SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE Act OF 1934
For the fiscal year ended December 31, 1997 Commission file number 0-15786
COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2251762
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Market Street, Millersburg, PA 17061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 692-4781
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $5 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of March 1, 1998, the aggregate market value (based on recent selling
prices) of the voting stock of the registrant held by its nonaffiliates
(2,359,439 shares) was $96,736,999
Indicate the number of shares outstanding of each registrant's classes of
common stock, as of the latest practical date.
3,039,592 shares of common stock outstanding on March 1, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13 contains portions of the Annual Report to Stockholders incorporated
by reference into Parts I, II, and III.
Exhibit index is located on page 21. This document contains 23 pages.
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
PART I
Item 1. Business:
Community Banks, Inc. (Bank) is a bank holding company whose banking
subsidiary is Community Banks, N.A. (CBNA) and whose non-banking subsidiaries
are Community Banks Investments, Inc. (CBII) and Community Banks Life
Insurance Company, Inc. (CBLIC).
The Bank conducts a full service commercial banking business and provides
trust services in northern Dauphin County, Northumberland County, western
Schuylkill County, and southern Luzerene County. The Bank currently has 22
offices. There are 52 offices of commercial banks and savings and loan
associations within its market area with which the Bank competes. Deposits of
the Bank represent approximately 13% of the total deposits in the market area.
The Bank has 7 offices in Dauphin County, 2 offices in Northumberland County,
10 offices in Schuylkill County, and 3 offices in Luzerne County. On January
12, 1996, Community Banks, Inc. completed its merger of the Citizens National
Bank of Ashland (Citizens). Citizens had 3 banking offices which are located
in Ashland, Gordon, and Lavelle, Pennsylvania. This transaction was accounted
for as a pooling-of-interests.
Like other depository institutions, the Bank has been subjected to
competition from brokerage firms, money market funds, consumer finance and
credit card companies and other companies providing financial services and
credit to consumers. As a result of federal legislation, regulatory
restrictions previously imposed on the Bank with respect to establishing money
market fund accounts have been eliminated and the Bank is now better able to
compete with other financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on deposit
accounts and interest rates charged on loans.
During 1986 the Bank formed CBLIC to provide credit life insurance to its
consumer credit borrowers. Total premiums earned were $399,000 for the year
ended December 31, 1997. During 1985 the Bank formed CBII to make investments
primarily in equity securities of other banks. Total assets of CBII at
December 31, 1997 were $5,121,000.
The Bank has approximately 262 full and part-time employees and considers
its employee relations to be satisfactory.
Community Banks, Inc. is registered as a bank holding company with the
Board of Governors of the Federal Reserve System in accordance with the
requirements of the Bank Holding Company Act of 1956. It is subject to
regulation by the Federal Reserve Board and the Comptroller of the Currency.
In 1989, the Federal Reserve Board issued final risk-based capital
guidelines for bank holding companies which were phased in through
December 31, 1992. The intent of regulatory capital guidelines is to measure
capital adequacy based upon the credit risk of various assets and off-balance
sheet items. Risk categories, weighted at 0%, 20%, 50% and 100%, are
specifically identified. The sum of the results of each such category is then
related to the adjusted capital account of the Company. A minimum required
capital ratio at December 31, 1997, was 8 percent. The Bank's December
31, 1997 ratio approximated 18%. Subsequently, in August 1990 the board
announced approval of capital to total assets (leverage) guidelines. This
minimum leverage ratio was set at 4% and would apply only to those banking
organizations receiving a regulatory composite 1 rating. Most banking
organizations will be required to maintain a leverage ratio ranging from 1 to
2 percentage points above the minimum standard. The Bank's leverage ratio at
December 31, 1997, approximated 11%. Risk-based capital requirements replace
previous capital guidelines which established minimum primary and total
capital requirements.
The following summarizes the Bank's capital adequacy position:
Required
Bank Regulatory Capital
(in thousands) December 31, 1997 December 31, 1997
Risk-based capital $52,041 17.9% $23,258 8.0%
Leverage ratio
(tier 1 capital) 49,120 10.8% 18,193 4.0%
-2-
Statistical Data:
Pages 19 through 21 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 1997 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields
for the three years ended December 31, 1997.
Rate/Volume Analysis for the two years ended December 31, 1997.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1997.
Amortized cost and Estimated Market Values of Investment Securities as
of December 31, 1997, 1996, and 1995.
Maturity Distribution of Securities as of December 31, 1997 (Market Value).
Loan Account Composition as of December 31, 1997, 1996, 1995, 1994, and
1993.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 1997.
Nonperforming Loans as of December 31, 1997, 1996, 1995, 1994, and
1993.
Loan Loss Experience for the five years ended December 31, 1997.
Loans Charged Off and Recovered for the five years ended December 31, 1997.
Allowance for Loan Losses as of December 31, 1997, 1996, 1995, 1994, and
1993.
Maturity Distribution of Time Deposits over $100,000 as of
December 31, 1997.
Interest Rate Sensitivity as of December 31, 1997.
-3-
Item 2. Properties:
The Bank owns no real property except through its subsidiary bank, CBNA
which owns the following buildings: 150 Market Street, Millersburg,
Pennsylvania (its corporate headquarters); 13-23 South Market Street,
Elizabethville, Pennsylvania; 3679 Peters Mountain Road, Halifax, Pennsylvania;
906 N. River Road, Halifax, Pennsylvania; 800 Peters Mountain Road, Dauphin,
Pennsylvania; Main and Market Streets, Lykens, Pennsylvania; Route 209, Porter
Township, Schuylkill County, Pennsylvania; 29 E. Main Street, Tremont,
Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair,
Schuylkill County, Pennsylvania; R.D. 3, Mill Creek Manor, Pottsville,
Schuylkill County, Pennsylvania; 300 East Independence Street, Shamokin,
Northumberland County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill
County, Pennsylvania; One South Arch Street, Milton, Northumberland County,
Pennsylvania; 22 S. Church Street, Hazleton, Luzerne County, Pennsylvania;
702 West Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center
Street, Ashland, Schuylkill County, Pennsylvania; P.O. Box 44, Gordon,
Schuylkill County, Pennsylvania; 436 Main Street, Lavelle, Schuylkill County,
Pennsylvania; and 9-11 N. Centre Street, Pottsville, Schuylkill County,
Pennsylvania. Real property located at One Westside Drive, Shamokin Dam,
Snyder County, Pennsylvania is owned in contemplation of future expansion. In
addition thereto, CBNA leases an office at Main Street, Pillow, Pennsylvania,
pursuant to a lease which, with renewal options, will extend to the year 2008.
Also, the Bank leases offices at Route 93, Conyngham, Luzerne County,
Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania; and
6700 Derry Street, Rutherford, Dauphin County, Pennsylvania. From time to time,
the subsidiary bank also acquires real estate by virtue of foreclosure
proceedings, which real estate is disposed of in the usual and ordinary course
of business as expeditiously as is prudently possible.
All the buildings used by the Bank are free-standing and are used
exclusively for banking purposes with the exception of offices and retail
space rented at the St. Clair and Milton locations.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than routine litigation
incidental to the business of the Bank, to which the Bank is a party.
Item 4. Submission of Matters to a Vote of Security Holders:
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
-4-
APPENDIX A
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
Return on average equity 11.89% 12.08% 11.27% 12.61% 12.54%
Return on average assets 1.34% 1.40% 1.28% 1.39% 1.40%
Average equity to average assets 11.29% 11.63% 11.36% 10.99% 11.18%
Dividend payout ratio 42.38% 40.13% 42.23% 36.74% 35.00%
-5-
APPENDIX A
Continued
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
AT DECEMBER 31, 1997, 1996, and 1995
1997 1996 1995
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
Mortgage backed U.S. Government agencies $ 82,723 $ 83,348 $ 69,837 $ 68,528 $ 45,888 $ 46,153
U.S. Treasury and U.S. Government agencies 39,814 40,074 40,267 40,432 27,719 28,031
Obligations of states and political sub-
divisions 29,337 30,019 30,496 30,958 34,067 34,941
Other securities 5,470 7,960 4,450 5,528 7,232 8,301
Total $157,344 $161,401 $145,050 $145,446 $114,906 $117,426
======== ======== ======== ======== ======== ========
COMMUNITY BANKS, INC. and SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Market Value)
(dollars in thousands)
as of December 31, 1997
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield <F1>
U.S. Government and agencies $ 9,469 $15,215 $20,144 $78,594 $123,422 8 yr. 2 mos. 6.98%
Obligations of states and political
subdivisions 401 18,052 9,402 2,164 30,019 5 yr. 3 mos. 6.84%
Other 6,923 1,037 --- --- 7,960 6 mos. 3.36%
Total $16,793 $34,304 $29,546 $80,758 $161,401 7 yr. 3 mos. 6.78%
======= ======= ======= ======= ========
Percentage of total 10.4% 21.3% 18.3% 50.0% 100.0%
===== ===== ===== ===== ======
Weighted average yield <F1> 5.32% 6.04% 7.16% 7.26% 6.78%
===== ===== ===== ===== =====
<FN>
<F1> Weighted average yields were computed on a tax equivalent basis using a
federal income tax rate of 34%.
</FN>
The Bank monitors investment performance and valuation on an ongoing basis to
evaluate investment quality. An investment which has experienced a decline in
market value considered to be other than temporary is written down to its net
realizable value and the amount of the write down is accounted for as a
realized loss.
-6-
APPENDIX A
Continued
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and agricultural $ 39,559 14.5% $ 44,129 16.8% $ 38,251 15.7% $ 32,243 14.8% $ 28,087 14.5%
Real estate-construction 1,276 0.5 1,816 0.7 3,283 1.4 3,354 1.6 1,573 0.8
Real estate-mortgage 170,582 62.5 151,299 57.8 133,389 54.8 124,320 57.0 108,112 55.6
Personal-installment 53,599 19.6 59,142 22.6 62,373 25.6 51,953 23.8 49,777 25.6
Other 7,933 2.9 5,590 2.1 6,012 2.5 6,142 2.8 6,705 3.5
272,949 100.0% 261,976 100.0% 243,308 100.0% 218,012 100.0% 194,254 100.0%
Less: ===== ===== ===== ===== =====
Unearned discount (11,799) (11,965) (11,671) (9,141) (8,122)
Reserve for loan losses (2,921) (2,798) (2,574) (2,346) (2,120)
$258,229 $247,213 $229,063 $206,525 $184,012
======== ======== ======== ======== ========
The Corporation's loan activity is principally with customers located
within the local market area. The Corporation continues to maintain a
diversified loan portfolio and has no significant loan concentration in any
economic sector. Changes in loan demand in 1997 resulted in decreases
in commercial, financial, and agricultural loans and personal-installment loans
of 10.4% and 9.4%, respectively. Real estate loans increased 12.2%
during this same period. Commercial, financial, and agricultural loans
represented 14.5% of total loans at December 31, 1997 and consist principally
of commercial lending secured by financial assets of businesses including
account receivables, inventories and equipment, and, in most cases, include
liens or real estate. Real estate construction and mortgage loans are primarily
1 to 4 family residential loans secured by residential properties within
the bank's market area. Personal-installment loans comprised 19.6% of total
loans at December 31, 1997 and consist principally of secured loans for items
such as automobiles, property improvement, household and other consumer goods.
The Corporation continues to sell fixed rate mortgages in the secondary
market to avoid associated interest rate risk. Historically, relative credit
risk of commercial, financial and agricultural loans has generally been
greater than that of other types of loans.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL AND REAL ESTATE - CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 1997
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
Commercial, Financial and
agricultural $23,598 $12,320 $3,641 $39,559
Real estate-construction 1,276 --- --- 1,276
$24,874 $12,320 $3,641 $40,835
======= ======= ====== =======
Interest Sensitivity
Variable Fixed Total
Due in one year or less $23,010 $2,387 $25,397
Due after one year 15,361 77 15,438
$38,371 $2,464 $40,835
======= ====== =======
-7-
APPENDIX A
Continued
NONPERFORMING LOANS <F1>
(dollars in thousands)
as of December 31
1997 1996 1995 1994 1993
Loans past due 90 days or more:
Commercial, financial and agricultural $ 53 $ 20 $ 120 $ 152 $ 9
Mortgages 405 547 558 440 485
Personal installment 72 189 236 226 219
Other 21 11 --- 1 9
551 767 914 819 722
Loans renegotiated with the borrowers NONE NONE NONE NONE NONE
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural 762 723 415 327 50
Mortgages 1,716 1,904 1,245 888 1,244
Other 300 283 99 30 59
2,778 2,910 1,759 1,245 1,353
Other real estate owned 481 351 302 338 381
Total
$3,810 $4,028 $2,975 $2,402 $2,456
====== ====== ====== ====== ======
<FN>
<F1> The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing
the collectibility of such amounts.
The approximate amount that would have been accrued on those loans for
which interest was discontinued in 1997 was $265,000. Interest income from
these loans would have approximated $217,000 in 1996.
The change in nonperforming loans is primarily a result of the impact of
economic conditions upon the loan portfolio. The economic outlook remains
uncertain. If the economy in the Bank's trading area improves this could have
a positive impact on delinquency trends and collectibility of loans. However,
the commercial real estate market in the Bank's trading area remains stagnant.
The ability of borrowers to liquidate collateral is dependent upon the demand
for commercial real estate projects and a buyer's ability to finance
commercial real estate projects.
</FN>
-8-
APPENDIX A
Continued
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
Loans at year-end, net of unearned income $261,150 $250,011 $231,637 $208,871 $186,132
======== ======== ======== ======== ========
Average loans balance <F1> $253,600 $243,840 $222,624 $196,751 $187,513
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 2,798 $ 2,574 $ 2,347 $ 2,120 $ 1,891
Net charge-offs <F2> (594) (818) (501) (286) (703)
Provision for loan losses 717 1,042 728 513 932
Balance, allowance for loan losses,
December 31 $ 2,921 $ 2,798 $ 2,574 $ 2,347 $ 2,120
======== ======== ======== ======== ========
Net charge-offs to loans at year end .23% .33% .22% .14% .38%
Net charge-offs to average loans <F1> .23 .34 .23 .15 .37
Balance of allowance for loan losses
to loans at year end 1.12 1.12 1.11 1.12 1.14
<FN>
<F1> Averages are a combination of monthly and daily averages.
<F2> For detail, see Schedule of Loans Charged Off and Recovered.
</FN>
The allowance for loans losses is based upon management's continuing
evaluation of the loan portfolio. A review as to loan quality, current macro-
economic conditions and delinquency status is performed at least on a
quarterly basis. The provision for loan losses is adjusted quarterly based
upon current review. The table on page 10 presents an allocation by loan
categories of the allowance for loan losses at December 31 for the last five
years. In retrospect, the specific allocation in any particular category
may prove excessive or inadequate and consequently may be reallocated in the
future to reflect the then current condition. Accordingly, the entire
allowance is available to absorb losses in any category.
As discussed in the Corporation's Annual Report, the Corporation adopted
SFAS 114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS
114 did not result in any additional provision for loan losses.
The provision for loan losses totalled $717,000 for the year ended December
31, 1997 compared to $1,042,000, $728,000, $513,000, and $932,000 for the years
ended December 31, 1996, 1995, 1994, and 1993, respectively. The relationship
of the allowance for loan losses to loans at year end approximated 1.12%
compared to ratios of 1.11% to 1.14% for the previous four years. In reviewing
the adequacy of the allowance for loan losses, management considered the
relationship of nonaccrual loans, other real estate owned, and accruing loans
contractually past due 90 days or more to total assets. This relationship
approximated .82%, .93%, .78%, .65%, and .71% at year-end 1997, 1996, 1995,
1994, and 1993, respectively.
-9-
APPENDIX A
Continued
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
for the years ended December 31, 1997, 1996, 1995, 1994, and 1993
1997 1996 1995 1994 1993
Loans charged off:
Commercial, financial and agricultural $ 21 $ 17 --- --- ---
Real estate-mortgage 82 133 $115 $151 $156
Personal installment 731 1,053 647 493 828
Other 96 93 78 119 66
Total 930 1,296 840 763 1,050
Loans recovered:
Commercial, financial and agricultural 3 6 --- --- ---
Real estate-mortgage 11 27 29 83 79
Personal installment 298 415 295 361 254
Other 24 30 15 33 14
Total 336 478 339 477 347
Net charge-offs $ 594 $ 818 $501 $286 $ 703
====== ====== ==== ==== ======
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES<F1>
(dollars in thousands)
as of December 31
1997 1996 1995 1994 1993
Loans:
Commercial, financial and agricultural $ 686 $ 631 $ 355 $ 452 $ 577
Real estate-construction --- 2 -- 1 ---
Real estate-mortgage 761 684 690 353 260
Installment 892 823 639 598 564
Unallocated 582 658 890 943 719
Balance $2,921 $2,798 $2,574 $2,347 $2,120
====== ====== ====== ====== ======
<FN>
<F1>See Schedule "Loan Account Composition" for the percent of loan
classification to total loans.
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 1997
Remaining to Maturity:
Less than three months $ 7,065
Three months to six months 2,322
Six months to twelve months 1,835
More than twelve months 4,471
$15,693
=======
-10-
APPENDIX A
Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing liabilities
which are expected to mature or reprice within a given period is commonly
referred to as the "GAP" for that period. For an institution with a negative
GAP, the amount of income earned on its assets fluctuates less than the cost
of its liabilities in response to changes in the prevailing rates of interest
during the period. Accordingly, in a period of decreasing interest rates,
institutions with a negative GAP will experience a smaller decrease in the
yield on their assets than in the cost of their liabilities. Conversely, in a
period of rising interest rates, institutions with a negative GAP face a
smaller increase in the yield on their assets than in the cost of their
liabilities. A decreasing interest rate environment is favorable to
institutions with a negative GAP because more of their liabilities than their
assets adjust during the period and, accordingly, the decrease in the cost of
their liabilities is greater than the decrease in the yield on their assets.
The negative GAP between the Bank's interest-earning assets and interest-
bearing liabilities maturing or repricing within one year approximated 4% of
total assets at December 31, 1997.
Significant maturity/repricing assumptions (based on internal analysis)
include the presentation of all savings and NOW accounts as being 75% interest
rate sensitive. Equity securities are reflected in the shortest time interval.
Assumed paydowns on mortgage-backed securities and loans have also been
included in all time intervals.
The following table sets forth the scheduled repricing or maturity of the
Bank's interest-earning assets and interest-bearing liabilities at December
31, 1997.
Interest Rate Sensitivity
At December 31, 1997 1-90 90-180 180-365 1 year Total
Dollars in thousands days days days or more
Assets
Interest-bearing deposits in
other banks $ 1,934 $ 100 --- --- $ 2,034
Investment securities 18,813 8,632 $11,326 $122,630 161,401
Federal funds sold 2,100 --- --- --- 2,100
Loans, net of unearned income<F1> 79,111 89,583 20,012 72,444 261,150
Loans held for sale 2,641 --- --- --- 2,641
Total $104,599 $98,315 $31,338 $195,074 $429,326
Liabilities
Savings $ 46,541 $25,982 $51,964 $34,117 $158,604
Time 35,230 30,195 30,919 56,860 153,204
Time in denominations of
$100,000 or more 7,065 2,322 1,835 4,471 15,693
Short-term borrowings 752 --- --- --- 752
Long-term debt 18,000 --- --- 28,000 46,000
Total $107,588 $58,499 $84,718 $123,448 $374,253
Interest Sensitivity Gap
Periodic $(2,989) $39,816 $(53,380) $71,626
Cumulative 36,827 (16,553) 55,073
<FN>
<F1>Does not include nonaccrual loans.
</FN>
-11-
Forward-Looking Statements:
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S.
Private Securities Litigation Reform Act of 1995, such as
statements that include the words "expect", "estimate",
"project", "anticipate", "should", "intend", "probability",
"risk", "target", "objective", and similar expressions or
variations on such expressions. In particular, this document
includes forward-looking statements relating, but not limited to,
Community's potential exposures to various types of market risks
such as interest rate risk and credit risk. Such statements are
subject to certain risks and uncertainties. For example, certain
of the market risk disclosures are dependent on choices about key
model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk
disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual
income gains and losses could materially differ from those that
have been estimated. Other factors that could cause actual
results to differ materially from those estimated by the
forward-looking statements contained in this document include,
but are not limited to: general economic conditions in market
areas which Community has significant business activities or
investments; the monetary and interest rate policies of the Board
of Governors of the Federal Reserve System; inflation; deflation;
unanticipated turbulence in interest rates; changes in laws,
regulations and taxes; changes in competition and pricing
environments; natural disasters; the inability to hedge certain
risks economically; the adequacy of loan reserves; acquisitions
or restructurings' technological changes; in consumer spending
and saving habits; and the success of Community in managing the
risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk.
Community has only a limited involvement with derivative
financial instruments and does not use them for trading purposes.
The business of Community and the compositions of its balance
sheet consists of investments in interest-earning assets
(primarily loans, mortgage-backed securities, and investment
securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). Such financial instruments
have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans which are
originated and held for sale, all of the financial instruments of
Community are for other than trading purposes.
Interest rate sensitivity results when the maturity or
repricing intervals and interest rate indices of the
interest-earning assets, interest -bearing liabilities, and
off-balance sheet financial instruments are different, creating a
risk that changes in the level of market interest rates will
result in disproportionate changes in the value of, and the net
earnings generated from, Community's interest-earning assets,
interest-bearing liabilities, and off-balance sheet financial
instruments. Community's exposure to interest rate sensitivity is
managed primarily through Community's strategy of selecting the
types and terms of interest-earnings assets and interest-bearing
liabilities which generate favorable earnings, while limiting the
potential negative effects of changes in market interest rates.
Since Community's primary source of interest-bearing liabilities
is customer deposits, Community's ability to manage the types and
terms of such deposits may be somewhat limited by customer
-12-
preferences in the market areas in which Community operates.
Borrowings, which include Federal Home Loan Bank (FHLB) advances
and short-term loans, subordinated notes, and other short-term
and long-term borrowings are generally structured with specific
terms which in management's judgement, when aggregated with the
terms for outstanding deposits and matched with interest-earning
assets, mitigate Community's exposure to interest rate
sensitivity.
The rates, terms and interest rate indices of Community's
interest-earning assets result primarily from Community's
strategy of investing in loans and securities (a substantial
portion of which have adjustable-rate terms) which permit
Community to limit its exposure to interest rate sensitivity,
together with credit risk, while at the same time achieving a
positive interest rate spread from the difference between the
income earned on interest-earning assets and the cost of
interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate
Sensitivity
Managing Community's exposure to interest rate sensitivity
involves significant assumptions about the exercise of imbedded
options and the relationship of various interest rate indices of
certain financial instruments.
Imbedded Options.
A substantial portion of Community's loans and
mortgage-backed securities and residential mortgage loans
containing significant imbedded options which permit the borrower
to prepay the principal balance of the loan prior to maturity
("prepayments") without penalty. A loan's propensity for
prepayment is dependent upon a number of factors, including the
current interest rate and interest rate index, (if any) of the
loan, the financial ability of the borrower to refinance, the
economic benefit to be obtained from refinancing, availability of
refinancing at attractive terms, as well as economic and other
factors in specific geographic areas which affect the sales and
price levels of residential property. In a changing interest
rate environment, prepayments may increase or decrease on fixed
and adjustable-rate loans depending on the current relative
levels and expectations of future short and long-term interest
rates. Since a significant portion of Community's loans are
variable rate loans, prepayments on such loans generally increase
when long-term interest rates fall or are at historically low
levels relative to short-term interest rates making fixed-rate
loans more desirable.
Investment securities, other than those with early call
provisions, generally do not have significant imbedded options
and repay pursuant to specific terms until maturity. While
savings and checking deposits generally may be withdrawn upon the
customer's request without prior notice, a continuing
relationship with customers resulting in future deposits and
withdrawals is generally predictable resulting in a dependable
and uninterrupted source of funds. Time deposits generally have
early withdrawal penalties, while term FHLB borrowings and
subordinated notes have prepayment penalties, which discourage
customer withdrawal of time deposits and prepayment of FHLB
borrowings and subordinated notes prior to maturity.
-13-
Interest Rate indices. Community's loans and mortgage-backed
securities are primarily indexed to the national interest indices. When
such loans and mortgage-backed securities are funded by interest-bearing
liabilities which are determined by other indices, primarily deposits and
FHLB borrowings, a changing interest rate environment may result in
different levels of changes in the different indices leading to
disproportionate changes in the value of, and net earnings generated from,
the Company's financial instruments. Each index is unique and is
influenced by different external factors, therefore, the historical
relationships in various indices may not be indicative of the actual
change which may result in a changing interest rate environment.
Interest Rate Sensitivity Measurement
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in
interest-rates, management also utilizes a quarterly report which measures
Community's exposure to interest rate risk. The model calculates the
present value of assets, liabilities and equity at current interest rates,
and at hypothetical higher and lower interest rates at one percent
intervals. The present value of each major category of financial
instrument is calculated by the model using estimated cash flows based on
prepayments, early withdrawals, weighted average contractual rates and
terms, and discount rates for similar financial instruments. The resulting
present value of longer term fixed-rate financial instruments are more
sensitive to change in a higher or lower interest rate scenario, while
adjustable-rate financial instruments largely reflect only a change in
present value representing the difference between the contractual and
discounted rates until the next interest rate repricing date.
The following table reflects the estimated present value of assets,
liabilities and equity financial instruments using the model for Community
as of December 31, 1997, consolidated with the estimated present values of
other financial instruments of Community, at current interest rates and
hypothetical higher and lower interest rates of one and two percent.
Base
-2% -1% Present Value +1% +2%
(dollars in thousands)
Assets
Cash, interest-bearing time deposits,
and federal funds sold............. $ 22,853 $ 22,853 $ 22,853 $ 22,853 $ 22,853
Investment securities................. 167,325 164,254 161,401 157,844 153,241
Loans, net of unearned income......... 260,775 258,260 255,660 252,227 248,537
Loans held for sale................... 2,694 2,668 2,641 2,606 2,567
Other assets.......................... 17,926 17,926 17,926 17,926 17,926
Total assets..................... $471,573 $465,961 $460,481 $453,456 $445,124
======== ======== ======== ======== ========
Liabilities
Deposits.............................. $361,904 $360,000 $358,148 $356,346 $354,591
Short-term borrowings................. 752 752 752 752 752
Long-term debt........................ 47,558 46,793 46,059 45,354 44,677
Other liabilities..................... 5,366 5,366 5,366 5,366 5,366
Total liabilities................ 415,580 412,911 410,325 407,818 405,386
Total stockholders' equity....... 55,993 53,050 50,156 45,638 39,738
Total liab. and stockholders'
equity........................ $471,573 $465,961 $460,481 $453,456 $445,124
======== ======== ======== ======== ========
-14-
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters:
Incorporated by reference is the information appearing under the
heading "Market for the Holding Company's Common Stock and Related Securities
Holder Matters" on page 3 of the Annual Report to Stockholders for the year
ended December 31, 1997 (hereafter referred to as the "Annual Report").
Item 6. Selected Financial Data:
Incorporated by reference is the information appearing under the
heading "Financial Highlights" on page 19 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Incorporated by reference is the information appearing under the
headings "Rate/Volume Analysis"; "Average Balances, Effective Interest
Differential and Interest Yields"; and "Management's Discussion of Financial
Condition and Results of Operations" on pages 20 through 24 of the Annual
Report.
Item 8. Financial Statements and Supplementary Data:
The consolidated financial statements, together with the report
thereon of Coopers & Lybrand L.L.P. dated January 13, 1998, are incorporated
by reference to pages 6 through 19 of the Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
-15-
PART III
Item 10. Directors and Executive Officers of the Registrant:
The following table sets forth the name and age of each director of
Community Banks, Inc. as well as the director's business experience, including
occupation for the past 5 years, the period during which he has served as a
director of the Bank, or its wholly-owned subsidiary, Community Banks, N.A.
(Formerly Upper Dauphin National Bank), and the number and percentage of
outstanding shares of Common Stock of the Bank beneficially owned by said
directors as of December 31, 1997.
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership(2) Owned
Thomas L. Miller Chairman of Bank 1966 32,291 (11) 1.06%
Age 65
Kenneth L. Deibler Self-Employed 1966 23,009 (3) .76%
Age 75 Insurance Broker
Elizabethville, PA
Leon E. Kocher Chairman of the Board, 1963 18,138 .60%
Age 85 Kocher Enterprise, Inc.
Millersburg, PA
Ernest L. Lowe President of Bank 1990 22,847 (10) .75%
Age 61
Robert W. Rissinger Sec./Treasurer 1968 159,245 (4) 5.24%
Age 71 Alvord Polk Tool Co. (5)
(cutting tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 28,425 (8) .94%
Age 72 Millersburg and
Harrisburg, PA
William C. Troutman President, 1968 97,091 (6) 3.20%
Age 82 The W. C. Troutman Co.
(automobile dealership)
Millersburg, PA
James A. Ulsh Attorney-at-Law 1977 10,208 .34%
Age 51 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Superintendent, 1992 1,348 .04%
Age 64 Warrior Run
School District
Turbotville, PA
Susan K. Nenstiel Insurance Broker 1996 138 --
Age 46 Nenstiel and Nenstiel
Hazleton, PA
-16-
Percentage
Business Experience Amount and of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and A Past Five Years Since (1) Ownership(2) Owned
Ronald E. Boyer President, 1981 13,994 (7) .46%
Age 60 Alvord-Polk Tool Co.
(manufacturing of
cutting tools)
Millersburg, PA
Peter DeSoto President, 1981 27,116 .89%
Age 58 Metal Industries, Inc.
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long President, 1981 7,982 .26%
Age 68 Millersburg Hardware
Millersburg, PA
Donald L. Miller President, Miller Bros. 1981 58,669 1.93%
Age 68 Dairy
Millersburg, PA
Ray N. Leidich Dentist 1985 44,984 (9) 1.48%
Age 69 Tremont, PA
(1) Includes service as a director of CBNA (formerly Upper Dauphin National
Bank), a wholly-owned subsidiary of the bank, prior to 1983 and service as a
director of the bank after 1983.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the wife and/or children of
the individual and any other relative who has the same home as such
individual, as well as other securities as to which the individual has or
shares voting or investment power or has the right to acquire under
outstanding stock options within 60 days after December 31, 1997. Beneficial
ownership may be disclaimed as to certain of the securities.
(3) Includes 1,826 shares owned by Mr. Deibler's grandchildren.
(4) Includes 4,112 shares owned by Alvord-Polk Tool Co., Inc. the stock of
which is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
(5) Includes 9,163 shares owned by Engle Ford, Inc., 28,887 shares owned by
Mr. Rissinger's spouse, Shirley Rissinger, and 5,027 shares owned by Engle
Ford, Inc. Profit Sharing Plan in which Mr. Rissinger is Co-Trustee.
(6) Includes 21,601 shares owned by Mr. Troutman's spouse, Dorothy Troutman
and 6,115 shares owned by W.C. Troutman Co.
(7) Includes 4,112 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and 162
shares owned by Mr. Boyer's wife, Judith Boyer.
(8) Includes 4,847 shares owned by Mr. Shaffer's Pension plan.
(9) Includes 22,492 shares owned by Dr. Leidich's wife, Dolores Leidich.
-17-
(10) Includes 119 shares owned by Mr. Lowe's wife, Barbara and 14 shares
owned by Mr. Lowe's child and incentive stock options to acquire 21,132 shares.
(11) Includes incentive stock options to acquire 9,733 shares.
(12) Includes incentive stock options to acquire 13,639 shares.
(13) Includes incentive stock options to acquire 7,750 shares and 93 shares
registered to Mr. Lawley for his minor children.
(14) Includes incentive stock options to acquire 1,683 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1997, to the knowledge of CBI, all Executive Officers and
directors timely filed all reports with the Securities Exchange Commission.
None of the directors or nominee directors are directors of other
companies with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
Executive Officers:
The following table sets forth the executive officers of Community
Banks, Inc., their ages, their positions with Community Banks, Inc. and the
beneficial ownership (as determined in accordance with the rules and
regulations of the Securities and Exchange Commission) of Common Stock of the
Bank by each of such persons as of December 31, 1997.
Amount and Percentage
Principal Occupation Nature of of
for the Past Five Beneficial Outstanding
Name and Age Years Term (1) Ownership(2)Common Stock
Thomas L. Miller Chairman & Chief Executive 1966 32,291 (11) 1.06%
Age 65 Officer
Ernest L. Lowe President, 1985 22,847 (10) .75%
Age 61 Chief Operating Officer
Terry L. Burrows Executive Vice President, 1977 13,201 (14) .43%
Age 49 Chief Financial Officer
David E. Hawley Executive Vice President, 1975 13,995 (12) .46%
Age 59 Corporate Property Officer
Robert W. Lawley Executive Vice President, 1980 7,879 (13) .26%
Age 43 Chief Lending Officer
(1) Initial year employed in this capacity.
-18-
The following is all shares beneficially owned by all directors and
executive officers of the Bank as a group:
Amount and Nature
of Beneficial
Ownership
Percent
Title of Class Direct Indirect of Class
Common 418,053 158,395 18.99%
Item 11. Executive Compensation:
Information regarding executive compensation is omitted from this
report as the holding company will file a definitive proxy statement for its
annual meeting of shareholders to be held May 26, 1998; and the information
included therein with respect to this item is incorporated herein by reference.
Pension Plan:
The Bank maintains a pension plan for its employees. An employee
becomes a participant in the pension plan on January 1 or July 1 after
completion of one year of service (12 continuous months) and attainment of the
age 21 years. The cost of the pension is actuarially determined and paid by
the Bank. The amount of monthly pension is equal to 1.15% of average monthly
pay up to $650, plus .60% of average monthly pay in excess of $650, multiplied
by the number of years of service completed by an employee. Average
-19-
monthly pay is based upon the 5 consecutive plan years of highest pay preceding
retirement. The maximum amount of annual compensation used in determining
retirement benefits is $160,000. A participant is eligible for early
retirement after attainment of the age of 60 years and the completion of 5
years of service. The early retirement benefit is the actuarial equivalent of
the pension accrued to the date of early retirement. Thomas L. Miller and
Ernest L. Lowe have been credited with 39 and 13 years of service,
respectively, under the pension plan as of December 31, 1997.
The amounts shown on the following table assume an annual
retirement benefit for an employee who chose a straight-line annuity and who
is presently 50 years old and who will retire at the age of 65 years.
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35 40
$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 16 through 19.
Item 13. Certain Relationships and Related Transactions:
(a) Transactions with Management and Others
Incorporated by reference is the information appearing in Note 12
(Related Parties) of Notes to Consolidated Financial Statements on page 15 of
the Annual Report.
(b) Certain Business Relationships
Allen Shaffer, a director of the Bank, is an attorney practicing
in Harrisburg and Millersburg, Pennsylvania, who has been retained in the
last two fiscal years by the Bank and who the Bank proposes to retain in the
current fiscal year. James A. Ulsh, a director of the Bank, is a shareholder/
employee of the law firm of Mette, Evans & Woodside, Harrisburg, Pennsylvania
which the Bank has retained in the last two fiscal years and proposes to
retain in the current fiscal year. Thomas J. Carlyon, a director of CBNA, is a
partner in the law firm of Carlyon & McNelis, Hazleton, Pennsylvania, which
CBI has retained in the last two fiscal years and proposes to retain in the
current fiscal year.
All loans to directors and their business affiliates, executive
officers and their immediate families were made by the subsidiary bank in the
ordinary course of business, at the subsidiary bank's normal credit terms,
including interest rates and collateralization prevailing at the time for
comparable transactions with other non-related persons, and do not represent
more than a normal risk of collection.
-20-
PART IV
Item 14. Exhibits, Financial Statements Schedules and
Reports on Form 8-K:
Reference (page)
Annual
Form Report to
10-K Shareholders
(a) (1) Consolidated Financial Statements
Report of Independent Public
Accountants -- 19
Balance Sheets as of December 31, 1997
and 1996 -- 6
Statements of Income for each of the three years
ended December 31, 1997 -- 7
Statements of Changes in Stockholders'
Equity for each of the three years ended
December 31, 1997 -- 8
Statements of Cash Flows for each of the three
years ended December 31, 1997 -- 8
Notes to Financial Statements -- 9-18
All other schedules are omitted since the required information is
not applicable or is not present in amounts sufficient to require submission of
the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated Registration
by reference to the Proxy Statements dated April 14, 1987 and April 12, 1988 and
Amendment 2 to Form S-2 dated May 13, 1987.
(13) Portions of the Annual Report to Security Holders incorporated by
reference within this document is filed as part of this report.
(21) Subsidiaries of the Registrant (see Item 1, pages 2 and 3).
(b) The registrant filed Form 8-K, October 28, 1997, subsequent to entering
into an Agreement and Plan of Reorganization with The Peoples Bank of East
Berlin
-21-
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration
statements of Community Banks, Inc. on Form S-8 (File No. 0-15786
and File No. 33-24908) of our report, dated January 13, 1998 on
our audits of the consolidated financial statements of Community
Banks, Inc. as of December 31, 1997 and 1996, and for the years
ended December 31, 1997, 1996, and 1995, which report is
incorporated by reference in this Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 20, 1998
-22-
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By: /S/ Ernest L. Lowe _____
(Ernest L. Lowe)
Chairman
Chief Executive Officer
and Director
Date: March 6, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Terry L. Burrows Ex. Vice President and 3/6/98
(Terry L. Burrows) Principal Financial Officer
/S/ Ronald E. Boyer Director 3/6/98
(Ronald E. Boyer)
/S/ Samuel E. Cooepr Director 3/6/98
(Samuel E. Cooper)
/S/ Kenneth L. Deibler Director 3/6/98
(Kenneth L. Deibler)
/S/ Peter DeSoto Director 3/6/98
(Peter DeSoto)
/S/ Leon E. Kocher Director 3/6/98
(Leon E. Kocher)
/S/ Ray N. Leidich Director 3/6/98
(Ray N. Leidich)
/S/ Thomas W. Long Director 3/6/98
(Thomas W. Long)
/S/ Donald L. Miller Director 3/6/98
(Donald L. Miller)
/S/ Thomas L. Miller Director 3/6/98
(Thomas L. Miller)
/S/ Susan K. Nenstiel Director 3/6/98
(Susan K. Nenstiel)
/S/ Robert W. Rissinger Director 3/6/98
(Robert W. Rissinger)
/S/ Willaim C. Troutman Director 3/6/98
(William C. Troutman)
/S/ James A. Ulsh _ Director 3/6/98
(James A. Ulsh)
-23-