Community Banks, Inc. and Subsidiaries
MARKET FOR THE HOLDING COMPANY'S COMMON STOCK AND RELATED SECURITIES
HOLDER MATTERS
The shares of Community Banks, Inc. are traded on the NASDAQ Small-Cap Market
and are transferred through local and regional brokerage houses. The Holding
Company has approximately 1,404 shareholders as of February 14, 1996. The
following table sets forth the high and low prices within the knowledge of
management of Community Banks, Inc. at which the Capital Stock has been
transferred during the periods indicated. The table is based solely upon
transactions known to management of the Holding Company and represents a portion
of the actual transfers of Capital Stock during the periods in question.
Price Per Share Price Per Share
1995 Low High 1994 Low High
First Quarter.............$23.75 $26.00 First Quarter..........$35.25 $37.25
Second Quarter............ 25.25 26.75 Second Quarter......... 34.38 37.00
Third Quarter............. 25.25 26.75 Third Quarter.......... 32.00 35.75
Fourth Quarter............ 25.44 27.25 Fourth Quarter......... 22.75 33.50
Holders of the Capital Stock of the Holding Company are entitled to such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefore. Community Banks, Inc. has paid cash
dividends per share of Common Stock during the last five years as follows:
1991-$0.44, 1992-$0.54, 1993-$0.62, 1994-$0.70, and 1995-$0.80. The market
prices listed above are based on historical market quotations and have not been
restated for the issuance of stock dividends. The Corporation declared a 20%
stock dividend during the fourth quarter of 1994.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1995 and 1994
(dollars in thousands except per share data)
. 1995 1994
ASSETS
Cash and due from banks.......................... $ 12,985 $ 12,152
Interest-bearing time deposits in other banks.... 434 645
Investment securities, available for sale (market
value)......................................... 87,539 99,249
Loans............................................ 216,052 190,792
Less: Unearned income........................... (11,067) (8,522)
Allowance for loan losses................. (2,280) (2,069)
Net loans................................. 202,705 180,201
Premises and equipment, net...................... 7,333 6,589
Goodwill......................................... 1,388 1,629
Other real estate owned.......................... 302 338
Loans held for sale.............................. 2,206 35
Accrued interest receivable and other assets..... 5,489 6,283
Total assets................................... $320,381 $307,121
LIABILITIES
Deposits:
Demand......................................... $ 23,958 $ 24,343
Savings........................................ 111,818 115,104
Time........................................... 126,577 108,593
Time in denominations of $100,000 or more...... 10,488 8,072
Total deposits................................. 272,841 256,112
Short-term borrowings............................ 1,016 11,709
Long-term debt................................... 7,000 7,000
Accrued interest payable and other liabilities... 2,931 1,933
Subordinated capital notes....................... --- 15
Total liabilities.............................. 283,788 276,769
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding............... --- ---
Common Stock, $5.00 par value; 5,000,000 shares
authorized; 2,032,072 and 2,027,918 shares
issued in 1995 and 1994, respectively.......... 10,160 10,140
Surplus.......................................... 9,878 9,839
Retained earnings................................ 15,241 12,443
Net unrealized gain (loss) on investment
securities available for sale, net of tax...... 1,367 (2,017)
Less: Treasury stock of 2,651
shares at cost................................. (53) (53)
Total stockholders' equity..................... 36,593 30,352
Total liabilities and stockholders' equity..... $320,381 $307,121
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, 1995, 1994, and 1993
(dollars in thousands except per share data)
. 1995 1994 1993
Interest Income:
Interest and fees on loans....................... $18,489 $14,975 $14,177
Interest and dividends on investment securities:
Taxable....................................... 4,251 4,490 4,613
Exempt from federal income tax................ 1,556 1,867 1,792
Other interest income............................ 83 67 102
Total interest income......................... 24,379 21,399 20,684
Interest expense:
Interest on deposits:
Savings....................................... 2,517 2,537 2,621
Time.......................................... 6,484 5,028 5,486
Time in denominations of $100,000 or more..... 528 397 409
Interest on short-term borrowings and
long-term debt.................................. 669 525 489
Interest on subordinated capital notes........... --- 2 4
Total interest expense........................ 10,198 8,489 9,009
Net interest income........................... 14,181 12,910 11,675
Provision for loan losses.......................... 712 462 702
Net interest income after provision for
loan losses................................. 13,469 12,448 10,973
Other income:
Trust department income.......................... 217 180 207
Service charges on deposit accounts.............. 792 687 597
Other service charges, commissions and fees...... 207 237 209
Investment security gains........................ 137 395 154
Income on insurance premiums..................... 583 396 414
Gains on mortgage sales.......................... 346 210 933
Other income..................................... 228 177 174
Total other income............................ 2,510 2,282 2,688
Other expenses:
Salaries and employee benefits.................. 4,850 4,267 3,858
Net occupancy expense........................... 1,423 1,301 1,102
Operating expenses of insurance subsidiary...... 353 282 357
Other operating expense......................... 3,450 3,430 3,139
Total other expenses......................... 10,076 9,280 8,456
Income before income taxes................... 5,903 5,450 5,205
Provision for income taxes........................ 1,478 1,288 1,289
Net income................................... $ 4,425 $ 4,162 $ 3,916
Fully diluted earnings per share (based on average
shares outstanding).........................<F1> $ 2.15 $ 2.03 $ 1.92
<FN>
<F1> Earnings per share have been restated to include a 20% stock dividend
effective November 29, 1994.
</FN>
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, 1995, 1994, and 1993
(dollars in thousands except per share data)
. Total
. Common Retained Valuation Treasury Stockholders'
. Stock Surplus Earnings Allowance Stock Equity
Balance, December 31, 1992..................... $ 8,630 $ 9,624 $ 8,772 $(53) $26,703
Net Income for 1993............................ 3,916 3,916
Cash dividends ($0.62 per share)............... (1,257) (1,257)
Issuance of additional 10,187 shares........... 51 116 (26) 141
Balance, December 31, 1993..................... 8,411 9,740 11,405 (53) 29,503
Valuation allowance on investment securities
available for sale, January 1, 1994........ $2,246 $2,246
Net income for 1994............................ 4,162 4,162
Cash dividends ($0.70 per share)............... (1,425) (1,425)
20% stock dividend (additional 337,248 shares). 1,686 (1,686)
Issuance of additional 8,435 shares............ 43 99 (13) 129
Change in valuation allowance on investment
securities, available for sale............. (4,263) (4,263)
Balance, December 31, 1994..................... 10,140 9,839 12,443 (2,017) (53) 30,352
Net income for 1995............................ 4,425 4,425
Cash dividends ($0.80 per share)............... (1,623) (1,623)
Issuance of additional 4,154 shares............ 20 39 (4) 55
Change in valuation allowance on investment
securities, available for sale............. 3,384
Balance, December 31, 1995..................... $10,160 $9,878 $15,241 $ 1,367 $(53) $36,593
Per share data for all periods has been restated to reflect stock dividends.
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994, and 1993
(in thousands)
. 1995 1994 1993
Operating Activities:
Net income.............................................. $ 4,425 $ 4,162 $ 3,916
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................ 712 462 702
Provision for depreciation and amortization.......... 788 716 625
Amortization of goodwill............................. 241 242 241
Investment security gains............................ (137) (395) (154)
Loans originated for sale............................ (17,590) (6,704) (27,083)
Proceeds from sales of loans......................... 15,765 10,975 25,092
Gains on mortgage sales.............................. (346) (210) (933)
Decrease (increase) in other assets.................. 468 (2,450) (471)
Increase (decrease) in accrued interest payable
and other liabilities............................... 294 241 (384)
Net cash provided by operating activities......... 4,620 7,039 1,551
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks................................ 211 (69) (201)
Proceeds from sales of investment
securities............................................. 347 892 298
Proceeds from maturities of investment securities....... 17,392 17,513 22,580
Purchases of investment securities...................... (765) (18,939) (23,866)
Net increase in total loans............................. (23,893) (22,468) (9,845)
Purchases of premises and equipment..................... (1,532) (1,454) (1,235)
. Net cash used in investing activities............. ( 8,240) (24,525) (12,269)
Financing Activities:
Net increase in total deposits.......................... 16,729 12,820 7,695
Net increase (decrease) in short-term borrowings........ (10,693) 10,504 330
Proceeds from issuance of long-term debt................ 5,000 --- 2,000
Repayment of long-term debt............................. (5,000) (2,000) ---
Repayment of subordinated capital notes................. (15) (16) (15)
Cash dividends.......................................... (1,623) (1,425) (1,257)
Proceeds from issuance of common stock.................. 55 129 140
. Net cash provided by financing activities......... 4,453 20,012 8,893
. Increase (decrease) in cash and cash equivalents.. 833 2,526 (1,825)
Cash and cash equivalents at beginning of year............ 12,152 9,626 11,451
Cash and cash equivalents at end of year.................. $12,985 $12,152 $ 9,626
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
Community Banks, Inc. (Corporation) is a bank holding company whose
wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Community
Banks Investments, Inc. (CBI) 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
18 branch banking offices located in Dauphin, Northumberland, Schuylkill
and Luzerne Counties in Pennsylvania. Community Bank's, Inc. primary source
of revenue is derived from loans to customers, who are predominantly
middle-income individuals.
2. Summary of Significant Accounting Policies:
The more significant accounting policies of the Corporation are:
Investment Securities:
At January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). This statement requires enterprises
to classify debt and equity securities as either "held-to-maturity,"
"available-for-sale," or "trading." Investments for which management has
the intent, and the corporation has the ability, to hold to maturity are
carried at the lower of cost or market adjusted for amortization of premium
and accretion of discount. Amortization and accretion are calculated
principally on the interest method. Securities bought and held primarily
for the purpose of selling them in the near term are classified as
"trading" and reported at fair value. Changes in unrealized gains and
losses on "trading" securities are recognized in the Consolidated
Statements of Income. At December 31, 1995, there were no securities
identified as "held-to-maturity" or "trading." All other securities are
classified as "available-for-sale" and reported at fair value. Changes in
unrealized gains and losses for "available-for-sale" securities, net of
applicable taxes, are recorded as a component of shareholder's equity.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management
strategy, and that may be sold in response to changes in interest rates,
resultant prepayment risk and other factors. Realized gains and losses on
the sale of securities are recognized using the specific identification
method and are included in Other Income in the Consolidated Statements of
Income.
Allowance for Loan Losses:
The Corporation maintains an allowance for loan losses at an amount which,
in management's judgement, should be adequate to absorb losses on existing
loans that may become uncollectible. Management's judgement in determining
the adequacy of the allowance is based on evaluations of the collectibility
of loans. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions
that may affect the borrowers' ability to pay, overall portfolio quality
and review of specific problem loans.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using accelerated and straight-line methods over
the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred, while major additions and improvements are
capitalized. Gain or loss on retirement or disposal of individual assets is
recorded as income or expense in the period of retirement or disposal.
Goodwill:
Goodwill which represents the excess of purchase price, including
acquisition costs over the fair market value of net assets acquired under
the purchase method of accounting is amortized on a straight line basis
over 15 years.
Pension Plan:
The Corporation has a noncontributory defined benefit pension plan covering
substantially all employees. Pension costs are funded currently subject to
the full funding limitation imposed under federal income tax regulations.
Income Taxes:
In accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes", deferred income taxes are accounted for by
the liability method, wherein deferred tax assets and liabilities are
calculated on the differences between the bases of assets and liabilities
for financial statement purposes versus tax purposes (temporary
differences) using enacted tax rates in effect for the year in which the
differences are expected to reverse. Tax expense in the statements of
income is equal to the sum of taxes currently payable, including the effect
of the alternative minimum tax, if any, plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to period-end
temporary differences at prevailing tax rates. (See Note 10).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of
interest has ceased and where all previously accrued and unpaid interest is
reversed. Loans, other than consumer loans, are placed on nonaccrual status
when principal or interest is past due 90 days or more and the collateral
may be inadequate to recover principal and interest, or immediately, if in
the opinion of management, full collection is doubtful. Generally, the
uncollateralized portions of consumer loans past due 90 days or more are
charged-off. Interest accrued but not collected as of the date of placement
on nonaccrual status is reversed and charged against current income.
Subsequent cash payments received either are applied to the outstanding
principal balance or recorded as interest income, depending upon
management's assessment of the ultimate collectibility of principal and
interest. (See also Note 5). Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of
the yield on the related loan.
Other Real Estate owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior
to foreclosure, the recorded amount of the loan is written down, if
necessary, to the appraised value of the real estate to be acquired by
charging the allowance for loan losses. During 1995, 1994, and 1993
non-cash transactions related to real estate acquired through foreclosure
totalled $677,000, $322,000, and $646,000, 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 $1,495,000, $1,276,000,
and $1,268,000, and $10,017,000, $8,545,000, and $9,085,000 for income
taxes and interest, respectively, in 1995, 1994, and 1993. Certain prior
year amounts have been reclassified to conform with the current year's
presentation.
Earnings Per Common Share:
Net income per share is computed based upon the weighted average shares of
common stock outstanding which amounted to 2,054,822, 2,053,475, and
2,040,911 shares for the years ended December 31, 1995, 1994, and 1993,
respectively.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Investment Securities:
The amortized cost and market value of investment securities at
December 31, 1995 and 1994 are as follows:
. December 31
. 1995 1994
. Amortized Market Amortized Market
. Cost Value Cost Value
. (in thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies......................... $14,732 $14,842 $ 18,807 $17,832
Mortgage-backed U.S. government agencies........................ 37,601 37,825 43,926 41,900
Obligations of states and political subdivisions................ 26,379 27,048 33,185 32,733
Corporate securities............................................ 3,516 3,646 3,518 3,499
Equity securities............................................... 3,241 4,178 2,869 3,285
Total...................................................... $85,469 $87,539 $102,305 $99,249
The amortized cost and market value of all investment securities at
December 31, 1995 and 1994 are as follows:
. 1995 1994
. 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........ $14,732 $ 156 $ (46) $14,842 $ 18,807 $ 3 $ (978) $17,832
Mortgage-backed U.S. government agencies......... 37,601 510 (286) 37,825 43,926 86 (2,112) 41,900
Obligations of states and political subdivisions. 26,379 712 (43) 27,048 33,185 263 (715) 32,733
Corporate securities............................. 3,516 130 --- 3,646 3,518 54 (73) 3,499
Equity securities................................ 3,241 959 (22) 4,178 2,869 416 --- 3,285
Total................................... $85,469 $2,467 $(397) $87,539 $102,305 $822 $(3,878) $99,249
The amortized cost and market value of all investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
. Amortized Market
. Cost Value
. (in thousands)
Due in one year or less.................. $ 4,457 $ 4,562
Due after one year through five years.... 20,751 21,164
Due after five years through ten years... 18,919 19,303
Due after ten years...................... 500 507
. 44,627 45,536
Mortgage-backed securities............... 37,601 37,825
Equity securities........................ 3,241 4,178
. $85,469 $87,539
No sales of investments in debt securities occurred in 1995.
At December 31, 1995 and 1994, investment securities with carrying amounts
of approximately $21,619,000 and $25,548,000 respectively, are pledged to
collateralize public deposits and for other purposes as provided by law.
Effective January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which requires the Corporation to
reflect securities available and held for sale at fair value on the balance
sheet. Upon adoption, the Corporation classified all investments held at
January 1, 1994, as available for sale and recorded the increase to fair value
as a separate component of equity. The increase recorded to stockholders'
equity at January 1, 1994 was $2,246,000, net of applicable income taxes.
4. Loans:
The composition of loans outstanding by lending classification is as
follows:
. December 31
. 1995 1994
. (in thousands)
Commercial, financial and agricultural................... $ 37,774 $ 31,227
Real-estate-construction................................. 3,283 3,354
Real-estate-mortgage..................................... 112,190 103,851
Personal installment..................................... 56,793 46,342
Other.................................................... 6,012 6,018
. $216,052 $190,792
Loans held for resale amounted to $2,206,000 and $35,000 at December 31,
1995 and 1994, respectively.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows:
. December 31
. 1995 1994
. (in thousands)
Balance, January 1................................ $2,069 $1,837
Provision for loan losses......................... 712 462
Loan charge-offs.................................. (744) (577)
Recoveries........................................ 243 347
Balance, December 31.............................. $2,280 $2,069
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
. December 31
. 1995 1994
. (in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural....... $ 120 $ 152
Mortgages.................................... 197 114
Personal installment......................... 145 59
Other........................................ --- 1
. 462 326
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural....... 415 327
Mortgages.................................... 934 475
Other........................................ 99 30
. 1,448 832
Other real estate............................... 302 338
Total........................................ $2,212 $1,496
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing
the collectibility of such amounts.
Impaired Loans
The Corporation adopted FAS 114 "Accounting by Creditors for Impairment of
a Loan", as amended by FAS 118, on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events, if it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the
loan agreement. For purposes of applying FAS 114, larger groups of smaller-
balance loans such as residential mortgage and installment loans are
collectively evaluated for impairment. Management has established a smaller-
dollar-value threshold of $200,000 for all loans. Loans exceeding this
threshold are evaluated in accordance with FAS 114. An insignificant delay or
shortfall in the amount of payments, when considered independent of other
factors, would not cause a loan to be rendered impaired. Insignificant delays
or shortfalls may include, depending on specific facts and circumstances,
those that are associated with temporary operational downturns or seasonal
business delays.
Management performs periodic reviews of its loans to identify impaired
loans. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. The adoption of FAS 114 did not
result in an additional provision for credit losses at January 1, 1995.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance and subsequent recoveries, if any, are credited
to the valuation allowance. The company does not accrue interest on impaired
loans. While a loan is considered impaired, cash payments received are applied
to principal or interest depending upon management's assessment of the
ultimate collectibility of principal and interest.
At December 31, 1995, the Corporation recorded no investment in impaired
loans recognized in accordance with FAS 114 with no related FAS 114 valuation
allowance. For the twelve month period ended December 31, 1995, the average
balance of impaired loans was negligible. The application of FAS 114 has not
had any effect on the comparability of the non-performing loan table in
footnote 5 between the periods presented. The company recognized no interest
on impaired loans on the cash basis.
6. Premises and Equipment:
Premises and equipment are comprised of the following:
. December 31
. 1995 1994
. (in thousands)
Banking premises................................. $ 7,866 $7,547
Furniture and fixtures........................... 6,545 5,633
Leasehold improvements........................... 343 72
. 14,754 13,252
Less accumulated depreciation and amortization (7,421) (6,663)
. $ 7,333 $6,589
Depreciation expense charged to operations amounted to approximately
$788,000, $716,000, and $619,000 in 1995, 1994, and 1993, respectively.
7. Short-Term Borrowings and Long-Term Debt:
Short-term borrowings consist of the following:
. December 31
. 1995 1994
. (in thousands)
Federal funds purchased, 5.69% and 6.61% in 1995
and 1994 respectively.............................. $ 550 $11,025
Treasury tax and loan note option account,
5.15% and 3.54% in 1995 and 1994, respectively..... 466 684
. $1,016 $11,709
Interest incurred on short-term borrowings amounted to $225,000 ,
$115,000, and $29,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
At December 31, 1995, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $7,000,000. The long-term advance is for a period
of five years and is due to mature in June, 2000. Monthly payments of interest
are required at a fixed rate, presently 6.15%, with principal due at maturity.
Interest on long-term debt amounted to $444,000, $410,000, and $460,000 for the
years ended December 31, 1995, 1994, and 1993, respectively.
Maturities on long term debt at December 31, 1995 are as follows:
1998............................ $3,000,000
2000............................ $4,000,000
8. Subordinated Capital Notes:
Subordinated capital notes at December 31, 1994 bore interest at 11% and
matured annually at $15,000 through February 4, 1995.
9. Pension Plan:
The following table sets forth the pension plan's funded status at and
for the years ended December 31, 1995, 1994, and 1993.
1995 1994 1993
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $2,371, $1,903, and $1,652, respectively.................. $2,389 $1,915 $1,661
Projected benefit obligation for service rendered to date......................... $3,420 $2,780 $2,516
Plan assets at fair value, primarily listed stocks, corporate, and U.S. bonds..... 3,114 2,550 2,403
Plan assets in excess of projected benefit obligations............................ (306) (230) (113)
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions........................................ 949 791 528
Unrecognized net asset being recognized over 17 years............................. (55) (63) (71)
Prepaid pension costs............................................................. $ 588 $ 498 $ 344
Net pension cost for 1995, 1994, and 1993 included the following components: ====== ====== ======
Service cost...................................................................... $ 153 $ 159 $ 128
Interest cost..................................................................... 207 175 147
Actual return on plan assets...................................................... (374) (29) (116)
Net amortization and deferral..................................................... 154 (181) (86)
Net pension cost.................................................................. $ 140 $ 124 $ 73
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% for 1995, 1994 and
1993. The increase in future compensation levels used in determining the
actuarial present value of the benefit obligation was 5.00% in 1995, 1994, and
1993. The expected long-term rate of return on assets was 9.00% in 1995,
1994, and 1993.
10. Income Taxes:
The provision for income taxes consists of the following:
1995 1994 1993
(in thousands)
Current.................................. $1,498 $1,365 $1,334
Deferred................................. (20) (77) (45)
$1,478 $1,288 $1,289
As discussed in Note 2, the Corporation adopted the provisions of SFAS
No. 109 effective January 1, 1992.
The components of the net deferred tax asset (liability) as of December
31, 1995, 1994, and 1993 were as follows:
1995 1994 1993
(in thousands)
Deferred tax assets:
Loan loss provision......................... $ 552 $ 514 $466
Non-accrual loan interest income............ 121 104 62
Loan origination fees....................... 18 25 21
Net unrealized loss on marketable securities. --- 1,039 --
Miscellaneous............................... 110 84 49
. Total deferred tax assets............... 801 1,766 598
Deferred tax liabilities:
Depreciation.................... ........... 479 482 476
Accretion of discount....................... 123 104 81
Pension expense............................. 182 145 116
Unrealized gain on marketable equity securities. 704 --- ---
Miscellaneous................................... 2 1 7
Total deferred tax liability................ 1,490 732 680
Net deferred asset (liability).............. $ (689) $1,034 $(82)
The significant components of the deferred tax benefit in 1995, 1994, and
1993 were as follows:
. 1995 1994 1993
. (in thousands)
Loan origination fees................. $ 7 $ 4 $ (4)
Accretion of discount................. 19 23 26
Loan loss provision................... (38) (48) (84)
Non-Accrual loan interest income...... (17) (42) (14)
Depreciation expense.................. (3) (6) (8)
Pension expense....................... 37 29 45
Lease financing....................... (1) (7) (7)
Miscellaneous......................... (24) (30) 1
Total deferred taxes.................. $(20) $(77) $(45)
Income tax provisions (benefits) related to securities gains and losses
were $47,000, $134,000, and $52,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
The provision for income taxes differs from the amounts derived from
applying the statutory federal tax rate of 34%.
1995 1994 1993
(in thousands)
Computed "expected" tax provision................ $2,007 $1,853 $1,769
Effect of tax-exempt municipal bond and loan.....
interest, net of interest expense disallowance. (543) (634) (591)
Goodwill amortization............................ 82 82 82
Other, net....................................... (68) (13) 29
Total provision for income taxes................. $1,478 $1,288 $1,289
11. Stock Options, Preferred Stock, and Common Stock:
The Corporation has adopted a Long Term Incentive Plan. Under the plan,
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
50,900, 22,800, 21,350, 18,250, 17,750, and 18,000 in 1995, 1994, 1993, 1992,
1991, and 1990, respectively.
The following is a summary of transactions under the plan:
Shares Shares Option
Under Available Price Per
Option For Option Share
Balance, December 31, 1992............. 65,117 133,900
Options granted........................ 21,350 (21,350) $20.00
Options exercised...................... (11,921) --- $15.56
Options cancelled or expired........... (250) 250
Balance, December 31, 1993.............. 74,296 112,800
Options granted......................... 22,800 (22,800) $29.77
Options exercised....................... (9,098) --- $16.82
Options cancelled or expired............ (1,550) 1,550
Balance, December 31, 1994.............. 86,448 91,550
Options granted......................... 24,525 (24,525) $23.61
26,375 (26,375) $26.88
Options exercised....................... (4,278) --- $13.55
Options cancelled or expired............. --- ---
Balance December 31, 1995............... 133,070 40,650 $11.65-$29.77
During October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation". SFAS 123 encourages employers to adopt its
prescribed fair value-based method of accounting to recognize compensation
expense for employee stock compensation plans, however, it does allow the
Corporation to continue to account for its plans using its current method.
The Corporation intends to adopt the provisions of FASB 123 effective January
1, 1996 under its disclosure-only alternative.
The Corporation has authorized 500,000 shares of no par preferred stock.
No such shares were issued or outstanding at December 31, 1995 and 1994.
12. Related Parties:
Certain directors and their business affiliates (defined as the
beneficial ownership of at least a 10 percent interest), executive officers
and their families are indebted to Community Banks, N.A. At December 31, 1995,
1994, and 1993, loans to these persons and their business affiliates amounted
to $3,371,000, $3,890,000, and $4,292,000, respectively.
In the opinion of management, such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.
1995 1994 1993
(in thousands)
Balance beginning of period................. $3,890 $4,292 $4,853
Additions................................... 467 624 83
Amounts collected........................... (986) (1,026) (644)
Amounts written off......................... --- --- ---
Balance end of period....................... $3,371 $3,890 $4,292
13. Condensed Financial Information of Community Banks, Inc. (Parent only):
1995 1994
(in thousands)
Condensed Balance Sheets:
Cash and investments.......................... $ 402 $ 347
Investment in Community Banks, N.A. .......... 33,161 27,592
Investment in nonbank subsidiaries............ 3,030 2,413
Total assets.................................. $36,593 $30,352
Stockholders' equity.......................... 36,593 30,352
Total liabilities and stockholders' equity.... $36,593 $30,352
. 1995 1994 1993
Condensed Statements of Income: (in thousands)
Dividends from:
Community Banks, N.A. ............................ $1,623 $1,425 $1,257
Nonbank subsidiaries.............................. --- --- ---
Income before equity in undistributed earnings of
subsidiaries........................................... 1,623 1,425 1,257
Equity in undistributed earnings of:
Community Banks, N.A. ................................. 2,553 2,275 2,537
Nonbank subsidiaries................................... 249 462 122
. 2,802 2,737 2,659
Net income................................................. $4,425 $4,162 $3,916
Condensed Statements of Cash Flows:
Operating activities:
Net income............................................. $4,425 $4,162 $3,916
Adjustments to reconcile net cash provided by
operating activities:
Undistributed earnings of:
Community Banks, N.A. ............................. (2,553) (2,275) (2,537)
Nonbank subsidiaries............................... (249) (462) (122)
Other liabilities.................................... --- --- ---
Net cash provided by operating activities.......... 1,623 1,425 1,257
Investing activities:
Additional investment in nonbank subsidiaries........ --- --- ---
Net cash used in investment activities............... --- --- ---
Financing Activities:
Proceeds from issuance of common stock................. 55 129 141
Dividends paid....................................... (1,623) (1,425) (1,257)
Net cash used by financing activities.............. (1,568) (1,296) (1,116)
Net change in cash and cash equivalents........... 55 129 141
Cash and cash equivalents at beginning of year... 347 218 77
Cash and cash equivalents at end of year......... $ 402 $ 347 $ 218
14. Dividend Restrictions:
CBNA is subject to legal limitations as to the amount of dividends that
can be paid to its shareholder (the Corporation). The approval of certain
banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA could declare dividends in 1996 without regulatory approval of $5,521,000
plus an additional amount equal to the banks' retained net profits in 1996 up
to the date of any dividend declaration.
15. Financial Instruments with Off-Balance Sheet Risk:
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and standby
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statement of condition. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for loan commitments and
standby letters of credit is represented by the contractual amount of these
instruments. The Corporation uses the same credit policies as it does for on-
balance sheet instruments.
Financial instruments with off-balance sheet risk at December 31, 1995,
are as follows:
Contract or Notional Amount
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans.......................... $14,119
Unused lines of credit.................................. $11,124
Standby letters of credit............................... $ 832
Unadvanced portions of construction loans............... $ 1,026
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, 1995 and 1994:
Three Months Ended
1995 1994
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.............. $5,855 $6,091 $6,175 $6,258 $5,034 $5,222 $5,454 $5,689
Interest expense............. 2,344 2,562 2,648 2,644 2,073 2,094 2,113 2,209
Net interest income.......... 3,511 3,529 3,527 3,614 2,961 3,128 3,341 3,480
Provision for loan losses.... 122 168 170 252 75 159 159 69
Net interest income after
provision for loan losses:.. 3,389 3,361 3,357 3,362 2,886 2,969 3,182 3,411
Other income................. 433 491 550 553 368 428 447 434
Investment security
gains...................... 36 38 63 -- 161 160 59 15
Gains on mortgage sales...... 18 48 60 220 149 2 31 28
Other expenses............... 2,462 2,534 2,501 2,579 2,241 2,277 2,330 2,432
Income before income taxes... 1,414 1,404 1,529 1,556 1,323 1,282 1,389 1,456
Income taxes................. 348 352 363 415 298 302 326 362
Net income................... $1,066 $1,052 $1,166 $1,141 $1,025 $ 980 $1,063 $1,094
Fully diluted earnings
per share.................. $. 52 $ .51 $ .57 $ .55 $ .50 $ .48 $ .52 $ .53
Dividends per share.......... $.200 $.200 $.200 $.200 $.167 $.167 $.167 $.200
Per share data has been restated to include a 20% stock dividend effective
November 29, 1994.
17. Fair Values of Financial Instruments:
In December 1991, the Financial Accounting Standards Board released SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, which requires
disclosure of the fair value of all financial instruments. The FASB previously
released SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk, which required similar disclosures relating to off-balance-
sheet financing.
The following methodologies and assumptions were used by the Corporation
to estimate its fair value disclosures:
Cash, interest-bearing time deposits, and federal funds sold:
The carrying values for cash, interest-bearing time deposits, and federal
funds sold equal those assets' fair values.
Investment securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-
rate residential mortgage loans, consumer loans, commercial, and commercial
real estate loans are estimated by discounting the future cash flows using
comparable current rates at which similar loans would be made to borrowers at
similar credit risk. The carrying value of accrued interest adjusted for
credit risk equals its fair value. The fair value of loans held for sale is
based on quoted market prices for similar loans sold in securitization
transactions.
Deposit liabilities:
The fair values of demand and savings deposits equal their carrying values.
Statement 107 prohibits adjusting such fair value for any value from retaining
those deposit relationships in the future. That component, known as a deposit
intangible, is not considered in the value disclosed nor is it recorded in the
balance sheet. The carrying values for variable rate money market accounts
approximate their fair values at the reporting date. Fair values for fixed-
rate certificates of deposit are estimated using rates currently offered for
similar deposits.
Short-term borrowings:
The fair values of short-term borrowings approximate their carrying values.
Long-term borrowings:
The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flow analyses, based on rates available to the
Corporation for similar types of borrowings.
Off-balance-sheet instruments:
Fair values for the Corporation's unused commitments to originate loans
and unused lines of credit are deemed to be the same as their carrying values.
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1995 and 1994:
December 31,
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
Financial assets:
Cash, interest-bearing time deposits,
and federal funds sold................... $ 13,419 $ 13,419 $ 12,797 $ 12,797
Investment securities...................... 87,539 87,539 99,249 99,249
Loans, net of unearned income.............. 204,985 200,900 182,270 178,797
Less: Allowance for loan losses............ (2,280) -- (2,069) --
Net Loans............................ 202,705 200,900 180,201 178,797
Loans held for sale........................ 2,206 2,206 35 35
Total................................ $305,869 $304,064 $292,282 $290,878
Financial liabilities:
Deposits................................... $272,841 $274,038 $256,112 $254,914
Short-term borrowings...................... 1,016 1,016 11,709 11,709
Long-term debt............................. 7,000 7,061 7,000 6,668
Subordinated capital notes................. -- -- 15 15
Total $280,857 $282,115 $274,836 $273,306
18. Subsequent Event - Acquisition:
On January 12, 1996, Community Banks, Inc. completed its merger of
Citizens National Bank of Ashland (Citizens). Citizens has three banking
offices which are located in Ashland, Gordon, and Lavelle, Pennsylvania.
Community issued 578,081 shares of common stock for all of the outstanding
common stock of Citizens. This transaction will be accounted for as a pooling
of interests.
Assuming the acquisition had occurred on January 1, 1993, proforma
unaudited financial statement data is as follows:
1995 1994 1993
(dollars in thousands except per share data)
Results of Operations
Total interest income...... $28,621 $25,630 $25,159
Net interest income........ 16,588 15,551 14,390
Net income................. $ 4,814 $ 4,994 $ 4,763
Earnings per share......... $ 1.83 $ 1.90 $ 1.82
Contributing to the decline of 1995 proforma net income were costs
associated with the acquisition.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Community Banks, Inc. and subsidiaries (Corporation) as of
December 31, 1995 and 1994 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. These standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Community Banks, Inc. and subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements,
the Corporation has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994.
/S/ COOPERS & LYBRAND, L.L.P
One South Market Square
Harrisburg, PA 17101
January 13, 1996
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion of financial condition and results of operations
is based on the selected financial data listed below and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
FINANCIAL HIGHLIGHTS 1995 1994 1993 1992 1991
(dollars in thousands except per share data)
Balance Sheet Data
Total assets........................ $320,381 $307,121 $284,723 $272,297 $246,560
Loans (net of unearned income and
allowance for loan losses)........ 202,705 180,201 158,195 149,052 150,111
Deposits............................ 272,841 256,112 243,292 235,597 218,157
Shareholders' equity................ 36,593 30,352 29,503 26,703 24,261
Earnings Data
Net interest income................. 14,181 12,910 11,675 10,998 9,753
Provision for loan losses........... 712 462 702 683 737
Other income........................ 2,510 2,282 2,688 2,158 1,468
Other expense....................... 10,076 9,280 8,456 7,803 7,281
Net income.......................... 4,425 4,162 3,916 3,491 2,529
Per Share Data
Net income.......................... 2.15 2.03 1.92 1.73 1.27
Cash dividends...................... .80 .70 .62 .54 .44
Book value.......................... 18.03 14.99 14.64 13.33 12.11
Average shares outstanding.......... 2,054,822 2,053,475 2,040,911 2,014,381 2,003,032
Community Banks, Inc. and Subsidiaries
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL
AND INTEREST YIELDS
Income and Rates on a Tax Equivalent Basis <F2> for the
Years Ended December 31, 1995, 1994, and 1993 (dollars in thousands)
1995 1994 1993
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance<F3> Expense<F1> Paid<F1> Balance<F3>Expense<F1> Paid<F1> Balance<F3>Expense<F1>Paid<F1>
Assets:
Cash and due from banks......... $ 11,459 $ 9,862 $ 8,146
Earnings Assets:
Interest-bearing deposits in
other banks................. 1,187 $ 51 4.30% 1,357 $ 29 2.14% 1,307 $ 29 2.22%
Investment securities:
Taxable..................... 63,207 4,251 6.73 71,048 4,490 6.32 68,540 4,613 6.73
Tax-exempt (b).............. 29,159 2,358 8.09 33,223 2,829 8.52 28,971 2,715 9.37
Total investment
securities.................. 92,366 104,271 97,511
Federal funds sold............ 544 32 5.88 1,081 38 3.52 2,454 73 2.97
Loans, net of unearned
income (b).................. 196,138 18,588 9.48 170,945 15,037 8.80 159,976 14,213 8.88
Total Earning Assets......... 290,235 $25,280 8.71 277,654 $22,423 8.08 261,248 $21,643 8.28
Allowance for loans
losses........................ (2,196) (1,991) (1,783)
Premises, equipment and
other assets................. 14,460 12,790 10,549
Total assets................. $313,958 $298,315 $278,160
Liabilities:
Demand deposits................. 23,283 21,452 18,033
Interest bearing liabilites:
Savings deposits.............. 113,081 2,517 2.23 116,334 2,537 2.18 103,932 2,621 2.52
Time deposits:
$100,000 or greater......... 10,221 8,573 8,049
Other....................... 119,547 108,438 107,922
Total time deposits........... 129,768 7,012 5.40 117,011 5,425 4.64 115,971 5,895 5.08
Total time and savings
deposits.................... 242,849 233,345 219,903
Short-term borrowings......... 3,891 225 5.78 2,626 115 4.38 1,116 29 2.60
Long-term debt................ 7,781 444 5.71 7,871 410 5.21 9,014 460 5.10
Subordinated capital notes.... 2 -- 11.00 17 2 11.00 32 4 11.00
Total interest-bearing
liabilities................. 254,523 $10,198 4.01 243,859 $ 8,489 3.48 230,065 $ 9,009 3.92
Accrued interst, taxes and
other liabilities............. 2,369 2,477 1,789
Total liabilities............. 280,175 267,788 249,887
Stockholders' Equity.............. 33,783 30,527 28,273
Total liabilities and
stockholders' equity......... $313,958 $298,315 $278,160
Interest income to earning
assets........................ 8.71% 8.08% 8.28%
Interest expense to earning
assets........................ 3.51 3.06 3.45
Effective interest
differential.............. $15,082 5.20% $13,934 5.02% $12,634 4.83%
<FN>
<F1> Amortization of net deferred fees included in interest income and rate
calculation.
<F2>Interest income on all tax-exempt securities and loans have been adjusted
to tax equivalent basis utilizing a Federal income tax rate of 34%.
<F3> Averages are a combination of monthly and daily averages.
</FN>
Community Banks, Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations
Rate/Volume Analysis <F1>
For the Years Ended December 31, 1995 and 1994
(in thousands)
. 1995 vs 1994 1994 vs 1993
. Volume Rate Total Volume Rate Total
Increase (decrease) in interest income:
Loans................................... $2,330 $1,221 $3,551 $ 948 $(124) $ 824
Investment securities:
Taxable............................... (517) 278 (239) 165 (288) (123)
Tax-exempt............................ (334) (137) (471) 375 (261) 114
Total.............................. (851) 141 (710) 540 (549) (9)
Federal funds sold...................... (24) 18 (6) (46) 11 (35)
Interest-bearing deposits in other
banks.................................. (4) 26 22 1 (1) ---
Total................................ 1,451 1,406 2,857 1,443 (663) 780
Increase (decrease) in interest expense:
Savings deposits........................ (75) 55 (20) 292 (376) (84)
Time deposits........................... 634 953 1,587 52 (522) (470)
Short-term borrowings................... 66 44 110 57 29 86
Long-term debt and capital notes........ (16) 48 32 (61) 9 (52)
Total................................ 609 1,100 1,709 340 (860) (520)
Increase (decrease) in effective
interest differential.................. $ 842 $ 306 $1,148 $1,103 $ 197 $1,300
<FN>
<F1> Table shows approximate effect on the effective interest differential
of volume and rate changes for the years 1995 and 1994. The effect of a
change in average volume has been determined by applying the average yield
or rate in the earlier period to the change in average volume during the
period. The effect of a change in rate has been determined by applying the
change in rate during the period to the average volume of the prior period.
Any resulting unallocated amount was allocated ratably between the volume
and rate components. Nonaccrual loans have been included in the average
volume of each period. Tax-exempt income is shown on a tax equivalent basis
assuming a federal income tax rate of 34%.
</FN>
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The earnings of Community Banks, Inc. are derived exclusively
from the operations of its wholly owned subsidiaries; Community
Banks, N.A.; Community Banks Investments, Inc.; and Community
Banks Life Insurance Co.
Net income was $2.15 per share in 1995 compared to $2.03 per
share in 1994, and $1.92 in 1993. Net income per share in 1995
was 5.9% more than net income per share in 1994 and 12.0% more
than net income per share in 1993.
Net Interest Income:
The primary determinant of Community Banks, Inc. net income is
net interest income. This is the income which remains after
deducting from the total income generated by earning assets the
interest expense applicable to funds required to support the
earning assets.
Total interest income increased $2,980,000 or 13.9% in 1995,
compared to an increase of $715,000 or 3.5% in 1994, and a
decrease of $367,000 or 1.7% in 1993. Interest and fees on loans
increased $3,514,000 or 23.5% in 1995. Most of this increase was
volume related and caused by an increase in average balances of
$25,193,000 or 14.7%. The decrease of $550,000 or 8.7% in
interest and dividends on investment securities was also volume
related. The average balances of tax-exempt securities decreased
$4,064,000 or 12.2% in 1995 which resulted in a decrease in
tax-exempt interest income. Because of significant loan demand
experienced in 1995, management chose to use proceeds from
maturities of investment securities to fund the demand. Interest
and fees on loans increased $798,000 or 5.6% in 1994. This was a
volume related change caused by an increase in average balances
of $10,969,000 or 6.9%. The decrease of $48,000 or 0.7% in
interest and dividends on investment securities was rate related.
The average balance of tax-exempt securities increased $4,252,000
or 14.7% in 1994 which resulted in an increase in tax-exempt
interest income. Factors contributing to the 1993 change included
a rate related decrease in interest and fees on loans of $492,000
and a volume related increase of $85,000 in interest and
dividends on investment securities.
Total interest expense increased $1,709,000 or 20.1% in 1995,
after decreasing $520,000 or 5.8% in 1994, and $1,044,000 or
10.4% in 1993. Materially affecting the 1995 increase was an
increase of $1,587,000 or 29.3% in time deposit interest expense.
Although a portion of the increase in time deposit interest
expense was caused by increased volume, a more significant factor
was an increase in rates paid for these funds. The increase in
interest paid on short-term borrowings and long-term debt was for
the most part, rate related. Material factors affecting the 1994
decrease were decreases of $84,000 or 3.2% in savings interest
expense and $470,000 or 8.0% in total time deposit interest
expense. These declines were slightly offset by an increase of
$36,000 in
interest expense of short-term borrowings and long-term debt.
Although the average balances of savings accounts increased
$12,402,000 or 11.9%, this increase was more than offset by the
decline in the interest rates of these deposits. The decline in
time deposit interest expense in 1994 was also rate related.
Material factors affecting the 1993 decrease were decreases of
$517,000 in savings interest expense and $780,000 in time deposit
interest expense.
Average interest-bearing deposits represented 91.3% of average
total deposits in 1995 compared to 91.6% in 1994 and 92.4% in
1993.
Net interest income increased $1,271,000 or 9.8% in 1995,
compared to $1,235,000 or 10.6% in 1994 and $677,000 or 6.2% in
1993. Average earning assets increased $12,581,000 or 4.5% in
1995 compared to $16,406,000 or 6.3% in 1994 and $21,496,000 or
9.0% in 1993. Average interest-bearing liabilities increased
$10,664,000 or 4.4% in 1995 compared to $13,794,000 or 6.0% in
1994 and $18,551,000 or 8.8% in 1993.
Net Interest Income Margin:
Net interest income margin for 1995 was 5.20% compared to 5.02%
in 1994 and 4.83% in 1993. Interest income to earning assets
increased from 8.08% in 1994 to 8.71% in 1995. Interest expense
to earning assets also increased from 3.06% to 3.51%. Interest
rates applicable to earning assets and interest-bearing
liabilities (with the exception of the interest rates applicable
to tax-exempt investment securities and subordinated capital
notes) increased in 1995. In general, declines occurred in 1994
and 1993.
Provision for Loan Losses:
Net loan charge-offs for 1995 were $501,000 compared to $230,000
in 1994 and $454,000 in 1993. The provision for loan losses
charged to income was $712,000 in 1995 compared to $462,000 in
1994 and $702,000 in 1993. Total non-performing loans
approximated $1,910,000, $1,158,000, and $1,122,000, as of
December 31, 1995, 1994, and 1993, respectively. Non-performing
residential real estate and commercial loans totalled
approximately $1,100,000 and $200,000, respectively, at year-end
1995. Total delinquencies as a percentage of total loans
approximated 4.3%, 3.9%, and 4.9% at December 31, 1995, 1994, and
1993, respectively.
Other Income and Other Expenses:
Other income net of security gains increased $486,000 or 25.8% in
1995 compared to a decrease of $647,000 or 25.5% in 1994 and an
increase of $373,000 or 17.3% in 1993. The increases in trust
department income and service charges on deposit accounts which
occurred in 1995 resulted from management's renewed emphasis on
these functions. Investment security gains in 1995 were
associated exclusively with equity securities held by Community
Banks Investments, Inc. No investment security losses were
recognized in 1995. Increased income on insurance premiums are a
reflection of increased loan demand and increased activity at
Community Banks Life Insurance Co. Gains on mortgage sales
increased in 1995 as a result of increased demand for fixed-rate
real estate loans. These sales are composed of only fixed-rate
real estate loans extended specifically for resale. The market
values of loans held for sale approximated their carrying values
at year ends 1995, 1994, and 1993. Loans originated for sale
increased $10,886,000 in 1995. The most notable change in other
income in 1994 was the decrease in gains on sales of mortgages.
This was a direct reflection of reduced demand and a
corresponding decline in the volume of loans originated for sale.
No investment security losses were recognized in 1994. Every
component of total other income with the exception of
miscellaneous income increased in 1993. Most notable was the
increase in gains on sales of mortgages.
Other expense increased $796,000 or 8.6% in 1995 compared to
$824,000 or 9.7% in 1994, and $653,000 or 8.4% in 1993. The 1995
increases in salaries and benefits of $583,000 or 13.7% and net
occupancy expense of $122,000 or 9.4% were affected by the
opening of two new banking offices. The increase in operating
expenses of insurance subsidiary was materially impacted by
additional claims recognized at Community Banks Life Insurance
Co. Increases of $409,000 or 10.6% in salaries and employee
benefits and $199,000 or 18.1% in net occupancy expense affected
the 1994 increase. Two new banking offices were also established
in 1994. Increases of $295,000 or 8.3% in salaries and benefits
and $108,000 or 10.9% in occupancy expense affected the 1993
increase.
Provision for Income Taxes:
The relationship of the provision for income taxes to income
before income taxes increased from 23.6% in 1994 to 25.0% in
1995. Significantly impacting this change was a reduction in
tax-exempt investment security and loan income recognized in
1995. Although the provision for income taxes essentially
remained unchanged from 1993 to 1994, the relationship to pre-tax
income declined slightly due in part to additional tax-free
income. Similar changes occurred in 1993.
These factors contributed to increases in net income for 1995,
1994, and 1993 of $263,000 or 6.3%, $246,000 or 6.3%, and
$425,000 or 12.2%, respectively.
Balance Sheet Data:
Earning assets represented 92.1% of total assets at year-end 1995
compared to 92.4% at year-end 1994. Changes in the composition of
earning assets reflect management's attempt to respond to
fluctuating loan demand and corresponding policies relating to
liquidity and asset/liability management.
Effective January 1, 1994, the Corporation adopted the provisions
of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities", which requires the Corporation to reflect securities
available and held for sale at fair value on the balance sheet.
Upon adoption, the Corporation classified all investments held at
January 1, 1994, as available for sale and recorded the increase
to fair value as a separate component of equity. The increase
recorded to stockholders' equity at January 1, 1994 was
$2,246,000, net of applicable income taxes.
Under the Corporation's current policy, if management has the
intent and the Corporation has the ability at the time of
purchase to hold securities until maturity or on a long-term
basis, securities are classified as investments and carried at
amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity or on a
long-term basis are classified as available for sale and carried
at the lower of cost or market value. Securities held for
indefinite periods of time include securities that management
intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates,
resultant prepayment risk and other factors related to interest
rate and resultant prepayment risk changes.
At December 31, 1995 and 1994, management classified investment
securities with book and market values of $85,469,000 and
$87,539,000 and $102,305,000 and $99,249,000, respectively, as
available for sale. Gross unrealized gains and losses relating to
investment securities were $2,467,000 and $397,000 and $822,000
and $3,878,000, respectively, at year-end 1995 and 1994. The
Corporation owned no securities below investment grade at
year-end 1995 and 1994. No securities were considered held for
sale or for trading purposes at December 31, 1995 and December
31, 1994.
At December 31, 1995 and 1994, the unrealized gain (loss) on
investments available for sale, net of tax was $1,367,000 and
$(2,017,000), respectively, and was accordingly reflected in
shareholders equity. These fluctuations are deemed to be
temporary in nature and result from changes in interest
rates.
Net loans increased 12.5% from December 31, 1994 to December 31,
1995. Commercial, real estate, and personal and other loans
increased 21.0%, 7.7%, and 19.9%, respectively, during the
period. New banking offices opened in 1994 and 1995 affected
these increases.
The following table sets forth information regarding nonaccrual
loans, other real estate owned, and loans which are 90 days or
more delinquent but accruing interest at the dates indicated.
. December 31
. 1995 1994 1993 1992 1991
. (dollars in thousands)
Nonaccrual loans.......... $1,448 $ 832 $ 918 $ 680 $ 429
Other real estate owned... 302 338 366 145 631
Accruing loans contractually
past due 90 days or more.. 462 326 204 871 922
Total................. $2,212 $1,496 $1,488 $1,696 $1,982
Ratio of nonaccrual loans,
other real estate owned,
and accruing loans contractu-
ally past due 90 days or
more to total assets...... .69% .49% .52% .62% .80%
As discussed in Note 5 to the Financial statements, the
Corporation adopted FAS 114 "Accounting by Creditors for
Impairment of a Loan", as amended by FAS 118, on January 1, 1995.
The adoption of FAS 114 did not result in an additional provision
for credit losses. Management performs periodic reviews of its
loans to identify risks in the loan portfolio. As a result of
these periodic reviews, problem loans and potential problem loans
are identified and the likelihood of collectibility is assessed.
Based upon the results of these reviews, which also consider
other pertinent data, management determines an appropriate
allowance for loan losses. Other relevant factors include past
loss experience, current economic conditions, and the growth and
composition of the loan portfolio. The allowances for loan losses
is maintained at a level believed by management to be adequate to
absorb potential losses in the respective portfolios. The
allowance for loan losses to loans net of unearned income
approximated 1.11%, 1.14%, 1.15%, 1.05%, and .97%, at year-end,
1995, 1994, 1993, 1992, and 1991, respectively.
At December 31, 1995, management is not aware of any loans or
lending relationships that are expected to deteriorate in the
next year. In addition, the Corporation is not aware of any
significant environmental liability related to real estate owned
or in-foreclosure procedures.
The increase of $744,000 or 11.3% in premises and equipment was
materially impacted by the previously noted new banking
locations. Goodwill is being amortized over fifteen years.
Increased interest rates on short-term borrowings resulted in the
reduction of these liabilities in 1995. The increase in loans
held for sale reflects increased demand for fixed-rate real
estate loans in 1995. Affecting the decrease of $794,000 in
accrued interest receivable and other assets was the elimination
of the deferred tax asset of $1,039,000 associated with the
previously noted SFAS No. 115 adjustment at December 31, 1994.
Total deposits increased $16,729,000 or 6.5% in 1995. Total
deposits other than time deposits of $100,000 or more increased
5.8%. A general movement of funds from savings products to higher
rate time deposit products contributed to a decrease of
$3,286,000 in savings balances and an increase of $20,400,000 in
total time deposits. It is not management's general policy to bid
aggressively for funds. As previously mentioned, management chose
to reduce the Corporation's dependence on short-term borrowings
in 1995. Affecting the increase of $998,000 in accrued interest
payable and other liabilities was a deferred tax liability of
$704,000 associated with the previously mentioned SFAS No. 115
adjustment.
Liquidity:
The primary functions of asset/liability management are the
assurance of adequate liquidity and maintenance of an appropriate
balance between interest-sensitive earning assets and
interest-bearing liabilities. Liquidity management refers to the
ability to meet the cash flow requirements of depositors and
borrowers.
A continuous review of net liquid assets is conducted to assure
appropriate cash flow to meet needs and obligations in a timely
manner.
The Corporation's primary funding requirement is loan demand. The
loan demand is primarily funded through deposit growth.
Generally, any deposit growth not used in funding loan demand is
invested in short-term, interest-bearing deposits or longer term
investments. These short-term investments and shorter term
investment portfolio securities are a source of liquidity to fund
loan demand.
For the years ended December 31, 1995, 1994 and 1993, financing
activities provided cash of $4,453,000, $20,012,000, and
$8,893,000, respectively. Deposits accounted for the largest
portion of this funding source amounting to $16,729,000,
$12,820,000, and $7,695,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
Net cash used in investing activities totalled $8,240,000,
$24,525,000, and $12,269,000 for the years ended December 31,
1995, 1994 and 1993, respectively. The primary uses of funds in
1995 were increases in loans of $23,893,000 as proceeds from
maturities of investment securities were used to fund loan
demand. The primary uses of funds in 1994 were purchases of
investment securities of $18,939,000 and increases in loans of
$22,468,000. In 1994 and 1993, investment securities purchased
exceeded the proceeds from sales and maturities of securities,
resulting in a net increase in investment securities.
Forward Outlook:
On January 12, 1996, Community Bank's Inc. completed its merger
of The Citizens National Bank of Ashland (Citizens). Citizens has
three banking offices which are located in Ashland, Gordon, and
Lavelle, Pennsylvania. The Company issued 578,081 shares of
common stock in exchange for all the outstanding shares of common
stock of Citizens. At December 31, 1995 and for the year then
ended, Citizens had total interest earning assets, interest
bearing liabilities, equity capital and net income of $58.0
million, $51.3 million, $9.4 million and $4.8 million,
respectively.
Management is unaware of any regulatory recommendations which, if
implemented, would have a material effect on the liquidity,
capital resources, or operations of the Corporation. Strong loan
demand is anticipated for the remainder of 1996 and management
will continue to carefully evaluate this demand based on the
creditworthiness of the borrower and the relative strength of the
economy in the Corporation's market.
Effects on Inflation:
All business enterprises are affected by the constantly changing
economic environment. Changes in the economy, however, affect the
banking industry differently than other industries. A bank's
assets and liabilities are primarily monetary in nature and
values are established without regard to future price changes.
Also, banks, unlike industrial corporations are not required to
provide for large capital expenditures in the form of premises,
equipment and inventory. Interest rate changes and the actions of
the Federal Reserve Board have a greater impact on a bank's
operations than do the effects of inflation. Although occasional
deviations may occur, it is management's policy to generally
maintain rate-sensitive assets at a level approximating
rate-sensitive liabilities. Based on a one-year parameter, this
relationship approximated 99% at December 31, 1995.
Accordingly, management anticipates that any additional decrease
in interest rates will positively impact earnings of the
Corporation. Conversely, management may not be able to increase
rates on certain earning assets as rapidly as those of
interest-bearing liabilities if a significant increase in
interest rates would occur. This may result in a decline in the
net interest margin of the Corporation.
Capital Strength:
The current economic and regulatory environment has placed an
increased emphasis on capital strength. Risk-based capital
guidelines recognize the relative degree of credit risk
associated with various assets by setting lower capital
requirements for some assets which clearly have less credit risk
than others. Capital guidelines require banks to hold 4% Tier 1
and 8% Total Risk-based capital. Following is a summary of
significant capital ratios at the dates indicated.
. Regulatory December 31,
. Minimum 1995 1994
. (dollars in thousands)
Core (Tier 1) Capital --- $33,838 $30,740
Leverage ratio (A) 4.0% 10.6% 10.1%
Risk-based Capital Ratios:
Tier 1 capital ratio (B) 4.0% 15.3% 15.4%
Total risk-based capital
ratio (C) 8.0% 17.2% 17.2%
(A) Core capital divided by total assets less
intangible assets.
(B) Core capital divided by year-end risk-adjusted
assets, as defined by risk-based capital
guidelines.
(C) Total capital divided by risk-adjusted assets,
as defined by risk-based guidelines.
As shown by the table, the Bank's capital ratios exceeded
regulatory minimums in 1995 and 1994. The core capital ratio
decreased from 15.4% to 15.3%, and the total capital ratio
remained unchanged at 17.2%, well above the regulatory minimums
of 4.0% for core and 8.0% for total capital. These changes were
impacted by the Corporation's retention of earnings during the
year.