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, 1997 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, 1998, the aggregate market value (based on recent selling
prices) of the voting stock of the registrant held by its nonaffiliates
(2,359,439 shares) was $96,736,999
Indicate the number of shares outstanding of each registrant's classes of
common stock, as of the latest practical date.
3,039,592 shares of common stock outstanding on March 1, 1998
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 21. This document contains 23 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 22
offices. There are 52 offices of commercial banks and savings and loan
associations within its market area with which the Bank competes. Deposits of
the Bank represent approximately 13% of the total deposits in the market area.
The Bank has 7 offices in Dauphin County, 2 offices in Northumberland County,
10 offices in Schuylkill County, and 3 offices in Luzerne County. On January
12, 1996, Community Banks, Inc. completed its merger of the Citizens National
Bank of Ashland (Citizens). Citizens had 3 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 $399,000 for the year
ended December 31, 1997. During 1985 the Bank formed CBII to make investments
primarily in equity securities of other banks. Total assets of CBII at
December 31, 1997 were $5,121,000.
The Bank has approximately 262 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, 1997, was 8 percent. The Bank's December
31, 1997 ratio approximated 18%. 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, 1997, approximated 11%. 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, 1997 December 31, 1997
Risk-based capital $52,041 17.9% $23,258 8.0%
Leverage ratio
(tier 1 capital) 49,120 10.8% 18,193 4.0%
-2-
Statistical Data:
Pages 19 through 21 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 1997 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields
for the three years ended December 31, 1997.
Rate/Volume Analysis for the two years ended December 31, 1997.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1997.
Amortized cost and Estimated Market Values of Investment Securities as
of December 31, 1997, 1996, and 1995.
Maturity Distribution of Securities as of December 31, 1997 (Market Value).
Loan Account Composition as of December 31, 1997, 1996, 1995, 1994, and
1993.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 1997.
Nonperforming Loans as of December 31, 1997, 1996, 1995, 1994, and
1993.
Loan Loss Experience for the five years ended December 31, 1997.
Loans Charged Off and Recovered for the five years ended December 31, 1997.
Allowance for Loan Losses as of December 31, 1997, 1996, 1995, 1994, and
1993.
Maturity Distribution of Time Deposits over $100,000 as of
December 31, 1997.
Interest Rate Sensitivity as of December 31, 1997.
-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; 22 S. Church 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; 436 Main Street, Lavelle, Schuylkill County,
Pennsylvania; and 9-11 N. Centre Street, Pottsville, Schuylkill County,
Pennsylvania. Real property located at One 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 1997.
-4-
APPENDIX A
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Return on average equity 11.89% 12.08% 11.27% 12.61% 12.54%
Return on average assets 1.34% 1.40% 1.28% 1.39% 1.40%
Average equity to average assets 11.29% 11.63% 11.36% 10.99% 11.18%
Dividend payout ratio 42.38% 40.13% 42.23% 36.74% 35.00%
</TABLE>
-5-
APPENDIX A
Continued
<TABLE>
<CAPTION>
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
AT DECEMBER 31, 1997, 1996, and 1995
1997 1996 1995
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 $ 82,723 $ 83,348 $ 69,837 $ 68,528 $ 45,888 $ 46,153
U.S. Treasury and U.S. Government agencies 39,814 40,074 40,267 40,432 27,719 28,031
Obligations of states and political sub-
divisions 29,337 30,019 30,496 30,958 34,067 34,941
Other securities 5,470 7,960 4,450 5,528 7,232 8,301
Total $157,344 $161,401 $145,050 $145,446 $114,906 $117,426
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANKS, INC. and SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Market Value)
(dollars in thousands)
as of December 31, 1997
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 $ 9,469 $15,215 $20,144 $78,594 $123,422 8 yr. 2 mos. 6.98%
Obligations of states and political
subdivisions 401 18,052 9,402 2,164 30,019 5 yr. 3 mos. 6.84%
Other 6,923 1,037 --- --- 7,960 6 mos. 3.36%
Total $16,793 $34,304 $29,546 $80,758 $161,401 7 yr. 3 mos. 6.78%
======= ======= ======= ======= ========
Percentage of total 10.4% 21.3% 18.3% 50.0% 100.0%
===== ===== ===== ===== ======
Weighted average yield <F1> 5.32% 6.04% 7.16% 7.26% 6.78%
===== ===== ===== ===== =====
<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
1997 1996 1995 1994 1993
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 $ 39,559 14.5% $ 44,129 16.8% $ 38,251 15.7% $ 32,243 14.8% $ 28,087 14.5%
Real estate-construction 1,276 0.5 1,816 0.7 3,283 1.4 3,354 1.6 1,573 0.8
Real estate-mortgage 170,582 62.5 151,299 57.8 133,389 54.8 124,320 57.0 108,112 55.6
Personal-installment 53,599 19.6 59,142 22.6 62,373 25.6 51,953 23.8 49,777 25.6
Other 7,933 2.9 5,590 2.1 6,012 2.5 6,142 2.8 6,705 3.5
272,949 100.0% 261,976 100.0% 243,308 100.0% 218,012 100.0% 194,254 100.0%
Less: ===== ===== ===== ===== =====
Unearned discount (11,799) (11,965) (11,671) (9,141) (8,122)
Reserve for loan losses (2,921) (2,798) (2,574) (2,346) (2,120)
$258,229 $247,213 $229,063 $206,525 $184,012
======== ======== ======== ======== ========
</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. Changes in loan demand in 1997 resulted in decreases
in commercial, financial, and agricultural loans and personal-installment loans
of 10.4% and 9.4%, respectively. Real estate loans increased 12.2%
during this same period. Commercial, financial, and agricultural loans
represented 14.5% of total loans at December 31, 1997 and consist principally
of commercial lending secured by financial assets of businesses including
account receivables, inventories and equipment, and, in most cases, include
liens or 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 19.6% of total
loans at December 31, 1997 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, 1997
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
agricultural $23,598 $12,320 $3,641 $39,559
Real estate-construction 1,276 --- --- 1,276
$24,874 $12,320 $3,641 $40,835
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
Variable Fixed Total
<S> <C> <C> <C>
Due in one year or less $23,010 $2,387 $25,397
Due after one year 15,361 77 15,438
$38,371 $2,464 $40,835
======= ====== =======
</TABLE>
-7-
APPENDIX A
Continued
<TABLE>
<CAPTION>
NONPERFORMING LOANS <F1>
(dollars in thousands)
as of December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more:
Commercial, financial and agricultural $ 53 $ 20 $ 120 $ 152 $ 9
Mortgages 405 547 558 440 485
Personal installment 72 189 236 226 219
Other 21 11 --- 1 9
551 767 914 819 722
Loans renegotiated with the borrowers NONE NONE NONE NONE NONE
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural 762 723 415 327 50
Mortgages 1,716 1,904 1,245 888 1,244
Other 300 283 99 30 59
2,778 2,910 1,759 1,245 1,353
Other real estate owned 481 351 302 338 381
Total
$3,810 $4,028 $2,975 $2,402 $2,456
====== ====== ====== ====== ======
<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 1997 was $265,000. Interest income from
these loans would have approximated $217,000 in 1996.
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, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans at year-end, net of unearned income $261,150 $250,011 $231,637 $208,871 $186,132
======== ======== ======== ======== ========
Average loans balance <F1> $253,600 $243,840 $222,624 $196,751 $187,513
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 2,798 $ 2,574 $ 2,347 $ 2,120 $ 1,891
Net charge-offs <F2> (594) (818) (501) (286) (703)
Provision for loan losses 717 1,042 728 513 932
Balance, allowance for loan losses,
December 31 $ 2,921 $ 2,798 $ 2,574 $ 2,347 $ 2,120
======== ======== ======== ======== ========
Net charge-offs to loans at year end .23% .33% .22% .14% .38%
Net charge-offs to average loans <F1> .23 .34 .23 .15 .37
Balance of allowance for loan losses
to loans at year end 1.12 1.12 1.11 1.12 1.14
<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 $717,000 for the year ended December
31, 1997 compared to $1,042,000, $728,000, $513,000, and $932,000 for the years
ended December 31, 1996, 1995, 1994, and 1993, respectively. The relationship
of the allowance for loan losses to loans at year end approximated 1.12%
compared to ratios of 1.11% 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 .82%, .93%, .78%, .65%, and .71% at year-end 1997, 1996, 1995,
1994, and 1993, respectively.
-9-
APPENDIX A
Continued
<TABLE>
<CAPTION>
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
for the years ended December 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans charged off:
Commercial, financial and agricultural $ 21 $ 17 --- --- ---
Real estate-mortgage 82 133 $115 $151 $156
Personal installment 731 1,053 647 493 828
Other 96 93 78 119 66
Total 930 1,296 840 763 1,050
Loans recovered:
Commercial, financial and agricultural 3 6 --- --- ---
Real estate-mortgage 11 27 29 83 79
Personal installment 298 415 295 361 254
Other 24 30 15 33 14
Total 336 478 339 477 347
Net charge-offs $ 594 $ 818 $501 $286 $ 703
====== ====== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES<F1>
(dollars in thousands)
as of December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans:
Commercial, financial and agricultural $ 686 $ 631 $ 355 $ 452 $ 577
Real estate-construction --- 2 -- 1 ---
Real estate-mortgage 761 684 690 353 260
Installment 892 823 639 598 564
Unallocated 582 658 890 943 719
Balance $2,921 $2,798 $2,574 $2,347 $2,120
====== ====== ====== ====== ======
<FN>
<F1>See Schedule "Loan Account Composition" for the percent of loan
classification to total loans.
</TABLE>
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 1997
Remaining to Maturity:
Less than three months $ 7,065
Three months to six months 2,322
Six months to twelve months 1,835
More than twelve months 4,471
$15,693
=======
-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 4% of
total assets at December 31, 1997.
Significant maturity/repricing assumptions (based on internal analysis)
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, 1997.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
At December 31, 1997 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 $ 1,934 $ 100 --- --- $ 2,034
Investment securities 18,813 8,632 $11,326 $122,630 161,401
Federal funds sold 2,100 --- --- --- 2,100
Loans, net of unearned income<F1> 79,111 89,583 20,012 72,444 261,150
Loans held for sale 2,641 --- --- --- 2,641
Total $104,599 $98,315 $31,338 $195,074 $429,326
Liabilities
Savings $ 46,541 $25,982 $51,964 $34,117 $158,604
Time 35,230 30,195 30,919 56,860 153,204
Time in denominations of
$100,000 or more 7,065 2,322 1,835 4,471 15,693
Short-term borrowings 752 --- --- --- 752
Long-term debt 18,000 --- --- 28,000 46,000
Total $107,588 $58,499 $84,718 $123,448 $374,253
Interest Sensitivity Gap
Periodic $(2,989) $39,816 $(53,380) $71,626
Cumulative 36,827 (16,553) 55,073
<FN>
<F1>Does not include nonaccrual loans.
</FN>
</TABLE>
-11-
Forward-Looking Statements:
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S.
Private Securities Litigation Reform Act of 1995, such as
statements that include the words "expect", "estimate",
"project", "anticipate", "should", "intend", "probability",
"risk", "target", "objective", and similar expressions or
variations on such expressions. In particular, this document
includes forward-looking statements relating, but not limited to,
Community's potential exposures to various types of market risks
such as interest rate risk and credit risk. Such statements are
subject to certain risks and uncertainties. For example, certain
of the market risk disclosures are dependent on choices about key
model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk
disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual
income gains and losses could materially differ from those that
have been estimated. Other factors that could cause actual
results to differ materially from those estimated by the
forward-looking statements contained in this document include,
but are not limited to: general economic conditions in market
areas which Community has significant business activities or
investments; the monetary and interest rate policies of the Board
of Governors of the Federal Reserve System; inflation; deflation;
unanticipated turbulence in interest rates; changes in laws,
regulations and taxes; changes in competition and pricing
environments; natural disasters; the inability to hedge certain
risks economically; the adequacy of loan reserves; acquisitions
or restructurings' technological changes; in consumer spending
and saving habits; and the success of Community in managing the
risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk.
Community has only a limited involvement with derivative
financial instruments and does not use them for trading purposes.
The business of Community and the compositions of its balance
sheet consists of investments in interest-earning assets
(primarily loans, mortgage-backed securities, and investment
securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). Such financial instruments
have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans which are
originated and held for sale, all of the financial instruments of
Community are for other than trading purposes.
Interest rate sensitivity results when the maturity or
repricing intervals and interest rate indices of the
interest-earning assets, interest -bearing liabilities, and
off-balance sheet financial instruments are different, creating a
risk that changes in the level of market interest rates will
result in disproportionate changes in the value of, and the net
earnings generated from, Community's interest-earning assets,
interest-bearing liabilities, and off-balance sheet financial
instruments. Community's exposure to interest rate sensitivity is
managed primarily through Community's strategy of selecting the
types and terms of interest-earnings assets and interest-bearing
liabilities which generate favorable earnings, while limiting the
potential negative effects of changes in market interest rates.
Since Community's primary source of interest-bearing liabilities
is customer deposits, Community's ability to manage the types and
terms of such deposits may be somewhat limited by customer
-12-
preferences in the market areas in which Community operates.
Borrowings, which include Federal Home Loan Bank (FHLB) advances
and short-term loans, subordinated notes, and other short-term
and long-term borrowings are generally structured with specific
terms which in management's judgement, when aggregated with the
terms for outstanding deposits and matched with interest-earning
assets, mitigate Community's exposure to interest rate
sensitivity.
The rates, terms and interest rate indices of Community's
interest-earning assets result primarily from Community's
strategy of investing in loans and securities (a substantial
portion of which have adjustable-rate terms) which permit
Community to limit its exposure to interest rate sensitivity,
together with credit risk, while at the same time achieving a
positive interest rate spread from the difference between the
income earned on interest-earning assets and the cost of
interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate
Sensitivity
Managing Community's exposure to interest rate sensitivity
involves significant assumptions about the exercise of imbedded
options and the relationship of various interest rate indices of
certain financial instruments.
Imbedded Options.
A substantial portion of Community's loans and
mortgage-backed securities and residential mortgage loans
containing significant imbedded options which permit the borrower
to prepay the principal balance of the loan prior to maturity
("prepayments") without penalty. A loan's propensity for
prepayment is dependent upon a number of factors, including the
current interest rate and interest rate index, (if any) of the
loan, the financial ability of the borrower to refinance, the
economic benefit to be obtained from refinancing, availability of
refinancing at attractive terms, as well as economic and other
factors in specific geographic areas which affect the sales and
price levels of residential property. In a changing interest
rate environment, prepayments may increase or decrease on fixed
and adjustable-rate loans depending on the current relative
levels and expectations of future short and long-term interest
rates. Since a significant portion of Community's loans are
variable rate loans, prepayments on such loans generally increase
when long-term interest rates fall or are at historically low
levels relative to short-term interest rates making fixed-rate
loans more desirable.
Investment securities, other than those with early call
provisions, generally do not have significant imbedded options
and repay pursuant to specific terms until maturity. While
savings and checking deposits generally may be withdrawn upon the
customer's request without prior notice, a continuing
relationship with customers resulting in future deposits and
withdrawals is generally predictable resulting in a dependable
and uninterrupted source of funds. Time deposits generally have
early withdrawal penalties, while term FHLB borrowings and
subordinated notes have prepayment penalties, which discourage
customer withdrawal of time deposits and prepayment of FHLB
borrowings and subordinated notes prior to maturity.
-13-
Interest Rate indices. Community's loans and mortgage-backed
securities are primarily indexed to the national interest indices. When
such loans and mortgage-backed securities are funded by interest-bearing
liabilities which are determined by other indices, primarily deposits and
FHLB borrowings, a changing interest rate environment may result in
different levels of changes in the different indices leading to
disproportionate changes in the value of, and net earnings generated from,
the Company's financial instruments. Each index is unique and is
influenced by different external factors, therefore, the historical
relationships in various indices may not be indicative of the actual
change which may result in a changing interest rate environment.
Interest Rate Sensitivity Measurement
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in
interest-rates, management also utilizes a quarterly report which measures
Community's exposure to interest rate risk. The model calculates the
present value of assets, liabilities and equity at current interest rates,
and at hypothetical higher and lower interest rates at one percent
intervals. The present value of each major category of financial
instrument is calculated by the model using estimated cash flows based on
prepayments, early withdrawals, weighted average contractual rates and
terms, and discount rates for similar financial instruments. The resulting
present value of longer term fixed-rate financial instruments are more
sensitive to change in a higher or lower interest rate scenario, while
adjustable-rate financial instruments largely reflect only a change in
present value representing the difference between the contractual and
discounted rates until the next interest rate repricing date.
The following table reflects the estimated present value of assets,
liabilities and equity financial instruments using the model for Community
as of December 31, 1997, consolidated with the estimated present values of
other financial instruments of Community, at current interest rates and
hypothetical higher and lower interest rates of one and two percent.
<TABLE>
<CAPTION>
Base
-2% -1% Present Value +1% +2%
(dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C>
Cash, interest-bearing time deposits,
and federal funds sold............. $ 22,853 $ 22,853 $ 22,853 $ 22,853 $ 22,853
Investment securities................. 167,325 164,254 161,401 157,844 153,241
Loans, net of unearned income......... 260,775 258,260 255,660 252,227 248,537
Loans held for sale................... 2,694 2,668 2,641 2,606 2,567
Other assets.......................... 17,926 17,926 17,926 17,926 17,926
Total assets..................... $471,573 $465,961 $460,481 $453,456 $445,124
======== ======== ======== ======== ========
Liabilities
Deposits.............................. $361,904 $360,000 $358,148 $356,346 $354,591
Short-term borrowings................. 752 752 752 752 752
Long-term debt........................ 47,558 46,793 46,059 45,354 44,677
Other liabilities..................... 5,366 5,366 5,366 5,366 5,366
Total liabilities................ 415,580 412,911 410,325 407,818 405,386
Total stockholders' equity....... 55,993 53,050 50,156 45,638 39,738
Total liab. and stockholders'
equity........................ $471,573 $465,961 $460,481 $453,456 $445,124
======== ======== ======== ======== ========
</TABLE>
-14-
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, 1997 (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, 1998, are incorporated
by reference to pages 6 through 19 of the Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
-15-
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, 1997.
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 32,291 (11) 1.06%
Age 65
Kenneth L. Deibler Self-Employed 1966 23,009 (3) .76%
Age 75 Insurance Broker
Elizabethville, PA
Leon E. Kocher Chairman of the Board, 1963 18,138 .60%
Age 85 Kocher Enterprise, Inc.
Millersburg, PA
Ernest L. Lowe President of Bank 1990 22,847 (10) .75%
Age 61
Robert W. Rissinger Sec./Treasurer 1968 159,245 (4) 5.24%
Age 71 Alvord Polk Tool Co. (5)
(cutting tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 28,425 (8) .94%
Age 72 Millersburg and
Harrisburg, PA
William C. Troutman President, 1968 97,091 (6) 3.20%
Age 82 The W. C. Troutman Co.
(automobile dealership)
Millersburg, PA
James A. Ulsh Attorney-at-Law 1977 10,208 .34%
Age 51 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Superintendent, 1992 1,348 .04%
Age 64 Warrior Run
School District
Turbotville, PA
Susan K. Nenstiel Insurance Broker 1996 138 --
Age 46 Nenstiel and Nenstiel
Hazleton, PA
-16-
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and A Past Five Years Since (1) Ownership(2) Owned
Ronald E. Boyer President, 1981 13,994 (7) .46%
Age 60 Alvord-Polk Tool Co.
(manufacturing of
cutting tools)
Millersburg, PA
Peter DeSoto President, 1981 27,116 .89%
Age 58 Metal Industries, Inc.
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long President, 1981 7,982 .26%
Age 68 Millersburg Hardware
Millersburg, PA
Donald L. Miller President, Miller Bros. 1981 58,669 1.93%
Age 68 Dairy
Millersburg, PA
Ray N. Leidich Dentist 1985 44,984 (9) 1.48%
Age 69 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, 1997. Beneficial
ownership may be disclaimed as to certain of the securities.
(3) Includes 1,826 shares owned by Mr. Deibler's grandchildren.
(4) Includes 4,112 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 9,163 shares owned by Engle Ford, Inc., 28,887 shares owned by
Mr. Rissinger's spouse, Shirley Rissinger, and 5,027 shares owned by Engle
Ford, Inc. Profit Sharing Plan in which Mr. Rissinger is Co-Trustee.
(6) Includes 21,601 shares owned by Mr. Troutman's spouse, Dorothy Troutman
and 6,115 shares owned by W.C. Troutman Co.
(7) Includes 4,112 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 162
shares owned by Mr. Boyer's wife, Judith Boyer.
(8) Includes 4,847 shares owned by Mr. Shaffer's Pension plan.
(9) Includes 22,492 shares owned by Dr. Leidich's wife, Dolores Leidich.
-17-
(10) Includes 119 shares owned by Mr. Lowe's wife, Barbara and 14 shares
owned by Mr. Lowe's child and incentive stock options to acquire 21,132 shares.
(11) Includes incentive stock options to acquire 9,733 shares.
(12) Includes incentive stock options to acquire 13,639 shares.
(13) Includes incentive stock options to acquire 7,750 shares and 93 shares
registered to Mr. Lawley for his minor children.
(14) Includes incentive stock options to acquire 1,683 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1997, to the knowledge of CBI, all Executive Officers and
directors timely filed all reports with the Securities Exchange Commission.
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, 1997.
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 32,291 (11) 1.06%
Age 65 Officer
Ernest L. Lowe President, 1985 22,847 (10) .75%
Age 61 Chief Operating Officer
Terry L. Burrows Executive Vice President, 1977 13,201 (14) .43%
Age 49 Chief Financial Officer
David E. Hawley Executive Vice President, 1975 13,995 (12) .46%
Age 59 Corporate Property Officer
Robert W. Lawley Executive Vice President, 1980 7,879 (13) .26%
Age 43 Chief Lending Officer
(1) Initial year employed in this capacity.
-18-
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 418,053 158,395 18.99%
Item 11. Executive Compensation:
Information regarding executive compensation is omitted from this
report as the holding company will file a definitive proxy statement for its
annual meeting of shareholders to be held May 26, 1998; 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
-19-
monthly pay is based upon the 5 consecutive plan years of highest pay preceding
retirement. The maximum amount of annual compensation used in determining
retirement benefits is $160,000. 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 39 and 13 years of service,
respectively, under the pension plan as of December 31, 1997.
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>
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35 40
<S> <C> <C> <C> <C> <C> <C>
$35,000........ $ 8,486 $11,314 $14,143 $16,971 $19,800 $ 22,138
$55,000........ $13,736 $18,314 $22,893 $27,471 $32,050 $ 35,778
$75,000........ $18,986 $25,314 $31,643 $37,971 $44,300 $ 49,418
$95,000........ $24,236 $32,314 $40,393 $48,471 $56,550 $ 63,058
$115,000....... $29,486 $39,314 $49,143 $58,971 $68,800 $ 76,698
$135,000....... $34,736 $46,314 $57,893 $69,471 $81,050 $ 90,338
$150,000....... $38,673 $51,564 $64,455 $77,346 $90,237 $100,568
$175,000....... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$200,000....... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$225,000....... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$250,000....... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$275,000....... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
</TABLE>
Directors' Compensation:
Each director of CBI is paid a quarterly fee of $750.00. In
addition, each outside director receives a fee of $250.00 for attendance at
the regular quarterly meetings of the Board of Directors of CBI. Each director
who is not an executive officer also receives $250.00 for attendance at each
committee meeting of CBI.
Item 12. Security Ownership of Certain Beneficial
Owners and Management:
Refer to Item 10 on pages 16 through 19.
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.
-20-
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, 1997
and 1996 -- 6
Statements of Income for each of the three years
ended December 31, 1997 -- 7
Statements of Changes in Stockholders'
Equity for each of the three years ended
December 31, 1997 -- 8
Statements of Cash Flows for each of the three
years ended December 31, 1997 -- 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 filed Form 8-K, October 28, 1997, subsequent to entering
into an Agreement and Plan of Reorganization with The Peoples Bank of East
Berlin
-21-
CONSENT OF INDEPENDENT ACCOUNTS
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, 1998 on
our audits of the consolidated financial statements of Community
Banks, Inc. as of December 31, 1997 and 1996, and for the years
ended December 31, 1997, 1996, and 1995, 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, 1998
-22-
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/ Ernest L. Lowe _____
(Ernest L. Lowe)
Chairman
Chief Executive Officer
and Director
Date: March 6, 1998
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 3/6/98
(Terry L. Burrows) Principal Financial Officer
/S/ Ronald E. Boyer Director 3/6/98
(Ronald E. Boyer)
/S/ Samuel E. Cooepr Director 3/6/98
(Samuel E. Cooper)
/S/ Kenneth L. Deibler Director 3/6/98
(Kenneth L. Deibler)
/S/ Peter DeSoto Director 3/6/98
(Peter DeSoto)
/S/ Leon E. Kocher Director 3/6/98
(Leon E. Kocher)
/S/ Ray N. Leidich Director 3/6/98
(Ray N. Leidich)
/S/ Thomas W. Long Director 3/6/98
(Thomas W. Long)
/S/ Donald L. Miller Director 3/6/98
(Donald L. Miller)
/S/ Thomas L. Miller Director 3/6/98
(Thomas L. Miller)
/S/ Susan K. Nenstiel Director 3/6/98
(Susan K. Nenstiel)
/S/ Robert W. Rissinger Director 3/6/98
(Robert W. Rissinger)
/S/ Willaim C. Troutman Director 3/6/98
(William C. Troutman)
/S/ James A. Ulsh _ Director 3/6/98
(James A. Ulsh)
-23-
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 1,507 shareholders as of February 14, 1998. 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
1997 Low High 1996 Low High
First Quarter.... $25.75 $36.00 First Quarter.... $24.25 $27.50
Second Quarter... 29.75 36.00 Second Quarter... 22.63 26.13
Third Quarter.... 32.88 38.75 Third Quarter.... 22.63 24.13
Fourth Quarter... 38.00 45.25 Fourth Quarter... 23.75 26.13
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:
1993-$0.55, 1994-$0.60, 1995-$0.67, 1996-$0.74, and 1997-$0.83. 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, 1997 and 1996
(dollars in thousands except per share data)
1997 1996
ASSETS
<S> <C> <C>
Cash and due from banks.......................... $ 18,719 $ 16,547
Interest-bearing time deposits in other banks.... 2,034 1,397
Investment securities, available for sale (market
value)......................................... 161,401 145,446
Federal funds sold............................... 2,100 ---
Loans............................................ 272,949 261,976
Less: Unearned income........................... (11,799) (11,965)
Allowance for loan losses................. (2,921) (2,798)
Net loans................................. 258,229 247,213
Premises and equipment, net...................... 9,165 7,848
Goodwill......................................... 906 1,147
Other real estate owned.......................... 481 351
Loans held for sale.............................. 2,641 4,622
Accrued interest receivable and other assets..... 7,374 7,947
Total assets................................... $ 463,050 $432,518
========= ========
LIABILITIES
Deposits:
Demand......................................... $ 30,071 $ 27,345
Savings........................................ 158,604 150,369
Time........................................... 153,204 152,615
Time in denominations of $100,000 or more...... 15,693 12,927
Total deposits................................. 357,572 343,256
Short-term borrowings............................ 752 13,217
Long-term debt................................... 46,000 25,000
Accrued interest payable and other liabilities... 5,366 3,306
Total liabilities.............................. 409,690 384,779
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; 3,080,173 and 2,888,088 shares
issued in 1997 and 1996, respectively.......... 15,401 14,440
Surplus.......................................... 18,533 13,716
Retained earnings................................ 17,864 19,743
Net unrealized gain on investment securities
available for sale, net of tax................. 2,678 261
Less: Treasury stock of 43,868 and 19,927
shares at cost................................. (1,116) (421)
Total stockholders' equity..................... 53,360 47,739
Total liabilities and stockholders' equity..... $ 463,050 $432,518
========= ========
</TABLE>
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, 1997, 1996, and 1995
(dollars in thousands except per share data)
1997 1996 1995
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans....................... $23,505 $22,544 $20,819
Interest and dividends on investment securities:
Taxable....................................... 8,647 6,196 5,599
Exempt from federal income tax................ 1,585 1,588 2,054
Other interest income............................ 74 58 83
Fed funds interest............................... 124 207 157
Total interest income......................... 33,935 30,593 28,712
Interest expense:
Interest on deposits:
Savings....................................... 3,279 3,212 3,054
Time.......................................... 8,154 8,061 7,721
Time in denominations of $100,000 or more..... 747 660 588
Interest on short-term borrowings and
long-term debt.................................. 1,294 502 669
Fed funds purchased and repo interest............ 1,080 252 ---
Total interest expense........................ 14,554 12,687 12,032
Net interest income........................... 19,381 17,906 16,680
Provision for loan losses.......................... 717 1,042 728
Net interest income after provision for
loan losses................................. 18,664 16,864 15,952
Other income:
Trust department income.......................... 317 251 217
Service charges on deposit accounts.............. 1,031 980 869
Other service charges, commissions and fees...... 223 242 262
Investment security gains........................ 749 284 140
Income on insurance premiums..................... 576 653 583
Gains on mortgage sales.......................... 219 211 346
Other income..................................... 260 133 293
Total other income............................ 3,375 2,754 2,710
Other expenses:
Salaries and employee benefits.................. 6,679 6,120 5,837
Net occupancy expense........................... 1,910 1,813 1,672
Operating expenses of insurance subsidiary...... 365 363 353
Other operating expense......................... 4,489 3,721 4,395
Total other expenses......................... 13,443 12,017 12,257
Income before income taxes................... 8,596 7,601 6,405
Provision for income taxes........................ 2,626 1,969 1,591
Net income................................... $ 5,970 $ 5,632 $ 4,814
======= ======= =======
Basic earnings per share.......................<F1> $ 1.98 $ 1.87 $ 1.60
======= ======= =======
Diluted earnings per share.....................<F1> $ 1.94 $ 1.84 $ 1.58
======= ======= =======
<FN>
<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, 1997, 1996, and 1995
(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, 1994.......................... $13,037 $ 8,342 $20,174 $(2,017) $(53) $39,483
Net income for 1995................................. 4,814 4,814
Cash dividends ($0.67 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 ($0.74 per share).................... (2,260) (2,260)
10% stock dividend (additional 260,925 shares)...... 1,304 5,219 (6,523)
Purchases of treasury stock (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
Net income for 1997................................. 5,970 5,970
Cash dividends ($0.83 per share).................... (2,530) (2,530)
5% stock dividend (additional 143,628 shares)....... 723 3,905 (4,628)
Purchases of treasury stock (22,945 shares)......... (695) (695)
Issuance of additional 47,461 shares................ 238 912 (691) 459
Change in valuation allowance on investment
securities, available for sale................... _______ _______ _______ 2,417 _______ 2,417
Balance, December 31, 1997.......................... $15,401 $18,533 $17,864 $ 2,678 $(1,116) $53,360
======= ======= ======= ======= ======= =======
</TABLE>
Per share data for all periods has been restated to reflect stock dividends.
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, 1997, 1996, and 1995
(in thousands)
1997 1996 1995
<S> <C> <C> <C>
Operating Activities:
Net income.............................................. $ 5,970 $ 5,632 $ 4,814
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................ 717 1,042 728
Provision for depreciation and amortization.......... 991 937 831
Amortization of goodwill............................. 241 241 241
Investment security gains............................ (749) (284) (140)
Loans originated for sale............................ (9,831) (11,329) (17,590)
Proceeds from sales of loans......................... 12,030 9,124 15,765
Gains on mortgage sales.............................. (219) (211) (346)
Increase in other assets............................. 573 (1,686) (186)
Increase in accrued interest payable and other
liabilities......................................... 815 320 335
Net cash provided by operating activities......... 10,538 3,786 4,452
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks................................ (637) (963) 211
Proceeds from sales of investment securities............ 12,182 1,643 347
Proceeds from maturities of investment securities....... 31,450 25,104 25,952
Purchases of investment securities...................... (55,175) (56,609) (7,699)
Net increase in total loans............................. (11,863) (19,241) (23,230)
Purchases of premises and equipment..................... (2,308) (1,128) (1,491)
Net cash used in investing activities............. (26,351) (51,194) (5,910)
Financing Activities:
Net increase in total deposits.......................... 14,316 19,159 16,124
Net increase (decrease) in short-term borrowings........ (12,465) 12,201 (10,693)
Proceeds from issuance of long-term debt................ 25,000 18,000 5,000
Repayment of long-term debt............................. (4,000) --- (5,000)
Repayment of subordinated capital notes................. --- --- (15)
Cash dividends.......................................... (2,530) (2,260) (2,033)
Purchases of treasury stock............................. (695) (368) ---
Proceeds from issuance of common stock.................. 459 138 55
Net cash provided by financing activities......... 20,085 46,870 3,438
Increase (decrease) in cash and cash equivalents.. 4,272 (538) 1,980
Cash and cash equivalents at beginning of year............ 16,547 17,085 15,105
Cash and cash equivalents at end of year.................. $20,819 $16,547 $17,085
======= ======= =======
</TABLE>
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
21 branch banking offices located in Dauphin, Northumberland, Schuylkill
and Luzerne Counties in Pennsylvania. Community Banks, Inc.'s primary
source of revenue is derived from loans to customers, who are predominantly
middle-income individuals.
2. Summary of Significant Accounting Policies:
The significant accounting policies of the Corporation are:
Investment Securities:
The corporation classifies 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, 1997, 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:
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 1997, 1996, and 1995
non-cash transactions related to real estate acquired through foreclosure
totalled $361,000, $460,000, and $677,000, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on
the periodic reevaluation 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 $1,965,000, $2,019,000,
and $1,656,000, and $14,453,000, $12,345,000, and $11,825,000 for income
taxes and interest, respectively, in 1997, 1996, and 1995. Certain prior
year amounts have been reclassified to conform with the current year's
presentation.
Earnings Per Common Share:
The corporation has adopted Statement of Accounting Standards (SFAS)
128-Earnings Per Share and SFAS 129-Disclosure of Information of Capital
Structure. SFAS 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This statement simplifies the standards
for computing earnings per share previously found in Accounting Principles
Board (APB) Opinion No. 15-Earnings Per Share. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.
In conjunction with its project to supersede the provisions of APB
Opinion No. 15-Earnings Per Share, the Financial Accounting Standards Board
(FASB) issued SFAS 129-Disclosure of Information of Capital Structure.
SFAS 129 establishes standards for disclosing information about an entity's
capital structure. This Statement continues the previous requirements to
disclose certain information about an entity's capital structure.
Recent Accounting Pronouncements:
Statement of Financial Accounting Standards (SFAS) 130 "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format
for that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that
financial statement. This Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparitive purposes is
required. As SFAS 130 does not discuss the recognition or measurement of
comprehensive income, the adoption of SFAS 130 will not have a material
effect on the Corporation's financial condition or results of operations.
SFAS 131 "Disclosure About Segments of an Enterprise and Related
Information" establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This
Statement is effective for financial statements for periods beginning after
December 15, 1997 with comparative information for earlier years to be
restated. Adoption of SFAS 131 will not have a material effect on the
Corporation's financial condition or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosure about Pensions and
Other Postretirement Benefits" in January 1998. SFAS 132 revises current
note disclosure requirements for employers' pensions and other retiree
benefits. It does not address recognition or measurement issues. SFAS 132
is effective for fiscal years beginning after December 15, 1997. Adoption
of SFAS 132 will not have a material effect on the Corporation's financial
condition or results of operations.
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:
<TABLE>
<CAPTION>
The amortized cost and market value of all investment securities at December 31, 1997 and 1996 are as follows:
1997 1996
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........ $ 39,814 $ 279 $ (19) $ 40,074 $ 40,267 $ 242 $ (77) $ 40,432
Mortgage-backed U.S. government agencies......... 82,723 827 (202) 83,348 69,837 300 (1,609) 68,528
Obligations of states and political subdivisions. 29,337 699 (17) 30,019 30,496 553 (91) 30,958
Corporate securities............................. 1,015 22 --- 1,037 1,101 22 --- 1,123
Equity securities.............................. 4,455 2,468 --- 6,923 3,349 1,056 --- 4,405
Total................................... $157,344 $4,295 $ (238) $161,401 $145,050 $2,173 $(1,777) $145,446
======== ====== ====== ======== ======== ====== ======= ========
</TABLE>
The amortized cost and market value of all investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Market
Cost Value
(in thousands)
Due in one year or less.......................... $ 3,899 $ 3,903
Due after one year through five years............ 25,029 25,450
Due after five years through ten years........... 27,136 27,479
Due after ten years.............................. 14,102 14,298
70,166 71,130
Mortgage-backed securities....................... 82,723 83,348
Equity securities................................ 4,455 6,923
$157,344 $161,401
======== ========
Proceeds from sales of investments in debt securities were $10,976,000 and
$990,000 in 1997 and 1996, respectively. No sales occurred in 1995. Gross
gains and losses of $23,000 were recognized in 1997. Gross gains of $7,000
and no losses occurred in 1996.
At December 31, 1997 and 1996, investment securities with carrying amounts
of approximately $66,966,000 and $40,204,000 respectively, were pledged to
collateralize public deposits and for other purposes as provided by law.
Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB,
however, they do not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member
institution.
4. Loans:
The composition of loans outstanding by lending classification is as
follows:
December 31
1997 1996
(in thousands)
Commercial, financial and agricultural.................$ 39,559 $ 44,129
Real-estate-construction............................... 1,276 1,816
Real-estate-mortgage................................... 170,582 151,299
Personal installment................................... 53,599 59,142
Other.................................................. 7,933 5,590
$272,949 $261,976
======== ========
Loans held for resale amounted to $2,641,000 and $4,622,000 at December
31, 1997 and 1996, respectively. These loans are primarily fixed-rate mortgages.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows:
December 31
1997 1996 1995
(in thousands)
Balance, January 1.................... $2,798 $2,574 $2,347
Provision for loan losses... ......... 717 1,042 728
Loan charge-offs...................... (930) (1,296) (840)
Recoveries............................ 336 478 339
Balance, December 31.................. $2,921 $2,798 $2,574
====== ====== ======
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
December 31
1997 1996
(in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural..... $ 53 $ 20
Mortgages.................................. 405 547
Personal installment....................... 72 189
Other...................................... 21 11
551 767
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural..... 762 723
Mortgages.................................. 1,716 1,904
Other...................................... 300 283
2,778 2,910
Other real estate............................. 481 351
Total...................................... $3,810 $4,028
====== ======
(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
Loans are 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. 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 accounting standards and the bank's lending
policy. 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.
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, 1997, the Corporation recorded no investment in impaired
loans with no related valuation allowance. For the years ended December 31,
1997, 1996, and 1995, the average balance of impaired loans was negligible.
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
1997 1996
(in thousands)
Banking premises.................................... $10,286 $8,576
Furniture and fixtures.............................. 7,767 7,221
Leasehold improvements.............................. 345 345
18,398 16,142
Less accumulated depreciation and amortization...... (9,233) (8,294)
$ 9,165 $7,848
======= ======
Depreciation expense charged to operations amounted to approximately
$991,000, $937,000, and $831,000 in 1997, 1996, and 1995, respectively.
7. Short-Term Borrowings and Long-Term Debt:
Short-term borrowings consist of the following:
December 31
1997 1996
(in thousands)
Federal funds purchased, 5.25% in 1996............ --- $12,700
Treasury tax and loan note option account,
5.25% and 5.04% in 1997 and 1996, respectively.... $ 752 517
$ 752 $13,217
======= =======
Interest incurred on fed funds purchased and othershort-term borrowings
amounted to $143,000, $252,000, and $225,000 for the years ended December
31, 1997, 1996, and 1995, respectively.
At December 31, 1997, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $26,000,000 and repurchase agreements totalling
$20,000,000. The long-term advance is for a period of five years and is due
to mature in December, 2002. Monthly payments of interest are required to be
paid to the Federal Home Loan Bank at variable and fixed rates presently
5.83%, with principal due at maturity. Quarterly payments of interest are
required to be paid on the repurchase agreements at a fixed rate, presently
5.76%, with principal due at maturity. Interest on long-term debt and
repurchase agreements amounted to $2,231,000, $502,000, and $444,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
Maturities on long term debt at December 31, 1997 are as follows:
1998............................ $ 3,000,000
1999............................ $ 4,000,000
2000............................ $ 4,000,000
2001............................ $10,000,000
2002............................ $25,000,000
8. Pension Plan:
<TABLE>
<CAPTION>
The following table sets forth the pension plan's funded status at and for the years ended December 31, 1997,
1996, and 1995.
1997 1996 1995
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $3,301, $2,812, and $2,371, respectively...................... $3,378 $2,844 $2,389
====== ====== ======
Projected benefit obligation for service rendered to date......................... $4,461 $3,933 $3,420
Plan assets at fair value, primarily listed stocks, corporate, and U.S. bonds..... 4,473 3,626 3,114
Plan assets in excess of projected benefit obligations............................ 12 (307) (306)
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions........................................ 775 1,027 949
Unrecognized net asset being recognized over 17 years............................. (62) (46) (55)
Prepaid pension costs............................................................. $ 725 $ 674 $ 588
Net pension cost for 1997, 1996, and 1995 included the following components: ====== ====== ======
Service cost...................................................................... $ 221 $ 190 $ 153
Interest cost..................................................................... 293 238 207
Actual return on plan assets...................................................... (609) (290) (374)
Net amortization and deferral..................................................... 298 24 154
Net pension cost.................................................................. $ 203 $ 162 $ 140
====== ====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.00% for 1997, 7.50%
for 1996 and 7.25% for 1995. The increase in future compensation levels used
in determining the actuarial present value of the benefit obligation was 4.5%
in 1997, and 5.0% for 1996 and 1995. The expected long-term rate of return on
assets was 9.0% in 1997, 1996, and 1995.
9. Earnings Per Share:
<TABLE>
<CAPTION>
The following table sets forth the calculation of Basic and Fully Diluted Earnings Per Share for the years ended below:
For the Year Ended 1997 For the Year Ended 1996 For the Year Ended 1995
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
(in thousands except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders........................ $5,970 3,019 $1.98 $5,632 3,011 $1.87 $4,814 3,011 $1.60
===== ===== =====
Effect of Dilutive Securities:
Incentive stock options
outstanding......................... 61 42 29
Diluted EPS:
Income available to common
stockholders + assumed conversion... $5,970 3,080 $1.94 $5,632 3,053 $1.84 $4,814 3,040 $1.58
====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
As discussed in Note 2 to the consolidated financial statements, the
Corporation has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of Information of
Capital Structure", effective January 1, 1997.
10. Income Taxes:
The provision for income taxes consists of the following:
1997 1996 1995
(in thousands)
Current................................. $2,725 $1,942 $1,661
Deferred................................ (99) 27 (70)
$2,626 $1,969 $1,591
====== ====== ======
The components of the net deferred tax asset (liability) as of December 31,
1997, 1996, and 1995 were as follows:
1997 1996 1995
(in thousands)
Deferred tax assets:
Loan loss provision.................. $ 645 $ 648 $573
Non-accrual loan interest income..... 264 183 152
Loan origination fees................ --- --- 22
Miscellaneous........................ 83 88 88
Alternative minimum tax credit....... --- --- 54
Deferred compensation................ 176 73 75
Total deferred tax assets........ 1,168 992 964
Deferred tax liabilities:
Depreciation......................... $ 487 $ 515 $ 531
Accretion of discount................ 239 156 131
Pension expense...................... 246 216 182
Net unrealized gain on marketable
equity securities............... 1,379 134 857
Loan origination fees................ 4 12 ---
Total deferred tax liability..... 2,355 1,033 1,701
Net deferred asset (liability).... $(1,187) $ (41) $ (737)
======= ====== ======
The significant components of the deferred tax expense (benefit) in 1997,
1996, and 1995 were as follows:
1997 1996 1995
(in thousands)
Loan origination fees.............. $ (8) $ 34 $ 4
Accretion of discount.............. 83 26 19
Loan loss provision................ 3 (75) (48)
Non-Accrual loan interest income... (81) (31) (17)
Depreciation expense............... (28) (17) (3)
Deferred compensation.............. (103) --- (13)
Pension expense.................... 30 34 37
Lease financing.................... --- --- (1)
Miscellaneous...................... 5 2 (33)
Alternative minimum tax credit..... --- 54 (15)
Total deferred taxes............... $ (99) $ 27 $(70)
====== ==== ====
Income tax provisions related to securities gains were $255,000, $97,000,
and $47,000, for the years ended December 31, 1997, 1996, and 1995,
respectively.
The provision for income taxes differs from the amounts derived from
applying the statutory federal tax rate of 34%.
1997 1996 1995
(in thousands)
Computed "expected" tax provision.................$2,923 $2,585 $2,177
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance.. (524) (558) (696)
Goodwill amortization............................. 82 82 82
Nondeductible expense related to acquisition...... 161 --- 99
Other, net........................................ 160 (110) (71)
Deferred compensation............................. (176) (30) ---
Total provision for income taxes..................$2,626 $1,969 $1,591
======= ====== ======
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 31,150, 28,775, and 55,992, in
1997, 1996, and 1995, respectively.
<TABLE>
<CAPTION>
A summary of the status of the Bank's Plan as of December 31, 1997, 1996,
and 1995 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, 1994............. 150,769 187,843 $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............. 201,580 132,327 $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.............. 202,448 110,918 $19.56 102,236
Options granted........................ 31,150 (31,150) $41.13 $13.91
Options exercised...................... (61,257) --- $15.89
Options cancelled or expired........... (875) 875 $25.77
Balance December 31, 1997.............. 171,466 80,643 $23.67 83,005
======= ======= ====== ======
</TABLE>
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" (APB 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 1997 and 1996, respectively; dividend yield of
1%, expected volatility of 20%, risk-free interest rates of 6.14% and 6.14%,
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, 1997, 1996,
and 1995, loans to these persons and their business affiliates amounted to
$2,478,000, $2,989,000 and $3,402,000, respectively.
In the opinion of management, such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.
1997 1996 1995
(in thousands)
Balance beginning of period................. $ 2,989 $3,402 $3,927
Additions................................... 1,877 365 467
Amounts collected........................... (2,388) (778) (992)
Amounts written off......................... --- --- ---
Balance end of period....................... $ 2,478 $2,989 $3,402
======= ====== ======
13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
1997 1996
(in thousands)
Condensed Balance Sheets:
Cash and investments.......................... $ 137 $ 139
Investment in Community Banks, N.A............ 48,085 43,330
Investment in nonbank subsidiaries............ 4,652 3,081
Other assets.................................. 1,292 1,562
Total assets.................................. $54,166 $48,112
======= =======
Other liabilities............................. 806 373
Stockholders' equity.......................... 53,360 47,739
Total liabilities and stockholders' equity.... $54,166 $48,112
======= =======
1997 1996 1995
Condensed Statements of Income: (in thousands)
Dividends from:
Community Banks, N.A. ................ $2,530 $2,260 $2,033
Other expense......................... (948) (379) (360)
Income before equity in undistributed earnings of
subsidiaries............................... 1,582 1,881 1,673
Equity in undistributed earnings of:
Community Banks, N.A. ..................... 3,720 3,364 2,892
Nonbank subsidiaries....................... 668 387 249
4,388 3,751 3,141
Net income..................................... $5,970 $5,632 $4,814
====== ====== ======
Condensed Statements of Cash Flows:
Operating activities:
Net income................................. $5,970 $5,632 $4,814
Adjustments to reconcile net cash provided by
operating activities:
Undistributed earnings of:
Community Banks, N.A. ................. (3,720) (3,364) (2,892)
Nonbank subsidiaries................... (668) (387) (249)
Other, net............................... 1,182 346 360
Net cash provided by operating activities 2,764 2,227 2,033
Investing activities:
Additional investment in nonbank
subsidiaries........ --- --- ---
Net cash used in investment activities... --- --- ---
Financing Activities:
Proceeds from issuance of common stock..... 459 138 55
Purchase of Treasury Stock.............. (695) (368) ---
Dividends paid.......................... (2,530) (2,260) (2,033)
Net cash used by financing activities.. (2,766) (2,490) (1,978)
Net change in cash and cash equivalents (2) (263) 55
Cash and cash equivalents at
beginning of year... 139 402 347
Cash and cash equivalents at
end of year......... $ 137 $ 139 $ 402
======= ====== ======
14. Regulatory Restrictions of Banking Subsidiaries:
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 1998 without regulatory approval of $6,618,000
plus an additional amount equal to the bank's retained net profits in 1998 up
to the date of any dividend declaration.
Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The
amounts of such reserves are based on percentages of certain deposit types and
totalled $175,000 at December 31, 1997 and 1996.
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.
Financial instruments with off-balance sheet risk at December 31, 1997,
are as follows:
Contract or Notional Amount
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans......................... $23,438
Unused lines of credit................................. $12,215
Standby letters of credit.............................. $ 2,512
Unadvanced portions of construction loans.............. ---
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):
<TABLE>
<CAPTION>
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996:
Three Months Ended
1997 1996
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............ $8,127 $8,275 $8,754 $8,779 $7,423 $7,447 $7,798 $7,925
Interest expense........... 3,435 3,494 3,784 3,841 3,082 3,101 3,222 3,282
Net interest income........ 4,692 4,781 4,970 4,938 4,341 4,346 4,576 4,643
Provision for loan losses.. 240 140 140 197 202 183 245 412
Net interest income after
provision for loan losses: 4,452 4,641 4,830 4,741 4,139 4,163 4,331 4,231
Other income............... 621 570 636 581 497 589 597 576
Investment security
gains.................... 296 123 --- 330 147 130 4 3
Gains on mortgage sales.... 40 62 31 85 --- 70 47 94
Other expenses............. 3,134 3,237 3,273 3,799 3,040 3,052 2,972 2,953
Income before income taxes. 2,275 2,159 2,224 1,938 1,743 1,900 2,007 1,951
Income taxes............... 651 621 630 724 397 460 546 566
Net income................. $1,624 $1,538 $1,594 $1,214 $1,346 $1,440 $1,461 $1,385
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share... $ .54 $ .51 $ .53 $ .40 $ .44 $ .48 $ .49 $ .46
Diluted earnings
per share................ $ .53 $ .50 $ .52 $ .39 $ .44 $ .47 $ .48 $ .45
Dividends per share........ $ .20 $ .21 $ .21 $ .21 $ .17 $ .19 $ .19 $ .19
Per share data has been restated to reflect stock dividends.
17. Fair Values of Financial Instruments:
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.
Adjusting such fair value for any value from retaining those deposit
relationships in the future is prohibited. 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>
<TABLE>
<CAPTION>
The following table summarizes the carrying values and fair values of financial instruments at December 31, 1997 and 1996:
December 31,
1997 1996
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................... $ 22,853 $ 22,853 $ 17,944 $ 17,944
Investment securities...................... 161,401 161,401 145,446 145,446
Loans, net of unearned income.............. 261,150 255,660 250,011 245,329
Less: Allowance for loan losses............ (2,921) --- (2,798) ---
Net Loans............................ 258,229 255,660 247,213 245,329
Loans held for sale........................ 2,641 2,641 4,622 4,622
Total................................ $445,124 $442,555 $415,225 $413,341
======== ======== ======== ========
Financial liabilities:
Deposits................................... $357,572 $358,148 $343,256 $344,195
Short-term borrowings...................... 752 752 13,217 13,217
Long-term debt............................. 46,000 46,059 25,000 24,561
Total $404,324 $404,959 $381,473 $381,973
======== ======== ======== ========
</TABLE>
18. Subsequent Event-Acquisition:
On October 28, 1997 Community Banks, Inc. (Community) signed a definitive
agreement to acquire The Peoples State Bank (Peoples), a Pennsylvania bank
located in York and Adams County, with $257 million in assets and $192 million
in deposits at December 31, 1997. Community will acquire Peoples and its
subsidiaries for approximately 1,329,000 shares of its common stock based on
an exchange ratio of .889 shares of Community common stock for each share of
Peoples common stock. The acquisition requires shareholder and regulatory
approval prior to consummation and is not expected to close until the second
quarter of 1998. The acquisition will be accounted for under the pooling-of-
interests method of accounting, accordingly upon consummation the financial
statements of Community will be restated to include the consolidated accounts
of Peoples.
<TABLE>
A summary of unaudited pro forma combined financial information for Community and Peoples follows:
Year Ended December 31 1997 1996
(dollars in thousands except per share data)
Community/ Community/
Community Peoples Community Peoples
As Reported Combined As Reported Combined
<S> <C> <C> <C> <C>
Net interest income................................ $19,381 $27,864 $17,906 $24,607
Provision for loan losses and lease losses......... 717 1,317 1,042 1,567
Other Income....................................... 3,375 4,229 2,754 3,171
Other Expenses..................................... 13,443 19,360 12,017 16,534
Income before taxes................................ 8,596 11,416 7,601 9,677
Taxes.............................................. 2,626 3,491 1,969 2,693
Net income......................................... $ 5,970 $ 7,925 $ 5,632 $ 6,984
======= ======= ======= =======
Basic Earnings Per Share........................... $ 1.98 $ 1.82 $ 1.87 $ 1.61
Diluted Earnings Per Share......................... $ 1.94 $ 1.80 $ 1.84 $ 1.60
======= ======= ======= =======
</TABLE>
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, 1997 and 1996 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, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P
One South Market Square
Harrisburg, PA 17101
January 13, 1998
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
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 1997 1996 1995 1994 1993
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets........................ $463,050 $432,518 $381,822 $368,697 $345,960
Loans (net of unearned income and
allowance for loan losses)........ 258,229 247,213 229,063 206,525 184,012
Deposits............................ 357,572 343,256 324,097 307,973 295,267
Shareholders' equity................ 53,360 47,739 46,000 39,483 38,212
Earnings Data
Net interest income................. 19,381 17,906 16,680 15,551 14,390
Provision for loan losses........... 717 1,042 728 512 932
Other income........................ 3,375 2,754 2,710 2,424 2,821
Other expense....................... 13,443 12,017 12,257 11,007 10,137
Net income.......................... 5,970 5,632 4,814 4,994 4,763
Per Share Data
Basic net income.................... 1.98 1.87 1.60 1.66 1.59
Diluted net income.................. 1.94 1.84 1.58 1.64 1.57
Cash dividends...................... .83 .74 .67 .60 .55
Book value.......................... 17.57 16.64 17.64 15.15 16.91
Average shares outstanding.......... 3,080,166 3,053,400 3,041,003 3,039,448 3,024,936
</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, 1997, 1996, and 1995 (dollars in thousands)
1997 1996 1995
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>
Cash and due from banks......... $14,803 $14,676 $ 13,247
Earnings Assets:
Interest-bearing deposits in
other banks................. 1,387 $ 74 5.34% 978 $ 58 5.93% 1,660 $ 83 5.00%
Investment securities:
Taxable..................... 126,751 8,647 6.82 95,584 6,196 6.48 84,956 5,599 6.59
Tax-exempt <F2>............. 28,500 2,402 8.43 28,369 2,406 8.48 36,975 3,112 8.42
Total investment
securities.................. 155,251 123,953 121,931
Federal funds sold............ 2,158 124 5.75 3,808 207 5.44 3,118 157 5.04
Loans, net of unearned
income <F2>................. 253,600 23,608 9.31 243,840 22,639 9.28 222,624 20,918 9.40
Total Earning Assets......... 412,396 $34,855 8.45 372,579 $31,506 8.46 349,333 $29,869 8.55
Allowance for loans
losses........................ (2,956) (2,682) (2,515)
Premises, equipment and
other assets................. 20,598 16,404 15,688
Total assets................. $444,841 $400,977 $375,753
======== ======== ========
Liabilities:
Demand deposits................. 26,570 27,082 27,494
Interest bearing liabilites:
Savings deposits.............. 156,805 3,279 2.09 148,621 3,212 2.16 136,031 3,054 2.25
Time deposits:
$100,000 or greater......... 14,078 12,100 11,249
Other....................... 152,402 149,982 143,103
Total time deposits........... 166,480 8,901 5.35 162,082 8,721 5.38 154,352 8,309 5.38
Total time and savings
deposits.................... 323,285 310,703 290,383
Short-term borrowings......... 2,704 143 5.29 5,410 252 4.66 3,891 225 5.78
Long-term debt................ 37,967 2,231 5.88 7,787 502 6.45 7,781 444 5.71
Subordinated capital notes.... -- -- -- -- -- -- 2 -- 11.00
Total interest-bearing
liabilities................. 363,956 $14,554 4.00 323,900 $12,687 3.92 302,057 $12,032 3.98
Accrued interst, taxes and
other liabilities.............. 4,105 3,358 3,504
Total liabilities............. 394,631 354,340 333,055
Stockholders' Equity.............. 50,210 46,637 42,698
Total liabilities and
stockholders' equity......... $444,841 $400,977 $375,753
======== ======== ========
Interest income to earning
assets........................ 8.45% 8.46% 8.55%
Interest expense to earning
assets........................ 3.53 3.41 3.44
Effective interest
differential.............. $20,301 4.92% $18,819 5.05% $17,837 5.11%
======= ===== ======= ==== ======= ====
<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, 1997 and 1996
(in thousands)
1997 vs 1996 1996 vs 1995
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans................................... $ 897 $ 72 $ 969 $1,989 $ (268) $1,721
Investment securities:
Taxable............................... 2,111 340 2,451 691 (94) 597
Tax-exempt............................ 11 (15) (4) (728) 22 (706)
Total.............................. 3,019 397 3,416 (37) (72) (109)
Federal funds sold...................... (94) 11 (83) 37 13 50
Interest-bearing deposits in other
banks.................................. 22 (6) 16 (38) 13 (25)
Total................................ 2,947 402 3,349 1,951 (314) 1,637
Increase (decrease) in interest expense:
Savings deposits........................ 173 (106) 67 281 (123) 158
Time deposits........................... 230 (50) 180 416 (4) 412
Short-term borrowings................... (139) 30 (109) 77 (50) 27
Long-term debt and capital notes........ 1,777 (48) 1,729 -- 58 58
Total................................ 2,041 (174) 1,867 774 (119) 655
Increase (decrease) in effective
interest differential.................. $ 906 $ 576 $1,482 $1,177 $ (195) $ 982
====== ====== ====== ====== ====== ======
<FN>
<F1> Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1997 and 1996. 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. (Corporation) 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.
Diluted net income was $1.94 per share in 1997 compared to $1.84
per share in 1996, and $1.58 in 1995. Net income per share in
1997 was 5.4% more than net income per share in 1996. Net income
per share in 1996 increased 16.5% compared to the previous year.
Net Interest Income:
The primary determinant of the Corporation's 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 $3,342,000 or 10.9% in 1997,
compared to an increase of $1,881,000 or 6.6% in 1996, and an
increase of $3,082,000 or 12.0% in 1995. Interest and fees on
loans increased $961,000 or 4.3% in 1997. Most of this increase
was volume related and caused by an increase in average balances
of $9,760,000 or 4.0%. The increase of $2,448,000 or 31.4% in
interest and dividends on investment securities was volume
related. The average balances of tax-exempt securities increased
$131,000 or 0.5% in 1997. Interest and fees on loans increased
$1,725,000 or 8.3% in 1996. This was primarily a volume related
change driven 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 volume related. The
average balance of tax-exempt securities decreased $8,606,000 or
23.3% in 1996 which resulted in a decrease in tax-exempt interest
income. Factors contributing to the 1995 change included a
volume related increase in interest and fees on loans of
$3,519,000 and a volume related decrease of $512,000 in interest
and dividends on investment securities.
Total interest expense increased $1,867,000 or 14.7% in 1997 and
$655,000 or 5.4% in 1996, after increasing $1,953,000 or 19.4% in
1995. A volume related increase of $67,000 or 2.1% occurred in
savings interest expense. Also affecting the 1997 increase was an
increase of $180,000 or 2.1% in time deposit interest expense.
All of the increase in time deposit interest expense was caused
by increased volume. An increase of $1,620,000 or 114.9% in
borrowed funds interest significantly affected total interest
expense in 1997. Material factors affecting the 1996 increase
were increases of $412,000 or 5.0% in total time deposit interest
expense and an increase of $158,000 or 5.2% in savings interest
expense. The average balances of savings accounts increased
$12,590,000 or 8.5%. This increase was partially offset by a
decrease in the interest rates paid on these deposits. Material
factors affecting the 1995 change were increases of $1,826,000 or
28.2% in total time deposit interest expense and $144,000 or
27.4% in interest expense of borrowings.
Average interest-bearing deposits represented 92.4% of average
total deposits in 1997 compared to 92.0% in 1996 and 91.4% in
1995.
Net interest income increased $1,475,000 or 8.2% in 1997,
compared to $1,226,000 or 7.4% in 1996 and $1,129,000 or 7.3% in
1995. Average earning assets increased $39,817,000 or 10.7% in
1997 compared to $23,246,000 or 6.7% in 1996 and $12,485,000 or
3.7% in 1995. Average interest-bearing liabilities increased
$40,056,000 or 12.4% in 1997 compared to $21,843,000 or 7.2% in
1996 and $21,196,000 or 7.5% in 1995.
Net Interest Income Margin:
Net interest income margin for 1997 was 4.92% compared to 5.05%
in 1996 and 5.11% in 1995. Interest income to earning assets
decreased from 8.46% in 1996 to 8.45% in 1997. Interest expense
to earning assets increased from 3.41% to 3.53%.
Provision for Loan Losses:
Net loan charge-offs for 1997 were $594,000 compared to $818,000
in 1996 and $501,000 in 1995. The provision for loan losses
charged to income was $717,000 in 1997 compared to $1,042,000 in
1996 and $728,000 in 1995. Total non-performing loans
approximated $3,329,000, $3,677,000, and $2,673,000, as of
December 31, 1997, 1996, and 1995, respectively. Non-performing
residential real estate and commercial loans totalled
approximately $2,121,000 and $815,000, respectively, at year-end
1997. Total delinquencies as a percentage of total loans
approximated 4.5%, 5.1%, and 4.8% at December 31, 1997, 1996, and
1995, respectively.
Other Income and Other Expenses:
Other income net of security gains increased $156,000 or 6.3% in
1997 compared to an increase of $100,000 or 3.9% in 1996 and a
increase of $542,000 or 26.7% in 1995. The increases in trust
department income and service charges on deposit accounts which
occurred in 1997 and 1996 resulted from management's renewed
emphasis on these functions. Investment security gains in 1997
and 1996 were associated primarily with equity securities held by
Community Banks Investments, Inc. No investment security losses
were recognized in 1997. Decreased income on insurance premiums
are a reflection of decreased consumer loan demand and reduced
activity at Community Banks Life Insurance Co. Gains on mortgage
sales increased slightly in 1997 as a result of increased demand
for fixed-rate real estate loans. The market values of loans
held for sale approximated their carrying values at year ends
1997, 1996, and 1995.
Other expenses increased $1,426,000 or 11.9% in 1997 compared to
decreases of $240,000 or 2.0% in 1996, and $1,250,000 or 11.4%
in 1995. The 1997 increases in salaries and benefits of $559,000
or 9.1% and net occupancy expense of $97,000 or 5.4% were
affected by the opening of new banking offices. Also affecting
salaries and benefits was the recognition of certain retirement
plan obligations.. The increase of $768,000 or 20.6% in other
operating expense in 1997 was affected by increased FDIC
insurance premiums and the recognition of $470,000 of expense
associated with the pending acquisition of the Peoples State
Bank. Increases of $283,000 or 4.8% in salaries and employee
benefits and $111,000 or 8.4% in net occupancy expense affected
the 1996 increase in total other expenses. Three new banking
offices established in 1995 contributed to these changes.
Provision for Income Taxes:
The relationship of the provision for income taxes to income
approximated 30.5%, 25.9%, and 24.8% in 1997, 1996, and 1995,
respectively. Significantly impacting these changes were
reductions in tax-exempt investment security income recognized in
1997, 1996 and 1995.
These factors contributed to an increase in net income for 1997
of $338,000 or 6.0%, an increase of $818,000 or 17.0% in 1996,
and a decrease of $180,000 or 3.6% in 1995.
Balance Sheet Data:
Earning assets represented 92.7% of total assets at year-end 1997
compared to 92.8% at year-end 1996. Increases in deposits and
long-term debt in 1997 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.
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 held-to-maturity investments
and carried at amortized historical cost. Securities to be held
for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available for
sale and carried at 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, 1997 and 1996, management classified investment
securities with book and market values of $157,344,000 and
$161,401,000 and $145,050,000 and $145,446,000, respectively, as
available for sale. Gross unrealized gains and losses relating
to investment securities were $4,295,000 and $238,000 and
$2,173,000 and $1,777,000, respectively, at year-end 1997 and
1996. The Corporation owned no securities below investment grade
at year-end 1997 and 1996. No securities were considered held
for sale or for trading purposes at December 31, 1997 and
December 31, 1996.
At December 31, 1997 and 1996, the unrealized gains on
investments available for sale, net of tax were $2,678,000 and
$261,000, respectively, and were accordingly reflected in
shareholders equity.
Net loans increased 4.5% from December 31, 1996 to December 31,
1997. Real estate loans increased 12.2%, while commercial and
personal loans decreased during the period. New banking offices
opened in 1995 and 1996 and reduced demand for commercial and
personal loans affected these changes.
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
1997 1996 1995 1994 1993
(dollars in thousands)
Nonaccrual loans.......... $2,778 $2,910 $1,759 $1,245 $1,353
Other real estate owned... 481 351 302 338 381
Accruing loans contractually
past due 90 days or more.. 551 767 914 819 722
Total................. $3,810 $4,028 $2,975 $2,402 $2,456
====== ====== ====== ====== ======
Ratio of nonaccrual loans,
other real estate owned,
and accruing loans contractu-
ally past due 90 days or
more to total assets...... .82% .93% .78% .65% .71%
As discussed in Note 5 to the financial statements, 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 allowance 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%, 1.12%,
1.11%, 1.12%, and 1.14% at year-end, 1997, 1996, 1995, 1994, and
1993, respectively.
At December 31, 1997, 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 $1,317,000 or 16.8% in premises and equipment was
affected by new banking locations. Goodwill is being amortized
over fifteen years. The balance of loans held for sale at
December 31, 1997 included student loans totalling $1,831,000.
Total deposits increased $14,316,000 or 4.2% in 1997 with most of
the increase occurring in savings deposits. As previously noted,
management chose to reduce short-term borrowings and increase
long-term debt. Affecting the increase of $2,060,000 or 62.3% in
accrued interest payable and other liabilities was an increase in
deferred tax liabilities.
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, 1997, 1996 and 1995, financing
activities provided cash of $20,085,000, $46,870,000, and
$3,438,000, respectively. Deposit growth and long-term debt
accounted for the largest portion of this funding source in
1997. Deposits and borrowings represented the largest funding
sources in 1996 while deposits were the primary source in 1995.
Net cash used in investing activities totalled $26,221,000,
$51,194,000, and $5,910,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The primary uses of funds in
1997 were purchases of investment securities of $55,175,000 and
net increases in total loans of $11,863,000. The primary uses of
funds in 1996 were purchases of investment securities of
$56,609,000 and increases in net loans of $19,241,000. In 1995,
investment securities purchased and net increases in loans also
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 1998 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 93% at December 31,
1997.
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 1997 1996
(dollars in thousands)
Core (Tier 1) Capital --- $49,776 $46,331
Leverage ratio (A) 4.0% 10.8% 10.7%
Risk-based Capital Ratios:
Tier 1 capital ratio (B) 4.0% 17.1% 17.0%
Total risk-based capital
ratio (C) 8.0% 17.9% 18.0%
(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 1997 and 1996. The core capital ratio
increased from 17.0% to 17.1%, and the total capital ratio
decreased from 18.0% to 17.9%, 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.
Impact of the Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Corporation's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a recent assessment, the Corporation determined that it
will be required to modify or replace significant portions of its
software so that its computer systems will properly utilize dates
beyond December 31, 1999. The Corporation presently believes that
with modifications to existing software and conversions to new
software, the Year 2000 Issue can be mitigated. However, if such
modifications are not made, or are not completed timely, the Year
2000 Issue could have a material impact on the operations of the
Corporation.
The Corporation has initiated formal communications with all of
its significant suppliers and large customers to determine the
extent to which the Corporation is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. The
Corporation's total Year 2000 project cost and estimates to
complete are based on presently available information. However,
there can be no guarantee that the systems of other companies on
which the Corporation's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion
that is incompatible with the Corporation's systems, would not
have material adverse effect on the Corporation. The Corporation
has determined it has no exposure to contingencies related to the
Year 2000 Issue for the products it has sold.
The Corporation will utilize both internal and external resources
to reprogram resources, or replace, and test the software for
Year 2000 modifications. The Corporation plans to complete the
Year 2000 project within one year or not later than December 31,
1998. Cost incurred to date as well as for the 1998 fiscal year
for the Year 2000 project are considered normal operating costs
by the Corporation. All Year 2000 conversion software and
modifications are being delivered and executed by the
Corporation's various software vendors in which the Corporation
deals with for its many different computer processing and
transaction functions. The Corporation does not anticipate
significant expenses incurred or charged to the Year 2000 Issue
due to its many software, maintenance, and licensing agreements
with its software vendors.
The costs of the project and the date on which the Corporation
plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and
similar uncertainties.
Recent Accounting Pronouncements:
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS 130) in 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components,
which includes all change in stockholders' equity during a period
except those resulting from investments by owners and
distributions to owners. SFAS 130 requires that comprehensive
income be reported in the financial statements with the same
prominence as other items currently reported in the financial
statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. As SFAS 130 does not discuss the
recognition or measurement of comprehensive income, the adoption
of SFAS 130 will not have a material effect on the Corporation's
financial condition or results of operations.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information" (SFAS 131) in
1997. SFAS 131 establishes standards for disclosures about
products, services, geographic areas, and major customers. SFAS
131 is effective for fiscal years beginning after December 15,
1997. Adoption of SFAS 131 will not have a material effect on the
Corporation's financial condition or results of operations.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) in
January, 1998. SFAS 132 revises current note disclosure
requirements for employers' pensions and other retiree benefits.
It does not address recognition or measurement issues. SFAS 132
is effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS 132 will not have a material effect on the
Corporation's financial Condition or results of
operations.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,719
<INT-BEARING-DEPOSITS> 2,034
<FED-FUNDS-SOLD> 2,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 161,401
<INVESTMENTS-CARRYING> 161,401
<INVESTMENTS-MARKET> 161,401
<LOANS> 261,150
<ALLOWANCE> 2,921
<TOTAL-ASSETS> 463,050
<DEPOSITS> 357,572
<SHORT-TERM> 752
<LIABILITIES-OTHER> 5,366
<LONG-TERM> 46,000
0
0
<COMMON> 53,360
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<TOTAL-LIABILITIES-AND-EQUITY>463,050
<INTEREST-LOAN> 23,505
<INTEREST-INVEST> 10,232
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<INTEREST-TOTAL> 33,935
<INTEREST-DEPOSIT> 12,180
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<INTEREST-INCOME-NET> 19,381
<LOAN-LOSSES> 717
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<EXPENSE-OTHER> 13,443
<INCOME-PRETAX> 8,596
<INCOME-PRE-EXTRAORDINARY> 5,970
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,970
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 9.27
<LOANS-NON> 2,778
<LOANS-PAST> 551
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<ALLOWANCE-OPEN> 2,798
<CHARGE-OFFS> 930
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<ALLOWANCE-CLOSE> 2,921
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