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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998.
or
(_) Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from __________ to __________.
No. 000-29658
(Commission File Number)
COMMUNITY INDEPENDENT BANK, INC.
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(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2357593
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(State of Incorporation) (IRS Employer ID Number)
201 N. MAIN STREET, BERNVILLE, PA 19506
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(Address of Principal Executive Offices) (zip code)
(610) 488-1200
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(Registrant's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $5.00 Par Value
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (_)
The issuer's revenues for the fiscal year ended December 31, 1998 were
$7,875,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant is $7,615,494.
The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of February 28, 1999 was 696,774.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from the
registrant's Proxy Statement for the Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (check one): Yes No X
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COMMUNITY INDEPENDENT BANK, INC.
FORM 10-KSB CROSS-REFERENCE INDEX
Page
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Part I
Item 1. Business 4-10
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters 11-12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-30
Item 7. Financial Statements
Independent Auditor's Report 31
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997 32
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 33
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 35
Notes to Consolidated Financial Statements 36-57
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 58
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) Of the Exchange Act 58
Item 10. Executive Compensation 58
Item 11. Security Ownership of Certain Beneficial Owners and Management 58
Item 12. Certain Relationships and Related Transactions 58
Item 13. Exhibits and Reports on Form 8-K 60-62
Signatures 59
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PART I
ITEM 1. BUSINESS
General
Community Independent Bank, Inc. (the "Company") is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). The Company was
incorporated on December 31, 1984 for the purpose of acquiring Bernville Bank,
N.A. (the "Bank") and thereby enabling the Bank to operate within a bank holding
company structure. The Company became an active bank holding company on December
31, 1984 when it acquired the Bank. The Bank is a wholly-owned subsidiary of the
Company.
The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking business.
The Company, through the Bank, derives substantially all of its income from the
furnishing of banking and bank related services.
The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in the distributions and earnings of the Bank, are
necessarily subject to the prior claims of the creditors of the Bank, except to
the extent that claims of the Company itself as a creditor may be recognized.
Such claims on the Bank by creditors other than the Company include obligations
in respect of federal funds purchased and certain other borrowings, as well as
deposit liabilities.
The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical and advisory
services for the Bank, coordinates the Bank's general policies and activities,
and participates in the Bank's major business decisions.
As of December 31, 1998, the Company, on a consolidated basis, had total
assets of approximately $101.7 million, total deposits of approximately $85.4
million, and stockholders' equity of approximately $7.4 million.
Bernville Bank, N.A.
The Bank was incorporated in 1907 under the laws of the United States of
America as a national bank under the name "The First National Bank of
Bernville." In 1971, the charter was changed to a state charter under the name
"Bernville Bank." In 1983, the charter was again changed to a national banking
association under the current name. The Bank is a member of the Federal Reserve
System.
As of December 31, 1998, the Bank (exclusive of the holding company assets
and liabilities) had total assets of approximately $101.7 million, total
deposits of approximately $85.6 million, and stockholders' equity of
approximately $7.2 million. Its deposits are insured by the Bank Insurance Fund
("BIF") maintained by the Federal Deposit Insurance Corporation (the "FDIC") to
the maximum extent permitted by law.
The Bank engages in a full service commercial and consumer banking
business. The Bank, with its main office at 201 North Main Street, Bernville,
Pennsylvania, also provides services to its customers through three full service
branch banks which include drive-in facilities, and one loan service center. The
Bank's main office, three full service branch offices, operations center and
loan service center are all located in Berks County, Pennsylvania.
The Bank's services include accepting time, demand and saving deposits,
including NOW accounts, regular savings accounts, money market certificates,
fixed rate certificates of deposit and club accounts. Its services also include
making secured and unsecured commercial and consumer loans, making construction
and mortgage loans and the renting of safe deposit facilities. The Bank also
offers a check card to its customers and has instituted "Xpress Phone Banking"
which provides customers 24-hour access to their accounts. Additional services
include making residential mortgage loans, small business loans and student
loans. The Bank's business loans include seasonal credit, collateral loans and
term loans. The Bank is not authorized to exercise trust powers.
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No material amount of deposits is obtained from a single depositor or group
of depositors (including Federal, state and local governments). The Bank has not
experienced any significant seasonal fluctuations in the amount of its deposits.
Both fixed and adjustable rate residential mortgage loans are offered.
Fixed rate loans for residential mortgages have terms up to 30 years. Fixed rate
residential mortgage loans ranging from 20 to 30 years are generally sold in the
secondary market. Adjustable rate loans are held in portfolio. The current
residential mortgage portfolio is comprised of substantially all fixed rate
loans.
Home Equity loans are originated as fixed rate loans with terms generally
between 5 to 8 years, and occasionally up to 15 years. Variable-rate home equity
loans are also offered and represent approximately only 3% of the portfolio.
Commercial loans are offered as either variable rate loans for the life of
the loan or have a fixed term for 3 to 5 years and then vary according to an
index. Fixed rate loans currently represent 76% of the commercial portfolio.
Consumer loans are primarily fixed rates and represent 94% of the consumer
loan portfolio. Lines of credit are offered as adjustable rates and represent 6%
of the portfolio.
The Bank requires private mortgage insurance for all residential mortgage
loans in excess of the 80% of the appraised value. For retail loans, the Bank's
general policy is not to lend above 95% of the collateral value. However, any
retail loan over 85% of the appraised value requires private mortgage insurance.
Commercial loans are generally held at 75% loan to value.
No significant portion of the Bank's loans is concentrated within any one
business industry.
The Bank has no deposits or loans directly with foreign entities, and has a
minimal amount of deposits made by persons working in foreign countries. The
Bank's assets are not invested in foreign securities, Eurodollars or foreign
loans.
Market Area and Competition
The Bank's primary service area is the northwestern portion of Berks
County, Pennsylvania. By all indications, Berks County has experienced and will
continue to experience good economic growth. Much of Berks County's land is
dedicated to farming, while the number of manufacturing jobs in the area is
higher than the national average. Prominent manufacturing employers in Berks
County include East Penn Manufacturing Co., Inc., Carpenter Technology
Corporation, AT&T Microelectronics, Dana Corporation and Arrow International.
The unemployment level in the area has remained low during the recent past.
Additionally, Berks County continues to experience moderate population growth as
the Philadelphia metropolitan area grows north and west.
The Bank competes with local commercial banks as well as other commercial
banks with branches in the Bank's market area. All phases of the Bank's business
are highly competitive. The Bank considers its major competition to be Berks
County Bank, headquartered in Reading, Pennsylvania, and First National Bank of
Leesport, headquartered in Leesport, Pennsylvania.
The Bank, along with other commercial banks, competes with respect to its
lending activities as well as in attracting demand deposits, with savings banks,
savings and loan associations, insurance companies, regulated small loan
companies and credit unions. Most of these competitors have substantially
greater financial resources than the Company including a larger capital base
which allows them to attract customers seeking larger loans than the Bank is
able to make.
The Bank is generally competitive with all competing financial institutions
in its service areas with respect to interest rates paid on time and savings
deposits, service charges on deposit accounts and interest rates charged on
loans.
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Supervision and Regulation
The Company is subject to regulation by the Pennsylvania Department of
Banking and the Federal Reserve Board. The deposits of the Bank are insured by
the FDIC and the Bank is a member of the Bank Insurance Fund which is
administered by the FDIC. The Bank is subject to regulation by the Pennsylvania
Department of Banking and the FDIC, but, as a national bank, is regulated and
examined by the Office of the Comptroller of the Currency.
The Company is required to file with the Federal Reserve Board an annual
report and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC Act").
The Federal Reserve Board may also make examinations of the Company. The BHC Act
requires each bank holding company to obtain the approval of the Federal Reserve
Board before it may acquire substantially all the assets of any bank, or before
it may acquire ownership or control of any voting shares of any bank if, after
such acquisition, it would own or control, directly or indirectly, more than
five percent of the voting shares of such bank.
Pursuant to provisions of the BHC Act and regulations promulgated by the
Federal Reserve Board thereunder, the Company may only engage in or own
companies that engage in activities deemed by the Federal Reserve Board to be so
closely related to the business of banking or managing or controlling banks as
to be a proper incident thereto, and the Company must gain permission from the
Federal Reserve Board prior to engaging in most new business activities.
A bank holding company and its subsidiaries are subject to certain
restrictions imposed by the BHC Act on any extensions of credit to the bank or
any of its subsidiaries, investments in the stock or securities thereof, and on
the taking of such stock or securities as collateral for loans to any borrower.
A bank holding company and its subsidiaries are also prevented from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
Source of Strength Doctrine
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board regulations
or both. This doctrine is commonly known as the "source of strength" doctrine.
Dividends
Dividends are paid by the Company from its assets, which are mainly
provided by dividends from the Bank. However, certain regulatory restrictions
exist regarding the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans or advances. The approval of the Comptroller of
the Currency is required if the total of all dividends declared by a national
bank in any calendar year exceeds the Bank's net profits (as defined) for that
year combined with its retained net profits for the preceding two calendar
years. Under this restriction, the Bank, without prior regulatory approval, can
declare dividends to the Company totaling $863,000, plus an additional amount
equal to the Bank's net profit for 1999, up to the date of any such dividend
declaration.
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Capital Adequacy
The Federal banking regulators have adopted risk-based capital guidelines
for bank holding companies, such as the Company. Currently, the required minimum
ratio of total capital to risk-weighted assets (including off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be Tier 1 capital, consisting principally of common
shareholders' equity, non-cumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder (Tier 2
capital) may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the Federal banking
regulators established minimum leverage ratio (Tier 1 capital to total assets)
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are required
to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum.
The Company and the Bank exceed all applicable capital requirements.
FDICIA
In 1991, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") was signed into law. FDICIA established five different levels of
capitalization of financial institutions, with "prompt corrective actions" and
significant operational restrictions imposed on institutions that are capital
deficient under the categories. The five categories are: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
To be considered well capitalized, an institution must have a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, a leverage capital ratio of 5%, and must not be subject to any
order or directive requiring the institution to improve its capital level. An
institution falls within the adequately capitalized category if it has a total
risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at
least 4%, and a leverage capital ratio of at least 4%. Institutions with lower
capital levels are deemed to be undercapitalized, significantly undercapitalized
or critically undercapitalized, depending on their actual capital levels. In
addition, the appropriate federal regulatory agency may downgrade an institution
to the next lower capital category upon a determination that the institution is
in an unsafe or unsound condition, or is engaged in an unsafe or unsound
practice. Institutions are required under FDICIA to closely monitor their
capital levels and to notify their appropriate regulatory agency of any basis
for a change in capital category. On December 31, 1998, the Company and the Bank
exceeded the minimum capital levels of the well capitalized category.
Regulatory oversight of an institution becomes more stringent with each
lower capital category, with certain "prompt corrective actions" imposed
depending on the level of capital deficiency.
Other Provisions of FDICIA
Each depository institution must submit audited financial statements to its
primary regulator and the FDIC, which reports are made publicly available. In
addition, the audit committee of each depository institution must consist of
outside directors and the audit committee at "large institutions" (as defined by
FDIC regulation) must include members with banking or financial management
expertise. The audit committee at "large institutions" must also have access to
independent outside counsel. In addition, an institution must notify the FDIC
and the institution's primary regulator of any change in the institution's
independent auditor, and annual management letters must be provided to the FDIC
and the depository institution's primary regulator. The regulations define a
"large institution" as one with over $500 million in assets, which does not
include the Bank. Also, under the rule, an institution's independent auditor
must examine the institution's internal controls over financial reporting.
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Under FDICIA, each federal banking agency must prescribe certain safety and
soundness standards for depository institutions and their holding companies.
Three types of standards must be prescribed: asset quality and earnings,
operational and managerial, and compensation. Such standards would include a
ratio of classified assets to capital, minimum earnings, and, to the extent
feasible, a minimum ratio of market value to book value for publicly traded
securities of such institutions and holding companies. Operational and
managerial standards must relate to: (i) internal controls, information systems
and internal audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate exposure, (v) asset growth, and (vi) compensation, fees and
benefits.
Provisions of FDICIA relax certain requirements for mergers and
acquisitions among financial institutions, including authorization of mergers of
insured institutions that are not members of the same insurance fund, and
provide specific authorization for a federally chartered savings association or
national bank to be acquired by an insured depository institution.
Under FDICIA, all depository institutions must provide 90 days notice to
their primary federal regulator of branch closings, and penalties are imposed
for false reports by financial institutions. Depository institutions with assets
in excess of $250 million must be examined on-site annually by their primary
federal or state regulator or the FDIC.
FDICIA also sets forth Truth in Savings disclosure and advertising
requirements applicable to all depository institutions.
FDIC Insurance Assessments
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") created two deposit insurance funds to be administered by the FDIC:
the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF).
The Bank's deposits are insured under BIF. The FDIC has implemented a
risk-related premium schedule for all insured depository institutions that
results in the assessment of premium based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each institution to one of three capital groups (well capitalized,
adequately capitalized or undercapitalized) and further assigns such institution
to one of three subgroups within a capital group. The institution's subgroup
assignment is based upon the FDIC's judgment of the institution's strength in
light of supervisory evaluations, including examination reports, statistical
analyses and other information relevant to gauging the risk posed by the
institution. Only institutions with a total capital to risk-adjusted assets
ratio of 10.00% or greater, a Tier 1 capital to risk-adjusted assets ratio of
6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater are assigned to
the well-capitalized group.
SAIF Re-capitalization Plan
On September 30, 1996, Congress enacted a SAIF Recapitalization Plan and a
plan for banks insured by the fully capitalized BIF to share the burden of
repaying outstanding Finance Corporation (FICO) bonds issued to fund SAIF's
predecessor (the "FSLIC") in the late 1980s. The legislation enacted by Congress
containing the Recapitalization Plan is entitled the Deposit Insurance Funds Act
of 1996.
Under the Recapitalization Plan, SAIF insured institutions were required to
pay a one time special assessment in the fourth quarter of 1996 equivalent to
65.7 cents for every $100 of insured deposits as of March 31, 1995. The one time
special assessment on SAIF insured deposits is intended to result in a major
decrease in annual insurance premiums paid by SAIF insured institutions. At the
end of 1996, SAIF insured institutions generally paid 23 cents for each $100 of
deposit insurance coverage while BIF insured banks insured by the fully
capitalized BIF paid virtually zero assessments.
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As part of the legislation, a new formula was adopted whereby BIF insured
institutions, such as the Bank, would be required to share in the burden of
repayment of the FICO bonds issued to finance the FSLIC in the 1980s. Commencing
in calendar year 1997, the only deposit insurance cost for most
well-capitalized, well-managed BIF insured and SAIF insured institutions will be
FICO bond payments. For years 1997 through 1999, SAIF insured institutions will
pay approximately 6.5 cents per $100 in deposits toward the FICO bond payments
while BIF insured institutions will pay approximately 1.3 cents per $100 in
deposits. During 1998, the Bank paid $8,654 to the FDIC based on average
deposits of approximately $73 million. From the year 2000 to 2017, both SAIF
insured institutions and BIF insured institutions will pay approximately 2.43
cents per $100 in deposits toward retirement of the FICO obligations.
The legislation also contains certain restrictions on the ability of SAIF
insured institutions to transfer deposits to BIF insured affiliates and a
requirement that Congress must eliminate the thrift charter before merging SAIF
into BIF. Finally, the legislation also contained a prohibition against the FDIC
assessing any deposit insurance premiums against well-managed, well-capitalized
banks when BIF reserves are at or above the statutory reserve requirement of
1.25% of total insured deposits.
Interstate Banking
Prior to the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") in September 1994, interstate
acquisitions were prohibited under the terms of the Douglas Amendment to the BHC
Act unless the acquisition was specifically authorized by a reciprocal
interstate banking statute, such as the statute adopted in Pennsylvania in 1990.
Similarly, interstate branching was prohibited for national banks and
state-chartered member banks by the McFadden Act, although some states, not
including Pennsylvania, had passed laws permitting limited interstate branching
by non-Federal Reserve member state banks. The Riegle-Neal Act permits an
adequately capitalized, adequately managed bank holding company to acquire a
bank in another state as of September 29, 1994, whether or not the state permits
the acquisition, subject to certain deposit concentration caps and the Federal
Reserve Board's approval. A state may not impose discriminatory requirements on
acquisitions by out-of-state holding companies. In addition, beginning on June
1, 1997, under the Riegle-Neal Act, a bank can expand interstate by merging with
a bank in another state and also may consolidate the acquired bank into new
branch offices of the acquiring bank, unless the other state affirmatively opts
out of the legislation before that date. A state may also opt into the
legislation earlier than June 1, 1997 if it wishes to do so. The Riegle-Neal Act
also permits de novo interstate branching as of June 1, 1997 but only if a state
affirmatively opts in by appropriate legislation. Once a state opts in to
interstate branching, it may not opt out at a later date. The Riegle-Neal Act
also allows foreign banks to branch by merger or de novo branch to the same
extent as banks from the foreign bank's home state. The Riegle-Neal Act also
subjects foreign banks to some additional requirements, including extending
obligations under the Community Reinvestment Act to certain foreign bank
acquisitions and regulating the types of activities off-shore branches of
foreign banks may conduct. The Pennsylvania Legislature amended the Pennsylvania
Banking Code of 1965 in July, 1995, to opt in to all of the provisions of the
Riegle-Neal Act, including interstate bank mergers and de novo interstate
branching.
Year 2000 Compliance
As the year 2000 approaches, regulation about the Company and the Bank with
respect to completing Year 2000 modifications is likely to increase. A brief
discussion of the most recent federal banking agency pronouncements that affect
the Company and/or the Bank follows.
In December, 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an inter-agency statement. The statement indicates that senior
management and the board of directors should be actively involved in managing
the Company's and the Bank's Year 2000 compliance efforts. The statement also
recommended that institutions obtain the Year 2000 compliance certification from
vendors followed by comprehensive internal testing. In addition, contingency
plans should be developed for all vendors that service "mission critical"
applications which are applications vital to the successful continuance of a
core business activity. In addition, the Securities and Exchange Commission (the
"SEC") adopted, effective August 4, 1998, an interpretive release providing
guidance to public companies, such as the Company, with respect to making
meaningful disclosure of their Year 2000 issues. The Company has provided such
disclosure in its Management's Discussion and Analysis of Financial Condition
and Results of Operation under the heading "Year 2000."
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Legislative Developments
From time to time, various federal and state regulation is proposed that
could result in additional regulation of, and restriction on, the business of
the Company and the Bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation, if enacted, will have
a material effect on the business of the Company.
Employees
As of December 31,1998, the Bank had a total of 43 full-time and 13
part-time employees. The Bank provides a variety of employment benefits and
considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
The bank owns the main office of the Company and the Bank located at 201
North Main Street, Bernville, Pennsylvania and its branch offices located on
Route 422, R.D. 1, Robesonia, Pennsylvania, and on Roadside Drive,
Shartlesville, Pennsylvania. The property on which the main office is situated
is comprised of approximately 6,300 square feet of space in the aggregate, of
which approximately 2,100 square feet is used for banking facilities and the
remainder is used for corporate and other offices. The branch office located in
Robesonia is comprised of approximately 2,000 square feet. The branch office
located in Shartlesville is also comprised of approximately 2,000 square feet
with an additional basement comprised of approximately 1,000 square feet.
The Bank also leases the premises for one branch location, the operations
center and a loan center under operating lease agreements expiring in various
years through October 2017. Certain lease agreements contain escalation
provisions. The Bank also has options to extend the lease agreements for
additional lease terms from five to thirty years. The Bank is responsible to pay
all real estate taxes, insurance, utilities and maintenance and repairs on the
buildings. The loan center is located on Berkshire Boulevard in Wyomissing,
Pennsylvania, and comprises approximately 1,157 square feet. The branch office
is located on Commerce Drive in Wyomissing, Pennsylvania and is comprised of
approximately 3,300 square feet. The operations center is located on Corporate
Drive of the Berks Corporate Center in Reading, Pennsylvania, and comprises
approximately 7,500 square feet.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since August 19, 1998, the Company's Common Stock is traded on the American
Stock Exchange under the symbol CMYI. Prior to that date, the Company's stock
was traded in the over the counter market. The Common Stock has not been
actively traded and there is no assurance that an active market will develop in
the future. The following broker-dealers currently make a market in the
Company's Common Stock: F.J. Morrissey & Co., Inc., Ryan, Beck & Co., Wheat,
First Union Securities Inc. and Berkshire Capital Management.
The following table sets forth high and low bid prices per share for the
Company's Common Stock for each quarter of 1997, and each quarter of 1998, based
upon information obtained from the American Stock Exchange (since August 19,
1998) and the OTC Bulletin Board. All such bid prices reflect inter-dealer
prices, without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions. The table also reflects cash dividends declared
on the Company's Common Stock.
Dividends
1997 High bid Low Bid Declared
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First Quarter $ 9.375 $ 8.50 $ .055
Second Quarter 10.25 9.375 .055
Third Quarter 11.25 10.125 .055
Fourth Quarter 12.0675 10.625 .06
1998
First Quarter 12.75 11.75 .06
Second Quarter 14.375 12.625 .06
Third Quarter 16.00 13.50 .06
Fourth Quarter 14.625 12.00 .06
As of December 31, 1998, 696,774 shares of Common Stock were outstanding
held of record by approximately 483 persons, and there were outstanding options
which were exercisable on that date (or within 90 days thereof) for 9,267 shares
of Common Stock.
The holders of the Company's Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, subject to the payment of any preferential dividend to the
holders of the Company's Preferred Stock, if any. Funds for the payment of
dividends of the Company are primarily obtained from dividends paid by the Bank.
On June 25, 1998, the Company adopted a dividend reinvestment and stock
purchase plan available to stockholders who elect to reinvest their cash
dividends for the purchase of additional shares of the Company's Common Stock.
Participants may also elect to make voluntary cash payments not to exceed $2,500
each quarter for the purchase of additional shares of the Company's Common
Stock.
It is the present intention of the Company's Board of Directors to continue
to pay regular quarterly cash dividends; however, the declaration and payment of
future dividends is at the sole discretion of the Board of Directors, and their
amount depends upon the earnings, financial condition and capital needs of the
Company and the Bank and certain other factors, including restrictions arising
from federal banking laws and regulations to which the Company and the Bank are
subject.
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The Bank is subject to certain limitations on the amount of cash dividends
that it can pay. The prior approval of the Comptroller of Currency of the United
States is required if the total of all cash dividends declared by a national
bank, such as the Bank, in any calendar year will exceed the sum of such bank's
net profits (as defined by statute) for that year combined with the retained net
profits for the preceding two calendar years, less any required transfers to
surplus. Under this formula, as of December 31, 1998, the Bank has approximately
$863,000 legally available for the payment of dividends without such approval.
In addition, the Comptroller of the Currency is authorized to determine under
certain circumstances relating to the financial condition of a national bank
that the payment of dividends would be an unsafe or unsound practice and to
prohibit payment thereof. The Federal Deposit Insurance Corporation Act
generally prohibits all payments of the dividends by any bank which is in
default of any assessment to the FDIC.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Income statement data:
Net interest income $ 3,595 $ 2,932 $ 2,594
Provision for loan losses 240 78 72
Noninterest income 684 431 385
Noninterest expense 3,276 2,489 2,054
Income before income taxes 763 796 853
Net income 544 587 618
Balance sheet data at year end:
Total assets $101,722 $ 83,462 $ 68,100
Loans, net 79,322 64,364 52,217
Securities available for sale 12,876 9,524 6,490
Securities held to maturity -- 1,001 2,513
Deposits 85,443 70,729 61,135
Long-term debt 5,000 5,000 --
Stockholders' equity 7,359 6,900 6,435
Per common share data:
Net income, basic and diluted $ 0.78 $ 0.84 $ 1.00
Cash dividends declared 0.24 0.22 0.20
Book value 10.56 9.91 9.24
Selected ratios:
Return on average assets 0.58% 0.80% 0.94%
Return on average stockholders' equity 7.90% 9.17% 12.09%
Average equity to average assets 7.38% 8.71% 7.78%
Allowance for loan losses to total loans at end of period 0.89% 0.82% 0.91%
Dividend payout ratio 30.75% 26.71% 20.63%
</TABLE>
The per common share data amounts prior to 1998 have been restated to reflect
the 100% stock dividend on July 31, 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on information about the
Company's financial condition and results of operations which is not otherwise
apparent from the financial statements. Reference should be made to those
statements and the selected financial data presented elsewhere for an
understanding of the following discussion and analysis.
RESULTS OF OPERATIONS
Community Independent Bank, Inc. recorded net income of $ 544,000 ($0 .78
per share) for 1998 compared to $ 587,000 ($ 0.84 per share) in 1997. Return on
average assets was .58% for 1998 and .80% for 1997. The decrease in net income
of $ 43,000 in 1998 was primarily caused by an increase in other expenses of $
787,000 and an increase in the provision for loan losses of $ 162,000 from 1997
to 1998 which was offset by an increase in other income of $ 254,000, and an
increase in net interest income of $ 662,000 from 1997 to 1998. A more detailed
explanation for each contribution to the change in net income from 1997 to 1998
is included in the remainder of this analysis.
Net Interest Income
Net interest income is the primary source of operating income for the
Company. Net interest income is the difference between interest earned on loans
and securities and interest paid on deposits and other funding sources.
Generally, changes in net interest income are measured by the net interest rate
spread and net interest rate margin. The net interest rate spread is equal to
the difference between the average rate earned on earning assets and the average
rate incurred on interest-bearing liabilities. The net interest rate margin
represents the difference between interest income (including net loan fees
earned) and interest expense calculated as a percentage of average earning
assets. The factors that influence net interest income include changes in
interest rates and changes in the volume and mix of assets and liability
balances.
Net interest income increased $ 662,000 or 23% in 1998 compared to 1997.
Table 1 analyzes the factors contributing to the increase in net interest income
in 1998. The average balances, interest income and expense, and the average
rates earned and paid for assets and liabilities are found in Table 2.
During 1998, the average yield on earning assets increased .09%, while the
average cost of funds increased .23%. An increase of $ 17,404,000 or 31% in
average loan volume during 1998 resulted in additional loan interest income of $
1,533,000. However, lower interest rates resulted in a decrease in the yield
earned on average loans in 1998 to 8.79% compared to 8.81% in 1997.
The Company's securities' portfolio in 1998 grew by $ 1,368,000 or 13%
compared to 1997. Interest income increased $ 104,000 or 19% in 1998 compared to
1997 primarily due to the increased portfolio.
Average interest-bearing demand deposits, savings deposits and certificates
of deposit increased by $ 12,288,000 or 21% in 1998 compared to 1997. The
increase in interest expense on these deposits of $ 599,000 or 24% was primarily
a result of the increase in deposits during 1998 as the average rate paid on
deposits increased 8 basis points from 4.42% to 4.50%.
14
<PAGE>
Net Interest Income (Continued)
Likewise, the Company increased its reliance on short-term borrowings and
long-term debt as a source of funds in 1998. Average short-term borrowings
increased $ 1,917,000, resulting in additional interest expense of $ 111,000
while the rate paid on these borrowings decreased interest expense by $ 8,000.
Long-term debt averaged $ 5,000,000 in 1998 compared to $ 1,164,000 in 1997,
resulting in additional interest expense of $ 231,000.
Table 1 - Volume/Rate Analysis
<TABLE>
<CAPTION>
1998 vs. 1997 Increase
(Decrease) Due to Changes In
Volume Rate Total
------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest income:
Interest-bearing deposits with other banks $ (23) $ -- $ (23)
Securities:
Taxable 132 18 150
Tax-exempt (44) (2) (46)
Federal funds sold (1) -- (1)
Loans 1,533 (18) 1,515
------------------------------
1,597 (2) 1,595
------------------------------
Interest expense:
Interest-bearing demand deposits 146 6 152
Savings deposits (9) (20) (29)
Time deposits 457 19 476
Short-term borrowings 111 (8) 103
Long-term borrowings 231 -- 231
------------------------------
936 (3) 933
------------------------------
Net interest income $ 661 $ 1 $ 662
==============================
</TABLE>
15
<PAGE>
Net Interest Income (Continued)
Table 2 - Average Balances and Interest Rates
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Interest Interest
Average Income Average Average Income Average
Balance (Expense) Rate Balance (Expense) Rate
----------------------------------- -----------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Taxable securities $10,261 $ 586 5.71% $ 8,031 $ 445 5.54%
Tax-exempt securities 684 29 4.24 1,675 75 4.48
Other 819 50 6.11 1,137 65 5.72
Loans, net of reserves 74,266 6,525 8.79 56,862 5,010 8.81
--------------------- -----------------------
Total interest earning assets 86,030 7,190 8.36 67,705 5,595 8.26
Other assets 7,326 -- 5,803 --
----------------------------------- -----------------------
Total assets $93,356 7,190 7.70% $73,508 5,595 7.61%
======== ======== ======= ========
Liabilities and Stockholders' Equity
Interest bearing deposits:
Demand deposits $18,948 642 3.39% $14,604 490 3.36%
Savings deposits 9,752 221 2.27 10,113 250 2.47
Time deposits 41,048 2,278 5.55 32,743 1,802 5.50
--------------------- -----------------------
Total interest bearing deposits 69,748 3,141 4.50 57,460 2,542 4.42
Short-term borrowings 2,799 154 5.50 882 51 5.78
Long-term borrowings 5,000 301 6.02 1,164 70 6.02
--------------------- -----------------------
Total interest bearing liabilities 77,547 3,596 4.64 59,506 2,663 4.48
Non-interest bearing demand deposits 8,303 -- 7,150 --
Other liabilities 617 -- 452 --
Stockholders' equity 6,889 -- 6,400 --
--------------------- -----------------------
Total liabilities and
stockholders' equity $93,356 $73,508
======= ========
Interest rate spread 3.06% 3.13%
======= ========
Net interest income/margin $ 3,594 4.18% $ 2,932 4.33%
====================== =====================
</TABLE>
For purposes of computing average loan balances, nonaccruing loans are
included in the daily average loan balance. Yields on tax-free securities are
not presented on a tax equivalent basis.
16
<PAGE>
Other Income
Other income increased by $ 254,000 or 59% from 1997 to 1998. The increase
which occurred in 1998 is summarized as follows. Service charges on deposit
accounts increased $ 44,000 or 21% which directly correlated with the increase
in customer accounts. The increase in other income of $ 122,000 or 70% is due to
an increase in earnings on life insurance policies and loan related fees. Gains
on loan sales increased $ 88,000 or 200% as a result of an increase in the
volume of loan sales.
Other Expenses
Other expenses increased $ 787,000 or 32% in 1998 to $ 3,276,000 compared
to $ 2,489,000 in 1997. Salaries and benefits totaled $ 1,694,000 in 1998, an
increase of $ 431,000 or 34% from 1997. Occupancy expense totaled $ 325,000 in
1998, an increase of $ 130,000 or 68% compared to $ 194,000 in 1997. Equipment
and furniture expenses increased $ 72,000 or 31% in 1998 to $ 308,000 compared
to $ 236,000 in 1997. The increase in salaries and benefits was due to new
personnel hired to staff the new branch which opened in November 1997 and to
fill new positions created as result of bank growth. The new facility also
attributed to the increase in occupancy and equipment expenses from 1997 to
1998. Marketing expenses totaled $ 89,000 in 1998, a decrease of $ 45,000 or 34%
from 1997 due to the promotion of the new office in 1997. Professional fees
increased $ 62,000 or 221% from $ 28,000 in 1997 to $ 90,000 in 1998 as a result
of additional professional services needed for the Company's initial
registration of its stock and subsequent SEC filings.
Other expenses increased to $ 602,000 in 1998 compared to $ 450,000 in
1997, an increase of $ 152,000 or 34%. Other expenses included in this category
include directors' fees, ATM fees, FDIC insurance premiums, examinations,
travel, telephone, dues and subscriptions, postage, training and charitable
contributions. The increase in such expense categories is primarily the result
of the Company's growth.
Provision for Federal Income Taxes
The provision for federal income taxes was $ 219,000 for 1998 as compared
to $ 209,000 for 1997. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 29% in 1998 and 27% in 1997. The tax
rate for both periods was less than the federal statutory rate of 34%, primarily
because of tax-exempt securities and loan income.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", income taxes are accounted for under the
liability method. Under the liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to temporary
differences between the financial statement and tax basis of existing assets and
liabilities. At December 31, 1998, deferred tax assets amounted to $ 241,000 and
deferred tax liabilities amounted to $ 190,000. Deferred tax assets are
realizable primarily through carryback of existing temporary differences to
recover taxes paid in prior years, and through the future reversal of existing
temporary differences.
FINANCIAL CONDITION
The Company's financial condition can be evaluated in terms of trends in
its sources and uses of funds. Table 3 illustrates how the Company has managed
its sources and uses of funds which are directly affected by outside economic
factors, such as interest rate fluctuations.
17
<PAGE>
Table 3 - Sources and Uses of Funds
<TABLE>
<CAPTION>
1998 Increase (Decrease) 1997
-----------------------------------------------------------
Average Average
Balance Amount % Balance
-----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Funding uses:
Loans:
Commercial $ 22,521 $ 8,862 64.88% $ 13,659
Mortgage 46,700 7,464 19.02 39,236
Consumer 5,638 1,158 25.85 4,480
-------------------------- --------
74,859 17,484 30.47 57,375
Less allowance for loan losses (593) (80) 15.59 (513)
-------------------------- --------
74,266 17,404 30.61 56,862
-------------------------- --------
Interest-bearing deposits with banks 192 (427) (69.98) 619
-------------------------- --------
Securities:
Taxable 10,871 2,359 27.71 8,512
Tax-exempt 684 (991) (59.16) 1,675
-------------------------- --------
11,555 1,368 13.43 10,187
-------------------------- --------
Federal funds sold 17 (20) (54.05) 37
-------------------------- --------
Total interest earning assets 86,030 18,325 27.07 67,705
Other assets 7,326 1,523 26.25 5,803
-------------------------- --------
Total uses $ 93,356 $ 19,848 27.00% $ 73,508
========================== ========
Funding sources:
Deposits:
Demand $ 8,303 $ 1,153 16.13% $ 7,150
Interest-bearing demand 18,948 4,344 29.75 14,604
Savings 9,752 (361) (3.57) 10,113
Time under $ 100,000 36,168 6,873 23.46 29,295
-------------------------- --------
Total core deposits 73,171 12,009 19.63 61,162
Time over $ 100,000 4,880 1,432 41.53 3,448
-------------------------- --------
Total deposits 78,051 13,441 20.80 64,610
-------------------------- --------
Funds borrowed:
Short-term 2,799 1,917 217.35 882
Long-term 5,000 3,836 329.55 1,164
-------------------------- --------
Total funds borrowed 7,799 5,753 281.18 2,046
Total deposits and funds borrowed 85,850 19,194 28.80 66,656
Other liabilities 617 165 36.50 452
Stockholders' equity 6,889 489 7.64 6,400
-------------------------- --------
Total sources $ 93,356 $ 19,848 27.00% $ 73,508
========================== ========
</TABLE>
18
<PAGE>
Loans Receivable
Average loans receivable, net of the allowance for loan losses, increased $
17,404,000 or 30% in 1998. The increase in loans was directly attributable to
increased marketing efforts, favorable economic conditions in the Company's
market area and competitive pricing. Table 4 provides an analysis of the
Company's loan distribution at the end of each of the last two years. Consumer
loans include revolving credit plans, personal lines of credit, installment
loans and student loans. Loans which are secured by real estate include
residential and nonresidential mortgages and home equity loans to individuals.
Table 4 - Loan Portfolio
December 31,
1998 1997
----------------------------------
(In Thousands)
Commercial, financial and agricultural $ 16,019 $ 9,594
Consumer, net of unearned discount 5,185 4,592
Real estate 58,856 50,731
All other 464 567
----------------------------------
$ 80,524 $ 65,484
==================================
Table 5 - Loan Maturities
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences and consumer loans) outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Due In One Due In One Due In Over
Year Or Less To Five Years Five Years Total
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 3,926 $ 6,929 $ 5,164 $ 16,019
All other - 19 445 464
------------------------------------------------------
$ 3,926 $ 6,948 $ 5,609 $ 16,483
======================================================
Interest rates on loans which are:
Fixed $ 5,673 $ 5,340
Floating 1,275 269
-----------------------------
$ 6,948 $ 5,609
=============================
</TABLE>
19
<PAGE>
Nonperforming Loans
Table 6 reflects the Company's nonaccrual, past due and restructured loans
for each of the past two years. A loan is generally placed on nonaccrual when
the contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of principal or
interest, even though the loan is currently performing.
Table 6 - Nonperforming Loans
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------------
(In Thousands)
<S> <C> <C>
Average loans outstanding $ 74,859 $ 57,375
===========================
Nonaccrual loans:
Commercial $ - $ -
Real estate 93 290
Consumer - -
---------------------------
Total nonaccrual loans 93 290
Accruing loans past due 90 days or more 202 6
Restructured loans - -
---------------------------
$ 295 $ 296
===========================
Ratio of nonperforming loans to average loans outstanding 0.39% 0.52%
===========================
</TABLE>
All of the nonaccrual loans at December 31, 1998 are secured by real estate
or otherwise guaranteed as to repayment. Management has identified $ 1,334,000
as potential problem loans that are not included in the above table.
Table 7 - Nonaccrual and Restructured Loans - Related Information
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------------
(In Thousands)
<S> <C> <C>
Interest income that would have been recorded under original terms $ 8 $ 16
Interest income reported during the period - -
Commitments to lend additional funds - -
</TABLE>
20
<PAGE>
Allowance for Loan Losses
The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, current economic conditions, loan portfolio composition, prior loan
loss experience, trends in portfolio volume and management's estimation of
future potential losses. Management believes that the allowance for loan losses
is adequate. Table 8 is an analysis of the allowance for loan losses for the
past two years.
Table 8 - Summary of Loan Loss Experience
December 31,
1998 1997
-------------------
(In Thousands)
Average loans outstanding $74,859 $57,375
===================
Allowance for loan losses at January 1 $ 540 $ 484
-------------------
Losses charged to allowance:
Commercial -- 12
Real estate 42 --
Consumer 26 14
-------------------
68 26
-------------------
Recoveries credited to allowance:
Commercial 1 --
Real estate 3 --
Consumer 4 4
-------------------
8 4
-------------------
Net charge-offs 60 22
Provision for loan losses 240 78
-------------------
Allowance for loan losses at December 31 $ 720 $ 540
===================
Ratio of net charge-offs to average loans outstanding 0.08% 0.04%
===================
21
<PAGE>
Allowance for Loan Losses (Continued)
The specific allocations of the allowance for loan losses are based on
management's evaluation of the risks inherent in the specific portfolios for the
dates indicated. Amounts in a particular category may be used to absorb losses
if another category allocation proves to be inadequate. Table 9 reflects the
allocations of the allowance for loan losses for each of the past two years.
Table 9 - Allocation of the Allowance for Loan Losses
1998 1997
----------------------------------------------
% Of % Of
Amount Loans Amount Loans
----------------------------------------------
(In Thousands)
Commercial $602 20.2% $293 15.5%
Real estate 103 73.4 95 77.5
Consumer 15 6.4 25 7.0
Unallocated -- -- 127 --
-----------------------------------------------
$720 100.0% $540 100.0%
===============================================
Highly leveraged transactions (HLTs) generally include loans and
commitments made in connection with recapitalizations, acquisitions, and
leveraged buyouts and result in the borrower's debt-to-total assets ratio
exceeding 75%. The Bank had no loans at December 31, 1998 that qualified as
HLTs.
Securities
The Company's securities' portfolio is classified as either "held to
maturity" or "available for sale". At December 31, 1998, all of the Company's
securities were classified as available for sale. Securities classified as held
to maturity are carried at amortized cost and include those securities that the
bank has both the intent and ability to hold to maturity. Securities classified
as available for sale, which are those securities that the bank intends to hold
for an indefinite amount of time, but not necessarily to maturity, are carried
at fair value with the unrealized holding gains or losses, net of taxes,
reported as accumulated other comprehensive income on the balance sheet.
Average securities increased to $ 11,555,000 in 1998 from $ 10,187,000 in
1997. The increase of $ 1,368,000 or 13% was primarily due to the purchase of
U.S. Government agency obligations with proceeds from the maturity of the held
to maturity securities and deposit growth.
22
<PAGE>
Securities (Continued)
Table 10 sets forth the carrying amount of securities at the dates
indicated.
Table 10 - Securities Portfolio
December 31,
1998 1997
---------------------------
(In Thousands)
Held to maturity, U.S. Treasury securities $ - $ 1,001
===========================
Available for sale securities (at fair value):
U.S. Treasury securities 4,568 4,543
U.S. Government agencies 7,099 3,486
State and political subdivisions 462 1,011
Equity securities 747 484
---------------------------
$ 12,876 $ 9,524
===========================
Table 11 sets forth the maturities and the weighted average yields of
securities by contractual maturities at December 31, 1998. Yields on obligations
of states and political subdivisions are not presented on a tax equivalent
basis.
Table 11 - Analysis of Securities
<TABLE>
Maturing
After One Year But After Five Years
Within One Year Within Five Years But Within Ten Years After Ten Years
--------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $2,534 6.20% $2,034 6.20% $ -- -- $ -- --%
U.S. Government agencies 499 5.10 6,600 5.60 -- -- -- --
State and political subdivisions -- -- 379 4.49 83 4.95 -- --
--------- -------- -------- ---------
$3,033 4.75% $9,013 5.91% $ 83 4.73 $ -- --%
========= ======== ======== =========
</TABLE>
Deposits
The Company's primary source of funds continues to be core deposit accounts
which include both interest and noninterest bearing demand, savings and time
deposits under $ 100,000. Core deposits increased an average of $ 12,009,000 or
20% in 1998. The largest category of core deposits and the primary source of
funds continues to be time deposits under $ 100,000. This category includes
certificates of deposit, which allow customers to invest their funds at selected
maturity ranges from fourteen days to ten years, individual retirement accounts,
and the Bank's passbook accounts. The average balance of these funds increased $
6,873,000 or 23% in 1998.
23
<PAGE>
Deposits (Continued)
Interest bearing demand accounts, consisting of N.O.W. and Money Market
accounts increased an average of $4,344,000 or 30% in 1998. The increase was a
result of competitive pricing of the money market product and the opening of a
new office.
Table 12 - Average Deposits and Average Rates by Major Classification
1998 1997
------------------------------------------------
Amount Rate Amount Rate
------------------------------------------------
(In Thousands)
Non-interest bearing demand $ 8,303 --% $ 7,150 --%
Interest-bearing demand 18,948 3.39 14,604 3.36
Savings deposits 9,752 2.27 10,113 2.47
Time deposits 41,048 5.55 32,743 5.50
--------------- --------------
$ 78,051 $ 64,610
=============== ==============
At December 31, 1998, time deposits outstanding in an individual amount of
$ 100,000 or more totaled $ 5,494,000. The maturities of these deposits are
reflected in Table 13.
Table 13 - Maturities of Time Deposits of $100,000 or More
1998
------------------
(In Thousands)
Three months or less $ 1,530
Over three months through six months 1,024
Over six months through twelve months 1,764
Over twelve months 1,176
------------------
$ 5,494
==================
Short-term Borrowings and Long-term Debt
Borrowed funds are utilized when timing differences occur between the
purchase of new assets and the maturity of existing assets. Management also uses
borrowed funds as an asset/liability tool to match the repricing characteristics
of certain earning assets, allowing for core funds to be used for additional
loan volume or security purchases.
24
<PAGE>
Short-term Borrowings and Long-term Debt (Continued)
Table 14 - Borrowed Funds
1998 1997
-----------------------------------
(In Thousands)
Short-term borrowings $ 3,423 $ 472
Long-term debt 5,000 5,000
-----------------------------------
$ 8,423 $ 5,472
===================================
The Company maintains a U.S. Treasury tax and loan note option account for
the deposit of withholding taxes, corporate income taxes and certain other
payments to the federal government. Deposits are subject to withdrawal and are
evidenced by an open-ended interest-bearing note. Borrowings under this note
option account were $ 88,000 and $ 472,000 at December 31, 1998 and 1997
respectively, with interest payable at a variable rate (4.11% and 5.25% at
December 31, 1998 and 1997 respectively).
The Company has an arrangement with the Federal Home Loan Bank (FHLB) which
allows for borrowings up to a maximum percentage of qualifying assets. At
December 31, 1998, the Bank has a maximum borrowing capacity of $ 34,791,000.
The Company has a line of credit under the "RepoPlus" Advance program with
the Federal Home Loan Bank which expires June 24, 1999 for borrowings up to $
10,000,000. Borrowings under this line of credit were $ 3,335,000 and $ -0- at
December 31, 1998 and 1997 respectively.
Long-term debt is an advance from the Federal Home Loan Bank under a note
totaling $ 5,000,000 at a fixed rate of interest of 6.02% which matures in 1999.
Capital Requirements/Ratios
The Company places a significant emphasis on maintaining a strong capital
base. The capital resources of the Bank consist of two major components of
regulatory capital, stockholders' equity and the allowance for loan losses. The
Bank's capital maintained steady growth during 1998.
Current capital guidelines issued by federal regulatory authorities require
the bank to meet minimum risk-based capital ratios in an effort to make
regulatory capital more responsive to the risk exposure related to a bank's on
and off balance sheet items.
Risk-based capital guidelines redefine the components of capital,
categorize assets into risk classes and include certain off-balance sheet items
in the calculation of capital requirements. The components of risk-based capital
are segregated as Tier I and Tier II capital. Tier I capital is composed of
total stockholders' equity reduced by goodwill and other intangible assets. Tier
II capital is comprised of the allowance for loan losses and any qualifying debt
obligations. Regulators also have adopted minimum requirements of 4% of Tier I
capital and 8% of risk-adjusted assets in total capital.
25
<PAGE>
Capital Requirements/Ratios (Continued)
The Company is also subject to leverage capital requirements. This
requirement compares capital (using the definition of Tier I capital) to balance
sheet assets and is intended to supplement the risk-based capital ratio in
measuring capital adequacy. The guidelines set a minimum leverage ratio of 3%
for institutions that are highly rated in terms of safety and soundness, and
which are not experiencing or anticipating any significant growth. Other
institutions are expected to maintain capital levels of at least 1% or 2% above
the minimum. As of December 31, 1998 the Company had a leverage ratio of 7.04%.
Table 15 - Capital Ratios
<TABLE>
1998 1997
-------------------------
(In Thousands)
<S> <C> <C>
Tier I, common stockholders' equity $ 7,058 $ 6,625
Tier II, allowable portion of allowance for loan losses 720 540
-------------------------
Risk-based capital $ 7,778 $ 7,165
=========================
Risk adjusted assets, including off-balance-sheet exposures $ 71,192 $ 55,338
=========================
Tier 1 risk-based capital ratio 9.91% 11.97%
=========================
Total risk-based capital ratio 10.93% 12.95%
=========================
</TABLE>
Note: Unrealized gains or losses on securities available for sale are
excluded from regulatory capital components of risk-based capital and leverage
ratios.
Capital Analysis
During 1998, the Company paid cash dividends to its stockholders amounting
to $ 167,000 compared to $ 157,000 in 1997. On a per share basis, the Company
paid dividends of $ .24 in 1998 compared to $ .22 in 1997.
On June 25, 1998, the Board of Directors declared a two-for-one stock
split in the form of a 100% stock dividend on common stock outstanding, payable
on July 31, 1998 to stockholders of record on July 17, 1998. The stock split
resulted in the issuance of 348,387 additional common shares and all per share
data has been adjusted for the effect of the stock split.
Also, on June 25, 1998, the Company adopted a dividend reinvestment and
stock purchase plan available to stockholders who elect to reinvest their cash
dividends for the purchase of additional shares of the Company's common stock.
Participants may also elect to make voluntary cash payments not to exceed $
2,500 each quarter for the purchase of additional shares of the Company's common
stock. The common stock must be purchased in the open market through May 1999.
Subsequent to that date, it may be purchased in the open market or from
authorized but unissued shares, substantially at prevailing market prices. The
Company has reserved 225,000 shares of common stock for possible issuance under
the plan.
26
<PAGE>
Capital Analysis (Continued)
Stockholders' equity is adjusted for the effect of unrealized gains and
losses, net of tax, on securities classified as available for sale. At December
31, 1998 and 1997, stockholders' equity included $ 99,000 and $ 18,000
respectively, in unrealized gains.
The return on average equity at December 31, 1998 was 7.90%, a decrease
from 9.17% at December 31, 1997.
Relationship Between
Significant Financial Ratios
--------------------------------
1998 1997
--------------------------------
Return on average equity 7.90 % 9.17 %
Earnings retained 69.25 73.29
Internal capital growth 5.47 6.72
Change in average assets 27.00 11.88
Equity to average assets 7.38 8.71
Growth in average equity 7.64 25.20
Dividend payout ratio 30.75 26.71
Note: Internal capital growth is equal to return on average equity multiplied by
earnings retained.
Interest Rate Sensitivity and Market Risk
The operations of the Company are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of
the Company's interest earning assets and the amount of interest bearing
liabilities that are prepaid/withdrawn, mature or reprice in specified periods.
The principal objective of the Company's asset/liability management
activities is to provide consistently higher levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and
facilitating the funding needs of the Company. The Company utilizes an interest
rate sensitivity model as the primary quantitative tool in measuring the amount
of interest rate risk that is present. The traditional maturity "gap" analysis,
which reflects the volume difference between interest rate sensitive assets and
liabilities during a given time period, is reviewed regularly by management. A
positive gap occurs when the amount of interest sensitive assets exceeds
interest sensitive liabilities. This position would contribute positively to net
income in a rising interest rate environment. Conversely, if the balance sheet
has more liabilities repricing than assets, the balance sheet is liability
sensitive or negatively gapped. Management continues to monitor sensitivity in
order to avoid overexposure to changing interest rates.
Another method used by management to review its interest sensitivity
position is through "simulation". In simulation, the Company projects the future
net interest streams in light of the current gap position. Various interest rate
scenarios are used to measure levels of interest income associated with
potential changes in our operating environment. Management cannot measure levels
of interest income associated with potential changes in the Company's operating
environment. Management cannot predict the direction of interest rates or how
the mix of assets and liabilities will change. The use of this information will
help formulate strategies to minimize the unfavorable effect on net interest
income caused by interest rate changes.
27
<PAGE>
Interest Rate Sensitivity and Market Risk (Continued)
The operations of the Company do not subject it to foreign currency
exchange or commodity price risk. Also, the Company does not utilize interest
rate swaps, caps or other hedging transactions.
The Company's overall sensitivity to interest rate risk is low due to its
non-complex balance sheet. The Bank has implemented several strategies to manage
interest rate risk which include selling most newly originated residential
mortgages, increasing the volume of variable rate commercial loans and
maintaining a short maturity in the investment portfolio.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For securities,
loans and deposits, the table presents principal cash flows and related weighted
average interest rates by maturity dates or repricing frequency. The Company has
no market risk sensitive instruments entered into for trading purposes.
Table 16 - Interest Rate Sensitivity
<TABLE>
<CAPTION>
Over Three Over Six Over One
Months But Months But Year But
Three Months Within Six Within One Within Three Over Three
Or Less Months Year Years Years Total
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing deposits with
other banks $ 26 $ -- $ -- $ -- $ -- $ 26
Securities (amortized cost):
U.S. treasuries -- 500 2,008 1,996 -- 4,504
U.S. Government agencies 500 -- -- 6,520 -- 7,020
Municipals -- -- -- 285 170 455
Loans 12,429 1,860 5,084 15,001 47,202 81,576
------------------------------------------------------------------------------
Total interest-earning assets 12,955 2,360 7,092 23,802 47,372 93,581
------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits (1) 4,548 -- -- 16,601 -- 21,149
Savings deposits (2) 102 -- 86 -- 9,433 9,621
Time deposits 6,852 5,089 15,588 13,926 3,666 45,121
Short-term borrowings 3,423 -- -- -- -- 3,423
Long-term borrowings -- -- 5,000 -- -- 5,000
------------------------------------------------------------------------------
Total interest-bearing liabilities 14,925 5,089 20,674 30,527 13,099 84,314
------------------------------------------------------------------------------
Interest sensitivity gap $ (1,970) $ (2,729) $(13,582) $ (6,725) $ 34,273 $ 9,267
==============================================================================
Cumulative sensitivity gap $ (1,970) $ (4,699) $(18,281) $ 25,006) $ 9,267
===============================================================
</TABLE>
(1) Interest-bearing demand deposits over one year but within three years
include mostly money markets which normally do not reprice on a regular
basis.
(2) Three months or less consist of vacation clubs, over six months but within
one year consist of Christmas clubs and over three years consist of regular
savings which normally do not reprice on a regular basis.
28
<PAGE>
Liquidity
Liquidity management involves meeting the funds flow requirements of
customers who may either be depositors wanting to withdraw funds, or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. Liquid assets consist of vault cash, securities and maturities of earning
assets.
The Company's principal source of assets liquidity is the securities
portfolio. As disclosed in Note 3 of the financial statements, the carrying
value of securities maturing in less than one year equals $ 3,033,000. Other
sources of funds are principal paydowns and maturities in the loan portfolio.
The loan maturity schedule (Table 5) illustrates the maturities of commercial
loans.
The Company also has sources of liability liquidity which include core
deposits and borrowing capacity at the Federal Home Loan Bank as previously
discussed.
Management believes that the Company's liquidity is sufficient to meet its
anticipated needs.
Year 2000
The Company has made, and is continuing to make, a concerted effort to
insure that all aspects of the Company's operation will not be adversely
affected by the changeover to year 2000. Senior management and the Board of
Directors of the Company have been actively involved in the planning, allocating
of resources and monitoring the progress to evaluate and implement corrective
actions to assure Y2K readiness. The Company has named the Vice President of
Operations as the Y2K Coordinator to oversee the project. A Y2K committee
comprised of members of Senior Management regularly reviews the status of Y2K
activities. The Y2K Coordinator reports to the Board of Directors on a monthly
basis.
The Company's software systems are products provided by software vendors
and are not developed in-house. The Company has contacted and is working closely
with its vendors to ensure readiness. Early in the Y2K project, mission critical
applications were identified. These applications have all been certified as Y2K
ready. The Company has participated in a joint Y2K testing program with its
primary software vendor. All PCs have been tested for Y2K compliance. BIOS
upgrades were made to those PCs which did not pass the initial tests. ATMs were
upgraded to assure their readiness for Year 2000.
Systems such as HVAC, security access systems, elevators, calculators, etc.
were all checked and verified for Year 2000 readiness.
Through December 31, 1998, the Company incurred approximately $ 15,000 in
expenses related to the Year 2000. Through 1999, the Company anticipates
incurring an additional $ 4,000 in expenses.
The Company has identified and contacted its major commercial customers
concerning the Y2K efforts of the commercial customers. Information concerning
Y2K and the Companies readiness efforts has been made available to all customers
of the Company. Employees of the Company have been informed of the Company's
efforts through articles in the Company's weekly newsletter.
As part of the planning process, the Company is also developing contingency
plans that will provide alternative methods of doing business, should it be
necessary. The Company has in place a contract with an alternative site provider
to provide contingency processing services.
29
<PAGE>
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature, and therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. The precise impact of inflation upon the Company is difficult to
measure. Inflation may affect the borrowing needs of consumers, thereby
impacting the growth rate of the Company's assets. Inflation may also affect the
general level of interest rates, which can have a direct bearing on the Bank.
Management believes the most significant impact on financial results is
the Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Community Independent Bank, Inc.
Bernville, Pennsylvania
We have audited the accompanying consolidated balance sheets of Community
Independent Bank, Inc. and its wholly-owned subsidiary, Bernville Bank, N.A., as
of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Community
Independent Bank, Inc. and its wholly-owned subsidiary, Bernville Bank, N.A., as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ BEARD & COMPANY, INC.
Reading, Pennsylvania
January 22, 1999
31
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,998,485 $ 1,701,268
Interest bearing deposits in other banks 25,707 1,773,211
Federal funds sold - 158,000
----------------------------------------
Cash and cash equivalents 3,024,192 3,632,479
Securities available for sale 12,876,464 9,524,028
Securities held to maturity, fair value 1997 $ 999,375 - 1,000,585
Mortgage loans held for sale 1,051,500 -
Loans receivable, net of allowance for loan losses
1998 $ 719,788; 1997 $ 540,158 79,322,201 64,364,029
Bank premises and equipment, net 2,710,743 2,636,981
Accrued interest receivable and other assets 2,736,735 2,303,885
----------------------------------------
Total assets $ 101,721,835 $ 83,461,987
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 9,551,421 $ 7,442,811
Interest bearing 75,891,372 63,286,257
----------------------------------------
Total deposits 85,442,793 70,729,068
Other borrowed funds 3,423,300 471,808
Long-term debt 5,000,000 5,000,000
Other liabilities 496,270 360,705
----------------------------------------
Total liabilities 94,362,363 76,561,581
----------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $ 5.00 per share;
authorized and unissued 1,000,000 shares - -
Common stock, par value $ 5.00 per share;
authorized 5,000,000 shares; issued and
outstanding 1998 696,774 shares; 1997
348,287 shares 3,483,870 1,741,435
Surplus 142,148 1,882,808
Retained earnings 3,634,445 3,257,894
Accumulated other comprehensive income 99,009 18,269
----------------------------------------
Total stockholders' equity 7,359,472 6,900,406
----------------------------------------
Total liabilities and stockholders' equity $ 101,721,835 $ 83,461,987
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable, including fees $ 6,524,913 $ 5,010,103
Securities:
Taxable 586,566 445,055
Tax-exempt 28,794 74,831
Other 50,057 64,889
-------------------------------------
Total interest income 7,190,330 5,594,878
-------------------------------------
Interest expense:
Deposits 3,140,848 2,542,353
Other borrowed funds 153,841 50,430
Long-term debt 301,000 70,096
-------------------------------------
Total interest expense 3,595,689 2,662,879
-------------------------------------
Net interest income 3,594,641 2,931,999
Provision for loan losses 240,000 78,000
-------------------------------------
Net interest income after provision for loan losses 3,354,641 2,853,999
-------------------------------------
Other income:
Customer service fees 256,276 212,396
Net gains from sale of loans 131,537 43,622
Other 296,639 174,608
-------------------------------------
Total other income 684,452 430,626
-------------------------------------
Other expenses:
Salaries and employee benefits 1,693,963 1,262,118
Occupancy 324,666 194,327
Equipment 307,792 236,326
Marketing and advertising 88,769 133,884
Loan collection and foreclosed real estate 89,342 105,288
Stationery and supplies 79,311 79,101
Professional fees 90,258 27,743
Other 601,959 449,911
-------------------------------------
Total other expenses 3,276,060 2,488,698
-------------------------------------
Income before income taxes 763,033 795,927
Federal income taxes 219,280 209,064
-------------------------------------
Net income $ 543,753 $ 586,863
=====================================
Basic and diluted earnings per share $ 0.78 $ 0.84
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------------- Other
Number Par Retained Comprehensive
Of Shares Value Surplus Earnings Income Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 348,287 $ 1,741,435 $ 1,882,808 $ 2,827,759 $ (16,580) $ 6,435,422
----------------
Comprehensive income:
Net income - - - 586,863 - 586,863
Net change in unrealized gain
on securities available for
sale, net of taxes - - - - 34,849 34,849
----------------
Total comprehensive income 621,712
----------------
Cash dividends ($ .22 per share) - - - (156,728) - (156,728)
------------------------------------------------------------------------------------------
Balance, December 31, 1997 348,287 1,741,435 1,882,808 3,257,894 18,269 6,900,406
----------------
Comprehensive income:
Net income - - - 543,753 - 543,753
Net change in unrealized gain
on securities available for
sale, net of taxes - - - - 80,740 80,740
----------------
Total comprehensive income 624,493
----------------
Stock options exercised 100 500 1,275 - - 1,775
Two-for-one stock split 348,387 1,741,935 (1,741,935) - - -
Cash dividends ($ .24 per share) - - - (167,202) - (167,202)
------------------------------------------------------------------------------------------
Balance, December 31, 1998 696,774 $ 3,483,870 $ 142,148 $ 3,634,445 $ 99,009 $ 7,359,472
==========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 543,753 $ 586,863
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 240,000 78,000
Provision for depreciation 264,097 201,073
Gain on disposal of property and equipment - (1,800)
Net gains on sale of loans (131,537) (43,622)
Net amortization of securities premiums and discounts 6,073 19,846
Amortization of mortgage servicing rights 20,223 6,879
Loans originated for sale (9,560,950) (2,547,172)
Proceeds from sale of loans 8,640,987 2,590,794
(Increase) decrease in accrued interest receivable and other assets (94,704) 89,867
Increase in other liabilities 135,565 61,574
--------------------------------------
Net cash provided by operating activities 63,507 1,042,302
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity 1,000,000 1,500,000
Proceeds from maturities of securities available for sale 2,135,000 2,185,000
Purchase of securities available for sale (5,370,591) (5,173,233)
Net increase in loans (15,283,134) (12,245,755)
Proceeds from sale of property and equipment - 18,810
Purchases of bank premises and equipment (337,859) (529,249)
Purchase of life insurance (315,000) (1,450,000)
--------------------------------------
Net cash used in investing activities (18,171,584) (15,694,427)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 14,713,725 9,593,066
Net increase in other borrowed funds 2,951,492 241,908
Proceeds from long-term debt - 5,000,000
Cash dividends (167,202) (156,728)
Proceeds from common stock options exercised 1,775 -
--------------------------------------
Net cash provided by financing activities 17,499,790 14,678,246
--------------------------------------
Increase (decrease) in cash and due from banks (608,287) 26,121
Cash and cash equivalents:
Beginning 3,632,479 3,606,358
--------------------------------------
Ending $ 3,024,192 $ 3,632,479
======================================
Cash payments for:
Interest $ 3,558,642 $ 2,621,742
======================================
Income taxes $ 250,939 $ 202,143
======================================
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Nature of operations:
The Bank operates under a national bank charter and provides full banking
services. As a national bank, the Bank is subject to regulation of the
Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. The bank holding company (Parent Company) is subject to
regulation of the Federal Reserve Bank. The area served by the Bank is
principally Berks County, Pennsylvania.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Community Independent Bank, Inc. (the Corporation) and its wholly-owned
subsidiary, Bernville Bank, N.A. (the Bank). All significant intercompany
accounts and transactions have been eliminated.
Estimates:
The preparation of financial statements in conformity 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks.
Securities:
Securities classified as available for sale are those securities that the
Bank intends to hold for an indefinite period of time but not necessarily
to maturity. Any decision to sell a security classified as available for
sale would be based on various factors, including significant movement in
interest rates, changes in maturity mix of the Bank's assets and
liabilities, liquidity needs, regulatory capital considerations and other
similar factors. Available for sale securities are carried at fair value.
Unrealized gains or losses, net of tax, on available for sale securities
are reported as a net amount in other comprehensive income. Gains and
losses on the sale of available for sale securities are determined using
the specific-identification method. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method
over the period to maturity.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance
sheet date.
Mortgage loans held for sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. All
sales are made without recourse. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income.
36
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans receivable:
Loans generally are stated at their outstanding unpaid principal balances
net of an allowance for loan losses and any deferred fees or costs.
Interest income is accrued on the unpaid principal balance. Loan
origination fees net of certain direct origination costs are deferred and
recognized as an adjustment of the yield (interest income) of the related
loans. The Bank is generally amortizing these amounts over the estimated
life of the loan.
A loan is generally considered impaired when it is probable the Bank will
be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest is
discontinued when the contractual payment of principal or interest has
become 90 days past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed
on nonaccrual status, unpaid interest credited to income in the current
year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer
in doubt.
Allowance for loan losses:
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses related to impaired loans that are identified
for evaluation is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. By the time a loan becomes probable of
foreclosure, it has been charged down to fair value, less estimated costs
to sell.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change, including the amounts and timing
of future cash flows expected to be received on impaired loans.
37
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan servicing:
The cost of mortgage servicing rights is amortized in proportion to and
over the period of estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation of property and equipment is computed
principally on the straight-line method over the estimated useful lives of
the related assets.
Advertising costs:
The Bank follows the policy of charging the costs of advertising to expense
as incurred.
Income taxes:
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the balance
sheets when they are funded.
Earnings per share:
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of shares outstanding during the
period. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been
issued as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by the
Corporation relate solely to outstanding stock options and are determined
using the treasury stock method. Per share amounts have been adjusted to
give retroactive effect to stock splits declared through December 31, 1998.
38
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment reporting:
The Bank acts as an independent community financial services provider, and
offers traditional banking and related services to individual, business and
government customers. Through its branch and automated teller machine
network, the Bank offers a full array of commercial and retail financial
services, including the taking of time, savings and demand deposits; the
making of commercial, consumer and mortgage loans; and the providing of
other financial services.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial and retail operations of the
Bank. As such, discrete financial information is not available and segment
reporting would not be meaningful.
New accounting standard:
The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", in June
1998. The Bank is required to adopt the Statement on January 1, 2000. The
adoption of the Statement is not expected to have a significant impact on
the financial condition or results of operations of the Bank.
2
- --------------------------------------------------------------------------------
RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The total of those reserve balances was approximately $ 400,000 at
December 31, 1998 and $ 150,000 at December 31, 1997.
39
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
3
- --------------------------------------------------------------------------------
SECURITIES
The amortized cost of securities and their approximate fair value at December 31
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
December 31, 1998:
U.S. Treasury securities $ 4,504,588 $ 63,381 $ - $ 4,567,969
U.S. Government agency obligations 7,019,921 80,562 (1,283) 7,099,200
Obligations of states and political
subdivisions 454,940 7,355 - 462,295
Equity securities 747,000 - - 747,000
--------------------------------------------------------------------
$ 12,726,449 $ 151,298 $ (1,283) $ 12,876,464
====================================================================
December 31, 1997:
U.S. Treasury securities $ 4,509,946 $ 33,259 $ (77) $ 4,543,128
U.S. Government agency obligations 3,497,900 1,572 (13,167) 3,486,305
Obligations of states and political
subdivisions 1,005,000 6,095 - 1,011,095
Equity securities 483,500 - - 483,500
--------------------------------------------------------------------
$ 9,496,346 $ 40,926 $ (13,244) $ 9,524,028
====================================================================
Held to maturity securities:
December 31, 1997:
U.S. Treasury securities $ 1,000,585 $ - $ (1,210) $ 999,375
====================================================================
</TABLE>
Equity securities are principally comprised of stock in the Federal Reserve Bank
and Federal Home Loan Bank.
40
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
3
- --------------------------------------------------------------------------------
SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31, 1998, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.
Available For Sale
-----------------------------------
Amortized Fair
Cost Value
-----------------------------------
Due in one year or less $ 3,008,368 $ 3,033,282
Due after one year through five years 8,891,081 9,013,382
Due after five years through ten years 80,000 82,800
Equity securities 747,000 747,000
-----------------------------------
$ 12,726,449 $ 12,876,464
===================================
There were no sales of securities during the years ended December 31, 1998 and
1997.
Securities with a carrying value of $ 4,055,000 and $ 5,520,620 at December 31,
1998 and 1997 respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
4
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
Loans receivable are comprised of the following:
December 31,
1998 1997
------------------------------------
Commercial $ 27,184,490 $ 16,418,588
Consumer 6,172,544 4,917,381
Mortgage 47,167,224 44,148,080
------------------------------------
80,524,258 65,484,049
Allowance for loan losses (719,788) (540,158)
Net deferred loan fees and costs (482,269) (579,862)
------------------------------------
$ 79,322,201 $ 64,364,029
====================================
41
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
4
- --------------------------------------------------------------------------------
LOANS RECEIVABLE (CONTINUED)
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
1998 1997
----------------------------------
Balance, beginning $ 540,158 $ 484,226
Provision for loan losses 240,000 78,000
Loans charged off (68,129) (26,363)
Recoveries 7,759 4,295
----------------------------------
Balance, ending $ 719,788 $ 540,158
==================================
There were no impaired loans at December 31, 1998 and 1997.
5
- --------------------------------------------------------------------------------
LOAN SERVICING
The Bank capitalized $ 84,962 and $ 20,991 of mortgage servicing rights for
loans originated and sold in 1998 and 1997 respectively and amortized $ 20,223
and $ 6,879 of those rights for the years ended December 31, 1998 and 1997
respectively.
The amortization of originated mortgage servicing rights is recorded as a
reduction of servicing revenue in other income. Mortgage servicing rights are
included in other assets.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others totaled $ 14,145,720 and $ 6,773,957 at December 31, 1998
and 1997 respectively. Servicing income, net of mortgage servicing rights
amortization, for the years ended December 31, 1998 and 1997 was $ 6,992 and $
6,997 respectively.
42
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
6
- --------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation were as follows:
December 31,
1998 1997
--------------------------------
Land and land improvements $ 262,562 $ 262,562
Bank buildings and leasehold improvements 2,047,972 2,034,690
Bank furniture and equipment 1,978,327 1,653,750
--------------------------------
4,288,861 3,951,002
Less accumulated depreciation 1,578,118 1,314,021
--------------------------------
$ 2,710,743 $ 2,636,981
================================
7
- --------------------------------------------------------------------------------
DEPOSITS
The components of deposits at December 31, 1998 and 1997 were as follows:
December 31,
1998 1997
----------------------------------------
Demand, non-interest bearing $ 9,551,421 $ 7,442,811
Demand, interest bearing 21,148,971 16,069,319
Savings 9,621,079 9,648,567
Time, $ 100,000 and over 5,493,701 4,784,853
Time, other 39,627,621 32,783,518
----------------------------------------
$ 85,442,793 $ 70,729,068
========================================
43
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7
- --------------------------------------------------------------------------------
DEPOSITS (CONTINUED)
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 27,480,322
2000 11,757,000
2001 2,221,000
2002 1,626,000
2003 1,402,000
Thereafter 635,000
--------------------
$ 45,121,322
====================
8
- --------------------------------------------------------------------------------
OTHER BORROWED FUNDS AND LONG-TERM DEBT
The Bank maintains a U.S. Treasury tax and loan note option account for the
deposit of withholding taxes, corporate income taxes and certain other payments
to the federal government. Deposits are subject to withdrawal and are evidenced
by an open-ended interest-bearing note. Borrowings under this note option
account were $ 88,300 and $ 471,808 at December 31, 1998 and 1997 respectively,
with interest payable at a variable rate (4.11% and 5.25% at December 31, 1998
and 1997 respectively).
The Bank has a line of credit under the "RepoPlus" Advance program with the
Federal Home Loan Bank which expires June 24, 1999 for borrowings up to $
10,000,000. Borrowings under this line of credit were $ 3,335,000 and $ -0- at
December 31, 1998 and 1997 respectively.
Long-term debt at December 31, 1998 and 1997 is an advance from the Federal Home
Loan Bank in the amount of $ 5,000,000 due October 8, 1999 with an interest rate
of 6.02%.
44
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9
- --------------------------------------------------------------------------------
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet the minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented below. The
consolidated capital ratios are not materially different from the Bank's capital
ratios.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets) $7,778,000 10.93% $5,695,000 8.0% $7,119,000 10.0%
Tier I capital (to risk weighted assets) 7,058,000 9.91 2,848,000 4.00 4,272,000 6.00
Tier I capital (to average assets) 7,058,000 7.04 4,010,000 4.00 5,013,000 5.00
As of December 31, 1997:
Total capital (to risk weighted assets) $7,165,000 12.95% $4,427,000 8.0% $5,534,000 10.0%
Tier I capital (to risk weighted assets) 6,625,000 11.97 2,214,000 4.00 3,320,000 6.00
Tier I capital (to average assets) 6,625,000 8.28 3,200,000 4.00 4,000,000 5.00
</TABLE>
Banking laws and regulations limit the amount of dividends that may be paid and
any dividends declared by the Bank are subject to approval by the Bank's
regulatory agencies. Under current banking laws, the Bank would be limited to
approximately $ 863,000 of dividends in 1999 plus an additional amount equal to
the Bank's net income for 1999, up to the date of any such dividend declaration.
45
<PAGE>
On June 25, 1998, the Board of Directors declared a two-for-one stock split in
the form of a 100% stock dividend on common stock outstanding, payable on July
31, 1998 to shareholders of record on July 17, 1998. The stock split resulted in
the issuance of 348,387 additional common shares. All per share data has been
adjusted for the effect of the stock split.
46
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
10
- --------------------------------------------------------------------------------
STOCKHOLDER AUTOMATIC DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
On June 25, 1998, the Corporation adopted a dividend reinvestment and stock
purchase plan available to stockholders who elect to reinvest their cash
dividends for the purchase of additional shares of the Corporation's common
stock. Participants may also elect to make voluntary cash payments not to exceed
$ 2,500 each quarter for the purchase of additional shares of the Corporation's
common stock. The common stock must be purchased in the open market through May
1999. Subsequent to that date, it may be purchased in the open market or from
authorized but unissued shares, substantially at prevailing market prices. The
Corporation has reserved 225,000 shares of common stock for possible issuance
under the plan.
11
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
The following table sets forth the computations of basic and diluted earnings
per share for the years ended December 31, 1998 and 1997:
1998 1997
---------------------------
Net income $ 543,753 $ 586,863
===========================
Weighted average shares outstanding 696,686 696,574
Effect of dilutive securities, stock options 2,842 1,316
---------------------------
Weighted average shares and assumed conversion 699,528 697,890
===========================
12
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or stockholders' equity.
47
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
12
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME (CONTINUED)
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
1998 1997
-------------------------------
Net unrealized holding gains on
available for sale securities $ 122,333 $ 52,802
Tax effect (41,593) (17,953)
-------------------------------
Net of tax amount $ 80,740 $ 34,849
===============================
13
- --------------------------------------------------------------------------------
EMPLOYEE BENEFITS
The Bank has a 401(k) Profit Sharing Plan and Trust for its employees. Employees
are permitted to contribute up to 17% of their compensation, but not over the
statutory limit. The profit sharing plan covers employees who meet the
eligibility requirements of having worked 1,000 hours in a plan year and have
attained the age of 21. The amount of matching 401(k) contributions and profit
sharing plan contributions is at the discretion of the Bank's Board of
Directors. The expense related to this plan was $ 21,067 and $ 18,070 in 1998
and 1997 respectively.
On June 26, 1997, the Bank adopted various deferred compensation plans for
certain directors and officers of the Bank. Under the Plans' provisions,
benefits will be payable upon retirement, death or permanent disability of the
participant. At December 31, 1998 and 1997, $ 76,157 and $ 22,624 respectively
had been accrued under these contracts. To fund the benefits under these
agreements, the Bank is the owner and the beneficiary of life insurance policies
on the lives of the directors and officers. The policies had an aggregate cash
surrender value of $ 1,887,123 and $ 1,489,186 at December 31, 1998 and 1997
respectively.
48
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
13
- --------------------------------------------------------------------------------
EMPLOYEE BENEFITS (CONTINUED)
The Bank has an Employee Stock Option Plan that covers all officers and key
employees of the Corporation and its subsidiary and is administered by a
committee of the Board of Directors. The Plan covers 50,000 shares of common
stock. The option price for options issued under the Plan must be at least equal
to 100% of the fair market value of the common stock on the date of grant.
Options granted under the Plan are exercisable over a three-year period,
commencing one year after the date of grant, on a cumulative basis. Options
expire on the earlier of ten years after the date of grant, three months from
the participants' termination of employment or one year from the date of the
participants' death or disability.
The Bank has a Non-Employee Directors' Stock Option Plan that covers 20,000
shares of common stock. The Plan covers all directors of the Corporation and its
subsidiary who are not employees. The option price for options issued under the
Plan will be equal to the fair market value of the Corporation's common stock on
the date of grant. On the fifth anniversary date of the initial option grant
date, and every five years thereafter, each non-employee director shall be
granted options to purchase 1,000 shares of common stock. Options are
exercisable one year from the date of grant and expire on the earlier of ten
years after the date of grant, three months from the date the participant ceases
to be a director of the Corporation or three months from the date of the
participants' death or disability.
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee and director stock options. Under
APB 25, because the exercise price of the Bank's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Corporation had accounted for
its stock options under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998
and 1997 respectively: risk-free interest rates of 4.6% and 5.3%; volatility
factors of the expected market price of the Bank's common stock of 8.2% and 0%;
expected life of the options of 7 years and a cash dividend yield of 1.84% and
2.16%.
49
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
13
- --------------------------------------------------------------------------------
EMPLOYEE BENEFITS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Corporation's pro
forma information follows:
Year Ended December 31,
1998 1997
------------------------------------
Net income:
As reported $ 543,753 $ 586,863
Pro forma $ 538,369 $ 582,474
Earnings per share:
As reported, basic $ 0.78 $ 0.84
Pro forma, basic $ 0.77 $ 0.84
As reported, diluted $ 0.78 $ 0.84
Pro forma, diluted $ 0.77 $ 0.83
Stock option transactions as restated for the 2-for-1 stock split under the
Plans were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 15,800 $ 10.24 9,400 $ 9.28
Granted 1,700 12.13 6,400 11.78
Exercised (200) 8.88 - -
Forfeited (3,400) 10.56 - -
------------------------------------------------------
Outstanding at the end of the year 13,900 $ 10.47 15,800 $ 10.29
======================================================
Exercisable at December 31 9,267 $ 9.84 8,133 $ 9.51
======================================================
Weighted-average fair value of options
granted during the year $ 2.06 $ 1.73
================ ================
</TABLE>
Options available for grant at December 31, 1998 were 55,900.
The weighted-average remaining contractual life of the above options is
approximately 9.04 years.
50
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
14
- --------------------------------------------------------------------------------
INCOME TAXES
The components of income tax expense were as follows:
Years Ended December 31,
1998 1997
---------------------------------
Current $ 245,329 $ 225,543
Deferred (26,049) (16,479)
---------------------------------
$ 219,280 $ 209,064
=================================
Reconciliation of the statutory income tax at a rate of 34% to the income tax
expense included in the consolidated statements of income is as follows:
Years Ended December 31,
1998 1997
---------------------------------
Computed statutory tax expense $ 259,431 $ 270,615
Tax exempt interest (19,055) (34,376)
Disallowance of interest expense 3,093 5,331
Bank-owned life insurance (28,203) (13,323)
Other 4,014 (19,183)
---------------------------------
$ 219,280 $ 209,064
=================================
Net deferred tax assets consisted of the following components:
December 31,
1998 1997
---------------------------------
Deferred tax assets:
Allowance for loan losses $ 215,279 $ 154,205
Deferred loan fees - 23,361
Deferred compensation 25,893 7,692
---------------------------------
Total deferred tax assets 241,172 185,258
---------------------------------
Deferred tax liabilities:
Bank premises and equipment (97,721) (89,866)
Mortgage servicing rights (41,276) (19,264)
Unrealized appreciation on
securities available for sale (51,006) (9,412)
---------------------------------
(190,003) (118,542)
---------------------------------
Net deferred tax assets $ 51,169 $ 66,716
=================================
51
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
15
- --------------------------------------------------------------------------------
LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Bank leases the premises for one branch location, a loan center and an
operations center under operating lease agreements expiring in various years
through October 2017. Certain lease agreements contain escalation provisions.
The Bank also has options to extend the lease agreements for additional lease
terms from five to thirty years. The Bank is responsible to pay all real estate
taxes, insurance, utilities and maintenance and repairs on the buildings.
Future minimum lease payments by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more, consisted
of the following at December 31, 1998:
1999 $ 139,006
2000 140,539
2001 142,218
2002 129,285
2003 133,961
Thereafter 1,399,310
------------------
$ 2,084,319
==================
The total rental expense included in the statements of income for the years
ended December 31, 1998 and 1997 is $ 111,446 and $ 21,849 respectively.
16
- --------------------------------------------------------------------------------
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
The Bank has had banking transactions in the ordinary course of business with
its executive officers and directors and their related interests on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. At December 31, 1998 and 1997, these
persons were indebted to the Bank for loans totaling $ 1,260,656 and $ 1,420,123
respectively. During 1998, $ 193,267 of new loans were made and repayments
totaled $ 352,734.
52
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
17
- -------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Bank's financial instrument commitments is as follows:
December 31,
1998 1997
------------------------------
Commitments to grant loans $ 1,844,000 $ 1,614,000
Unfunded commitments under lines of credit 5,163,000 5,861,000
Outstanding letters of credit 755,000 531,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of 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.
18
- -------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
The Bank grants commercial, residential and consumer loans to customers
primarily located in Berks County, Pennsylvania. The concentrations of credit by
type of loan are set forth in Note 4. Although the Bank has a diversified loan
portfolio, its debtors' ability to honor their contracts is influenced by the
region's economy.
53
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
19
- -------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Bank
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year-end.
The following information should not be interpreted as an estimate of the fair
value of the entire Bank since a fair value calculation is only provided for a
limited portion of the Bank's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Bank's disclosures and those of other companies may not
be meaningful. The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and due from banks, interest bearing deposits in other banks and
federal funds sold: The carrying amounts reported approximate those
assets' fair value.
Securities:
Fair values of 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.
Mortgage loans held for sale:
Fair values are based on quoted market prices of similar loans sold.
Loans receivable:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The
fair values for other loans receivable were estimated using discounted
cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Accrued interest receivable and payable:
The carrying amount of accrued interest receivable and payable
approximate their fair values.
Deposit liabilities:
The fair values disclosed for demand deposits (e.g., interest-bearing
and noninterest-bearing checking, passbook, savings and certain types
of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates
currently being offered on certificates of deposit to a schedule of
aggregated expected monthly maturities on time deposits.
54
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
19
- -------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Other borrowed funds:
The current carrying amounts of other borrowed funds approximate their
fair values.
Long-term debt:
The current carrying value of the debt approximates the fair value.
Off-balance sheet instruments:
Off-balance sheet instruments of the Bank consist of letters of credit,
loan commitments and unfunded lines of credit. Fair values for the
Bank's off-balance sheet instruments are based on fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing. Any fees charged are immaterial.
A summary of the estimated fair values of the Bank's financial instruments are
as follows:
<TABLE>
1998 1997
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,998 $ 2,998 $ 1,701 $ 1,701
Interest-bearing deposits in other banks 26 26 1,773 1,773
Federal funds sold - - 158 158
Securities 12,876 12,876 10,525 10,523
Mortgage loans held for sale 1,052 1,052 - -
Loans receivable, net 79,322 81,830 64,364 65,143
Accrued interest receivable 485 485 381 381
Financial liabilities:
Deposits 85,443 86,288 70,729 70,977
Other borrowed funds 3,423 3,423 472 472
Long-term debt 5,000 5,000 5,000 5,000
Accrued interest payable 298 298 261 261
Off-balance sheet financial instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
</TABLE>
55
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
20
- -------------------------------------------------------------------------------
COMMUNITY INDEPENDENT BANK, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
December 31,
1998 1997
----------------------------
Assets:
Cash $ 173,314 $ 257,300
Investment in bank subsidiary 7,157,000 6,643,106
Other assets 29,158 -
----------------------------
Total assets $ 7,359,472 $ 6,900,406
============================
Stockholders' equity $ 7,359,472 $ 6,900,406
============================
Statements of Income
Year Ended December 31,
1998 1997
----------------------------
Dividends from Bank subsidiary $ 167,202 $ 156,728
Other expenses (56,603) -
Equity in undistributed earnings of Bank subsidiary 433,154 430,135
----------------------------
Net income $ 543,753 $ 586,863
============================
56
<PAGE>
COMMUNITY INDEPENDENT BANK, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY,
BERNVILLE BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
20
- -------------------------------------------------------------------------------
COMMUNITY INDEPENDENT BANK, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
(CONTINUED)
Statements of Cash Flows
Year Ended December 31,
1998 1997
-----------------------
Operating activities:
Net income $ 543,753 $ 586,863
Adjustments to reconcile net income to cash
provided by operating activities:
Undistributed earnings of Bank subsidiary (433,154) (430,135)
Increase in other assets (29,158) -
-----------------------
Net cash provided by operating activities 81,441 156,728
-----------------------
Financing activities:
Cash dividends (167,202) (156,728)
Proceeds from common stock options exercised 1,775 -
-----------------------
Net cash used in financing activities (165,427) (156,728)
-----------------------
Decrease in cash (83,986) -
Cash:
Beginning 257,300 257,300
-----------------------
Ending $ 173,314 $ 257,300
=======================
57
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
21. Subsidiaries of the Registrant
23. Consent of Independent Auditors
27. Financial Data Schedule
b. Reports on Form 8-K
None
58
<PAGE>
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 INDEPENDENT BANK, INC.
--------------------------------
(Registrant)
------------
3/30/99 /s/ Arlan J. Werst
- ---------- ------------------------------
Date Arlan J. Werst, President/CEO
3/30/99 /s/ Linda L. Strohmenger
- ---------- ------------------------------
Date Linda L. Strohmenger, Secretary
(Principal Financial Officer)
3/30/99 /s/ Frederick P. Krott
- ---------- ------------------------------
Date Frederick P. Krott, Chairman of
The Board
3/30/99 /s/ John F. Hampson
- ---------- ------------------------------
Date John F. Hampson, Director
3/30/99 /s/ Paul T. Manrodt
- ---------- ------------------------------
Date Paul T. Manrodt, Director
3/30/99 /s/ Walter J. Potteiger
- ---------- ------------------------------
Date Walter J. Potteiger, Director
3/30/99 /s/ Deborah K. Ritter
- ---------- ------------------------------
Date Deborah K. Ritter, Director
3/30/99 /s/ John J. Seitzinger
- ---------- ------------------------------
Date John J. Seitzinger, Director
3/30/99 /s/ Stratton D. Yatron
- ---------- ------------------------------
Date Stratton D. Yatron, Director
59
<PAGE>
ITEM 13(a). EXHIBITS
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
Bernville Bank, N.A.
201 N. Main Street
Bernville, PA 19506
<PAGE>
EXHIBIT 23. CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(on Forms S-8) of Community Independent Bank, Inc. of our report dated
January 22, 1999, with respect to the consolidated financial statements of
Community Independent Bank, Inc. and subsidiary included in this Annual Report
(Form 10-KSB) for the year ended December 31, 1998.
/s/ BEARD & COMPANY, INC.
Reading, Pennsylvania
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMMUNITY INDEPENDENT BANK, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,
1998 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1998 AND OTHER FINANCIALS DATA INCLUDED WITHIN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,998,485
<INT-BEARING-DEPOSITS> 25,707
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,876,464
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 79,322,201
<ALLOWANCE> 719,788
<TOTAL-ASSETS> 101,721,835
<DEPOSITS> 85,442,793
<SHORT-TERM> 3,423,300
<LIABILITIES-OTHER> 496,270
<LONG-TERM> 5,000,000
0
0
<COMMON> 3,483,870
<OTHER-SE> 3,875,602
<TOTAL-LIABILITIES-AND-EQUITY> 101,721,835
<INTEREST-LOAN> 6,524,913
<INTEREST-INVEST> 615,360
<INTEREST-OTHER> 50,057
<INTEREST-TOTAL> 7,190,330
<INTEREST-DEPOSIT> 3,140,848
<INTEREST-EXPENSE> 3,595,689
<INTEREST-INCOME-NET> 3,594,641
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,276,060
<INCOME-PRETAX> 763,033
<INCOME-PRE-EXTRAORDINARY> 763,033
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 543,753
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 3.72
<LOANS-NON> 93,000
<LOANS-PAST> 202,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,334,000
<ALLOWANCE-OPEN> 540,158
<CHARGE-OFFS> 68,129
<RECOVERIES> 7,759
<ALLOWANCE-CLOSE> 719,788
<ALLOWANCE-DOMESTIC> 719,788
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
