SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE Act OF 1934
For the fiscal year ended December 31, 1996 Commission file number 0-15786
COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2251762
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Market Street, Millersburg, PA 17061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 692-4781
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $5 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of March 1, 1997, the aggregate market value (based on recent selling
prices) of the voting stock of the registrant held by its nonaffiliates
(2,193,647 shares) was $74,583,998
Indicate the number of shares outstanding of each registrant's classes of
common stock, as of the latest practical date.
2,885,322 shares of common stock outstanding on March 1, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13 contains portions of the Annual Report to Stockholders incorporated
by reference into Parts I, II, and III.
Exhibit index is located on page 18. This document contains 20 pages.
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
PART I
Item 1. Business:
Community Banks, Inc. (Bank) is a bank holding company whose banking
subsidiary is Community Banks, N.A. (CBNA) and whose non-banking subsidiaries
are Community Banks Investments, Inc. (CBII) and Community Banks Life
Insurance Company, Inc. (CBLIC).
The Bank conducts a full service commercial banking business and provides
trust services in Northern Dauphin County, Northumberland County, western
Schuylkill County, and southern Luzerene County. The Bank currently has
twenty-one offices. There are 57 offices of commercial banks and savings and
loan associations within its market area with which the Bank competes.
Deposits of the Bank represent approximately 14% of the total deposits in the
market area. The Bank has seven offices in Dauphin County, two offices in
Northumberland County, nine offices in Schuylkill County, and three offices
in Luzerne County. On January 12, 1996, Community Banks, Inc. completed its
merger of the Citizens National Bank of Ashland (Citizens). Citizens had three
banking offices which are located in Ashland, Gordon, and Lavelle,
Pennsylvania. This transaction was accounted for as a pooling-of-interests.
Like other depository institutions, the Bank has been subjected to
competition from brokerage firms, money market funds, consumer finance and
credit card companies and other companies providing financial services and
credit to consumers. As a result of federal legislation, regulatory
restrictions previously imposed on the Bank with respect to establishing money
market fund accounts have been eliminated and the Bank is now better able to
compete with other financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on deposit
accounts and interest rates charged on loans.
During 1986 the Bank formed CBLIC to provide credit life insurance to its
consumer credit borrowers. Total premiums earned were $453,000 for the year
ended December 31, 1996. During 1985 the Bank formed CBII to make investments
primarily in equity securities of other banks. Total assets of CBII at
December 31, 1996 were $2,920,000.
The Bank has approximately 253 full and part-time employees and considers
its employee relations to be satisfactory.
Community Banks, Inc. is registered as a bank holding company with the
Board of Governors of the Federal Reserve System in accordance with the
requirements of the Bank Holding Company Act of 1956. It is subject to
regulation by the Federal Reserve Board and the Comptroller of the Currency.
In 1989, the Federal Reserve Board issued final risk-based capital
guidelines for bank holding companies which were phased in through December
31, 1992. The intent of regulatory capital guidelines is to measure capital
adequacy based upon the credit risk of various assets and off-balance sheet
items. Risk categories, weighted at 0%, 20%, 50% and 100%, are specifically
identified. The sum of the results of each such category is then related to
the adjusted capital account of the Company. A minimum required capital ratio
at December 31, 1996, was 8 percent. The Bank's December 31, 1996 ratio
approximated 17%. Subsequently, in August 1990 the board announced approval of
capital to total assets (leverage) guidelines. This minimum leverage ratio was
set at 4% and would apply only to those banking organizations receiving a
regulatory composite 1 rating. Most banking organizations will be required to
maintain a leverage ratio ranging from 1 to 2 percentage points above the
minimum standard. The Bank's leverage ratio at December 31, 1996, approximated
10%. Risk-based capital requirements replace previous capital guidelines
which established minimum primary and total capital requirements.
The following summarizes the Bank's capital adequacy position:
Required
Bank Regulatory Capital
(in thousands) December 31, 1996 December 31, 1996
Risk-based capital $48,426 17.5% $22,138 8.0%
Leverage ratio
(tier 1 capital) 46,331 10.7% 17,320 4.0%
-2-
Statistical Data:
Pages 19 through 21 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 1996 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields
for the three years ended December 31, 1996.
Rate/Volume Analysis for the two years ended December 31, 1996.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1996.
Amortized cost and Estimated Market Values of Investment Securities as
of December 31, 1996, 1995, and 1994.
Maturity Distribution of Securities as of December 31, 1996
(Market Value).
Loan Account Composition as of December 31, 1996, 1995, 1994, 1993, and
1992.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 1996.
Nonperforming Loans as of December 31, 1996, 1995, 1994, 1993, and
1992.
Loan Loss Experience for the five years ended December 31, 1996.
Loans Charged Off and Recovered for the five years ended
December 31, 1996.
Allowance for Loan Losses as of December 31, 1996, 1995, 1994, 1993,
and 1992.
Maturity Distribution of Time Deposits over $100,000 as of
December 31, 1996.
Interest Rate Sensitivity as of December 31, 1996.
-3-
Item 2. Properties:
The Bank owns no real property except through its subsidiary
bank, CBNA which owns the following buildings: 150 Market Street, Millersburg,
Pennsylvania (its corporate headquarters); 13-23 South Market Street,
Elizabethville, Pennsylvania; 3679 Peters Mountain Road, Halifax, Pennsylvania;
906 N. River Road, Halifax, Pennsylvania; 800 Peters Mountain Road, Dauphin,
Pennsylvania; Main and Market Streets, Lykens, Pennsylvania; Route 209, Porter
Township, Schuylkill County, Pennsylvania; 29 E. Main Street, Tremont,
Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair,
Schuylkill County, Pennsylvania; R.D. 3, Mill Creek Manor, Pottsville,
Schuylkill County, Pennsylvania; 300 East Independence Street, Shamokin,
Northumberland County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill
County, Pennsylvania; One South Arch Street, Milton, Northumberland County,
Pennsylvania; 4 West Broad Street, Hazleton, Luzerne County, Pennsylvania;
702 West Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center
Street, Ashland, Schuylkill County, Pennsylvania; P.O. Box 44, Gordon,
Schuylkill County, Pennsylvania; and 436 Main Street, Lavelle, Schuylkill
County, Pennsylvania. Real property located at 911 N. Centre Street,
Pottsville, Schuylkill County, Pennsylvania and Westside Drive, Shamokin Dam,
Snyder County, Pennsylvania is owned in contemplation of future expansion. In
addition thereto, CBNA leases an office at Main Street, Pillow, Pennsylvania,
pursuant to a lease which, with renewal options, will extend to the year 2008.
Also, the Bank leases offices at Route 93, Conyngham, Luzerne County,
Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania; and
6700 Derry Street, Rutherford, Dauphin County, Pennsylvania. From time to time,
the subsidiary bank also acquires real estate by virtue of foreclosure
proceedings, which real estate is disposed of in the usual and ordinary course
of business as expeditiously as is prudently possible.
All the buildings used by the Bank are free-standing and are used
exclusively for banking purposes with the exception of offices and retail
space rented at the St. Clair and Milton locations.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than routine
litigation incidental to the business of the Bank, to which the Bank is a party.
Item 4. Submission of Matters to a Vote of Security Holders:
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
APPENDIX A
-4-
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993, and 1992
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average equity 12.08% 11.27% 12.61% 12.54% 12.48%
Return on average assets 1.40% 1.28% 1.39% 1.40% 1.36%
Average equity to average assets 11.63% 11.36% 10.99% 11.18% 10.92%
Dividend payout ratio 40.13% 42.23% 36.74% 35.00% 33.85%
</TABLE>
-5-
APPENDIX A
Continued
<TABLE>
<CAPTION>
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
AT DECEMBER 31, 1996, 1995, and 1994
1996 1995 1994
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Mortgage backed U.S. Government agencies $ 69,837 $ 68,528 $ 45,888 $ 46,153 $ 43,926 $ 41,900
U.S. Treasury and U.S. Government agencies 40,267 40,432 27,719 28,031 39,929 38,318
Obligations of states and political sub-
divisions 30,496 30,958 34,067 34,941 42,428 41,926
Other securities 4,450 5,528 7,232 8,301 7,082 7,466
Total $145,050 $145,446 $114,906 $117,426 $133,365 $129,610
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANKS, INC. and SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Market Value)
(dollars in thousands)
as of December 31, 1996
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield <F1>
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agencies $27,367 $40,932 $23,446 $17,215 $108,960 6 yr. 11 mos. 6.69%
Obligations of states and political
subdivisions 3,379 13,226 13,564 789 30,958 4 yr. 10 mos. 6.59%
Other 4,405 1,034 89 --- 5,528 4 mos. 3.64%
Total $35,151 $55,192 $37,099 $18,004 $145,446 6 yr. 2 mos. 6.55%
======= ======= ======= ======= ========
Percentage of total 24.2% 37.9% 25.5% 12.4% 100.0%
===== ===== ===== ===== ======
Weighted average yield <F1> 5.73% 6.39% 7.11% 7.49% 6.55%
===== ===== ===== ===== =====
<FN>
<F1> Weighted average yields were computed on a tax equivalent basis using a
federal income tax rate of 34%.
</FN>
</TABLE>
The Bank monitors investment performance and valuation on an ongoing basis to
evaluate investment quality. An investment which has experienced a decline in
market value considered to be other than temporary is written down to its net
realizable value and the amount of the write down is accounted for as a
realized loss.
-6-
Appendix A
Continued
<TABLE>
<CAPTION>
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 44,129 16.8% $ 38,251 15.7% $ 32,243 14.8% $ 28,087 14.5% $ 21,829 11.7%
Real estate-construction 1,816 0.7 3,283 1.4 3,354 1.6 1,573 0.8 1,796 1.0
Real estate-mortgage 151,299 57.8 133,389 54.8 124,320 57.0 108,112 55.6 101,866 54.6
Personal-installment 59,142 22.6 62,373 25.6 51,953 23.8 49,777 25.6 53,061 28.5
Other 5,590 2.1 6,012 2.5 6,142 2.8 6,705 3.5 7,879 4.2
261,976 100.0% 243,308 100.0% 218,012 100.0% 194,254 100.0% 186,431 100.0%
Less: ===== ===== ===== ===== =====
Unearned discount (11,965) (11,671) (9,141) (8,122) (8,692)
Reserve for loan losses (2,798) (2,574) (2,346) (2,120) (1,891)
$247,213 $229,063 $206,525 $184,012 $175,848
======== ======== ======== ======== ========
</TABLE>
The Corporation's loan activity is principally with customers located
within the local market area. The Corporation continues to maintain a
diversified loan portfolio and has no significant loan concentration in any
economic sector. Increased loan demand in 1996 resulted in increases
in commercial, financial, and agricultural and real estate loan balances of
15%, and 12%, respectively. Commercial, financial and agricultural loans
represented 16.8% of total loans at December 31, 1996 and consist principally
of commercial lending secured by financial assets of businesses including
account receivables, inventories and equipment, and, in most cases, include
liens on real estate. Real estate construction and mortgage loans are
primarily 1 to 4 family residential loans secured by residential properties
within the bank's market area. Personal-installment loans comprised 22.6% of
total loans at December 31, 1996 and consist principally of secured loans for
items such as automobiles, property improvement, household and other consumer
goods. The Corporation continues to sell fixed rate mortgages in the secondary
market to avoid associated interest rate risk. Historically, relative credit
risk of commercial, financial, and agricultural loans has generally
been greater than that of other types of loans.
<TABLE>
<CAPTION>
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL AND REAL ESTATE - CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 1996
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
agricultural $24,697 $14,676 $4,756 $44,129
Real estate-construction 1,816 --- --- 1,816
$26,513 $14,676 $4,756 $45,945
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
Variable Fixed Total
<S> <C> <C> <C>
Due in one year or less $24,385 $2,128 $26,513
Due after one year 19,276 156 19,432
$43,661 $2,284 $45,945
======= ====== =======
</TABLE>
-7-
APPENDIX A
Continued
<TABLE>
<CAPTION>
NONPERFORMING LOANS <F1>
(dollars in thousands)
as of December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more:
Commercial, financial and agricultural $ 20 $ 120 $ 152 $ 9 $ 196
Mortgages 547 558 440 485 1,017
Personal installment 189 236 226 219 596
Other 11 --- 1 9 10
767 914 819 722 1,819
Loans renegotiated with the borrowers NONE NONE NONE NONE NONE
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural 723 415 327 50 64
Mortages 1,904 1,245 888 1,244 931
Other 283 99 30 59 77
2,910 1,759 1,245 1,353 1,072
Other real estate owned 351 302 338 381 167
Total $4,028 $2,975 $2,402 $2,456 $3,058
====== ====== ====== ====== ======
<FN>
<F1> The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing
the collectibility of such amounts.
The approximate amount that would have been accrued on those loans for
which interest was discontinued in 1996 was $217,000. Interest income from
these loans would have approximated $141,000 in 1995.
The change in nonperforming loans is primarily a result of the impact of
economic conditions upon the loan portfolio. The economic outlook remains
uncertain. If the economy in the Bank's trading area improves this could have
a positive impact on delinquency trends and collectibility of loans. However,
the commercial real estate market in the Bank's trading area remains stagnant.
The ability of borrowers to liquidate collateral is dependent upon the demand
for commercial real estate projects and a buyer's ability to finance
commercial real estate projects.
</FN>
</TABLE>
-8-
APPENDIX A
Continued
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 1996, 1995, 1994, 1993, and 1992
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans at year-end, net of unearned income $250,011 $231,637 $208,871 $186,132 $177,739
======== ======== ======== ======== ========
Average loans balance <F1> $243,840 $222,624 $196,751 $187,513 $181,226
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 2,574 $ 2,347 $ 2,120 $ 1,891 $ 1,735
Net charge-offs <F2> (818) (501) (286) (703) (702)
Provision for loan losses 1,042 728 513 932 858
Balance, allowance for loan losses,
December 31 <F2> $ 2,798 $ 2,574 $ 2,347 $ 2,120 $ 1,891
======== ======== ======== ======== ========
Net charge-offs to loans at year end .33% .22% .14% .38% .39%
Net charge-offs to average loans <F1> .34 .23 .15 .37 .39
Balance of allowance for loan losses
to loans at year end 1.12 1.11 1.12 1.14 1.06
<FN>
<F1> Averages are a combination of monthly and daily averages.
<F2> For detail, see Schedule of Loans Charged Off and Recovered.
</FN>
</TABLE>
The allowance for loans losses is based upon management's continuing
evaluation of the loan portfolio. A review as to loan quality, current
macro-economic conditions and delinquency status is performed at least on a
quarterly basis. The provision for loan losses is adjusted quarterly based
upon current review. The table on page 10 presents an allocation by loan
categories of the allowance for loan losses at December 31 for the last five
years. In retrospect, the specific allocation in any particular category may
prove excessive or inadequate and consequently may be reallocated in the
future to reflect the then current condition. Accordingly, the entire
allowance is available to absorb losses in any category.
As discussed in the Corporation's Annual Report, the Corporation adopted
SFAS 114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS 114
did not result in any additional provision for loan losses.
The provision for loan losses totalled $1,042,000 for the year ended
December 31, 1996 compared to $728,000, $513,000, $932,000, and $858,000 for
the years ended December 31, 1995, 1994, 1993, and 1992, respectively. The
relationship of the allowance for loan losses to loans at year end approximated
1.12% compared to ratios of 1.06% to 1.14% for the previous four years. In
reviewing the adequacy of the allowance for loan losses, management considered
the relationship of nonaccrual loans, other real estate owned, and accruing
loans contractually past due 90 days or more to total assets. This
relationship approximated .93%, .78%, .65%, .71%, and .91% at year-end 1996,
1995, 1994, 1993, and 1992, respectively.
-9-
APPENDIX A
Continued
<TABLE>
<CAPTION>
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
for the years ended December 31, 1996, 1995, 1994, 1993, and 1992
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans charged off:
Commercial, financial and agricultural $ 17 --- --- --- $ 63
Real estate-mortgage 133 $115 $151 $ 156 210
Personal installment 1,053 647 493 828 681
Other 93 78 119 66 59
Total 1,296 840 763 1,050 1,013
Loans recovered:
Commercial, financial and agricultural 6 --- --- --- 6
Real estate-mortgage 27 29 83 79 4
Personal installment 415 295 361 254 291
Other 30 15 33 14 10
Total 478 339 477 347 311
Net charge-offs $ 818 $501 $286 $ 703 $ 702
====== ==== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES<F1>
(dollars in thousands)
as of December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans:
Commercial, financial and agricultural $ 631 $ 355 $ 452 $ 577 $ 715
Real estate-construction 2 -- 1 --- 19
Real estate-mortgage 684 690 353 260 568
Installment 823 639 598 564 482
Unallocated 658 890 943 719 107
Balance $2,798 $2,574 $2,347 $2,120 $1,891
====== ====== ====== ====== ======
<FN>
<F1>See Schedule "Loan Account Composition" for the percent of loan
classification to total loans.
</FN>
</TABLE>
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 1996
Remaining to Maturity:
Less than three months $ 3,596
Three months to six months 2,135
Six months to twelve months 2,968
More than twelve months 4,228
$12,927
=======
-10-
APPENDIX A
Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing
liabilities which are expected to mature or reprice within a given period is
commonly referred to as the "GAP" for that period. For an institution with a
negative GAP, the amount of income earned on its assets fluctuates less than
the cost of its liabilities in response to changes in the prevailing rates of
interest during the period. Accordingly, in a period of decreasing interest
rates, institutions with a negative GAP will experience a smaller decrease in
the yield on their assets than in the cost of their liabilities. Conversely,
in a period of rising interest rates, institutions with a negative GAP face a
smaller increase in the yield on their assets than in the cost of their
liabilities. A decreasing interest rate environment is favorable to
institutions with a negative GAP because more of their liabilities than their
assets adjust during the period and, accordingly, the decrease in the cost of
their liabilities is greater than the decrease in the yield on their assets.
The negative GAP between the Bank's interest-earning assets and
interest-bearing liabilities maturing or repricing within one year
approximated 1.0% of total assets at December 31, 1996.
Significant maturity/repricing assumptions include the presentation
of all savings and NOW accounts as being 75% interest rate sensitive. Equity
securities are reflected in the shortest time interval. Assumed paydowns on
mortgage-backed securities and loans have also been included in all time
intervals.
The following table sets forth the scheduled repricing or maturity of
the Bank's interest-earning assets and interest-bearing liabilities at
December 31, 1996.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
At December 31, 1996 1-90 90-180 180-365 1 year Total
Dollars in thousands days days days or more
<S> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits in
other banks $ 1,297 $ 100 --- --- $ 1,397
Investment securities 15,213 7,206 $12,732 $110,295 145,446
Federal funds sold --- --- --- --- ---
Loans, net of unearned income<F1> 76,730 99,891 18,576 54,814 250,011
Loans held for sale 4,622 --- --- --- 4,622
Total $97,862 $107,197 $31,308 $165,109 $401,476
Liabilities
Savings $29,519 $29,518 $59,036 $32,296 $150,369
Time 34,784 33,359 28,476 55,996 152,615
Time in denominations of
$100,000 or more 3,596 2,135 2,968 4,228 12,927
Short-term borrowings 13,217 --- --- --- 13,217
Long-term debt --- --- 4,000 21,000 25,000
Total $81,116 $65,012 $94,480 $113,520 $354,128
Interest Sensitivity Gap
Periodic $16,746 $42,185 $(63,172) $51,589
Cumulative 58,931 (4,241) 47,348
<FN>
<F1>Does not include nonaccrual loans.
</FN>
</TABLE>
-11-
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters:
Incorporated by reference is the information appearing under the
heading "Market for the Holding Company's Common Stock and Related Securities
Holder Matters" on page 3 of the Annual Report to Stockholders for the year
ended December 31, 1996 (hereafter referred to as the "Annual Report").
Item 6. Selected Financial Data:
Incorporated by reference is the information appearing under the
heading "Financial Highlights" on page 19 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Incorporated by reference is the information appearing under the
headings "Rate/Volume Analysis"; "Average Balances, Effective Interest
Differential and Interest Yields"; and "Management's Discussion of Financial
Condition and Results of Operations" on pages 20 through 24 of the Annual
Report.
Item 8. Financial Statements and Supplementary Data:
The consolidated financial statements, together with the report
thereon of Coopers & Lybrand L.L.P. dated January 13, 1997, are incorporated
by reference to pages 6 through 19 of the Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
-12-
PART III
Item 10. Directors and Executive Officers of the Registrant:
The following table sets forth the name and age of each director of
Community Banks, Inc. as well as the director's business experience, including
occupation for the past 5 years, the period during which he has served as a
director of the Bank, or its wholly-owned subsidiary, Community Banks, N.A.
(Formerly Upper Dauphin National Bank), and the number and percentage of
outstanding shares of Common Stock of the Bank beneficially owned by said
directors as of December 31, 1996.
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership(2) Owned
Thomas L. Miller Chairman of Bank 1966 33,008 (12) 1.15%
Age 64
Kenneth L. Deibler Self-Employed 1966 21,785 (3) .76%
Age 74 Insurance Broker
Elizabethville, PA
Leon E. Kocher Chairman of the Board, 1963 17,275 .60%
Age 84 Kocher Enterprise, Inc.
Millersburg, PA
Ernest L. Lowe President of Bank 1990 19,553 (11) .68%
Age 60
Robert W. Rissinger Sec./Treasurer 1968 151,254 (4) 5.27%
Age 70 Alvord Polk Tool Co. (5)
(cutting tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 27,073 (9) .94%
Age 71 Millersburg and
Harrisburg, PA
William C. Troutman President, 1968 92,470 (6) 3.22%
Age 81 The W. C. Troutman Co.
(automobile dealership)
Millersburg, PA
James A. Ulsh Attorney-at-Law 1977 9,722 .34%
Age 50 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Superintendent, 1992 1,252 .04%
Age 63 Warrior Run
School District
Turbotville, PA
Susan K. Nenstiel Insurance Broker 1996 132 --
Age 45 Nenstiel and Nenstiel
Hazleton, PA
-13-
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership(2) Owned
Ronald E. Boyer President, 1981 12,999 (7) .45%
Age 59 Alvord-Polk Tool Co.
(manufacturing of
cutting tools)
Millersburg, PA
Peter DeSoto President, 1981 25,826 .90%
Age 57 Metal Industries, Inc.
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long President, 1981 13,799 (8) .48%
Age 67 Millersburg Hardware
Millersburg, PA
Donald L. Miller President, Miller Bros. 1981 55,876 1.95%
Age 67 Dairy
Millersburg, PA
Ray N. Leidich Dentist 1985 42,842 (10) 1.49%
Age 68 Tremont, PA
(1) Includes service as a director of CBNA (formerly Upper Dauphin
National Bank), a wholly-owned subsidiary of the bank, prior to 1983 and
service as a director of the bank after 1983.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the wife and/or children of
the individual and any other relative who has the same home as such individual,
as well as other securities as to which the individual has or shares voting
or investment power or has the right to acquire under outstanding stock
options within 60 days after December 31, 1996. Beneficial ownership may
be disclaimed as to certain of the securities.
(3) Includes 1,697 shares owned by Mr. Deibler's grandchildren.
(4) Includes 3,819 shares owned by Alvord-Polk Tool Co., Inc. the stock of
which is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
(5) Includes 8,509 shares owned by Engle Ford, Inc., 27,512 shares owned by
Mr. Rissinger's spouse, Shirley Rissinger, and 4,693 shares owned by Engle
Ford, Inc. Profit Sharing Plan in which Mr. Rissinger is Co-Trustee.
(6) Includes 20,573 shares owned by Mr. Troutman's spouse, Dorothy Troutman
and 5,824 shares owned by W.C. Troutman Co.
(7) Includes 3,819 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and 151
shares owned by Mr. Boyer's wife, Judith Boyer.
(8) Includes 8,157 shares owned by the Trust of Mr. Long's mother,
Leah Long.
(9) Includes 4,617 shares owned by Mr. Shaffer's Pension plan.
-14-
(10) Includes 21,421 shares owned by Dr. Leidich's wife, Dolores Leidich.
(11) Includes 112 shares owned by Mr. Lowe's wife, Barbara and 70 shares
owned by Mr. Lowe's children and incentive stock options to acquire 18,273
shares.
(12) Includes incentive stock options to acquire 24,225 shares.
(13) Includes incentive stock options to acquire 11,595 shares.
(14) Includes incentive stock options to acquire 7,220 shares and 115 shares
registered to Mr. Lawley for his minor children.
(15) Includes incentive stock options to acquire 4,384 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1996, to the knowledge of CBI, all Executive Officers and
directors timely filed all reports with the Securities Exchange Commission,
except for Thomas L. Miller, who filed one Form 4 report, regarding one
transaction, in an untimely manner.
None of the directors or nominee directors are directors of other
companies with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
Executive Officers:
The following table sets forth the executive officers of Community
Banks, Inc., their ages, their positions with Community Banks, Inc. and the
beneficial ownership (as determined in accordance with the rules and
regulations of the Securities and Exchange Commission) of Common Stock of the
Bank by each of such persons as of December 31, 1996.
Amount and Percentage
Principal Occupation Nature of of
for the Past Five Beneficial Outstanding
Name and Age Years Term (1) Ownership(2) Common Stock
Thomas L. Miller Chairman & Chief Executive 1966 33,008 (12) 1.15%
Age 64 Officer
Ernest L. Lowe President, 1985 19,553 (11) .68%
Age 60 Chief Operating Officer
Terry L. Burrows Executive Vice President, 1977 11,761 (15) .41%
Age 48 Chief Financial Officer
David E. Hawley Executive Vice President, 1975 11,733 (13) .41%
Age 58 Corporate Property Officer
Robert W. Lawley Executive Vice President, 1980 7,369 (14) .26%
Age 42 Chief Lending Officer
(1) Initial year employed in this capacity.
-15-
The following is all shares beneficially owned by all directors and
executive officers of the Bank as a group:
Amount and Nature
of Beneficial
Ownership
Percent
Title of Class Direct Indirect of Class
Common 378,943 172,967 19.24%
Item 11. Executive Compensation:
Information regarding executive compensation is omitted from this
report as the holding company has filed a definitive proxy statement for its
annual meeting of shareholders to be held May 6, 1997; and the information
included therein with respect to this item is incorporated herein by reference.
Pension Plan:
The Bank maintains a pension plan for its employees. An employee
becomes a participant in the pension plan on January 1 or July 1 after
completion of one year of service (12 continuous months) and attainment of
the age 21 years. The cost of the pension is actuarially determined and paid
by the Bank. The amount of monthly pension is equal to 1.15% of average
monthly pay up to $650, plus .60% of average monthly pay in excess of $650,
multiplied by the number of years of service completed by an employee. Average
-16-
monthly pay is based upon the 5 consecutive plan years of highest pay preceeding
retirement. The maximum amount of annual compensation used in determining
retirement benefits is $150,000. A participant is eligible for early
retirement after attainment of the age of 60 years and the completion of 5
years of service. The early retirement benefit is the actuarial equivalent of
the pension accrued to the date of early retirement. Thomas L. Miller and
Ernest L. Lowe have been credited with 38 and 12 years of service, respectively,
under the pension plan as of December 31, 1996.
The amounts shown on the following table assume an annual retirement
benefit for an employee who chose a straight-line annuity and who is presently
50 years old and who will retire at the age of 65 years.
<TABLE>
<CAPTION>
Remuneration
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years of
Service $35,000 $55,000 $75,000 $95,000 $115,000 $135,000 $150,000 $175,000 $200,000 $225,000
15 $ 8,486 $13,736 $18,986 $24,236 $29,486 $34,736 $38,673 $38,673 $38,673 $38,673
20 $11,314 $18,314 $25,314 $32,314 $39,314 $46,316 $51,564 $51,564 $51,564 $51,564
25 $14,143 $22,893 $31,643 $40,393 $49,143 $57,893 $64,455 $64,455 $64,455 $64,455
30 $16,971 $27,471 $37,971 $48,471 $58,971 $69,471 $77,346 $77,346 $77,346 $77,346
35 $19,800 $32,050 $44,300 $56,550 $68,800 $81,050 $90,237 $90,237 $90,237 $90,237
40 $22,138 $35,778 $49,418 $63,058 $76,698 $90,338 $100,568 $100,568 $100,568 $100,568
</TABLE>
Directors' Compensation:
Each director of CBI is paid a quarterly fee of $600.00. In addition,
each outside director receives a fee of $200.00 for attendance at the regular
quarterly meetings of the Board of Directors of CBI. Each director who is not
an executive officer also receives $200 for attendance at each committee
meeting of CBI.
Item 12. Security Ownership of Certain Beneficial
Owners and Management:
Refer to Item 10 on pages 13 through 16.
Item 13. Certain Relationships and Related Transactions:
(a) Transactions with Management and Others
Incorporated by reference is the information appearing in Note 12
(Related Parties) of Notes to Consolidated Financial Statements on page 15 of
the Annual Report.
(b) Certain Business Relationships
Allen Shaffer, a director of the Bank, is an attorney practicing in
Harrisburg and Millersburg, Pennsylvania, who has been retained in the last
two fiscal years by the Bank and who the Bank proposes to retain in the
current fiscal year. James A. Ulsh, a director of the Bank, is a shareholder/
employee of the law firm of Mette, Evans & Woodside, Harrisburg, Pennsylvania
which the Bank has retained in the last two fiscal years and proposes to
retain in the current fiscal year. Thomas J. Carlyon, a director of CBNA, is
a partner in the law firm of Carlyon & McNelis, Hazleton, Pennsylvania, which
CBI has retained in the last two fiscal years and proposes to retain in the
current fiscal year.
All loans to directors and their business affiliates, executive
officers and their immediate families were made by the subsidiary bank in the
ordinary course of business, at the subsidiary bank's normal credit terms,
including interest rates and collateralization prevailing at the time for
comparable transactions with other non-related persons, and do not represent
more than a normal risk of collection.
-17-
PART IV
Item 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K:
Reference (page)
Annual
Form Report to
10-K Shareholders
(a) (1) Consolidated Financial Statements
Report of Independent Public
Accountants -- 19
Balance Sheets as of December 31, 1996
and 1995 -- 6
Statements of Income for each of the three years
ended December 31, 1996 -- 7
Statements of Changes in Stockholders'
Equity for each of the three years ended
December 31, 1996 -- 8
Statements of Cash Flows for each of the three
years ended December 31, 1996 -- 8
Notes to Financial Statements -- 9-18
All other schedules are omitted since the required information is
not applicable or is not present in amounts sufficient to require submission
of the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated Registration
by reference to the Proxy Statements dated April 14, 1987 and April 12, 1988
and Amendment 2 to Form S-2 dated May 13, 1987.
(13) Portions of the Annual Report to Security Holders incorporated by
reference within this document is filed as part of this report.
(21) Subsidiaries of the Registrant (see Item 1, pages 2 and 3).
(b) The registrant did not file on Form 8-K during the Fourth quarter of the
Fiscal year ended December 31, 1996.
-18-
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Community Banks, Inc. on Form S-8 (File No. 0-15786 and File No. 33-24908) of
our report, dated January 13, 1997 on our audits of the consolidated financial
statements of Community Banks, Inc. as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995, and 1994, which report is incorporated
by reference in this Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 20, 1997
-19-
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By:/S/ Thomas L. Miller
(Thomas L. Miller)
Chairman
Chief Executive Officer
and Director
Date: March 6, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Terry L. Burrows Ex. Vice President and 3/6/97
(Terry L. Burrows) Principal Financial Officer
/S/ Ronald E. Boyer Director 3/6/97
(Ronald E. Boyer)
/S/ Kenneth L. Deibler Director 3/6/97
(Kenneth L. Deibler)
/S/ Peter Desoto Director 3/6/97
(Peter DeSoto)
/S/ Leon E. Kocher Director 3/6/97
(Leon E. Kocher)
/S/ Ray N. Leidich Director 3/6/97
(Ray N. Leidich)
/S/ Thomas W. Long Director 3/6/97
(Thomas W. Long)
/S/ Ernest L. Lowe Director 3/6/97
(Ernest L. Lowe)
/S/ Donald L. Miller Director 3/6/97
(Donald L. Miller)
/S/ Robert W. Rissinger Director 3/6/97
(Robert W. Rissinger)
/S/ Allen Shaffer Director 3/6/97
(Allen Shaffer)
/S/ William C. Troutman Director 3/6/97
(William C. Troutman)
/S/ James A. Ulsh Director 3/6/97
(James A. Ulsh)
-20-
Community Banks, Inc. and Subsidiaries
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SECURITIES HOLDER MATTERS
The shares of Community Banks, Inc. are traded on the American Stock
Exchange and are transferred through local and regional brokerage houses. The
Holding Company has approximately 1,453 shareholders as of February 14, 1997.
The following table sets forth the high and low prices within the knowledge of
management of Community Banks, Inc. at which the Capital Stock has been
transferred during the periods indicated. The table is based solely upon
transactions known to management of the Holding Company and represents a portion
of the actual transfers of Capital Stock during the periods in question.
Price Per Share Price Per Share
1996 Low High 1995 Low High
First Quarter $24.25 $27.50 First Quarter $23.75 $26.00
Second Quarter 22.63 26.13 Second Quarter 25.25 26.75
Third Quarter 22.63 24.13 Third Quarter 25.25 26.75
Fourth Quarter 23.75 26.13 Fourth Quarter 25.44 27.25
Holders of the Capital Stock of the Holding Company are entitled to such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefore. Community Banks, Inc. has paid cash
dividends per share of Common Stock during the last five years as follows:
1992 - $0.52, 1993 - $0.58, 1994 - $0.63, 1995 - $0.70 and 1996 - $0.78. The
market prices listed above are based on historical market quotations and have
not been restated for the issuance of stock dividends.
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1996 and 1995
(dollars in thousands except per share data)
1996 1995
ASSETS
<S> <C> <C>
Cash and due from banks.......................... $ 16,547 $ 14,870
Interest-bearing time deposits in other banks.... 1,397 434
Investment securities, available for sale (market
value)......................................... 145,446 117,426
Federal funds sold............................... --- 2,215
Loans............................................ 261,976 243,308
Less: Unearned income........................... (11,965) (11,671)
Allowance for loan losses................. (2,798) (2,574)
Net loans................................. 247,213 229,063
Premises and equipment, net...................... 7,848 7,657
Goodwill......................................... 1,147 1,388
Other real estate owned.......................... 351 302
Loans held for sale.............................. 4,622 2,206
Accrued interest receivable and other assets..... 7,947 6,261
Total assets................................... $432,518 $381,822
======== ========
LIABILITIES
Deposits:
Demand......................................... $ 27,345 $ 28,337
Savings........................................ 150,369 133,004
Time........................................... 152,615 150,908
Time in denominations of $100,000 or more...... 12,927 11,848
Total deposits................................. 343,256 324,097
Short-term borrowings............................ 13,217 1,016
Long-term debt................................... 25,000 7,000
Accrued interest payable and other liabilities... 3,306 3,709
Total liabilities.............................. 384,779 335,822
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding............... --- ---
Common stock, $5.00 par value; 5,000,000 shares
authorized; 2,888,088 and 2,611,409 shares
issued in 1996 and 1995, respectively.......... 14,440 13,057
Surplus.......................................... 13,716 8,381
Retained earnings................................ 19,743 22,951
Net unrealized gain on investment securities
available for sale, net of tax................. 261 1,664
Less: Treasury stock of 19,927 and 3,907
shares at cost................................. (421) (53)
Total stockholders' equity..................... 47,739 46,000
Total liabilities and stockholders' equity..... $432,518 $381,822
======== ========
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and The
Citizens' National Bank of Ashland.
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1996, 1995, and 1994
(dollars in thousands except per share data)
1996 1995 1994
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans....................... $22,544 $20,819 $17,300
Interest and dividends on investment securities:
Taxable....................................... 6,196 5,599 5,740
Exempt from federal income tax................ 1,588 2,054 2,425
Other interest income............................ 58 83 67
Fed funds interest............................... 207 157 98
Total interest income......................... 30,593 28,712 25,630
Interest expense:
Interest on deposits:
Savings....................................... 3,212 3,054 3,069
Time.......................................... 8,061 7,721 6,049
Time in denominations of $100,000 or more..... 660 588 434
Interest on short-term borrowings and
long-term debt.................................. 502 669 525
Fed funds purchased and repo interest............ 252 --- ---
Interest on subordinated capital notes........... --- --- 2
Total interest expense........................ 12,687 12,032 10,079
Net interest income........................... 17,906 16,680 15,551
Provision for loan losses.......................... 1,042 728 512
Net interest income after provision for
loan losses................................. 16,864 15,952 15,039
Other income:
Trust department income.......................... 251 217 180
Service charges on deposit accounts.............. 980 869 761
Other service charges, commissions and fees...... 242 262 298
Investment security gains........................ 284 140 396
Income on insurance premiums..................... 653 583 396
Gains on mortgage sales.......................... 211 346 210
Other income..................................... 133 293 183
Total other income............................ 2,754 2,710 2,424
Other expenses:
Salaries and employee benefits.................. 6,120 5,837 5,138
Net occupancy expense........................... 1,813 1,672 1,500
Operating expenses of insurance subsidiary...... 363 353 282
Other operating expense......................... 3,721 4,395 4,087
Total other expenses......................... 12,017 12,257 11,007
Income before income taxes................... 7,601 6,405 6,456
Provision for income taxes........................ 1,969 1,591 1,462
Net income................................... $ 5,632 $ 4,814 $ 4,994
======= ======= =======
Fully diluted earnings per share (based on average
shares outstanding)..........................<F1> $ 1.94 $ 1.66 $ 1.73
======= ======= =======
<FN>
All periods reflect the combined data of Community Banks, Inc. and The Citizens'
National Bank of Ashland.
<F1> Per share data for all periods has been restated to reflect stock
dividends.
</FN>
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995, and 1994
(dollars in thousands except per share data)
Total
Common Retained Valuation Treasury Stockholders'
Stock Surplus Earnings Allowance Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......................... $11,308 $ 8,243 $18,714 $ (53) $38,212
Valuation allowance on investment securities
available for sale, January 1, 1994.............. $ 2,246 2,246
Net income for 1994................................. 4,994 4,994
Cash dividends ($0.63 per share).................... (1,835) (1,835)
20% stock dividend (additional 337,248 shares)...... 1,686 (1,686)
Issuance of additional 8,436 shares................. 43 99 (13) 129
Change in valuation allowance on investment
securities, available for sale................... (4,263) (4,263)
Balance, December 31, 1994.......................... 13,037 8,342 20,174 (2,017) (53) 39,483
Net income for 1995................................. 4,814 4,814
Cash dividends ($0.70) per share.................... (2,033) (2,033)
Issuance of additional 4,154 shares................. 20 39 (4) 55
Change in valuation allowance on investment
securities, available for sale................... 3,681 3,681
Balance, December 31, 1995.......................... 13,057 8,381 22,951 1,664 (53) 46,000
Net income for 1996................................. 5,632 5,632
Cash dividends ($0.78 per share).................... (2,260) (2,260)
10% stock dividend (additional 260,925 shares)...... 1,304 5,219 (6,523)
Purchase of treasury stock (additional 16,020 shares) (368) (368)
Issuance of additional 15,754 shares................ 79 116 (57) 138
Change in valuation allowance on investment
securities, available for sale................... (1,403) (1,403)
Balance, December 31, 1996.......................... $14,440 $13,716 $19,743 $ 261 $(421) $47,739
======= ======= ======= ====== ====== =======
</TABLE>
Per share data for all periods has been restated to reflect stock dividends.
All periods reflect the combined data of Community Banks, Inc. and The
Citizens' National Bank of Ashland.
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net income.............................................. $ 5,632 $ 4,814 $ 4,994
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................ 1,042 728 512
Provision for depreciation and amortization.......... 937 831 772
Amortization of goodwill............................. 241 241 242
Investment security gains............................ (284) (140) (396)
Loans originated for sale............................ (11,329) (17,590) (6,704)
Proceeds from sales of loans......................... 9,124 15,765 10,975
Gains on mortgage sales.............................. (211) (346) (210)
Increase in other assets............................. (1,686) (186) (2,564)
Increase in accrued interest payable and other
liabilities......................................... 320 335 272
Net cash provided by operating activities......... 3,786 4,452 7,893
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks................................ (963) 211 (69)
Proceeds from sales of investment securities............ 1,643 347 892
Proceeds from maturities of investment securities....... 25,104 25,952 24,287
Purchases of investment securities...................... (56,609) (7,699) (27,127)
Net increase in total loans............................. (19,241) (23,230) (22,982)
Purchases of premises and equipment..................... (1,128) (1,491) (1,523)
Net cash used in investing activities............. (51,194) (5,910) (26,522)
Financing Activities:
Net increase in total deposits.......................... 19,159 16,124 12,706
Net increase (decrease) in short-term borrowings........ 12,201 (10,693) 10,504
Proceeds from issuance of long-term debt................ 18,000 5,000 --
Repayment of long-term debt............................. -- (5,000) (2,000)
Repayment of subordinated capital notes................. -- (15) (16)
Cash dividends.......................................... (2,260) (2,033) (1,835)
Purchases of treasury stock............................. (368) -- --
Proceeds from issuance of common stock.................. 138 55 129
Net cash provided by financing activities......... 46,870 3,438 19,488
Increase (decrease) in cash and cash equivalents.. (538) 1,980 859
Cash and cash equivalents at beginning of year............ 17,085 15,105 14,246
Cash and cash equivalents at end of year.................. $16,547 $17,085 $15,105
======= ======= =======
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and The
Citizens' National Bank of Ashland.
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
Community Banks, Inc. (Corporation) is a bank holding company whose
wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Community
Banks Investments, Inc. (CBII) and Community Banks Life Insurance Company
(CBLIC). All significant intercompany transactions have been eliminated.
The Corporation operates through its main office in Millersburg and through
20 branch banking offices located in Dauphin, Northumberland, Schuylkill
and Luzerne Counties in Pennsylvania. Community Bank's, Inc. primary source
of revenue is derived from loans to customers, who are predominantly
middle-income individuals.
2. Summary of Significant Accounting Policies:
The more significant accounting policies of the Corporation are:
Investment Securities:
At January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). This statement requires enterprises
to classify debt and equity securities as either "held-to-maturity,"
"available-for-sale," or "trading." Investments for which management has
the intent, and the corporation has the ability, to hold to maturity are
carried at the lower of cost or market adjusted for amortization of premium
and accretion of discount. Amortization and accretion are calculated
principally on the interest method. Securities bought and held primarily
for the purpose of selling them in the near term are classified as
"trading" and reported at fair value. Changes in unrealized gains and
losses on "trading" securities are recognized in the Consolidated
Statements of Income. At December 31, 1996, there were no securities
identified as "held-to-maturity" or "trading." All other securities are
classified as "available-for-sale" and reported at fair value. Changes in
unrealized gains and losses for "available-for-sale" securities, net of
applicable taxes, are recorded as a component of shareholder's equity.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management
strategy, and that may be sold in response to changes in interest rates,
resultant prepayment risk and other factors. Realized gains and losses on
the sale of securities are recognized using the specific identification
method and are included in Other Income in the Consolidated Statements of
Income.
Allowance for Loan Losses:
The Corporation maintains an allowance for loan losses at an amount which,
in management's judgement, should be adequate to absorb losses on existing
loans that may become uncollectible. Management's judgement in determining
the adequacy of the allowance is based on evaluations of the collectibility
of loans. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions
that may affect the borrowers' ability to pay, overall portfolio quality
and review of specific problem loans.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using accelerated and straight-line methods over
the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred, while major additions and improvements are
capitalized. Gain or loss on retirement or disposal of individual assets is
recorded as income or expense in the period of retirement or disposal.
Goodwill:
Goodwill which represents the excess of purchase price, including
acquisition costs over the fair market value of net assets acquired under
the purchase method of accounting is amortized on a straight line basis
over 15 years.
Pension Plan:
The Corporation has a noncontributory defined benefit pension plan covering
substantially all employees. Pension costs are funded currently subject to
the full funding limitation imposed under federal income tax regulations.
Income Taxes:
In accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes", deferred income taxes are accounted for by
the liability method, wherein deferred tax assets and liabilities are
calculated on the differences between the basis of assets and liabilities
for financial statement purposes versus tax purposes (temporary
differences) using enacted tax rates in effect for the year in which the
differences are expected to reverse. Tax expense in the statements of
income is equal to the sum of taxes currently payable, including the effect
of the alternative minimum tax, if any, plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to period-end
temporary differences at prevailing tax rates. (See Note 10).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of
interest has ceased and where all previously accrued and unpaid interest is
reversed. Loans, other than consumer loans, are placed on nonaccrual status
when principal or interest is past due 90 days or more and the collateral
may be inadequate to recover principal and interest, or immediately, if in
the opinion of management, full collection is doubtful. Generally, the
uncollateralized portions of consumer loans past due 90 days or more are
charged-off. Interest accrued but not collected as of the date of placement
on nonaccrual status is reversed and charged against current income.
Subsequent cash payments received either are applied to the outstanding
principal balance or recorded as interest income, depending upon
management's assessment of the ultimate collectibility of principal and
interest. (See also Note 5). Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the
yield on the related loan.
Other Real Estate owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior
to foreclosure, the recorded amount of the loan is written down, if
necessary, to the appraised value of the real estate to be acquired by
charging the allowance for loan losses. During 1996, 1995, and 1994
non-cash transactions related to real estate acquired through foreclosure
totalled $460,000, $677,000, and $322,000, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are
credited or charged to noninterest expense. Costs of maintaining and
operating foreclosed property are expensed as incurred. Expenditures to
improve foreclosed properties are capitalized only if expected to be
recovered; otherwise, they are expensed.
Statement of Cash Flows:
Cash and cash equivalents included cash and due from banks and federal
funds sold. The Corporation made cash payments of $2,019,000, $1,656,000,
and $1,435,000, and $12,345,000, $11,825,000, and $10,143,000 for income
taxes and interest, respectively, in 1996, 1995, and 1994. Certain prior
year amounts have been reclassified to conform with the current year's
presentation.
Earnings Per Common Share:
Net income per share is computed based upon the weighted average shares of
common stock outstanding which amounted to 2,908,000, 2,896,193, and
2,894,712 shares for the years ended December 31, 1996, 1995, and 1994,
respectively.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
3. Investment Securities:
The amortized cost and market value of investment securities at December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTON>
December 31
1996 1995
Amortized Market Amortized Market
Cost Value Cost Value
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies......................... $ 40,267 $ 40,432 $ 27,719 $ 28,031
Mortgage-backed U.S. government agencies........................ 69,837 68,528 45,888 46,153
Obligations of states and political subdivisions................ 30,496 30,958 34,067 34,941
Corporate securities............................................ 1,101 1,123 3,991 4,123
Equity securities............................................... 3,349 4,405 3,241 4,178
Total...................................................... $145,050 $145,446 $114,906 $117,426
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and market value of all investment securities at
December 31, 1996 and 1995 are as follows:
. 1996 1995
. Gross Gross Gross Gross
. Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
. Cost Gains Losses Value Cost Gains Losses Value
. (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government corporations and agencies........ $ 40,267 $ 242 $ (77) $ 40,432 $ 27,719 $ 364 $ (52) $ 28,031
Mortgage-backed U.S. government agencies......... 69,837 300 (1,609) 68,528 45,888 566 (301) 46,153
Obligations of states and political subdivisions. 30,496 553 (91) 30,958 34,067 927 (53) 34,941
Corporate securities............................. 1,101 22 -- 1,123 3,991 133 (1) 4,123
Equity securities................................ 3,349 1,056 -- 4,405 3,241 959 (22) 4,178
Total................................... $145,050 $2,173 $(1,777) $145,446 $114,906 $2,949 $(429) $117,426
======== ====== ======= ======== ======== ====== ===== ========
</TABLE>
The amortized cost and market value of all investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
. Amortized Market
. Cost Value
. (in thousands)
Due in one year or less........................... $ 15,570 $ 15,615
Due after one year through five years............. 30,112 30,410
Due after five years through ten years............ 25,419 25,699
Due after ten years............................... 763 789
. 71,864 72,513
Mortgage-backed securities........................ 69,837 68,528
Equity securities................................. 3,349 4,405
. $145,050 $145,446
. ======== ========
Proceeds from sales of investments in debt securities in 1996 were
$990,000. Gross gains of $7,000 and no losses were realized.
At December 31, 1996 and 1995, investment securities with carrying
amounts of approximately $40,204,000 and $21,619,000 respectively, are
pledged to collateralize public deposits and for other purposes as provided
by law.
Effective January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which requires the Corporation to
reflect securities available and held for sale at fair value on the balance
sheet. Upon adoption, the Corporation classified all investments held at
January 1, 1994, as available for sale and recorded the increase to fair
value as a separate component of equity. The increase recorded to
stockholders' equity at January 1, 1994 was $2,246,000, net of applicable
income taxes.
4. Loans:
The composition of loans outstanding by lending classification is as follows:
. December 31
. 1996 1995
. (in thousands)
Commercial, financial and agricultural................... $ 44,129 $ 38,251
Real-estate-construction................................. 1,816 3,283
Real-estate-mortgage..................................... 151,299 133,389
Personal installment..................................... 59,142 62,373
Other.................................................... 5,590 6,012
. $261,976 $243,308
. ======== ========
Loans held for resale amounted to $4,622,000 and $2,206,000 at December
31, 1996 and 1995, respectively.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows:
. December 31
. 1996 1995
. (in thousands)
Balance, January 1............................... $2,574 $2,347
Provision for loan losses........................ 1,042 728
Loan charge-offs................................. (1,296) (840)
Recoveries....................................... 478 339
Balance, December 31............................. $2,798 $2,574
. ====== ======
. NONPERFORMING LOANS (a)
. AND OTHER REAL ESTATE
. December 31
. 1996 1995
. (in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural......... $ 20 $ 120
Mortgages...................................... 547 558
Personal installment........................... 189 236
Other.......................................... 11 --
. 767 914
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural......... 723 415
Mortgages...................................... 1,904 1,245
Other.......................................... 283 99
. 2,910 1,759
Other real estate................................. 351 302
Total.......................................... $4,028 $2,975
. ====== ======
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing
the collectibility of such amounts.
Impaired Loans
The Corporation adopted FAS 114 "Accounting by Creditors for Impairment
of a Loan", as amended by FAS 118, on January 1, 1995. Under the new standard,
a loan is considered impaired, based on current information and events, if it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. For purposes of applying FAS 114, larger groups of
smaller-balance loans such as residential mortgage and installment loans are
collectively evaluated for impairment. Management has established a
smaller-dollar-value threshold of $250,000 for all loans. Loans exceeding this
threshold are evaluated in accordance with FAS 114. An insignificant delay or
shortfall in the amount of payments, when considered independent of other
factors, would not cause a loan to be rendered impaired. Insignificant delays
or shortfalls may include, depending on specific facts and circumstances,
those that are associated with temporary operational downturns or seasonal
business delays.
Management performs periodic reviews of its loans to identify impaired
loans. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. The adoption of FAS 114 did not
result in an additional provision for credit losses at January 1, 1995.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance and subsequent recoveries, if any, are credited
to the valuation allowance. The company does not accrue interest on impaired
loans. While a loan is considered impaired, cash payments received are applied
to principal or interest depending upon management's assessment of the
ultimate collectibility of principal and interest.
At December 31, 1996, the Corporation recorded no investment in impaired
loans recognized in accordance with FAS 114 with no related valuation
allowance. For the year ended December 31, 1996, the average balance of
impaired loans was negligible. The application of FAS 114 has not had any
effect on the comparability of the non-performing loan table in footnote 5
between the periods presented. The company recognized no interest on impaired
loans on the cash basis.
6. Premises and Equipment:
Premises and equipment are comprised of the following:
. December 31
. 1996 1995
. (in thousands)
Banking premises...................................... $8,576 $8,438
Furniture and fixtures................................ 7,221 7,340
Leasehold improvements................................ 345 343
. 16,142 16,121
Less accumulated depreciation and amortization........ (8,294) (8,464)
. $7,848 $7,657
. ====== ======
Depreciation expense charged to operations amounted to approximately
$937,000, $831,000, and $716,000, in 1996, 1995, and 1994, respectively.
7. Short-Term Borrowings and Long-Term Debt:
Short-term borrowings consist of the following:
. December 31
. 1996 1995
. (in thousands)
Federal funds purchased, 5.25% and 5.69% in 1996 and
1995, respectively............................... $12,700 $ 550
Treasury tax and loan note option account,
5.04% and 5.15% in 1996 and 1995, respectively... 517 466
. $13,217 $1,016
. ======= ======
Interest incurred on short-term borrowings amounted to $284,000,
$225,000, and $115,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
At December 31, 1996, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $15,000,000 and repurchase agreements totalling
$10,000,000. The long-term advance is for a period of five years and is due
to mature in December, 2001. Monthly payments of interest are required to be
paid to the Federal Home Loan Bank at a fixed rate, presently 6.06%, with
principal due at maturity. Quarterly payments of interest are required
to be paid on the repurchase agreements at a fixed rate, presently 5.57%, with
principal due at maturity. Interest on long-term debt amounted to $470,000,
$444,000, and $410,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Maturities on long term debt at December 31, 1996 are as follows:
1997............................ $ 4,000,000
1998............................ $ 3,000,000
1999............................ $ 4,000,000
2000............................ $ 4,000,000
2001............................ $10,000,000
8. Subordinated Capital Notes:
Subordinated capital notes at December 31, 1994 bore interest at 11% and
matured annually at $15,000 through February 4, 1995.
9. Pension Plan:
<TABLE>
<CAPTION>
The following table sets forth the pension plan's funded status at and
for the years ended December 31, 1996, 1995, and 1994.
. 1996 1995 1994
. (in thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $2,812, $2,371, and $1,903, respectively...................... $2,844 $2,389 $1,915
. ====== ====== ======
Projected benefit obligation for service rendered to date......................... $3,933 $3,420 $2,780
Plan assets at fair value, primarily listed stocks, corporate, and U.S. bonds..... 3,626 3,114 2,550
Plan assets in excess of projected benefit obligations............................ (307) (306) (230)
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions........................................ 1,027 949 791
Unrecognized net asset being recognized over 17 years............................. (46) (55) (63)
Prepaid pension costs............................................................. $ 674 $ 588 $ 498
Net pension cost for 1996, 1995, and 1994 included the following components: ====== ====== ======
Service cost...................................................................... $ 190 $ 153 $ 159
Interest cost..................................................................... 238 207 175
Actual return on plan assets...................................................... (290) (374) (29)
Net amortization and deferral..................................................... 24 154 (181)
Net pension cost.................................................................. $ 162 $ 140 $ 124
. ====== ====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.50% for 1996, and
7.25% for 1995 and 1994. The increase in future compensation levels used in
determining the actuarial present value of the benefit obligation was 5.00%
in 1996, 1995, and 1994. The expected long-term rate of return on assets
was 9.00% in 1996, 1995, and 1994.
10. Income Taxes:
The provision for income taxes consists of the following:
. 1996 1995 1994
. (in thousands)
Current................................... $1,942 $1,661 $1,531
Deferred.................................. 27 (70) (69)
. $1,969 $1,591 $1,462
. ====== ====== ======
As discussed in Note 2, the Corporation adopted the provisions of SFAS
No. 109 effective January 1, 1992.
<TABLE>
<CAPTION>
The components of the net deferred tax asset (liability) as of December
31, 1996, 1995, and 1994 were as follows:
. 1996 1995 1994
. (in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Loan loss provision................................... $ 648 $ 573 $ 561
Non-accrual loan interest income...................... 183 152 123
Loan origination fees................................. --- 22 57
Net unrealized loss on marketable securities.......... --- --- 1,039
Miscellaneous......................................... 88 85 ---
Alternative minimum tax credit........................ --- 54 46
Deferred compensation................................. 73 75 68
Total deferred tax assets................................ $ 992 $ 961 $1,894
Deferred tax liabilities:
Depreciation.......................................... $ 515 $ 531 $ 523
Accretion of discount................................. 156 131 109
Pension expense....................................... 216 182 145
Net unrealized gain on marketable equity securities... 134 857 ---
Miscellaneous......................................... --- (3) 28
Loan origination fees................................. 12 --- ---
Total deferred tax liability............................. $1,033 $1,698 $ 805
Net deferred asset (liability)........................... $ (41) $ (737) $1,089
. ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
The significant components of the deferred tax expense (benefit) in
1996, 1995, and 1994 were as follows:
. 1996 1995 1994
. (in thousands)
<S> <C> <C> <C>
Loan origination fees.............................. $ 34 $ 4 $ 33
Accretion of discount.............................. 26 19 23
Loan loss provision................................ (75) (48) (46)
Non-Accrual loan interest income................... (31) (17) (42)
Depreciation expense............................... (17) (3) (9)
Deferred compensation.............................. --- (13) (10)
Pension expense.................................... 34 37 29
Lease financing.................................... --- (1) (7)
Miscellaneous...................................... 2 (33) (33)
Alternative minimum tax credit..................... 54 (15) (7)
Total deferred taxes............................... $ 27 $(70) $(69)
. ==== ==== ====
</TABLE>
Income tax provisions related to securities gains were $97,000, $47,000,
and $134,000, for the years ended December 31, 1996, 1995, and 1994,
respectively.
The provision for income taxes differs from the amounts derived from
applying the statutory federal tax rate of 34%.
<TABLE>
<CAPTION>
. 1996 1995 1994
. (in thousands)
<S> <C> <C> <C>
Computed "expected" tax provision.......................... $2,585 $2,177 $2,195
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance........ (558) (696) (807)
Goodwill amortization...................................... 82 82 82
Nondeductible expense related to acquistion................ --- 99 ---
Other, net................................................. (110) (71) (8)
Deferred compensation...................................... (30) --- ---
Total provision for income taxes........................... $1,969 $1,591 $1,462
. ====== ====== ======
</TABLE>
11. Stock Options, Preferred Stock, and Common Stock:
The Corporation has a Long Term Incentive Plan whereby awards in the form of
Incentive Stock Options, Nonqualified Stock Options or Stock Appreciation
Rights may be granted to certain Executive Officers and other key employees
selected by a committee of the Board of Directors. The price at which common
stock can be purchased pursuant to the exercise of options cannot be less than
100% in the case of Incentive Stock Options and 80% in the case of
Nonqualified Stock Options, of the fair market value of the common stock on
the date of the grant of the option. Options are exercisable starting one
year from the date of grant to the extent of 20.0% to 33.3% a year on a
cumulative basis and expire no later than ten years after the date of grant.
Incentive stock options issued under the plan totalled 28,775, 55,992, and
30,096 in 1996, 1995, and 1994, respectively.
<TABLE>
<CAPTION>
A summary of the status of the Bank's Plan as of December 31, 1996,
1995, and 1994 and changes during the years ending on those dates is
presented below:
. Weighted
. Average Fair
. Shares Shares Weighted Options Value of Options
. Under Available Average Exercisable Granted During
. Option For Option Exercise Price at Year-end The Year
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993........................ 126,190 209,668 $13.06 48,675
Options granted................................... 30,096 (30,096) $27.06
Options exercised................................. (12,162) --- $12.74
Options cancelled or expired...................... (3,055) 3,055 $16.02
Balance, December 31, 1994........................ 141,069 182,627 $16.01 64,307
Options granted................................... 55,992 (55,992) $23.00 $7.46
Options exercised................................. (4,705) --- $12.32
Options cancelled or expired...................... (476) 476 $21.46
Balance, December 31, 1995........................ 191,880 127,111 $18.13 88,974
Options granted................................... 28,775 (28,775) $24.25 $7.58
Options exercised................................. (20,541) --- $11.91
Options cancelled or expired...................... (7,366) 7,366 $21.97
Balance December 31, 1996......................... 192,748 105,702 $19.56 102,236
. ======= ======= ====== =======
On January 1, 1996, the Bank adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Bank has chosen to apply APB Opinion No. 25,
"Accounting for Stock issued to Employees" (ABP 25) and related interpretations
in accounting for its Plans. Accordingly, no compensation cost has been
recognized for options granted under the Plan. Had Compensation cost for the
Bank's Plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS 123, the impact on
the Bank's net income and net income per share would not have been material.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; dividend yield of
1%, expected volatility of 20%, risk-free interest rates of 6.14% and 7.85%,
and expected life of 6 years.
12. Related Parties:
Certain directors and their business affiliates (defined as the
beneficial ownership of at least a 10 percent interest), executive officers
and their families are indebted to Community Banks, N.A. At December 31,
1996, 1995, and 1994, loans to these persons and their business affiliates
amounted to $2,989,000, $3,402,000, and $3,927,000, respectively.
In the opinion of management, such loans are consistent with sound
banking practices and are within applicable regulatory lending limitations.
</TABLE>
<TABLE>
<CAPTION>
. 1996 1995 1994
. (in thousands)
<S> <C> <C> <C>
Balance beginning of period....................... $3,402 $3,927 $4,335
Additions......................................... 365 467 624
Amounts collected................................. (778) (992) (1,032)
Amounts written off............................... --- --- ---
Balance end of period............................. $2,989 $3,402 $3,927
. ====== ====== ======
</TABLE>
13. Condensed Financial Information of Community Banks, Inc. (Parent only):
. 1996 1995
. (in thousands)
Condensed Balance Sheets:
Cash and investments.............................. $ 139 $ 402
Investment in Community Banks, N.A. .............. 44,519 42,904
Investment in nonbank subsidiaries................ 3,081 2,694
Total assets...................................... $47,739 $46,000
. ======= =======
Stockholders' equity.............................. 47,739 46,000
Total liabilities and stockholders' equity........ $47,739 $46,000
. ======= =======
<TABLE>
<CAPTION>
. 1996 1995 1994
Condensed Statements of Income: (in thousands)
<S> <C> <C> <C>
Dividends from:
Community Banks, N.A. ............................ $2,260 $2,033 $1,835
Nonbank subsidiaries.............................. --- --- ---
Income before equity in undistributed earnings of
subsidiaries........................................... 2,260 2,033 1,835
Equity in undistributed earnings of:
Community Banks, N.A. ................................. 2,985 2,532 2,697
Nonbank subsidiaries................................... 387 249 462
. 3,372 2,781 3,159
Net income................................................. $5,632 $4,814 $4,994
. ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows:
<S> <C> <C> <C>
Operating activities:
Net income............................................. $5,632 $4,814 $4,994
Adjustments to reconcile net cash provided by
operating activities:
Undistributed earnings of:
Community Banks, N.A. ............................. (2,985) (2,532) (2,697)
Nonbank subsidiaries............................... (387) (249) (462)
Other liabilities.................................... (33) --- ---
Net cash provided by operating activities.......... 2,227 2,033 1,835
Investing activities:
Additional investment in nonbank subsidiaries........ --- --- ---
Net cash used in investment activities............... --- --- ---
Financing Activities:
Proceeds from issuance of common stock................. 138 55 129
Purchase of Treasury Stock........................... (368) --- ---
Dividends paid....................................... (2,260) (2,033) (1,835)
Net cash used by financing activities.............. (2,490) (1,978) (1,706)
Net change in cash and cash equivalents........... (263) 55 129
Cash and cash equivalents at beginning of year... 402 347 218
Cash and cash equivalents at end of year......... $ 139 $ 402 $ 347
. ====== ====== ======
</TABLE>
14. Dividend Restrictions:
CBNA is subject to legal limitations as to the amount of dividends that
can be paid to its shareholder (the Corporation). The approval of certain
banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA could declare dividends in 1996 without regulatory approval of $6,290,000
plus an additional amount equal to the bank's retained net profits in 1996 up
to the date of any dividend declaration.
15. Financial Instruments with Off-Balance Sheet Risk:
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and standby
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statement of condition. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation has
in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for loan commitments and
standby letters of credit is represented by the contractual amount of these
instruments. The Corporation uses the same credit policies as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risk at December 31, 1996,
are as follows:
. Contract or Notional Amount
. (in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans.......................... $21,338
Unused lines of credit.................................. $11,626
Standby letters of credit............................... $ 1,817
Unadvanced portions of construction loans............... $ 1,986
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Lines of credit are similar
to commitments as they have fixed expiration dates and are driven by certain
criteria contained within the loan agreement. Lines of credit normally do not
extend beyond a period of one year. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
16. Quarterly Results of Operations (Unaudited):
The following is a summary of the quarterly results of operations for
the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
. Three Months Ended
. 1996 1995
. Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
. (dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.............. $7,423 $7,447 $7,798 $7,925 $6,894 $7,171 $7,291 $7,356
Interest expense............. 3,082 3,101 3,222 3,282 2,768 3,021 3,128 3,115
Net interest income.......... 4,341 4,346 4,576 4,643 4,126 4,150 4,163 4,241
Provision for loan losses.... 202 183 245 412 122 168 170 268
Net interest income after
provision for loan losses:.. 4,139 4,163 4,331 4,231 4,004 3,982 3,993 3,973
Other income................. 497 589 597 576 473 540 593 618
Investment security
gains...................... 147 130 4 3 36 40 63 1
Gains on mortgage sales...... -- 70 47 94 18 48 60 220
Other expenses............... 3,040 3,052 2,972 2,953 2,862 2,964 3,003 3,428
Income before income taxes... 1,743 1,900 2,007 1,951 1,669 1,646 1,706 1,384
Income taxes................. 397 460 546 566 396 398 385 412
Net income................... $1,346 $1,440 $1,461 $1,385 $1,273 $1,248 $1,321 $ 972
. ====== ====== ====== ====== ====== ====== ====== ======
Fully diluted earnings
per share.................. $ .46 $ .50 $ .50 $ .48 $ .44 $ .43 $ .45 $ .34
Dividends per share.......... $.182 $.200 $.200 $.200 $.172 $.171 $.171 $.188
</TABLE>
Per share data has been restated to include a 10% stock dividend effective May
31, 1996.
17. Fair Values of Financial Instruments:
In December 1991, the Financial Accounting Standards Board released SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, which requires
disclosure of the fair value of all financial instruments. The FASB
previously released SFAS No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, which required similar disclosures relating to
off-balance-sheet financing.
The following methodologies and assumptions were used by the Corporation
to estimate its fair value disclosures:
Cash, interest-bearing time deposits, and federal funds sold:
The carrying values for cash, interest-bearing time deposits, and federal
funds sold equal those assets' fair values.
Investment securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant
change in credit risk, fair value equals carrying value. The fair values for
fixed-rate residential mortgage loans, consumer loans, commercial, and
commercial real estate loans are estimated by discounting the future cash
flows using comparable current rates at which similar loans would be made to
borrowers at similar credit risk. The carrying value of accrued interest
adjusted for credit risk equals its fair value. The fair value of loans held
for sale is based on quoted market prices for similar loans sold in
securitization transactions.
Deposit liabilities:
The fair values of demand and savings deposits equal their carrying
values. Statement 107 prohibits adjusting such fair value for any value from
retaining those deposit relationships in the future. That component, known as
a deposit intangible, is not considered in the value disclosed nor is it
recorded in the balance sheet. The carrying values for variable rate money
market accounts approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using rates
currently offered for similar deposits.
Short-term borrowings:
The fair values of short-term borrowings approximate their carrying values.
Long-term borrowings:
The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flow analyses, based on rates available to the
Corporation for similar types of borrowings.
Off-balance-sheet instruments:
Fair values for the Corporation's unused commitments to originate loans
and unused lines of credit are deemed to be the same as their carrying values.
<TABLE>
<CAPTION>
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1996 and 1995:
. December 31,
. 1996 1995
. Carrying Fair Carrying Fair
. Value Value Value Value
. (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash, interest-bearing time deposits,
and federal funds sold................... $ 17,944 $ 17,944 $ 17,519 $ 17,519
Investment securities...................... 145,446 145,446 117,426 117,426
Loans, net of unearned income.............. 250,011 245,329 231,637 226,851
Less: Allowance for loan losses............ (2,798) -- (2,574) --
Net Loans............................ 247,213 245,329 229,063 226,851
Loans held for sale........................ 4,622 4,622 2,206 2,206
Total................................ $415,225 $413,341 $366,214 $364,002
. ======== ======== ======== ========
Financial liabilities:
Deposits................................... $343,256 $344,195 $324,097 $325,210
Short-term borrowings...................... 13,217 13,217 1,016 1,016
Long-term debt............................. 25,000 24,561 7,000 7,061
Total $381,473 $381,973 $332,113 $333,287
. ======== ======== ======== ========
</TABLE>
18. Acquisition:
On January 12, 1996, Community Banks, Inc. completed its merger of The
Citizens' National Bank of Ashland (Citizens). Citizens has three banking
offices which are located in Ashland, Gordon, and Lavelle, Pennsylvania.
Community issued 578,081 shares of common stock for all of the outstanding
common stock of Citizens. The transaction was accounted for as a pooling of
interests.
<TABLE>
<CAPTION>
. 1995 1994
. (dollars in thousands except per share data)
. Community Citizens Community Citizens
<S> <C> <C> <C>
Total interest income.............................. $14,181 $ 2,499 $12,910 $2,641
Provision for loan losses.......................... 712 16 462 50
Other income....................................... 2,510 200 2,282 142
Other expenses..................................... 10,076 2,181 9,280 1,727
Income before income taxes......................... 5,903 502 5,450 1,006
Provision for income taxes......................... 1,478 113 1,288 174
Net income......................................... $ 4,425 $ 389 $ 4,162 $ 832
Fully diluted earnings per share................... $ 1.95 $ 17.68 $ 1.85 $37.82
. ======= ======= =======
</TABLE>
Per share data has been restated to reflect a 10 percent stock dividend
effective May 31, 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Community Banks, Inc. and subsidiaries (Corporation) as of
December 31, 1996 and 1995 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. These standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Community Banks, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements,
the Corporation has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994.
. /S/ COOPERS & LYBRAND, L.L.P
One South Market Square
Harrisburg, PA 17101
January 13, 1997
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion of financial condition and results of operations is based on the selected financial data
listed below and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
FINANCIAL HIGHLIGHTS 1996 1995 1994 1993 1992
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets........................ $432,518 $381,822 $368,697 $345,960 $334,616
Loans (net of unearned income and
allowance for loan losses)........ 247,213 229,063 206,525 184,012 175,848
Deposits............................ 343,256 324,097 307,973 295,267 288,960
Shareholders' equity................ 47,739 46,000 39,483 38,212 34,975
Earnings Data
Net interest income................. 17,906 16,680 15,551 14,390 13,800
Provision for loan losses........... 1,042 728 512 932 858
Other income........................ 2,754 2,710 2,424 2,821 2,288
Other expense....................... 12,017 12,257 11,007 10,137 9,505
Net income.......................... 5,632 4,814 4,994 4,763 4,366
Per Share Data
Net income.......................... 1.94 1.66 1.73 1.65 1.52
Cash dividends...................... .78 .70 .63 .58 .52
Book value.......................... 16.64 17.64 15.15 16.91 15.54
Average shares outstanding.......... 2,908,000 2,896,193 2,894,712 2,880,891 2,851,708
</TABLE>
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL
AND INTEREST YIELDS
Income and Rates on a Tax Equivalent Basis<F2> for the
Years Ended December 31, 1996, 1995, and 1994 (dollars in thousands)
. 1996 1995 1994
. Average Average Average
. Interest Rates Interest Rates Interest Rates
. Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
. Balance<F3>Expense<F1> Paid<F1>Balance<F3>Expense<F1> Paid<F1> Balance<F3>Expense<F1> Paid<F1>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks......... $14,676 $ 13,247 $ 11,693
Earnings Assets:
Interest-bearing deposits in
other banks................. 978 $ 58 5.93% 1,660 $ 83 5.00% 2,347 $ 67 2.85%
Investment securities:
Taxable..................... 95,584 6,196 6.48 84,956 5,599 6.59 92,686 5,740 6.19
Tax-exempt<F2>.............. 28,369 2,406 8.48 36,975 3,112 8.42 42,512 3,674 8.64
Total investment
securities.................. 123,953 121,931 135,198
Federal funds sold............ 3,808 207 5.44 3,118 157 5.04 2,552 98 3.84
Loans, net of unearned
income<F2>.................. 243,840 22,639 9.28 222,624 20,918 9.40 196,751 17,362 8.82
Total Earning Assets......... 372,579 $31,506 8.46 349,333 $29,869 8.55 336,848 $26,941 8.00
Allowance for loans
losses........................ (2,682) (2,515) (2,278)
Premises, equipment and
other assets................. 16,404 15,688 14,150
Total assets................. $400,977 $375,753 $360,413
. ======== ======== ========
Liabilities:
Demand deposits................. 27,082 27,494 25,752
Interest bearing liabilites:
Savings deposits.............. 148,621 3,212 2.16 136,031 3,054 2.25 141,030 3,069 2.18
Time deposits:
$100,000 or greater......... 12,100 11,249 9,271
Other....................... 149,982 143,103 131,260
Total time deposits........... 162,082 8,721 5.38 154,352 8,309 5.38 140,531 6,483 4.61
Total time and savings
deposits.................... 310,703 290,383 281,561
Short-term borrowings......... 5,410 252 4.66 3,891 225 5.78 2,626 115 4.38
Long-term debt................ 7,787 502 6.45 7,781 444 5.71 7,871 410 5.21
Subordinated capital notes.... -- -- -- 2 -- 11.00 17 2 11.00
Total interest-bearing
liabilities................. 323,900 $12,687 3.92 302,057 $12,032 3.98 292,075 $10,079 3.45
Accrued interst, taxes and
other liabilities.............. 3,358 3,504 2,988
Total liabilities............. 354,340 333,055 320,815
Stockholders' Equity.............. 46,637 42,698 39,598
Total liabilities and
stockholders' equity......... $400,977 $375,753 $360,413
. ======== ======== ========
Interest income to earning
assets........................ 8.46% 8.55% 8.00%
Interest expense to earning
assets........................ 3.41 3.44 2.99
Effective interest
differential.............. $18,819 5.05% $17,837 5.11% $16,862 5.01%
. ======= ==== ======= ==== ======= ====
<FN>
<F1> Amortization of net deferred fees included in interest income and rate
calculation.
<F2> Interest income on all tax-exempt securities and loans have been adjusted
to tax equivalent basis utilizing a Federal income tax rate of 34%.
<F3> Averages are a combination of monthly and daily averages.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations
Rate/Volume Analysis <F1>
. For the Years Ended December 31, 1996 and 1995
. (in thousands)
. 1996 vs 1995 1995 vs 1994
. Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans................................... $1,989 $ (268) $1,721 $2,371 $1,185 $3,556
Investment securities:
Taxable............................... 691 (94) 597 (497) 356 (141)
Tax-exempt............................ (728) 22 (706) (470) (92) (562)
Total.............................. (37) (72) (109) (967) 264 (703)
Federal funds sold...................... 37 13 50 24 35 59
Interest-bearing deposits in other
banks.................................. (38) 13 (25) (24) 40 16
Total................................ 1,951 (314) 1,637 1,404 1,524 2,928
Increase (decrease) in interest expense:
Savings deposits........................ 281 (123) 158 (112) 97 (15)
Time deposits........................... 416 (4) 412 677 1,149 1,826
Short-term borrowings................... 77 (50) 27 66 44 110
Long-term debt and capital notes........ -- 58 58 (16) 48 32
Total................................ 774 (119) 655 615 1,338 1,953
Increase (decrease) in effective
interest differential.................. $1,177 $ (195) $ 982 $ 789 $ 186 $ 975
. ====== ====== ====== ====== ====== ======
<FN>
<F1>Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1996 and 1995. The effect of a change
in average volume has been determined by applying the average yield or rate
in the earlier period to the change in average volume during the period. The
effect of a change in rate has been determined by applying the change in rate
during the period to the average volume of the prior period. Any resulting
unallocated amount was allocated ratably between the volume and rate
components. Nonaccrual loans have been included in the average volume of each
period. Tax-exempt income is shown on a tax equivalent basis assuming a
federal income tax rate of 34%.
</FN>
</TABLE>
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The earnings of Community Banks, Inc. are derived exclusively
from the operations of its wholly owned subsidiaries; Community
Banks, N.A.; Community Banks Investments, Inc.; and Community
Banks Life Insurance Co.
On January 12, 1996, Community Bank's Inc. completed its merger
of The Citizens' National Bank of Ashland (Citizens). Citizens
had three banking offices which are located in Ashland, Gordon,
and Lavelle, Pennsylvania. The Company issued 578,081 shares of
common stock in exchange for all the outstanding shares of common
stock of Citizens. At December 31, 1995 and for the year then
ended, Citizens had total interest earning assets, interest
bearing liabilities, equity capital and net income of $58.0
million, $51.3 million, $9.4 million and $4.8 million,
respectively.
Net income was $1.94 per share in 1996 compared to $1.66 per
share in 1995, and $1.73 in 1994. Net income per share in 1996
was 16.9% more than net income per share in 1995. Net income per
share in 1995 declined 4.0% when compared to the previous year.
Net Interest Income:
The primary determinant of Community Banks, Inc. net income is
net interest income. This is the income which remains after
deducting from the total income generated by earning assets the
interest expense applicable to funds required to support the
earning assets.
Total interest income increased $1,881,000 or 6.6% in 1996,
compared to an increase of $3,082,000 or 12.0% in 1995, and an
increase of $471,000 or 1.9% in 1994. Interest and fees on loans
increased $1,725,000 or 8.3% in 1996. Most of this increase was
volume related and caused by an increase in average balances of
$21,216,000 or 9.5%. The increase of $131,000 or 1.7% in
interest and dividends on investment securities was also volume
related. The average balances of tax-exempt securities decreased
$8,606,000 or 23.3% in 1996 which resulted in a decrease in
tax-exempt interest income. Interest and fees on loans increased
$3,519,000 or 20.3% in 1995. This was a volume and rate related
change driven by an increase in average balances of $25,873,000
or 13.2%. The decrease of $512,000 or 6.3% in interest and
dividends on investment securities was volume related. The
average balance of tax-exempt securities decreased $5,537,000 or
13.0% in 1995 which resulted in a decrease in tax-exempt interest
income. Factors contributing to the 1994 change included a
volume related increase in interest and fees on loans of $545,000
and a rate related decrease of $16,000 in interest and dividends
on investment securities.
Total interest expense increased $655,000 or 5.4% in 1996 and
$1,953,000 or 19.4% in 1995, after decreasing $690,000 or 6.4% in
1994. A volume related increase of $158,000 or 5.2% occurred in
savings interest expense. Materially affecting the 1996 increase
was an increase of $412,000 or 5.0% in time deposit interest
expense. All of the increase in time deposit interest expense
was caused by increased volume. An increase of $85,000 in
borrowed funds interest also affected total interest expense in
1996. Material factors affecting the 1995 increase were
increases of $1,826,000 or 28.2% in total time deposit interest
expense and an increase of $144,000 in interest expense of
short-term borrowings and long-term debt. Although the average
balances of savings accounts decreased $4,999,000 or 3.5%, this
decrease was essentially offset by an increase in the interest
rates paid on these deposits. Material factors affecting the
1994 decrease were decreases of $116,000 in savings interest
expense and $608,000 in time deposit interest expense.
Average interest-bearing deposits represented 92.0% of average
total deposits in 1996 compared to 91.4% in 1995 and 91.6% in
1994.
Net interest income increased $1,226,000 or 7.4% in 1996,
compared to $1,129,000 or 7.3% in 1995 and $1,161,000 or 10.8% in
1994. Average earning assets increased $23,246,000 or 6.7% in
1996 compared to $12,485,000 or 3.7% in 1995 and $13,386,000 or
4.1% in 1994. Average interest-bearing liabilities increased
$21,843,000 or 7.2% in 1996 compared to $21,196,000 or 7.5% in
1995 and $3,796,000 or 1.4% in 1994.
Net Interest Income Margin:
Net interest income margin for 1996 was 5.05% compared to 5.11%
in 1995 and 5.01% in 1994. Interest income to earning assets
decreased from 8.55% in 1995 to 8.46% in 1996. Interest expense
to earning assets also decreased from 3.44% to 3.41%. Most
interest rates applicable to earning assets and interest-bearing
liabilities increased in 1995. In general, declines occurred in
1994.
Provision for Loan Losses:
Net loan charge-offs for 1996 were $818,000 compared to $501,000
in 1995 and $286,000 in 1994. The provision for loan losses
charged to income was $1,042,000 in 1996 compared to $728,000 in
1995 and $512,000 in 1994. Total non-performing loans
approximated $3,677,000, $2,673,000, and $2,064,000, as of
December 31, 1996, 1995, and 1994, respectively. Non-performing
residential real estate and commercial loans totalled
approximately $2,451,000 and $743,000, respectively, at year-end
1996. Total delinquencies as a percentage of total loans
approximated 5.1%, 4.8%, and 4.5% at December 31, 1996, 1995, and
1994, respectively.
Other Income and Other Expenses:
Other income net of security gains decreased $100,000 or 3.9% in
1996 compared to an increase of $542,000 or 26.7% in 1995 and a
decrease of $638,000 or 23.9% in 1994. The increases in trust
department income and service charges on deposit accounts which
occurred in 1996 resulted from management's renewed emphasis on
these functions. Investment security gains in 1996 were
associated primarily with equity securities held by Community
Banks Investments, Inc. No investment security losses were
recognized in 1996. Increased income on insurance premiums are a
reflection of increased loan demand and increased activity at
Community Banks Life Insurance Co. Gains on mortgage sales
declined in 1996 as a result of decreased demand for fixed-rate
real estate loans. The market values of loans held for sale
approximated their carrying values at year ends 1996, 1995, and
1994. Affecting the apparent change in other income from 1995 to
1996 were tax refunds and non-recurring income recognized in
1995. The most notable change in other income in 1995 was the
decrease in investment security gains. No investment security
losses were recognized in 1995.
Other expenses decreased $240,000 or 2.0% in 1996 compared to
increases of $1,250,000 or 11.4% in 1995, and $870,000 or 8.6%
in 1994. The 1996 increases in salaries and benefits of $283,000
or 4.8% and net occupancy expense of $141,000 or 8.4% were
affected by the opening of new banking offices. The increase in
operating expenses of insurance subsidiary was impacted by
additional claims recognized at Community Banks Life Insurance
Co. The decline of $574,000 in other operating expense in 1996
was affected by reduced FDIC insurance premiums and legal and
professional fees. Increases of $699,000 or 13.6% in salaries
and employee benefits and $172,000 or 11.5% in net occupancy
expense affected the 1995 increase in total other expenses.
Three new banking offices were established in 1995. The increase
of $308,000 in other operating expense was affected by increases
in legal and professional fees. Increases of $471,000 or 10.1%
in salaries and benefits and $203,000 or 15.7% in occupancy
expense affected the 1994 increase.
Provision for Income Taxes:
The relationship of the provision for income taxes to income
approximated 24.8%, 25.9%, and 22.6% in 1996, 1995, and 1994,
respectively. Significantly impacting these changes were
reductions in tax-exempt investment security income recognized in
1996 and 1995. Although the provision for income taxes
essentially remained unchanged from 1993 to 1994, the
relationship to pre-tax income declined slightly due in part to
additional tax-free income.
These factors contributed to an increase in net income for 1996
of $818,000 or 17.0%, a decrease of $180,000 or 3.6% in 1995, and
an increase of $231,000 or 4.8% in 1994.
Balance Sheet Data:
Earning assets represented 92.8% of total assets at year-end 1996
compared to 92.7% at year-end 1995. Increases in short-term
borrowings and long-term debt of $30,201,000 in 1996 were
reflected in increases in earning assets, most notably investment
securities. Changes in the composition of earning assets reflect
management's attempt to respond to fluctuating loan demand and
corresponding policies relating to liquidity and asset/liability
management.
Effective January 1, 1994, the Corporation adopted the provisions
of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities", which requires the Corporation to reflect securities
available and held for sale at fair value on the balance sheet.
Upon adoption, the Corporation classified all investments held at
January 1, 1994, as available for sale and recorded the increase
to fair value as a separate component of equity. The increase
recorded to stockholders' equity at January 1, 1994 was
$2,246,000, net of applicable income taxes.
Under the Corporation's current policy, if management has the
intent and the Corporation has the ability at the time of
purchase to hold securities until maturity or on a long-term
basis, securities are classified as investments and carried at
amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity or on a
long-term basis are classified as available for sale and carried
at the lower of cost or market value. Securities held for
indefinite periods of time include securities that management
intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates,
resultant prepayment risk and other factors related to interest
rate and resultant prepayment risk changes.
At December 31, 1996 and 1995, management classified investment
securities with book and market values of $145,050,000 and
$145,446,000 and $114,906,000 and $117,426,000, respectively, as
available for sale. Gross unrealized gains and losses relating
to investment securities were $2,173,000 and $1,777,000 and
$2,949,000 and $429,000, respectively, at year-end 1996 and 1995.
The Corporation owned no securities below investment grade at
year-end 1996 and 1995. No securities were considered held for
sale or for trading purposes at December 31, 1996 and December
31, 1995.
At December 31, 1996 and 1995, the unrealized gains on
investments available for sale, net of tax were $261,000 and
$1,664,000, respectively, and were accordingly reflected in
shareholders equity. These fluctuations are deemed to be
temporary in nature and result from changes in interest
rates.
Net loans increased 7.9% from December 31, 1995 to December 31,
1996. Commercial and real estate loans increased 15.4% and
12.0%, and personal and other loans decreased 5.3%, during the
period. New banking offices opened in 1995 and 1996 and reduced
demand for personal and other loans affected these increases.
The following table sets forth information regarding nonaccrual
loans, other real estate owned, and loans which are 90 days or
more delinquent but accruing interest at the dates indicated.
. December 31
. 1996 1995 1994 1993 1992
. (dollars in thousands)
Nonaccrual loans.......... $2,910 $1,759 $1,245 $1,353 $1,072
Other real estate owned... 351 302 338 381 167
Accruing loans contractually
past due 90 days or more.. 767 914 819 722 1,819
Total................. $4,028 $2,975 $2,402 $2,456 $3,058
. ====== ====== ====== ====== ======
Ratio of nonaccrual loans,
other real estate owned,
and accruing loans contractu-
ally past due 90 days or
more to total assets...... .93% .78% .65% .71% .91%
As discussed in Note 5 to the Financial statements, the
Corporation adopted FAS 114 "Accounting by Creditors for
Impairment of a Loan", as amended by FAS 118, on January 1, 1995.
The adoption of FAS 114 did not result in an additional provision
for credit losses. Management performs periodic reviews of its
loans to identify risks in the loan portfolio. As a result of
these periodic reviews, problem loans and potential problem loans
are identified and the likelihood of collectibility is assessed.
Based upon the results of these reviews, which also consider
other pertinent data, management determines an appropriate
allowance for loan losses. Other relevant factors include past
loss experience, current economic conditions, and the growth and
composition of the loan portfolio. The allowances for loan
losses is maintained at a level believed by management to be
adequate to absorb potential losses in the respective portfolios.
The allowance for loan losses to loans net of unearned income
approximated 1.12%, 1.11%, 1.12%, 1.14%, and 1.06%, at year-end,
1996, 1995, 1994, 1993, and 1992, respectively.
At December 31, 1996, management is not aware of any loans or
lending relationships that are expected to deteriorate in the
next year. In addition, the Corporation is not aware of any
significant environmental liability related to real estate owned
or in-foreclosure procedures.
The increase of $191,000 or 2.5% in premises and equipment was
affected by the previously noted new banking locations. Goodwill
is being amortized over fifteen years. The balance of loans held
for sale at December 31, 1996 included student loans totalling
$4,153,000. Affecting the increase of $1,686,000 in accrued
interest receivable and other assets were increases in accrued
interest receivable and deferred taxes of $190,000 and $338,000,
respectively. In addition, the premium paid for deposits
acquired at the new Valley View, Pennsylvania banking office
approximated $703,000 at December 31, 1996.
Total deposits increased $19,159,000 or 5.9% in 1996 with most of
the increase occurring in savings deposits. As previously noted,
management chose to increase short-term and long-term borrowings
$30,201,000 in 1996. Affecting the decrease of $403,000 in
accrued interest payable and other liabilities was a decrease in
deferred taxes.
Liquidity:
The primary functions of asset/liability management are the
assurance of adequate liquidity and maintenance of an appropriate
balance between interest-sensitive earning assets and
interest-bearing liabilities. Liquidity management refers to the
ability to meet the cash flow requirements of depositors and
borrowers.
A continuous review of net liquid assets is conducted to assure
appropriate cash flow to meet needs and obligations in a timely
manner.
The Corporation's primary funding requirement is loan demand.
The loan demand is primarily funded through deposit growth.
Generally, any deposit growth not used in funding loan demand is
invested in short-term, interest-bearing deposits or longer term
investments. These short-term investments and shorter term
investment portfolio securities are a source of liquidity to fund
loan demand.
For the years ended December 31, 1996, 1995 and 1994, financing
activities provided cash of $46,870,000, $3,438,000, and
$19,488,000, respectively. Short-term borrowings and long-term
debt accounted for the largest portion of this funding source in
1996. Deposits accounted for the largest portion of this funding
source amounting to $16,124,000, and $12,706,000 for the years
ended December 31, 1995 and 1994, respectively.
Net cash used in investing activities totalled $51,194,000,
$5,910,000, and $26,522,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The primary uses of funds in
1996 were purchases of investment securities of $56,609,000 as
most of the proceeds from maturities of investment securities
were used to fund loan demand. The primary uses of funds in 1995
were purchases of investment securities of $7,699,000 and
increases in loans of $23,230,000. In 1994, investment
securities purchased and net increases in loans represented most
of the investing activities.
Forward Outlook:
Management is unaware of any regulatory recommendations which, if
implemented, would have a material effect on the liquidity,
capital resources, or operations of the Corporation. Adequate
loan demand is anticipated for the remainder of 1997 and
management will continue to carefully evaluate this demand based
on the creditworthiness of the borrower and the relative strength
of the economy in the Corporation's market.
Effects on Inflation:
All business enterprises are affected by the constantly changing
economic environment. Changes in the economy, however, affect
the banking industry differently than other industries. A bank's
assets and liabilities are primarily monetary in nature and
values are established without regard to future price changes.
Also, banks, unlike industrial corporations are not required to
provide for large capital expenditures in the form of premises,
equipment and inventory. Interest rate changes and the actions
of the Federal Reserve Board have a greater impact on a bank's
operations than do the effects of inflation. Although occasional
deviations may occur, it is management's policy to generally
attempt to maintain rate-sensitive assets at a level
approximating rate-sensitive liabilities. Based on a one-year
parameter, this relationship approximated 98% at December 31,
1996.
Accordingly, management anticipates that any additional decrease
in interest rates will positively impact earnings of the
Corporation. Conversely, management may not be able to increase
rates on certain earning assets as rapidly as those of
interest-bearing liabilities if a significant increase in
interest rates would occur. This may result in a decline in the
net interest margin of the Corporation.
Capital Strength:
The current economic and regulatory environment has placed an
increased emphasis on capital strength. Risk-based capital
guidelines recognize the relative degree of credit risk
associated with various assets by setting lower capital
requirements for some assets which clearly have less credit risk
than others. Capital guidelines require banks to hold 4% Tier 1
and 8% Total Risk-based capital. Following is a summary of
significant capital ratios at the dates indicated.
.
. Regulatory December 31,
. Minimum 1996 1995
. (dollars in thousands)
Core (Tier 1) Capital --- $46,331 $42,948
Leverage ratio (A) 4.0% 10.7% 11.2%
Risk-based Capital Ratios:
Tier 1 capital ratio (B) 4.0% 17.0% 17.5%
Total risk-based capital
ratio (C) 8.0% 18.0% 18.6%
(A) Core capital divided by total assets less
intangible assets.
(B) Core capital divided by year-end risk-adjusted
assets, as defined by risk-based capital
guidelines.
(C) Total capital divided by risk-adjusted assets,
as defined by risk-based guidelines.
As shown by the table, the Bank's capital ratios exceeded
regulatory minimums in 1996 and 1995. The core capital ratio
decreased from 17.5% to 17.0%, and the total capital ratio
decreased from 18.6% to 18.0%, well above the regulatory minimums
of 4.0% for core and 8.0% for total capital. These changes were
impacted by the Corporation's retention of earnings during the
year.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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0
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