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, 1998 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, 1999, the aggregate market value (based on recent selling prices)
of the voting stock of the registrant held by its nonaffiliates (5,407,169
shares) was $141,262,290
Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practical date.
6,518,129 shares of common stock outstanding on March 1, 1999
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. (Corporation) is a bank holding company whose banking
subsidiaries are Community Banks, N.A. (CBNA) and Peoples State Bank (PSB) and
whose non-banking subsidiaries are Community Banks Investments, Inc. (CBII)
and Community Banks Life Insurance Company, Inc. (CBLIC).
The Corporation conducts a full service commercial banking business and
provides trust services in Adams County, Dauphin County, southern Luzerne
County, Northumberland County, western Schuylkill County, Snyder County, and
York County. The Corporation currently has 29 offices. There are 58
offices of commercial banks and savings and loan associations within its market
area with which the Corporation competes. Deposits of the Corporation represent
approximately 14% of the total deposits in the market area. The Corporation
has 1 office in Adams County, 7 offices in Dauphin County, 3 offices in Luzerne
County, 2 offices in Northumberland County, 10 offices in Schuylkill County, 1
office in Snyder County, and 5 offices in York County. On March 31, 1998,
Community Banks, Inc. completed its merger of the Peoples State Bank of East
Berlin. PSB's banking offices are located in Dover, Hanover, and Manchester,
Pennsylvania. The transaction was accounted for as a pooling of interests.
Like other depository institutions, the Corporation 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 Corporation formed CBLIC to provide credit life insurance
to its consumer credit borrowers. Total premiums earned were $493,000 for the
year ended December 31, 1998. During 1985 the Corporation formed CBII to make
investments primarily in equity securities of other banks. Total assets of
CBII at December 31, 1998 were $4,462,000.
The Corporation has approximately 400 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 Corporation. A minimum required capital ratio
at December 31, 1998, was 8 percent. The Bank's December 31, 1998 ratio
approximated 14%. 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 Corporation's leverage ratio at December 31, 1998,
approximated 9%. Risk-based capital requirements replace previous capital
guidelines which established minimum primary and total capital requirements.
The following summarizes the Corporation's capital adequacy position:
Required
Bank Regulatory Capital
(in thousands) December 31, 1998 December 31, 1998
Risk-based capital $81,767 14.0% $46,745 8.0%
Leverage ratio
(tier 1 capital) 74,813 8.8% 23,372 4.0%
-2-
Statistical Data:
Pages 19 through 21 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 1998 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields for
the three years ended December 31, 1998.
Rate/Volume Analysis for the two years ended December 31, 1998.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1998.
Amortized cost and Estimated Market Values of Investment Securities as
of December 31, 1998, 1997, and 1996.
Maturity Distribution of Securities as of December 31, 1998 (Market Value).
Loan Account Composition as of December 31, 1998, 1997, 1996, 1995, and
1994.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 1998.
Nonperforming Loans as of December 31, 1998, 1997, 1996, 1995, and
1994.
Loan Loss Experience for the five years ended December 31, 1998.
Loans Charged Off and Recovered for the five years ended December 31, 1998.
Allowance for Loan Losses as of December 31, 1998, 1997, 1996, 1995, and
1994.
Maturity Distribution of Time Deposits over $100,000 as of
December 31, 1998.
Interest Rate Sensitivity as of December 31, 1998.
-3-
Item 2. Properties:
The Corporation owns no real property except through its subsidiary
banks. CBNA 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; and One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania.
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.
All the buildings used by CBNA are free-standing and are used exclusively
for banking purposes with the exception of offices and retail space rented at
the St. Clair, Milton, Pottsville and Hazleton locations.
PSB owns the following buildings: 100 E. King Street, East Berlin,
Pennsylvania; and 3421 Carlisle Road, Dover, Pennsylvania. In addition thereto,
PSB leases and office at 600 Carlisle Street, Hanover, Pennsylvania, pursuant to
a lease which, with renewal options, will extend to the year 2006. PSB also owns
real property through its subsidiary, PSB Realty, at the following locations:
1191 Eichelberger Street, Hanover, Pennsylvania; 155 Glen Drive, Manchester,
Pennsylvania; and 1345 Baltimore Street, Hanover, Pennsylvania.
All the Buildings used by PSB are free-standing and are used exclusively
for banking purposes with the exception of offices and retail space rented at
the Carlisle Street, Hanover location.
From time to time, the subsidiary banks also acquire 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.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than routine litigation
incidental to the business of the Corporation, to which the Corporation 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 1998.
-4-
APPENDIX A
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995, and 1994
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Return on average equity 13.04% 11.49% 11.39% 10.36% 10.76%
Return on average assets 1.31% 1.16% 1.18% 1.06% 1.05%
Average equity to average assets 10.06% 10.12% 10.36% 10.25% 9.74%
Dividend payout ratio 40.83% 39.66% 39.02% 42.09% 39.37%
</TABLE>
-5-
APPENDIX A
Continued
<TABLE>
<CAPTION>
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
AT DECEMBER 31, 1998, 1997, and 1996
1998 1997 1996
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 $ 82,887 $ 83,260 $ 84,568 $ 85,137 $ 73,407 $ 71,984
U.S. Treasury and U.S. Government agencies 78,800 79,449 66,940 67,389 83,432 83,573
Obligations of states and political sub-
divisions 85,771 87,676 55,248 56,633 31,144 31,601
Other securities 40,858 42,157 7,623 10,125 5,767 6,845
Total $288,316 $292,542 $214,379 $219,284 $193,750 $194,003
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
COMMUNITY BANKS, INC. and SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Market Value)
(dollars in thousands)
as of December 31, 1998
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 $ 4,547 $14,868 $27,235 $116,059 $162,709 14 yr. 11 mos. 7.51%
Obligations of states and political
subdivisions 3,627 13,119 10,260 60,670 87,676 15 yr. 9 mos. 7.34%
Other 10,466 2,224 2,487 26,980 42,157 13 yr. 1 mos. 5.34%
Total $18,640 $30,211 $39,982 $203,709 $292,542 14 yr. 11 mos. 7.15%
======= ======= ======= ======== ========
Percentage of total 6.4% 10.3% 13.7% 69.6% 100.0%
===== ===== ===== ===== ======
Weighted average yield <F1> 4.23% 6.11% 6.25% 7.75% 7.15%
===== ===== ===== ===== =====
<FN>
<F1> Weighted average yields were computed on a tax equivalent basis using a
federal income tax rate of 34%.
</FN>
</TABLE>
The Corporation 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
1998 1997 1996 1995 1994
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 $ 65,698 12.8% $ 53,520 11.8% $ 52,844 12.6% $ 45,017 12.3% $ 37,991 11.9%
Real estate-construction 17,381 3.4 5,553 1.2 5,724 1.4 5,890 1.6 4,645 1.4
Real estate-mortgage 324,709 63.4 299,529 65.7 268,276 63.8 229,830 62.8 214,561 67.0
Personal-installment 97,561 19.0 88,046 19.3 87,381 20.8 78,771 21.5 56,470 17.6
Other 6,931 1.4 9,182 2.0 5,982 1.4 6,662 1.8 6,695 2.1
512,280 100.0% 455,830 100.0% 420,207 100.0% 366,170 100.0% 320,362 100.0%
Less: ===== ===== ===== ===== =====
Unearned discount (10,018) (11,799) (11,965) (11,671) (9,141)
Reserve for loan losses (6,954) (6,270) (5,561) (4,955) (4,407)
$495,308 $437,761 $402,681 $349,544 $306,814
</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 1998 resulted in increases in commercial, financial,
and agricultural loans and personal-installment loans of 22.8% and 10.8%,
respectively. Real estate loans increased 12.1% during this same period.
Commercial, financial, and agricultural loans represented 12.8% of total loans
at December 31, 1998 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 19.0% of total loans at December 31, 1998 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, 1998
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
agricultural $29,080 $17,866 $18,752 $65,698
Real estate-construction 8,502 2,064 6,815 17,381
$37,582 $19,930 $25,567 $83,079
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
Variable Fixed Total
<S> <C> <C> <C>
Due in one year or less $36,688 $ 894 $37,582
Due after one year 44,033 1,464 45,497
$80,721 $2,358 $83,079
======= ====== =======
</TABLE>
-7-
APPENDIX A
Continued
<TABLE>
<CAPTION>
NONPERFORMING LOANS <F1>
(dollars in thousands)
as of December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more:
Commercial, financial and agricultural $ 47 $ 53 $ 20 $ 120 $ 152
Mortgages 353 405 588 558 440
Personal installment 34 72 189 239 226
Other 7 21 11 --- 1
441 551 808 917 819
Loans renegotiated with the borrowers 248 626 277 494 366
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural 866 926 791 579 743
Mortgages 2,282 3,388 3,645 2,346 1,985
Other 282 300 318 252 174
3,430 4,614 4,754 3,177 2,902
Other real estate owned 625 866 883 901 1,846
Total
$4,744 $6,657 $6,722 $5,489 $5,933
====== ====== ====== ====== ======
<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 1998 was $358,000. Interest income from
these loans would have approximated $425,000 in 1997.
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 Corporation'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 Corporation'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, 1998, 1997, 1996, 1995, and 1994
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans at year-end, net of unearned income $502,262 $444,031 $408,242 $354,499 $311,221
======== ======== ======== ======== ========
Average loans balance <F1> $467,094 $421,283 $385,956 $332,630 $299,343
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 6,270 $ 5,561 $ 4,955 $ 4,407 $ 4,832
Net charge-offs <F2> (780) (608) (961) (530) (2,338)
Provision for loan losses 1,464 1,317 1,567 1,078 1,913
Balance, allowance for loan losses,
December 31 $ 6,954 $ 6,270 $ 5,561 $ 4,955 $ 4,407
======== ======== ======== ======== ========
Net charge-offs to loans at year end .16% .14% .24% .15% .75%
Net charge-offs to average loans <F1> .17 .14 .25 .16 .78
Balance of allowance for loan losses
to loans at year end 1.38 1.41 1.36 1.40 1.42
<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 loan losses is based upon management's continuing evaluation
of the loan portfolio. A review as to loan quality, current macro-economic
conditions and delinquency status is performed at least on a quarterly basis.
The provision for loan losses is adjusted quarterly based upon current
review. The table on page 10 presents an allocation by loan categories of the
allowance for loan losses at December 31 for the last five years. In
retrospect, the specific allocation in any particular category may prove
excessive or inadequate and consequently may be reallocated in the future to
reflect the then current condition. Accordingly, the entire allowance is
available to absorb losses in any category.
As discussed in the Corporation's Annual Report, the Corporation adopted SFAS
114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS 114 did
not result in any additional provision for loan losses.
The provision for loan losses totalled $1,464,000 for the year ended December
31, 1998 compared to $1,317,000, $1,567,000, $1,078,000, and $1,912,000 for
the years ended December 31, 1997, 1996, 1995, and 1994, respectively. The
relationship of the allowance for loan losses to loans at year end
approximated 1.38% compared to ratios of 1.36% to 1.42% 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 .56%, .93%, 1.03%, .99%, and 1.13% at year-end 1998,
1997, 1996, 1995, and 1994, respectively.
-9-
APPENDIX A
Continued
<TABLE>
<CAPTION>
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
for the years ended December 31, 1998, 1997, 1996, 1995, and 1994
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans charged off:
Commercial, financial and agricultural $ 138 $ 83 $ 165 $ 135 $ 762
Real estate-mortgage 223 361 382 298 1,358
Personal installment 820 926 1,327 774 806
Other 77 96 93 78 119
Total 1,258 1,466 1,967 1,285 3,045
Loans recovered:
Commercial, financial and agricultural 53 428 336 234 63
Real estate-mortgage 104 63 131 136 169
Personal installment 296 343 509 369 443
Other 25 24 30 15 33
Total 478 858 1,006 754 708
Net charge-offs $ 780 $ 608 $ 961 $ 531 $2,337
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES<F1>
(dollars in thousands)
as of December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans:
Commercial, financial and agricultural $2,199 $1,663 $1,541 $1,268 $1,177
Real estate-construction --- --- 2 --- 1
Real estate-mortgage 1,366 1,780 1,868 1,702 1,532
Installment 1,161 1,458 1,125 841 695
Unallocated 2,228 1,369 1,025 1,144 1,002
Balance $6,954 $6,270 $5,561 $4,955 $4,407
====== ====== ====== ====== ======
<FN>
<F1>See Schedule "Loan Account Composition" for the percent of loan
classification to total loans.
</FN>
</TABLE>
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 1998
Remaining to Maturity:
Less than three months $ 6,620
Three months to six months 3,117
Six months to twelve months 6,233
More than twelve months 9,697
$25,667
=======
-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 positive GAP between the Corporation's interest-earning assets and
interest-bearing liabilities maturing or repricing within one year approximated
2% of total assets at December 31, 1998.
Significant maturity/repricing assumptions (based on internal analysis) include
the presentation of all savings and NOW accounts as being 62% 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
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 1998.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
At December 31, 1998 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 $ 1,258 --- --- --- $ 1,258
Investment securities 42,184 $17,125 $26,124 $207,109 292,542
Federal funds sold 2,208 --- --- --- 2,208
Loans, net of unearned income<F1> 215,540 29,664 53,266 203,792 502,262
Loans held for sale 3,319 --- --- --- 3,319
Total $264,509 $46,789 $79,390 $410,901 $801,589
Liabilities
Savings $ 79,935 $32,509 $ 46,250 $ 95,622 $254,316
Time 49,068 48,825 54,324 113,667 265,884
Time in denominations of
$100,000 or more 6,620 3,117 6,233 9,697 25,667
Short-term borrowings 7,910 --- --- --- 7,910
Long-term debt 15,000 10,000 14,000 122,000 161,000
Total $158,533 $94,451 $120,807 $340,986 $714,777
Interest Sensitivity Gap
Periodic $105,976 $(47,662) $(41,417) $69,915
Cumulative 58,314 16,897 86,812
<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,
the Corporation'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 the Corporation 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, environments; natural disasters; the inability to hedge
certain risks economically; the adequacy of loan reserves;
acquisitions or restructurings' technological changes; in
consumer spending and savings habits; and the success of the
Corporation in managing the risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk.
Community Banks, Inc. has only a limited involvement with
derivative financial instruments and does not use them for
trading purposes. The business of the Corporation and the
composition 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 the Corporation are for other than
trading purposes.
Interest rate sensitivity results when the maturity or
repricing intervals are 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, the Corporation's interest-earning
assets, interest-bearing liabilities, and off-balance sheet
financial instruments. the Corporation's exposure to interest
rate sensitivity is managed primarily through the Corporation's
strategy of selecting the types and terms of interest-earning
assets and interest-bearing liabilities which generate favorable
earnings, while limiting the potential negative effects of
changes in market interest rates. Since the Corporation's primary
source of interest-bearing liabilities is customer deposits, it's
ability to manage the types and terms of such deposits may be
-12-
somewhat limited by customer preferences in the market areas in
which it 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 the Corporation's
exposure to interest rate sensitivity.
The rates, terms and interest rate indices of the
Corporation's interest-earning assets result primarily from
its strategy on investing in loans and securities (a
substantial portion of which have adjustable-rate terms)
which permit the Corporation 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 interest-bearing
liabilities.
Significant Assumptions Utilized in Managing Interest Rate
Sensitivity
Managing the Corporation'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 the Corporation'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 the
Corporation'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
The Corporation'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 Corporation'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 the Corporation'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 Banks, Inc. as
of December 31, 1998 consolidated with the estimated present values of other
financial instruments of the Corporation, 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............ $ 28,502 $ 28,502 $ 28,502 $ 28,502 $ 28,502
Investments securities............... 303,673 297,947 292,542 285,529 271,543
Loans, net of unearned income........ 504,784 501,851 498,552 493,911 489,085
Loans held for sale.................. 3,360 3,341 3,319 3,288 3,256
Other assets......................... 32,003 32,003 32,003 32,003 32,003
Total assets.................... $872,322 $863,644 $854,918 $843,233 $824,389
======== ======== ======== ======== ========
Liabilities
Deposits............................. $603,699 $601,143 $598,654 $596,228 $593,864
Short-term borrowings................ 7,910 7,910 7,910 7,910 7,910
Long-term debt....................... 174,802 167,530 160,822 155,899 155,129
Other liabilities.................... 7,983 7,983 7,983 7,983 7,983
Total liabilities............... 794,394 784,566 775,369 768,020 764,886
Total stockholders' equity...... 77,928 79,078 79,549 75,213 59,503
Total liab. and stockholders'
equity...................... $872,322 $863,644 $854,918 $843,233 $824,389
======== ======== ======== ======== ========
</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 Corporation's Common Stock and Related Securities Holder
Matters" on page 3 of the Annual Report to Stockholders for the year ended
December 31, 1998 (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 21 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 22 through 26 of the Annual Report.
Item 8. Financial Statements and Supplementary Data:
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated January 14, 1999, are incorporated by
reference to pages 6 through 20 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, 1998.
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
Ernest L. Lowe Chairman-CBI 1990 37,998 (9) .58%
Age 62 Pres/CEO
Community Banks, N.A.
Prior to 12/31/97
Ex. V.P. of CBI
Eddie L. Dunklebarger President/CEO 1998 92,785 (19) 1.42%
Age 45 CBI & PSB
Prior to 3/31/98
Pres/CEO of PSB
Thomas L. Miller Retired CEO of 1966 57,721 (10) .88%
Age 66 CBI & CBNA
Kenneth L. Deibler Self-Employed 1966 34,703 (3) .53%
Age 76 Insurance Broker
Elizabethville, PA
Leon E. Kocher Chairman of the Board, 1963 27,206 .42%
Age 86 Kocher Enterprise, Inc.
Millersburg, PA
Robert W. Rissinger Sec./Treasurer 1968 242,365 (4) 3.71%
Age 72 Alvord Polk Tool Co. (5)
(cutting tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 42,637 (7) .65%
Age 73 Millersburg and
Harrisburg, PA
James A. Ulsh Attorney-at-Law 1977 16,295 .25%
Age 52 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Retired Superintendent 1992 2,069 .03%
Age 65 Warrior Run
School District
Turbotville, PA
Susan K. Nenstiel Regional Dir. of Dev. 1996 207 --
Age 47 Lutheran Welfare Serv.
Hazleton, PA
-16-
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership(2) Owned
Ronald E. Boyer President, 1981 21,725 (6) .33%
Age 61 Alvord-Polk Tool Co.
(manufacturing of
cutting tools)
Millersburg, PA
Peter DeSoto CEO, J.T. Walker 1981 44,270 (14) .68%
Age 59 Industries, Inc.
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long Partner, 1981 9,326 .14%
Age 69 Millersburg Hardware
Millersburg, PA
Donald L. Miller President, Miller Bros. 1981 88,003 1.35%
Age 69 Dairy
Millersburg, PA
Ray N. Leidich Retired Dentist 1985 67,476 (8) 1.03%
Age 70 Tremont, PA
John W. Taylor, Jr. President-Air Brake 1998 18,930 (15) .29%
Age 68 & Power Equip. Co.
Harry B. Nell Retired Merchant 1998 34,480 (16) .53%
Age 72
Earl L. Mummert Consulting Actuary 1998 32,643 (17) .50%
Age 54 Conrad M. Siegel, Inc.
Harrisburg
Wayne H. Mummert Retired U.S. Postal 1998 72,548 (18) 1.11%
Age 65 Service/Farmer
(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, 1998. Beneficial ownership may be disclaimed
as to certain of the securities.
(3) Includes 2,802 shares owned by Mr. Deibler's grandchildren.
(4) Includes 6,310 shares owned by Alvord-Polk Tool Co., Inc. the stock of
which is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
-17-
(5) Includes 14,062 shares owned by Engle Ford, Inc., 43,330 shares owned by
Mr. Rissinger's spouse, Shirley Rissinger, and 10,578 shares owned by Engle
Ford, Inc. Profit Sharing Plan.
(6) Includes 6,310 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 496
shares owned by Mr. Boyer's wife, Judith Boyer.
(7) Includes 7,270 shares owned by Mr. Shaffer's Retirement plan.
(8) Includes 33,738 shares owned by Dr. Leidich's wife, Dolores Leidich.
(9) Includes 180 shares owned by Mr. Lowe's wife, Barbara and 21 shares owned
by Mr. Lowe's son and incentive stock options to acquire 31,373 shares.
(10) Includes incentive stock options to acquire 24,964 shares and 788 in his
IRA.
(11) Includes incentive stock options to acquire 22,543 shares.
(12) Includes incentive stock options to acquire 13,068 shares and 142 shares
registered to Mr. Lawley for his minor children.
(13) Includes incentive stock options to acquire 1,443 shares.
(14) Includes 97 shares owned by Mr. DeSoto's son.
(15) Includes 1,210 shares owned by Mr. Taylor's wife, LouAnn and 865 in his
IRA.
(16) Includes 787 shares owned by Mr. Nell's wife, Helen and stock options to
acquire 2,004 shares.
(17) Includes stock options to acquire 2,004 shares and 13,723 shares in
Mr. Mummert's IRA.
(18) Includes stock options to acquire 2,004 shares and 16,380 shares owned by
Mr. Mummert's, wife Shirley.
(19) Includes 298 shares owned by Mr. Dunklebarger's wife, Connie, 8,867 shares
owned by Mr. Dunklebarger's children, 7,446 shares in his 401(k) plan, 6,336
shares in his IRA and 45,430 stock options (ISO and NQ's) to acquire shares.
(20) Includes 4,035 shares in his 401(k) plan and 14,272 (ISO and NQ) stock
options to acquire shares.
(21) Includes 3,447 shares in his 401(k) plan and 7,487 shares in his IRA and
15,930 stock options to acquire shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1998, to the knowledge of CBI, all Executive Officers and directors timely
filed all reports with the Securities Exchange Commission, except Peter DeSoto
who filed one Form 4 report, regarding one transaction two days late.
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.
-18-
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, 1998.
Amount and Percentage
Principal Occupation Nature of of
for the Past Five Beneficial Outstanding
Name and Age Years Term (1) Ownership(2)Common Stock
Ernest L. Lowe Chairman-CBI 1985 37,998 (9) .58%
Age 62 Pres/CEO
Community Banks, N.A.
Prior to 12/31/97
Ex. V.P. of CBI
Eddie L. Dunklebarger President/CEO 1998 92,785 (19) 1.42%
Age 45 CBI & PSB
Prior to 3/31/98
Pres/CEO of PSB
Terry L. Burrows Executive Vice President, 1977 20,251 (13) .31%
Age 50 Chief Financial Officer
David E. Hawley Executive Vice President, 1975 23,088 (11) .35%
Age 60 Corporate Property Officer
Robert W. Lawley Executive Vice President, 1980 13,266 (12) .20%
Age 44 Chief Lending Officer
Anthony N. Leo Executive Vice President 1998 25,976 (20) .40%
Age 38
Jeffrey M. Seibert Executive Vice President 1998 33,998 (21) .52%
Age 39
(1) Initial year employed in this capacity.
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 687,751 365,730 16.16%
-19-
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 4, 1999; and the information included
therein with respect to this item is incorporated herein by reference.
Pension Plan:
CBNA 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 CBNA. 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. The years of service for the
additional portion are limited to a maximum of 37. Average 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. As of December 31, 1998, the
following officers have been credited with the following years of service:
Ernest L. Lowe-14 years of service, Robert W. Lawley-23 years of service, and
Terry L. Burrows-25 years of service.
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.
-20-
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 16 of
the Annual Report.
(b) Certain Business Relationships
Allen Shaffer, a director of CBI, is an attorney practicing in
Harrisburg and Millersburg, Pennsylvania, who has been retained in the last
fiscal year by CBI and who CBI proposes to retain in the current fiscal year.
James A. Ulsh, a director of CBI, is a shareholder/employee of the law firm of
Mette, Evans, & Woodside, Harrisburg, Pennsylvania, which CBI has retained in
the last fiscal year 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 fiscal year
and proposes to retain in the current fiscal year. Earl L. Mummert, a director
of CBI, is an actuarial consultant with Conrad M. Siegel, Inc., Harrisburg,
Pennsylvania, which provides actuarial services to CBI.
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.
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 -- 20
Balance Sheets as of December 31, 1998
and 1997 -- 6
Statements of Income for each of the three years
ended December 31, 1998 -- 7
Statements of Changes in Stockholders'
Equity for each of the three years ended
December 31, 1998 -- 8
Statements of Cash Flows for each of the three
years ended December 31, 1998 -- 9
Notes to Financial Statements -- 10-20
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 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).
-21-
(b) The registrant filed Form 8-K, November 23, 1998, subsequent to announcing
a stock repurchase program effective November 10, 1998. Up to five percent of
outstanding shares could be repurchased pursuant to the program.
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 14, 1999 on
our audits of the consolidated financial statements of Community
Banks, Inc. as of December 31, 1998 and 1997, and for the years
ended December 31, 1998, 1997, and 1996, which report is
incorporated by reference in the Annual Report on Form 10-K.
PricewaterhouseCoopers, LLP
One South Market Square
Harrisburg, Pennsylvania
March 25, 1999
-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: Ernest L. Lowe _____
(Ernest L. Lowe)
Chairman of the Board
and Director
Date: March 5, 1999
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 3/5/99
(Terry L. Burrows) Chief Financial Officer
/S/ Ronald E. Boyer Director 3/5/99
(Ronald E. Boyer)
/S/ Samuel E. Cooper Director 3/5/99
(Samuel E. Cooper)
/S/ Kenneth L. Deibler Director 3/5/99
(Kenneth L. Deibler)
/S/ Eddie L. Dunklebarger President & CEO and 3/5/99
(Eddie L. Dunklebarger) Director
/S/ Leon E. Kocher Director 3/5/99
(Leon E. Kocher)
/S/ Ray N. Leidich Director 3/5/99
(Ray N. Leidich)
/S/ Thomas L. Miller Director 3/5/99
(Thomas L. Miller)
/S/ Earl L. Mummert Director 3/5/99
(Earl L. Mummert)
/S/ Wayne H. Mummert Director 3/5/99
(Wayne H. Mummert)
/S/ Harry B. Nell Director 3/5/99
(Harry B. Nell)
/S/ Robert W. Rissinger Director 3/5/99
(Robert W. Rissinger)
/S/ Allen Shaffer Director 3/5/99
(Allen Shaffer)
/S/ John W. Taylor Director 3/5/99
(John W. Taylor)
/S/ James A. Ulsh _ Director 3/5/99
(James A. Ulsh)
-23-
Community Banks, Inc. and Subsidiaries
MARKET FOR THE CORPORATION'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
Corporation has approximately 2,640 shareholders as of February 12, 1999. The
following table sets forth the high and low prices within the knowledge of
management of Community Banks, Inc. at which the Common Stock has been
transferred during the periods indicated. The table is based solely upon
transactions known to management of the Corporation and represents a portion
of the actual transfers of Common Stock during the periods in question.
Price Per Share Price Per Share
1998 Low High 1997 Low High
First Quarter.... $24.33 $28.42 First Quarter.... $16.35 $22.86
Second Quarter.. 23.63 27.59 Second Quarter... 19.83 24.00
Third Quarter... 23.25 25.75 Third Quarter.... 21.92 25.83
Fourth Quarter.. 21.50 25.25 Fourth Quarter... 25.33 30.17
Holders of the Common Stock of the Corportion 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: 1994-$0.32, 1995-$0.37,
1996-$0.41, 1997-$0.48, and 1998-$0.62. The market prices listed above are
based on historical market quotations and have been restated to reflect stock
dividends and splits
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1998 and 1997
(dollars in thousands except per share data)
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks.......................... $ 25,036 $ 28,015
Interest-bearing time deposits in other banks.... 1,258 2,406
Investment securities, available for sale (market
value)......................................... 292,542 219,284
Federal funds sold............................... 2,208 2,100
Loans............................................ 512,280 455,830
Less: Unearned income........................... (10,018) (11,799)
Allowance for loan losses................. (6,954) (6,270)
Net loans................................. 495,308 437,761
Premises and equipment, net...................... 14,203 13,963
Goodwill......................................... 665 906
Other real estate owned.......................... 625 866
Loans held for sale.............................. 3,319 2,641
Accrued interest receivable and other assets..... 16,510 11,520
Total assets................................... $ 851,674 $ 719,462
========= =========
LIABILITIES
Deposits:
Demand......................................... $ 50,038 $ 44,181
Savings........................................ 254,316 226,376
Time........................................... 265,884 248,999
Time in denominations of $100,000 or more...... 25,667 30,199
Total deposits................................. 595,905 549,755
Short-term borrowings............................ 7,910 10,540
Long-term debt................................... 161,000 77,280
Accrued interest payable and other liabilities... 7,983 7,874
Total liabilities.............................. 772,798 645,449
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding............... --- ---
Common stock, $5.00 par value; 20,000,000 shares
authorized; 6,631,000 and 4,406,000 shares
issued in 1998 and 1997, respectively.......... 33,157 22,028
Surplus.......................................... 17,989 28,645
Retained earnings................................ 27,023 21,219
Accumulated other comprehensive income, net of
tax of $1,437,000 and $1,668,000, respectively.. 2,789 3,237
Less: Treasury stock of 105,000 and 44,000
shares at cost................................. (2,082) (1,116)
Total stockholders' equity..................... 78,876 74,013
Total liabilities and stockholders' equity..... $ 851,674 $ 719,462
========= =========
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank.
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, 1998, 1997, and 1996
(dollars in thousands except per share data)
1998 1997 1996
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans....................... $41,306 $38,095 $34,696
Interest and dividends on investment securities:
Taxable....................................... 11,325 11,382 8,429
Exempt from federal income tax................ 3,795 2,422 1,665
Other interest income............................ 80 84 278
Fed funds interest............................... 494 304 207
Total interest income......................... 57,000 52,287 45,275
Interest expense:
Interest on deposits:
Savings....................................... 5,479 5,556 4,974
Time.......................................... 13,459 13,420 13,030
Time in denominations of $100,000 or more..... 1,580 1,578 1,378
Interest on short-term borrowings and
long-term debt.................................. 4,975 2,627 1,034
Fed funds purchased and repo interest............ 1,394 1,242 252
Total interest expense........................ 26,887 24,423 20,668
Net interest income........................... 30,113 27,864 24,607
Provision for loan losses.......................... 1,464 1,317 1,567
Net interest income after provision for
loan losses................................. 28,649 26,547 23,040
Other income:
Trust department income.......................... 302 317 251
Service charges on deposit accounts.............. 1,584 1,338 1,195
Other service charges, commissions and fees...... 731 627 368
Investment security gains........................ 575 770 302
Income on insurance premiums..................... 661 576 653
Gains on mortgage sales.......................... 634 283 269
Other income..................................... 473 318 133
Total other income............................ 4,960 4,229 3,171
Other expenses:
Salaries and employee benefits.................. 10,380 9,679 8,613
Net occupancy expense........................... 3,202 2,797 2,531
Operating expenses of insurance subsidiary...... 472 365 363
Other operating expense......................... 5,971 6,519 5,027
Total other expenses......................... 20,025 19,360 16,534
Income before income taxes................... 13,584 11,416 9,677
Provision for income taxes........................ 3,534 3,491 2,693
Net income................................... $10,050 $ 7,925 $ 6,984
========= ======= =======
Basic earnings per share.......................<F1> $ 1.54 $ 1.22 $ 1.07
========= ======= =======
Diluted earnings per share.....................<F1> $ 1.50 $ 1.19 $ 1.05
========= ======= =======
<FN>
<F1> Per share data for all periods has been restated to reflect stock
dividends and splits.
</FN>
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
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, 1998, 1997, and 1996
(dollars in thousands except per share data)
Accumulated Total
Other
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......................... $19,424 $14,406 $24,077 $1,742 $ (53) $59,596
Comprehensive income:
Net Income................................. 6,984 6,984
Change in unrealized gain (loss) on
securities, net of tax of $(812) and
reclassification adjustment of $302........ (1,576) (1,576)
Total comprehensive income................. 5,408
Cash dividends...................................... (2,725) (2,725)
10% stock dividend.................................. 1,304 5,219 (6,523)
Purchase of treasury stock.......................... (368) (368)
Issuance of additional shares....................... 205 2,020 (57) 2,168
Balance, December 31, 1996.......................... 20,933 21,645 21,756 166 (421) 64,079
Comprehensive income:
Net income................................. 7,925 7,925
Change in unrealized gain (loss) on
securities, net of tax of $1,582 and
reclassification adjustment of $770........ 3,071 3,071
Total comprehensive income................. 10,996
Cash dividends...................................... (3,143) (3,143)
5% stock dividend................................... 723 3,905 (4,628)
Purchase of treasury stock.......................... (695) (695)
Issuance of additional shares....................... 372 3,095 __(691) _______ 2,776
Balance, December 31, 1997.......................... 22,028 28,645 21,219 3,237 (1,116) 74,013
Comprehensive income:
Net income................................. 10,050 10,050
Change in umrealized gain (loss) on
securities, net of tax of $(231) and
reclassification adjustment of $575........ (448) (448)
Total comprehensive income................. 9,602
Cash dividends...................................... (4,103) (4,103)
3 for 2 stock split................................. 11,024 (11,024)
Purchase of treasury stock.......................... (966) (966)
Issuance of additional shares....................... 105 368 (143) 330
Balance, December 31, 1998.......................... $33,157 $17,989 $27,023 $2,789 $(2,082) $78,876
======= ======= ======= ====== ======== =======
</TABLE>
Per share data for all periods has been restated to reflect stock dividends and
splits.
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
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, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Operating Activities:
Net income.............................................. $10,050 $ 7,925 $ 6,984
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................ 1,464 1,317 1,567
Provision for depreciation and amortization.......... 1,656 1,450 1,268
Amortization of goodwill............................. 241 241 241
Investment security gains............................ (575) (770) (302)
Loans originated for sale............................ (38,348) (14,017) (11,329)
Proceeds from sales of loans......................... 38,304 16,281 9,124
Gains on mortgage sales.............................. (634) (283) (269)
Change in other assets, net.......................... (3,769) (456) (1,701)
Increase in accrued interest payable and other
liabilities, net.................................... 340 781 1,454
Net cash provided by operating activities......... 8,729 12,469 7,037
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks................................ 1,148 (900) (1,072)
Proceeds from sales of investment securities............ 25,310 30,525 13,420
Proceeds from maturities of investment securities....... 80,425 44,612 38,621
Purchases of investment securities...................... (179,097) (94,995) (92,814)
Net increase in total loans............................. (59,991) (36,380) (54,594)
Net increase in premises and equipment.................. (1,896) (3,445) (1,368)
Net cash used in investing activities............. (134,101) (60,583) (97,807)
Financing Activities:
Net increase in total deposits.......................... 46,150 27,153 48,557
Net increase (decrease) in short-term borrowings........ (2,630) 7,439 26,092
Proceeds from issuance of long-term debt................ 88,720 25,000 18,000
Repayment of long-term debt............................. (5,000) (4,000) ---
Cash dividends.......................................... (4,103) (3,143) (2,725)
Purchases of treasury stock............................. (966) (695) (368)
Proceeds from issuance of common stock.................. 330 2,776 2,168
Net cash provided by financing activities......... 122,501 54,530 91,724
Increase (decrease) in cash and cash equivalents.. (2,871) 6,416 954
Cash and cash equivalents at beginning of year............ 30,115 23,699 22,745
Cash and cash equivalents at end of year.................. $27,244 $30,115 $23,699
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
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),Peoples
State Bank (PSB), 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
28 branch banking offices located in Dauphin, Northumberland, Schuylkill,
Luzerne, Snyder, Adams, and York 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 more 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, 1998 and 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 CBNA employees and a defined contribution plan
covering PSB 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 1998, 1997, and 1996
non-cash transactions related to real estate acquired through foreclosure
totalled $980,000, $1,163,000, and $808,000, 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 $4,436,000, $3,071,000,
and $2,320,000, and $26,011,000, $24,085,000, and $20,232,000 for income
taxes and interest, respectively, in 1998, 1997, and 1996. Certain prior
year amounts have been reclassified to conform with the current year's
presentation.
Recent Accounting Pronouncements:
During 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" (SFAS No. 130), which established
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains, and losses). SFAS 130 requires that
all items 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.
Comprehensive income includes a reclassification adjustment for net
realized investment gains included in net income of $575,000, $770,000, and
$302,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. The new standard requires only additional disclosures in the
consolidated financial statement: it does not affect the Corporation's
financial position or results of operation.
During 1998, the Corporation also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which revises employers'
disclosures about pensions and other postretirement benefit plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were under previous
pronouncements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June of 1998. SFAS 133 establishes standards for
recording derivative financial instruments on the balance sheet at their
fair value. This Statement requires changes in the fair value of
derivatives to be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management anticipates that the adoption of
SFAS 133 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
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131) in 1997. SFAS 131 establishes standards for
disclosure about products, services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has reviewed SFAS 131 and determined that the Corporation only
has one qualifying segment and no additional disclosure is required.
SFAS 134 " Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" requires that after a securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interest based on
its ability and intent to sell or hold those investments. The Statement is
effective for the first fiscal quarter beginning after December 15, 1998.
Management anticipates that this Statement 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, 1998 and 1997 are as follows:
1998 1997
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........ $ 78,800 $ 845 $ (196) $ 79,449 $ 66,940 $ 474 $ (25) $ 67,389
Mortgage-backed U.S. government agencies......... 82,887 568 (195) 83,260 84,568 834 (265) 85,137
Obligations of states and political subdivisions. 85,771 2,211 (306) 87,676 55,248 1,406 (21) 56,633
Corporate securities............................. 27,574 225 (340) 27,459 1,244 34 --- 1,278
Equity securities.............................. 13,284 1,565 (151) 14,698 6,379 2,468 --- 8,847
Total................................... $288,316 $5,414 $(1,188) $292,542 $214,379 $5,216 $ (311) $219,284
======== ====== ======== ======== ======== ====== ======= ========
</TABLE>
The amortized cost and market value of all investment securities at
December 31, 1998, 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............................ $ 6,457 $ 6,519
Due after one year through five years.............. 27,391 27,877
Due after five years through ten years.. .......... 36,546 36,938
Due after ten years................................ 121,751 123,250
192,145 194,584
Mortgage-backed securities......................... 82,887 83,260
Equity securities.................................. 13,284 14,698
$288,316 $292,542
======== ========
Proceeds from sales of investments in debt securities were $24,279,000,
$29,319,000 and $12,767,000 in 1998, 1997, and 1996, respectively. Gross gains
and losses of $147,000 and $17,000, respectively, were recognized in 1998.
Gross gains and losses of $138,000 and $117,000, respectively, were recognized
in 1997. Gross gains and losses of $113,000 and $88,000, respectively, were
recognized in 1996.
At December 31, 1998 and 1997, investment securities with carrying amounts
of approximately $104,186,000 and $89,373,000 respectively, were pledged to
collateralize public deposits and for other purposes as provided by law.
Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB,
however, it does not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member
institution.
4. Loans:
The composition of loans outstanding by lending classification is as follows:
December 31
1998 1997
(in thousands)
Commercial, financial and agricultural................$ 65,698 $ 53,520
Real-estate-construction.............................. 17,381 5,553
Real-estate-mortgage.................................. 324,709 299,529
Personal installment.................................. 97,561 88,046
Other................................................. 6,931 9,182
$512,280 $455,830
======== ========
Loans held for resale amounted to $3,319,000 and $2,641,000 at
December 31, 1998 and 1997, 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
1998 1997 1996
(in thousands)
Balance, January 1................... $6,270 $5,561 $4,955
Provision for loan losses............ 1,464 1,317 1,567
Loan charge-offs..................... (1,258) (1,466) (1,967)
Recoveries........................... 478 858 1,006
Balance, December 31................. $6,954 $6,270 $5,561
====== ====== ======
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
December 31
1998 1997
(in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural... $ 47 $ 53
Mortgages................................ 353 405
Personal installment..................... 34 72
Other.................................... 7 21
441 551
Restructured Loans 248 626
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural... 866 926
Mortgages................................ 2,282 3,388
Other.................................... 282 300
3,430 4,614
Other real estate........................... 625 866
Total.................................... $4,744 $6,657
====== ======
(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, 1998, the Corporation recorded no investment in impaired
loans with no related valuation allowance. For the years ended December 31,
1998, 1997, and 1996, 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
1998 1997
(in thousands)
Banking premises..................................... $15,504 $14,808
Furniture and fixture................................ 11,110 9,963
Leasehold improvements............................... 369 345
26,983 25,116
Less accumulated depreciation and amortization....... (12,780) (11,153)
$14,203 $13,963
======= =======
Depreciation expense charged to operations amounted to approximately
$1,656,000, $1,450,000, and $1,268,000 in 1998, 1997, and 1996, respectively.
7. Short-Term Borrowings and Long-Term Debt:
Short-term borrowings consist of the following:
December 31
1998 1997
(in thousands)
Securities sold under agreements to repurchase,
3.40% and 4.97% in 1998 and 1997, respectively...... $ 1,188 $ 753
Federal Home Loan Bank, 5.77% in 1997.................. --- 8,085
Federal funds purchased, 4.96% in 1998................. 6,400 ---
Treasury tax and loan note option account,
4.34% and 4.91% in 1998 and 1997, respectively...... 322 1,702
$ 7,910 $10,540
======= =======
Interest incurred on Federal Funds purchased and other short-term
borrowings amounted to $298,000, $331,000, and $353,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $141,000,000 and repurchase agreements totalling
$20,000,000. The long-term advances are due to mature from 1999 through 2008.
Monthly payments of interest are required to be paid to the Federal Home Loan
Bank at variable and fixed rates presently 5.26%, 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 amounted to $6,071,000, $3,538,000, and
$933,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Maturities on long term debt at December 31, 1998 are as follows:
1999............................ $ 4,000,000
2000............................ $ 4,000,000
2001............................ $20,000,000
2002............................ $45,000,000
2003............................ $10,000,000
Subsequent to 2003.............. $78,000,000
8. Pension Plan:
<TABLE>
<CAPTION>
The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 1998 and 1997.
1998 1997
(in thousands)
<S> <C> <C>
Changes in benefit obligation:
Projected benefit obligation at beginning of year................................. $4,461 $3,933
Service cost...................................................................... 244 222
Interest cost..................................................................... 310 293
Distributions..................................................................... (128) (49)
Change due to change in assumptions............................................... 299 (66)
Change due to plan amendment...................................................... 215 ---
Experience (gain) or loss......................................................... 533 128
Projected benefit obligation at end of year....................................... $5,934 $4,461
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.................................... $4,546 $3,626
Employer contributions............................................................ 355 360
Actual return on assets........................................................... 297 609
Distributions..................................................................... (128) (49)
Fair value of plan assets at end of year, primarily listed stocks,
corporate, and US bonds.......................................................... $5,070 $4,546
====== ======
Funded status at end of year...................................................... $ (864) $ 85
Unrecognized net transition (asset) or obligation................................. (29) (38)
Unrecognized prior service cost................................................... 128 (97)
Unrecognized net (gain) or loss................................................... 1,679 775
End of year (accrued) or prepaid pension cost..................................... $ 914 $ 725
====== ======
Discount rate..................................................................... 6.5% 7.0%
Expected return on plan assets.................................................... 9.0% 9.0%
Rate of compensation increases.................................................... 4.0% 4.5%
Components of net periodic benefit cost:
Service cost...................................................................... $ 244 $ 221
Interest cost..................................................................... 311 293
Actual return on plan assets...................................................... (297) (609)
Amortization of unrecognized net transition (asset) or obligation................. (8) (8)
Amortization of unrecognized prior service cost................................... (8) (8)
Amortization of unrecognized net (gain) or loss................................... 47 42
Asset gain or (loss) deferred..................................................... (119) 272
Net periodic pension cost for the year............................................ $ 170 $ 203
====== ======
</TABLE>
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 1998 For the Year Ended 1997 For the Year Ended 1996
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........................ $10,050 6,542 $1.54 $7,925 6,516 $1.22 $6,984 6,504 $1.07
===== ===== =====
Effect of Dilutive Securities:
Incentive stock options
outstanding......................... 150 164 136
Diluted EPS:
Income available to common
stockholders and assumed
conversion......................... $10,050 6,692 $1.50 $7,925 6,680 $1.19 $6,984 6,640 $1.05
======= ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
10. Income Taxes:
The provision for income taxes consists of the following:
1998 1997 1996
(in thousands)
Current........................... $4,004 $3,775 $2,440
Deferred.......................... (470) (284) 253
$3,534 $3,491 $2,693
====== ====== ======
The components of the net deferred tax asset (liability) as of December
31, 1998, 1997, and 1996 were as follows:
1998 1997 1996
(in thousands)
Deferred tax assets:
Loan loss provision......................... $1,531 $1,183 $1,010
Non-accrual loan interest income............ 363 264 183
Miscellaneous............................... 121 291 296
Deferred compensation....................... 296 176 73
Total deferred tax assets............... $2,311 $1,914 $1,562
Deferred tax liabilities:
Depreciation................................ $ 560 $ 583 $ 628
Accretion of discount....................... 176 239 156
Pension expense............................. 285 246 216
Unrealized gain on marketable
equity securities....................... 1,437 1,671 97
Miscellaneous............................... --- 23 14
Total deferred tax liability............ 2,458 2,762 1,111
Net deferred asset (liability).......... $ (147) $ (848) $ 451
====== ====== ======
1998 1997 1996
(in thousands)
Computed "expected" tax provision.................. $4,615 $3,882 $3,291
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance... (1,230) (784) (605)
Goodwill amortization.............................. 92 82 82
Nondeductible expense related to acquisition....... 49 252 ---
Other, net......................................... 61 59 (75)
Officer life insurance, net........................ (53) --- ---
Total provision for income taxes................... $3,534 $3,491 $2,693
====== ====== ======
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 119,926, 86,070, and 85,501, in 1998, 1997, and
1996, respectively.
<TABLE>
<CAPTION>
A summary of the status of the Bank's Plan as of December 31, 1998, 1997,
and 1996 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, 1995........................ 338,141 1,197,376 $11.73 142,325
Options granted................................... 85,501 (85,501) $13.24 $ 6.53
Options exercised................................. (30,865) --- $ 7.94
Options cancelled or expired...................... (11,049) 11,049 $14.64
Balance, December 31, 1996........................ 381,728 1,122,924 $12.32 162,218
Options granted................................... 86,070 (86,070) $19.91 $ 8.43
Options exercised................................. (92,059) --- $10.59
Options cancelled or expired...................... (1,923) 1,923 $14.92
Balance, December 31, 1997........................ 373,816 1,038,777 $13.99 151,129
Options granted................................... 119,926 (119,926) $24.02 $ 5.05
Options exercised................................. (28,374) --- $10.82
Options cancelled or expired...................... (1,914) 1,914 $20.00
Balance, December 31, 1998........................ 463,454 920,765 $17.07 279,320
======= ========= ====== =======
</TABLE>
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123). As permitted by SFAS 123, the Corporation 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 Corporation'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 Corporation's net income and net income per share would
have approximated $(267,000) and $(.04), respectively in 1998. The impact on
net income and net income per share in 1997 would have been $(96,000) and
$(.01), respectively. The impact on net income and net income per share in
1996 would have been $(73,000) and $(.01), respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively; dividend yield of
2.5% and 1.0%, expected volatility of 23% and 20%, risk-free interest rates of
4.80% 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. and Peoples State Bank. At
December 31, 1998, 1997, and 1996, loans to these persons and their business
affiliates amounted to $6,548,000, $6,367,000 and $4,012,000, respectively.
In the opinion of management, such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.
1998 1997 1996
(in thousands)
Balance beginning of period................. $ 6,367 $ 4,012 $ 4,492
Additions................................... 2,003 4,884 708
Amounts collected........................... (1,822) (2,529) (1,188)
Amounts written off......................... --- --- ---
Balance end of period....................... $ 6,548 $ 6,367 $ 4,012
======= ======= =======
13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
1998 1997
(in thousands)
Condensed Balance Sheets:
Cash and investments............................ $ 150 $ 137
Investment in Community Banks, N.A. ............ 49,537 48,085
Investment in Peoples State Bank................ 24,228 20,653
Investment in nonbank subsidiaries.............. 4,329 4,652
Other assets.................................... 1,023 1,292
Total assets.................................... $79,267 $74,819
======== =======
Other liabilities............................... $ 391 $ 806
Stockholders' equity............................ 78,876 74,013
Total liabilities and stockholders' equity...... $79,267 $74,819
======== =======
1998 1997 1996
Condensed Statements of Income: (in thousands)
Dividends from:
Community Banks, N.A. ................... $5,279 $3,010 $2,260
Peoples State Bank....................... 285 --- ---
Other income (expense)................... (546) (335) 86
Income before equity in undistributed earnings of
subsidiaries.................................. 5,018 2,675 2,346
Equity in undistributed earnings of:
Community Banks, N.A. ........................ 1,483 3,240 3,364
Peoples State Bank............................ 3,118 1,342 887
Nonbank subsidiaries.......................... 431 668 387
5,032 5,250 4,638
Net income........................................ $10,050 $7,925 $6,984
======= ====== ======
Condensed Statements of Cash Flows:
Operating activities:
Net income.................................... $10,050 $7,925 $6,984
Adjustments to reconcile net cash provided
by operating activities:
Undistributed earnings of:
Community Banks, N.A. .................... (1,483) (3,240) (3,364)
Peoples State Bank........................ (3,118) (1,342) (887)
Nonbank subsidiaries...................... (431) (668) (387)
Other, net.................................. 266 (1,615) (1,684)
Net cash provided by operating activities. 4,752 1,060 662
Investing activities:
Additional investment in nonbank subsidiaries --- --- ---
Net cash used in investment activities....... --- --- ---
Financing Activities:
Proceeds from issuance of common stock........ 330 2,776 2,168
Purchase of Treasury Stock................. (966) (695) (368)
Dividends paid............................. (4,103) (3,143) (2,725)
Net cash used by financing activities..... (4,739) (1,062) (925)
Net change in cash and cash equivalents.. 13 (2) (263)
Cash and cash equivalents at
beginning of year.................. 137 139 402
Cash and cash equivalents at end of year $ 150 $ 137 $ 139
======= ======= ======
14. Regulatory Restrictions of Banking Subsidiaries:
CBNA and PSB are 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 and PSB could declare dividends in 1998 without regulatory approval of
$9,183,000 plus an additional amount equal to the bank's retained net profits in
1999 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 $265,000 at December 31, 1998 and 1997.
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, 1998,
are as follows:
Contract or Notional Amount
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans............................ $50,925
Unused lines of credit.................................... $21,136
Standby letters of credit................................. $ 3,640
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, 1998 and 1997:
Three Months Ended
1998 1997
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.............. $13,456 $13 702 $14,542 $15,300 $12,406 $12,788 $13,467 $13,626
Interest expense............. 6,235 6,330 6,917 7,405 5,801 5,941 6,268 6,413
Net interest income.......... 7,221 7,372 7,625 7,895 6,605 6,847 7,199 7,213
Provision for loan losses.... 193 231 487 553 390 290 340 297
Net interest income after
provision for loan losses:.. 7,028 7,141 7,138 7,342 6,215 6,557 6,859 6,916
Other income................. 845 913 971 1,022 779 748 876 773
Investment security
gains...................... 270 73 224 8 373 104 86 207
Gains on mortgage sales...... 142 142 131 219 40 62 31 150
Other expenses............... 4,932 4,885 5,020 5,188 4,395 4,588 4,678 5,699
Income before income taxes... 3,353 3,384 3,444 3,403 3,012 2,883 3,174 2,347
Income taxes................. 976 920 868 770 909 831 931 820
Net income................... $ 2,377 $ 2,464 $ 2,576 $ 2,633 $ 2,103 $ 2,052 $ 2,243 $ 1,527
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share..... $ .37 $ .38 $ .39 $ .40 $ .32 $ .32 $ .35 $ .23
Diluted earnings
per share.................. $ .35 $ .37 $ .39 $ .39 $ .31 $ .31 $ .34 $ .23
Dividends per share.......... $ .14 $ .16 $ .16 $ .16 $ .11 $ .12 $ .12 $ .13
</TABLE>
Per share data has been restated to reflect stock dividends and splits.
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>
<CAPTION>
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1998 and 1997:
December 31,
1998 1997
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................... $ 28,502 $ 28,502 $ 32,521 $ 32,521
Investment securities...................... 292,542 292,542 219,284 219,284
Loans, net of unearned income.............. 502,262 498,552 444,031 437,121
Less: Allowance for loan losses............ (6,954) --- (6,270) ---
Net Loans............................ 495,308 498,552 437,761 437,121
Loans held for sale........................ 3,319 3,319 2,641 2,641
Total................................ $819,671 $822,915 $692,207 $691,567
======== ======== ======== ========
Financial liabilities:
Deposits................................... $595,905 $598,654 $549,755 $550,847
Short-term borrowings...................... 7,910 7,910 10,540 10,540
Long-term debt............................. 161,000 160,822 77,280 75,038
Total $764,815 $767,386 $637,575 $636,425
======== ======== ======== ========
</TABLE>
18. Completed Acquisition:
On March 31, 1998 Community Bank, Inc. (Community) completed its merger of The
Peoples State Bank (Peoples). Peoples has six banking offices which are located
in York and Adams Counties, Pennsylvania. Community issued 1,325,330 shares
of common stock for all of the outstanding common stock of Peoples. This
transaction was accounted for as a pooling of interests and combined unaudited
financial information is included in this report.
<TABLE>
<CAPTION>
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........................... $ 1.32 $ 1.22 $ 1.25 $ 1.07
Diluted Earnings Per Share......................... $ 1.29 $ 1.19 $ 1.23 $ 1.05
======= ======= ======= =======
</TABLE>
Per share data for all periods has been restated to reflect stock dividends
and split
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, changes of stockholders'
equity, and cash flows present fairly, in all material respects, the
financial position of Community Banks, Inc. (Corporation) and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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
of these statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS, L.L.P
One South Market Square
Harrisburg, PA 17101
January 14, 1999
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion of financial condition and results of operations is
based on the selected financial data listed below and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
FINANCIAL HIGHLIGHTS 1998 1997 1996 1995 1994
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Investment securities............... $292,542 $219,284 $194,003 $155,676 $161,053
Loans (net of unearned income and
allowance for loan losses)........ 495,308 437,761 402,681 349,544 306,814
Total assets........................ 851,674 719,462 651,573 553,325 526,866
Total deposits...................... 595,905 549,755 522,602 474,045 443,516
Stockholders' equity................ 78,876 74,013 64,079 59,596 51,131
Total average assets................ 765,980 681,491 591,724 538,682 515,088
Total average stockholders' equity.. 77,057 68,971 61,320 55,209 50,156
Earnings Data
Net interest income................. 30,113 27,864 24,607 22,381 20,629
Provision for loan losses........... 1,464 1,317 1,567 1,078 1,912
Net interest income after
provision for loan losses....... 28,649 26,547 23,040 21,303 18,717
Other income........................ 4,960 4,229 3,171 2,790 3,387
Other expense....................... 20,025 19,360 16,534 16,303 15,107
Provision for income taxes.......... 3,534 3,491 2,693 2,071 1,602
Net income.......................... 10,050 7,925 6,984 5,719 5,395
Per Share Data
Basic earnings per share............ 1.54 1.22 1.07 .88 .83
Diluted earnings per share.......... 1.50 1.19 1.05 .86 .82
Cash dividends...................... .62 .48 .41 .37 .32
Book value.......................... 12.09 11.31 9.85 9.16 7.81
Average diluted shares
outstanding..................... 6,692,172 6,679,675 6,639,526 6,620,931 6,618,598
Profitability Ratios
Return on average assets............ 1.31% 1.16% 1.18% 1.06% 1.05%
Return in average stockholders'
equity.......................... 13.04% 11.49% 11.39% 10.36% 10.76%
Net interest margin (FTE)........... 4.47% 4.58% 4.60% 4.39% 4.30%
Efficiency ratio.................... 53.80% 55.29% 60.40% 62.80% 61.80%
Capital & Liquidity Ratios
Stockholders' equity to total assets 9.26% 10.29% 9.83% 10.77% 9.70%
Net loans to assets................. 58.16% 60.85% 61.80% 63.17% 58.23%
Asset Quality Ratios
Reserve for loan losses to total
loans outstanding............... 1.38% 1.41% 1.36% 1.40% 1.41%
Reserve for loan losses to
non-performing assets........... 147% 94% 83% 90% 74%
Non-performing assets to total
loans outstanding............... .94% 1.50% 1.65% 1.55% 1.91%
Non-performing assets to
total assets.................... .56% .93% 1.03% .99% 1.13%
</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, 1998, 1997, and 1996 (dollars in thousands)
1998 1997 1996
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks......... $ 20,438 $18,809 $ 17,845
Earnings Assets:
Interest-bearing deposits in
other banks................. 1,626 $ 80 4.92% 1,587 $ 84 5.29% 5,211 $ 278 5.33%
Investment securities:
Taxable..................... 176,687 11,325 6.41 167,732 11,382 6.79 130,978 8,429 6.44
Tax-exempt<F2>.............. 68,489 5,750 8.40 43,017 3,670 8.53 29,696 2,523 8.50
Total investment
securities.................. 245,176 210,749 160,674
Federal funds sold............ 8,251 494 5.99 5,528 304 5.50 3,808 207 5.44
Loans, net of unearned
income<F2>.................. 467,094 41,539 8.89 421,283 38,236 9.08 385,956 34,806 9.02
Total Earning Assets......... 722,147 $59,188 8.19 639,147 $53,676 8.40 555,649 $46,243 8.32
Allowance for loans
losses........................ (6,528) (6,035) (5,225)
Premises, equipment and
other assets................. 29,923 29,570 23,455
Total assets................. $765,980 $681,491 $591,724
======== ======== ========
Liabilities:
Demand deposits................. 43,911 37,806 35,762
Interest bearing liabilites:
Savings deposits.............. 243,290 5,479 2.25% 224,786 5,556 2.47 202,019 4,974 2.46
Time deposits:
$100,000 or greater......... 28,687 28,987 25,270
Other....................... 251,223 248,467 240,812
Total time deposits........... 279,910 15,039 5.37 277,454 14,998 5.41 266,082 14,408 5.41
Total time and savings
deposits.................... 523,200 502,240 468,101
Short-term borrowings......... 4,527 298 6.58 6,313 331 5.24 7,496 354 4.72
Long-term debt................ 109,414 6,071 5.55 60,636 3,538 5.83 14,758 932 6.32
Total interest-bearing
liabilities................. 637,141 $26,887 4.22 569,189 $24,423 4.29 490,355 $20,668 4.21
Accrued interest, taxes and
other liabilities............. 7,871 5,525 4,287
Total liabilities............. 688,923 612,520 530,404
Stockholders' Equity.............. 77,057 68,971 61,320
Total liabilities and
stockholders' equity......... $765,980 $681,491 $591,724
======== ======== ========
Interest income to earning
assets........................ 8.19% 8.40% 8.32%
Interest expense to earning
assets........................ 3.72 3.82 3.72
Effective interest
differential.............. $32,301 4.47% $29,253 4.58% $25,575 4.60%
======= ===== ======= ===== ======= ====
<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, 1998 and 1997
(in thousands)
1998 vs 1997 1997 vs 1996
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans............................. $4,112 ($809) $3,303 $3,197 $ 233 $3,430
Investment securities:
Taxable......................... 594 (651) (57) 2,474 479 2,953
Tax-exempt...................... 2,137 (57) 2,080 1,138 9 1,147
Total........................ 2,731 (708) 2,023 3,612 488 4,100
Federal funds sold................ 161 29 190 95 2 97
Interest-bearing deposits in other
banks............................ 2 (6) (4) (192) (2) (194)
Total.......................... 7,006 (1,494) 5,512 6,712 721 7,433
Increase (decrease) in interest expense:
Savings deposits.................. 438 (515) (77) 562 20 582
Time deposits..................... 143 (102) 41 590 --- 590
Short-term borrowings............. (107) 74 (33) (60) 37 (23)
Long-term debt and capital notes.. 2,711 (178) 2,533 2,683 (77) 2,606
Total.......................... 3,185 (721) 2,464 3,775 (20) 3,755
Increase (decrease) in effective
interest differential............ $3,821 $(733) $3,048 $2,937 $ 741 $3,678
====== ====== ====== ====== ====== ======
<FN>
<F1> Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1998 and 1997. 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%.
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On March 31, 1998 Community Banks, Inc. (Community) completed its
merger of The Peoples State Bank (Peoples). Peoples has six
banking offices which are located in York and Adams Counties,
Pennsylvania. Community issued 1,325,330 shares of common stock
for all of the outstanding common stock of Peoples. This
transaction was accounted for as a pooling of interests and
combined unaudited financial information is included in this
report.
The earnings of Community Banks, Inc. (Corporation) are derived
exclusively from the operations of its wholly owned subsidiaries;
Community Banks, N.A.; Peoples State Bank; Community Banks
Investments, Inc.; and Community Banks Life Insurance Co.
Diluted net income was $1.50 per share in 1998 compared to $1.19
per share in 1997, and $1.05 in 1996. Net income per share in
1998 was 26.1% more than net income per share in 1997. Net income
per share in 1997 increased 13.3% 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 $4,713,000 or 9.0% in 1998,
compared to an increase of $7,012,000 or 15.5% in 1997, and an
increase of $4,131,000 or 10.0% in 1996. Interest and fees on
loans increased $3,211,000 or 8.4% in 1998. Most of this
increase was volume related and caused by an increase in average
balances of $45,811,000 or 10.9%. The increase of $1,316,000 or
9.5% in interest and dividends on investment securities was also
volume related. The average balances of tax-exempt securities
increased $25,472,000 or 59.2% in 1998. Interest and fees on
loans increased $3,399,000 or 9.8% in 1997. This was primarily a
volume related change driven by an increase in average balances
of $35,327,000 or 9.2%. The increase of $3,710,000 or 36.8% in
interest and dividends on investment securities was also volume
related. The average balances of investment securities increased
$50,075,000 or 31.2% in 1997. Factors contributing to the 1996
change included a volume related increase in interest and fees on
loans of $4,350,000 and a volume related decrease of $317,000 in
interest and dividends on investment securities.
Total interest expense increased $2,464,000 or 10.1% in 1998 and
$3,755,000 or 18.2% in 1997, and $1,905,000 or 10.2% in 1996. A
rate related decrease of $77,000 or 1.4% occurred in savings
interest expense in 1998. Also affecting the 1998 increase was an
increase of $41,000 or 0.3% in time deposit interest expense.
All of the increase in time deposit interest expense was caused
by increased volume. An increase of $2,500,000 or 64.6% in
borrowed funds interest significantly affected total interest
expense in 1998. Material factors affecting the 1997 increase
were increases of $590,000 or 4.1% in total time deposit interest
expense and an increase of $582,000 or 11.7% in savings interest
expense. The average balances of savings accounts increased
$22,767,000 or 11.3%. Material factors affecting the 1996 change
were increases of $625,000 or 4.5% in total time deposit interest
expense and $367,000 or 40.0% in interest expense of
borrowings.
Average interest-bearing deposits represented 92.3% of average
total deposits in 1998 compared to 93.0% in 1997 and 93.2% in
1996.
Net interest income increased $2,249,000 or 8.1% in 1998,
compared to $3,257,000 or 13.2% in 1997 and $2,226,000 or 9.9% in
1996. Average earning assets increased $83,000,000 or 13.0% in
1998 compared to $83,498,000 or 15.0% in 1997 and $49,843,000 or
9.9% in 1996. Average interest-bearing liabilities increased
$67,952,000 or 11.9% in 1998 compared to $78,834,000 or 16.1% in
1997 and $45,264,000 or 10.2% in 1996.
Net Interest Income Margin:
Net interest income margin for 1998 was 4.47% compared to 4.58%
in 1997 and 4.60% in 1996. Interest income to earning assets
decreased from 8.40% in 1997 to 8.19% in 1998. Interest expense
to earning assets decreased from 3.82% to 3.72%.
Provision for Loan Losses:
Net loan charge-offs for 1998 were $780,000 compared to $608,000
in 1997 and $961,000 in 1996. The provision for loan losses
charged to income was $1,464,000 in 1998 compared to $1,317,000
in 1997 and $1,567,000 in 1996. Total non-performing loans
approximated $4,119,000, $5,791,000, and $5,839,000, as of
December 31, 1998, 1997, and 1996, respectively. Non-performing
residential real estate and commercial loans totalled
approximately $2,635,000 and $913,000, respectively, at year-end
1998. Total delinquencies as a percentage of total loans
approximated 2.2%, 3.4%, and 4.2% at December 31, 1998, 1997, and
1996, respectively.
Other Income and Other Expenses:
Other income net of security gains increased $926,000 or 26.8% in
1998 compared to an increase of $590,000 or 20.6% in 1997 and a
decrease of $1,000 in 1996. The increase in 1998 of $350,000 or
17.8% in service charges on deposit accounts and other service
charges commissions and fees resulted from increased deposit
account balances and management's renewed emphasis on these
functions. The increases in trust department income and service
charges on deposit accounts which occurred in 1997 and 1996 also
resulted from management's emphasis on these functions.
Investment security gains in 1998 and 1997 were associated
primarily with equity securities held by Community Banks
Investments, Inc. Investment security losses approximated
$17,000 in 1998. Changes in income on insurance premiums are a
reflection of consumer loan demand and activity at Community
Banks Life Insurance Co. Gains on mortgage sales increased
significantly in 1998 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 1998,
1997, and 1996.
Other expenses increased $665,000 or 3.4% in 1998 compared to
increases of $2,826,000 or 17.1% in 1997, and $231,000 or 1.4% in
1996. The 1998 increases in salaries and employee benefits of
$701,000 or 7.2% and occupancy expense of $405,000 or 14.5% were
affected by the opening of new banking offices. The 1997
increases in salaries and benefits of $1,066,000 or 12.4% and net
occupancy expense of $266,000 or 10.5% were also affected by the
opening of new banking offices. In addition, affecting salaries
and benefits was the recognition of certain retirement plan
obligations. The decrease of $548,000 or 8.4% in other operating
expense in 1998 was affected by the recognition in 1997 of
expense associated with the pending acquisition of the Peoples
State Bank. Increases in salaries and employee benefits and net
occupancy expense also affected an increase in 1996 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 26.0%, 30.6%, and 27.8% in 1998, 1997, and 1996,
respectively. Significantly impacting these changes were
increases in tax-exempt investment security income recognized in
1998.
These factors contributed to increases in net income of
$2,125,000 or 26.8%, $941,000 or 13.5%, and $1,265,000 or 22.1%
for 1998, 1997, and 1996, respectively.
Balance Sheet Data:
Earning assets represented 94.1% of total assets at year-end 1998
compared to 93.2% at year-end 1997. Increases in deposits and
long-term debt in 1998 were reflected in increases in earning
assets, most notably investment securities and loans. 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 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, 1998 and 1997, management classified investment
securities with book and market values of $288,316,000 and
$292,542,000 and $214,379,000 and $219,284,000, respectively, as
available for sale. Gross unrealized gains and losses relating
to investment securities were $5,414,000 and $1,188,000 and
$5,216,000 and $311,000, respectively, at year-end 1998 and 1997.
The Corporation generally avoids investments in securities of a
speculative nature. No securities were considered held for sale
or for trading purposes at December 31, 1998 and December 31,
1997.
At December 31, 1998 and 1997, the unrealized gains on
investments available for sale, net of tax were $2,789,000 and
$3,237,000, respectively, and were accordingly reflected in
shareholders equity.
Net loans increased 13.1% from December 31, 1997 to December 31,
1998. Real estate loans increased 12.1%, while commercial and
personal loans increased 22.8% and 10.8%, respectively, during
the period. New banking offices and increased demand for loans
affected these changes.
The following table sets forth information regarding nonaccrual
loans, other real estate owned, restructured loans, and loans
which are 90 days or more delinquent but accruing interest at the
dates indicated.
December 31
1998 1997 1996 1995 1994
(dollars in thousands)
Nonaccrual loans.......... $3,430 $4,614 $4,754 $3,177 $2,902
Other real estate owned... 625 866 883 901 1,846
Restructured loans........ 248 626 277 494 366
Accruing loans contractually
past due 90 days or more.. 441 551 808 917 819
Total.................. $4,744 $6,657 $6,722 $5,489 $5,933
====== ====== ====== ====== ======
Ratio of nonaccrual loans,
other real estate owned,
restructured loans,
and accruing loans contractu-
ally past due 90 days or
more to total assets...... .56% .93% 1.03% .99% 1.13%
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 1.38%, 1.41%,
1.36%, 1.40%, and 1.46% at year-end, 1998, 1997, 1996, 1995, and
1994, respectively.
At December 31, 1998, 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 $240,000 or 1.7% 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, 1998 included student loans totalling $2,257,000.
The increase of $4,990,000 or 43.3% in accrued interest
receivable and other assets was impacted by increases in accrued
interest receivable, prepaid expenses, and deferred taxes.
Total deposits increased $46,150,000 or 8.4% in 1998 with most of
the increase occurring in savings and time deposits. As
previously noted, management chose to reduce short-term
borrowings and increase long-term debt by borrowing at the
Federal Home Loan Bank of Pittsburgh.
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, 1998, 1997 and 1996, financing
activities provided cash of $122,501,000, $54,530,000, and
$91,724,000, respectively. Deposit growth and long-term debt
accounted for the largest portion of this funding source in 1998
and 1997. Deposits and short-term and long-term borrowings
represented the largest funding source in 1996.
Net cash used in investing activities totalled $134,101,000,
$60,583,000, and $97,807,000 for the years ended December 31,
1998, 1997 and 1996, respectively. The primary uses of funds in
1998 were purchases of investment securities of $179,097,000 and
net increases in total loans of $59,991,000. The primary uses of
funds in 1997 were purchases of investment securities of
$94,995,000 and increases in net loans of $36,380,000. In 1996,
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 1999 and
management will continue to carefully evaluate this demand based
on the creditworthiness of borrowers 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 105% at December 31,
1998.
Accordingly, management anticipates that any decline in interest
rates will negatively impact earnings of the Corporation.
Conversely, management may be able to increase rates on certain
earning assets more rapidly than those of interest-bearing
liabilities if a significant increse in interest rates would
occur. This may result in an increase 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 1998 1997
(dollars in thousands)
Core (Tier 1) Capital --- $74,813 $69,214
Leverage ratio (A) 4.0% 8.8% 9.6%
Risk-based Capital Ratios:
Tier 1 capital ratio (B) 4.0% 12.8% 15.0%
Total risk-based capital
ratio (C) 8.0% 14.0% 15.8%
(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 1998 and 1997. The core capital ratio
decreased from 15.0% to 12.8%, and the total capital ratio
decreased from 15.8% to 14.0%, still well above the regulatory
minimums of 4.0% for core and 8.0% for total capital. These
changes were impacted by the Corporation's asset growth and
retention of earnings during the year.
Impact of the Year 2000 Issue:
The "Year 2000 Issue" is the result of the possibility that
computer programs may be unable to properly recognize 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 business activities.
Based on an ongoing assessment, the Corporation has determined
that it will need to modify or replace portions of its software
and hardware so that its computer systems will properly utilize
dates beyond December 31, 1999. If such modifications and
conversions are not made, or are not completed on a timely basis,
the Year 2000 Issue could have an adverse impact on operations of
the Corporation. However, management presently believes that as a
result of modifications to existing software and hardware and
conversions to new software and hardware, the Year 2000 Issue
will be mitigated.
The Corporation's Year 2000 Action Plan has been categorized into
five phases: Awareness, Assessment, Testing, Validation, and
Implementation. The initial focus within those phases has been on
vendors and systems that are related to mission critical business
processes. Mission critical processes are defined as those areas
of the business whose continued operations are required in order
to provide basic banking services. Management is currently
testing these mission critical processes and plans to complete
implementation by May 31, 1999. In addition, all other business
processes subject to Y2K remediation are expected to be completed
prior to December 31, 1999.
Community Banks, Inc. has initiated formal communications with
all of its significant vendors and large commercial customers to
determine the extent to which it is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. To date,
no material impact is anticipated based upon responses to these
communications. The Corporation's estimated Year 2000 project
costs include the costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently
available information. For significant vendors, management will
validate that they are Year 2000 compliant by December 31, 1999,
or make plans to switch to a new vendor or system that is
compliant. For large commercial loan customers, management will
take appropriate action based upon the customer's response.
The Corporation will utilize both internal and external resources
to reprogram or replace, and test software for Year 2000
modifications. Costs incurred to date as well as for the 1998
fiscal year for the Year 2000 project total less than $100,000
and are generally 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 with which the Corporation deals for its many
different computer processing and transaction functions. The
Corporation does not anticipate significant expense incurred or
charged to the Year 2000 Issue due to its many software,
maintenance, and licensing agreements with its software vendors.
The cost to complete the internal process is currently estimated
to be less than $100,000.
Management believes that the Corporation's existing alternative
processing procedures will be available as a contingency
alternative in the unanticipated event that the Year 2000 Issue
results in significant disruption of normal business
activities.
Recent Accounting Pronouncements:
During 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" (SFAS No.
130), which established standards for the reporting and
disclosure of comprehensive income and its components (revenues,
expenses, gains, and losses). SFAS 130 requires all items
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. Comprehensive income includes a
reclassification adjustment for net realized investment gains
included in net income of $575,000, $770,000, and $302,000 for
the years ended December 31, 1998, 1997, and 1996 respectively.
The new standard requires only additional disclosures in the
consolidated financial statements: it does not affect the
Corporation's financial position or results of operations.
During 1998, the Corporation also adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132), which
revises employers' disclosures about pensions and other
postretirement benefit plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were under
previous pronouncements.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June of 1998.
SFAS 133 establishes standards for recording derivative financial
instruments on the balance sheet at their fair value. The
statement requires changes in the fair value of derivatives to be
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part
of a hedge transaction, and, if it is, the type of hedge
transaction. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management
anticipates that the adoption of SFAS 133 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 Standards No., "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131) in 1997. SFAS 131
establishes standards for disclosure about products, services,
geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. Management has
reviewed SFAS 131 and determined that the Corporation only has
one qualifying segment and no additional disclosure is required.
SFAS 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" requires that after a securitization
of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed
securities or other retained interest based on its ability and
intent to sell or hold those investments. The statement is
effective for the first fiscal quarter beginning after December
15, 1998. Management anticipates that this Statement will not
have a material effect on the Corporation's financial condition
or results of operations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,036
<INT-BEARING-DEPOSITS> 1,258
<FED-FUNDS-SOLD> 2,208
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 292,542
<INVESTMENTS-CARRYING> 292,542
<INVESTMENTS-MARKET> 292,542
<LOANS> 502,262
<ALLOWANCE> 6,954
<TOTAL-ASSETS> 851,674
<DEPOSITS> 595,905
<SHORT-TERM> 7,910
<LIABILITIES-OTHER> 7,983
<LONG-TERM> 161,000
0
0
<COMMON> 78,876
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 851,674
<INTEREST-LOAN> 41,306
<INTEREST-INVEST> 15,120
<INTEREST-OTHER> 574
<INTEREST-TOTAL> 57,000
<INTEREST-DEPOSIT> 20,518
<INTEREST-EXPENSE> 26,887
<INTEREST-INCOME-NET> 30,113
<LOAN-LOSSES> 1,464
<SECURITIES-GAINS> 575
<EXPENSE-OTHER> 20,025
<INCOME-PRETAX> 13,584
<INCOME-PRE-EXTRAORDINARY> 10,050
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,050
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 7.89
<LOANS-NON> 3,430
<LOANS-PAST> 441
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,270
<CHARGE-OFFS> 1,258
<RECOVERIES> 478
<ALLOWANCE-CLOSE> 6,954
<ALLOWANCE-DOMESTIC> 6,954
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
