COMMUNITY BANKS INC /PA/
SALARY CONTINUATION OF ANTHONY N. LEO
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>13
<FILENAME>ex_10-12.txt
<DESCRIPTION>SALARY CONTINUATION OF ANTHONY N. LEO
<TEXT>
                                                                   EXHIBIT 10.12

                             THE PEOPLES STATE BANK
                              AMENDED AND RESTATED
                          SALARY CONTINUATION AGREEMENT


     THIS  AMENDED  AND  RESTATED  AGREEMENT  is  dated  February  15,  2000 and
effective  January 1, 2000,  by THE PEOPLES STATE BANK, a  Pennsylvania  banking
institution located in East Berlin,  Pennsylvania (the "Company") and ANTHONY N.
LEO (the "Executive").

                                  INTRODUCTION

     To  encourage  the  Executive  to remain an  employee of the  Company,  the
Company and  Executive  entered  into a certain  Salary  Continuation  Agreement
("Agreement")  dated March 28, 1997  effective  January 1, 1997. The Company and
Executive desire to amend and restate the Agreement as hereinafter set forth.

                                    AGREEMENT

     The Executive and the Company agree as follows:

                                    Article 1
                                   Definitions

          1.1  Definitions. Whenever used in this Agreement, the following words
               and phrases shall have the meanings specified:

               1.1.1 "Change of Control" shall mean any of the following:

                    (A) An  acquisition  by any  "person"  or "group"  (as those
               terms are defined or used in Section  13(d) of the Exchange  Act,
               as  enacted  and in  force  on the date  hereof)  of  "beneficial
               ownership"  (within the meaning of Rule 13d-3 under the  Exchange
               Act, as enacted and in force on the date hereof) of securities of
               Company  representing 24.99% or more of the combined voting power
               of Company's securities then outstanding;

                    (B) A merger, consolidation or other reorganization of Compa
               ny, except where the resulting entity is controlled,  directly or
               indirectly, by Company;

                    (C) A merger, consolidation or other reorganization of Compa
               ny, except where  shareholders  of Company  immediately  prior to
               consummation of any such transaction  continue to hold at least a
               majority of the voting power of the outstanding voting securities
               of  the  legal  entity  resulting  from  or  existing  after  any
               transaction  and a  majority  of  the  members  of the  Board  of
               Directors of the legal entity  resulting from or existing after a
               transaction are former members of Company's Board of Directors;
<PAGE>

                    (D) A sale,  exchange,  transfer  or  other  disposition  of
               substantially  all of the assets of  Company  to another  entity,
               except  to an  entity  controlled,  directly  or  indirectly,  by
               Company or a corporate division involving Company;

                    (E) A contested proxy solicitation of Company's shareholders
               that results in the  contesting  party  obtaining  the ability to
               cast  twenty-five  percent (25%) or more of the votes entitled to
               be cast in an election of directors of Company.


          Notwithstanding  anything  else  to the  contrary  set  forth  in this
     Agreement,  if (i) an  agreement  is  executed  by the  Corporation  or the
     Company  providing for any of the  transactions  or events  constituting  a
     Change of Control as defined herein, and the agreement subsequently expires
     or is terminated  without the transaction or event being  consummated,  and
     (ii)  Executive's  employment did not terminate during the period after the
     agreement and prior to such expiration or termination, for purposes of this
     Agreement it shall be as though such  agreement  was never  executed and no
     Change of Control event shall be deemed to have occurred as a result of the
     execution of such agreement.


               1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.

               1.1.3 "Corporation" means Community Banks, Inc.

               1.1.4 "Disability" means  the  Executive  suffering  a  sickness,
                    accident  or injury  which,  in the  judgment of a physician
                    satisfactory  to the Company,  prevents the  Executive  from
                    performing  substantially  all  of  the  Executive's  normal
                    duties  for the  Company  for a period of nine (9) months of
                    any twelve (12) consecutive  month period. As a condition to
                    any  benefits,  the Company may  require  the  Executive  to
                    submit to such physical or mental  evaluations  and tests as
                    the Company's Board of Directors deems appropriate.

               1.1.5 "Early  Termination" means the  Termination  of  Employment
                    before Normal  Retirement  Age for reasons other than death,
                    Disability,  Termination  for Cause or following a Change of
                    Control.

                                       2
<PAGE>

               1.1.6 "Early Termination  Date" mean the  month,  day and year in
                    which Early Termination occurs.

               1.1.7 "Normal  Retirement   Age"  means  the   Executive's   62nd
                    birthday.

               1.1.8 "Normal Retirement  Date"  means  the  later of the  Normal
                    Retirement Age or Termination of Employment.

               1.1.9 "Plan Year" means each twelve-month  period commencing with
                    the effective date of this Agreement.

               1.1.10 "Termination for Cause" See Section 5.2.

               1.1.11  "Termination  of  Employment"  means  that the  Executive
                    ceases  to  be  employed  by  the  Company  for  any  reason
                    whatsoever  other than by reason of a leave of absence which
                    is approved by the Company.  For purposes of this Agreement,
                    if there is a  dispute  over the  employment  status  of the
                    Executive  or the  date of the  Executive's  Termination  of
                    Employment,  the  Company  shall have the sole and  absolute
                    right to decide the dispute.


                                    Article 2
                                Lifetime Benefits

          2.1 Normal  Retirement  Benefit.  Upon Termination of Employment on or
     after the Normal  Retirement Age for reasons other than death,  the Company
     shall pay to the  Executive  the benefit  described  in this Section 2.1 in
     lieu of any other benefit under this Agreement.

               2.1.1 Amount of Benefit.  The annual  Normal  Retirement  Benefit
                    under this Section 2.1 is Forty Thousand  ($40,000) Dollars.
                    The annual  benefit  amounts on Schedule A are calculated by
                    amortizing  the annual normal  retirement  benefit using the
                    interest  method  of  accounting,  a  7.00%  discount  rate,
                    monthly compounding and monthly payments.

               2.1.2 Payment of  Benefit.  The  Company  shall  pay  the  annual
                    benefit to the  Executive in 12 equal  monthly  installments
                    payable on the first day of each month  commencing  with the
                    month following the Executive's  Normal  Retirement Date and
                    continuing  for  239  additional  months.  Termination,  the
                    Company shall pay to the Executive the benefit  described in
                    this  Section  2.2 in lieu of any other  benefit  under this
                    Agreement.

          2.2 Early Termination  Benefit.  Upon Early  Termination,  the company
     shall pay to the  Executive  the benefit  described  in this Section 2.2 in
     lieu of any other benefit under this Agreement.

                                       3
<PAGE>

               2.2.1 Amount of Benefit.The annual benefit under this Section 2.2
                    is  the  Early  Termination  Annual  Benefit  set  forth  in
                    Schedule A for the Plan Year ending immediately prior to the
                    Early Termination Date.

               2.2.2 Payment of  Benefit.  The  Company  shall  pay  the  annual
                    benefit to the  Executive in 12 equal  monthly  installments
                    payable on the first day of each month  commencing  with the
                    month  following the Executive's  Normal  Retirement Age and
                    continuing for 239 additional months.


          2.3 Disability Benefit. If the Executive terminates  employment due to
     Disability  prior to Normal  Retirement  Age, the Company  shall pay to the
     Executive  the benefit  described  in this Section 2.3 in lieu of any other
     benefit under this Agreement.

               2.3.1 Amount of Benefit. The annual  benefit  under this  Section
                    2.3 is the Disability Benefit amount set forth in Schedule A
                    for the Plan Year  ending  immediately  prior to the date in
                    which Termination of Employment occurs.

               2.3.2 Payment of Benefit.  The  Company  shall have the option to
                    pay the accrued benefit  equivalent of the Disability Annual
                    Benefit to the  Executive  in a lump sum  within  sixty (60)
                    days after the  Executive's  termination of employment.  The
                    Company  shall pay the benefit to the  Executive in 12 equal
                    monthly  installments  commencing  within 90 days  after the
                    date  of  the  Executive's  Termination  of  Employment  and
                    continuing for 239 additional months.

          2.4  Change of  Control  Benefit.  If the  Executive  is in the active
     service of the  Company  at the time of a Change of  Control,  the  Company
     shall pay to the  Executive  the benefit  described  in this Section 2.4 in
     lieu of any other benefit under this Agreement.

               2.4.1 Amount of Benefit. The annual  benefit  under this  Section
                    2.4 is the Early  Termination  Benefit set forth in Schedule
                    A,  based on two (2) years  plus the  number  of Plan  Years
                    completed  on the  date of the  Executive's  termination  of
                    employment, not to exceed twenty- one (21) years.

               2.4.2 Payment of Benefit.The Company shall pay the annual benefit
                    to the Executive in 12 equal monthly installments payable on
                    the  first  day of each  month  commencing  with  the  month
                    following  the   Executive's   Normal   Retirement  Age  and
                    continuing  for 239  additional  months or at the  Company's
                    option pay the Accrued  Benefit  set forth on  Schedule  "A"
                    within sixty (60) days after the Executive's  termination of
                    employment.


                                       4
<PAGE>



                                    Article 3
                                 Death Benefits

          3.1 Death During Active  Service.  If the Executive  dies while in the
     active  service of the Company,  the Company  shall pay to the  Executive's
     beneficiary  the benefit  described in this Section 3.1. This benefit shall
     be paid in lieu of the Lifetime Benefits of Article 2.

               3.1.1 Amount of Benefit. The annual  benefit  under this  Section
                    3.1 is the Normal  Retirement  Benefit  described in Section
                    2.1.1.

               3.1.2 Payment  of  Benefit. The  Company  shall  pay  the  annual
                    benefit to the beneficiary in 12 equal monthly  installments
                    payable on the first day of each month  commencing  with the
                    month following the Executive's death and continuing for 239
                    additional months.

          3.2 Death  During  Benefit  Period.  If the  Executive  dies after the
     benefit  payments have commenced under this Agreement but before  receiving
     all such  payments,  the Company  shall pay the  remaining  benefits to the
     Executive's beneficiary at the same time and in the same amounts they would
     have been paid to the Executive had the Executive survived.

          3.3 Death  Following  Termination  of Employment  But Before  Benefits
     Commence.  If the Executive is entitled to benefits  under this  Agreement,
     but dies prior to receiving  said  benefits,  the Company  shall pay to the
     Executive's  beneficiary the same benefits,  in the same manner, they would
     have been paid to the Executive had the Executive survived;  however,  said
     benefit payments will commence upon the Executive's death.


                                    Article 4
                                  Beneficiaries

          4.1  Beneficiary   Designations.   The  Executive  shall  designate  a
     beneficiary by filing a written designation with the Company. The Executive
     may  revoke  or  modify  the  designation  at  any  time  by  filing  a new
     designation.  However, designations will only be effective if signed by the
     Executive and accepted by the Company during the Executive's lifetime.  The
     Executive's  beneficiary  designation shall be deemed automatically revoked
     if the beneficiary  predeceases the Executive,  or if the Executive names a
     spouse as beneficiary  and the marriage is subsequently  dissolved.  If the
     Executive dies without a valid beneficiary designation,  all payments shall
     be made to the Executive's estate.

          4.2  Facility  of  Payment.  If a benefit is payable to a minor,  to a
     person  declared  incapacitated,  or to a person  incapable of handling the
     disposition of his or her property, the Company may pay such benefit to the
     guardian, legal representative or person having the care or custody of such
     minor,  incapacitated  person or incapable person.  The Company may require
     proof of incapacity,  minority or guardianship  as it may deem  appropriate
     prior to distribution of the benefit.  Such  distribution  shall completely
     discharge the Company from all liability with respect to such benefit.


                                       5
<PAGE>

                                    Article 5
                               General Limitations

          Notwithstanding  any provision of this Agreement to the contrary,  the
     Company shall not pay any benefit under this Agreement:

          5.1  Termination  for Cause.  Notwithstanding  any  provision  of this
     Agreement to the contrary, the Company shall not pay any benefit under this
     Agreement, if the Company terminates the Executives employment for:

               5.1.1 Gross negligence or gross neglect of duties;

               5.1.2 Commission of a felony or of a gross misdemeanor  involving
                    moral turpitude; or

               5.1.3 Fraud, disloyalty,  dishonesty or willful  violation of any
                    law or significant  Company  policy  committed in connection
                    with the Executive's  employment and resulting in an adverse
                    effect on the Company.

               5.1.4 Removal. Notwithstanding any provision of this Agreement to
                    the  contrary,  the Company  shall not pay any benefit under
                    this  Agreement  if the  Executive  is  subject  to a  final
                    removal  or  prohibition  order  issued  by  an  appropriate
                    federal  banking  agency  pursuant  to  Section  8(e) of the
                    Federal Deposit Insurance Act.

          5.2 Competition After Termination of Employment.  No benefits shall be
     payable,  except  for  benefits  paid due to a Change  of  Control,  if the
     Executive,  without the prior  written  consent of the Company,  engages in
     conduct  which is  deemed  to  violate  the  non-competition  clause of the
     Executive's Employment Contract, which clause is hereby incorporated herein
     by reference,  both parties further hereby  acknowledging  having received,
     read and understood a copy of said Employment Contract.

          5.3 Suicide or Misstatement.  If the Executive  commits suicide within
     two years after the date of this  Agreement,  or if the  insurance  company
     denies coverage for material misstatements of fact made by the Executive on
     any application for life insurance  purchased by the company,  or any other
     reason, provided however that the Company shall evaluate the reason for the
     denial,  and upon  advice of Counsel and in its sole  discretion,  consider
     judicially challenging any denial.


                                       6
<PAGE>

                                    Article 6
                          Claims and Review Procedures

          6.1 Claims  Procedure.  The Company  shall notify any person or entity
     that makes a claim  against  the  Agreement  (the  "Claimant")  in writing,
     within ninety (90) days of Claimant's written application for benefits,  of
     his or her eligibility or noneligibility  for benefits under the Agreement.
     If the Company determines that the Claimant is not eligible for benefits or
     full benefits, the notice shall set forth (1) the specific reasons for such
     denial,  (2) a specific  reference to the  provisions  of the  Agreement on
     which the denial is based, (3) a description of any additional  information
     or material  necessary for the Claimant to perfect his or her claim,  and a
     description of why it is needed,  and (4) an explanation of the Agreement's
     claims review procedure and other  appropriate  information as to the steps
     to be taken if the  Claimant  wishes  to have the  claim  reviewed.  If the
     Company   determines  that  there  are  special   circumstances   requiring
     additional  time to make a decision,  the Company shall notify the Claimant
     of the special  circumstances  and the date by which a decision is expected
     to be made,  and may extend the time for up to an  additional  ninety-  day
     period.

          6.2 Review Procedure. If the Claimant is determined by the Company not
     to be eligible for benefits,  or if the Claimant believes that he or she is
     entitled to greater or  different  benefits,  the  Claimant  shall have the
     opportunity to have such claim reviewed by the Company by filing a petition
     for review with the  Company  within  sixty (60) days after  receipt of the
     notice  issued by the  Company.  Said  petition  shall  state the  specific
     reasons  which the Claimant  believes  entitle him or her to benefits or to
     greater or different benefits.  Within sixty (60) days after receipt by the
     Company  of the  petition,  the  Company  shall  afford the  Claimant  (and
     counsel,  if any) an  opportunity  to present  his or her  position  to the
     Company orally or in writing,  and the Claimant (or counsel) shall have the
     right to review the  pertinent  documents.  The  Company  shall  notify the
     Claimant of its decision in writing  within the sixty-day  period,  stating
     specifically the basis of its decision,  written in a manner  calculated to
     be understood by the Claimant and the specific  provisions of the Agreement
     on which the decision is based. If, because of the need for a hearing,  the
     sixty-day period is not sufficient,  the decision may be deferred for up to
     another sixty-day period at the election of the Company, but notice of this
     deferral shall be given to the Claimant.


                                    Article 7
                           Amendments and Termination

          This  Agreement  may  be  amended  or  terminated  only  by a  written
     agreement signed by the Company and the Executive.


                                       7
<PAGE>

                                    Article 8
                                  Miscellaneous

          8.1 Binding  Effect.  This Agreement  shall bind the Executive and the
     Company,  and  their  beneficiaries,   survivors,  executors,   successors,
     administrators and transferees.

          8.2 No Guarantee of  Employment.  This  Agreement is not an employment
     policy or contract.  It does not give the  Executive the right to remain an
     employee of the Company,  nor does it interfere with the Company's right to
     discharge the  Executive.  It also does not require the Executive to remain
     an  employee  nor  interfere  with  the  Executive's   right  to  terminate
     employment at any time.

          8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
     transferred, assigned, pledged, attached or encumbered in any manner.

          8.4 Tax  Withholding.  The Company  shall  withhold any taxes that are
     required to be withheld from the benefits provided under this Agreement.

          8.5 Applicable  Law. The Agreement and all rights  hereunder  shall be
     governed by the laws of the  Commonwealth  of  Pennsylvania,  except to the
     extent preempted by the laws of the United States of America.

          8.6 Unfunded  Arrangement.  The Executive and  beneficiary are general
     unsecured  creditors of the Company for the payment of benefits  under this
     Agreement.  The benefits  represent  the mere promise by the Company to pay
     such  benefits.  The rights to  benefits  are not  subject in any manner to
     anticipation,  alienation, sale, transfer, assignment, pledge, encumbrance,
     attachment,  or garnishment by creditors.  Any insurance on the Executive's
     life  is a  general  asset  of the  Company  to  which  the  Executive  and
     beneficiary have no preferred or secured claim.

          8.7  Recovery of Estate  Taxes.  If the  Executive's  gross estate for
     federal estate tax purposes  includes any amount determined by reference to
     and on account of this Agreement,  and if the beneficiary is other than the
     Executive's  estate,  then the  Executive's  estate  shall be  entitled  to
     recover from the beneficiary  receiving such benefit under the terms of the
     Agreement,  an amount by which the total estate tax due by the  Executive's
     estate,  exceeds the total  estate tax which would have been payable if the
     value  of such  benefit  had not been  included  in the  Executive's  gross
     estate. If there is more than one person receiving such benefit,  the right
     of recovery shall be against each such person. In the event the beneficiary
     has a liability  hereunder,  the beneficiary may petition the Company for a
     lump sum  payment in an amount not to exceed  the  beneficiary's  liability
     hereunder.

          8.8 Entire Agreement.  This Agreement constitutes the entire agreement
     between the Company and the Executive as to the subject matter  hereof.  No
     rights are granted to the Executive by virtue of this Agreement  other than
     those specifically set forth herein.



                                       8
<PAGE>

          8.9  Administration.  The Company shall have power which are necessary
     to administer this Agreement, including but not limited to:

               8.9.1 Interpreting   the  provisions  of  the   Agreement;

               8.9.2 Establishing and revising  the method o accounting  for the
                    Agreement;

               8.9.3 Maintaining a record of benefit payments; and

               8.9.4 Establishing  rules and  prescribing an forms  necessary or
                    desirable to administer the Agreement.


     IN WITNESS  WHEREOF,  the Executive and a duly  authorized  Company officer
have signed this Agreement.

EXECUTIVE:                                           COMPANY:
                                                     THE PEOPLES STATE BANK

/S/ Anthony N. Leo                                  By /S/ Eddie L. Dunklebarger
-------------------------------------                  -------------------------
Anthony N. Leo                                         Title President & CEO
                                                            --------------------


     By execution  hereof,  Community Banks,  Inc.  consents to and agrees to be
bound by the terms and condition of this Agreement.



ATTEST:                                              CORPORATION:
                                                     COMMUNITY BANKS, INC.

 /S/ Jeffrey M. Seibert                             By /S/ Eddie L. Dunklebarger
-------------------------------------                  -------------------------
                                                       Title President & CEO
                                                             -------------------



                                       9
<PAGE>




                AGREEMENT TO MODIFY SALARY CONTINUATION AGREEMENT

     THIS AGREEMENT TO MODIFY SALARY CONTINUATION AGREEMENT  ("Modification") is
entered into on this 11th day of January,  2002, by COMMUNITY  BANKS, a bank and
trust  company  organized  and existing  under the laws of the  Commonwealth  of
Pennsylvania,   formerly  known  as  The  Peoples  State  Bank  and  located  in
Millersburg,  Pennsylvania  ("Bank"),  and  ANTHONY  N. LEO  (the  "Executive").
BACKGROUND

     A.  Bank  and  Executive  entered  into  an  Amended  and  Restated  Salary
Continuation Agreement on or about January 1, 2000 (the "Agreement").

     B. Bank and  Executive  wish to clarify that the  definition  of "Change of
Control" in the Agreement applies to Community Banks, Inc. ("Corporation").

     NOW, THEREFORE, in consideration of the foregoing premises and intending to
be legally bound, the parties hereby agree as follows:

     1.  Modification of Change of Control  Definition.  The term "Company",  as
used in the definition of "Change of Control" in Section 1.1.1 of the Agreement,
is hereby  changed to  "Corporation"  and shall be deemed to refer to  Community
Banks, Inc.

     2. Effective Date. This Modification  shall be deemed to be effective as of
the date on which the parties first entered into the Agreement.

     3. No Other Changes.  Except as specifically modified herein, all terms and
conditions of the Agreement shall remain in full force and effect.

     IN WITNESS  WHEREOF,  the Executive and a duly authorized Bank officer have
signed this Modification.

EXECUTIVE:                                                COMMUNITY BANKS

/S/ Anthony N. Leo                                  By /S/ Eddie L. Dunklebarger
-------------------------------------                  -------------------------
Anthony N. Leo                                         Title President & CEO
                                                            --------------------



     By execution  hereof,  Community Banks,  Inc.  consents to and agrees to be
bound by the terms and condition of this Modification.

WITNESS/ATTEST:                                        COMMUNITY BANKS, INC.


/S/ Patricia E. Hoch                                By /S/ Eddie L. Dunklebarger
-------------------------------------                 --------------------------
                                                      Title Chairman & CEO
                                                           ---------------------



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