 $12,418,000 $12,143,000
=========== =========== =========== ===========
HELD TO MATURITY:
U.S. Government agencies $ 1,000,000 $ 1,002,000 $ -- $ --
Mortgage-backed securities 14,281,000 14,189,000 12,763,000 12,393,000
Other securities 1,545,000 1,545,000 -- --
----------- ----------- ----------- -----------
Total $16,826,000 $16,736,000 $12,763,000 $12,393,000
=========== =========== =========== ===========
</TABLE>
Loans
Total loans for CFBC increased $16,445,000 or 17% to $110,567,000 at
December 31, 1997 from $94,122,000 at December 31, 1996. Commercial loans
secured by real estate totaled $44,279,000 at December 31, 1997, an increase of
$6,777,000 for the year. They represent 40.1% of the loan portfolio. Commercial
and industrial loans increased $4,810,000 in 1997 because of CFBC's intent to
lend within its geographic markets to sound commercial businesses, as well as,
ongoing refinancings of existing commercial loans and lines of credit.
Residential mortgage loans, which include home equity loans and lines of credit
secured by first or second mortgages, increased $7,531,000 in 1997 to reach
$30,765,000. Table 7 presents the loans outstanding, by type of loan, for 1997
and 1996.
Loans held for sale, which constitute residential mortgages originated
from our mortgage division, totaled $4,370,000 at December 31, 1997, as
compared to $3,209,000 for year-end 1996.
Fixed rate loans total $74,576,000 and represent 67% of the loan
portfolio, while floating rate loans total $36,038,000 and represent 33% of the
portfolio.
Table 7: Loan Portfolio
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- ------------------------------
Percentage Percentage
of Loans to of Loans to
Amount Total Loans Amount Total Loans
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Residential properties $ 30,765,000 27.8% $ 23,234,000 24.7%
Commercial mortgage 44,279,000 40.1 37,502,000 39.8
Construction mortgage 2,527,000 2.3 2,152,000 2.3
Commercial & industrial loans 27,447,000 24.7 22,637,000 24.1
Loans to individuals 5,596,000 5.1 8,605,000 9.1
Less-unearned income (47,000) (8,000)
------------ ------------
Total $110,567,000 100.0% $ 94,122,000 100.0%
============ ===== ============ =====
Loans held for sale 4,370,000 3,209,000
============ ============
</TABLE>
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range, as of
December 31, 1997, are summarized in Table 8.
41
<PAGE>
Table 8: Loan Maturities and Interest Rates
<TABLE>
<CAPTION>
December 31, 1997
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
Due Due after One but Due
within One Year within Five Years after Five Years Total
----------------- ------------------- ------------------ ----------
<S> <C> <C> <C> <C>
Types of Loans:
Commercial & Industrial $ 7,913 $16,739 $ 2,795 $27,447
Construction 2,527 -- -- 2,527
------- ------- ------- -------
$10,440 $16,739 $ 2,795 $29,974
Amount of such loans with:
Predetermined rates $ 5,162 $11,362 $ 1,903 $18,427
Floating or adjustable rates 5,278 5,377 892 11,547
------- ------- ------- -------
$10,440 $16,739 $ 2,795 $29,974
</TABLE>
Deposits
CFBC's deposit base is the principal source of funds that support our
interest earning assets. Our overall philosophy of building and maintaining
long-term customer relationships is the key to further deposit growth and
provides opportunities for cross-selling of services. CFBC offers a full range
of deposit products, as well as access to trust services provided by Manchester
Trust Bank and money market mutual funds available through SEI Corporation.
Total deposits for CFBC increased $32,417,000 or 27% to reach $152,016,000
at December 31, 1997, compared to $119,599,000 at December 31, 1996. All
deposit categories reflected increases during 1997, with the largest increase
being in non-interest bearing demand deposits which increased $14,708,000 to
reach $46,296,000 at year end. They represent 30% of total deposits. Interest
bearing demand deposits or NOW accounts increased $5,544,000 in 1997. Saving
accounts increased $3,777,000 while money market accounts were up $3,964,000 in
1997. CFBC's significant core deposit base is the basis for the strong net
interest margin represented at year end. Table 9 represents a comparison of
Average Deposit Balances and Interest Rates for years ended 1997 and 1996.
Table 10 represents the maturity distribution of time Certificate of
Deposits $100,000 and over at December 31, 1997. Time deposits over $100,000
increased $4,884,000 to reach $13,583,000 in 1997. They represent 9% of total
deposits. Total time deposits represent 25% of total deposits.
Table 9: Average Deposit Balances and Interest Rates
1997 1996
-------------------------- -------------------------
Average Average
Balance Rate Balance Rate
--------------- --------- --------------- -------
Demand deposits $ 36,853,000 $ 27,234,000
Savings deposits 23,201,000 2.85% 18,689,000 2.85%
Prime asset funds 12,998,000 3.01 10,072,000 2.93
Money market accounts 518,000 2.51 486,000 2.47
Now accounts 23,723,000 2.35 19,326,000 2.44
Time deposits 37,801,000 5.29 32,414,000 5.49
------------ ----- ------------ -----
Total $135,094,000 2.68% $108,221,000 2.86%
============ ===== ============ =====
Table 10: Deposit Maturity
Three months or less $ 8,820,000
Over three months through 1 year 4,563,000
Over one year through three years 200,000
Over three years 0
-----------
Total $13,583,000
===========
42
<PAGE>
Asset/Liability Management
Interest rate sensitivity is the relationship between market interest
rates and earnings volatility due to the repricing characteristics of assets
and liabilities. Through Tinton Falls' Asset/Liability Policy, senior
management strives to maintain a consistent net interest rate differential by
managing the sensitivity and repricing of its assets and liabilities to
interest rate fluctuations. The process of executing interest rate risk
management is assisted by the Asset/Liability Management Committee.
To account for repricing and earnings effects between market sensitive
assets and less rate sensitive core deposit accounts, management utilizes a
simulation model to project future levels of net interest income under various
interest rate environments and balance sheet structures. The "base case"
scenario uses the current balance sheet strategy and tests the income effects
with flat interest rates, rising rates of 3% and falling rates of 3% over a
twelve month period. Management has established guidelines to limit the amount
that net interest income can vary within these rate ranges. The guidelines
state that a movement in interest rates of +300 b.p. or -300 b.p. over a twelve
month period should not affect net interest income by more than 6%. As of
December 31, 1997, CFBC was within the guidelines set forth.
A traditional form of asset/liability management is the static gap report.
This type of report categorizes interest bearing assets and liabilities by
repricing or maturity characteristics. On a cumulative basis, as of December
31, 1997, more of CFBC's liabilities than assets repriced in the three month,
six month and one year period. A liability sensitive gap may indicate an
exposure to earnings if interest rates increase. However, deposits that reprice
within one year are predominantly core savings, NOW and money market deposits
that are Bank administered. Historically, these accounts have been much less
volatile than the prime and Fed funds rates, which to a large degree effect
earning asset yields. Therefore, management believes the gap position may
overstate the actual risk to earnings over the next twelve month period.
Liquidity management measures the ability to satisfy current and future
cash flow needs as they become due. Maintaining a level of liquid funds through
asset-liability management seeks to ensure that these needs are met at a
reasonable cost. Principal sources of liquidity are deposit generation and
maturities and repayment of loans and investment securities. In addition,
Tinton Falls has established lines of credit with the Federal Home Loan Bank,
two correspondent banks and other funding sources which further enhance
liquidity. There were approximately $14,000,000 in lines of credit available
for general corporate purposes, with no outstandings at year end 1997.
At December 31, 1997, CFBC had a total of $30,830,000 or 19% of total
assets in cash and cash equivalents and marketable government and
mortgage-backed securities, available for sale. This compares to $18,333,000 or
14% in 1996. Investment securities provide cash flow through maturities and
periodic repayments of principal.
Capital Resources
The capital adequacy of CFBC is reviewed on an ongoing basis by management
and the Board of Directors which considers regulatory guidelines, asset size,
balance sheet composition and risk profile characteristics. An adequate capital
base is important to support growth and expansion and protect against
unexpected losses.
CFBC and Tinton Falls are required to maintain a minimum ratio of total
capital to risk weighted assets of 8% of which at least 4% must be in the form
of Tier I capital (primarily shareholders' equity) and a leverage ratio of 4%.
At December 31, 1997, CFBC had a ratio of total capital to risk weighted assets
of 11.32% of which 10.41% was in the form of Tier I Capital. CFBC's leverage
ratio as of December 31, 1997 was 7.63%.
43
<PAGE>
BUSINESS OF CBH
General
Financial and other information relating to CBH, including information
relating to CBH's directors and executive officers, is set forth in CBH's 1997
Annual Report on Form 10-K, as amended (which incorporated certain portions of
CBH's 1998 Annual Meeting Proxy Statement), and CBH's 1998 First and Second
Quarter Reports on Form 10-Q, which are incorporated by reference herein,
copies of which may be obtained from CBH as indicated in "WHERE YOU CAN FIND
INFORMATION."
History and Business
Commerce Bancorp, Inc. ("CBH") is a multi-bank holding company
headquartered in Cherry Hill, New Jersey which operates three nationally
chartered bank subsidiaries: Commerce Bank, N.A., Cherry Hill, New Jersey
("Commerce NJ"), Commerce Bank/Pennsylvania, N.A., Devon, Pennsylvania
("Commerce PA"), Commerce Bank/Shore, N.A., Toms River, New Jersey ("Commerce
Shore"), and one state chartered bank subsidiary, Commerce Bank/North, Ramsey,
New Jersey ("Commerce North"). These four bank subsidiaries have 64 retail
branch offices in New Jersey, and 17 retail branch offices in Metropolitan
Philadelphia. Average deposits per branch as of June 30, 1998 (excluding
branches open less than two years) were approximately $59.5 million.
CBH, through its four bank subsidiaries, provides a full range of retail
and commercial services to individuals and businesses. These services include
free checking accounts for customers maintaining certain minimum balances,
savings programs, money market accounts, negotiable orders of withdrawal
("NOW") accounts, certificates of deposit, safe deposit facilities, consumer
loan programs, home equity and Visa Gold(TM) card revolving lines of credit,
overdraft checking, automated teller facilities and expanded banking hours.
Lending services include commercial, residential, construction, real estate,
term and installment loans. Corporate trust services are offered by Commerce NJ
and Commerce PA.
CBH operates one nonbank subsidiary, Commerce Capital Markets, Inc.,
Philadelphia, Pennsylvania ("CCMI"), which engages in certain securities
activities permitted to bank holding company subsidiaries under Section 20 of
the Glass-Steagall Act.
In addition, CBH, through Commerce National Insurance Services, Inc., a
nonbank subsidiary of Commerce North ("Commerce National"), operates an
insurance brokerage firm concentrating on commercial property, casualty and
surety as well as personal lines. Commerce National also offers a line of
employee benefit programs including both group as well as individual medical,
life, disability and pension. Commerce National places insurance for clients in
multiple states, primarily Delaware, New Jersey and Pennsylvania.
CBH, a New Jersey business corporation, which was incorporated on December
9, 1982, became a registered bank holding company under the BHCA on June 30,
1983, by acquiring Commerce NJ. Commerce PA was acquired by CBH on January 2,
1987. Commerce Shore was acquired by CBH on December 31, 1988. Commerce North
was acquired by CBH on January 21, 1997. CCMI was acquired by CBH on March 27,
1998.
As of June 30, 1998, CBH, on a consolidated basis, had total assets of
approximately $4.4 billion, total deposits of approximately $3.9 billion and
total shareholders' equity of approximately $282.0 million.
CBH's principal executive offices are located at Commerce Atrium, 1701
Route 70 East, Cherry Hill, New Jersey, 08034-5400, and its telephone number is
(609) 751-9000.
For additional information regarding CBH's business, see "WHERE YOU CAN
FIND MORE INFORMATION."
44
<PAGE>
DESCRIPTION OF CBH CAPITAL STOCK
The following statements are summaries of certain provisions of CBH's
capital stock and are qualified in their entirety by reference to the complete
text of the CBH Certificate, copies of which are incorporated by reference as
exhibits to the Registration Statement of which this Proxy Statement-Prospectus
is a part.
Authorized Capital
The authorized capital stock of CBH consists of 50,000,000 shares of
Common Stock, par value $1.5625 per share, and 10,000,000 shares of Preferred
Stock, without par value.
Under CBH's Certificate, the CBH Board is authorized, without further
shareholder action, to provide for the issuance of the Preferred Stock in one
or more series, with such designations, number of shares, relative rights,
preferences and limitations as shall be set forth in resolutions providing for
the issuance thereof adopted by the CBH Board.
CBH Common Stock
Based on the number of shares of CBH Common Stock and CFBC Common Stock
outstanding as of the Record Date and giving effect to the issuance of the
approximately 1.5 million shares of CBH Common Stock that will be issued to the
shareholders of CFBC in the Merger, there will be approximately 24.3 million
shares of CBH Common Stock outstanding upon completion of the Merger. In
addition, as part of the Merger, options to purchase an additional 226,936
shares of CFBC Common Stock will be converted into options to purchase CBH
Common Stock. Based on the number of shareholders of record of CBH and CFBC as
of the Record Date, and assuming no duplication, CBH is expected to have
approximately 16,000 holders of record upon completion of the Merger.
The shares of CBH Common Stock, when issued to holders of outstanding
shares of CFBC Common Stock in connection with the Merger, will be validly
issued, fully paid and non-assessable.
The rights, preferences and privileges of holders of CBH Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which CBH may designate and issue in
the future.
Voting Rights. Holders of CBH Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of shareholders and do not
have cumulative voting rights. Holders of a majority of the shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election.
Dividends. Holders of CBH Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the CBH Board out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock.
Liquidation. Upon the liquidation, dissolution or winding up of CBH, the
holders of CBH Common Stock are entitled to receive ratably the net assets of
CBH available after the payment of all debts and other liabilities and subject
to the prior rights of any outstanding preferred stock.
Preemptive Rights. Holders of CBH Common Stock have no preemptive,
subscription, redemption or conversion rights.
Transfer Agent and Registrar. The transfer agent and registrar for the
CBH's Common Stock is Chase/Mellon Shareholder Services, LLC.
CBH Preferred Stock
CBH preferred stock ("CBH Preferred Stock") may be issued with such
preferences, voting rights and conversion rights as the CBH Board, without
further approval by the shareholders, may determine by duly
45
<PAGE>
adopted resolution. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a Change in Control of CBH. As of the Record
Date, there were no shares of CBH Preferred Stock issued and outstanding. CBH
has no present plans to issue any shares of preferred stock.
"Anti-Takeover" Provisions and Management Implications
The CBH Certificate requires the affirmative vote of the holders of at
least 80% of the outstanding capital stock of CBH entitled to vote thereon in
order to permit the consummation of any of the following transactions: (i) any
merger or consolidation of CBH with or into any other corporation; or (ii) any
sale, lease, exchange or other disposition of all of the assets of CBH to or
with any other corporation, person or other entity. The 80% voting requirement
would not, however, apply to any transaction approved by the CBH Board prior to
the consummation thereof. The CBH Certificate also provides for the issuance of
up to 10,000,000 shares of preferred stock, the rights, preferences and
limitations of which may be determined by the Board of Directors of CBH.
The provisions in the CBH Certificate relating to the 80% voting
requirements and issuance of preferred stock may have the effect not only of
discouraging tender offers or other stock acquisitions but also of deterring
existing shareholders from making management changes. Issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
secure a majority of outstanding voting stock. Similarly, absent the 80% voting
requirement provision relating to mergers and dispositions of assets, the
transactions described above could be consummated upon the favorable vote of
the holders of a majority of the votes cast by holders of shares entitled to
vote thereon.
These provisions may enhance the possibility that a potential bidder for
control of CBH will be required to act through arms-length negotiation with
respect to such major transactions as a merger, consolidation or purchase of
substantially all of the assets of CBH. Such provisions may also have the
effect of discouraging tender offers or other stock acquisitions, giving
management of CBH power to reject certain transactions which might be desired
by the owners of a majority of CBH's voting securities. These provisions could
also be deemed to benefit incumbent management to the extent they deter such
offers by persons who would wish to make changes in management or exercise
control over management. The CBH Board does not presently know of a third party
that plans to make an offer to acquire CBH through a tender offer, merger or
purchase of substantially all the assets of CBH.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless that Federal Reserve Board
has been given 60 days' prior written notice of such proposed acquisition and
within that time period the Federal Reserve Board has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days
the period during which such a disapproval may be issued, or unless the
acquisition is subject to Federal Reserve Board approval under the BHCA. An
acquisition may be made prior to the expiration of the disapproval period if
the Federal Reserve Board issues written notice of its intent not to disapprove
the action. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of more than ten percent of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act, such as CBH, would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25 percent (five percent
in the case of an acquiror that is a bank holding company) or more of the
outstanding shares of CBH Common Stock, or otherwise obtaining "control" over
CBH. Under the BHCA, "control" generally means (i) the ownership, control or
power to vote 25 percent or more of any class of voting securities of the
banking holding company, (ii) the ability to elect a majority of the bank
holding company's directors, or (iii) the ability otherwise to exercise a
controlling influence over the management and policies of the bank holding
company. See "THE MERGER -- Regulatory Approvals" for a description of the
standards applicable to the Merger under the BHCA.
In addition, in certain instances the issuance of authorized but unissued
shares of CBH Common Stock or CBH Preferred Stock may have an anti-takeover
effect. The authority of the CBH Board to issue CBH
46
<PAGE>
Preferred Stock with rights and privileges, including voting rights, as it may
deem appropriate, may enable the CBH Board to prevent a change of control
despite a shift in ownership of CBH Common Stock. In addition, the CBH Board's
authority to issue additional shares of CBH Common Stock may help deter or
delay a change of control by increasing the number of shares needed to gain
control.
The NJBCA provides that no publicly held corporation organized under the
laws of New Jersey with its principal executive offices or significant
operations located in New Jersey (a "resident domestic corporation") may engage
in any "business combination" (as defined in the NJBCA) with any "interested
shareholder" (generally, a ten percent or greater beneficial owner of 10% or
more of the voting power) of such corporation for a period of five years
following such interested shareholder's stock acquisition unless such business
combination is approved by the board of directors of such corporation prior to
the "interested shareholder's" stock acquisition. A resident domestic
corporation, such as CBH, cannot opt out of the foregoing provisions of the
NJBCA.
In addition, no resident domestic corporation may engage, at any time, in
any business combination with any interested shareholders of such corporation
other than: (i) a business combination approved by the board of directors of
such corporation prior to the "interested shareholder's" stock acquisition;
(ii) a business combination approved by the affirmative vote of the holders of
two-thirds of the voting stock not beneficially owned by that interested
shareholder at a meeting called for such purpose; or (iii) a business
combination in which the interested shareholder pays a formula price designed
to ensure that all other shareholders receive at least the highest price per
share paid by that interested shareholder. The business combination statute
will not be applicable to the Merger because the Merger was approved by the
CFBC Board prior to CBH becoming an "interested shareholder."
Under the NJBCA, the director of a New Jersey corporation may consider, in
discharging his or her duties to the corporation and in determining what he or
she reasonably believes to be in the best interest of the corporation, any of
the following (in addition to the efforts of any action on shareholders): (i)
the effects of the action on the corporation's employees, suppliers, creditors
and customers; (ii) the effects of the action on the community in which the
corporation operates; and (iii) the long-term as well as the short-term
interests of the corporation and its shareholders, including the possibility
that these interest may best be served by the continued independence of the
corporation. If, on the basis of the foregoing factors, the board of directors
determines that any proposal or offer to acquire the corporation is not in the
best interest of the corporation, it may reject such proposal or offer, in
which event the board of directors will have no duty to facilitate, remove any
obstacles to, or refrain from impeding, such proposal or offer.
The existence of the foregoing provisions could (i) result in CBH being
less attractive to a potential acquiror, and (ii) result in CBH shareholders
receiving less for their shares of CBH Common Stock than otherwise might be
available in the event of a takeover attempt.
Payment of Dividends
CBH is a legal entity separate and distinct from its banking and other
subsidiaries. Under the NJBCA, a corporation may pay dividends or purchase,
redeem or otherwise acquire its own shares unless, after giving effect thereto,
(i) the corporation would be unable to pay its debts as they become due in the
usual course of its business, or (ii) its assets would be less than the sum of
its liabilities plus the amount that would be needed to satisfy the
preferential dissolution rights of shareholders whose preferential rights are
superior to those receiving the distribution.
A major portion of the revenues of CBH result from amounts paid as
dividends to CBH by its national bank subsidiaries. CBH's banking subsidiaries
are subject to legal limitations on the amount of dividends they can pay. The
prior approval of the Comptroller of the Currency (the "Comptroller") is
required if the total of all dividends declared by a national bank in any
calendar year will exceed the sum of such bank's net profits for the year and
its retained net profits for the preceding two calendar years, less any
required transfer to surplus. Federal law also prohibits national banks from
paying dividends which would be greater than the bank's undivided profits after
deducting statutory bad debt in excess of the bank's allowance from loan
losses.
47
<PAGE>
Under the foregoing dividend restrictions, as of June 30, 1998, CBH's
national bank subsidiaries, without obtaining affirmative governmental
approvals, could pay aggregate dividends of $66.1 million to CBH during the
remainder of 1998. During the first two quarters of 1998, CBH's subsidiaries
paid $7.0 million in cash dividends to CBH.
In addition, both CBH and its national bank subsidiaries are subject to
various general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory
minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
national bank or bank holding company that the payment of dividends that
deplete a national banks' capital base to an inadequate level would be an
unsound and unsafe banking practice. The Comptroller and the Federal Reserve
Board have each indicated that banking organizations should generally pay
dividends only out of certain operating earnings.
48
<PAGE>
CERTAIN DIFFERENCES IN THE RIGHTS OF CFBC AND CBH SHAREHOLDERS
General
The rights of shareholders of a corporation are governed by the laws of
the state in which the corporation is incorporated, as well as the governing
instruments of the corporation itself--that is, its certificate (or articles)
of incorporation and bylaws. Each of CBH and CFBC is incorporated under the
laws of the State of New Jersey and the rights of the holders of CBH Common
Stock and CFBC Common Stock are therefore governed by the NJBCA, the CBH
Certificate and the CBH Bylaws, with respect to CBH, and the CFBC Certificate
and the CFBC Bylaws, with respect to CFBC. Upon consummation of the Merger, the
rights of the CFBC shareholders will be governed by the CBH Certificate and the
CBH Bylaws and continue to be governed by the NJBCA. The following is a summary
of certain material differences between the CBH Certificate and CBH Bylaws and
the CFBC Certificate and the CFBC Bylaws.
The following summary does not reflect any rules of the NYSE that may
apply to CBH or the OTC with respect to CFBC in connection with the matters
discussed. This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, the NJBCA, and the constituent
documents of each corporation.
Authorized Capital
CFBC. The authorized capital stock of CFBC consists of 2,500,000 shares of
CFBC Common Stock and 500,000 shares of CFBC Preferred Stock. As of the Record
Date, CFBC had outstanding 2,114,621 shares of CFBC Common Stock and no shares
of CFBC Preferred Stock.
Under the CFBC Certificate, the CFBC Board is authorized, without further
shareholder action, to provide for the issuance of the CFBC Preferred Stock in
one or more classes or series within any class or classes, with such
designations, preferences, qualifications, limitations and special or relative
rights, if any, as may be designated by the CFBC Board.
CBH. CBH's authorized capital is set forth under "DESCRIPTION OF CBH
CAPITAL STOCK."
CFBC Common Stock
Voting Rights. Holders of CFBC Common Stock are entitled to one vote for
each share held on all matters submitted to a vote of shareholders and do not
have cumulative voting rights. Holders of a majority of the shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election.
Dividends. Holders of CFBC Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the CFBC Board out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
the affairs of CFBC, whether voluntary or otherwise, after payment or provision
for payment of the debts and other liabilities of CFBC, and subject to the
rights of the holders of any stock of CFBC ranking senior to the Preferred
Stock in respect of distributions upon liquidation, dissolution or winding up
of CFBC, the holders of the outstanding Preferred Stock shall be entitled to
receive and share ratably with any distribution of assets to be made to the
holders of any CFBC Common Stock.
CBH. CBH's Common Stock is set forth under "DESCRIPTION OF CBH CAPITAL
STOCK."
Director Nominations
CFBC. CFBC's Bylaws do not provide for any formal process with respect to
the nomination of directors. Unlike CBH, all of whose directors are elected
annually, CFBC's board of directors is staggered with one-third of such
directors being elected each year for a three year term.
49
<PAGE>
CBH. CBH's Bylaws provide that nominations for directors to be elected at
an annual meeting of the shareholders must be in writing and submitted to the
Secretary of CBH not later than the close of business on the fifth business day
immediately preceding the date of the meeting, with all late nominations being
rejected. All of CBH's directors are elected annually.
LEGAL MATTERS
An opinion will be delivered by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania and Cherry Hill, New Jersey, to the effect that the
shares of CBH Common Stock to be issued in the Merger will, when issued as
contemplated by the Merger Agreement, be validly issued, fully paid and
non-assessable. Jack R Bershad, a partner in Blank Rome Comisky & McCauley LLP,
is a director of CBH, Commerce NJ and Commerce PA. Mr. Bershad and certain
other partners of Blank Rome Comisky & McCauley LLP are shareholders of CBH.
Certain legal matters relating to CFBC will be passed upon by Pitney, Hardin,
Kipp & Szuch, Morristown, New Jersey.
EXPERTS
The consolidated financial statements of CBH as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
appearing in CBH's Annual Report on Form 10-K for the year-ended December 31,
1997, as amended, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein
by reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of CFBC as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
included herein, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto. Such financial
statements are included herein in reliance upon the authority of said firm as
experts in giving said reports.
50
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
CBH is subject to the informational requirements of the Exchange Act and
accordingly, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
reports, proxy statements and other information CBH files at the SEC's public
reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's Regional Offices in New York (7 World Trade Center, Suite 1300, New York,
New York 10048) and Chicago (Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661). You may call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. In addition, you may read
any reports, proxy statements and other information CBH files at the offices of
the NYSE, 20 Broad Street, New York, New York 10005. CBH's SEC filings are also
available on the SEC's Internet site at http://www.sec.gov.
CBH filed a Registration Statement on Form S-4 (No. 333-65801) (the
"Registration Statement") to register with the SEC the CBH Common Stock to be
issued to CFBC shareholders in the Merger. This Proxy Statement-Prospectus is a
part of that Registration Statement and constitutes a prospectus of CBH in
addition to being a proxy statement of CFBC for the Meeting. As allowed by SEC
rules, this Proxy Statement-Prospectus does not contain all the information you
can find in the Registration Statement or the exhibits to the Registration
Statement.
Some of the information that you may want to consider in deciding how to
vote with respect to the Merger is not physically included in this Proxy
Statement-Prospectus, but rather is "incorporated by reference" to documents
that have been filed by CBH with the SEC. The information that is incorporated
by reference consists of: (i) CBH's Annual Report on Form 10-K for the
year-ended December 31, 1997, as amended; and (ii) CBH's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998.
All documents filed by CBH pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement-Prospectus and prior
to the Meeting also are incorporated by reference into this Proxy
Statement-Prospectus and will be deemed to be a part hereof from the date of
filing of such documents.
Any statement contained in a document that is incorporated by reference
will be deemed to be modified or superseded for all purposes to the extent that
a statement contained herein (or in any other document that is subsequently
filed with the SEC and incorporated by reference) modifies or is contrary to
that previous statement.
We may have sent you some of the documents incorporated by reference, but
you can obtain any of them through us or the SEC. Documents incorporated by
reference are available from us without charge, excluding all exhibits unless
we have specifically incorporated by reference an exhibit in this Proxy
Statement-Prospectus. CFBC shareholders may obtain documents incorporated by
reference in this Proxy Statement-Prospectus by requesting them in writing or
by telephone from: Commerce Bancorp, Inc., 1701 Route 70 East, Cherry Hill, New
Jersey 08034-5400, Attention: C. Edward Jordan, Jr., Executive Vice President,
(telephone number (609) 751-9000). Responses to any request will be made within
one business day by sending the requested documents by first class mail or
equally prompt means. In order to ensure timely delivery of such documents, any
request should be made by December 2, 1998.
All information contained or incorporated by reference in this Proxy
Statement-Prospectus relating to CBH and its subsidiaries has been supplied by
CBH. All information contained in this Proxy Statement-Prospectus relating to
CFBC and its subsidiaries has been supplied by CFBC.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement-Prospectus to vote on the Merger. We have not
authorized anyone to provide you with information that is different from what
is contained in this Proxy Statement-Prospectus. This Proxy
Statement-Prospectus is dated November 6, 1998. You should not assume that the
information contained in the Proxy Statement-Prospectus is accurate as of any
other date or that there had been no change in the affairs of CBH or CFBC since
that date, and neither in the delivery of this Proxy Statement-Prospectus to
CFBC shareholders nor the issuance of CBH Common Stock in the Merger shall
create any implication to the contrary. This Proxy Statement-Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities, or the solicitation of a Proxy, in any jurisdiction in which, or to
any person to whom, it is unlawful to make any such offer or solicitation.
51
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
COMMUNITY FIRST BANKING COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants ................................................. F-2
Consolidated Balance Sheets as of June 30, 1998 (unaudited), December 31, 1997 and
December 31, 1996 ....................................................................... F-3
Consolidated Statements of Income for the six months ended June 30, 1998 and June 30, 1997
(unaudited), and for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 ....................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June
30, 1998 (unaudited), and for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 ...................................................................... F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30,
1997 (unaudited), and for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995 ....................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Community First Banking Company:
We have audited the accompanying consolidated balance sheets of Community
First Banking Company (a New Jersey Corporation) and subsidiary as of December
31, 1997 and 1996 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Community First Banking
Company and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 23, 1998 (except with respect
to the matter discussed in Note 18, as to which
the date is May 27, 1998 and the matter discussed in
Note 19, as to which the date is August 12, 1998)
F-2
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1998, DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
June 30, December 31,
---------------- -----------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks
(Notes 2, 12 and 16) ............................................. $ 13,328,000 $ 10,766,000 $ 5,490,000
Federal funds sold ................................................ 8,000,000 4,500,000 700,000
------------ ------------ ------------
Total cash and cash equivalents .................................. 21,328,000 15,266,000 6,190,000
------------ ------------ ------------
SECURITIES (Notes 2, 3 and 16):
Available for sale, at market value ............................... 13,798,000 15,564,000 12,143,000
Held to maturity (market value of $16,218,000, in 1998, $16,736,000
in 1997 and $12,393,000 in 1996) ................................. 16,241,000 16,826,000 12,763,000
------------ ------------ ------------
Total securities ................................................. 30,039,000 32,390,000 24,906,000
------------ ------------ ------------
LOANS HELD FOR SALE ................................................ 6,950,000 4,370,000 3,209,000
LOANS (Notes 2, 4, 5 and 16) ....................................... 125,762,000 110,567,000 94,122,000
Less -- Allowance for possible loan losses ........................ (1,300,000) (1,051,000) (830,000)
------------ ------------ ------------
Net loans ........................................................ 124,462,000 109,516,000 93,292,000
------------ ------------ ------------
ACCRUED INTEREST RECEIVABLE (Note 16) .............................. 1,066,000 982,000 712,000
------------ ------------ ------------
PROPERTY, PREMISES AND EQUIPMENT, net (Notes 2 and 6) .............. 2,199,000 2,200,000 2,242,000
------------ ------------ ------------
OTHER REAL ESTATE (Note 2) ......................................... -- -- 105,000
------------ ------------ ------------
OTHER ASSETS (Notes 2 and 7) ....................................... 686,000 573,000 647,000
------------ ------------ ------------
Total assets ..................................................... $186,730,000 $165,297,000 $131,303,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits--(Note 9 and 16)
Demand--
Noninterest bearing ............................................. $ 56,185,000 $ 46,296,000 $ 31,588,000
Interest bearing ................................................ 27,893,000 23,941,000 18,397,000
Money market ..................................................... 18,795,000 19,218,000 15,254,000
Savings .......................................................... 29,899,000 24,600,000 20,823,000
Time--
$100,000 or more ................................................ 15,130,000 13,583,000 8,699,000
Other ........................................................... 24,597,000 24,378,000 24,838,000
------------ ------------ ------------
Total deposits ................................................ 172,499,000 152,016,000 119,599,000
Accrued interest payable (Note 16) ................................ 671,000 778,000 997,000
Accrued expenses and other liabilities ............................ 539,000 488,000 486,000
------------ ------------ ------------
Total liabilities ............................................. 173,709,000 153,282,000 121,082,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (Notes 10, 15 and 18):
Preferred stock, 500,000 shares authorized; no shares issued
and outstanding .................................................. -- -- --
Common stock, stated value $2.50 per share; 2,500,000 authorized
2,113,939, 2,111,586 and 2,109,820 shares issued and outstanding
in 1998, 1997 and 1996, respectively ............................. 5,285,000 5,175,000 4,781,000
Additional paid-in capital ........................................ 7,475,000 6,700,000 5,335,000
Retained earnings ................................................. 257,000 143,000 270,000
Accumulated other comprehensive income (loss) ..................... 4,000 (3,000) (165,000)
------------ ------------ ------------
Total shareholders' equity .................................... 13,021,000 12,015,000 10,221,000
------------ ------------ ------------
Total liabilities and shareholders' equity .................... $186,730,000 $165,297,000 $131,303,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------- --------------------------------------------------
1998 1997 1997 1996 1995
--------------- --------------- ---------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME (Note 2):
Interest and fees on loans ......... $ 6,654,000 $ 4,897,000 $ 10,285,000 $8,399,000 $ 6,568,000
Interest on securities and interest
bearing deposits with banks ...... 900,000 949,000 2,039,000 1,608,000 1,260,000
Interest on Federal funds sold ..... 166,000 76,000 180,000 89,000 257,000
----------- ----------- ------------ ----------- -----------
Total interest income ............ 7,720,000 5,922,000 12,504,000 10,096,000 8,085,000
----------- ----------- ------------ ----------- -----------
INTEREST EXPENSE:
Interest on deposits ............... 1,965,000 1,731,000 3,622,000 3,090,000 2,675,000
Interest on borrowed funds ......... 1,000 6,000 8,000 77,000 --
----------- ----------- ------------ ----------- -----------
Total interest expense ........... 1,966,000 1,737,000 3,630,000 3,167,000 2,675,000
----------- ----------- ------------ ----------- -----------
Net interest income .............. 5,754,000 4,185,000 8,874,000 6,929,000 5,410,000
PROVISION FOR POSSIBLE
LOAN LOSSES
(Notes 2 and 5) .................... 246,000 172,000 392,000 425,000 329,000
----------- ----------- ------------ ----------- -----------
Net interest income after
provision for possible loan
losses ........................... 5,508,000 4,013,000 8,482,000 6,504,000 5,081,000
----------- ----------- ------------ ----------- -----------
OTHER INCOME:
Service charges on deposit
accounts ......................... 598,000 461,000 1,060,000 836,000 644,000
Net gains (losses) on securities
transactions (Notes 2 and 3) ..... 9,000 11,000 10,000 (20,000) 16,000
Other income ....................... 99,000 86,000 180,000 147,000 111,000
----------- ----------- ------------ ----------- -----------
Total other income ............... 706,000 558,000 1,250,000 963,000 771,000
----------- ----------- ------------ ----------- -----------
OTHER EXPENSES:
Salaries and employee
benefits ......................... 2,412,000 1,693,000 3,546,000 2,703,000 2,214,000
Occupancy expense .................. 346,000 320,000 545,000 339,000 308,000
Other operating expenses
(Note 13) ........................ 1,657,000 1,281,000 2,710,000 2,365,000 1,900,000
----------- ----------- ------------ ----------- -----------
Total other expenses ............. 4,415,000 3,294,000 6,801,000 5,407,000 4,422,000
----------- ----------- ------------ ----------- -----------
Income before provision
for income taxes ................ 1,799,000 1,277,000 2,931,000 2,060,000 1,430,000
PROVISION FOR
INCOME TAXES (Note 7) .............. 711,000 489,000 1,115,000 792,000 543,000
----------- ----------- ------------ ----------- -----------
Net income ......................... $ 1,088,000 $ 788,000 $ 1,816,000 $1,268,000 $ 887,000
=========== =========== ============ =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 11) .............. 2,113,428 2,110,510 2,110,902 2,109,819 1,883,548
=========== =========== ============ =========== ===========
BASIC EARNINGS PER SHARE
(Notes 2 and 11) ................... $ 0.51 $ 0.37 $ 0.86 $ 0.60 $ 0.47
=========== =========== ============ =========== ===========
DILUTED EARNINGS PER
SHARE (Notes 2 and 11) ............. $ 0.50 $ 0.37 $ 0.84 $ 0.60 $ 0.47
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Capital
------------- -----------------
<S> <C> <C>
BALANCE,
December 31, 1994 .......................... $3,123,000 $2,818,000
Issuance of 385,138 shares, common
stock, net of expenses .................... 963,000 1,118,000
Issuance of 167,532 shares for stock
dividends ................................. 419,000 725,000
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- --
Net income -- 1995 ......................... -- --
---------- ----------
Comprehensive Income .......................
BALANCE,
December 31, 1995 .......................... 4,505,000 4,661,000
Issuance of 109,766 shares for stock
dividends ................................. 274,000 670,000
Exercise of stock options .................. 2,000 4,000
Cash dividends paid ($.09 per share) ....... -- --
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- --
Net income -- 1996 ......................... -- --
---------- ----------
Comprehensive Income .......................
BALANCE,
December 31, 1996 .......................... 4,781,000 5,335,000
Issuance of 155,968 shares for stock
dividends ................................. 390,000 1,360,000
Exercise of stock options .................. 4,000 5,000
Cash dividends paid ($.10 per share) ....... -- --
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- --
Net income -- 1997 ......................... -- --
---------- ----------
Comprehensive Income .......................
BALANCE,
December 31, 1997 .......................... 5,175,000 6,700,000
Issuance of 41,446 shares for stock
dividends (unaudited) ..................... 106,000 767,000
Exercise of stock options .................. 4,000 8,000
Cash dividends paid ($.05 per share)
(unaudited) ............................... -- --
Change in unrealized loss on securities
available for sale, net of income taxes
(unaudited) ............................... -- --
Net income -- six months 1998
(unaudited) ............................... -- --
---------- ----------
Comprehensive Income (unaudited) ...........
BALANCE,
June 30, 1998 (unaudited) .................. $5,285,000 $7,475,000
========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Comprehensive Shareholders'
Earnings Income (loss) Income Equity
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1994 .......................... $ 371,000 ($ 311,000) $ -- $ 6,001,000
Issuance of 385,138 shares, common
stock, net of expenses .................... -- -- -- 2,081,000
Issuance of 167,532 shares for stock
dividends ................................. (1,144,000) -- -- --
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- 235,000 235,000 235,000
Net income -- 1995 ......................... 887,000 -- 887,000 887,000
------------- --------- ----------- -----------
Comprehensive Income ....................... $ 1,122,000
===========
BALANCE,
December 31, 1995 .......................... 114,000 (76,000) $ -- 9,204,000
Issuance of 109,766 shares for stock
dividends ................................. (944,000) -- -- --
Exercise of stock options .................. -- -- -- 6,000
Cash dividends paid ($.09 per share) ....... (168,000) -- -- (168,000)
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- (89,000) (89,000) (89,000)
Net income -- 1996 ......................... 1,268,000 -- 1,268,000 1,268,000
------------- --------- ----------- -----------
Comprehensive Income ....................... $ 1,179,000
===========
BALANCE,
December 31, 1996 .......................... 270,000 (165,000) $ -- 10,221,000
Issuance of 155,968 shares for stock
dividends ................................. (1,750,000) -- -- --
Exercise of stock options .................. -- -- -- 9,000
Cash dividends paid ($.10 per share) ....... (193,000) -- -- (193,000)
Change in unrealized loss on securities
available for sale, net of income
taxes ..................................... -- 162,000 162,000 162,000
Net income -- 1997 ......................... 1,816,000 -- 1,816,000 1,816,000
------------- --------- ----------- -----------
Comprehensive Income ....................... $ 1,978,000
===========
BALANCE,
December 31, 1997 .......................... 143,000 (3,000) $ -- 12,015,000
Issuance of 41,446 shares for stock
dividends (unaudited) ..................... (873,000) -- -- --
Exercise of stock options .................. -- -- -- 12,000
Cash dividends paid ($.05 per share)
(unaudited) ............................... (101,000) -- -- (101,000)
Change in unrealized loss on securities
available for sale, net of income taxes
(unaudited) ............................... -- 7,000 7,000 7,000
Net income -- six months 1998
(unaudited) ............................... 1,088,000 -- 1,088,000 1,088,000
------------- --------- ----------- -----------
Comprehensive Income (unaudited) ........... $ 1,095,000
===========
BALANCE,
June 30, 1998 (unaudited) .................. $ 257,000 $ 4,000 $13,021,000
============= ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
June 30,
----------------------------------
1998 1997
---------------- ----------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................... $ 1,088,000 $ 788,000
Adjustments to reconcile net income to
net cash provided by operating
activities--
Provision for possible loan losses ........... 246,000 172,000
Depreciation and amortization ................ 189,000 246,000
Deferred tax benefit ......................... (41,000) (29,000)
Amortization of premium on
securities, net of discount accretion 247,000 309,000
Securities (gain) loss, net .................. (9,000) (11,000)
(Increase) decrease in accrued interest
receivable .................................. (84,000) 55,000
(Increase) decrease in other assets .......... (76,000) (988,000)
(Decrease) increase in accrued interest
payable ..................................... (107,000) (340,000)
Increase (decrease) in accrued
expenses and other liabilities .............. 51,000 677,000
-------------- --------------
Net cash provided by operating
activities .................................. 1,504,000 879,000
-------------- --------------
INVESTING ACTIVITIES:
Securities transactions--
Purchases-
Available for sale ........................... (3,543,000) (8,342,000)
Held to maturity ............................. (4,000,000) (3,000,000)
Sales of securities available for sale ........ 2,023,000 2,000,000
Proceeds from calls prior to maturity ......... 4,000,000 --
Maturities--
Available for sale ........................... 2,104,000 --
Held to maturity ............................. 1,540,000 --
Net increase in loans ......................... (17,772,000) (4,769,000)
Capital expenditures .......................... (188,000) (218,000)
-------------- --------------
Net cash used by investing activities ......... (15,836,000) (14,329,000)
-------------- --------------
FINANCING ACTIVITIES:
Net increase in deposits ...................... 20,483,000 19,738,000
Proceeds from issuance of common
stock, net of expenses ....................... -- --
Dividends paid ................................ (101,000) (96,000)
Exercise of stock options ..................... 12,000 6,000
-------------- --------------
Net cash provided by financing
activities .................................. 20,394,000 19,648,000
-------------- --------------
Increase (decrease) in cash and cash
equivalents .................................. $ 6,062,000 $ 6,198,000
CASH AND CASH EQUIVALENTS,
beginning of period ........................... 15,266,000 6,190,000
-------------- --------------
CASH AND CASH EQUIVALENTS, end
of period ..................................... $ 21,328,000 $ 12,388,000
============== ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for--
Interest ..................................... $ 2,073,000 $ 2,077,000
Taxes ........................................ 806,000 629,000
Transfers from loans to other real estate ...... -- --
-------------- --------------
Write-off of fully depreciated assets .......... $ 845,000 $ --
============== ==============
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................... $ 1,816,000 $ 1,268,000 $ 887,000
Adjustments to reconcile net income to
net cash provided by operating
activities--
Provision for possible loan losses ........... 392,000 425,000 329,000
Depreciation and amortization ................ 488,000 441,000 372,000
Deferred tax benefit ......................... (50,000) (108,000) (75,000)
Amortization of premium on
securities, net of discount accretion 254,000 43,000 8,000
Securities (gain) loss, net .................. (10,000) 20,000 (16,000)
(Increase) decrease in accrued interest
receivable .................................. (270,000) 32,000 (152,000)
(Increase) decrease in other assets .......... 15,000 (110,000) 167,000
(Decrease) increase in accrued interest
payable ..................................... (219,000) 97,000 708,000
Increase (decrease) in accrued
expenses and other liabilities .............. 2,000 375,000 (152,000)
-------------- ------------ --------------
Net cash provided by operating
activities .................................. 2,418,000 2,483,000 2,076,000
-------------- ------------ --------------
INVESTING ACTIVITIES:
Securities transactions--
Purchases-
Available for sale ........................... (11,914,000) (14,348,000) (6,221,000)
Held to maturity ............................. (7,486,000) (7,226,000) --
Sales of securities available for sale ........ 7,973,000 12,793,000 2,020,000
Proceeds from calls prior to maturity ......... 2,000,000 -- --
Maturities--
Available for sale ........................... 541,000 1,170,000 2,793,000
Held to maturity ............................. 1,429,000 3,170,000 2,105,000
Net increase in loans ......................... (17,672,000) (21,317,000) (18,449,000)
Capital expenditures .......................... (446,000) (783,000) (1,436,000)
-------------- ------------ --------------
Net cash used by investing activities ......... (25,575,000) (26,541,000) (19,188,000)
-------------- ------------ --------------
FINANCING ACTIVITIES:
Net increase in deposits ...................... 32,417,000 23,218,000 18,381,000
Proceeds from issuance of common
stock, net of expenses ....................... -- -- 2,081,000
Dividends paid ................................ (193,000) (168,000) --
Exercise of stock options ..................... 9,000 6,000 --
-------------- ------------ --------------
Net cash provided by financing
activities .................................. 32,233,000 23,056,000 20,462,000
-------------- ------------ --------------
Increase (decrease) in cash and cash
equivalents .................................. $ 9,076,000 ($ 1,002,000) $ 3,350,000
CASH AND CASH EQUIVALENTS,
beginning of period ........................... 6,190,000 7,192,000 3,842,000
-------------- ------------ --------------
CASH AND CASH EQUIVALENTS, end
of period ..................................... $ 15,266,000 $ 6,190,000 $ 7,192,000
============== ============ ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for--
Interest ..................................... $ 3,849,000 $ 3,070,000 $ 1,967,000
Taxes ........................................ 1,257,000 697,000 823,000
Transfers from loans to other real estate ...... -- 293,000 --
-------------- ------------ --------------
Write-off of fully depreciated assets .......... $ -- $ -- $ 163,000
============== ============ ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995
(Information with regard to June 30, 1998 and 1997 and for each of the
six month periods then ended is unaudited)
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Community First Banking Company (the "Parent Company") and its wholly-owned
subsidiary, Tinton Falls State Bank (the "Bank", or when consolidated with the
Parent Company, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Effective April, 1996 all of the then outstanding common shares of the
Bank were exchanged for an equal number of shares of the Parent Company common
stock and the Parent Company acquired all of the outstanding common shares of
the Bank. This exchange of shares has been accounted for as a reorganization of
entities under common control resulting in no changes to the underlying
carrying amount of assets and liabilities.
The Bank, a New Jersey State Chartered commercial bank, commenced
operations in 1989. It provides commercial banking services for a broad range
of individual and corporate customers and various community bodies. The Bank
operates seven branches in the Monmouth County, New Jersey area.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates--
The accompanying consolidated financial statements, which are prepared in
conformity with generally accepted accounting principles, require the use of
management estimates. The most significant estimate with regard to these
financial statements relates to the allowance for possible loan losses, the
carrying value of other real estate and the fair value of financial
instruments, as discussed in Notes 3, 5 and 16. Actual results may differ from
those assumed in management's estimates.
Securities--
Securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Securities that the Company
does not have the positive intent and ability to hold to maturity are
classified as either trading or available for sale and carried at fair value.
Unrealized holding gains and losses on securities classified as available for
sale are carried as a separate component of shareholders' equity, net of income
taxes. Unrealized holding gains and losses associated with trading securities
are credited or charged to the statement of operations. The Company does not
have any securities held for trading purposes.
Management determines the appropriate classification of securities at the
time of purchase. The amortized cost of debt securities classified as held to
maturity or available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Realized gains and losses, and declines in
value other than temporary, are included in net securities gains (losses). The
cost of securities sold is based on the specific identification method.
For securities in the Company's held to maturity and available for sale
portfolios, fair value is determined by reference to quoted market prices. If
quoted market prices are not available, fair value is estimated using quoted
market values for similar securities.
Allowance For Possible Loan Losses--
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses, although, ultimate losses may
vary from current estimates. Adjustments to the allowance are reflected in
operations in the period in which they become known. The allowance is increased
by provisions charged to expense and reduced by net charge-offs. The level of
the allowance is based on
F-7
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
management's evaluation of potential losses in the loan portfolio, after
consideration of appraised collateral values, financial condition of the
borrowers, as well as prevailing and anticipated economic conditions. Credit
reviews of the loan portfolio, designed to identify potential charges to the
allowance, are made on a periodic basis during the year by senior management.
Impaired Loans--
Impaired loans, as defined, are measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loans
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. Large groups of smaller-homogeneous loans, such as residential
mortgage loans, credit card loans and consumer loans, are collectively
evaluated for impairment.
Loans Held for Sale--
Loans held for sale are carried at the lower of aggregate cost or fair
market value.
Interest And Fees On Loans--
Interest on loans is credited to operations based upon the principal
amount outstanding. When management believes there is sufficient doubt as to
the ultimate collectibility of interest on any loan, the accrual of applicable
interest is discontinued. Net loan origination fees are deferred and amortized
over the life of the related loan as an adjustment to the loan yield.
Property, Premises And Equipment--
Property, premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on
the straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related leases including expected renewal periods.
Other Real Estate--
Other real estate includes loan collateral that has been formally
repossessed. All amounts have been transferred into and carried in other real
estate at the lower of the loan value or fair market value less estimated costs
to sell the underlying collateral. During 1997 and 1996, the Company incurred
operating expenses and made adjustments to the carrying values of other real
estate resulting in net expense of $4,000, $14,000, $0 for 1997, 1996 and 1995,
respectively, which is included in other operating expenses in the accompanying
financial statements. No expenses were incurred for the six months ended June
30, 1998 and 1997 (unaudited).
Cash and Cash Equivalents--
Cash and cash equivalents includes cash on hand, noninterest bearing
amounts due from banks and Federal funds sold. Generally, Federal funds are
sold for one to four-day periods.
Net Income Per Share--
The Company adopted SFAS No. 128, "Earnings per Share" effective December
15, 1997. In accordance with this new accounting standard, basic earnings per
share is computed based on the weighted average number of shares outstanding
for the periods presented. Diluted earnings per share is computed based on the
weighted average number of shares outstanding for the period presented adjusted
for the effect of the stock options and warrants outstanding, if dilutive. All
prior periods have been restated.
F-8
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Income Taxes--
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
New Financial Accounting Standards--
The Company adopted SFAS 130, "Reporting Comprehensive Income," effective
January 1, 1998. In accordance with the new accounting standard a complete set
of financial statements includes the components of comprehensive income.
Comprehensive income consists of net income or loss for the current period and
revenues, expenses, gains and losses that have been previously excluded from
the income statement and were only reported as a component of equity. All prior
periods have been restated. Adoption of SFAS 130 did not have a material impact
on the results of operations, financial condition or disclosures of the
Company.
In June 1997 the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for all periods beginning after December 15, 1997 (and must
be adopted by the Company no later than in the fourth quarter of 1998).
Statement No. 131 requires that a company report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to
shareholders.
It also requires that a company report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. Management is currently evaluating the disclosures impact of
Statement No. 131 on its financial statements and has not determined if it has
any reportable segments.
Dividend Restrictions--
New Jersey state law permits the payment of dividends from the Bank to the
Company to the extent that the Bank will have a surplus of not less than 50% of
its capital stock or if not, payment of the dividend will not reduce its
surplus. At June 30, 1998, December 31, 1997 and 1996, the Bank had aggregate
retained earnings of $3,765,000, $2,842,000 and $2,761,000, respectively,
available under state law to pay dividends. The Bank will also be guided on its
dividend policy by the FDIC requirements.
Reclassifications--
Certain reclassifications have been made to prior years' amounts to
conform with the current year presentation.
F-9
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(3) SECURITIES:
Information relative to the Company's securities portfolio is as follows--
<TABLE>
<CAPTION>
June 30, 1998 (unaudited)
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U. S. Treasury ............................. $ 3,994,000 $23,000 $ -- $ 4,017,000
U. S. Government agency securities ......... 2,000,000 -- (3,000) 1,997,000
Mortgage backed securities ................. 7,241,000 12,000 (26,000) 7,227,000
Federal Home Loan Bank stock and other
securities ................................ 557,000 -- -- 557,000
----------- ------- -------- -----------
Total ............................. ...... $13,792,000 $35,000 ($ 29,000) $13,798,000
=========== ======= ======== ===========
Held to Maturity
U. S. Government agency securities ......... $ 3,000,000 $ -- $ -- $ 3,000,000
Mortgage backed securities ................. 12,717,000 12,000 (35,000) 12,694,000
Other securities ........................... 524,000 -- $ -- 524,000
----------- ------- -------- -----------
Total .................................... $16,241,000 $12,000 ($ 35,000) $16,218,000
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U. S. Treasury ............................. $ 3,993,000 $29,000 $ -- $ 4,022,000
U. S. Government agency securities ......... 3,999,000 4,000 -- 4,003,000
Mortgage backed securities ................. 7,102,000 9,000 (45,000) 7,066,000
Federal Home Loan Bank stock and other
securities ................................ 473,000 -- -- 473,000
----------- ------- -------- -----------
Total .................................... $15,567,000 $42,000 ($ 45,000) $15,564,000
=========== ======= ======== ===========
Held to Maturity
U. S. Government agency securities ......... $ 1,000,000 $ 2,000 $ -- $ 1,002,000
Mortgage backed securities ................. 14,281,000 7,000 (99,000) 14,189,000
Other securities ........................... 1,545,000 -- -- 1,545,000
----------- ------- -------- -----------
Total .................................... $16,826,000 $ 9,000 ($ 99,000) $16,736,000
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Available for Sale ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
U. S. Government agency securities ......... $ 2,999,000 $15,000 $ -- $ 3,014,000
Mortgage backed securities ................. 8,969,000 -- (290,000) 8,679,000
Federal Home Loan Bank stock and other
securities ................................ 450,000 -- -- 450,000
----------- ------- --------- -----------
Total .................................... $12,418,000 $15,000 ($ 290,000) $12,143,000
=========== ======= ========= ===========
Held to Maturity
Mortgage backed securities ................. $12,763,000 $ -- ($ 370,000) $12,393,000
=========== ======= ========= ===========
</TABLE>
F-10
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(3) SECURITIES: -- (Continued)
The amortized cost and estimated market value of debt securities at June
30, 1998 and December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------------------- -----------------------------
(unaudited)
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Available for Sale
Maturing within 1 year .............. $ 2,000,000 $ 2,012,000 $ 3,999,000 $ 4,003,000
Maturing 1 to 5 years ............... 3,994,000 4,002,000 3,993,000 4,022,000
Mortgage backed securities .......... 7,241,000 7,227,000 7,102,000 7,066,000
Other securities .................... 557,000 557,000 473,000 473,000
----------- ----------- ----------- -----------
Total available for sale ......... $13,792,000 $13,798,000 $15,567,000 $15,564,000
=========== =========== =========== ===========
Held to Maturity
Maturing 1 to 5 years ............... $ 3,000,000 $ 3,000,000 $ 1,000,000 $ 1,002,000
Mortgage backed securities .......... 12,717,000 12,694,000 14,281,000 14,189,000
Other securities .................... 524,000 524,000 1,545,000 1,545,000
----------- ----------- ----------- -----------
Total held to maturity ........... $16,241,000 $16,218,000 $16,826,000 $16,736,000
=========== =========== =========== ===========
</TABLE>
As of June 30, 1998 and December 31, 1997, securities having a book value
of $12,686,000 and $9,531,000, respectively, were pledged to secure public
deposits and for other purposes as required by law.
(4) LOANS:
Loans outstanding by classification at June 30, 1998, December 31, 1997
and 1996 are as follows--
<TABLE>
<CAPTION>
June 30, December 31,
---------------- ---------------------------------
1998 1997 1996
---------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C>
Loans secured by real estate--
Residential properties ................. $ 28,689,000 $ 30,765,000 $23,234,000
Commercial properties .................. 46,843,000 44,279,000 37,502,000
Construction properties ................. 2,641,000 2,527,000 2,152,000
Commercial and industrial loans ......... 45,262,000 27,447,000 22,637,000
Loans to individuals .................... 2,416,000 5,596,000 8,605,000
Less--Unearned income ................... (89,000) (47,000) (8,000)
------------ ------------ -----------
$125,762,000 $110,567,000 $94,122,000
============ ============ ===========
Loans held for sale ..................... $ 6,950,000 $ 4,370,000 $ 3,209,000
============ ============ ===========
</TABLE>
A majority of the Company's loans have been made to organizations and
individuals in the State of New Jersey, primarily in the Monmouth County, New
Jersey area.
F-11
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(4) LOANS: -- (Continued)
Activity related to loans to directors, executive officers and their
affiliated interests during the periods ended June 30, 1998 and December 31,
1997 is as follows--
<TABLE>
<CAPTION>
June 30, December 31,
-------------- -------------
1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
Balance, beginning of period ......... $1,876,000 $1,452,000
Loans granted ........................ 148,000 790,000
Repayments of loans .................. (118,000) (366,000)
---------- ----------
Balance, end of period ............... $1,906,000 $1,876,000
========== ==========
</TABLE>
All such loans were current as to principal and interest payments as of
June 30, 1998 and December 31, 1997.
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reflected in
operations in the periods in which they become known.
An analysis of the allowance for possible loan losses for the six months
ended June 30, 1998 and 1997 and for the years ended December 31, 1997, 1996
and 1995 is as follows--
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
------------- ----------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period ......... $1,051,000 $ 830,000 $ 830,000 $ 580,000 $ 471,000
Provision charged to expense ......... 246,000 172,000 392,000 425,000 329,000
Charge-offs .......................... (5,000) (21,000) (175,000) (258,000) (222,000)
Recoveries ........................... 8,000 2,000 4,000 83,000 2,000
---------- --------- ---------- ---------- ----------
Balance, end of period ............... $1,300,000 $ 983,000 $1,051,000 $ 830,000 $ 580,000
========== ========= ========== ========== ==========
</TABLE>
As of June 30, 1998, December 31, 1997 and 1996, nonaccrual loans totaled
$585,000, $381,000 and $652,000, respectively. Interest income that would have
been recorded in the financial statements had the above loans been performing
in accordance with their original terms is not significant.
F-12
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES: -- (Continued)
A loan is considered impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. These loans consist of nonaccrual loans as of June 30, 1998,
December 31, 1997 and 1996, but may also include performing loans to the extent
that situations arise which would reduce the probability of collection in
accordance with the contractual terms. As of June 30, 1998, December 31, 1997
and 1996 and Company's recorded investment in impaired loans and the related
valuation allowance calculated are as follows--
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 December 31, 1996
-------------------------- -------------------------- -------------------------
(unaudited)
Recorded Valuation Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance Investment Allowance
------------ ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Impaired loans--
Valuation Allowance
required ......... $585,000 $194,000 $381,000 $135,000 $652,000 $140,000
======== ======== ======== ======== ======== ========
</TABLE>
The valuation allowance is included in the allowance for possible loan
losses in the accompanying balance sheets. The average recorded investment in
impaired loans for the period ended June 30, 1998, December 31, 1997 and 1996
was $577,000, $555,000 and $519,000, respectively.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is doubtful at
which time payments received are recorded as reductions of principal. The
Company did not recognize any interest income on impaired loans in the periods
ended June 30, 1998, December 31, 1997 and 1996.
(6) PROPERTY, PREMISES AND EQUIPMENT:
Property, premises and equipment consists of the following as of June 30,
1998, December 31, 1997 and 1996--
<TABLE>
<CAPTION>
June 30, December 31,
--------------- ---------------------------------
1998 1997 1996
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Land ............................. $ 185,000 $ 185,000 $ 185,000
Building ......................... 481,000 479,000 477,000
Leasehold improvements ........... 1,194,000 1,090,000 1,007,000
Furniture and equipment .......... 2,173,000 2,804,000 2,398,000
------------ ------------ ------------
4,033,000 4,558,000 4,067,000
Less--Accumulated depreciation and
amortization .................... (1,834,000) (2,358,000) (1,825,000)
------------ ------------ ------------
$ 2,199,000 $ 2,200,000 $ 2,242,000
============ ============ ============
</TABLE>
F-13
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(7) INCOME TAXES:
The components of the income tax provision for the period ended June 30,
1998 and 1997, December 31, 1997, 1996 and 1995 are as follows--
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- --------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------------- ------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal--
Current tax provision ......... $ 608,000 $ 433,000 $ 963,000 $ 783,000 $ 536,000
Deferred tax benefit .......... (41,000) (29,000) (50,000) (108,000) (75,000)
State .......................... 144,000 85,000 202,000 117,000 82,000
--------- --------- ---------- ---------- ---------
$ 711,000 $ 489,000 $1,115,000 $ 792,000 $ 543,000
========= ========= ========== ========== =========
</TABLE>
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. Cumulative temporary differences and carryforwards at December 31,
1997 and 1996 are as follows--
<TABLE>
<CAPTION>
Deferred Tax Asset
----------------------------------------
June 30, December 31,
------------ -------------------------
1998 1997 1996
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
Provision for possible loan losses ....................... $470,000 $325,000 $317,000
Depreciation ............................................. 46,000 (1,000) 52,000
Points charged on mortgage loans ......................... (1,000) -- 23,000
Unrealized loss on securities available for sale ......... (2,000) 2,000 110,000
Other, net ............................................... 66,000 66,000 --
-------- -------- --------
Net deferred tax asset ................................ $579,000 $392,000 $502,000
======== ======== ========
</TABLE>
Based upon the Company's historical and current pretax earnings,
management believes it is more likely than not that the Company will generate
future net taxable income in sufficient amounts to realize its net deferred tax
asset, accordingly, the Company did not record any valuation allowance against
such deferred tax asset at June 30, 1998 and December 31, 1997.
The difference between the provision for income taxes computed by applying
the Federal income tax rate of 34% and the effective tax rates for 1998, 1997,
1996 and 1995 are primarily a result of the state tax expense, net of the
Federal benefit.
F-14
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(8) OTHER COMPREHENSIVE INCOME:
The tax effect of other comprehensive income is as follows--
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Before-Tax Tax Net of Tax
(unaudited) Amount Effect Amount
- ------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Unrealized gains on securities --
Unrealized holdings gains arising during
period ................................ $ 21,000 ($ 8,000) $ 13,000
Less - Reclassification adjustments for
gains realized in net income .......... (9,000) 3,000 (6,000)
-------- ------- --------
Net unrealized gains ...................... 12,000 (5,000) 7,000
-------- ------- --------
Other comprehensive income ................ $ 12,000 ($ 5,000) $ 7,000
======== ======= ========
Six Months Ended June 30, 1997
(unaudited)
- -------------------------------------------
Unrealized gains on securities--
Unrealized holdings gains arising during
period ................................ $ 74,000 ($ 28,000) $ 46,000
Less -- Reclassification adjustments for
gains realized in net income .......... (11,000) 4,000 (7,000)
--------- -------- --------
Net unrealized gains ...................... 63,000 (24,000) 39,000
--------- -------- --------
Other comprehensive income ................ $ 63,000 ($ 24,000) $ 39,000
======== ======= ========
Year Ended December 31, 1997
- -------------------------------------------
Unrealized gains on securities --
Unrealized holdings gains arising during
period ................................ $ 271,000 ($ 103,000) $168,000
Less -- Reclassification adjustments for
gains realized in net income .......... (10,000) 4,000 (6,000)
--------- --------- --------
Net unrealized gains ...................... 261,000 (99,000) 162,000
--------- --------- --------
Other comprehensive income ................ $ 261,000 ($ 99,000) $162,000
========= ========= ========
Year Ended December 31, 1996
- --------------------------------------------
Unrealized losses on securities --
Unrealized holdings losses arising during
period ................................. ($ 163,000) $ 62,000 ($ 101,000)
Less -- Reclassification adjustments for
losses realized in net income .......... 20,000 (8,000) 12,000
--------- -------- ---------
Net unrealized losses ...................... (143,000) 54,000 (89,000)
--------- -------- ---------
Other comprehensive (loss) ................. ($ 143,000) $ 54,000 ($ 89,000)
========= ======== =========
Year Ended December 31, 1995
- -------------------------------------------
Unrealized gains on securities --
Unrealized holdings gains arising during
period ................................ $ 395,000 ($ 150,000) $ 245,000
Less -- Reclassification adjustments for
gains realized in net income .......... (16,000) 6,000 (10,000)
--------- --------- ---------
Net unrealized gains ...................... 379,000 (144,000) 235,000
--------- --------- ---------
Other comprehensive income ................ $ 379,000 ($ 144,000) $ 235,000
========= ========= =========
</TABLE>
F-15
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(9) DEPOSITS:
At June 30, 1998, December 31, 1997 and 1996, scheduled maturities of
certificates of deposit are as follows --
<TABLE>
<CAPTION>
Over Three Over One
Months Through Year Through
Three Months Twelve Three Over Three
or Less Months Years Years Total
-------------- ---------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
June 30, 1998 (unaudited)
$100,000 or more ........... $8,129,000 $ 6,501,000 $ 400,000 $100,000 $15,130,000
Less than $100,000 ......... 6,323,000 13,910,000 4,361,000 3,000 24,597,000
December 31, 1997
$100,000 or more ........... $8,820,000 $ 4,563,000 $ 200,000 $ -- $13,583,000
Less than $100,000 ......... 7,829,000 12,593,000 3,912,000 44,000 24,378,000
December 31, 1996
$100,000 or more ........... $5,141,000 $ 2,943,000 $ 615,000 $ -- $ 8,699,000
Less than $100,000 ......... 9,383,000 9,085,000 6,370,000 -- 24,838,000
</TABLE>
(10) SHAREHOLDERS' EQUITY:
Effective July, 1995, the Company issued 385,138 shares of common stock at
a price of $5.63 per share. The net proceeds to the Company after expenses of
$86,000 was $2,081,000.
Effective June, 1996, the Board of Directors approved an amendment to
increase the number of authorized shares of common stock from 1,500,000 to
2,500,000 shares and to authorize the issuance of up to 500,000 shares of
preferred stock. The Board of Directors is entitled to authorize the creation
and issuance of the preferred shares in one or more series at their discretion.
During 1997, the Company declared and paid a 3% and a 5% stock dividend to
shareholders. During 1996, the Company declared and paid two 3% stock dividends
to shareholders. All per share information for prior periods has been restated
to give effect to these stock adjustments.
F-16
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(10) SHAREHOLDERS' EQUITY: -- (Continued)
In 1994, the Bank approved a stock option plan (the Option Plan) which
reserved 103,220 shares (amended to 136,347 shares in June, 1996) for future
grants to key employees, including directors and officers who are also
employees. Effective June, 1996, the Company approved a stock option plan for
nonemployee directors (the Director's Plan) which reserved 204,520 shares for
future grants. The Director's Plan provides for an initial grant of 102,261
options in June, 1996, and for an additional aggregate grant of 20,453 options
annually to be allocated equally among eligible nonemployee directors. Options
under both plans are granted at the market value of stock at the time of the
grant as approved by the Board of Directors. The options under the Option Plan
that were granted in 1995 vest at 20% per year and are fully vested in five
years; where as, options granted in 1997 and 1996 vest fully in three years,
30% the first two years and 40% the third year. Options under the Directors
Plan vest at 20% per year and become fully vested in five years. Vesting under
the Directors Plan is determined based upon their years of service as a
director. Options expire in ten years. Option activity for the six months ended
June 30, 1998, and for the year ended 1997, 1996 and 1995 is summarized below --
Number of Exercise Price
Shares Per Share
----------- ----------------
Outstanding, December 31, 1994 ................. 37,718 $ 4.19
Options Granted ............................. 36,618 6.71
Options Exercised ........................... -- --
Options Expired ............................. (6,975) 4.19
------ --------------
Outstanding, December 31, 1995 ................. 67,361 $4.19 to 6.71
Options Granted ............................. 116,986 7.49 to 7.93
Options Exercised ........................... -- --
Options Expired ............................. (857) 4.19
------ --------------
Outstanding, December 31, 1996 ................. 183,490 $ 4.19 to 7.93
Options Granted ............................. 35,125 8.84 to 10.91
Options Exercised ........................... (1,328) 4.19 to 6.71
Options Expired ............................. (3,021) 4.19 to 6.71
------ --------------
Outstanding, December 31, 1997 ................. 214,266 $4.19 to 10.91
Options Granted (unaudited) ................. 18,360 15.20
Options Exercised (unaudited) ............... (2,197) 4.19 to 10.91
Options Expired (unaudited) ................. (2,817) 4.19 to 10.91
------ --------------
Outstanding, June 30, 1998 (unaudited) ......... 227,612 $4.19 to 15.20
======= ===============
F-17
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(10) SHAREHOLDERS' EQUITY: -- (Continued)
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plan. Accordingly, no compensation
cost has been recognized for its Option Plan. Had compensation costs for the
Company's Option Plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of FASB Statement
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below for the periods ended June 30, 1998 and
1997, and December 31, 1997, 1996 and 1995 --
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
--------------- ------------- --------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income --
As reported .............. $ 1,088,000 $ 788,000 $ 1,816,000 $ 1,268,000 $ 887,000
Pro forma ................ 997,000 725,000 1,738,000 1,124,000 887,000
Basic earnings per share --
As reported .............. $ 0.51 $ 0.37 $ 0.86 $ 0.60 $ 0.47
Pro forma ................ 0.47 0.34 0.82 0.53 0.47
Diluted earnings per share --
As reported .............. $ 0.50 $ 0.37 $ 0.84 $ 0.60 $ 0.47
Pro forma ................ 0.46 0.34 0.81 0.53 0.47
</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 1998, 1997, 1996 and 1995, respectively;
dividends yields of 1% for the 1998 and 1997 grants and 6% for the 1996 and
1995 grants, expected volatility of 40.61% for all years, risk-free interest
rates of 5.86%, 6.48% and 5.84% for the Option Plan, and 5.86% for the 1998
grants, 7.06% for the 1997 grants, and 7.11% for grants in 1996 and 1995 in the
Director's Plan, and expected lives of 9 years for the 1998 grants, 8.5 years
for the 1997 grants and 9 years for the 1996 and 1995 grants.
F-18
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(10) SHAREHOLDERS' EQUITY: -- (Continued)
The following table summarizes information about stock options outstanding
at June 30, 1998 and December 31, 1997--
<TABLE>
<CAPTION>
Number Outstanding Number Exercisable
at at
June 30, 1998 Remaining Contractual June 30, 1998
Exercise Price (unaudited) Life (unaudited)
- ---------------- -------------------- ----------------------- -------------------
<S> <C> <C> <C>
$ 4.19 27,773 6.5 years 21,894
6.71 30,342 7.5 years 11,866
7.49 102,258 8 years 102,258
7.93 14,170 8.5 years 4,129
8.84 19,863 9 years 19,863
10.91 14,750 9.5 years --
15.20 18,360 10 years 18,360
------- -------
227,516 178,370
======= =======
Number Outstanding Number Exercisable
at Remaining Contractual at
Exercise Price December 31, 1997 Life December 31, 1997
- ---------------- -------------------- ----------------------- -------------------
$ 4.19 28,709 7 years 18,836
6.71 33,446 8 years 13,258
7.49 102,265 8.5 years 102,265
7.93 14,721 9 years 4,406
8.84 19,866 9.5 years 19,866
10.91 15,259 10 years --
------- -------
214,266 158,631
======= =======
</TABLE>
F-19
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(11) EARNINGS PER SHARE DISCLOSURES:
The following is a reconciliation of the calculation of basic and diluted
earnings per share--
<TABLE>
<CAPTION>
Weighted
Income Average Shares Income Per
(Numerator) (Denominator) Share
------------- ---------------- -----------
<S> <C> <C> <C>
For the period ended June 30, 1998 --
Basic earnings per share-- Income available to
common shareholders (unaudited) ....................... $1,088,000 2,113,428 $ 0.51
======
Effect of Dilutive Securities -- Stock Options
(unaudited) ........................................... -- 74,981
---------- ---------
Diluted earnings per share -- Income available to
common shareholders plus assumed conversions
(unaudited) ........................................... $1,088,000 2,188,409 $ 0.50
========== ========= ======
For the period ended June 30, 1997 --
Basic earnings per share -- Income available to
common shareholders (unaudited) ....................... $ 788,000 2,110,510 $ 0.37
======
Effect of Dilutive Securities -- Stock Options
(unaudited) ........................................... -- 34,347
---------- ---------
Diluted earnings per share -- Income available to
common shareholders plus assumed conversions
(unaudited) ........................................... $ 788,000 2,144,857 $ 0.37
========== ========= ======
For the year ended December 31, 1997 --
Basic earnings per share -- Income available to
common shareholders ................................... $1,816,000 2,110,902 $ 0.86
======
Effect of Dilutive Securities -- Stock Options ......... -- 47,910
---------- ---------
Diluted Earnings per share -- Income available to
common shareholders plus assumed conversions .......... $1,816,000 2,158,812 $ 0.84
========== ========= ======
For the year ended December 31, 1996 --
Basic earnings per share -- Income available to common
shareholders ......................................... $1,268,000 2,109,819 $ 0.60
======
Effect of Dilutive Securities -- Stock Options ......... -- 14,335
---------- ---------
Diluted Earnings per share -- Income available to
common shareholders plus assumed conversions ......... $1,268,000 2,124,154 $ 0.60
========== ========= ======
For the year ended December 31, 1995 --
Basic earnings per share -- Income available to common
shareholders ......................................... $ 887,000 1,883,548 $ 0.47
======
Effect of Dilutive Securities -- Stock Options ......... -- 10,112
---------- ---------
Diluted Earnings per share -- Income available to
common shareholders plus assumed conversions ......... $ 887,000 1,893,660 $ 0.47
========== ========= ======
</TABLE>
F-20
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(12) COMMITMENTS AND CONTINGENCIES:
Lease and License Obligations --
The Company leases most of its facilities under noncancellable operating
leases which expire through 2011 and contain renewal options. The Company has a
license obligation for an in-store branch.
As of December 31, 1997, future minimum rental payments under these leases
and license fees are as
follows --
1998 ......................... $260,000
1999 ......................... 230,000
2000 ......................... 215,000
2001 ......................... 141,000
2002 ......................... 142,000
--------
Thereafter ................... 647,000
========
Rent expense aggregated $281,000, $244,000, $462,000, $282,000 and
$254,000 for the periods ended June 30, 1998, June 30, 1997, December 31, 1997,
1996 and 1995, respectively.
Required Cash Balances --
Cash and due from banks includes certain reserve balances maintained in
accordance with requirements of the Bank's regulatory authorities. These
balances aggregated $2,416,000, $2,416,000 and $1,263,000 at June 30, 1998,
December 31, 1997 and 1996, respectively.
Commitments With Off-Balance Sheet Risk --
Commitments to extend credit, which aggregate $18,279,000, $34,155,000 and
$20,202,000 as of June 30, 1998, December 31, 1997 and 1996, are agreements to
lend to customers as long as there are no violation of any conditions
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of appropriate fees. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer. The Company is also contingently liable for outstanding letters of
credit aggregating approximately $1,484,000 and $1,394,000 as of June 30, 1998
and December 31, 1997. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
Litigation --
The Company may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. Management is not aware of
any present legal proceedings or other contingent liabilities and commitments
that would have a material effect on the Company's financial condition or the
results of its operations.
F-21
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(13) OTHER OPERATING EXPENSES:
The components of other operating expenses for the period ended June 30,
1998 and 1997, December 31, 1997, 1996 and 1995 are as follows --
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Equipment expense ................... $ 250,000 $ 198,000 $ 488,000 $ 318,000 $ 341,000
Office expense ...................... 98,000 85,000 173,000 157,000 146,000
Professional and other fees ......... 101,000 103,000 213,000 328,000 215,000
Computer services ................... 161,000 142,000 291,000 227,000 183,000
Marketing ........................... 92,000 87,000 170,000 134,000 135,000
Utilities ........................... 106,000 89,000 172,000 136,000 67,000
Other expenses ...................... 849,000 577,000 1,203,000 1,065,000 813,000
---------- ---------- ---------- ---------- ----------
$1,657,000 $1,281,000 $2,710,000 $2,365,000 $1,900,000
========== ========== ========== ========== ==========
</TABLE>
(14) EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) Profit Sharing Plan covering substantially all of
its employees. The Company currently matches 50% of each employee's
contribution up to the first 6%, and such match has a vesting period of six
years. The amount expensed for the six months ended June 30, 1998 and June 30,
1997 is $38,000 and $24,000 and in 1997, 1996 and 1995 was $49,000, $12,000 and
$9,000, respectively.
(15) REGULATORY CAPITAL REQUIREMENTS:
The Parent Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Parent Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Parent Company's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Parent Company's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of June 30, 1998 and
December 31, 1997, that the Parent Company and the Bank meet all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. The Parent Company has
not received notification from the Federal Reserve Bank of its capital
category. To be categorized as well capitalized, the Parent Company and the
Bank must maintain minimum total risk-based; Tier I risk-based; and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
F-22
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(15) REGULATORY CAPITAL REQUIREMENTS: -- (Continued)
The Parent Company's and the Bank's actual capital amounts and ratios are
also presented in the table --
<TABLE>
<CAPTION>
To Be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- --------------- ------- --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Parent Company --
As of June 30, 1998 (unaudited) --
Total capital (to Risk Weighted
Assets) ........................ $14,321,000 11.02% *$10,393,000 *8% *$12,991,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $13,021,000 10.02% *$ 5,196,000 *4% *$7,795,000 * 6%
Tier I Capital (to Average Assets) $13,021,000 6.97% *$ 5,602,000 *3% *$9,337,000 * 5%
As of December 31, 1997 --
Total capital (to Risk Weighted
Assets) ........................ $13,066,000 11.32% *$ 9,235,000 *8% *$11,544,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $12,018,000 10.41% *$ 4,617,000 *4% *$6,926,000 * 6%
Tier I Capital (to Average Assets) $12,018,000 7.63% *$ 6,299,000 *4% *$7,874,000 * 5%
As of December 31, 1996 --
Total capital (to Risk Weighted
Assets) ........................ $11,172,000 12.02% *$ 7,436,000 *8% *$9,295,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $10,387,000 11.17% *$ 3,718,000 *4% *$5,577,000 * 6%
Tier I Capital (to Average Assets) $10,387,000 7.97% *$ 5,213,000 *4% *$6,516,000 * 5%
Bank --
As of June 30, 1998 (unaudited) --
Total capital (to Risk Weighted
Assets) ........................ $14,235,000 10.96% *$10,393,000 *8% *$12,991,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $12,935,000 9.96% *$ 5,196,000 *4% *$7,795,000 * 6%
Tier I Capital (to Average Assets) $12,935,000 6.93% *$ 5,602,000 *3% *$9,337,000 * 5%
As of December 31, 1997 --
Total capital (to Risk Weighted
Assets) ........................ $13,057,000 11.31% *$ 9,235,000 *8% *$11,544,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $12,009,000 10.40% *$ 4,617,000 *4% *$6,926,000 * 6%
Tier I Capital (to Average Assets) $12,009,000 7.63% *$ 6,299,000 *4% *$7,874,000 * 5%
As of December 31, 1996 --
Total capital (to Risk Weighted
Assets) ........................ $11,163,000 12.01% *$ 7,436,000 *8% *$9,295,000 *10%
Tier I Capital (to Risk Weighted
Assets) ........................ $10,378,000 11.16% *$ 3,718,000 *4% *$5,577,000 * 6%
Tier I Capital (to Average Assets) $10,378,000 7.96% *$ 5,213,000 *4% *$6,516,000 * 5%
</TABLE>
* = greater than or equal to.
F-23
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(16) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations are
used by the Company for the purposes of this disclosure. Estimated fair values
have been determined by the Company using the best available data and
estimation methodology suitable for each category of financial instruments. For
those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate their recorded book balances. The
estimation methodologies used for the estimated fair values and carrying values
of the Company's financial instruments are set forth below --
Cash and Cash Equivalents and Accrued Interest Receivable and Payable --
The carrying amounts for cash and cash equivalents and accrued interest
receivable and payable approximate fair value.
Securities --
The fair values for securities are based on quoted market prices or dealer
prices.
Loans and Loans Held for Sale --
The fair value of loans is estimated by discounting the future cash flows,
using the current rates at which similar loans with similar remaining
maturities would be made to borrowers with similar credit ratings. Loans held
for sale approximate fair value.
Deposits --
For demand and savings accounts, fair value is the carrying amount
reported in the consolidated financial statements. For certificates of deposit,
fair value is estimated using the rates currently offered for deposits of
similar remaining maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written --
The fair value of commitments is not significant as of June 30, 1998,
December 31, 1997 or 1996.
The carrying values and estimated fair values of the Company's financial
instruments are as follows --
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 December 31, 1996
------------------------------ ------------------------------ --------------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
-------------- -------------- -------------- -------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Financial assets --
Cash and cash equivalents ......... $ 21,328,000 $ 21,328,000 $ 15,266,000 $ 15,266,000 $ 6,190,000 $ 6,190,000
Securities available for sale ..... 13,798,000 13,798,000 15,564,000 15,564,000 12,143,000 12,143,000
Securities held to maturity ....... 16,241,000 16,218,000 16,826,000 16,736,000 12,763,000 12,378,000
Loans and loans held for sale ..... 131,412,000 132,857,000 113,886,000 115,187,000 96,501,000 97,869,000
Accrued interest receivable ....... 1,066,000 1,066,000 982,000 982,000 712,000 712,000
Financial liabilities --
Deposits .......................... 172,499,000 172,594,000 152,016,000 152,158,000 119,599,000 119,742,000
Accrued interest payable .......... 671,000 671,000 778,000 778,000 997,000 997,000
</TABLE>
Limitations --
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the entire holdings of a particular financial
instrument. Because no market value exists for a significant portion of the
financial instruments, fair value estimates are based on judgments regarding
expected loss experience, current economic conditions, risk characteristics of
various
F-24
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(16) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (Continued)
financial instruments and other factors. These estimates are subjective in
nature, involve uncertainties and matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business, and exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not
be likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation
methodologies, introduces a greater degree of subjectivity of these estimated
fair values.
(17) CONDENSED FINANCIAL STATEMENTS OF COMMUNITY FIRST BANKING COMPANY (PARENT
COMPANY ONLY):
<TABLE>
<CAPTION>
June 30, December 31,
-------------- ---------------------------------
1998 1997 1996
-------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Balance sheet
Assets --
Cash and due from Banks .......................... $ 83,000 $ 5,000 $ 5,000
Investment in Bank subsidiary
(equity method) ................................ 12,935,000 12,006,000 10,213,000
Other assets ..................................... 3,000 4,000 3,000
----------- ----------- -----------
Total assets .................................. $13,021,000 $12,015,000 $10,221,000
=========== =========== ===========
Liabilities and shareholders' equity --
Liabilities -- Other liabilities ................. $ -- $ -- $ --
----------- ----------- -----------
Shareholders' equity:
Common stock ................................... 5,285,000 5,175,000 4,781,000
Capital paid in excess of stated value ......... 7,475,000 6,700,000 5,335,000
Retained earnings .............................. 257,000 143,000 270,000
Net unrealized holding losses on securities
available for sale, net of tax ................ 4,000 (3,000) (165,000)
----------- ----------- -----------
Total shareholders' equity .................... 13,021,000 12,015,000 10,221,000
----------- ----------- -----------
Total liabilities and shareholders' equity $13,021,000 $12,015,000 $10,221,000
=========== =========== ===========
</TABLE>
F-25
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(17) CONDENSED FINANCIAL STATEMENTS OF COMMUNITY FIRST BANKING COMPANY (PARENT
COMPANY ONLY): -- (Continued)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
-------------------------- -----------------------------
June 30, December 31,
-------------------------- -----------------------------
1998 1997 1997 1996
------------- ---------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Income
Operating income --
Dividends from Bank subsidiary .................. $ 210,000 $ 96,000 $ 194,000 $ 600,000
Operating expenses ............................... 44,000 4,000 9,000 8,000
---------- -------- ---------- ----------
Income before income taxes and equity in
undistributed income of subsidiary ........... 166,000 92,000 185,000 592,000
Provision for income taxes (a) ................... -- -- -- --
---------- -------- ---------- ----------
Income before equity in undistributed
income of subsidiary ......................... 166,000 92,000 185,000 592,000
Equity in undistributed income of subsidiary ..... 922,000 696,000 1,631,000 676,000
---------- -------- ---------- ----------
Net income .................................... $1,088,000 $788,000 $1,816,000 $1,268,000
========== ======== ========== ==========
</TABLE>
(a) No Federal income tax is applicable to the dividends and other income
received from subsidiary since the Parent Company and subsidiary file a
consolidated Federal income tax return.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
----------------------------- -------------------------------
June 30, December 31,
----------------------------- -------------------------------
1998 1997 1997 1996
------------- ------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Cash Flows
Cash flows from operating activities --
Net income ................................ $1,088,000 $ 788,000 $ 1,816,000 $1,268,000
Adjustments to reconcile net income to
Net cash provided by operating
activities --
Equity in undistributed income of
subsidiary ............................. (922,000) (696,000) (1,631,000) (676,000)
Additional investment in Bank
subsidiary ............................. -- -- -- (422,000)
Decrease (increase) in other assets ...... 1,000 -- (1,000) (3,000)
---------- ---------- ------------ ----------
Net cash provided by operating
activities ........................... 167,000 92,000 184,000 167,000
---------- ---------- ------------ ----------
Cash flows from financing activities --
Cash dividends paid ....................... (101,000) (95,000) (193,000) (168,000)
Exercise of stock options ................. 12,000 6,000 9,000 6,000
---------- ---------- ------------ ----------
Net cash used in financing
activities ........................... (89,000) (89,000) (184,000) (162,000)
---------- ---------- ------------ ----------
Net increase in cash and cash
equivalents .......................... 78,000 3,000 -- 5,000
---------- ---------- ------------ ----------
Cash and cash equivalents, beginning of
period .................................... 5,000 5,000 5,000 --
---------- ---------- ------------ ----------
Cash and cash equivalents, end of period $ 83,000 $ 8,000 $ 5,000 $ 5,000
========== ========== ============ ==========
</TABLE>
F-26
<PAGE>
COMMUNITY FIRST BANKING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, DECEMBER 31, 1997, 1996 AND 1995 -- (Continued)
(18) SUBSEQUENT EVENT -- STOCK SPLIT AND STOCK DIVIDENDS:
On April 8, 1998 the Board of Directors declared a two for one stock split
for common share holders as of the record date of May 8, 1998, payable May 22,
1998.
On April 8, 1998 the Board of Directors approved an amendment to increase
the number of authorized shares of common stock from 2,500,000 to 5,000,000,
amended the stated value to $2.50 per share. In addition, the Board of
Directors approved an amendment to increase the number of authorized shares of
preferred stock from 500,000 to 1,000,000 shares.
On May 27, 1998 the Board of Directors declared a 2% stock dividend for
common shareholders as of the record date of June 15, 1998, payable June 29,
1998.
All applicable share and per share amounts have been retroactively
adjusted to reflect the effects of the two for one stock split, the 2% stock
dividend and the amendment to the number of authorized shares.
(19) SUBSEQUENT EVENT -- MERGER AGREEMENT:
On August 12, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Commerce Bancorp, Inc. In accordance with
the Merger Agreement, each share of common stock of the Company would be
exchanged for shares of Commerce Bancorp, Inc. common stock at an exchange
ratio ranging from .613 to .706 shares, to be determined based upon the average
market price of Commerce Bancorp, Inc. common stock prior to the merger,
subject to certain adjustment provisions in the Agreement. Upon the closing of
the transaction, the Bank will be merged into Commerce Bancorp, Inc.'s
subsidiary, Commerce Bank/Shore, N.A. The proposed transaction is subject to
approval by the Company's shareholders and certain regulatory authorities.
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following quarterly financial information for the year ended December
31, 1997 and 1996 is unaudited. However, in the opinion of management, all
adjustments, which include normal recurring adjustments necessary to present
fairly the results of operations for the periods, are reflected. Results of
operations for the periods are not necessarily indicative of the results of the
entire year or any other interim period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 96 June 96 Sept. 96
---------- ----------- ----------
(In thousands, except per share
amounts)
-----------------------------------
<S> <C> <C> <C>
Total interest income ..................... $ 2,247 $ 2,513 $ 2,587
Total interest expense .................... 669 805 835
Net interest income ....................... 1,578 1,708 1,752
Provision for possible loan losses ........ 97 112 78
Net interest income after provision for
possible loan losses ..................... 1,481 1,596 1,674
Total other income ........................ 188 237 251
Total other expense ....................... 1,275 1,324 1,354
Net income ................................ $ 241 $ 308 $ 352
Basic earnings per share .................. $ 0.11 $ 0.15 $ 0.17
Diluted earnings per share ................ $ 0.11 $ 0.15 $ 0.17
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
Dec. 96 March 97 June 97 Sept. 97 Dec. 97
----------- ---------- ----------- ---------- -----------
(In thousands, except per share amounts)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income ..................... $ 2,749 $ 2,899 $ 3,023 $ 3,214 $ 3,368
Total interest expense .................... 858 847 890 939 954
Net interest income ....................... 1,891 2,052 2,133 2,275 2,414
Provision for possible loan losses ........ 138 76 96 93 127
Net interest income after provision for
possible loan losses ..................... 1,753 1,976 2,037 2,182 2,287
Total other income ........................ 287 257 301 339 353
Total other expense ....................... 1,454 1,637 1,657 1,732 1,775
Net income ................................ $ 367 $ 362 $ 426 $ 488 $ 540
Basic earnings per share .................. $ 0.17 $ 0.17 $ 0.20 $ 0.23 $ 0.26
Diluted earnings per share ................ $ 0.17 $ 0.17 $ 0.20 $ 0.22 $ 0.25
</TABLE>
F-27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ANNEX A
AMENDED
AGREEMENT AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION dated August 12, 1998 by and between
COMMERCE BANCORP, INC. ("CBH"), a New Jersey business corporation registered as
a bank holding company under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"), and COMMUNITY FIRST BANKING COMPANY ("CFBC"), a New
Jersey business corporation registered as a bank holding company under the
Holding Company Act.
BACKGROUND
The Board of Directors of CBH has determined to merge CFBC with and into
CBH (hereinafter referred to as the "Merger") in accordance with the provisions
of the New Jersey Business Corporation Act, as amended ("BCA"), and the terms
and conditions of the Agreement and Plan of Merger of even date herewith
between CFBC and CBH (the "Merger Agreement") in the form of Exhibit "A"
attached hereto.
The Board of Directors of CFBC has determined that CFBC be merged with and
into CBH in accordance with the provisions of the BCA and the Merger Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
provisions contained herein and subject to the satisfaction of the terms and
conditions set forth herein and the Merger Agreement, intending to be legally
bound hereby, CBH and CFBC agree as follows:
1. THE MERGERS
(a) Subject to the provisions of this Agreement and the Merger Agreement,
CFBC will be merged with and into CBH. CBH agrees to issue shares of CBH's
common stock, par value $1.5625 per share, to the shareholders of CFBC, on the
Effective Date (as hereinafter defined) of the Merger, in exchange for the
outstanding shares of CFBC's common stock, stated value $5.00 per share, as
provided in this Agreement and in the Merger Agreement and to abide and comply
with all of the other terms and conditions set forth in the Merger Agreement.
(b) Upon consummation of the Merger, CBH shall cause Tinton Falls State
Bank ("Tinton Falls Bank"), CFBC's wholly-owned bank subsidiary, to be merged
with and into CBH's wholly-owned bank subsidiary, Commerce Bank/Shore, N.A.
2. EFFECTIVE DATE
The "Effective Date" shall be the date and time at which an executed
Certificate of Merger is duly filed with the New Jersey Secretary of State in
accordance with Chapter 10 of the BCA.
3. REPRESENTATIONS AND WARRANTIES OF CFBC
CFBC represents and warrants to CBH and agrees as follows:
3.1 CFBC is a corporation duly organized under the BCA and is validly
existing and in good standing under the laws of the State of New Jersey. Tinton
Falls Bank is a banking corporation duly organized under the New Jersey Banking
Act of 1948, as amended and is validly existing and in good standing under the
laws of the State of New Jersey. Except as set forth in Schedule 3.1 to this
Agreement, CFBC has no subsidiaries except Tinton Falls Bank and neither Tinton
Falls Bank nor any other subsidiary of CFBC has any subsidiaries. All
references to "CFBC" hereinafter contained in Section 3 of this Agreement shall
be deemed to include CFBC, Tinton Falls Bank and all of the subsidiaries of
either. The deposits of Tinton Falls Bank are insured by the Bank Insurance
Fund of the FDIC to the maximum extent permitted by law.
3.2 The authorized capital stock of CFBC consists of (i) 500,000 shares of
preferred stock, no par value per share (the "CFBC Preferred Stock"), of which
no series is issued and outstanding and (ii) 2,500,000 shares of common stock,
stated value $5.00 per share ("CFBC Common Stock"), 2,113,939 shares of which
A-1
<PAGE>
have been validly issued and are outstanding, fully paid and non-assessable as
of the date hereof and no shares are held in treasury. CFBC owns all of the
shares of the issued and outstanding capital stock of Tinton Falls Bank, free
and clear of any lien or other encumbrance. As of the date hereof, no shares of
CFBC capital stock were reserved for issuance, except that 249,158 shares of
CFBC Common Stock were reserved for issuance in connection with CFBC's stock
option plans. If all stock options heretofore granted pursuant to CFBC's stock
option plans were exercised, 227,516 shares of CFBC Common Stock would be
issued pursuant thereto. There are no outstanding subscriptions, Rights,
options, warrants, calls, commitments or agreements to which CFBC or any of its
subsidiaries is a party or by which any of them may be bound, which relate to
the issuance or sale by any of them of shares of their capital stock except as
set forth above. The number of issued and outstanding shares of CFBC's capital
stock will be the same on the Effective Date as on the date hereof except for
additional shares of CFBC Common Stock issued pursuant to the exercise of
currently outstanding stock options granted pursuant to CFBC's stock option
plans. None of the shares of CFBC's capital stock has been issued in violation
of the preemptive rights of any person. CFBC does not own, directly or
indirectly, 5% or more of the outstanding capital stock or other voting
securities of any corporation, bank or other organization except as set forth
in Schedule 3.1 to this Agreement.
3.3 There have been delivered to CBH (a) the audited consolidated balance
sheets of CFBC and its subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1997 and 1996 together with the
notes related thereto and (b) the unaudited consolidated balance sheet of CFBC
and its subsidiaries as of June 30, 1998, and the related consolidated
statement of income for the six month period ended June 30, 1998. Such
financial statements (i) are in accordance with the books and records of CFBC
and its subsidiaries, (ii) are true and correct in all material respects and
present fairly CFBC's and its subsidiaries' consolidated financial condition as
of December 31, 1997 and 1996 and the results of their operations for the years
then ended and as of June 30, 1998 and the result of their operations for the
six month period ended June 30, 1998, and (iii) have been prepared in
accordance with generally accepted accounting principles consistently applied.
The audited financial statements (with related notes) referred to in the first
sentence of this subsection have been examined and reported upon by Arthur
Andersen LLP, independent certified public accountants. Arthur Andersen LLP is
"independent" with respect to CFBC under the criteria established and applied
by the Securities and Exchange Commission.
3.4 Except as set forth in Schedule 3.4 to this Agreement, (a) CFBC and
its subsidiaries have filed all federal, state, city, county and local tax
returns which are required to be filed by them, and such returns are true and
correct in all material respects; (b) CFBC and its subsidiaries have paid all
taxes required to be paid prior to the date of this Agreement or have
established adequate reserves therefor; (c) there are no deficiencies of tax,
interest or penalties which have been assessed against CFBC or any of its
subsidiaries which have not been paid in full; (d) no extensions of time with
respect to any date on which any tax return was or is to be filed by CFBC or
any of its subsidiaries is in force and no waiver or agreement by CFBC or any
of its subsidiaries is in force for the extension of time for the assessment or
payment of any tax; and (e) the statute of limitations with respect to any tax
year still open has not been waived. Except with respect to the three Change in
Control Agreements, copies of which CFBC has delivered to CBH, neither the
transactions contemplated hereby nor the termination of the employment of any
employees of CFBC or any CFBC subsidiary prior to or following consummation of
the transactions contemplated hereby could result in CFBC or any CFBC
subsidiary making or being required to make any "excess parachute payment" as
that term is defined in Section 280G of the Code (as hereinafter defined).
3.5 CFBC and its subsidiaries have good and marketable title to all their
respective assets free and clear of all liens or other encumbrances other than
(a) the liens or other encumbrances described in Schedule 3.5 to this
Agreement, or (b) such liens or other encumbrances, as the case may be, shown
in the financial statements or the notes thereto, or (c) encumbrances and
restrictions imposed by law, ordinances or regulations incidental to the usual
and normal conduct of business or other imperfections of title, or restrictions
or encumbrances, all of which, in the aggregate, do not materially adversely
interfere with the present use of such property in CFBC's and any of its
subsidiaries' business and with respect to any real estate which do not result
in the inability to procure title insurance thereon at regular rates. With the
foregoing exceptions, no person owns any interest in any of the assets of CFBC
or any of its subsidiaries except as incidental to banking transactions entered
into in the ordinary course of business consistent with past practices.
A-2
<PAGE>
3.6 Since June 30, 1998, there has been no change in the consolidated
condition, financial or otherwise, of CFBC and its subsidiaries, other than
changes occurring in the ordinary course of business consistent with past
practices, which changes have not materially adversely changed or affected
their business or condition, financial or otherwise. Except as set forth in
Schedule 3.6 to this Agreement, from June 30, 1998 to the date of this
Agreement, neither CFBC nor any of its subsidiaries has (i) incurred any
indebtedness, liabilities (whether current, long term, fixed, contingent,
liquidated, unliquidated, or otherwise) or obligations other than in the
ordinary course of business consistent with past practices; (ii) excluding
transfers among CFBC and its subsidiaries, declared or paid any dividends or
made any distribution of any of its assets in kind or redeemed or repurchased
any shares of its capital stock; (iii) sold or transferred any of its assets,
except in the ordinary course of business consistent with past practices; or
(iv) acquired the assets or capital stock of any other entity other than in the
ordinary course of business consistent with past practices.
3.7 Since June 30, 1998, there has been no damage, destruction or loss,
whether covered by insurance or not materially adversely affecting the assets
or business of CFBC or any of its subsidiaries, or any other event or condition
of any character materially adversely affecting the assets or business of CFBC
or any of its subsidiaries (other than external market conditions affecting
banks generally).
3.8 CFBC has delivered to CBH a list of all insurance policies and binders
maintained by CFBC or any of its subsidiaries. Such policies and binders are in
full force and effect and will continue to be in full force and effect to the
Effective Date.
3.9 Except as set forth in Schedule 3.9 to this Agreement, neither CFBC
nor any of its subsidiaries is a party to, nor have any obligation under, any
written or oral (a) contracts and other agreements with any current or former
director, officer, employee, shareholder, consultant or agent (except those
terminable on ninety days' or less notice without premium or penalty or which
do not involve more than $10,000 per year), (b) contracts and other agreements
with any labor union (whether in effect or expired), (c) bonus, severance,
hospitalization, vacation, deferred compensation, pension or profit sharing,
retirement, payroll savings, stock option, group life or medical insurance,
death benefit, welfare, or other employee benefit plan as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended,
("ERISA") (hereinafter collectively the "Employee Benefit Plans"), (d) material
leases for real or personal property, or (e) other material contracts and
agreements of any other nature with any person other than contracts and other
agreements made in the ordinary course of business consistent with past
practices. A true and correct copy of each of such contracts and other
agreements and branch leases has been made available to CBH or, if oral, have
been described in Schedule 3.9. All of the material contracts and agreements
(whether or not set forth in Schedule 3.9) to which CFBC or any of its
subsidiaries is a party are in full force and effect; CFBC or any of its
subsidiaries is not in material default under any of them nor to the best of
CFBC's knowledge is any other party to any such contract or other agreement in
material default thereunder. Neither the execution of this Agreement nor the
consummation of the transactions contemplated hereby will result in any breach
or acceleration of, or constitute (or with notice or lapse of time or both
would constitute) a default under any such contract or other agreement or any
branch lease. To the best of CFBC's knowledge, no employee of CFBC or any of
its subsidiaries is represented by a labor union with respect to his or her
employment by CFBC or any of its subsidiaries and no attempt has been or is
currently being made by any person to have the employees of CFBC or any of its
subsidiaries represented by a labor union.
3.10 The Employee Benefit Plans of CFBC and its subsidiaries comply in all
material respects with all applicable laws including, without limitation, ERISA
and the Internal Revenue Code of 1986, as amended ("Code"). In respect of the
Employee Benefit Plans identified on Schedule 3.9, CFBC and its subsidiaries
each have made all contributions required to be made by them and have or will
have accrued as of the Effective Date all payments due and payable as of the
Effective Date. The employee pension benefit plans (as defined in Section 3(2)
of ERISA) of CFBC and its subsidiaries have received determination letters from
the Internal Revenue Service that such plans are qualified plans pursuant to
Section 401(a) of the Code. To the best of CFBC's knowledge, there has been no
"reportable event" (as defined in the Code or ERISA), no event described in
Section 4062(e) of ERISA, no violation of Section 404 of ERISA, no "prohibited
transaction" (as defined in the Code or ERISA) and, except as contemplated by
this Agreement, no termination or partial termination of any Employee Benefit
Plan maintained or established by CFBC or any of its subsidiaries or to
A-3
<PAGE>
which CFBC or any of its subsidiaries contributes. There is no material issue
relating to Tinton Falls Bank's employee pension benefit plan, or its related
trust, currently pending before the Internal Revenue Service, the Department of
Labor or the Pension Benefit Guaranty Corporation and neither CFBC nor its
subsidiaries have any knowledge of any fact or circumstances which adversely
affects the status of any Employee Benefit Plan listed in Schedule 3.9.
3.11 Schedule 3.11 to this Agreement sets forth a list of all actions,
suits, investigations (formal or informal) or proceedings pending against CFBC
or any of its subsidiaries in any court or before any governmental agency or
arbitration tribunal other than those actions, suits, investigations or
proceedings in which the liability of CFBC or any of its subsidiaries is
reasonably anticipated to be less than $10,000 per action, suit, investigation
or proceeding provided that the liability of CFBC and its subsidiaries under
all such omitted actions, suits, investigations or proceedings is reasonably
anticipated to be less than $100,000. Schedule 3.11 may, at the option of CFBC,
list actions, suits, investigations or proceedings in which the liability of
CFBC or any of its subsidiaries is reasonably anticipated to be less than
$10,000 and any listing in such Schedule shall not be deemed an admission of
liability. There are no actions, suits, investigations (formal or informal) or
proceedings pending or to the knowledge of CFBC or any of its subsidiaries,
threatened against CFBC or any of its subsidiaries in any court or before any
governmental agency or arbitration tribunal which (either individually or in
the aggregate) are reasonably anticipated to have a material adverse effect on
the consolidated net worth of CFBC. Neither CFBC nor any of its subsidiaries is
subject to or bound by any judgment, order, writ, injunction or decree of any
such court, agency or tribunal, except in the ordinary course of Tinton Falls
Bank's business consistent with past practices.
3.12 Except as disclosed on Schedule 3.12, there are no pending actions,
suits or proceedings which have been brought by, or on behalf of CFBC or any of
its subsidiaries in any court or before any governmental agency or arbitration
tribunal, except such actions, suits and proceedings in the ordinary course of
Tinton Falls Bank's business consistent with past practices.
3.13 On and after the date hereof, to and including the Effective Date,
neither CFBC nor any of its subsidiaries will, without the prior written
consent of CBH, do any of the following:
(a) except as specifically permitted herein, make any changes in (and to
the terms of) its authorized, issued or outstanding capital stock or any
security convertible into capital stock;
(b) declare or pay any dividends (in cash, stock or in kind) on shares
of its capital stock except (i) dividends paid by Tinton Falls Bank or any
other subsidiary of CFBC to CFBC, and (ii) quarterly cash dividends by CFBC
to its shareholders (including a pro rata cash dividend for the calendar
quarter in which the Effective Date occurs) not to exceed $0.10 per share
on an annualized basis;
(c) effect any recapitalization, reclassification, stock dividend, stock
split or like change in its capital or grant any Rights (including any
additional options under any existing CFBC stock option plan);
(d) make any other distribution of its assets or properties to its
shareholders except as permitted in clause (b) above;
(e) acquire any shares of CFBC's or any of its subsidiaries' capital
stock;
(f) enter into or commit to enter into any new employment contract or
amend any existing employment contract or grant any salary increase, bonus,
or other form of compensation payable to any officer, employee or agent,
except for salary increases and bonuses consistent with the past practice
of CFBC and its subsidiaries, provided, however, that nothing contained
herein shall be deemed to restrict CFBC's ability to hire, as an employee
at will, any person who would not be deemed an executive officer of CFBC
and provided further that CFBC and CBH shall mutually agree on a mechanism
for calculating and paying prior to closing bonuses designed to provide
CFBC and Tinton Falls Bank officers and employees with a proportional level
of bonuses equal to that they would have received had closing hereunder not
occurred.
(g) amend the Articles of Incorporation or the Bylaws of CFBC or any of
its subsidiaries except where required by applicable law;
A-4
<PAGE>
(h) except in the ordinary course of business consistent with past
practices, incur any indebtedness, liabilities (whether current, long term,
fixed, contingent, liquidated, unliquidated or otherwise) or obligations;
(i) except in the ordinary course of business consistent with past
practices, purchase or otherwise acquire, or sell or otherwise dispose of,
any equity security, debt security or asset;
(j) change the criteria with respect to risk, or overall quality, of
Tinton Falls Bank's investment portfolio or loan portfolio;
(k) make capital expenditures other than in the ordinary course of
Tinton Falls Bank's business consistent with past practices;
(l) create any new Employee Benefit Plan or make any contributions to
any Employee Benefit Plan or other plan relating to its officers, employees
and agents except as may be required by the terms of any existing Employee
Benefit Plan or by applicable law; or
(m) file any application with any state or federal agency having
jurisdiction over the affairs of CFBC and its subsidiaries or conduct its
business in any manner other than in accordance with generally accepted
methods and procedures for conducting a banking business; and neither CFBC
nor any of its subsidiaries has done any of the things described in clauses
(a) through (m) of this Section 3.13 since June 30, 1998 except as set
forth in Schedule 3.13.
3.14 CFBC and each of its subsidiaries will (and have done so since June
30, 1998) continue to conduct their businesses in the usual, regular and
ordinary manner consistent with past practices. CBH hereby consents to the
incurring and payment, prior to the Effective Date, of all reasonable expenses
of CFBC and its subsidiaries in connection with the transactions contemplated
by this Agreement and the Merger Agreement, including the printing of CFBC's
proxy material and reasonable legal, investment advisory and accounting fees.
3.15 CFBC and its subsidiaries each have the corporate power and authority
to own, lease and operate their properties and to conduct their businesses as
now conducted. CFBC and its subsidiaries each have complied and are in
compliance in all material respects with all federal, state and local laws,
regulations, ordinances, rules or orders affecting or regulating the conduct
and operations of their respective businesses except for such non-compliance as
would not have a material adverse effect upon the financial condition or
results of operations of CFBC, and neither CFBC nor any CFBC subsidiary has
received notification from any agency or department of federal, state or local
government (i) asserting a material violation of any such statute or
regulation, (ii) threatening to revoke any license, franchise, permit or
government authorization or (iii) restricting or in any way limiting its
operation. Neither CFBC nor any CFBC subsidiary is subject to any regulatory or
supervisory cease and desist order, agreement, directive, memorandum of
understanding or commitment and none of them has received any communication
requesting that they enter into any of the foregoing. CFBC and its subsidiaries
have all federal, state, local and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted. Schedule 3.15 to this Agreement sets
forth a list, brief description of the purpose of and the current status of,
any notice, application or similar filing made by CFBC or any of its
subsidiaries within the last two years with any state or federal agency having
jurisdiction over the affairs of CFBC and its subsidiaries.
3.16 CFBC has the legal power and authority to enter into this Agreement
and the Merger Agreement and to consummate the transactions contemplated hereby
and thereby, subject to the approval thereof by the shareholders of CFBC under
applicable law and subject to the approval of the Department of Banking of the
State of New Jersey, the Office of the Comptroller of the Currency and the
Federal Reserve Board. This Agreement and the Merger Agreement constitute
legal, valid and binding obligations of CFBC enforceable against it in
accordance with their respective terms. Except as may otherwise be required in
order to comply with their fiduciary duties, the Board of Directors of CFBC
will recommend to its shareholders that they approve the Merger and all other
acts and transactions contemplated by the Merger and all other acts and
transactions contemplated by this Agreement and the Merger Agreement, and after
the receipt of such
A-5
<PAGE>
shareholder approval in the manner required by law, such shareholder approval
shall not be revokable. Approval of this Agreement and the Merger Agreement by
the CFBC shareholders shall also be deemed to authorize the CFBC Board of
Directors to amend, supplement or waive any of the provisions of this Agreement
and the Merger Agreement as provided in Section 16.6.
3.17 The Board of Directors of CFBC has authorized the execution and
delivery of this Agreement and Merger Agreement, and the transactions
contemplated hereby and thereby and neither the execution and delivery of this
Agreement or the Merger Agreement, nor, subject to the approval of CFBC's
shareholders and subject to the approval of the Department of Banking of the
State of New Jersey, the Office of the Comptroller of the Currency and the
Federal Reserve Board, the consummation of the transactions contemplated hereby
or the fulfillment of, or the compliance with, the terms, conditions, and
provisions of this Agreement and the Merger Agreement will conflict with, or
result in a breach of, any of the terms, conditions or provisions of the
Articles of Incorporation or the Bylaws of CFBC or any of its subsidiaries or
of any contract or other agreement to which CFBC or any of its subsidiaries is
a party or by which any of them may be bound, or constitute (with or without
the giving of notice or the passage of time, or both) a default under any such
contract or other agreement or cause the acceleration of the maturity of any
obligation of CFBC or of any of its subsidiaries other than with regard to such
contracts or other agreements a default under which would not have a material
adverse effect upon the financial condition or results of operations of CFBC.
Other than as set forth herein, no consent, approval or authorization of, or
declaration, notice, filing or registration with, any governmental or
regulatory authority, or any other person, is required to be made or obtained
by CFBC on or prior to the Effective Date in connection with the execution,
delivery and performance of this Agreement or the Merger Agreement or the
consummation of the transactions contemplated hereby or thereby.
3.18 All documents and other papers delivered by or on behalf of CFBC in
connection with this Agreement, the Merger Agreement and the transactions
contemplated hereby are true and, subject to Section 3.22 hereof, complete in
all material respects. The information furnished by or on behalf of CFBC to CBH
in connection with this Agreement, the Merger Agreement and the transactions
contemplated hereby do not contain any untrue statement of a material fact and,
subject to Section 3.22 hereof, do not omit to state any material fact
necessary to make the statements made, in the context in which made, not false
or misleading. Except for facts affecting the banking industry in general,
subject to Section 3.22 hereof, there is no fact which CFBC has not disclosed
to CBH in writing which materially adversely affects the business or condition
(financial or other) of CFBC or any of its subsidiaries.
3.19 Each loan reflected as an asset on the books and records of CFBC (i)
is evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms except as such enforcement may be
affected by bankruptcy or other statutes or regulatory provisions effecting
creditors rights generally.
3.20 Neither CFBC nor any CFBC subsidiary has received any written notice
of any legal, administrative, arbitral or other proceeding, claim or action
and, to the knowledge of CFBC and the CFBC subsidiaries, there is no
governmental investigation of any nature ongoing, in each case that could
reasonably be expected to result in the imposition, on CFBC or any CFBC
subsidiary, of any liability arising under any local, state or federal
environmental statute, regulation or ordinance including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, and there are no facts or circumstances which could
reasonably be expected to form the basis for any such proceeding, claim, action
or governmental investigation that would impose any such liability; and neither
CFBC nor any CFBC subsidiary is subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
3.21 To the best of CFBC's knowledge, Schedule 3.21 to this Agreement is a
true and correct list of the Affiliates of CFBC as the term "Affiliates" is
used in Rule 145 promulgated under the Securities Act of 1933, as amended.
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3.22 To the extent the Schedules delivered to CBH on or prior to the date
hereof are incomplete in any respect, CFBC shall cause revised complete
Schedules referred to in this Section 3 to be delivered to CBH within ten
business days of the date hereof and such revised complete Schedules shall
supercede the previously delivered Schedules.
3.23 Assuming the condition set forth in Section 7.15 hereof is met, as of
the date of this Agreement, CFBC knows of no reason relating to it or any of
its subsidiaries which would reasonably cause it to believe that the Merger
will not qualify as a pooling of interests for financial accounting purposes.
4. REPRESENTATIONS AND WARRANTIES OF CBH
CBH represents and warrants to CFBC and agrees as follows:
4.1 CBH is a corporation duly organized under the BCA and is validly
existing and in good standing under the laws of the State of New Jersey. CBH is
registered as a bank holding company under the Holding Company Act. Commerce
Bank, N.A., Commerce Bank/Pennsylvania, N.A., Commerce Bank/North and Commerce
Bank/Shore, N.A. are each banking organizations duly organized under the laws
of the United States and/or New Jersey, as the case may be, and are each
validly existing and in good standing under the laws of the United States.
Except as set forth in the CBH Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 ("CBH Form 10-K"), CBH has no material active
subsidiaries except Commerce Bank, N.A., Commerce Bank/Pennsylvania, N.A.,
Commerce Bank/North and Commerce Bank/Shore, N.A., and neither Commerce Bank,
N.A., Commerce Bank/Pennsylvania, N.A., Commerce Bank/North and Commerce
Bank/Shore, N.A. nor any other material subsidiary of CBH has any material
active subsidiaries.
4.2 The authorized capital stock of CBH consists of (i) 10,000,000 shares
of preferred stock, no par value per share (the "CBH Preferred Stock") of which
no series is issued and outstanding and (ii) 50,000,000 shares of common stock,
par value $1.5625 per share ("CBH Common Stock") 22,592,854 shares of which
have been validly issued and are outstanding, fully paid and non-assessable as
of the date hereof and 100,159 shares are held in treasury. CBH owns all of the
shares of the issued and outstanding capital stock of the Commerce Bank, N.A.,
Commerce Bank/Pennsylvania, N.A., Commerce Bank/North and Commerce Bank/Shore,
N.A. free and clear of any lien or other encumbrance. As of the date hereof,
there are no outstanding subscriptions, Rights, options, warrants, calls,
commitments or agreements to which either CBH or any of its subsidiaries is a
party or by which any of them may be bound, which relate to the issuance or
sale by any of them of shares of their capital stock except as set forth below.
As of the date hereof, no shares of CBH Preferred Stock or CBH Common Stock
were reserved for issuance, except (i) those shares which relate to the
issuance of CBH Common Stock in connection with the acquisition of insurance
agencies, (ii) those contemplated by the Merger Agreement, (iii) 94,000 shares
of CBH Common Stock were reserved for issuance pursuant to CBH's dividend
reinvestment and stock purchase plans, and (iv) 5,500,000 shares of CBH Common
Stock were reserved for issuance pursuant to CBH stock option plans, and
provided however, that the foregoing shall not be construed as preventing CBH
or any of its subsidiaries from proceeding with other mergers or acquisitions
using CBH's capital stock as the consideration whether or not such mergers or
acquisitions are completed prior to the Effective Date. The shares of CBH
common stock to be issued and delivered to the shareholders of CFBC pursuant to
the Merger Agreement are presently authorized but unissued and will, upon
issuance and delivery pursuant to the Merger Agreement, be validly issued and
outstanding, fully paid and non-assessable and no shareholder of CBH will have
any preemptive rights of subscription or purchase in respect thereto.
4.3 There has been delivered to CFBC (a) the audited consolidated balance
sheet of CBH and its subsidiaries as of December 31, 1997 and December 31, 1996
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the years ended December 31, 1997 and December 31,
1996 together with the notes related thereto and (b) the unaudited consolidated
balance sheet of CBH and its subsidiaries as of June 30, 1998 and the related
consolidated statement of income for the six month period ended June 30, 1998.
Such financial statements (i) are in accordance with the books and records of
CBH and its subsidiaries, (ii) are true and correct in all material respects
and present fairly CBH's and its subsidiaries' consolidated financial condition
as of December 31, 1997 and 1996 and the results of their operations for the
years then ended and as of June 30, 1998 and the results of their operations
for the six-month period ended
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June 30, 1998, and (iii) have been prepared in accordance with generally
accepted accounting principles consistently applied. The audited financial
statements (with related notes) referred to in the first sentence of this
subsection have been examined and reported upon by Ernst & Young LLP,
independent certified public accountants. Ernst & Young LLP is "independent"
with respect to CBH under the criteria established and applied by the
Securities and Exchange Commission.
4.4 Since June 30, 1998, there has been no material change in the
consolidated condition, financial or otherwise, of CBH and its subsidiaries,
other than changes occurring in the ordinary course of business consistent with
past practices, which changes have not materially adversely changed or affected
their business or condition, financial or otherwise. Since June 30, 1998,
neither CBH nor any of its subsidiaries has (i) incurred any indebtedness,
liabilities (whether current, long term, fixed, contingent, liquidated,
unliquidated, or otherwise) or obligations other than in the ordinary course of
business consistent with past practices; (ii) excluding transfers among CBH and
its subsidiaries, declared or paid any dividends (other than its regular
quarterly cash dividends and annual stock dividend, and a special 25% stock
dividend and a special $0.25 per share cash dividend) or made any distribution
of any of its assets in kind or redeemed or repurchased any shares of its
capital stock; (iii) sold or transferred any of its assets, except in the
ordinary course of business consistent with past practices; or (iv) acquired
the assets or capital stock of any other entity other than in the ordinary
course of business consistent with past practices.
4.5 Since June 30, 1998, there has been no damage, destruction or loss,
whether covered by insurance or not, materially adversely affecting the assets
or business of CBH or any of its subsidiaries, or any other event or condition
of any character materially adversely affecting the assets or business of CBH
or any of its subsidiaries (other than external market conditions affecting
banks generally).
4.6 CBH has the legal power and authority to enter into this Agreement and
the Merger Agreement, and to consummate the transactions contemplated hereby
and thereby subject to the approval of the Department of Banking of the State
of New Jersey, the Office of the Comptroller of the Currency and the Federal
Reserve Board. This Agreement and the Merger Agreement constitute the legal,
valid and binding obligation of CBH enforceable against CBH in accordance with
their respective terms.
4.7 The execution and delivery of this Agreement and the Merger Agreement,
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by the Board of Directors of CBH; and subject to the
approval of the Department of Banking of the State of New Jersey, the Office of
the Comptroller of the Currency and the Federal Reserve Board, neither the
execution and delivery of this Agreement or the Merger Agreement nor the
consummation of the transactions contemplated hereby and thereby will conflict
with or result in the breach of, the terms, conditions or provisions of the
Articles of Incorporation or the Bylaws of CBH or any of its subsidiaries, or
of any contract or other agreement to which CBH or any of its subsidiaries is a
party or by which any of them may be bound or constitute (with or without the
giving of notice or passage of time, or both) a default under any such
instrument or cause the acceleration of the maturity of any obligation of CBH
or any of its subsidiaries. Other than as set forth herein, no consent,
approval or authorization of, or declaration, notice, filing or registration
with, any governmental or regulatory authority, or any other person, is
required to be made or obtained by CBH on or prior to the Effective Date in
connection with the execution, delivery and performance of this Agreement or
the Merger Agreement or the consummation of the transactions contemplated
hereby or thereby.
4.8 All documents and other papers delivered by or on behalf of CBH in
connection with this Agreement, the Merger Agreement and the transactions
contemplated hereby are true and complete in all material respects. The
information furnished by or on behalf of CBH to CFBC in connection with this
Agreement, the Merger Agreement and the transactions contemplated hereby do not
contain any untrue statement of a material fact and do not omit to state any
material fact necessary to make the statements made, in the context in which
made, not false or misleading. Except for facts affecting the banking industry
in general, there is no fact which CBH has not disclosed to CFBC in writing
which materially adversely affects the business or condition (financial or
other) of CBH or any of its subsidiaries.
4.9 As of the date of this Agreement, CBH knows of no reason relating to
it or any of its subsidiaries which would reasonably cause it to believe that
the Merger will not qualify as a pooling of interests for financial accounting
purposes.
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4.10 There are no actions, suits, investigations (formal or informal) or
proceedings pending or to the knowledge of CBH or any of its subsidiaries,
threatened against CBH or any of its subsidiaries in any court or before any
governmental agency or arbitration tribunal which (either individually or in
the aggregate) are reasonably anticipated to have a material adverse effect on
the consolidated net worth of CBH. Neither CBH nor any of its subsidiaries is
subject to or bound by any judgment, order, writ, injunction or decree of any
such court, agency or tribunal, except in the ordinary course of CBH's and its
subsidiaries business consistent with past practices.
4.11 There are no pending actions, suits or proceedings which have been
brought by, or on behalf of CBH or any of its subsidiaries in any court or
before any governmental agency or arbitration tribunal, except such actions,
suits and proceeding in the ordinary course of CBH's and its subsidiaries
business consistent with past practices.
4.12 CBH and its subsidiaries each have the corporate power and authority
to own, lease, operate their properties and to conduct their businesses as now
conducted. CBH and its subsidiaries each have complied and are in compliance in
all material respects with all federal, state and local laws, regulations,
ordinances, rules or orders affecting or regulating the conduct and operations
of their respective businesses except for such non-compliance as would not have
a material adverse effect upon the financial condition or results of operations
of CBH, and neither CBH nor any CBH subsidiary has received notification from
any agency or department of federal, state or local government (i) asserting a
material violation of any such statute or regulation, (ii) restricting or in
any way limiting its operation. Neither CBH nor any CBH subsidiary is subject
to any regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment and none of them has received any
communication requesting that they enter into any of the foregoing. CBH and its
subsidiaries have all federal, state, local and foreign governmental
authorizations necessary for it to own or lease its properties and assets and
to carry on its business as it is now being conducted.
4.13 Neither CBH nor any CBH subsidiary has received any written notice of
any legal, administration, arbitral or other proceeding, claim or action and,
to the knowledge of CBH and the CBH subsidiaries, there is no governmental
investigation of any nature ongoing, in each case that could reasonably be
expected to result in the imposition, on CBH or any CBH subsidiary, of any
material liability arising under any local, state or federal environmental
statute, regulation or ordinance including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, and there are no facts or circumstances which could reasonably be
expected to form the basis for any such proceeding, claim, action or
governmental investigation that would impose any such material liability; and
neither CBH nor any CBH subsidiary is subject to any agreement, order,
judgment, decree or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any such material liability.
5. APPROVAL OF CFBC'S SHAREHOLDERS AND SECURITIES ACT OF 1933
5.1 As promptly as practicable after the "Registration Statement" referred
to below becomes effective with the Securities and Exchange Commission ("SEC"
or "Commission"), CFBC will duly hold a meeting of its shareholders for the
purpose of authorizing the transactions contemplated by this Agreement and the
Merger Agreement insofar as they relate to CFBC. CFBC will, in accordance and
full compliance with the Securities Exchange Act of 1934, as amended ("1934
Act") and the rules and regulations promulgated thereunder, and to the extent
permitted consistent with the Board's exercise of its fiduciary duty, solicit
proxies from its shareholders, for use at the meeting of CFBC shareholders
referred to above, in favor of the transactions contemplated by this Agreement
and the Merger Agreement. Except with the prior written consent of CBH, CFBC
will not distribute any materials to its shareholders in connection with such
solicitation of proxies other than materials contained in the Registration
Statement (as defined in Section 5.2 hereof) after such Registration Statement
shall have become effective.
5.2 CBH and CFBC acknowledge that the transactions contemplated hereby are
subject to the provisions of the Securities Act of 1933, as amended (the "1933
Act"), and Rule 145 promulgated thereunder. CBH agrees to prepare promptly
(with the assistance and cooperation of CFBC) and file a "Registration
Statement" pursuant to the provisions of the 1933 Act for the purposes of
registering the shares of CBH common stock to
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be issued in connection with the transactions contemplated hereby. CFBC agrees
to provide promptly to CBH information concerning the business and financial
condition and affairs of CFBC and its subsidiaries as may be required or
appropriate for inclusion in the Registration Statement and to cause its
counsel and auditors to cooperate with CBH's counsel and auditors in the
preparation and filing of such Registration Statement. CBH and CFBC agree to
use their respective best efforts to have such Registration Statement declared
effective under the 1933 Act as soon as may be practicable and to distribute
the prospectus contained in such Registration Statement ("Prospectus") to the
shareholders of CFBC in accordance with applicable law. Except to the extent
permitted by Rule 145(b) or with the prior consent of the other, CBH and CFBC
agree not to publish any communication, other than the Registration Statement
or notice and proxy material accompanied by the Prospectus, in respect of this
Agreement, the Merger Agreement, or the transactions contemplated hereby. CBH
shall not be required to maintain the effectiveness of the Registration
Statement or the Prospectus for the purpose of resale by the affiliates of
CFBC, as such term is used in Rule 145. CBH shall take all actions necessary to
register or qualify the shares of CBH Common Stock to be issued in the Merger
pursuant to all applicable state "blue sky" or securities laws and shall
maintain such registrations or qualifications in effect for all purposes
hereof. CBH shall apply for approval to list the shares of CBH Common Stock to
be issued in the Merger on the NYSE, subject to official notice of issuance,
prior to the Effective Date.
5.3 Each party warrants, represents and covenants to the other that when
the Registration Statement shall become effective, and at all times subsequent
to effectiveness, up to and including the date of the CFBC shareholders meeting
with respect to the transactions contemplated hereby, such Registration
Statement and all amendments or supplements thereto will, with respect to the
information furnished by each party or its representatives to the other party
or its representatives, (i) comply in all material respects with the applicable
provisions of the 1933 Act and the 1934 Act and the rules and regulations
thereunder and (ii) not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading. Each party warrants, represents
and covenants to the other that all information furnished to each other for use
in the regulatory filings described in or contemplated by this Agreement and
the Merger Agreement shall not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements contained therein not misleading. Each party hereby agrees
to fully indemnify and hold harmless the other party, and its directors,
officers and representatives, from and against any and all losses, claims,
liabilities, damages and expenses (including reasonable attorneys fees and
costs of litigation) that arise out of or are based upon a breach of this
warranty, representation and covenant.
6. PRIOR TO CLOSING
6.1 From and after the date hereof, CBH or CFBC, as the case may be, will
provide to the officers and accredited representatives of the other, their
(including subsidiaries') books and records at such times as either shall
reasonably request in order that CBH or CFBC, as the case may be, may have full
opportunity to make such investigation as either shall desire to make of the
business and affairs of the other and its subsidiaries, provided that such
investigation shall not unduly interfere with the normal conduct by the other
and its subsidiaries of their business. CBH and CFBC, as the case may be, shall
each furnish to the other such information about its business and affairs as
the other may reasonably request in order to consummate the transactions herein
contemplated. All non-public materials and information furnished by the parties
hereto shall be held strictly confidential and may not be used by the receiving
party for their own benefit whatsoever if the closing contemplated hereunder
does not occur. In such event, any party receiving such non-public materials
and information shall return such materials and information to the party
providing such materials and information. The obligations of the parties
pursuant to the preceding sentence shall survive any termination of this
Agreement for any reason whatsoever.
6.2 CBH and CFBC will use their respective best efforts and cooperate with
each other in promptly obtaining all government, regulatory and shareholder
consents and approvals necessary for the consummation of the transactions
contemplated by this Agreement and the Merger Agreement. CBH and CFBC shall
cooperate with each other and shall promptly furnish and make available to each
other any and all information, data and facts which may be required to obtain
all government, regulatory and shareholder consents and approvals and to comply
with all rules in obtaining CFBC's shareholders consent to the Merger.
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6.3 No party hereto shall take or fail to take, or cause or permit its
subsidiaries to take or fail to take, or to the best of its ability permit to
be taken or omitted to be taken by any third persons, any action that would
substantially impair the prospects of completing the Merger pursuant to this
Agreement and the Merger Agreement, that would materially delay such
completion, or that would adversely affect the qualification of the Merger for
pooling of interests accounting treatment or as a reorganization within the
meaning of Section 368(a) of the Code.
6.4 CBH and CFBC shall agree with each other as to the form and substance
of any press release related to the Merger and shall consult each other as to
the form and substance of other public disclosures related thereto, provided,
however, that nothing contained herein shall prohibit any party, following
notification to the other, from making any disclosure which is required by
applicable law or the rules of the NYSE.
6.5 CFBC shall not authorize or permit any of its officers, directors,
employees or agents to directly or indirectly solicit, initiate or encourage
any inquiries relating to, or the making of any proposal which constitutes, a
"takeover proposal" (as defined below), or recommend or endorse any takeover
proposal, or participate in any discussions or negotiations, or provide third
parties with any non-public information, relating to any such inquiry or
proposal or otherwise facilitate any effort or attempt to make or implement a
takeover proposal except to the extent required for the discharge of the
fiduciary duties of its Board of Directors; provided, however, that CFBC may
communicate information about any such takeover proposal to its stockholders
if, in the judgment of its Board of Directors, based upon the advice of outside
counsel, such communication is required under applicable law. CFBC will take
all actions necessary or advisable to inform the appropriate individuals or
entities referred to in the first sentence hereof of the obligations undertaken
herein. CFBC will notify CBH immediately if any such inquiries or takeover
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, CFBC,
and CFBC will promptly inform CBH in writing of all of the relevant details
with respect to the foregoing. As used in this Agreement, "takeover proposal"
shall mean any tender or exchange offer, proposal for a merger, consolidation
or other business combination involving CFBC or any of its subsidiaries or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, CFBC or any of its subsidiaries other
than the transactions contemplated or permitted by this Agreement and the
Merger Agreement.
6.6 (a) CBH and CFBC shall cooperate and use their best efforts to
identify those persons who may be deemed to be "affiliates" of CBH or CFBC
within the meaning of Rule 145 promulgated by the Commission under the
Securities Act and for purposes of qualifying the "Merger" for "pooling of
interests" accounting treatment. CFBC and CBH shall use its respective best
efforts to cause each person so identified to deliver to CBH, no later than 30
days prior to the Effective Date, a written agreement in form and substance
satisfactory to CBH with respect to the resale of CBH Common Stock. Shares of
CBH Common Stock issued to such CFBC and CBH affiliates in exchange for CFBC
Common Stock or previously owned by them shall not be transferable until such
time as financial results covering at least 30 days of combined operations of
CBH and CFBC have been published within the meaning of Section 201.01 of the
Commission's Codification of Financial Reporting Policies, regardless of
whether each such affiliate has provided the written agreement referred to in
this section.
(b) CBH shall use its best efforts to publish no later than ninety (90)
days after the end of the first month after the Effective Date in which
there are at least thirty (30) days of post-Merger combined operations
(which month may be the month in which the Effective Date occurs), combined
sales and net income figures as contemplated by and in accordance with the
terms of SEC Accounting Series Release No. 135.
6.7 After the date of this Agreement, each of CFBC and CBH shall
coordinate with the other the declaration of any dividends in respect of CFBC
Common Stock and CBH Common Stock and the record dates and payment dates
relating thereto, it being the intention of the parties hereto that holders of
CFBC Common Stock or CBH Common Stock shall not receive two dividends, or fail
to receive one dividend, for any single calendar quarter with respect to their
shares of CFBC Common Stock and/or CBH Common Stock and any shares of CBH
Common Stock any such holder receives in exchange therefor in the Merger.
6.8 (a) CBH agrees that all rights to indemnification or exculpation now
existing in favor of the directors, officers, employees and agents of CFBC and
its subsidiaries as provided in their respective charters or Bylaws
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or otherwise in effect as of the date hereof with respect to matters occurring
prior to the Effective Date of the Merger shall survive the Merger and shall
continue in full force and effect. To the maximum extent permitted by the BCA,
such indemnification shall be mandatory rather than permissive and CBH shall
advance expenses in connection with such indemnification.
(b) In additional to the rights provided for in Section (a) hereof, and
not in limitation thereof, CBH shall indemnify, defend and hold harmless
each present and former director, officer, employee and agent of CFBC and
its subsidiaries ("Indemnified Parties") to the fullest extent permitted by
law for all claims, losses, damages, liabilities, costs, judgments and
amounts paid in settlement, including advancement of expenses (including
attorneys' fees) as incurred in respect of any threatened, pending or
contemplated claim, action, suit or proceeding, whether criminal, civil,
administrative or investigative, including, without limitation, any action
by or on behalf of any or all securityholders of CFBC or by or in the right
of CFBC or CBH, or investigation relating to any action or omission by such
party in its capacity as such (including service to any other entity, plan,
trust or the like at CFBC's request) occurring on or prior to the Effective
Date of the Merger which arise out of or related to the transactions
contemplated by this Agreement.
(c) In the event that CBH or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and
assets to any person, then and in each such case, proper provisions shall
be made so that the successors and assigns of CBH shall assume its
obligations as set forth in this Section 6.8.
(d) The provisions of this Section 6.8 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his heirs
and his personal representatives.
7. CONDITIONS PRECEDENT TO CBH'S OBLIGATION
The obligation of CBH hereunder to close the transactions contemplated by
this Agreement and the Merger Agreement is subject to the following conditions
precedent (all or any of which may be waived by CBH in its sole discretion):
7.1 Each of the representations and warranties herein made by CFBC shall
be true in all material respects on the Effective Date as if made on, as of,
and with respect to the Effective Date, and the agreements to be performed by
CFBC and its subsidiaries on or before the Effective Date shall have been so
performed in all material respects. On the Effective Date, CFBC will furnish a
certificate to CBH, dated as of the Effective date, of its President and
Secretary to the effect set forth in this Section 7.1.
7.2 On or before the Effective Date, CBH and CFBC shall have received all
required permits, consents and approvals (which permits, consents and approvals
shall be unconditional and free of any material restrictions or requirements by
reason of the acceptance of any such permit, consent or approval) from all
federal and state governmental agencies and boards (including, without
limitation, the Department of Banking of the State of New Jersey, the Office of
the Comptroller of the Currency and the Federal Reserve Board) and any
application waiting period shall have expired.
7.3 A ruling shall have been obtained from the Internal Revenue Service or
an opinion of counsel satisfactory to CBH shall have been received, to the
effect that the transactions contemplated by this Agreement and the Merger
Agreement will constitute a tax free reorganization so that no gain or loss
will be recognized to CBH or CFBC by reason of the Merger or to the
shareholders of CFBC who exchange their CFBC common stock for CBH common stock
(other than with respect to cash received in lieu of fractional shares). CBH
agrees that it will not unreasonably withhold its approval with respect to the
form and/or content of any such ruling or opinion of counsel.
7.4 On or before the Effective Date, CFBC shall have delivered to CBH
certified copies of the minutes of the meetings of the Board of Directors and
shareholders of CFBC approving this Agreement, the Merger Agreement and the
transactions contemplated by this Agreement and the Merger Agreement.
7.5 On or before the Effective Date, there shall have been no material
adverse change in the business, consolidated earnings or consolidated net worth
of CFBC and its subsidiaries since December 31, 1997. It is understood,
however, that material adverse changes caused by external market conditions
affecting banks generally (e.g. changes in banking legislation and changes in
interest rates) will not relieve CBH or its subsidiaries of their obligation to
close.
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7.6 The Registration Statement shall have been declared effective by the
SEC; no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceeding for that purpose shall have been
initiated, or to the knowledge of CBH or CFBC, shall be contemplated or
threatened by the SEC.
7.7 On or before the Effective Date, CFBC shall have delivered to CBH all
material consents and authorizations of landlords or others necessary to permit
the Merger to be consummated without the violation of any such material lease
or other agreement to which CFBC or any of its subsidiaries is a party.
7.8 Each affiliate (as the term is defined in SEC Rule 144) of CFBC shall
have delivered to CBH a letter in form and substance satisfactory to counsel
for CBH, stating that he will not resell shares of CBH common stock acquired
pursuant to this Agreement and the Merger Agreement, except as permitted by SEC
Rule 145 which permits regular trading transactions in limited quantities.
7.9 No action, proceeding or material claim shall be pending to prevent
consummation or seek damages by reason of the transaction contemplated by this
Agreement and the Merger Agreement; no governmental authority shall be claiming
that the transaction shall constitute a violation of law.
7.10 On or before the Effective Date, the shareholders of CFBC shall have
duly approved the transactions contemplated by this Agreement and the Merger
Agreement insofar as they related to CFBC and, if necessary, similarly the
shareholders of CBH shall have duly approved the transactions contemplated by
this Agreement and the Merger Agreement.
7.11 No event shall have occurred that shall preclude the Merger from
being accounted for as a pooling of interests and, if deemed necessary by CBH,
CBH shall have received a letter from its independent public accountants to
such effect.
7.12 CBH shall have received an opinion of Pitney, Hardin, Kipp & Szuch
reasonably satisfactory to it, dated the Closing Date.
7.13 CFBC shall have delivered to CBH the revised complete Schedules on or
before the date required by Section 3.22 hereof and the Schedules as so
delivered to CBH by CFBC in accordance with Section 3.22 hereof do not disclose
facts which either individually or in the aggregate, materially adversely
affect or are reasonably likely to materially adversely affect the assets,
properties, earnings or business of CFBC or any of its subsidiaries. This
condition to closing shall be deemed to have been met, or waived by CBH, unless
CBH notifies CFBC to the contrary in a writing specifically referring to this
Section 7.13 withing ten business days after CFBC delivers to CBH such revised
complete Schedules.
7.14 All holders of currently outstanding CFBC stock options shall have
agreed in writing not to exercise any cash election option granted to them
thereunder.
7.15 The Change in Control Agreements with Barry B. Davall, Michael J.
Gormley and James A. Kinghorn shall have been terminated (i.e. paid out in
full) without any further liability to CFBC and/or CBH, and Barry B. Davall
shall have entered into an employment arrangement with CBH in a form reasonably
acceptable to CBH.
8. CONDITIONS PRECEDENT TO CFBC'S OBLIGATION
The obligation of CFBC hereunder to close the transactions contemplated by
this Agreement and the Merger Agreement is subject to the following conditions
precedent (all or any of which may be waived by CFBC in its sole discretion):
8.1 Each of the representations and warranties herein made by CBH shall be
true in all material respects on the Effective Date as if made on, as of, and
with respect to the Effective Date, and the agreements to be performed by CBH
on or before the Effective Date shall have been so performed in all material
respects. On the Effective Date, CBH shall furnish a certificate to CFBC dated
the Effective Date, of its President and its Secretary, to the effect set forth
in this Section 8.1.
8.2 On or before the Effective Date, CFBC and CBH shall have received all
permits, consents and approvals from all federal and state governmental
agencies and boards (including, without limitation, the Department of Banking
of the State of New Jersey, the Office of the Comptrollor of the Currency and
the Federal Reserve Board) and any applicable waiting period shall have
expired.
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8.3 A ruling shall have been obtained from the Internal Revenue Service or
an opinion of counsel satisfactory to CFBC shall have been received, to the
effect that the transactions contemplated by this Agreement and the Merger
Agreement will constitute a tax free reorganization so that no gain or loss
will be recognized to CBH or CFBC by reason of the Merger or to the
shareholders of CFBC who exchange their CFBC common stock for CBH common stock
(other than with respect to cash received in lieu of fractional shares). CFBC
agrees that it will not unreasonably withhold its approval with respect to the
form and/or content of any such ruling or opinion of counsel.
8.4 On or before the Effective Date, CBH shall have delivered to CFBC
certified copies of the minutes of the meetings of the Board of Directors of
CBH and, if required, the shareholders of CBH, approving this Agreement and the
Merger Agreement, and the transactions contemplated by this Agreement and the
Merger Agreement.
8.5 On or before the Effective Date, there shall be no material adverse
change in the business, consolidated earnings or consolidated net worth of CBH
and its subsidiaries since December 31, 1997. It is understood, however, that
material adverse changes caused by external market conditions affecting banks
generally (e.g. changes in banking legislation and changes in interest rates)
will not relieve CFBC or its subsidiaries of their obligations to close.
8.6 The Registration Statement shall have been declared effective by the
SEC; no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of CBH or CFBC, shall be contemplated or
threatened by the SEC.
8.7 CBH shall have sufficient authorized but unissued shares of CBH common
stock and cash to meet all of CBH's obligations under this Agreement and the
Merger Agreement.
8.8 No action, proceeding or material claim shall be pending to prevent
consummation or seek damages by reason of the transaction contemplated by this
Agreement and the Merger Agreement; no governmental authority shall be claiming
that the transaction shall constitute a violation of law. Notwithstanding the
foregoing, if CBH provides full indemnification to CFBC and its directors and
officers (in form and substance and amount reasonably satisfactory to such
directors and officers and specifically providing for the advancement of
expenses) with respect to an such action, proceeding or material claim brought
by a non-governmental party, such action, proceeding or material claim shall
not be deemed a condition precedent to CFBC's obligation to close.
8.9 On or before the Effective Date, the shareholders of CFBC shall have
duly approved the transactions contemplated by this Agreement and the Merger
Agreement.
8.10 The shares of CBH Common Stock that will be issued in the Merger
shall have been approved for listing on the NYSE, subject to official notice of
issuance.
8.11 No event shall have occurred that shall preclude the Merger from
being accounted for as a pooling of interests.
8.12 CFBC shall have received an opinion of Blank Rome Comisky & McCauley
LLP, reasonably acceptable to it, dated the Closing Date.
8.13 Within three business days of the date on which the CFBC proxy
materials are mailed to CFBC shareholders to vote on the Merger, CFBC's
financial advisor shall have issued its written fairness opinion that the
Exchange Ratio is fair to the shareholders of CFBC from a financial point of
view.
8.14 A one year employment agreement shall have been offered to Barry B.
Davall for an annual base salary of $157,500.
9. CLOSING AND POST-CLOSING
9.1 Closing shall take place at the office of CBH, 1701 Route 70 East,
Cherry Hill, New Jersey, commencing at 10:00 A.M. on the tenth business day
immediately following the later of (i) the approval of
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the Merger by CFBC shareholders or (ii) approval of the Merger by all
regulatory authorities and the expiration of all applicable waiting periods, or
such other date as is mutually agreed to by CBH and CFBC provided that all
conditions precedent to the obligations of CFBC and CBH to close have then been
met or waived. Immediately upon completion of the closing, CBH shall be
telephone instruct its representative in Trenton, New Jersey to file, or shall
otherwise cause the filing of, an executed Certificate of Merger with the New
Jersey Secretary of State in accordance with Chapter 10 of the BCA.
9.2 At the close of business on the last business day preceding the
closing, the stock transfer books of CFBC shall be closed.
9.3 As part of the closing, but effective immediately following closing,
Gerald F. Murphy and three other current members of the CFBC Board of Directors
shall be appointed to the Board of Directors of Commerce Bank/Shore, N.A., such
persons to be mutually acceptable to CBH and CFBC, and such proposed directors
shall be submitted by CFBC to CBH in writing not less than 30 days prior to the
Effective Date.
9.4 As part of the closing, but effective immediately following closing
and subject to Section 8.14 hereof, Barry B. Davall shall be offered employment
as a Senior Vice President of Commerce Bank/Shore, N.A. and Gerald F. Murphy
shall be appointed as a Vice Chairman of the Board of Directors of Commerce
Bank/Shore, N.A.
10. EXPENSES
If the transactions contemplated by this Agreement and the Merger
Agreement are consummated, CBH and CFBC each shall pay all expenses incurred by
it in connection with this Agreement, the Merger Agreement and such
consummation. If the transactions contemplated by this Agreement and the Merger
Agreement are not consummated each party shall pay its own expenses except that
the cost of printing the Registration Statement and related Prospectus
heretofore referred to shall be incurred equally by CBH and CFBC and if this
Agreement is terminated because of the wilful or intentional breach of any term
or provision hereof, the non-breaching party shall be entitled to be reimbursed
from the breaching party for all of its out-of-pocket expenses incurred in
connection with this Agreement to the date of termination, including without
limitation, legal, accounting and financial advisor costs and expenses. If the
transactions contemplated hereby are not consummated for any reason whatsoever,
nothing contained in this Section shall be deemed to preclude either party from
seeking to recover damages which it incurs as a result of such non-consummation
or to obtain other legal or equitable relief (including specific performance),
if such non-consummation results from a wilful or intentional (but not a
negligent or unintentional) breach of any term or provision of this Agreement
or the Merger Agreement by the party from whom damages are or against whom such
other legal or equitable relief is sought.
11. BROKERS, FINDERS AND FINANCIAL ADVISORS
Each party to this Agreement represents and warrants that such party has
not dealt with any broker, finder or other person, firm or corporation
performing brokerage, finder or similar services, and does not know of any
person, firm or corporation asserting a brokerage, finder's or similar claim,
in connection with the making or negotiation of this Agreement, the Merger
Agreement or the transactions contemplated thereby. CBH acknowledges that it
has received a copy of the retainer agreement between CFBC and Berwind
Financial L.P. ("Berwind") pursuant to which Berwind will act as financial
advisor to CFBC in connection with the Merger.
12. TERMINATION
(a) This Agreement may be terminated and the Merger abandoned (either
before or after approval by the shareholders of CFBC contemplated hereby and
without seeking further shareholder approval) at any time prior to the
Effective Date:
(i) by mutual written consent of the parties authorized by their
respective Boards of Directors;
(ii) by written notice from CFBC to CBH or CBH to CFBC, as the case may
be, if the Effective Date shall not have occurred by March 31, 1999;
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(iii) by written notice from CFBC to CBH, or CBH to CFBC, as the case
may be, stating that the party giving such notice elects to terminate this
Agreement and abandon the Merger, as of a stated date, which shall not be
less than ten business days after the date on which such notice is given,
because (a) the party receiving such notice will be unable, by March 31,
1999, to meet or satisfy one or more specified conditions precedent to the
obligation of the party sending such notice to close under this Agreement
and (b) the party sending such notice does not intend to waive the
satisfaction of such conditions precedent;
(iv) in the event of termination of the Merger Agreement pursuant to the
terms thereof;
(v) by CBH, if the Board of Directors of CFBC shall (i) withdraw, modify
or change its recommendation or approval in respect of this Agreement in a
manner adverse to CBH or (ii) approve or recommend any proposal other than
by CBH in respect of a takeover proposal (as defined in Section 6.5
hereof);
(vi) assuming CFBC shall not have contravened Section 6.5 hereof, by
CFBC to allow CFBC to enter into a takeover proposal (as defined in Section
6.5 hereof); or
(vii) by CFBC if the "Average Price" of a share of CBH Common Stock, as
that term is defined in the first sentence of Section 5 of the Merger
Agreement, is not $32.00 or above.
13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The respective representations, warranties and covenants of the parties in
this Agreement shall not survive the Effective Date and shall terminate on the
Effective Date, except for the covenants contained in Section 4.2 (last
sentence only), 6.8 and 16.3 hereof. However, such termination shall not be
deemed to deprive any of the parties hereto or their subsidiaries, or any of
their directors, officers or controlling persons, of any defense in law or
equity which otherwise would be available against the claims of any person,
including, but not limited to, any shareholder or former shareholder of the
parties hereto. Prior to the Effective Date, each party shall be deemed to have
relied upon each and every representation and warranty of the other party,
regardless of any investigation heretofore or hereafter made by or on behalf of
such party.
14. BENEFITS OF THIS AGREEMENT AND MERGER AGREEMENT
This Agreement and the Merger Agreement and the rights and obligations of
CBH and CFBC hereunder shall not be assigned by any party to any third party,
except with the written consent of the other. This Agreement and the Merger
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective permitted successors and assigns. Except as provided in
Section 6.8 hereof, nothing in this Agreement or the Merger Agreement,
expressed or implied, is intended to confer upon any person, other than the
parties hereto and their respective permitted successors and assigns, any
rights or remedies under or by reason of this Agreement and there are no third
party beneficiaries of this Agreement or the Merger Agreement. CFBC agrees that
to the extent necessary or appropriate to facilitate the transaction
contemplated hereby, CFBC will agree and consent to any change in the method of
accomplishing such transaction requested by CBH so long as such change does not
result in a reduction in the Exchange Ratio (as defined in the Merger
Agreement) or result in an adverse tax or other effect to CFBC's shareholders.
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15. NOTICES
Any notice, request, instruction, legal process, or other instrument to be
given or served hereunder by any party to another shall be deemed given or
served if in writing and delivered personally or sent by facsimile or overnight
express or registered or certified mail, postage prepaid, to the respective
party or parties at the following addresses:
A. If to CBH:
Commerce Atrium
1701 Route 70 East
Cherry Hill, NJ 08034
Attn: Vernon W. Hill, II
With a copy to:
Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attn: Lawrence R. Wiseman, Esquire
B. If to CFBC: 656 Shrewsbury Avenue
Tinton Falls, NJ 07701
Attn: Barry B. Davall, President
With copies to:
Pitney, Hardin, Kipp & Szuch
Attn: Michael W. Zelenty, Esquire
Mail: P.O. Box 1945
Morristown, NJ 07962-1945
Hand Delivery: 200 Campus Drive
Florham Park, NJ 07932
and to such other address or addresses as either party may designate to the
other by like notice as set forth above.
16. MISCELLANEOUS
16.1 As used in this Agreement, the following terms have the following
meanings unless the context otherwise requires:
(i) "contracts and other agreements" means and includes all contracts,
agreements, indentures, leases, franchises, licenses, commitments or
legally binding arrangements, express or implied, written or oral;
(ii) "lien or other encumbrance" means and includes any lien, pledge,
mortgage, security interest, claim, lease, charge, option, right of first
refusal, easement or any other encumbrance whatsoever;
(iii) "person' means a natural person, corporation, partnership, sole
proprietorship, joint venture, association, joint-stock company, trust,
estate, unincorporated organization, government (and any branch or
subdivision thereof), government agency, cooperative or other entity.
(iv) "subsidiaries" means when used with respect to a party to this
Agreement any corporation 50% or more of whose outstanding stock is either
directly or indirectly (through one or more other subsidiaries) owned by
such party.
(v) "Rights" means any warrants, options, rights, convertible securities
or other arrangements or commitments which obligates an entity to issue or
dispose of its equity securities.
(vi) "business day" means any day on which regular trading of securities
occurs on the "NYSE".
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16.2 CFBC and CBH will each cause its respective subsidiaries to abide by
its respective obligations under this Agreement.
16.3 Subsequent to the Effective Date, the Board of Directors of CBH shall
reserve the right to withhold the payment of dividends on its common stock from
any former shareholder of CFBC who fails to exchange certificates representing
the shares of CFBC common stock for certificates representing the shares of CBH
common stock in accordance with the Merger Agreement within a reasonable period
of time after such shareholders have been advised by the Board of Directors of
CBH of its determination that the exchange is in the best interests of CBH.
Such shareholders shall retain the right to be paid any such withheld
dividends, without interest, upon presentation of their CFBC certificates for
exchange or, in the event such CFBC certificates are lost of destroyed, an
affidavit of lost certificate acceptable to CBH.
16.4 CFBC and CBH shall use their best efforts to have all publicity,
press releases and other announcements relating to this Agreement, the Merger
Agreement or the transactions contemplated thereby reviewed in advance by both
CBH and CFBC.
16.5 This Agreement and the Merger Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated
hereby, supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties, and
there are no warranties, representations, covenants or other agreements between
the parties in connection with the subject matter hereof except as specifically
set forth herein.
16.6 Any party to this Agreement may, at any time prior to the Effective
Date, by action taken by its Board of Directors or officers thereunto duly
authorized, waive any of the terms or conditions of this Agreement binding on
the other party or agree to an amendment or modification to this Agreement by
an agreement in writing executed in the same manner (but not necessarily by the
same persons) as this Agreement. No amendment, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions hereof (whether or not
similar), nor shall any waiver constitute a continuing waiver unless otherwise
expressly provided. CFBC's Board of Directors may authorize the amendment or
supplementation of this Agreement or the Merger Agreement or waiver of any
provision hereof or thereof, either before or after the approval of CFBC's
shareholders provided in Section 5 hereof (and without seeking further
shareholder approval), so long as such amendment, supplement or waiver does not
result in the reduction of the Exchange Ratio (as defined in the Merger
Agreement) or result in a materially adverse tax or other effect to CFBC's
shareholders.
16.7 This Agreement has been executed in the State of New Jersey and shall
be construed in accordance with the laws of the State of New Jersey. This
Agreement may be executed in any number of copies, each of which shall be
deemed an original, and all of which together, shall be deemed one and the same
instrument.
IN WITNESS WHEREOF, pursuant to authority duly given by the respective
Boards of Directors of CBH and CFBC, this Agreement has been signed on behalf
of said corporations by their respective Presidents under their respective
corporate seals, and attested by their respective Secretaries or Assistant
Secretaries, as the case may be, all on the day, month and year first written
above. The signature of a Secretary or Assistant Secretary of a corporate
entity is intended not only as an execution hereof, but also is a certification
that such corporation's board of directors has duly authorized the execution
and delivery of this Agreement.
COMMERCE BANCORP, INC.
By: /s/ Vernon W. Hill, II
----------------------------------------
Vernon W. Hill, II, President
Attest: /s/ Thomas J. Sukay
------------------------------------
Thomas J. Sukay, Assistant Secretary
COMMUNITY FIRST BANKING COMPANY
By: /s/ Barry B. Davall
----------------------------------------
Barry B. Davall, President
Attest: /s/ Arthur E. James
------------------------------------
Arthur E. James, Secretary
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ANNEX B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT made this 12th day of August, 1998 by and between COMMUNITY
FIRST BANKING COMPANY ("CFBC"), a New Jersey business corporation registered as
a bank holding company under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"), and COMMERCE BANCORP, INC. ("CBH"), a New Jersey
business corporation registered as a bank holding company under the Holding
Company Act (CFBC and CBH sometimes collectively referred to as the
"Constituent Corporations").
BACKGROUND
CBH and CFBC have entered into an Amended Agreement and Plan of
Reorganization of even date herewith (the "Plan"), which contemplates the
merger of CFBC with and into CBH (the "Merger") in accordance with the terms
and conditions of this Merger Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants and
agreements herein contained, and subject to the satisfaction of the terms and
conditions set forth herein and in the Plan, intending to be legally bound
hereby, CFBC and CBH do hereby agree as follows:
SECTION 1
On the Effective Date of the Merger, as hereinafter defined, CFBC shall be
merged with and into CBH under and pursuant to Chapter 10 of the New Jersey
Business Corporation Act, as amended ("BCA").
SECTION 2
CBH shall be the surviving corporation (hereinafter referred to as the
"Surviving Corporation"), and the name of the Surviving Corporation shall be
"Commerce Bancorp, Inc."
SECTION 3
On the Effective Date of the Merger:
(a) For all purposes the separate existence of CFBC shall cease. CFBC
shall be merged with and into CBH, the Surviving Corporation, and the Surviving
Corporation shall thereupon and thereafter possess all the rights, privileges
and powers, of a public as well as of a private nature, and all property (real,
personal and mixed), and franchises of each of the Constituent Corporations.
(b) All debts due on whatever account to any of the Constituent
Corporations including subscriptions to shares and other chooses in action
belonging to any of the Constituent Corporations shall be taken and deemed to
be transferred to and vested in the Surviving Corporation without further act
or deed.
(c) The Surviving Corporation shall thenceforth shall be responsible for
all the liabilities and obligations of each of the Constituent Corporations,
but the liabilities of the Constituent Corporations, or of their shareholders,
directors, or officers, shall not be affected; nor shall the rights of the
creditors thereof, or of any persons dealing with the Constituent Corporations,
or any liens upon the property of the Constituent Corporations, be impaired by
the Merger; and any claim existing or action or proceeding pending by or
against any of the Constituent Corporations may be prosecuted to judgment as if
the Merger had not taken place, or the Surviving Corporation may be proceeded
against or substituted in its place.
(d) Any taxes, penalties and public accounts of the State of New Jersey
claimed against any of the Constituent Corporations, but not settled, assessed
or determined prior to the Merger shall be settled, assessed or determined
against the Surviving Corporation and, together with interest thereon, shall be
a lien against the franchises and property, both real and personal, of the
Surviving Corporation.
If at any time the Surviving Corporation shall consider or be advised that
any further assignment or assurances in law, or any things are necessary or
desirable to vest in the Surviving Corporation, according to
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the terms hereof, the title of any property or rights of CFBC, the last acting
officers and directors of CFBC, or the corresponding officers and directors of
the Surviving Corporation, as the case may be, then shall and will execute and
make all such property assignments and assurances, and do all things necessary
or proper to vest title in such property or rights in the Surviving
Corporation, and otherwise to carry out the purposes of this Merger Agreement.
SECTION 4
(a) On the Effective Date, the Articles of Incorporation and By-laws of
CBH, as in effect immediately prior to the Effective Date, shall become the
Articles of Incorporation and By-laws of the Surviving Corporation (whose name
shall remain Commerce Bancorp, Inc.), until duly amended in accordance with
law.
(b) On the Effective Date, the then Board of Directors of CBH shall serve
as the Board of Directors of the Surviving Corporation until such time as their
successors have been elected and qualified.
(c) On the Effective Date, the persons who are executive or other offices
of CBH shall serve as officers of the Surviving Corporation until such time as
the Board of Directors of the Surviving Corporation shall otherwise determine.
SECTION 5
On the Effective Date:
(a) The shares of CBH Common Stock and Preferred Stock then issued or
outstanding (or held in Treasury) shall by virtue of the Merger and without any
action on the part of the holder thereof, be automatically converted into and
become the same number of shares of Common Stock and Preferred Stock of the
Surviving Corporation. From and after the Effective Date, each certificate
which, prior to the Effective Date, represented shares of CBH, shall evidence
ownership of shares of the Surviving Corporation on the basis hereinbefore set
forth. Each share of Common Stock and Preferred Stock of the Surviving
Corporation issued pursuant to this Subsection shall be fully paid and
non-assessable.
(b) Each share of CFBC Common Stock then issued and outstanding
immediately prior to the Effective Date (except as provided in Subsection (d)
hereof) shall, by virtue of the Merger and without any action on the part of
the holder thereof, be automatically converted into and become fully paid and
non-assessable shares of the common stock, par value $1.5625 per share, of CBH
("CBH Common Stock") equal to $28.00 divided by the Average Price of CBH Common
Stock (as determined pursuant to Subsection (e) hereof), subject to adjustment
as set forth in Subsection (f) hereof, (hereinafter the "Exchange Ratio"). From
and after the Effective Date, each certificate which, prior to the Effective
Date, represented shares of CFBC Common Stock, shall evidence ownership of
shares of CBH Common Stock on the basis hereinbefore set forth.
(c) No fractional shares of CBH Common Stock shall be issued as a result
of the Merger. In lieu of the issuance of fractional shares, cash adjustments
will be paid to the shareholders of CFBC in respect of any fraction of a share
of CBH Common Stock which would otherwise be issuable under this Merger
Agreement. Such cash adjustment shall be equal to an amount determined by
multiplying such fraction by the Average Price of CBH Common Stock (as
determined pursuant to Subsection (e) hereof).
(d) Each issued, but not outstanding share of CFBC Common Stock held as a
treasury share by CFBC or owned beneficially by any subsidiary of CFBC other
than in a fiduciary capacity or in connection with a debt previously contracted
and all shares of CFBC Common Stock owned by CBH or owned beneficially by any
subsidiary of CBH other than in a fiduciary capacity or in connection with a
debt previously contracted at the Effective Date of the Merger, if any, shall
thereupon and without more be cancelled and retired and cease to exist and no
cash, stock or other property shall be delivered in exchange therefor.
(e) Subject to the next sentence of this Subsection (e) hereof, "Average
Price" of CBH Common Stock as used herein shall refer to the mean average of
the closing sale prices for CBH Common Stock as quoted in the New York Stock
Exchange as reported by The Wall Street Journal, for the five business day
period ending on and excluding the second business day next preceding the
Effective Date. Notwithstanding anything to the
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contrary contained in the Plan and this Agreement, if the Average Price of CBH
Common Stock would otherwise be more than $45.6875, the Average Price shall be
deemed to be $45.6875 and if the Average Price of CBH Common Stock would
otherwise be less than $39.6875, the Average Price shall be deemed to be
$39.6875.
(f) If prior to the Effective Date, CBH shall issue to holders of CBH
Common Stock any shares of CBH Common Stock as a stock dividend, shall
subdivide the number of outstanding shares of CBH Common Stock into a greater
number of shares or shall contract the number of outstanding shares, then, in
any such case, the number of shares of CBH Common Stock into which shares of
CFBC Common Stock are automatically convertible into as set forth in Subsection
(b) hereof shall be adjusted equitably. For purposes of this Section of this
Merger Agreement, a dividend, subdivision or contraction shall be deemed to
have become final at the close of business on the record date fixed for
determining stockholders entitled to receive such dividend, or whose shares are
to be affected by such subdivision or contraction; provided, however, that in
the event that after such record date, but not before payment of such dividend
or before such subdivision or contraction became effective, CBH shall legally
abandon its plan to pay such dividend, or to effect such subdivision or
contraction, the number of shares of CBH Common Stock issuable on the Effective
Date of the Merger, if adjusted as hereinabove provided, shall forthwith be
readjusted to the number of shares of CBH Common Stock issuable upon the
Effective Date of the Merger which would have been in effect had such dividend,
subdivision or contraction never been declared.
(g) At or prior to the Effective Date, CBH shall designate its Transfer
Agent to act as exchange agent to receive from the holders thereof,
certificates which immediately prior to the Effective Date represented CFBC
Common Stock and to exchange such certificates for certificates of CBH Common
Stock and cash as hereinbefore provided.
(h) (i) Promptly, but in no event later than ten business days, after the
Effective Date, the exchange agent shall mail to each record holder, as of the
Effective Date, of an outstanding certificate or certificates, which prior to
the Effective Date represented shares of CFBC Common Stock, a letter of
transmittal (which shall specify how delivery shall be effected, and that risk
of loss and title to such certificate or certificates shall pass only upon
proper delivery of such certificate or certificates, together with a properly
executed letter of transmittal, to the exchange agent at its address stated
therein), and instructions for use in effecting the surrender of such
certificate or certificates for exchange therefor. Upon surrender to the
exchange agent of such certificate or certificates, together with such letter
of transmittal, properly executed, the exchange agent shall exchange such
certificate or certificates for shares of CBH Common Stock and pay to such
record holder any payment due for a fractional share of CBH Common Stock as
heretofore provided. Until so surrendered, each outstanding certificate or
certificates, which prior to the Effective Date represented shares of CFBC
Common Stock shall be deemed for all purposes to evidence ownership of the
number of shares of CBH Common Stock, and the right to receive payment for any
fractional share of CBH Common Stock into which the shares represented by such
certificate or certificates have been changed or converted as aforesaid.
(ii) No dividends or other distributions declared or made with respect to
shares of CBH Common Stock with a record date after the Effective Date shall be
paid to the holder of any unsurrendered certificate or certificates, which
prior to the Effective Date represented shares of CFBC Common Stock, with
respect to shares of CBH Common Stock that such holder would be entitled to
receive upon surrender of such certificate or certificates and no cash payment
in lieu of fractional shares of CBH Common Stock shall be paid to any such
holder pursuant to Subsection (c) hereof until such holder shall surrender such
certificate or certificates in accordance with this Subsection (h) hereof.
Subject to the effect of applicable laws, following surrender of any such
certificate or certificates, there shall be paid to such holder of shares of
CBH Common Stock issuable in exchange therefor, without interest, (a) promptly
after the time of such surrender, the amount of any cash payable in lieu of
fractional shares of CBH Common Stock to which such holder is entitled pursuant
to Subsection (c) hereof and the amount of dividends or other distributions
with a record date after the Effective Date theretofore paid with respect to
such whole shares of CBH Common Stock, and (b) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Date but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such shares of CBH Common Stock.
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(iii) If any certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such certificate, the Exchange Agent will deliver in
exchange for such lost, stolen or destroyed certificate the applicable merger
consideration with respect to the shares of CFBC Common Stock formerly
represented thereby, any cash in lieu of fractional shares of CBH Common Stock,
and unpaid dividends and distributions on shares of CBH Common Stock
deliverable in respect thereof, pursuant to this Agreement.
SECTION 6
On the Effective Date, CFBC's obligations under its stock option plans
with respect to then outstanding stock options granted thereunder and not
therefore exercised shall at the Effective Date become fully vested and shall
be converted into an equivalent number of options under the CBH 1998 Employee
Stock Option Plan based on the Exchange Ratio and CBH shall deliver to the
holder of each such option, options under the CBH 1998 Employee Stock Option
Plan as aforesaid; provided, however the period during which an optionee may
exercise his or her option shall not be reduced, nor shall any other material
terms of the option be altered in a manner materially adverse to the optionee.
SECTION 7
(a) The obligations of the parties hereto to effect the Merger shall be
subject to all of the terms and conditions contained in the Plan.
(b) This Merger Agreement may be terminated and the Merger abandoned by
the mutual written consent of the Boards of Directors of the parties hereto
prior to, or after the approval of the shareholders of the parties. If the Plan
is terminated pursuant to the terms thereof, then this Merger Agreement shall
terminate simultaneously, and the Merger shall be abandoned without further
action by the parties hereto.
SECTION 8
The Merger shall become effective (the "Effective Date") at the date and
time at which executed Certificate of Merger are duly filed with the New Jersey
Secretary of State in accordance with Chapter 10 of the BCA.
SECTION 9
(a) Any party to this Merger Agreement may, at any time prior to the
Effective Date, by action taken by its Board of Directors or officers thereunto
duly authorized, waive any of the terms or conditions of this Merger Agreement,
or agree to an amendment or modification to this Merger Agreement by an
agreement in writing executed in the same manner (but no necessarily by the
same persons) as this Merger Agreement. No amendment, modification or waiver of
this Merger Agreement shall be binding unless executed in writing by the party
to be bound thereby. No waiver of any of the provisions of this Merger
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided. CFBC's Board of Directors may
authorize the amendment or supplementation of this Merger Agreement or waiver
of any provision hereof, either before or after the approval of CFBC's
shareholders provided in Section 5 of the Plan (and without seeking further
shareholder approval), so long as such amendment, supplement or waiver does not
result in the reduction of the Exchange Ratio, or result in an adverse tax or
other effect to CFBC's shareholders.
(b) Nothing expressed or implied in this Merger Agreement is intended or
shall be construed to confer upon or give any person, firm or corporation other
than the parties hereto any rights or remedies under or by reason of this
Merger Agreement, and there are no third-party beneficiaries of this Merger
Agreement.
(c) No party hereto shall assign this Merger Agreement, or any part hereof
without the prior written consent of the other parties. Except as otherwise
provided herein, this Merger Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
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(d) This Merger Agreement and the Plan constitute the entire agreement
between the parties pertaining to the subject matter hereof, and supersede all
prior and contemporaneous agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations, covenants or other agreements between the parties
in connection with the subject matter hereof except as specifically set forth
herein or therein.
(e) This Merger 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 instrument.
(f) This Merger Agreement shall be governed by the laws of the State of
New Jersey applicable to contracts executed in and to be performed exclusively
within the State of New Jersey, regardless of where it is executed.
WITNESS the signatures and seals of the Constituent Corporations on the
day and year first above written, each hereunto set by its duly authorized
officers and attested by its Secretary or Assistant Secretary, pursuant to a
resolution of the Board of Directors.
COMMERCE BANCORP, INC.
By: /s/ Vernon W. Hill, II
------------------------------------------
Vernon W. Hill, II, President
Attest: /s/ Thomas J. Sukay
--------------------------------------
Thomas J. Sukay, Assistant Secretary
COMMUNITY FIRST BANKING COMPANY
By: /s/ Barry B. Davall
------------------------------------------
Barry B. Davall, President
Attest: /s/ Arthur E. James
--------------------------------------
Arthur E. James, Secretary
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<PAGE>
ANNEX C
November 5, 1998
Board of Directors
Community First Banking Company
656 Shrewsbury Avenue
Tinton Falls, New Jersey 07701
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Community First Banking Company ("Community")
of the financial terms of the proposed merger by and between Community and
Commerce Bancorp, Inc. ("Commerce"). The terms of the proposed merger (the
"Proposed Merger") by and between Community and Commerce are set forth in the
Agreement and Plan of Merger dated August 12, 1998 (the "Merger Agreement") and
provide that each outstanding share of Community common stock will be converted
into the right to receive shares of Commerce common stock equal to $28.00
divided by the Average Price of Commerce common stock, as defined in the Merger
Agreement, subject to certain adjustments as set forth 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 Community and Commerce and reviewed certain internally-prepared
financial analyses and forecasts prepared by the management of Community and
Commerce, (ii) reviewed the Merger Agreement, (iii) reviewed the Proxy
Statement/Prospectus (iv) reviewed and analyzed the stock market performance of
Community and Commerce, (v) studied and analyzed the consolidated financial and
operating data of Community and Commerce, (vi) considered the terms and
conditions of the Proposed Merger between Community and Commerce as compared
with the terms and conditions of comparable bank and bank holding company
mergers and acquisitions, (vii) met and/or communicated with certain members of
Community's and Commerce's senior management to discuss their respective
operations, historical financial statements and future prospects, 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 Community and Commerce, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by Community and Commerce 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 Community and Commerce nor other data which we have
considered in our review and, for purposes of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data. We have not conducted any valuation or appraisal of any
assets or liabilities of Community or Commerce, nor have any such valuations or
appraisals been provided to us. 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 Community and Commerce, we have assumed that such information has
been reasonably prepared and reflects the best currently available estimates
and judgment of the management of Community and Commerce as to their most
likely future performance and the cost savings and other potential synergies
(including the amount, timing and achievability thereof) anticipated to result
from the Proposed Merger. For Community and Commerce, we have assumed the
allowance for loan losses indicated on the balance sheets of each entity is
adequate to cover
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<PAGE>
such losses; we have not reviewed credit files of either Community or Commerce.
Also, 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 Proposed Merger to Community.
Our opinion is based upon information provided to us by the managements of
Community and Commerce, as well as market, economic, financial and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration of the Proposed Merger, is for the information of the Board of
Directors of Community First Banking Company in connection with its evaluation
of the Proposed Merger, does not constitute a recommendation to the Board of
Community and does not constitute a recommendation to Community shareholders as
to how such shareholders should vote on the Proposed Merger. We are not
expressing any opinion to the actual value of Community common stock when
issued pursuant to the Proposed Merger or the prices at which Commerce common
stock will trade subsequent to 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 Community and Commerce
are fair, from a financial point of view, to the shareholders of Community.
Sincerely,
/s/ BERWIND FINANCIAL, L.P.
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