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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 0-15786
------------------ -------
COMMUNITY BANKS, INC.
- --------------------------------------------------------------------------------
(Exact names of registrant as specified in its charter)
Pennsylvania 23-2251762
- --------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Market Street, Millersburg, PA 17061
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 692-4781
----------------------------
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $5 per share American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of March 1, 2000, the aggregated market value (based on recent selling
prices) of the voting stock of the registrant held by its nonaffiliates
(5,542,872 shares) was $110,164,581.
Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practical date.
6,778,261 shares of common stock outstanding on March 1, 2000
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13 contains portions of the Annual Report to Stockholders
incorporated by reference into Parts I, II, and III.
Exhibit index is located on page 27, This document contains 32 pages.
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1
PART I
Item 1. Business:
- -----------------
Community Banks, Inc. (Corporation) is a bank holding company whose banking
subsidiaries are Community Banks, N.A. (CBNA) and Peoples State Bank (PSB) and
whose non-banking subsidiaries are Community Banks Investments, Inc. (CBII) and
Community Banks Life Insurance Company, Inc. (CBLIC)
The Corporation conducts a full service commercial banking business and
provides trust services in Adams County, Dauphin County, southern Luzerne
County, Northumberland County, western Schuylkill County, Snyder County, and
York County. The Corporation currently has 32 offices. There are 70 offices of
commercial banks and savings and loan associations within its market area with
which the Corporation competes. Deposits of the Corporation represent
approximately 15% of the total deposits in the market area. The Corporation has
2 offices in Adams County, 8 offices in Dauphin County, 3 offices in Luzerne
County, 2 offices in Northumberland County, 10 offices in Schuylkill County, 1
office in Snyder County, and 6 offices in York County. On March 31, 1998,
Community Banks, Inc. completed its merger of the Peoples State Bank of East
Berlin. PSB's banking offices are located in Adams and York Counties. The
transaction was accounted for as a pooling of interests.
Like other depository institutions, the Corporation has been subjected to
competition from brokerage firms, money market funds, consumer finance and
credit card companies and other companies providing financial services and
credit to consumers. As a result of federal legislation, regulatory restrictions
previously imposed on the Bank with respect to establishing money market fund
accounts have been eliminated and the Bank is now better able to compete with
other financial institutions in its service area with respect to interest rates
paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.
During 1986 the Corporation formed CBLIC to provide credit life insurance
to its consumer credit borrowers. Total premiums earned were $558,000 for the
year ended December 31, 1999. During 1985 the Corporation formed CBII to make
investments primarily in equity securities of other banks. Total assets of CBII
at December 31, 1999 were $3,852,000.
The Corporation has approximately 439 full and part-time employees and
considers its employee relations to be satisfactory.
Community Banks, Inc. is registered as a bank holding company with the
Board of Governors of the Federal Reserve System in accordance with the
requirements of the Bank Holding Company Act of 1956. It is subject to
regulation by the Federal Reserve Board and the Comptroller of the Currency.
In 1989, the Federal Board issued final risk-based capital guidelines for
bank holding companies which were phased in through December 31, 1992. The
intent of regulatory capital guidelines is to measure capital adequacy based
upon the credit risk of various assets and off-balance sheet items. Risk
categories, weighted at 0%, 20%, 50% and 100%, are specifically identified. The
sum of the results of each such category is then related to the adjusted capital
account of the Corporation. The minimum required capital ratio at December 31,
1999, was 8 percent. The Corporation's December 31, 1999 ratio approximated 12%.
Subsequently, in August 1990 the board announced
2
approval of capital to total assets (leverage) guidelines. This minimum leverage
ratio was set at 4% and would apply only to those banking organizations
receiving a regulatory composite 1 rating. Most banking organizations will be
required to maintain a leverage ratio ranging from 1 to 2 percentage points
above minimum standard. The Corporation's leverage ratio at December 31, 1999,
approximated 8%. Risk-based capital requirements replace previous capital
guidelines which established minimum primary and total capital requirements.
CBNA and PSB are also subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet 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 Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
each subsidiary bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgements by the regulators
about components risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires CBNA and PSB to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that CBNA and
PSB meet all capital adequacy requirements to which they are subject.
The following table summarizes the Corporation's capital adequacy position:
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 Capital Total Risk-Based Capital Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- ------------------------------------------------------------------------------------------------------------------------------------
Required Minimum 4.0% 8.0% 4.0%
Community Banks, N.A. 12.4 13.4 8.4
Peoples State Bank 9.8 11.1 7.6
Community Banks, Inc. 11.3 12.4 8.4
[FN]
(A) Tier 1 capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier 1 capital divided by average total assets less disallowed intangible
assets.
3
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act
of 1999) which will, when effective March 11, 2000, permit bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, is well managed and
has at least a satisfactory rating under the Community Reinvestment Act, by
filing a declaration that the bank holding company wishes to become a financial
holding company. Also effective March 11, 2000, no regulatory approval will be
required for a financial holding company to acquire a company, other than a bank
or savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. The Financial Services Modernization Act defines
"financial in nature" to include; securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory Community Reinvestment Act rating. The specific
effects of the enactment of the Financial Services Modernization Act on the
banking industry in general and on the Corporation in particular has yet to be
determined due to the fact that the Financial Services Modernization Act was
only recently adopted.
4
Statistical Data:
- ----------------
Pages 5, 21, and 22 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 1999 contain the following information
concerning:
Financial Highlights, Average Balances, Effective Interest Differential,
and Interest Yields for the three years ended December 31, 1999.
Rate/Volume Analysis for the two years ended December 31, 1999.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1999.
Amortized cost and Estimated Market Values of Investment Securities as of
December 31, 1999, 1998, and 1997.
Maturity Distribution of Securities as of December 31, 1999 (Market Value).
Loan Account Composition as of December 31, 1999, 1998, 1997, 1996, and
1995.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 1999.
Non-performing Loans as of December 31, 1999, 1998, 1997, 1996, and 1995.
Loan Loss Experience for the five years ended December 31, 1999.
Loans Charged Off and Recovered for the five years ended December 31, 1999.
Allowance for Loan Losses as of December 31, 1999, 1998, 1997, 1996, and
1995.
Maturity Distribution of Time Deposits over $100,000 as of December 31,
1999.
Maturity Distribution of all Time Deposits as of December 31, 1999.
Interest Rate Sensitivity as of December 31, 1999.
5
Item 2. Properties:
- --------------------
The Corporation owns no real property except through its subsidiary banks.
CBNA owns the following buildings: 150 Market Street, Millersburg, Dauphin
County, Pennsylvania (the corporate headquarters); 13-23 South Market Street,
Elizabethville, Dauphin County, Pennsylvania; 3679 Peters Mountain Road,
Halifax, Dauphin County, Pennsylvania; 906 North River Road, Halifax, Dauphin
County, Pennsylvania; 800 Peters Mountain Road, Dauphin County, Pennsylvania;
Main and Market Streets, Lykens, Dauphin County, Pennsylvania; Route 209, Porter
Township, Schuylkill County, Pennsylvania; 29 East Main Street, Tremont,
Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair,
Schuylkill County, Pennsylvania; Port Carbon Highway, St. Clair, Schuylkill
County, Pennsylvania; 300 East Independence Street, Shamokin, Northumberland
County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill County,
Pennsylvania; One South Arch Street, Milton, Northumberland County,
Pennsylvania; 30 S. Church Street, Hazleton, Luzerne County, Pennsylvania; 702
West Main Street, Valley View, Schuylkill County, Pennsylvania; Route 25, East
Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center Street,
Ashland, Schuylkill County, Pennsylvania; 300 Hobart Street, Gordon, Schuylkill
County, Pennsylvania; 9-11 N. Centre Street, Pottsville, Schuylkill County,
Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania; and
2796 Old Post Road, Linglestown, Dauphin County, Pennsylvania. In addition
thereto, CBNA leases an office at Main Street, Pillow, Dauphin County,
Pennsylvania, pursuant to a lease which, with renewal options, will extend to
the year 2008. Also, the Bank leases offices at Route 93, Conyngham, Luzerne
County, Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania;
6700 Derry Street, Rutherford, Dauphin County, Pennsylvania; and 339 Main
Street, LaVelle, Schuylkill County, Pennsylvania.
All the buildings used by CBNA are free-standing and are used exclusively
for banking purposes with the exception of offices at the Pillow, St. Clair,
Milton, Pottsville, Hazleton, LaVelle, and Valley View locations.
CBNA also owns or leases the following properties for the purpose of future
expansion: 390 E. Penn Drive, Enola, Cumberland County, Pennsylvania and 201 St.
Johns Church Road, Camp Hill, Hampden Township, Cumberland County, Pennsylvania.
PSB owns the following buildings: 100 E. King Street, East Berlin, Adams
County, Pennsylvania; and 3421 Carlisle Road, Dover, York County, Pennsylvania.
In addition thereto, PSB leases offices at 600 Carlisle Street, Hanover, York
County, Pennsylvania, pursuant to a lease which, with renewal options, will
extend to the year 2006 and 509 Greenbriar Road, Gettysburg, Adams County,
Pennsylvania, pursuant to a lease which, with renewal options, will extend to
the year 2029. PSB also owns real property through its subsidiary, PSB realty,
at the following locations: 1191 Eichelberger Street, Hanover, York County,
Pennsylvania; 155 Glen Drive, Manchester, York County, Pennsylvania; 1345
Baltimore Street, Hanover, York County, Pennsylvania; and 29 N. Washington
Street, Gettysburg, Adams County, Pennsylvania.
PSB leases the following property for the purpose of future expansion:
Kingston Square, York, York County,Pennsylvania.
All the buildings used by PSB are free-standing and are used exclusively
for banking purposes with the exception of offices and retail space rented at
the Carlisle Street, Hanover location.
6
From time to time, the subsidiary banks also acquire real estate by virtue
of foreclosure proceedings, such real estate is disposed of in the usual and
ordinary course of business as expeditiously as is prudently possible.
Item 3. Legal Proceedings:
- ---------------------------
There are no material pending legal actions, other than routine litigation
incidental to the business of the Corporation, to which the Corporation is a
party.
Item 4. Submission of Matters to a Vote of Security Holders:
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
APPENDIX A
----------
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996, AND 1995
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Return on average equity 15.41% 13.04% 11.49% 11.39% 10.36%
Return on average assets 1.29% 1.31% 1.16% 1.18% 1.06%
Average equity to average assets 8.35% 10.06% 10.12% 10.36% 10.25%
Dividend payout ratio 36.80% 40.83% 39.66% 39.02% 42.09%
7
APPENDIX A
----------
Continued
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
AT DECEMBER 31, 1999, 1998, AND 1997
------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------------------- --------------------- ---------------------
Mortgage backed U.S. Government agencies $ 61,788 $ 58,961 $ 82,887 $ 83,260 $ 84,568 $ 85,137
U.S. Treasury and U.S. Government agencies 132,661 123,919 78,800 79,449 66,940 67,389
Obligations of states and political sub-
divisions 84,778 78,853 85,771 87,676 55,248 56,633
Other securities 49,536 50,342 40,858 42,157 7,623 10,125
-------- -------- -------- -------- -------- --------
Total $328,763 $312,075 $288,316 $292,542 $214,379 $219,284
======== ======== ======== ======== ======== ========
COMMUNITY BANKS, INC. AND SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Market Value)
(dollars in thousands)
as of December 31, 1999
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield (a)
--------------------------------------------------------------------------------------
U.S. Government and agencies $ 2,121 $ 5,447 $56,988 $118,324 $182,880 13 yr. 11 mos. 6.65%
Obligations of states and political
Subdivisions 4,824 11,055 5,962 57,012 78,853 14 yr. 11 mos. 6.61%
Other 19,467 ---- 2,216 28,659 50,342 15 yr. 3 mos. 4.54%
------- ------- ------- -------- --------
Total $26,412 $16,502 $65,166 $203,995 $312,075 14 yr. 6 mos. 6.30%
======= ======= ======= ======== ========
Percentage of total 8.5% 5.3% 20.9% 65.3% 100.0%
===== ===== ===== ===== =====
Weighted average yield (a) 4.21% 5.85% 6.87% 6.43% 6.30%
===== ===== ===== ===== =====
[FN]
(a) Weighted average yields were computed on a tax equivalent basis using a
federal tax rate of 35%.
The Corporation monitors investment performance and valuation on an ongoing
basis to evaluate investment quality. An investment which has experienced a
decline in market value considered to be other than temporary is written down to
its net realizable value and the amount of the write down is accounted for as a
realized loss.
8
APPENDIX A
----------
Continued
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
-----------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------ ------ ------- ------ ------- ------ -------
Commercial, financial and agricultural $100,970 16.9% $65,698 12.8% $ 53,520 11.8% $ 52,844 12.6% $45,017 12.3%
Real estate-construction 14,670 2.5 17,381 3.4 5,553 1.2 5,724 1.4 5,890 1.6
Real estate-mortgage 362,297 60.8 324,709 63.4 299,529 65.7 268,276 63.8 229,830 62.8
Personal-installment 109,841 18.4 97,561 19.0 88,046 19.3 87,381 20.8 78,771 21.5
Other 8,523 1.4 6,931 1.4 9,182 2.0 5,982 1.4 6,662 1.8
-------- ------ ------- ----- -------- ------ ------- ------ ------- -----
596,301 100.0% 512,280 100.0% 455,830 100.0% 420,207 100.0% 366,170 100.0%
-------- ------- -------- ------- -------
====== ====== ====== ====== ======
Less:
Unearned discount (6,986) (10,018) (11,799) (11,965) (11,671)
Reserve for loan losses (7,456) (6,954) (6,270) (5,561) (4,955)
-------- -------- -------- -------- -------
$581,859 $495,308 $437,761 $402,681 $349,544
======== ======== ======== ======== =======
The Corporation's loan activity is principally with customers located within the
local market area. The Corporation continues to maintain a diversified loan
portfolio and has no significant loan concentration in any economic sector.
Changes in loan demand in 1999 resulted in increases in commercial, financial,
and agricultural loans and personal- installment loans of 53.7% and 12.6%,
respectively. Real estate loans increased 10.2% during this same
period.Commercial, financial, and agricultural loans represented 16.9% of total
loans at December 31, 1999 and consist principally of commercial lending secured
by financial assets of businesses including accounts receivable, inventories and
equipment, and, in most cases, include liens on real estate. Real estate
construction and mortgage loans are primarily 1 to 4 family residential loans
secured by residential properties within the bank's market area. Personal-
installment loans comprised 18.4% of total loans at December 31, 1999 and
consist principally of secured loans for items such as automobiles, property
improvement, household and other consumer goods. The Corporation continues to
sell fixed rate mortgages in the secondary market to avoid associated interest
rate risk. Historically, relative credit risk of commercial, financial and
agricultural loans has generally been greater than that of other types of loans.
9
APPENDIX A
----------
Continued
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
AND REAL-ESTATE CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 1999
-----------------------
Maturity Distribution
---------------------
One Year One to Over Five
Or Less Five Years Years Total
--------- ---------- ---------- -----
Commercial, Financial and
Agricultural $47,264 $38,440 $15,266 $100,970
Real estate-construction 5,332 3,320 6,018 14,670
------- ------- ------- --------
$52,596 $41,760 $21,284 $115,640
======= ======= ======= ========
Interest Sensitivity
--------------------
Variable Fixed Total
-------- ----- -----
Due in one year or less $ 50,303 $ 2,293 $ 52,596
Due after one year 54,479 8,565 63,044
-------- ------- --------
$104,782 $10,858 $115,640
======== ======= ========
10
APPENDIX A
----------
Continued
NON-PERFORMING LOANS (a)
------------------------
(dollars in thousands)
----------------------
as of December 31
------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans past due 90 days or more:
Commercial, financial and agricultural $ 146 $ 47 $ 53 $ 20 $ 120
Mortgages 147 353 405 588 558
Personal installment 73 34 72 189 239
Other 12 7 21 11 ---
----- ----- ----- ----- -------
378 441 551 808 917
----- ----- ----- ----- ------
Loans renegotiated with borrowers 254 248 626 277 494
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural 435 866 926 791 579
Mortgages 3,079 2,282 3,388 3,645 2,346
Other 222 282 300 318 252
----- ----- ----- ----- -----
3,736 3,430 4,614 4,754 3,177
----- ----- ----- ----- -----
Other real estate owned 405 625 866 883 901
----- ----- ----- ----- -----
Total $4,773 $4,744 $6,657 $6,722 $5,489
====== ====== ====== ====== ======
[FN]
(a) The determination to discontinue the accrual of interest on non-
performing loans is made on the individual case basis. Such factors as the
character and size of the loan, quality of the collateral and the historical
creditworthiness of the borrower and/or guarantors are considered by management
in assessing the collectibility of such amounts.
The approximate amount that would have been accrued on those loans for which
interest was discontinued in 1999 was $305,000. Interest income from these loans
would have approximated $358,000 in 1998.
The change in non-performing loans is primarily a result of the impact of
economic conditions upon the loan portfolio. The economic outlook remains
uncertain. If the economy in the Corporation's trading area improves this could
have a positive impact on delinquency trends and collectibility of loans.
However, the commercial real estate market in the Corporation's trading area
remains stagnant. The ability of borrowers to liquidate collateral is dependent
upon the demand for commercial real estate projects and a buyer's ability to
finance commercial real estate projects.
11
APPENDIX A
----------
Continued
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 1999, 1998, 1997, 1996 and 1995
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans at year-end, net of unearned income $598,315 $502,262 $444,031 $408,242 $354,499
======== ======== ======== ======== ========
Average loans balance (a) $548,293 $467,094 $421,283 $385,956 $332,630
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 6,954 $ 6,270 $ 5,561 $ 4,955 $ 4,407
Net charge-offs (b) (796) (780) (608) (961) (530)
Provision for loan losses, 1,298 1,464 1,317 1,567 1,078
-------- --------- -------- -------- --------
Balance, allowance for loan losses,
December 31 $ 7,456 $ 6,954 $ 6,270 $ 5,561 $ 4,955
======== ======== ======== ======== ========
Net charge-offs to loans at year end .13% .16% .14% .24% .15%
Net charge-offs to average loans (a) .15 .17 .14 .25 .16
Balance of allowance for loan losses
to loans at year end 1.25 1.38 1.41 1.36 1.40
[FN]
(a) Averages are a combination of monthly and daily averages.
(b) For detail, see Schedule of Loans Charged Off and Recovered.
The allowance for loan losses is based upon management's continuing evaluation
of the loan portfolio. A review as to loan quality, current macro-economic
conditions and delinquency status is performed at least on a quarterly basis.
The provision for loan losses is adjusted quarterly based upon current review.
The table on page 10 presents an allocation by loan categories of the allowance
for loan losses at December 31 for the last five years. In retrospect, the
specific allocation in any particular category may prove excessive or inadequate
and consequently may be reallocated in the future to reflect the then current
condition. Accordingly, the entire allowance is available to absorb losses in
any category.
12
APPENDIX A
----------
Continued
As discussed in the Corporation's Annual Report, the Corporation adopted SFAS
114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS 114 did
not result in any additional provision for loan losses.
The amount of the allowance assigned to each component of the loan portfolio is
derived from a combination of factors. Estimation methods and assumptions used
in the process are received periodically by both management and a committee of
the board of directors. In general, the allowance was not materially affected by
changes in these estimation methods and assumptions during 1999.
Specific allocations are provided for individual loans which are rated below an
acceptable standard by management. In addition, specific allocations are
provided for individual loans which have been placed on nonaccrual status.
Additional allocations for loan components are also dependent upon the
delinquencies of pools of loans. Analysis of losses by loan grouping over the
most recent three year period also impacts components of the allowance. The
components which result from these processes are combined and compared to the
relationship of historical losses and balances of the allowance from a total
portfolio perspective. Any necessary difference is categorized as unallocated.
During 1999 management deemed it appropriate to reduce the relative portion of
the total allowance allocated to real estate-mortgage loans to 16% from 20% at
year-end 1998. The corporation has accompanied the downward trends in the
relationships of net charge-offs to average loans and non-performing loans with
a reduction in the relationship of the allowance to total loans.
The provision for loan losses totaled $1,298,000 for the year ended December 31,
1999, compared to $1,464,000, $1,317,000, $1,567,000, and $1,078,000 for the
years ended December 31, 1998, 1997, 1996, and 1995, respectively. The
relationship of the allowance for loan losses to loans at year end approximated
1.25% compared to ratios of 1.36% to 1.41% for the previous four years. In
reviewing the adequacy of the allowance for loan losses, management
considered the relationship of nonaccrual loans, renegotiated loans, other real
estate owned, and accruing loans contractually past due 90 days or more to
total assets. This relationship approximated .49%, .56%, .93%, 1.03%, and .99%
at year-end 1999, 1998, 1997, 1996, and 1995, respectively.
13
APPENDIX A
----------
Continued
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans charged off:
Commercial, financial and agricultural $ 78 $ 138 $ 83 $ 165 $ 135
Real estate-mortgage 190 223 361 382 298
Personal installment 883 820 926 1,327 774
Other 81 77 96 93 78
----- ----- ----- ----- -----
Total 1,232 1,258 1,466 1,967 1,285
----- ----- ----- ----- -----
Loans recovered:
Commercial, financial and agricultural 137 53 428 336 234
Real estate-mortgage 43 104 63 131 136
Personal installment 239 296 343 509 369
Other 17 25 24 30 16
----- ----- ----- ----- -----
Total 436 478 858 1,006 755
----- ----- ----- ----- -----
Net charge-offs $ 796 $ 780 $ 608 $ 961 $ 530
===== ===== ===== ===== =====
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES*
(dollars in thousands)
as of December 31
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans:
Commercial, financial and agricultural $2,286 $2,199 $1,663 $1,541 $1,268
Real estate-construction 2 --- --- 2 ---
Real estate-mortgage 1,178 1,366 1,780 1,868 1,702
Installment 1,203 1,161 1,458 1,125 841
Unallocated 2,787 2,228 1,369 1,025 1,144
----- ----- ----- ----- -----
Balance $7,456 $6,954 $6,270 $5,561 $4,955
====== ====== ====== ====== ======
[FN]
*See Schedule "Loan Account Composition" for the percent of loan classification
to total loans.
14
APPENDIX A
----------
Continued
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 1999
-----------------------
Remaining to Maturity:
Less than three months $ 9,251
Three months to six months 11,599
Six months to twelve months 9,211
More than twelve months 12,360
------
$ 42,421
========
MATURITY DISTRIBUTION OF ALL
TIME DEPOSITS
(dollars in thousands)
as of December 31, 1999
-----------------------
Remaining Maturity:
One year or less $224,175
After one year through two years 76,724
After two years through three years 23,939
After three years through four years 30,294
After four years through five years 12,380
After five years 4,130
--------
$371,642
=======
15
APPENDIX A
----------
Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing liabilities
which are expected to mature or reprice within a given period is commonly
referred to as the "GAP" for that period. For an institution with a positive
GAP, the amount of income earned on its assets fluctuates more than the cost of
its liabilities in response to changes in the prevailing rates of interest
during the period. Accordingly, in a period of decreasing interest rates,
institutions with a positive GAP will experience a greater decrease in the yield
on their assets than in the cost of their liabilities. Conversely, in a period
of rising interest rates, institutions with a positive GAP face a greater
increase in the yield on their assets than in the cost of their liabilities. An
increasing interest rate environment is favorable to institutions with a
positive GAP because more of their assets than their liabilities adjust during
the period and, accordingly, the increase in the yield of their assets is
greater than the increase in the cost of their liabilities.
The positive GAP between the Corporation's interest-earning assets and
interest-bearing liabilities maturing or repricing within one year approximated
2% of total assets at December 31, 1999.
Significant maturity/repricing assumptions (based on internal analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
44% interest rate sensitive . Equity securities are reflected in the shortest
time interval. Assumed pay downs on mortgage-backed securities and loans have
also been included in all time intervals.
The following table sets for the scheduled repricing or maturity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 1999.
16
APPENDIX A
----------
Continued
Interest Rate Sensitivity
- ---------------------------------------------------------------------------------------------------------------
At December 31, 1999 1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ---------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits in
Other banks $ 1,789 ---- ---- ---- $ 1,789
Investment securities 16,543 $ 2,998 $ 26,426 $266,108 312,075
Federal funds sold 2,050 ---- ---- ---- 2,050
Loans, net of unearned income* 264,719 36,355 68,363 219,878 589,315
Loans held for sale 4,004 ---- ---- ---- 4,004
- ---------------------------------------------------------------------------------------------------------------
Total $289,105 $39,353 $ 94,789 $485,986 $909,233
- --------------------------------------------------------- -----------------------------------------------------
Liabilities
Savings $ 58,987 $19,616 $ 39,233 $148,628 $266,464
Time 58,230 50,542 85,887 134,562 329,221
Time in denominations of
$100,000 or more 9,251 11,599 9,211 12,360 42,421
Short-term borrowings 3,338 ---- ---- ---- 3,338
Long-term debt 15,000 39,000 5,000 138,000 197,000
- ---------------------------------------------------------------------------------------------------------------
Total $144,806 $120,757 $139,331 $433,550 $838,444
- ---------------------------------------------------------------------------------------------------------------
Interest Sensitivity Gap
Periodic $144,299 $(81,404) $(44,542) $ 52,436
Cumulative 62,895 18,353 70,789
[FN]
*Does not include nonaccrual loans.
17
APPENDIX A
----------
Continued
Forward-Looking Statements:
- --------------------------
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "expect", "estimate", "project", "anticipate", "should", "intend",
"probability", "risk", "target", "objective", and similar expressions or
variations on such expressions. In particular, this document includes
forward-looking statements relating, but not limited to, the Corporation's
potential exposures to various types of market risks such as interest rate risk
and credit risk. Such statements are subject to certain risks and uncertainties.
For example, certain of the market risk disclosures are dependent on choices
about key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ materially from those estimated by the forward-looking statements
contained in this document include, but are not limited to: general economic
conditions in market areas which the Corporation has significant business
activities or investments; the monetary and in interest rate policies of the
Board of Governors of the Federal Reserve System; inflation; deflation;
unanticipated turbulence in interest rates; changes in laws, environments;
natural disasters; the inability to hedge certain risks economically; the
adequacy of loan reserves; acquisitions or restructurings' technological changes
in consumer spending and savings habits; and the success of the Corporation in
managing the risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Community Banks, Inc. has only a limited involvement with derivative
financial instruments and does not use them for trading purposes. The business
of the Corporation and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans, mortgage-backed
securities and investment securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). Such financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans which are originated and held
for sale, all of the financial instruments of the Corporation are for other than
trading purposes.
Interest rate sensitivity results when the maturity or repricing intervals
of interest-earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments are different, creating a risk that changes in the level
of market interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Corporation's interest-earning
assets, interest-bearing liabilities, and off-balance sheets financial
instruments. The Corporation's exposure to interest rate sensitivity is managed
primarily through the Corporation's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Since the Corporation's primary source of
interest-bearing liabilities is customer deposits, it's ability to manage the
types and terms of such deposits may be somewhat limited by customer preferences
in the market areas in which it operates. Borrowings, which include Federal Home
Loan Bank (FHLB) advances and short-term loans, subordinated notes, and other
short-term and long-term borrowings are generally structured with specific terms
which in management's judgement, when aggregated with the terms for outstanding
deposits and matched with interest-earning assets, mitigate the Corporation's
exposure to interest rate sensitivity.
18
APPENDIX A
----------
Continued
The rates, terms and interest rate indices of the Corporation's
interest-earning assets result primarily from its strategy on investing in loans
and securities (a substantial portion of which have adjustable-rate terms) which
permit the Corporation to limit its exposure to interest rate sensitivity,
together with credit risk, while at the same time achieving a positive interest
rate spread compared to the cost of interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate Sensitivity
- ----------------------------------------------------------------------
Managing the Corporation's exposure to interest rate sensitivity involves
significant assumptions about the exercise of imbedded options and the
relationship of various interest rate indices of certain financial instruments.
Imbedded Options
- ----------------
A substantial portion of the Corporation's loans and mortgage-backed
securities and residential mortgage loans contain significant imbedded options
which permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including the current interest rate and
interest rate index (if any) of the loan, the financial ability of the borrower
to refinance, the economic benefit to be obtained from refinancing, availability
of refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed and adjustable-rate loans pursuant to the current relative
levels and expectations of future short and long-term interest rates. Since a
significant portion of the Corporation's loans are variable rate loans,
prepayments on such loans generally increase when long-term interest rates fall
or are at historically low levels relative to short-term interest rates making
fixed-rate loans more desirable.
Investment securities, other than mortgage-backed securities and those with
early call provisions, generally do not have significant imbedded options and
repay pursuant to specific terms until maturity. While savings and checking
deposits generally may be withdrawn upon the customer's request without prior
notice, a continuing relationship with customers resulting in future deposits
and withdrawals is generally predictable resulting in a dependable and
uninterrupted source of funds. Time deposits generally have early withdrawal
penalties, while term FHLB borrowings and subordinated notes have prepayment
penalties, which discourage customer withdrawal of time deposits and prepayment
of FHLB borrowings and subordinated notes prior to maturity.
Interest Rate Indices
- ---------------------
The Corporation's loans and mortgage-backed securities are primarily
indexed to the national interest indices. When such loans and mortgage-backed
securities are funded by interest - bearing liabilities which are determined by
other indices, usually deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changes in the indices leading to
disproportionate changes in the value of, and net earnings generated from, the
Corporation's financial instruments. Each index is unique and is influenced by
different external factors, therefore, the historical relationships in various
indices may not be indicative of the actual change which may result in a
changing interest rate environment.
19
APPENDIX A
----------
Continued
Interest Rate Sensitivity Measurement
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a quarterly report which measures the
Corporation's exposure to interest rate risk. The model calculates the present
value of assets, liabilities and equity at current interest rates, and at
hypothetically higher and lower interest rates at one percent intervals. The
present value of each major category of financial instruments is calculated by
the model using estimated cash flows based on prepayments, early withdrawals,
weighted average contractual rates and terms, and discount rates for similar
financial instruments. The resulting present value of longer term fixed-rate
financial instruments are more sensitive to change in a higher or lower interest
rate scenario, while adjustable-rate financial instruments largely reflect only
a change in present value representing the difference between the contractual
and discounted rates until the next interest rate repricing date.
The following table reflects the estimated present value of assets,
liabilities and equity financial instruments using the model for Community
Banks, Inc. as of December 31, 1999 consolidated with the estimated present
values of other financial instruments of the Corporation, at current interest
rates and hypothetically, higher and lower interest rates of one and two
percent.
Base
-2% -1% Present Value +1% +2%
------------------------------------------------------------------------------
(dollars in thousands)
Assets
Cash, interest-bearing time deposits,
and federal funds sold....................... $ 32,933 $ 32,933 $ 32,933 $ 32,933 $ 32,933
Investment securities............................ 342,360 328,973 312,075 294,473 277,935
Loans, net of unearned income.................... 587,736 582,921 577,458 570,519 563,325
Loans held for sale.............................. 4,075 4,042 4,004 3,956 3,906
Other assets..................................... 40,953 40,953 40,953 40,953 40,953
--------- --------- --------- --------- ---------
Total assets................................ $1,008,057 $989,822 $967,423 $942,834 $919,052
========== ======== ======== ======== ========
Liabilities
Deposits......................................... $697,605 $694,343 $691,186 $688,129 $685,167
Short-term borrowings............................ 3,338 3,338 3,338 3,338 3,338
Long-term debt................................... 209,090 198,913 193,769 192,898 191,397
Other liabilities................................ 6,969 6,969 6,969 6,969 6,969
---------- -------- -------- -------- --------
Total liabilities........................... 917,002 903,563 895,262 891,334 886,871
---------- -------- --------- --------- --------
Total stockholders' equity.................. 91,055 86,259 72,161 51,500 32,181
---------- -------- --------- --------- --------
Total liab. and stockholders'
equity................................... $1,008,057 $989,822 $967,423 $942,834 $919,052
======== ========= ========= ========
20
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters:
- ------- ---------------------------------------------------------------------
Incorporated by reference is the information appearing under the
heading "Market for the Corporation's Common Stock and Related Securities Holder
Matters" on page 26 of the Annual Report to Stockholders for the year ended
December 31, 1999 (hereafter referred to as the "Annual Report").
Item 6. Selected Financial Data
Incorporated by reference is the information appearing under the
heading "Financial Highlights" on page 5 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
- --------------
Incorporated by reference is the information appearing under the
headings "Rate/Volume Analysis"; "Average Balances, Effective Interest
Differential and Interest Yields"; and "Management's's Discussion of Financial
Condition and Results of Operations" on pages 21 through 26 of the Annual
Report.
Item 8. Financial Statements and Supplementary Data:
The consolidated financial statements, together with the report
thereon of PricewaterhouseCoopers LLP dated January 20, 2000, are incorporated
by references to pages 6 through 20 of the Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosures:
- ------- ------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant:
- -------- ---------------------------------------------------
The following table sets forth the name and age of each director of
Community Banks, Inc. as well as the director's business experience, including
occupation for the past 5 years, the period during which he has served as a
director of Community Banks, N.A. (Formerly Upper Dauphin National Bank), and
the number and percentage of outstanding shares of Common Stock of the Bank
beneficially owned by said directors as of December 31, 1999.
21
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- ------------
Ernest L. Lowe Chairman-CBI/CBNA/ 1990 44,348 .65%
Age 63 PSB (8)
Community Banks, N.A.
Prior to 12/31/97
Ex. V.P. of CBI
Eddie L. Dunklebarger
Age 46 President/CEO 1998 125,714 1.83%
CBI/CBNA/PSB (18)
Prior to 3/31/98
Pres/CEO PSB
Thomas L. Miller Retired CEO of 1966 67,545 .99%
Age 67 CBI & CBNA (9)
Kenneth L. Deibler Self-Employed 1966 33,653 .49%
Age 77 Insurance Broker
Elizabethville, PA
Leon E. Kocher Chairman of the Board 1963 28,565 .42%
Age 87 Kocher Enterprises, Inc.
Millersburg, PA
Robert W. Rissinger Sec./Treasurer 1968 255,060 3.75%
Age 73 Alvord Polk Tool Co. (3) (4)
(Cutting Tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 44,768 .66%
Age 74 Millersburg and (6)
Harrisburg, PA
22
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- ------------
James A. Ulsh Attorney-at-Law 1977 17,109 .25%
Age 53 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Retired Superintendent 1992 2,231 .03%
Age 66 Warrior Run School
District
Turbotville, PA
Susan K. Nenstiel Regional Dir. Of Dev. 1966 218 ---
Age 48 Lutheran Welfare Serv.
Hazleton, PA
Ronald E. Boyer President, 1981 23,850 .35%
Age 60 Alvord-Polk Tool Co. (5)
(Manufacturing of Cutting tools)
Millersburg, PA.
Peter DeSoto CEO, J.T. Walker 1981 46,481 .68%
Age 60 Industries, Inc. (13)
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long Partner 1981 9,843 .14%
Age 70 Millersburg Hardware
Millersburg PA
Donald L. Miller President, Miller Bros. 1981 92,403 1.36%
Age 70 Dairy
Millersburg, PA
Ray N. Leidich Retired Dentist 1985 70,848 1.04%
Age 71 Tremont, PA (7)
23
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- ------------
John W. Taylor, Jr. President-Air Brake 1998 20,529 .30%
Age 69 & Power Equip. Co. (14)
Harry B. Nell Retired Merchant 1998 33,875 .50%
Age 73 (15)
Earl L. Mummert Consulting Actuary 1998 30,664 .45%
Age 55 Conrad M. Siegel, Inc/ (16)
Wayne H. Mummert Retired U.S. Postal 1998 76,173 1.12%
Age 66 Service/Farmer (17)
[FN]
(1) Includes service as a director of CBNA (formerly Upper Dauphin National
Bank), a wholly-owned subsidiary of the bank, prior to 1983 and service as a
director of the bank after 1983.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the wife and/or children of
the individual and any other relative who has the same home as such individual,
as well as other securities which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock options
within 60 days after December 31, 1999. Beneficial ownership may be disclaimed
as to certain of the securities.
(3) Includes 6,805 shares owned by Alvord-Polk Tool Co., Inc. the stock of which
is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
(4) Includes 15,166 shares owned by Engle Ford, Inc., 45,496 shares owned by Mr.
Rissinger's spouse, Shirley Rissinger, and 11,106 shares owned by Engle Ford,
Inc. Profit Sharing Plan.
(5) Includes 6,805 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and 535
shares owned by Mr. Boyer's wife, Judith Boyer.
24
[FN]
(6) Includes 7,633 shares owned by Mr. Shaffer's Retirement plan.
(7) Includes 35,424 shares owned by Dr. Leidich's wife, Dolores Leidich.
(8) Includes 192 shares owned by Mr. Lowe's wife, Barbara and 23 shares owned by
Mr. Lowe's son and incentive stock options to acquire 32,107 shares.
(9) Includes incentive stock options to acquire 33,457 shares and 846 in his
IRA.
(10) Includes incentive stock options to acquire 19,828 shares.
(11) Includes incentive stock options to acquire 16,751 shares and 153 shares
registered to Mr. Lawley for his minor children.
(12) Includes incentive stock options to acquire 3,511 shares.
(13) Includes 101 shares owned by Mr. DeSoto's son.
(14) Includes 1,270 shares owned by Mr. Taylor's wife, LouAnn and 908 in his
IRA.
(15) Includes 848 shares owned by Mr. Nell's wife, Helen and stock options to
acquire 2,103 shares.
(16) Includes stock options to acquire 2,103 shares and 19,492 shares in Mr.
Mummert's IRA.
(17) Includes stock options to acquire 2,103 shares and 17,671 shares owned by
Mr. Mummert's wife Shirley.
(18) Includes 321 shares owned by Mr. Dunklebarger's wife, Connie, 10,161 shares
owned by Mr. Dunklebarger's children, 9,075 shares in his 401(k) plan, 7,607
shares in his IRA and 72,094 stock options (ISO and NQ's) to acquire shares.
(19) Includes 4,760 shares in his 401(k) plan and 7,435 (ISO and NQ) stock
options to acquire shares.
(20) Includes 4,491 shares in his 401(k) plan and 7,861 shares in his IRA and
24,392 stock options to acquire shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1999, to the knowledge of Corporation, all Executive Officers and
directors timely filed all reports with the Securities and Exchange Commission.
None of the directors or nominee directors are directors of other
companies with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
25
Executive Officers:
- -------------------
The following table sets forth the executive officers of Community
Banks, Inc., their ages, their positions with Community Banks, Inc. and the
beneficial ownership (as determined in accordance with the rules and regulations
of the Securities and Exchange Commission) of Common Stock of the Corporation
owned by each of such persons as of December 31, 1999.
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Beneficial Common Stock
Name and Age Past Five Years Term (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- ------------
Ernest L. Lowe Chairman-CBI/ 1985 44,348 .65%
Age 63 CBNA/PSB (8)
Prior to 12/31/97
Ex. V.P. of CBI
Eddie L. Dunklebarger President/CEO 1998 125,714 1.83%
Age 46 CBI/CBNA/PSB (18)
Prior to 3/31/98
Pres/CEO of PSB
Terry L. Burrows Executive Vice President 1977 24,686 .36%
Age 51 Chief Financial Officer (12)
David E. Hawley Executive Vice President 1975 23,209 .34%
Age 61 (10)
Robert W. Lawley Executive Vice President 1980 16,965 .25%
Age 45 (11)
Anthony N. Leo Executive Vice President 1998 24,488 .36%
Age 39 (19)
Jeffrey M. Seibert Executive Vice President 1998 44,438 .65%
Age 40 (20)
[FN]
(1) Initial year employed in this capacity.
26
The following is all shares beneficially owned by all directors and
executive officers of the Bank as a group:
Amount and Nature
of Beneficial
Ownership
---------
Percent
Title of Class Direct Indirect of Class
-------------- ------ -------- --------
Common 984,501 166,357 16.32%
Item 11. Executive Compensation:
- ------- ----------------------
Information regarding executive compensation is omitted from this
report as the holding company will file a definitive proxy statement for its
annual meeting of shareholders to be held May 2, 2000; and the information
included therein with respect to this item is incorporated herein by reference.
Pension Plan:
- -------------
CBNA maintains a pension plan for its employees. An employee becomes a
participant in the pension plan on January 1 or July 1 after completion of one
year of service (12 continuous months) and attainment of the age 21 years. The
cost of the pension is actuarially determined and paid by CBNA. The amount of
monthly pension is equal to 1.15% of average monthly pay up to $650, plus .60%
of average monthly pay in excess of $650, multiplied by the number of years of
service completed by an employee. The years of service for the additional
portion are limited to a maximum of 37. Average monthly pay is based upon the 5
consecutive plan years of highest pay preceding retirement. The maximum amount
of annual compensation used in determining retirement benefits is $160,000. A
participant is eligible for early retirement after attainment of the age of 60
years and the completion of 5 years of service. The early retirement benefit is
the actuarial equivalent of the pension accrued to the date of early retirement.
As of December 31, 1999 the following officers have been credited with the
following years of service: Ernest L. Lowe-15 years of service, Robert W.
Lawley-24 years of service, and Terry L. Burrows-26 years of service.
In 1999, the Board of Directors amended the plan so that pension benefits will
be offset by employer contributions to the CBI 401(k) Plan. Employees hired
after 12/31/98 are not eligible to participate in the CBNA Pension Plan The
amounts shown on the following table assumes an annual retirement benefit for an
employee who chose a straight life annuity and who will retire at age 65. These
amounts are offset for the employer contribution in the 401(k) Plan.
27
PENSION PLAN TABLE
Years of Service
- ------------------------------------------------------------------------------------------------------------------------------------
15 20 25 30 35 40
- ------------------------------------------------------------------------------------------------------------------------------------
Remuneration
- ------------
$35,000...................... $ 8,486 $11,314 $14,143 $16,971 $19,800 $ 22,138
$55,000...................... $13,736 $18,314 $22,893 $27,471 $32,050 $ 35,778
$75,000...................... $18,986 $25,314 $31,643 $37,971 $44,300 $ 49,418
$95,000...................... $24,236 $32,314 $40,393 $48,471 $56,550 $ 63,058
$115,000..................... $29,486 $39,314 $49,143 $58,971 $68,800 $ 76,698
$135,000..................... $34,736 $46,314 $57,893 $69,471 $81,050 $ 90,338
$150,000..................... $38,673 $51,564 $64,455 $77,346 $90,237 $100,568
$175,000..................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$200,000..................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$225,000..................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$250,000..................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$275,000..................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
Directors' Compensation:
- ------------------------
Each director of CBI is paid a quarterly fee of $750.00. In addition,
each outside director receives a fee of $250.00 for attendance at the regular
quarterly meetings of the Board of Directors of CBI. Each director who is not an
executive officer also receives $250.00 for attendance at each committee meeting
of CBI.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
- -------- ---------------------------------------------------------------
Refer to Item 10 on pages 20 through 26.
Item 13. Certain Relationships and Related Transactions:
- -------- -----------------------------------------------
(a) Transaction with Management and Others
--------------------------------------
Incorporated by reference is the information appearing in Note 12
(Related Parties) of Notes to Consolidated Financial Statements on page 16 of
the Annual Report.
(b) Certain Business Relationships
------------------------------
Allen Shaffer, a director of CBI, is an attorney practicing in Harrisburg
and Millersburg, Pennsylvania, who has been retained in the last fiscal year by
CBI and who CBI proposes to retain in the current fiscal year. James A. Ulsh, a
director of CBI, is a shareholder/employee of the law firm of Mette, Evans, &
Woodside, Harrisburg, Pennsylvania, which CBI has retained in the last fiscal
year and proposes to retain in the current fiscal year. Thomas J. Carlyon, a
director of CBNA , is partner in the law firm of Carlyon & McNelis,
28
Hazleton, Pennsylvania, which CBI has retained in the last fiscal year and
proposes to retain in the current fiscal year. Earl L. Mummert, a director of
CBI, is an actuarial consultant with Conrad M. Siegel, Inc., Harrisburg,
Pennsylvania, which provides actuarial services to CBI.
All loans to directors and their business affiliates, executive
officers and their immediate families were made by the subsidiary bank in the
ordinary course of business, at the subsidiary bank's normal credit terms,
including interest rates and collateralization prevailing at the time for
comparable transactions with other non- related persons, and do not represent
more than a normal risk of collection.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K:
- -------- -----------------------------------------------------------------
Reference (page)
Form Annual Report to
(a) (1) Consolidated Financial Statements 10-K Shareholders
Report of Independent Public ---- ------------
accountants --- 20
Balance Sheets as of December 31, 1999
and 1998 --- 6
Statements of Income for each of the three years
ended December 31, 1999 --- 7
Statements of Changes in Stockholders' Equity
for each of the three years ended December
31, 1999. --- 8
Statements of Cash Flows for each of the three
years ended December 31, 1999. --- 9
Notes to Financial Statements --- 10-20
All other schedules are omitted since the required information is
not applicable or is not present in amounts sufficient to require submission of
the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated by
reference to the Proxy Statements dated April 14, 1987 and April 12, 1988 and
Amendment 2 to Form S-2 dated May 13, 1987.
(13) Portions of the Annual Report to Security Holders
incorporated by reference within this document is filed as part of this report.
(21) Subsidiaries of the Registrant (See Item 1, pages 2 and 3.)
(b) The registrant did not file on Form 8-K during the fourth
calendar quarter of the year ending December 31, 1999
29
CONSENT OF INDEPENDENT ACCOUNTS
-------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8(File No. 0- 15786 and File No. 33-24908) of Community
Banks, Inc. of our report dated January 20, 2000 relating to the financial
statements, which appears in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
March 24, 2000
30
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By: /s/ Ernest L. Lowe
------------------------
(Ernest L. Lowe)
Chairman of the Board and Director
Date: March 6, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Terry L. Burrows Ex. Vice President and 2/8/00
- -------------------------------------- Chief Financial Officer
(Terry L. Burrows)
/s/ Ronald E. Boyer . Director 2/8/00
- --------------------------------------
(Ronald E. Boyer)
/s/ Samuel E. Cooper Director 2/8/00
- --------------------------------------
(Samuel E. Cooper)
/s/ Kenneth L. Deibler Director 2/8/00
- --------------------------------------
(Kenneth L. Deibler)
/s/ Eddie L. Dunklebarger President & CEO and 2/8/00
- -------------------------------------- Director
(Eddie L. Dunklebarger)
/s/ Leon E. Kocher Director 2/8/00
- --------------------------------------
(Leon E. Kocher)
/s/ Ray N. Leidich Director 2/8/00
- --------------------------------------
(Ray N. Leidich)
/s/ Thomas W. Long Director 2/8/00
- --------------------------------------
(Thomas W. Long)
/s/ Donald L. Miller Director 2/8/00
- --------------------------------------
(Donald L. Miller)
31
/s/ Thomas L. Miller Director 2/8/00
- --------------------------------------
(Thomas L. Miller)
/s/ Earl L. Mummert Director 2/8/00
- --------------------------------------
(Earl L. Mummert )
/s/ Wayne H. Mummert Director 2/8/00
- --------------------------------------
(Wayne H. Mummert)
/s/ Susan K. Nenstiel Director 2/8/00
- --------------------------------------
(Susan K. Nenstiel)
/s/ Robert W. Rissinger Director 2/8/00
- --------------------------------------
(Robert W. Rissinger)
/s/ Allen Shaffer Director 2/8/00
- --------------------------------------
(Allen Shaffer)
/s/ John W. Taylor, Jr. Director 2/8/00
- --------------------------------------
(John W. Taylor, Jr.)
/s/ James A. Ulsh Director 2/8/00
- --------------------------------------
(James A. Ulsh)
32
Report of Independent Accountants
Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Community Banks, Inc. (Corporation) and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS, L.L.P
One South Market Square
Harrisburg, PA 17101
January 20, 2000
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1999 and 1998
(dollars in thousands except per share data)
1999 1998
--------------------
ASSETS
Cash and due from banks.............................................. $ 29,094 $ 25,036
Interest-bearing time deposits in other banks........................ 1,789 1,258
Investment securities, available for sale (market value)............. 312,075 292,542
Federal funds sold................................................... 2,050 2,208
Loans................................................................ 596,301 512,280
Less: Unearned income............................................. (6,986) (10,018)
Allowance for loan losses................................... (7,456) (6,954)
--------- ---------
Net loans................................................... 581,859 495,308
Premises and equipment, net.......................................... 15,385 14,203
Goodwill............................................................. 424 665
Other real estate owned.............................................. 405 625
Loans held for sale.................................................. 4,004 3,319
Accrued interest receivable and other assets......................... 24,739 16,510
-------- ---------
Total assets.................................................... $971,824 $851,674
======== =========
LIABILITIES
Deposits:
Demand (Non-interest bearing)................................... $ 55,330 $ 50,038
Savings......................................................... 266,464 254,316
Time............................................................ 329,221 265,884
Time in denominations of $100,000 or more....................... 42,421 25,667
-------- --------
Total deposits.................................................. 693,436 595,905
Short-term borrowings................................................ 3,338 7,910
Long-term debt....................................................... 197,000 161,000
Accrued interest payable and other liabilities....................... 6,969 7,983
-------- --------
Total liabilities............................................... 900,743 772,798
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding................................ --- ---
Common stock, $5.00 par value; 20,000,000 shares
authorized; 6,976,000 and 6,631,000 shares
issued in 1999 and 1998, respectively........................... 34,878 33,157
Surplus.............................................................. 24,259 17,989
Retained earnings.................................................... 26,379 27,023
Accumulated other comprehensive income (loss), net
of tax (benefit) of $(5,841,000) and $1,437,000,
respectively.................................................... (10,847) 2,789
Less: Treasury stock of 175,000 and 105,000
shares at cost.................................................. (3,588) (2,082)
-------- -------
Total stockholders' equity...................................... 71,081 78,876
-------- -------
Total liabilities and stockholders' equity...................... $971,824 $851,674
======== ========
[FN]
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank. The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, 1997
(dollars in thousands except per share data)
1999 1998 1997
----------------------------------------------------
Interest income:
Interest and fees on loans...................................... $46,405 $41,306 $38,095
Interest and dividends on investment securities:
Taxable..................................................... 14,844 11,325 11,382
Exempt from federal income tax.............................. 4,709 3,795 2,422
Other interest income........................................... 78 80 84
Fed funds interest.............................................. 228 494 304
------- ------- -------
Total interest income....................................... 66,264 57,000 52,287
------- ------- -------
Interest expense:
Interest on deposits:
Savings..................................................... 5,575 5,479 5,556
Time........................................................ 15,501 13,459 13,420
Time in denominations of $100,000 or more................... 1,914 1,580 1,578
Interest on short-term borrowings and
long-term debt.............................................. 7,670 4,975 2,627
Fed funds purchased and repo interest........................... 1,553 1,394 1,242
------ ------ ------
Total interest expense...................................... 32,213 26,887 24,423
------ ------ ------
Net interest income......................................... 34,051 30,113 27,864
Provision for loan losses............................................ 1,298 1,464 1,317
------ ------ ------
Net interest income after provision for
loan losses............................................... 32,753 28,649 26,547
------ ------ ------
Other income:
Trust department income......................................... 458 302 317
Service charges on deposit accounts............................. 2,077 1,584 1,338
Other service charges, commissions and fees..................... 984 731 627
Investment security gains....................................... 251 575 770
Income on insurance premiums.................................... 710 661 576
Gains on mortgage sales......................................... 607 634 283
Other income.................................................... 581 473 318
----- ----- -----
Total other income.......................................... 5,668 4,960 4,229
----- ----- -----
Other expenses:
Salaries and employee benefits.................................. 12,436 10,380 9,679
Net occupancy expense........................................... 3,377 3,202 2,797
Operating expenses of insurance subsidiary...................... 497 472 365
Other operating expense......................................... 6,627 5,971 6,519
------- ------ ------
Total other expenses........................................ 22,937 20,025 19,360
------- ------ ------
Income before income taxes.................................. 15,484 13,584 11,416
Provision for income taxes........................................... 3,681 3,534 3,491
------- ------ ------
Net income.................................................. $11,803 $10,050 $ 7,925
======= ======= =======
Basic earnings per share.............................................1] $ 1.73 $ 1.47 $ 1.16
====== ====== ======
Diluted earnings per share...........................................1] $ 1.70 $ 1.43 $ 1.13
====== ====== ======
[FN]
1] Per share data for all periods has been restated to reflect stock dividends
and splits.
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank. The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998, and 1997
(dollars in thousands except per share data)
-----------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
-----------------------------------------------------------------------------------
Balance, December 31, 1996...................... $20,933 $21,645 $21,756 $ 166 $ (421) $64,079
Comprehensive income:
Net income............................. 7,925 7,925
Change in unrealized gain (loss) on
securities, net of tax of $1,582 and
reclassification adjustment of $770 3,071 3,071
-------
Total comprehensive income............. 10,996
Cash dividends ($.46 per share)................. (3,143) (3,143)
5% stock dividend (145,000 shares).............. 723 3,905 (4,628)
Purchases of treasury stock (23,000 shares)..... (695) (695)
Issuance of additional shares (74,000 shares)... 372 3,095 (691) 2,776
------- -------- ------- ------ ----- -------
Balance, December 31, 1997...................... 22,028 28,645 21,219 3,237 (1,116) 74,013
Comprehensive income:
Net income............................. 10,050 10,050
Change in unrealized gain (loss) on
securities, net of tax of $(231) and
reclassification adjustment of $575 (448) (448)
-------
Total comprehensive income............. 9,602
Cash dividends ($.59 per share) ................ (4,103) (4,103)
3 for 2 stock split (2,205,000 shares).......... 11,024 (11,024)
Purchases of treasury stock (40,000 shares)..... (966) (966)
Issuance of additional shares (21,000 shares)... 105 368 (143) 330
------ ------- ------ ------ ------- -------
Balance, December 31, 1998...................... 33,157 17,989 27,023 2,789 (2,082) 78,876
Comprehensive income:
Net income............................. 11,803 11,803
Change in unrealized gain (loss) on
securities, net of tax of $(7,278) and
reclassification adjustment of $251 (13,636) (13,636)
-------
Total comprehensive income (loss)...... (1,833)
Cash dividends ($.63 per share)................. (4,343) (4,343)
5% stock dividend (323,000 shares).............. 1,616 6,080 (7,696)
Purchases of treasury stock (82,000 shares)..... (1,885) (1,885)
Issuance of additional shares (21,000 shares)... 105 190 (408) 379 266
------- ------- ------- ------- ------- -------
Balance, December 31, 1999...................... $34,878 $24,259 $26,379 $(10,847) $(3,588) $71,081
======= ======= ======= ======== ======= =======
[FN]
Per share data for all periods has been restated to reflect stock dividends and
splits. All periods reflect the combined data of Community Banks, Inc. and
Peoples State Bank. The accompanying notes are an integral part of the
consolidated financial statements.
Community Banks, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998, and 1997
(in thousands)
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Operating Activities:
Net income................................................. $11,803 $10,050 $ 7,925
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.............................. 1,298 1,464 1,317
Provision for depreciation and amortization............ 1,706 1,656 1,450
Amortization of goodwill............................... 241 241 241
Investment security gains.............................. (251) (575) (770)
Loans originated for sale.............................. (33,285) (38,348) (14,017)
Proceeds from sales of loans........................... 33,207 38,304 16,281
Gains on mortgage sales................................ (607) (634) (283)
Change in other assets, net............................ (1,587) (3,769) (456)
Increase in accrued interest payable and other
liabilities, net..................................... 423 340 781
------- ------- -------
Net cash provided by operating activities......... 12,948 8,729 12,469
------- ------- -------
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks.................................. (531) 1,148 (900)
Proceeds from sales of investment securities............... 38,136 25,310 30,525
Proceeds from maturities of investment securities.......... 26,984 80,425 44,612
Purchases of investment securities......................... (105,316) (179,097) (94,995)
Net increase in total loans................................ (88,430) (59,991) (36,380)
Net increase in premises and equipment..................... (2,888) (1,896) (3,445)
-------- -------- -------
Net cash used in investing activities............. (132,045) (134,101) (60,583)
-------- -------- --------
Financing Activities:
Net increase in total deposits............................. 97,531 46,150 27,153
Net increase (decrease) in short-term borrowings........... (4,572) (2,630) 7,439
Proceeds from issuance of long-term debt................... 40,000 88,720 25,000
Repayment of long-term debt................................ (4,000) (5,000) (4,000)
Cash dividends............................................. (4,343) (4,103) (3,143)
Purchases of treasury stock................................ (1,885) (966) (695)
Proceeds from issuance of common stock..................... 266 330 2,776
-------- -------- -------
Net cash provided by financing activities......... 122,997 122,501 54,530
-------- -------- -------
Increase (decrease) in cash and cash equivalents.. 3,900 (2,871) 6,416
Cash and cash equivalents at beginning of year.................. 27,244 30,115 23,699
-------- -------- -------
Cash and cash equivalents at end of year........................ $31,144 $27,244 $30,115
======== ======== =======
[FN]
The accompanying notes are an integral part of the consolidated financial
statements. All periods reflect the combined data of Community Banks, Inc. and
Peoples State Bank.
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
- ----------------------------------------------
Community Banks, Inc. (Corporation) is a bank holding company whose
wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Peoples State
Bank (PSB), Community Banks Investments, Inc. (CBII) and Community Banks Life
Insurance Company (CBLIC). All significant intercompany transactions have been
eliminated. The Corporation operates through its main office in Millersburg and
through 32 branch banking offices located in Dauphin, Northumberland,
Schuylkill, Luzerne, Snyder, Adams, and York Counties in Pennsylvania. Community
Banks, Inc.'s primary source of revenue is derived from loans to customers, who
are predominantly middle-income individuals.
2. Summary of Significant Accounting Policies:
- ------------------------------------------------
The more significant accounting policies of the Corporation are:
Investment Securities:
The Corporation classifies debt and equity securities as either
"held-to-maturity," "available-for-sale," or "trading." Investments for which
management has the intent, and the Corporation has the ability, to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount. Amortization and accretion are calculated
principally on the interest method. Securities bought and held primarily for the
purpose of selling them in the near term are classified as "trading" and
reported at fair value. Changes in unrealized gains and losses on "trading"
securities are recognized in the Consolidated Statements of Income. At December
31, 1999 and 1998, there were no securities identified as "held-to-maturity" or
"trading." All other securities are classified as "available-for-sale" and
reported at fair value. Changes in unrealized gains and losses for
"available-for-sale" securities, net of applicable taxes, are recorded as a
component of shareholders' equity.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management strategy,
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors. Realized gains and losses on the sale of
securities are recognized using the specific identification method and are
included in Other Income in the Consolidated Statements of Income.
Allowance for Loan Losses:
The Corporation maintains an allowance for loan losses at an amount which,
in management's judgement, should be adequate to absorb losses on existing loans
that may become uncollectible. Management's judgement in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans. The evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, current economic conditions that may
affect the borrowers' ability to pay, overall portfolio quality and review of
specific problem loans.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using accelerated and straight-line methods over the
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred, while major additions and improvements are capitalized. Gain or loss
on retirement or disposal of individual assets is recorded as income or expense
in the period of retirement or disposal.
Goodwill:
Goodwill, which represents the excess of purchase price including
acquisition costs over the fair market value of net assets acquired under the
purchase method of accounting, is amortized on a straight line basis over 15
years.
Pension Plan:
The Corporation has a noncontributory defined benefit pension plan covering
substantially all CBNA employees. Pension costs are funded currently subject to
the full funding limitation imposed under federal income tax regulations. The
defined benefit pension plan was amended during 1999 to disallow the admittance
of any future participants into the plan; however, previous plan participants
are still accruing benefits under the plan. The Corporation maintains a 401(k)
savings
plan covering substantially all employees which allows employees to invest a
percentage of their earnings, matched to a certain amount specified by the
Corporation. Contributions to the savings plan which are included in salaries
and benefits expense amounted to $645,000 in 1999, $212,000 in 1998, and
$175,000 in 1997.
Income Taxes:
Deferred income taxes are accounted for by the liability method, wherein
deferred tax assets and liabilities are calculated on the differences between
the basis of assets and liabilities for financial statement purposes versus tax
purposes (temporary differences) using enacted tax rates in effect for the year
in which the differences are expected to reverse. Tax expense in the statements
of income is equal to the sum of taxes currently payable, including the effect
of the alternative minimum tax, if any, plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to period-end temporary
differences at prevailing tax rates. (See Note 10).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of interest
has ceased and where all previously accrued and unpaid interest is reversed.
Loans, other than consumer loans, are placed on nonaccrual status when principal
or interest is past due 90 days or more and the collateral may be inadequate to
recover principal and interest, or immediately, if in the opinion of management,
full collection is doubtful. Generally, the uncollateralized portions of
consumer loans past due 90 days or more are charged-off. Interest accrued but
not collected as of the date of placement on nonaccrual status is reversed and
charged against current income. Subsequent cash payments received either are
applied to the outstanding principal balance or recorded as interest income,
depending upon management's assessment of the ultimate collectibility of
principal and interest. (See also Note 5). Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment of the
yield on the related loan.
Other Real Estate Owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously served
as collateral or the current appraised value of the property at transfer date
less estimated selling cost. Prior to foreclosure, the recorded amount of the
loan is written down, if necessary, to the appraised value of the real estate to
be acquired by charging the allowance for loan losses. During 1999, 1998, and
1997 non-cash transactions related to real estate acquired through foreclosure
totalled $581,000, $980,000, and $1,163,000, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are credited or
charged to noninterest expense. Costs of maintaining and operating foreclosed
property are expensed as incurred. Expenditures to improve foreclosed properties
are capitalized only if expected to be recovered; otherwise, they are expensed.
Statement of Cash Flows:
Cash and cash equivalents included cash and due from banks and federal
funds sold. The Corporation made cash payments of $3,805,000, $4,436,000, and
$3,071,000, and $31,786,000, $26,011,000, and $24,085,000 for income taxes and
interest, respectively, in 1999, 1998, and 1997.
Recent Accounting Pronouncements:
During 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" (SFAS No. 130), which established
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains, and losses). SFAS 130 requires that all
items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
a reclassification adjustment for net realized investment gains included in net
income of $251,000, $575,000, and $770,000 for the years ended December 31,
1999, 1998, and 1997, respectively. The new standard requires only additional
disclosures in the consolidated financial statement: it does not affect the
Corporation's financial position of results of operation.
During 1998, the Corporation also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which revises employers' disclosures
about pensions and other postretirement benefit plans. It standardizes the
disclosure requirement for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous pronouncements.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS 133 establishes standards for recording derivative
financial instruments on the balance sheet at their fair value. This Statement
requires changes in the fair value of derivatives be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. As amended , this Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management anticipates
that the adoption of SFAS 133 will not have a material effect on the
Corporation's financial condition or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Standards No. 131, Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131) in 1997. SFAS 131 establishes standards for disclosure
about products, services, geographic areas, and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. Management has
reviewed SFAS 131 and determined that the Corporation only has one qualifying
segment and no additional disclosure is required.
SFAS 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
requires that after a securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interest based on its ability and intent to sell or
hold those investments. The Statement was effective for the first fiscal quarter
of 1999 and had no effect as the Corporation has not securitized any mortgage
loans.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. Investment Securities:
- --------------------------
The amortized cost and market value of all investment securities at
December 31, 1999 and 1998 are as follows:
----------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------------------------------------------------------
(in thousands)
U.S. government corporations and
agencies.......................... $132,661 $ 336 $ (9,078) $123,919 $ 78,800 $ 845 $ (196) $ 79,449
Mortgage-backed U.S. government
agencies.......................... 61,788 40 (2,867) 58,961 82,887 568 (195) 83,260
Obligations of states and political
subdivisions...................... 84,778 214 (6,139) 78,853 85,771 2,211 (306) 87,676
Corporate securities................ 31,739 333 (196) 31,876 27,574 225 (340) 27,459
Equity securities................... 17,797 1,015 (346) 18,466 13,284 1,565 (151) 14,698
-------- ------ -------- -------- -------- ------ ------ --------
Total......................... $328,763 $1,938 $(18,626) $312,075 $288,316 $5,414 $(1,188) $292,542
======== ====== ======== ======== ======== ====== ======= ========
[FN]
The amortized cost and market value of all investment securities at
December 31, 1999 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or repay obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
---------------------------------------
(in thousands)
Due in one year or less.................... $ 8,039 $ 7,946
Due after one year through five years...... 16,657 15,911
Due after five years through ten years..... 60,247 57,197
Due after ten years........................ 164,235 153,594
-------- --------
249,178 234,648
Mortgage-backed securities................. 61,788 58,961
Equity securities.......................... 17,797 18,466
-------- --------
$328,763 $312,075
======== ========
Proceeds from sales of investments in debt securities were $37,628,000,
$24,279,000 and $29,319,000 in 1999, 1998, and 1997, respectively. Gross
investment security gains and losses of $607,000 and $356,000, respectively were
recognized in 1999. Gross gains and losses of $592,000 and $17,000,
respectively, were recognized in 1998. Gross gains and losses of $887,000 and
$117,000, respectively were recognized in 1997.
At December 31, 1999 and 1998, investment securities with carrying amounts
of approximately $154,984,000 and $104,186,000, respectively, were pledged to
collateralize public deposits and for other purposes as provided by law.
Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB,
however, it does not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member
institution.
4. Loans:
- -----------
The composition of loans outstanding by lending classification is as
follows:
December 31
-----------------------------
1999 1998
-----------------------------
(in thousands)
Commercial, financial and agricultural........ $ 100,970 $ 65,698
Real-estate-construction...................... 14,670 17,381
Real-estate-mortgage.......................... 362,297 324,709
Personal installment.......................... 109,841 97,561
Other......................................... 8,523 6,931
--------- --------
$ 596,301 $512,280
========= ========
Loans held for resale amounted to $4,004,000 and $3,319,000 at December 31,
1999 and 1998, respectively. These loans are primarily fixed-rate mortgages and
education loans.
5. Allowance for Loan Losses:
- -------------------------------
Changes in the allowance for loan losses are as follows:
December 31
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
(in thousands)
Balance, January 1.................................. $6,954 $6,270 $5,561
Provision for loan losses........................... 1,298 1,464 1,317
Loan charge-offs.................................... (1,232) (1,258) (1,466)
Recoveries.......................................... 436 478 858
------ ------ ------
Balance, December 31................................ $7,456 $6,954 $6,270
====== ====== ======
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
December 31
-----------------------
1999 1998
-----------------------
(in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural......... $ 146 $ 47
Mortgages...................................... 147 353
Personal installment........................... 73 34
Other.......................................... 12 7
------ ------
378 441
------ ------
Restructured Loans 254 248
------ ------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural......... 435 866
Mortgages...................................... 3,079 2,282
Other.......................................... 222 282
------ ------
3,736 3,430
------ ------
Other real estate................................... 405 625
------ ------
Total.......................................... $4,773 $4,744
====== ======
[FN]
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing the
collectibility of such amounts.
Impaired Loans
- --------------
Loans are considered impaired, based on current information and events, if
it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Larger groups of smaller-balance loans such as residential
mortgage and installment loans are collectively evaluated for impairment.
Management has established a smaller-dollar-value threshold of $250,000 for all
loans. Loans exceeding this threshold are evaluated in accordance with
accounting standards and the bank's lending policy. An insignificant delay or
shortfall in the amount of payments, when considered independent of other
factors, would not cause a loan to be rendered impaired. Insignificant delays or
shortfalls may include, depending on specific facts and circumstances, those
that are associated with temporary operational downturns or seasonal business
delays.
Management performs periodic reviews of its loans to identify impaired
loans. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of impaired loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the related
valuation allowance and subsequent recoveries, if any, are credited to the
valuation allowance. The company does not accrue interest on impaired loans.
While a loan is considered impaired, cash payments received are applied to
principal or interest depending upon management's assessment of the ultimate
collectibility of principal and interest.
At December 31, 1999, the Corporation recorded no investment in impaired
loans with no related valuation allowance. For the years ended December 31,
1999, 1998, and 1997, the average balance of impaired loans was negligible. The
company recognized no interest on impaired loans on the cash basis.
6. Premises and Equipment:
- ----------------------------
Premises and equipment are comprised of the following:
December 31
---------------------------
1999 1998
---------------------------
(in thousands)
Banking premises......................................... $16,885 $15,504
Furniture, fixtures, and equipment....................... 12,510 11,110
Leasehold improvements................................... 439 369
------- -------
29,834 26,983
Less accumulated depreciation and amortization........... (14,449) (12,780)
------- -------
$15,385 $14,203
======= =======
Depreciation expense charged to operations amounted to approximately
$1,706,000, $1,656,000, and $1,450,000 in 1999, 1998, and 1997, respectively.
7. Short-Term Borrowings and Long-Term Debt:
- ---------------------------------------------
Short-term borrowings consist of the following:
December 31
---------------------------
1999 1998
---------------------------
(in thousands)
Securities sold under agreements to repurchase,
4.41% and 3.40% in 1999 and 1998, respectively...... $1,328 $1,188
Federal funds purchased, 4.96% in 1998................... --- 6,400
Treasury tax and loan note option account,
4.54% and 4.34% in 1999 and 1998, respectively...... 2,010 322
------ ------
$3,338 $7,910
====== ======
Interest incurred on Federal funds purchased and other short-term
borrowings amounted to $386,000, $298,000, and $331,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999, long-term debt consists of long-term advances from
the FHLB of Pittsburgh totalling $177,000,000 and repurchase agreements
totalling $20,000,000. The long-term advances were issued under variable and
fixed rates and are due to mature from 2000 to 2009. Monthly payments of
interest are required to be paid to the Federal Home Loan Bank at rates ranging
from 4.06% to 5.60% for variable advances and fixed rates presently 6.56%, with
principal due at maturity. The FHLB has the option to convert the fixed rate
advances to variable rates at any point prior to maturity of the advance.
Quarterly payments of interest are required to be paid on the repurchase
agreements at a fixed rate, presently 5.76%, with principal due at maturity.
Interest on long-term debt amounted to $8,837,000, $6,071,000, and $3,538,000
for the years ended December 31, 1999, 1998, and 1997, respectively.
Maturities on long-term debt at December 31, 1999 are as follows:
2000.......................................... $ 4,000,000
2001.......................................... $ 15,000,000
2002.......................................... $ 35,000,000
2003.......................................... $ 15,000,000
2004.......................................... ---
Subsequent to 2004............................ $128,000,000
8. Pension Plan:
- ------------------
The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 1999 and 1998.
---------------------------------------------
1999 1998 1997
---------------------------------------------
(in thousands)
Changes in benefit obligation:
Projected benefit obligation at beginning of year.................... $5,934 $4,461 $3,933
Service cost......................................................... 130 244 222
Interest cost........................................................ 300 310 293
Distributions........................................................ (171) (128) (49)
Change due to change in assumptions.................................. (369) 299 (66)
Change due to plan amendment......................................... (1,235) 215 ---
Experience (gain) or loss............................................ 490 533 128
------ ------ ------
Projected benefit obligation at end of year.......................... $5,079 $5,934 $4,461
====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year....................... $5,070 $4,546 $3,626
Employer contributions............................................... --- 355 360
Actual return on assets.............................................. 299 297 609
Distributions........................................................ (171) (128) (49)
------ ------ ------
Fair value of plan assets at end of year, primarily listed stocks,
corporate, and US bonds......................................... $5,198 $5,070 $4,546
====== ====== ======
Funded status at end of year......................................... $ 119 $ (864) $ 85
Unrecognized net transition (asset) or obligation.................... (21) (29) (38)
Unrecognized prior service cost...................................... (997) 128 (97)
Unrecognized net (gain) or loss...................................... 1,820 1,679 775
------ ------ ------
End of year (accrued) or prepaid pension cost........................ $ 921 $ 914 $ 725
====== ====== ======
Discount rate........................................................ 7.0% 6.5% 7.0%
Expected return on plan assets....................................... 9.0% 9.0% 9.0%
Rate of compensation increase........................................ 4.0% 4.0% 4.5%
Components of net periodic benefit cost:
Service cost......................................................... $ 130 $ 244 $ 221
Interest cost........................................................ 300 310 293
Actual return on plan assets......................................... (299) (297) (609)
Amortization of unrecognized net transition (asset) or obligation.... (8) (8) (8)
Amortization of unrecognized prior service cost...................... (110) (8) (8)
Amortization of unrecognized net (gain) or loss...................... 119 48 42
Asset gain or (loss) deferred........................................ (139) (119) 272
------ ------ ------
Net periodic pension cost (benefit) for the year..................... $ (7) $ 170 $ 203
====== ====== ======
9. Earnings Per Share:
- ------------------------
The following table sets forth the calculation of Basic and Fully Diluted
Earnings Per Share for the years ended below.
For the Year Ended 1999 For the Year Ended 1998 For the Year Ended 1997
------------------------- -------------------------- ----------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
(in thousands except for per share data)
Basic EPS:
Income available to common
stockholders................... $11,803 6,833 $1.73 $10,050 6,859 $1.47 $7,925 6,842 $1.16
======= ===== ======= ===== ====== =====
Effect of Dilutive Securities:
Incentive stock options
outstanding.................... 124 158 172
----- ----- -----
Diluted EPS:
Income available to common
stockholders and assumed
conversion..................... $11,803 6,957 $1.70 $10,050 7,017 $1.43 $7,925 7,014 $1.13
======= ===== ======= ===== ====== =====
10. Income Taxes:
- -------------------
The provision for income taxes consists of the following:
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(in thousands)
Current................................................. $3,866 $4,004 $3,775
Deferred................................................ (185) (470) (284)
------ ------ ------
$3,681 $3,534 $3,491
====== ====== ======
The components of the net deferred tax asset (liability) as of December 31,
1999, 1998, and 1997 were as follows:
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(in thousands)
Deferred tax assets:
Loan loss provision......................................... $1,881 $1,531 $1,183
Non-accrual loan interest income............................ 357 363 264
Unrealized loss on investment securities.................... 5,841 --- ---
Miscellaneous............................................... 119 121 291
Deferred compensation....................................... 198 296 176
------ ------ ------
Total deferred tax assets............................... $8,396 $2,311 $1,914
------ ------ ------
Deferred tax liabilities:
Depreciation................................................ $ 532 $ 560 $ 583
Accretion of discount....................................... 226 176 239
Pension expense............................................. 322 285 246
Unrealized gain on marketable equity securities............. --- 1,437 1,671
Miscellaneous............................................... --- --- 23
------ ------- ------
Total deferred tax liability............................ 1,080 2,458 2,762
------ ------- ------
Net deferred asset (liability).......................... $7,316 $ (147) $ (848)
====== ======= ======
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(in thousands)
Computed "expected" tax provision................................ $5,419 $4,615 $3,882
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance.............. (1,571) (1,230) (784)
Goodwill amortization............................................ 94 92 82
Nondeductible expense related to acquisition..................... --- 49 252
Other, net....................................................... (163) 61 59
Deferred compensation............................................ (98) (53) ---
------ ------ ------
Total provision for income taxes................................. $3,681 $3,534 $3,491
====== ====== ======
11. Stock Options, Preferred Stock, and Common Stock:
- -------------------------------------------------------
The Corporation has a Long Term Incentive Plan whereby awards in the form
of Incentive Stock Options , Nonqualified Stock Options or Stock Appreciation
Rights may be granted to certain Executive Officers and other key employees
selected by a committee of the Board of Directors. The price at which common
stock can be purchased pursuant to the exercise of options cannot be less than
100% in the case of Incentive Stock Options and 80% in the case of Nonqualified
Stock Options, of the fair market value of the common stock on the date of the
grant of the option. Options are exercisable starting one year from the date of
grant to the extent of 20.0% to 33.3% a year on a cumulative basis and expire no
later than ten years after the date of grant. Incentive stock options issued
under the plan totalled 88,000, 119,926, and 86,070, in 1999, 1998, and 1997,
respectively.
A summary of the status of the Bank's Plan as of December 31, 1999, 1998,
and 1997 and changes during the years ending on those dates is presented below:
Weighted
Average Fair
Shares Shares Weighted Options Value of Options
Under Available Average Exercisable Granted During
Option For Option Exercisable Price at Year-end The Year
------ ---------- ----------------- ----------- --------
Balance, December 31, 1996............... 404,481 1,168,946 $12.32 162,218
Options granted.......................... 86,070 (86,070) $19.91 $ 8.43
Options exercised........................ (92,059) --- $10.59
Options cancelled or expired............. (1,923) 1,923 $14.92
------- --------- ------ -------
Balance, December 31, 1997 396,569 1,084,799 $13.99 151,129
Options granted.......................... 119,926 (119,926) $24.02 $ 5.05
Options exercised........................ (28,374) --- $10.82
Options cancelled or expired............. (1,914) 1,914 $20.00
------- --------- ------ -------
Balance, December 31, 1998 486,207 966,787 $17.07 279,320
Options granted.......................... 88,000 (88,000) $22.50 $ 5.45
Options exercised........................ (37,185) --- $ 9.96
Options cancelled or expired............. --- ---
------- --------- ------ -------
Balance, December 31, 1999 537,022 878,787 $17.71 330,620
======= ========= ====== =======
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123). As permitted by SFAS 123, the Corporation has chosen to apply APB Opinion
No.25, "Accounting for Stock issued to Employees" (APB 25) and related
interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Plan. Had compensation cost
for the Corporation's Plan been determined based on the fair value at the grant
date for awards under the Plan consistent with the method of SFAS 123, the
impact on the Corporation's net income and net income per share would have
approximated $(195,000) and $(.03), respectively in 1999. The impact on net
income and net income per share in 1998 would have been $(267,000) and $(.04),
respectively. The impact on net income and net income per share in 1997 would
have been $(96,000) and $(.01), respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998, and 1997, respectively; dividend
yield of 2.9%, 2.5%, and 1.0%; expected volatility of 23%, 23%, and 20%; risk
free interest rates of 6.1%, 4.8%, and 6.1%; and expected lives of 5.5, 6, and 6
years.
12. Related Parties:
- ----------------------
Certain directors and their business affiliates (defined as the beneficial
ownership of at least a 10 percent interest), executive officers and their
families are indebted to Community Banks, N.A. and Peoples State Bank. At
December 31, 1999, 1998, and 1997, loans to these persons and their business
affiliates amounted to $8,479,000, $6,548,000, and $6,367,000, respectively.
In the opinion of management, such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.
----------------------------------------
1999 1998 1997
----------------------------------------
(in thousands)
Balance beginning of period.................. $6,548 $6,367 $4,012
Additions.................................... 5,255 2,003 4,884
Amounts collected............................ (3,324) (1,822) (2,529)
Amounts written off.......................... --- --- ---
------ ------ ------
Balance end of period........................ $8,479 $6,548 $6,367
====== ====== ======
13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
- ------------------------------------------------------------------------------
---------------------------
1999 1998
---------------------------
(in thousands)
Condensed Balance Sheets:
Cash and investments........................................ $ 50 $ 150
Investment in Community Banks, N.A. ........................ 42,799 49,537
Investment in Peoples State Bank............................ 25,620 24,348
Investment in nonbank subsidiaries.......................... 2,064 4,209
Other assets................................................ 754 1,023
------- -------
Total assets................................................ $71,287 $79,267
======= =======
Other liabilities........................................... $ 206 $ 391
Stockholders' equity........................................ 71,081 78,876
------- -------
Total liabilities and stockholders' equity.................. $71,287 $79,267
======= =======
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
(in thousands)
Condensed Statements of Income:
Dividends from:
Community Banks, N.A. ...................................... $ 5,415 $ 5,279 $ 3,010
Peoples State Bank.......................................... --- 285 ---
Nonbank subsidiaries........................................ 1,854 --- ---
Other income (expense)............................................ (491) (546) (335)
------- ------- -------
Income before equity in undistributed earnings of subsidiaries......... 6,778 5,018 2,675
------- ------- -------
Equity in undistributed earnings of:
Community Banks, N.A. ............................................ 1,901 1,483 3,240
Peoples State Bank................................................ 4,685 3,118 1,342
Nonbank subsidiaries.............................................. (1,561) 431 668
------- ------- -------
5,025 5,032 5,250
------- ------- -------
Net income............................................................. $11,803 $10,050 $ 7,925
======= ======= =======
Condensed Statements of Cash Flows:
Operating activities:
Net income........................................................ $11,803 $10,050 $ 7,925
Adjustments to reconcile net cash provided by
operating activities:
Undistributed earnings of:
Community Banks, N.A. ................................... (1,901) (1,483) (3,240)
Peoples State Bank....................................... (4,685) (3,118) (1,342)
Nonbank subsidiaries..................................... 1,561 (431) (668)
Other, net.................................................... 84 (266) (1,615)
------- ------- -------
Net cash provided by operating activities................ 6,862 4,752 1,060
Investing activities:
Additional investment in Peoples State Bank................... (1,000) --- ---
------- ------- -------
Net cash used in investment activities................... (1,000) --- ---
------- ------- -------
Financing Activities:
Proceeds from issuance of common stock............................ 266 330 2,776
Purchase of Treasury Stock........................................ (1,885) (966) (695)
Dividends paid.................................................... (4,343) (4,103) (3,143)
------- ------- -------
Net cash used by financing activities.................... (5,962) (4,739) (1,062)
------- ------- -------
Net change in cash and cash equivalents.................. (100) 13 (2)
Cash and cash equivalents at beginning of year.................... 150 137 139
------- ------- -------
Cash and cash equivalents at end of year.......................... $ 50 $ 150 $ 137
======= ======= =======
14. Regulatory Restrictions of Banking Subsidiaries:
- -----------------------------------------------------
CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the Corporation). The approval of certain
banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA and PSB could declare dividends in 1999 without regulatory approval of
$11,187,000 plus an additional amount equal to the bank's retained net profits
in 2000 up to the date of any dividend declaration.
Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The amounts
of such reserves are based on percentages of certain deposit types and totalled
$440,000 and $265,000 at December 31, 1999 and 1998, respectively.
15. Financial Instruments with Off-Balance Sheet Risk:
- -------------------------------------------------------
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and standby
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statement of condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
Financial instruments with off-balance sheet risk at December 31, 1999, are
as follows:
Contract or Notional Amount
---------------------------
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans...................................... $78,102
Unused lines of credit.............................................. $27,042
Standby letters of credit........................................... $ 7,185
Unadvanced portions of construction loans........................... ---
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Lines of credit are similar to
commitments as they have fixed expiration dates and are driven by certain
criteria contained within the loan agreement. Lines of credit normally do not
extend beyond a period of one year. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
16. Quarterly Results of Operations (Unaudited):
- -------------------------------------------------
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998:
Three Months Ended
-----------------------------------------------------------------------------------------
1999 1998
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
-----------------------------------------------------------------------------------------
(dollars in thousands except per share data)
Interest income........................... $15,479 $16,188 $16,764 $17,833 $13,456 $13,702 $14,542 $15,300
Interest expense.......................... 7,523 7,839 8,116 8,735 6,235 6,330 6,917 7,405
------- ------- ------- ------- ------- ------- ------- -------
Net interest income....................... 7,956 8,349 8,648 9,098 7,221 7,372 7,625 7,895
Provision for loan losses................. 276 291 220 511 193 231 487 553
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses.......................... 7,680 8,058 8,428 8,587 7,028 7,141 7,138 7,342
Other income.............................. 1,029 1,229 1,336 1,216 845 913 971 1,022
Investment security gains (losses)....... 153 (29) 3 124 270 73 224 8
Gains on mortgage sales................... 276 138 94 99 142 142 131 219
Other expenses............................ 5,592 5,542 5,885 5,918 4,932 4,885 5,020 5,188
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes................ 3,546 3,854 3,976 4,108 3,353 3,384 3,444 3,403
Income taxes.............................. 864 935 869 1,013 976 920 868 770
------- ------- ------- ------- ------- ------- ------- -------
Net income................................ $ 2,682 $ 2,919 $ 3,107 $ 3,095 $ 2,377 $ 2,464 $ 2,576 $ 2,633
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.................. $ .39 $ .43 $ .46 $ .45 $ .35 $ .36 $ .37 $ .38
Diluted earnings per share............... $ .38 $ .42 $ .45 $ .45 $ .33 $ .36 $ .37 $ .37
Dividends per share....................... $ .15 $ .16 $ .16 $ .16 $ .13 $ .15 $ .15 $ .15
Per share data has been restated to reflect stock dividends and splits.
17. Fair Values of Financial Instruments:
- ------------------------------------------
The following methodologies and assumptions were used by the Corporation to
estimate its fair value disclosures:
Cash, interest-bearing time deposits, and federal funds sold:
The carrying values for cash, interest-bearing time deposits, and federal
funds sold equal those assets' fair values.
Investment securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-rate
residential mortgage loans, consumer loans, commercial, and commercial real
estate loans are estimated by discounting the future cash flows using comparable
current rates at which similar loans would be made to borrowers at similar
credit risk. The carrying value of accrued interest adjusted for credit risk
equals its fair value. The fair value of loans held for sale is based on quoted
market prices for similar loans sold in securitization transactions.
Deposit liabilities:
The fair values of demand and savings deposits equal their carrying values.
Adjusting such fair value for any value from retaining those deposit
relationships in the future is prohibited. That component, known as a deposit
intangible, is not considered in the value disclosed nor is it recorded in the
balance sheet. The carrying values for variable rate money market accounts
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using rates currently offered for similar
deposits.
Short-term borrowings:
The fair values of short-term borrowings approximate their carrying values.
Long-term borrowings:
The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flows analyses, based on rates available to the
Corporation for similar types of borrowings.
Off-balance-sheet instruments:
Fair values for the Corporation's unused commitments to originate loans and
unused lines of credit are deemed to be the same as their carrying values.
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1999 and 1998:
December 31,
---------------------------------------------------
1999 1998
---------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------------------
(in thousands)
Financial assets:
Cash, interest-bearing time deposits,
and federal funds sold.................... $ 32,933 $ 32,933 $ 28,502 $ 28,502
Investment securities......................... 312,075 312,075 292,542 292,542
Loans, net of unearned income................. 589,315 577,458 502,262 498,552
Less: Allowance for loan losses............ (7,456) --- (6,954) ---
-------- -------- -------- --------
Net loans.............................. 581,859 577,458 495,308 498,552
Loans held for sale........................... 4,004 4,004 3,319 3,319
-------- -------- -------- --------
Total...................................... $930,871 $926,470 $819,671 $822,915
======== ======== ======== ========
Financial liabilities:
Deposits...................................... $693,436 $691,186 $595,905 $598,654
Short-term borrowings......................... 3,338 3,338 7,910 7,910
Long-term debt................................ 197,000 193,769 161,000 160,822
-------- -------- -------- --------
Total...................................... $893,774 $888,293 $764,815 $767,386
======== ======== ======== ========
18. Completed Acquisition:
- ---------------------------
On March 31, 1998 Community Banks, Inc. (Community) completed its merger of
The Peoples State Bank (Peoples). Peoples had six banking offices located in
York and Adams Counties, Pennsylvania. Community issued 1,325,330 shares of
common stock for all of the outstanding common stock of Peoples. This
transaction was accounted for as a pooling of interests and combined unaudited
financial information is included in this report.
A summary of unaudited pro forma combined financial information for
Community and Peoples follows:
----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996
----------------------------------------------------------------------------------------------------------------------
(dollars in thousands except per share data)
Community/ Community/
Community Peoples Community Peoples
As Reported Combined As Reported Combined
----------- -------- ----------- --------
Net interest income............................. $19,381 $27,864 $17,906 $24,607
Provision for loan losses and lease losses...... 717 1,317 1,042 1,567
Other income.................................... 3,375 4,229 2,754 3,171
Other expenses.................................. 13,443 19,360 12,017 16,534
------- ------- ------- -------
Income before taxes............................. 8,596 11,416 7,601 9,677
Taxes........................................... 2,626 3,491 1,969 2,693
------- ------- ------- -------
Net income...................................... $ 5,970 $ 7,925 $ 5,632 $ 6,984
======= ======= ======= =======
Basic earnings per share........................ $ 1.26 $ 1.16 $ 1.19 $ 1.02
Diluted earnings per share...................... $ 1.23 $ 1.13 $ 1.17 $ 1.00
======= ======= ======= =======
Per share data for all periods has been restated to reflect stock
dividends and split.