Community Banks, Inc. and Subsidiaries
MARKET FOR THE CORPORATION'S COMMON STOCK AND
RELATED SECURITIES HOLDER MATTERS
The shares of Community Banks, Inc. are traded on the American Stock Exchange
and are transferred through local and regional brokerage houses. The
Corporation has approximately 2,640 shareholders as of February 12, 1999. The
following table sets forth the high and low prices within the knowledge of
management of Community Banks, Inc. at which the Common Stock has been
transferred during the periods indicated. The table is based solely upon
transactions known to management of the Corporation and represents a portion
of the actual transfers of Common Stock during the periods in question.
Price Per Share Price Per Share
1998 Low High 1997 Low High
First Quarter.... $24.33 $28.42 First Quarter.... $16.35 $22.86
Second Quarter.. 23.63 27.59 Second Quarter... 19.83 24.00
Third Quarter... 23.25 25.75 Third Quarter.... 21.92 25.83
Fourth Quarter.. 21.50 25.25 Fourth Quarter... 25.33 30.17
Holders of the Common Stock of the Corportion are entitled to such dividends as
may be declared from time to time by the Board of Directors out of funds legally
available therefore. Community Banks, Inc. has paid cash dividends per share of
common stock during the last five years as follows: 1994-$0.32, 1995-$0.37,
1996-$0.41, 1997-$0.48, and 1998-$0.62. The market prices listed above are
based on historical market quotations and have been restated to reflect stock
dividends and splits
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 1998 and 1997
(dollars in thousands except per share data)
1998 1997
ASSETS
Cash and due from banks.......................... $ 25,036 $ 28,015
Interest-bearing time deposits in other banks.... 1,258 2,406
Investment securities, available for sale (market
value)......................................... 292,542 219,284
Federal funds sold............................... 2,208 2,100
Loans............................................ 512,280 455,830
Less: Unearned income........................... (10,018) (11,799)
Allowance for loan losses................. (6,954) (6,270)
Net loans................................. 495,308 437,761
Premises and equipment, net...................... 14,203 13,963
Goodwill......................................... 665 906
Other real estate owned.......................... 625 866
Loans held for sale.............................. 3,319 2,641
Accrued interest receivable and other assets..... 16,510 11,520
Total assets................................... $ 851,674 $ 719,462
========= =========
LIABILITIES
Deposits:
Demand......................................... $ 50,038 $ 44,181
Savings........................................ 254,316 226,376
Time........................................... 265,884 248,999
Time in denominations of $100,000 or more...... 25,667 30,199
Total deposits................................. 595,905 549,755
Short-term borrowings............................ 7,910 10,540
Long-term debt................................... 161,000 77,280
Accrued interest payable and other liabilities... 7,983 7,874
Total liabilities.............................. 772,798 645,449
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding............... --- ---
Common stock, $5.00 par value; 20,000,000 shares
authorized; 6,631,000 and 4,406,000 shares
issued in 1998 and 1997, respectively.......... 33,157 22,028
Surplus.......................................... 17,989 28,645
Retained earnings................................ 27,023 21,219
Accumulated other comprehensive income, net of
tax of $1,437,000 and $1,668,000, respectively.. 2,789 3,237
Less: Treasury stock of 105,000 and 44,000
shares at cost................................. (2,082) (1,116)
Total stockholders' equity..................... 78,876 74,013
Total liabilities and stockholders' equity..... $ 851,674 $ 719,462
========= =========
All periods reflect the combined data of Community Banks, Inc. and Peoples State
Bank.
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997, and 1996
(dollars in thousands except per share data)
1998 1997 1996
Interest Income:
Interest and fees on loans....................... $41,306 $38,095 $34,696
Interest and dividends on investment securities:
Taxable....................................... 11,325 11,382 8,429
Exempt from federal income tax................ 3,795 2,422 1,665
Other interest income............................ 80 84 278
Fed funds interest............................... 494 304 207
Total interest income......................... 57,000 52,287 45,275
Interest expense:
Interest on deposits:
Savings....................................... 5,479 5,556 4,974
Time.......................................... 13,459 13,420 13,030
Time in denominations of $100,000 or more..... 1,580 1,578 1,378
Interest on short-term borrowings and
long-term debt.................................. 4,975 2,627 1,034
Fed funds purchased and repo interest............ 1,394 1,242 252
Total interest expense........................ 26,887 24,423 20,668
Net interest income........................... 30,113 27,864 24,607
Provision for loan losses.......................... 1,464 1,317 1,567
Net interest income after provision for
loan losses................................. 28,649 26,547 23,040
Other income:
Trust department income.......................... 302 317 251
Service charges on deposit accounts.............. 1,584 1,338 1,195
Other service charges, commissions and fees...... 731 627 368
Investment security gains........................ 575 770 302
Income on insurance premiums..................... 661 576 653
Gains on mortgage sales.......................... 634 283 269
Other income..................................... 473 318 133
Total other income............................ 4,960 4,229 3,171
Other expenses:
Salaries and employee benefits.................. 10,380 9,679 8,613
Net occupancy expense........................... 3,202 2,797 2,531
Operating expenses of insurance subsidiary...... 472 365 363
Other operating expense......................... 5,971 6,519 5,027
Total other expenses......................... 20,025 19,360 16,534
Income before income taxes................... 13,584 11,416 9,677
Provision for income taxes........................ 3,534 3,491 2,693
Net income................................... $10,050 $ 7,925 $ 6,984
========= ======= =======
Basic earnings per share.......................<F1> $ 1.54 $ 1.22 $ 1.07
========= ======= =======
Diluted earnings per share.....................<F1> $ 1.50 $ 1.19 $ 1.05
========= ======= =======
<FN>
<F1> Per share data for all periods has been restated to reflect stock
dividends and splits.
</FN>
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997, and 1996
(dollars in thousands except per share data)
Accumulated Total
Other
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
Balance, December 31, 1995.......................... $19,424 $14,406 $24,077 $1,742 $ (53) $59,596
Comprehensive income:
Net Income................................. 6,984 6,984
Change in unrealized gain (loss) on
securities, net of tax of $(812) and
reclassification adjustment of $302........ (1,576) (1,576)
Total comprehensive income................. 5,408
Cash dividends...................................... (2,725) (2,725)
10% stock dividend.................................. 1,304 5,219 (6,523)
Purchase of treasury stock.......................... (368) (368)
Issuance of additional shares....................... 205 2,020 (57) 2,168
Balance, December 31, 1996.......................... 20,933 21,645 21,756 166 (421) 64,079
Comprehensive income:
Net income................................. 7,925 7,925
Change in unrealized gain (loss) on
securities, net of tax of $1,582 and
reclassification adjustment of $770........ 3,071 3,071
Total comprehensive income................. 10,996
Cash dividends...................................... (3,143) (3,143)
5% stock dividend................................... 723 3,905 (4,628)
Purchase of treasury stock.......................... (695) (695)
Issuance of additional shares....................... 372 3,095 __(691) _______ 2,776
Balance, December 31, 1997.......................... 22,028 28,645 21,219 3,237 (1,116) 74,013
Comprehensive income:
Net income................................. 10,050 10,050
Change in umrealized gain (loss) on
securities, net of tax of $(231) and
reclassification adjustment of $575........ (448) (448)
Total comprehensive income................. 9,602
Cash dividends...................................... (4,103) (4,103)
3 for 2 stock split................................. 11,024 (11,024)
Purchase of treasury stock.......................... (966) (966)
Issuance of additional shares....................... 105 368 (143) 330
Balance, December 31, 1998.......................... $33,157 $17,989 $27,023 $2,789 $(2,082) $78,876
======= ======= ======= ====== ======== =======
Per share data for all periods has been restated to reflect stock dividends and
splits.
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
Operating Activities:
Net income.............................................. $10,050 $ 7,925 $ 6,984
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................ 1,464 1,317 1,567
Provision for depreciation and amortization.......... 1,656 1,450 1,268
Amortization of goodwill............................. 241 241 241
Investment security gains............................ (575) (770) (302)
Loans originated for sale............................ (38,348) (14,017) (11,329)
Proceeds from sales of loans......................... 38,304 16,281 9,124
Gains on mortgage sales.............................. (634) (283) (269)
Change in other assets, net.......................... (3,769) (456) (1,701)
Increase in accrued interest payable and other
liabilities, net.................................... 340 781 1,454
Net cash provided by operating activities......... 8,729 12,469 7,037
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks................................ 1,148 (900) (1,072)
Proceeds from sales of investment securities............ 25,310 30,525 13,420
Proceeds from maturities of investment securities....... 80,425 44,612 38,621
Purchases of investment securities...................... (179,097) (94,995) (92,814)
Net increase in total loans............................. (59,991) (36,380) (54,594)
Net increase in premises and equipment.................. (1,896) (3,445) (1,368)
Net cash used in investing activities............. (134,101) (60,583) (97,807)
Financing Activities:
Net increase in total deposits.......................... 46,150 27,153 48,557
Net increase (decrease) in short-term borrowings........ (2,630) 7,439 26,092
Proceeds from issuance of long-term debt................ 88,720 25,000 18,000
Repayment of long-term debt............................. (5,000) (4,000) ---
Cash dividends.......................................... (4,103) (3,143) (2,725)
Purchases of treasury stock............................. (966) (695) (368)
Proceeds from issuance of common stock.................. 330 2,776 2,168
Net cash provided by financing activities......... 122,501 54,530 91,724
Increase (decrease) in cash and cash equivalents.. (2,871) 6,416 954
Cash and cash equivalents at beginning of year............ 30,115 23,699 22,745
Cash and cash equivalents at end of year.................. $27,244 $30,115 $23,699
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and Peoples
State Bank.
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
Community Banks, Inc. (Corporation) is a bank holding company whose
wholly-owned subsidiaries include Community Banks, N.A. (CBNA),Peoples
State Bank (PSB), Community Banks Investments, Inc. (CBII) and Community
Banks Life Insurance Company (CBLIC). All significant intercompany
transactions have been eliminated.
The Corporation operates through its main office in Millersburg and through
28 branch banking offices located in Dauphin, Northumberland, Schuylkill,
Luzerne, Snyder, Adams, and York Counties in Pennsylvania. Community Banks,
Inc.'s primary source of revenue is derived from loans to customers, who
are predominantly middle-income individuals.
2. Summary of Significant Accounting Policies:
The more significant accounting policies of the Corporation are:
Investment Securities:
The Corporation classifies debt and equity securities as either
"held-to-maturity," "available-for-sale," or "trading." Investments for
which management has the intent, and the Corporation has the ability, to
hold to maturity are carried at the lower of cost or market adjusted for
amortization of premium and accretion of discount. Amortization and
accretion are calculated principally on the interest method. Securities
bought and held primarily for the purpose of selling them in the near term
are classified as "trading" and reported at fair value. Changes in
unrealized gains and losses on "trading" securities are recognized in the
Consolidated Statements of Income. At December 31, 1998 and 1997, there
were no securities identified as "held-to-maturity" or "trading." All
other securities are classified as "available-for-sale" and reported at
fair value. Changes in unrealized gains and losses for "available-for-sale"
securities, net of applicable taxes, are recorded as a component of
shareholder's equity.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management
strategy, and that may be sold in response to changes in interest rates,
resultant prepayment risk and other factors. Realized gains and losses on
the sale of securities are recognized using the specific identification
method and are included in Other Income in the Consolidated Statements of
Income.
Allowance for Loan Losses:
The Corporation maintains an allowance for loan losses at an amount
which, in management's judgement, should be adequate to absorb losses on
existing loans that may become uncollectible. Management's judgement in
determining the adequacy of the allowance is based on evaluations of the
collectibility of loans. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, current
economic conditions that may affect the borrowers' ability to pay, overall
portfolio quality and review of specific problem loans.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using accelerated and
straight-line methods over the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred, while major additions and
improvements are capitalized. Gain or loss on retirement or disposal of
individual assets is recorded as income or expense in the period of
retirement or disposal.
Goodwill:
Goodwill which represents the excess of purchase price, including
acquisition costs over the fair market value of net assets acquired under
the purchase method of accounting is amortized on a straight line basis
over 15 years.
Pension Plan:
The Corporation has a noncontributory defined benefit pension plan
covering substantially all CBNA employees and a defined contribution plan
covering PSB employees. Pension costs are funded currently subject to the
full funding limitation imposed under federal income tax regulations.
Income Taxes:
Deferred income taxes are accounted for by the liability method, wherein
deferred tax assets and liabilities are calculated on the differences
between the basis of assets and liabilities for financial statement
purposes versus tax purposes (temporary differences) using enacted tax
rates in effect for the year in which the differences are expected to
reverse. Tax expense in the statements of income is equal to the sum of
taxes currently payable, including the effect of the alternative minimum
tax, if any, plus an amount necessary to adjust deferred tax assets and
liabilities to an amount equal to period-end temporary differences at
prevailing tax rates. (See Note 10).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded
on the interest method. Nonaccrual loans are those on which the accrual of
interest has ceased and where all previously accrued and unpaid interest is
reversed. Loans, other than consumer loans, are placed on nonaccrual status
when principal or interest is past due 90 days or more and the collateral
may be inadequate to recover principal and interest, or immediately, if in
the opinion of management, full collection is doubtful. Generally, the
uncollateralized portions of consumer loans past due 90 days or more are
charged-off. Interest accrued but not collected as of the date of placement
on nonaccrual status is reversed and charged against current income.
Subsequent cash payments received either are applied to the outstanding
principal balance or recorded as interest income, depending upon
management's assessment of the ultimate collectibility of principal and
interest. (See also Note 5). Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the
yield on the related loan.
Other Real Estate Owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously
served as collateral or the current appraised value of the property. Prior
to foreclosure, the recorded amount of the loan is written down, if
necessary, to the appraised value of the real estate to be acquired by
charging the allowance for loan losses. During 1998, 1997, and 1996
non-cash transactions related to real estate acquired through foreclosure
totalled $980,000, $1,163,000, and $808,000, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on
the periodic reevaluation of real estate acquired through foreclosure are
credited or charged to noninterest expense. Costs of maintaining and
operating foreclosed property are expensed as incurred. Expenditures to
improve foreclosed properties are capitalized only if expected to be
recovered; otherwise, they are expensed.
Statement of Cash Flows:
Cash and cash equivalents included cash and due from banks and federal
funds sold. The Corporation made cash payments of $4,436,000, $3,071,000,
and $2,320,000, and $26,011,000, $24,085,000, and $20,232,000 for income
taxes and interest, respectively, in 1998, 1997, and 1996. Certain prior
year amounts have been reclassified to conform with the current year's
presentation.
Recent Accounting Pronouncements:
During 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" (SFAS No. 130), which established
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains, and losses). SFAS 130 requires that
all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes a reclassification adjustment for net
realized investment gains included in net income of $575,000, $770,000, and
$302,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. The new standard requires only additional disclosures in the
consolidated financial statement: it does not affect the Corporation's
financial position or results of operation.
During 1998, the Corporation also adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which revises employers'
disclosures about pensions and other postretirement benefit plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were under previous
pronouncements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June of 1998. SFAS 133 establishes standards for
recording derivative financial instruments on the balance sheet at their
fair value. This Statement requires changes in the fair value of
derivatives to be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management anticipates that the adoption of
SFAS 133 will not have a material effect on the Corporation's financial
condition or results of operations.
The Financial Accounting Standards Board issued Statement of Financial
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131) in 1997. SFAS 131 establishes standards for
disclosure about products, services, geographic areas, and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has reviewed SFAS 131 and determined that the Corporation only
has one qualifying segment and no additional disclosure is required.
SFAS 134 " Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" requires that after a securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interest based on
its ability and intent to sell or hold those investments. The Statement is
effective for the first fiscal quarter beginning after December 15, 1998.
Management anticipates that this Statement will not have a material effect
on the Corporation's financial condition or results of operations.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. Investment Securities:
The amortized cost and market value of all investment securities at
December 31, 1998 and 1997 are as follows:
1998 1997
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
(in thousands)
U.S. government corporations and agencies........ $ 78,800 $ 845 $ (196) $ 79,449 $ 66,940 $ 474 $ (25) $ 67,389
Mortgage-backed U.S. government agencies......... 82,887 568 (195) 83,260 84,568 834 (265) 85,137
Obligations of states and political subdivisions. 85,771 2,211 (306) 87,676 55,248 1,406 (21) 56,633
Corporate securities............................. 27,574 225 (340) 27,459 1,244 34 --- 1,278
Equity securities.............................. 13,284 1,565 (151) 14,698 6,379 2,468 --- 8,847
Total................................... $288,316 $5,414 $(1,188) $292,542 $214,379 $5,216 $ (311) $219,284
======== ====== ======== ======== ======== ====== ======= ========
The amortized cost and market value of all investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Market
Cost Value
(in thousands)
Due in one year or less............................ $ 6,457 $ 6,519
Due after one year through five years.............. 27,391 27,877
Due after five years through ten years.. .......... 36,546 36,938
Due after ten years................................ 121,751 123,250
192,145 194,584
Mortgage-backed securities......................... 82,887 83,260
Equity securities.................................. 13,284 14,698
$288,316 $292,542
======== ========
Proceeds from sales of investments in debt securities were $24,279,000,
$29,319,000 and $12,767,000 in 1998, 1997, and 1996, respectively. Gross gains
and losses of $147,000 and $17,000, respectively, were recognized in 1998.
Gross gains and losses of $138,000 and $117,000, respectively, were recognized
in 1997. Gross gains and losses of $113,000 and $88,000, respectively, were
recognized in 1996.
At December 31, 1998 and 1997, investment securities with carrying amounts
of approximately $104,186,000 and $89,373,000 respectively, were pledged to
collateralize public deposits and for other purposes as provided by law.
Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB,
however, it does not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member
institution.
4. Loans:
The composition of loans outstanding by lending classification is as follows:
December 31
1998 1997
(in thousands)
Commercial, financial and agricultural................$ 65,698 $ 53,520
Real-estate-construction.............................. 17,381 5,553
Real-estate-mortgage.................................. 324,709 299,529
Personal installment.................................. 97,561 88,046
Other................................................. 6,931 9,182
$512,280 $455,830
======== ========
Loans held for resale amounted to $3,319,000 and $2,641,000 at
December 31, 1998 and 1997, respectively. These loans are primarily
fixed-rate mortgages.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows:
December 31
1998 1997 1996
(in thousands)
Balance, January 1................... $6,270 $5,561 $4,955
Provision for loan losses............ 1,464 1,317 1,567
Loan charge-offs..................... (1,258) (1,466) (1,967)
Recoveries........................... 478 858 1,006
Balance, December 31................. $6,954 $6,270 $5,561
====== ====== ======
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
December 31
1998 1997
(in thousands)
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural... $ 47 $ 53
Mortgages................................ 353 405
Personal installment..................... 34 72
Other.................................... 7 21
441 551
Restructured Loans 248 626
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural... 866 926
Mortgages................................ 2,282 3,388
Other.................................... 282 300
3,430 4,614
Other real estate........................... 625 866
Total.................................... $4,744 $6,657
====== ======
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing
the collectibility of such amounts.
Impaired Loans
Loans are considered impaired, based on current information and events,
if it is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Larger groups of smaller-balance loans such as
residential mortgage and installment loans are collectively evaluated for
impairment. Management has established a smaller-dollar-value threshold of
$250,000 for all loans. Loans exceeding this threshold are evaluated in
accordance with accounting standards and the bank's lending policy. An
insignificant delay or shortfall in the amount of payments, when considered
independent of other factors, would not cause a loan to be rendered impaired.
Insignificant delays or shortfalls may include, depending on specific facts
and circumstances, those that are associated with temporary operational
downturns or seasonal business delays.
Management performs periodic reviews of its loans to identify impaired
loans. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance and subsequent recoveries, if any, are credited
to the valuation allowance. The company does not accrue interest on impaired
loans. While a loan is considered impaired, cash payments received are applied
to principal or interest depending upon management's assessment of the
ultimate collectibility of principal and interest.
At December 31, 1998, the Corporation recorded no investment in impaired
loans with no related valuation allowance. For the years ended December 31,
1998, 1997, and 1996, the average balance of impaired loans was negligible.
The company recognized no interest on impaired loans on the cash basis.
6. Premises and Equipment:
Premises and equipment are comprised of the following:
December 31
1998 1997
(in thousands)
Banking premises..................................... $15,504 $14,808
Furniture and fixture................................ 11,110 9,963
Leasehold improvements............................... 369 345
26,983 25,116
Less accumulated depreciation and amortization....... (12,780) (11,153)
$14,203 $13,963
======= =======
Depreciation expense charged to operations amounted to approximately
$1,656,000, $1,450,000, and $1,268,000 in 1998, 1997, and 1996, respectively.
7. Short-Term Borrowings and Long-Term Debt:
Short-term borrowings consist of the following:
December 31
1998 1997
(in thousands)
Securities sold under agreements to repurchase,
3.40% and 4.97% in 1998 and 1997, respectively...... $ 1,188 $ 753
Federal Home Loan Bank, 5.77% in 1997.................. --- 8,085
Federal funds purchased, 4.96% in 1998................. 6,400 ---
Treasury tax and loan note option account,
4.34% and 4.91% in 1998 and 1997, respectively...... 322 1,702
$ 7,910 $10,540
======= =======
Interest incurred on Federal Funds purchased and other short-term
borrowings amounted to $298,000, $331,000, and $353,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $141,000,000 and repurchase agreements totalling
$20,000,000. The long-term advances are due to mature from 1999 through 2008.
Monthly payments of interest are required to be paid to the Federal Home Loan
Bank at variable and fixed rates presently 5.26%, with principal due at
maturity. Quarterly payments of interest are required to be paid on the
repurchase agreements at a fixed rate, presently 5.76%, with principal due at
maturity. Interest on long-term debt amounted to $6,071,000, $3,538,000, and
$933,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Maturities on long term debt at December 31, 1998 are as follows:
1999............................ $ 4,000,000
2000............................ $ 4,000,000
2001............................ $20,000,000
2002............................ $45,000,000
2003............................ $10,000,000
Subsequent to 2003.............. $78,000,000
8. Pension Plan:
The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 1998 and 1997.
1998 1997
(in thousands)
Changes in benefit obligation:
Projected benefit obligation at beginning of year................................. $4,461 $3,933
Service cost...................................................................... 244 222
Interest cost..................................................................... 310 293
Distributions..................................................................... (128) (49)
Change due to change in assumptions............................................... 299 (66)
Change due to plan amendment...................................................... 215 ---
Experience (gain) or loss......................................................... 533 128
Projected benefit obligation at end of year....................................... $5,934 $4,461
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.................................... $4,546 $3,626
Employer contributions............................................................ 355 360
Actual return on assets........................................................... 297 609
Distributions..................................................................... (128) (49)
Fair value of plan assets at end of year, primarily listed stocks,
corporate, and US bonds.......................................................... $5,070 $4,546
====== ======
Funded status at end of year...................................................... $ (864) $ 85
Unrecognized net transition (asset) or obligation................................. (29) (38)
Unrecognized prior service cost................................................... 128 (97)
Unrecognized net (gain) or loss................................................... 1,679 775
End of year (accrued) or prepaid pension cost..................................... $ 914 $ 725
====== ======
Discount rate..................................................................... 6.5% 7.0%
Expected return on plan assets.................................................... 9.0% 9.0%
Rate of compensation increases.................................................... 4.0% 4.5%
Components of net periodic benefit cost:
Service cost...................................................................... $ 244 $ 221
Interest cost..................................................................... 311 293
Actual return on plan assets...................................................... (297) (609)
Amortization of unrecognized net transition (asset) or obligation................. (8) (8)
Amortization of unrecognized prior service cost................................... (8) (8)
Amortization of unrecognized net (gain) or loss................................... 47 42
Asset gain or (loss) deferred..................................................... (119) 272
Net periodic pension cost for the year............................................ $ 170 $ 203
====== ======
9. Earnings Per Share:
The following table sets forth the calculation of Basic and Fully Diluted
Earnings Per Share for the years ended below:
For the Year Ended 1998 For the Year Ended 1997 For the Year Ended 1996
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
(in thousands except for per share data)
Basic EPS:
Income available to common
stockholders........................ $10,050 6,542 $1.54 $7,925 6,516 $1.22 $6,984 6,504 $1.07
===== ===== =====
Effect of Dilutive Securities:
Incentive stock options
outstanding......................... 150 164 136
Diluted EPS:
Income available to common
stockholders and assumed
conversion......................... $10,050 6,692 $1.50 $7,925 6,680 $1.19 $6,984 6,640 $1.05
======= ===== ===== ====== ===== ===== ====== ===== =====
10. Income Taxes:
The provision for income taxes consists of the following:
1998 1997 1996
(in thousands)
Current........................... $4,004 $3,775 $2,440
Deferred.......................... (470) (284) 253
$3,534 $3,491 $2,693
====== ====== ======
The components of the net deferred tax asset (liability) as of December
31, 1998, 1997, and 1996 were as follows:
1998 1997 1996
(in thousands)
Deferred tax assets:
Loan loss provision......................... $1,531 $1,183 $1,010
Non-accrual loan interest income............ 363 264 183
Miscellaneous............................... 121 291 296
Deferred compensation....................... 296 176 73
Total deferred tax assets............... $2,311 $1,914 $1,562
Deferred tax liabilities:
Depreciation................................ $ 560 $ 583 $ 628
Accretion of discount....................... 176 239 156
Pension expense............................. 285 246 216
Unrealized gain on marketable
equity securities....................... 1,437 1,671 97
Miscellaneous............................... --- 23 14
Total deferred tax liability............ 2,458 2,762 1,111
Net deferred asset (liability).......... $ (147) $ (848) $ 451
====== ====== ======
1998 1997 1996
(in thousands)
Computed "expected" tax provision.................. $4,615 $3,882 $3,291
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance... (1,230) (784) (605)
Goodwill amortization.............................. 92 82 82
Nondeductible expense related to acquisition....... 49 252 ---
Other, net......................................... 61 59 (75)
Officer life insurance, net........................ (53) --- ---
Total provision for income taxes................... $3,534 $3,491 $2,693
====== ====== ======
11. Stock Options, Preferred Stock, and Common Stock:
The Corporation has a Long Term Incentive Plan whereby awards in the form of
Incentive Stock Options, Nonqualified Stock Options or Stock Appreciation
Rights may be granted to certain Executive Officers and other key employees
selected by a committee of the Board of Directors. The price at which common
stock can be purchased pursuant to the exercise of options cannot be less than
100% in the case of Incentive Stock Options and 80% in the case of Nonqualified
Stock Options, of the fair market value of the common stock on the date of the
grant of the option. Options are exercisable starting one year from the date
of grant to the extent of 20.0% to 33.3% a year on a cumulative basis and expire
no later than ten years after the date of grant. Incentive stock options issued
under the plan totalled 119,926, 86,070, and 85,501, in 1998, 1997, and
1996, respectively.
A summary of the status of the Bank's Plan as of December 31, 1998, 1997,
and 1996 and changes during the years ending on those dates is presented below:
Weighted
Average Fair
Shares Shares Weighted Options Value of Options
Under Available Average Exercisable Granted During
Option For Option Exercise Price at Year-end The Year
Balance, December 31, 1995........................ 338,141 1,197,376 $11.73 142,325
Options granted................................... 85,501 (85,501) $13.24 $ 6.53
Options exercised................................. (30,865) --- $ 7.94
Options cancelled or expired...................... (11,049) 11,049 $14.64
Balance, December 31, 1996........................ 381,728 1,122,924 $12.32 162,218
Options granted................................... 86,070 (86,070) $19.91 $ 8.43
Options exercised................................. (92,059) --- $10.59
Options cancelled or expired...................... (1,923) 1,923 $14.92
Balance, December 31, 1997........................ 373,816 1,038,777 $13.99 151,129
Options granted................................... 119,926 (119,926) $24.02 $ 5.05
Options exercised................................. (28,374) --- $10.82
Options cancelled or expired...................... (1,914) 1,914 $20.00
Balance, December 31, 1998........................ 463,454 920,765 $17.07 279,320
======= ========= ====== =======
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123). As permitted by SFAS 123, the Corporation has chosen to apply APB Opinion
No. 25, "Accounting for Stock issued to Employees" (APB 25) and related
interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Plan. Had compensation cost
for the Corporation's Plan been determined based on the fair value at the
grant dates for awards under the Plan consistent with the method of SFAS
123, the impact on the Corporation's net income and net income per share would
have approximated $(267,000) and $(.04), respectively in 1998. The impact on
net income and net income per share in 1997 would have been $(96,000) and
$(.01), respectively. The impact on net income and net income per share in
1996 would have been $(73,000) and $(.01), respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively; dividend yield of
2.5% and 1.0%, expected volatility of 23% and 20%, risk-free interest rates of
4.80% and 6.14%, and expected life of 6 years.
12. Related Parties:
Certain directors and their business affiliates (defined as the beneficial
ownership of at least a 10 percent interest), executive officers and their
families are indebted to Community Banks, N.A. and Peoples State Bank. At
December 31, 1998, 1997, and 1996, loans to these persons and their business
affiliates amounted to $6,548,000, $6,367,000 and $4,012,000, respectively.
In the opinion of management, such loans are consistent with sound banking
practices and are within applicable regulatory lending limitations.
1998 1997 1996
(in thousands)
Balance beginning of period................. $ 6,367 $ 4,012 $ 4,492
Additions................................... 2,003 4,884 708
Amounts collected........................... (1,822) (2,529) (1,188)
Amounts written off......................... --- --- ---
Balance end of period....................... $ 6,548 $ 6,367 $ 4,012
======= ======= =======
13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
1998 1997
(in thousands)
Condensed Balance Sheets:
Cash and investments............................ $ 150 $ 137
Investment in Community Banks, N.A. ............ 49,537 48,085
Investment in Peoples State Bank................ 24,228 20,653
Investment in nonbank subsidiaries.............. 4,329 4,652
Other assets.................................... 1,023 1,292
Total assets.................................... $79,267 $74,819
======== =======
Other liabilities............................... $ 391 $ 806
Stockholders' equity............................ 78,876 74,013
Total liabilities and stockholders' equity...... $79,267 $74,819
======== =======
1998 1997 1996
Condensed Statements of Income: (in thousands)
Dividends from:
Community Banks, N.A. ................... $5,279 $3,010 $2,260
Peoples State Bank....................... 285 --- ---
Other income (expense)................... (546) (335) 86
Income before equity in undistributed earnings of
subsidiaries.................................. 5,018 2,675 2,346
Equity in undistributed earnings of:
Community Banks, N.A. ........................ 1,483 3,240 3,364
Peoples State Bank............................ 3,118 1,342 887
Nonbank subsidiaries.......................... 431 668 387
5,032 5,250 4,638
Net income........................................ $10,050 $7,925 $6,984
======= ====== ======
Condensed Statements of Cash Flows:
Operating activities:
Net income.................................... $10,050 $7,925 $6,984
Adjustments to reconcile net cash provided
by operating activities:
Undistributed earnings of:
Community Banks, N.A. .................... (1,483) (3,240) (3,364)
Peoples State Bank........................ (3,118) (1,342) (887)
Nonbank subsidiaries...................... (431) (668) (387)
Other, net.................................. 266 (1,615) (1,684)
Net cash provided by operating activities. 4,752 1,060 662
Investing activities:
Additional investment in nonbank subsidiaries --- --- ---
Net cash used in investment activities....... --- --- ---
Financing Activities:
Proceeds from issuance of common stock........ 330 2,776 2,168
Purchase of Treasury Stock................. (966) (695) (368)
Dividends paid............................. (4,103) (3,143) (2,725)
Net cash used by financing activities..... (4,739) (1,062) (925)
Net change in cash and cash equivalents.. 13 (2) (263)
Cash and cash equivalents at
beginning of year.................. 137 139 402
Cash and cash equivalents at end of year $ 150 $ 137 $ 139
======= ======= ======
14. Regulatory Restrictions of Banking Subsidiaries:
CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the Corporation). The approval of certain
banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA and PSB could declare dividends in 1998 without regulatory approval of
$9,183,000 plus an additional amount equal to the bank's retained net profits in
1999 up to the date of any dividend declaration.
Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The
amounts of such reserves are based on percentages of certain deposit types and
totalled $265,000 at December 31, 1998 and 1997.
15. Financial Instruments with Off-Balance Sheet Risk:
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and standby
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statement of condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
Financial instruments with off-balance sheet risk at December 31, 1998,
are as follows:
Contract or Notional Amount
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans............................ $50,925
Unused lines of credit.................................... $21,136
Standby letters of credit................................. $ 3,640
Unadvanced portions of construction loans................. ---
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Lines of credit are similar
to commitments as they have fixed expiration dates and are driven by certain
criteria contained within the loan agreement. Lines of credit normally do not
extend beyond a period of one year. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
16. Quarterly Results of Operations (Unaudited):
The following is a summary of the quarterly results of operations for the
years ended December 31, 1998 and 1997:
Three Months Ended
1998 1997
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
(dollars in thousands except per share data)
Interest income.............. $13,456 $13 702 $14,542 $15,300 $12,406 $12,788 $13,467 $13,626
Interest expense............. 6,235 6,330 6,917 7,405 5,801 5,941 6,268 6,413
Net interest income.......... 7,221 7,372 7,625 7,895 6,605 6,847 7,199 7,213
Provision for loan losses.... 193 231 487 553 390 290 340 297
Net interest income after
provision for loan losses:.. 7,028 7,141 7,138 7,342 6,215 6,557 6,859 6,916
Other income................. 845 913 971 1,022 779 748 876 773
Investment security
gains...................... 270 73 224 8 373 104 86 207
Gains on mortgage sales...... 142 142 131 219 40 62 31 150
Other expenses............... 4,932 4,885 5,020 5,188 4,395 4,588 4,678 5,699
Income before income taxes... 3,353 3,384 3,444 3,403 3,012 2,883 3,174 2,347
Income taxes................. 976 920 868 770 909 831 931 820
Net income................... $ 2,377 $ 2,464 $ 2,576 $ 2,633 $ 2,103 $ 2,052 $ 2,243 $ 1,527
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share..... $ .37 $ .38 $ .39 $ .40 $ .32 $ .32 $ .35 $ .23
Diluted earnings
per share.................. $ .35 $ .37 $ .39 $ .39 $ .31 $ .31 $ .34 $ .23
Dividends per share.......... $ .14 $ .16 $ .16 $ .16 $ .11 $ .12 $ .12 $ .13
Per share data has been restated to reflect stock dividends and splits.
17. Fair Values of Financial Instruments:
The following methodologies and assumptions were used by the Corporation to
estimate its fair value disclosures:
Cash, interest-bearing time deposits, and federal funds sold:
The carrying values for cash, interest-bearing time deposits, and federal
funds sold equal those assets' fair values.
Investment securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-
rate residential mortgage loans, consumer loans, commercial, and commercial real
estate loans are estimated by discounting the future cash flows using comparable
current rates at which similar loans would be made to borrowers at similar
credit risk. The carrying value of accrued interest adjusted for credit risk
equals its fair value. The fair value of loans held for sale is based on
quoted market prices for similar loans sold in securitization transactions.
Deposit liabilities:
The fair values of demand and savings deposits equal their carrying values.
Adjusting such fair value for any value from retaining those deposit
relationships in the future is prohibited. That component, known as a deposit
intangible, is not considered in the value disclosed nor is it recorded in
the balance sheet. The carrying values for variable rate money market
accounts approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using rates currently offered
for similar deposits.
Short-term borrowings:
The fair values of short-term borrowings approximate their carrying values.
Long-term borrowings:
The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flow analyses, based on rates available to the
Corporation for similar types of borrowings.
Off-balance-sheet instruments:
Fair values for the Corporation's unused commitments to originate loans and
unused lines of credit are deemed to be the same as their carrying values.
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 1998 and 1997:
December 31,
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
Financial assets:
Cash, interest-bearing time deposits,
and federal funds sold................... $ 28,502 $ 28,502 $ 32,521 $ 32,521
Investment securities...................... 292,542 292,542 219,284 219,284
Loans, net of unearned income.............. 502,262 498,552 444,031 437,121
Less: Allowance for loan losses............ (6,954) --- (6,270) ---
Net Loans............................ 495,308 498,552 437,761 437,121
Loans held for sale........................ 3,319 3,319 2,641 2,641
Total................................ $819,671 $822,915 $692,207 $691,567
======== ======== ======== ========
Financial liabilities:
Deposits................................... $595,905 $598,654 $549,755 $550,847
Short-term borrowings...................... 7,910 7,910 10,540 10,540
Long-term debt............................. 161,000 160,822 77,280 75,038
Total $764,815 $767,386 $637,575 $636,425
======== ======== ======== ========
18. Completed Acquisition:
On March 31, 1998 Community Bank, Inc. (Community) completed its merger of The
Peoples State Bank (Peoples). Peoples has six banking offices which are located
in York and Adams Counties, Pennsylvania. Community issued 1,325,330 shares
of common stock for all of the outstanding common stock of Peoples. This
transaction was accounted for as a pooling of interests and combined unaudited
financial information is included in this report.
A summary of unaudited pro forma combined financial information for Community and Peoples follows:
Year Ended December 31 1997 1996
(dollars in thousands except per share data)
Community/ Community/
Community Peoples Community Peoples
As Reported Combined As Reported Combined
Net interest income................................ $19,381 $27,864 $17,906 $24,607
Provision for loan losses and lease losses......... 717 1,317 1,042 1,567
Other Income....................................... 3,375 4,229 2,754 3,171
Other Expenses..................................... 13,443 19,360 12,017 16,534
Income before taxes................................ 8,596 11,416 7,601 9,677
Taxes.............................................. 2,626 3,491 1,969 2,693
Net income......................................... $ 5,970 $ 7,925 $ 5,632 $ 6,984
======= ======= ======= =======
Basic Earnings Per Share........................... $ 1.32 $ 1.22 $ 1.25 $ 1.07
Diluted Earnings Per Share......................... $ 1.29 $ 1.19 $ 1.23 $ 1.05
======= ======= ======= =======
Per share data for all periods has been restated to reflect stock dividends
and split
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Community Banks, Inc.
Millersburg, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, changes of stockholders'
equity, and cash flows present fairly, in all material respects, the
financial position of Community Banks, Inc. (Corporation) and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Corporation's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS, L.L.P
One South Market Square
Harrisburg, PA 17101
January 14, 1999
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion of financial condition and results of operations is
based on the selected financial data listed below and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
FINANCIAL HIGHLIGHTS 1998 1997 1996 1995 1994
(dollars in thousands except per share data)
Balance Sheet Data
Investment securities............... $292,542 $219,284 $194,003 $155,676 $161,053
Loans (net of unearned income and
allowance for loan losses)........ 495,308 437,761 402,681 349,544 306,814
Total assets........................ 851,674 719,462 651,573 553,325 526,866
Total deposits...................... 595,905 549,755 522,602 474,045 443,516
Stockholders' equity................ 78,876 74,013 64,079 59,596 51,131
Total average assets................ 765,980 681,491 591,724 538,682 515,088
Total average stockholders' equity.. 77,057 68,971 61,320 55,209 50,156
Earnings Data
Net interest income................. 30,113 27,864 24,607 22,381 20,629
Provision for loan losses........... 1,464 1,317 1,567 1,078 1,912
Net interest income after
provision for loan losses....... 28,649 26,547 23,040 21,303 18,717
Other income........................ 4,960 4,229 3,171 2,790 3,387
Other expense....................... 20,025 19,360 16,534 16,303 15,107
Provision for income taxes.......... 3,534 3,491 2,693 2,071 1,602
Net income.......................... 10,050 7,925 6,984 5,719 5,395
Per Share Data
Basic earnings per share............ 1.54 1.22 1.07 .88 .83
Diluted earnings per share.......... 1.50 1.19 1.05 .86 .82
Cash dividends...................... .62 .48 .41 .37 .32
Book value.......................... 12.09 11.31 9.85 9.16 7.81
Average diluted shares
outstanding..................... 6,692,172 6,679,675 6,639,526 6,620,931 6,618,598
Profitability Ratios
Return on average assets............ 1.31% 1.16% 1.18% 1.06% 1.05%
Return in average stockholders'
equity.......................... 13.04% 11.49% 11.39% 10.36% 10.76%
Net interest margin (FTE)........... 4.47% 4.58% 4.60% 4.39% 4.30%
Efficiency ratio.................... 53.80% 55.29% 60.40% 62.80% 61.80%
Capital & Liquidity Ratios
Stockholders' equity to total assets 9.26% 10.29% 9.83% 10.77% 9.70%
Net loans to assets................. 58.16% 60.85% 61.80% 63.17% 58.23%
Asset Quality Ratios
Reserve for loan losses to total
loans outstanding............... 1.38% 1.41% 1.36% 1.40% 1.41%
Reserve for loan losses to
non-performing assets........... 147% 94% 83% 90% 74%
Non-performing assets to total
loans outstanding............... .94% 1.50% 1.65% 1.55% 1.91%
Non-performing assets to
total assets.................... .56% .93% 1.03% .99% 1.13%
Community Banks, Inc. and Subsidiaries
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
Income and Rates on a Tax Equivalent Basis <F2> for the
Years Ended December 31, 1998, 1997, and 1996 (dollars in thousands)
1998 1997 1996
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>
Assets:
Cash and due from banks......... $ 20,438 $18,809 $ 17,845
Earnings Assets:
Interest-bearing deposits in
other banks................. 1,626 $ 80 4.92% 1,587 $ 84 5.29% 5,211 $ 278 5.33%
Investment securities:
Taxable..................... 176,687 11,325 6.41 167,732 11,382 6.79 130,978 8,429 6.44
Tax-exempt<F2>.............. 68,489 5,750 8.40 43,017 3,670 8.53 29,696 2,523 8.50
Total investment
securities.................. 245,176 210,749 160,674
Federal funds sold............ 8,251 494 5.99 5,528 304 5.50 3,808 207 5.44
Loans, net of unearned
income<F2>.................. 467,094 41,539 8.89 421,283 38,236 9.08 385,956 34,806 9.02
Total Earning Assets......... 722,147 $59,188 8.19 639,147 $53,676 8.40 555,649 $46,243 8.32
Allowance for loans
losses........................ (6,528) (6,035) (5,225)
Premises, equipment and
other assets................. 29,923 29,570 23,455
Total assets................. $765,980 $681,491 $591,724
======== ======== ========
Liabilities:
Demand deposits................. 43,911 37,806 35,762
Interest bearing liabilites:
Savings deposits.............. 243,290 5,479 2.25% 224,786 5,556 2.47 202,019 4,974 2.46
Time deposits:
$100,000 or greater......... 28,687 28,987 25,270
Other....................... 251,223 248,467 240,812
Total time deposits........... 279,910 15,039 5.37 277,454 14,998 5.41 266,082 14,408 5.41
Total time and savings
deposits.................... 523,200 502,240 468,101
Short-term borrowings......... 4,527 298 6.58 6,313 331 5.24 7,496 354 4.72
Long-term debt................ 109,414 6,071 5.55 60,636 3,538 5.83 14,758 932 6.32
Total interest-bearing
liabilities................. 637,141 $26,887 4.22 569,189 $24,423 4.29 490,355 $20,668 4.21
Accrued interest, taxes and
other liabilities............. 7,871 5,525 4,287
Total liabilities............. 688,923 612,520 530,404
Stockholders' Equity.............. 77,057 68,971 61,320
Total liabilities and
stockholders' equity......... $765,980 $681,491 $591,724
======== ======== ========
Interest income to earning
assets........................ 8.19% 8.40% 8.32%
Interest expense to earning
assets........................ 3.72 3.82 3.72
Effective interest
differential.............. $32,301 4.47% $29,253 4.58% $25,575 4.60%
======= ===== ======= ===== ======= ====
<FN>
<F1> Amortization of net deferred fees included in interest income and rate
calculation.
<F2> Interest income on all tax-exempt securities and loans have been adjusted
to tax equivalent basis utilizing a Federal income tax rate of 34%.
<F3> Averages are a combination of monthly and daily averages.
</FN>
Community Banks, Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations
Rate/Volume Analysis <F1>
For the Years Ended December 31, 1998 and 1997
(in thousands)
1998 vs 1997 1997 vs 1996
Volume Rate Total Volume Rate Total
Increase (decrease) in interest income:
Loans............................. $4,112 ($809) $3,303 $3,197 $ 233 $3,430
Investment securities:
Taxable......................... 594 (651) (57) 2,474 479 2,953
Tax-exempt...................... 2,137 (57) 2,080 1,138 9 1,147
Total........................ 2,731 (708) 2,023 3,612 488 4,100
Federal funds sold................ 161 29 190 95 2 97
Interest-bearing deposits in other
banks............................ 2 (6) (4) (192) (2) (194)
Total.......................... 7,006 (1,494) 5,512 6,712 721 7,433
Increase (decrease) in interest expense:
Savings deposits.................. 438 (515) (77) 562 20 582
Time deposits..................... 143 (102) 41 590 --- 590
Short-term borrowings............. (107) 74 (33) (60) 37 (23)
Long-term debt and capital notes.. 2,711 (178) 2,533 2,683 (77) 2,606
Total.......................... 3,185 (721) 2,464 3,775 (20) 3,755
Increase (decrease) in effective
interest differential............ $3,821 $(733) $3,048 $2,937 $ 741 $3,678
====== ====== ====== ====== ====== ======
<FN>
<F1> Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1998 and 1997. The effect of a change
in average volume has been determined by applying the average yield or rate
in the earlier period to the change in average volume during the period. The
effect of a change in rate has been determined by applying the change in rate
during the period to the average volume of the prior period. Any resulting
unallocated amount was allocated ratably between the volume and rate components.
Nonaccrual loans have been included in the average volume of each period.
Tax-exempt income is shown on a tax equivalent basis assuming a federal income
tax rate of 34%.
Community Banks, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On March 31, 1998 Community Banks, Inc. (Community) completed its
merger of The Peoples State Bank (Peoples). Peoples has six
banking offices which are located in York and Adams Counties,
Pennsylvania. Community issued 1,325,330 shares of common stock
for all of the outstanding common stock of Peoples. This
transaction was accounted for as a pooling of interests and
combined unaudited financial information is included in this
report.
The earnings of Community Banks, Inc. (Corporation) are derived
exclusively from the operations of its wholly owned subsidiaries;
Community Banks, N.A.; Peoples State Bank; Community Banks
Investments, Inc.; and Community Banks Life Insurance Co.
Diluted net income was $1.50 per share in 1998 compared to $1.19
per share in 1997, and $1.05 in 1996. Net income per share in
1998 was 26.1% more than net income per share in 1997. Net income
per share in 1997 increased 13.3% compared to the previous year.
Net Interest Income:
The primary determinant of the Corporation's net income is net
interest income. This is the income which remains after
deducting from the total income generated by earning assets the
interest expense applicable to funds required to support the
earning assets.
Total interest income increased $4,713,000 or 9.0% in 1998,
compared to an increase of $7,012,000 or 15.5% in 1997, and an
increase of $4,131,000 or 10.0% in 1996. Interest and fees on
loans increased $3,211,000 or 8.4% in 1998. Most of this
increase was volume related and caused by an increase in average
balances of $45,811,000 or 10.9%. The increase of $1,316,000 or
9.5% in interest and dividends on investment securities was also
volume related. The average balances of tax-exempt securities
increased $25,472,000 or 59.2% in 1998. Interest and fees on
loans increased $3,399,000 or 9.8% in 1997. This was primarily a
volume related change driven by an increase in average balances
of $35,327,000 or 9.2%. The increase of $3,710,000 or 36.8% in
interest and dividends on investment securities was also volume
related. The average balances of investment securities increased
$50,075,000 or 31.2% in 1997. Factors contributing to the 1996
change included a volume related increase in interest and fees on
loans of $4,350,000 and a volume related decrease of $317,000 in
interest and dividends on investment securities.
Total interest expense increased $2,464,000 or 10.1% in 1998 and
$3,755,000 or 18.2% in 1997, and $1,905,000 or 10.2% in 1996. A
rate related decrease of $77,000 or 1.4% occurred in savings
interest expense in 1998. Also affecting the 1998 increase was an
increase of $41,000 or 0.3% in time deposit interest expense.
All of the increase in time deposit interest expense was caused
by increased volume. An increase of $2,500,000 or 64.6% in
borrowed funds interest significantly affected total interest
expense in 1998. Material factors affecting the 1997 increase
were increases of $590,000 or 4.1% in total time deposit interest
expense and an increase of $582,000 or 11.7% in savings interest
expense. The average balances of savings accounts increased
$22,767,000 or 11.3%. Material factors affecting the 1996 change
were increases of $625,000 or 4.5% in total time deposit interest
expense and $367,000 or 40.0% in interest expense of
borrowings.
Average interest-bearing deposits represented 92.3% of average
total deposits in 1998 compared to 93.0% in 1997 and 93.2% in
1996.
Net interest income increased $2,249,000 or 8.1% in 1998,
compared to $3,257,000 or 13.2% in 1997 and $2,226,000 or 9.9% in
1996. Average earning assets increased $83,000,000 or 13.0% in
1998 compared to $83,498,000 or 15.0% in 1997 and $49,843,000 or
9.9% in 1996. Average interest-bearing liabilities increased
$67,952,000 or 11.9% in 1998 compared to $78,834,000 or 16.1% in
1997 and $45,264,000 or 10.2% in 1996.
Net Interest Income Margin:
Net interest income margin for 1998 was 4.47% compared to 4.58%
in 1997 and 4.60% in 1996. Interest income to earning assets
decreased from 8.40% in 1997 to 8.19% in 1998. Interest expense
to earning assets decreased from 3.82% to 3.72%.
Provision for Loan Losses:
Net loan charge-offs for 1998 were $780,000 compared to $608,000
in 1997 and $961,000 in 1996. The provision for loan losses
charged to income was $1,464,000 in 1998 compared to $1,317,000
in 1997 and $1,567,000 in 1996. Total non-performing loans
approximated $4,119,000, $5,791,000, and $5,839,000, as of
December 31, 1998, 1997, and 1996, respectively. Non-performing
residential real estate and commercial loans totalled
approximately $2,635,000 and $913,000, respectively, at year-end
1998. Total delinquencies as a percentage of total loans
approximated 2.2%, 3.4%, and 4.2% at December 31, 1998, 1997, and
1996, respectively.
Other Income and Other Expenses:
Other income net of security gains increased $926,000 or 26.8% in
1998 compared to an increase of $590,000 or 20.6% in 1997 and a
decrease of $1,000 in 1996. The increase in 1998 of $350,000 or
17.8% in service charges on deposit accounts and other service
charges commissions and fees resulted from increased deposit
account balances and management's renewed emphasis on these
functions. The increases in trust department income and service
charges on deposit accounts which occurred in 1997 and 1996 also
resulted from management's emphasis on these functions.
Investment security gains in 1998 and 1997 were associated
primarily with equity securities held by Community Banks
Investments, Inc. Investment security losses approximated
$17,000 in 1998. Changes in income on insurance premiums are a
reflection of consumer loan demand and activity at Community
Banks Life Insurance Co. Gains on mortgage sales increased
significantly in 1998 as a result of increased demand for
fixed-rate real estate loans. The market values of loans held
for sale approximated their carrying values at year ends 1998,
1997, and 1996.
Other expenses increased $665,000 or 3.4% in 1998 compared to
increases of $2,826,000 or 17.1% in 1997, and $231,000 or 1.4% in
1996. The 1998 increases in salaries and employee benefits of
$701,000 or 7.2% and occupancy expense of $405,000 or 14.5% were
affected by the opening of new banking offices. The 1997
increases in salaries and benefits of $1,066,000 or 12.4% and net
occupancy expense of $266,000 or 10.5% were also affected by the
opening of new banking offices. In addition, affecting salaries
and benefits was the recognition of certain retirement plan
obligations. The decrease of $548,000 or 8.4% in other operating
expense in 1998 was affected by the recognition in 1997 of
expense associated with the pending acquisition of the Peoples
State Bank. Increases in salaries and employee benefits and net
occupancy expense also affected an increase in 1996 in total
other expenses. Three new banking offices established in 1995
contributed to these changes.
Provision for Income Taxes:
The relationship of the provision for income taxes to income
approximated 26.0%, 30.6%, and 27.8% in 1998, 1997, and 1996,
respectively. Significantly impacting these changes were
increases in tax-exempt investment security income recognized in
1998.
These factors contributed to increases in net income of
$2,125,000 or 26.8%, $941,000 or 13.5%, and $1,265,000 or 22.1%
for 1998, 1997, and 1996, respectively.
Balance Sheet Data:
Earning assets represented 94.1% of total assets at year-end 1998
compared to 93.2% at year-end 1997. Increases in deposits and
long-term debt in 1998 were reflected in increases in earning
assets, most notably investment securities and loans. Changes in
the composition of earning assets reflect management's attempt to
respond to fluctuating loan demand and corresponding policies
relating to liquidity and asset/liability management.
Under the Corporation's current policy, if management has the
intent and the Corporation has the ability at the time of
purchase to hold securities until maturity or on a long-term
basis, securities are classified as held-to-maturity investments
and carried at amortized historical cost. Securities to be held
for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available for
sale and carried at market value. Securities held for indefinite
periods of time include securities that management intends to use
as part of its asset/liability management strategy and that may
be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and
resultant prepayment risk changes.
At December 31, 1998 and 1997, management classified investment
securities with book and market values of $288,316,000 and
$292,542,000 and $214,379,000 and $219,284,000, respectively, as
available for sale. Gross unrealized gains and losses relating
to investment securities were $5,414,000 and $1,188,000 and
$5,216,000 and $311,000, respectively, at year-end 1998 and 1997.
The Corporation generally avoids investments in securities of a
speculative nature. No securities were considered held for sale
or for trading purposes at December 31, 1998 and December 31,
1997.
At December 31, 1998 and 1997, the unrealized gains on
investments available for sale, net of tax were $2,789,000 and
$3,237,000, respectively, and were accordingly reflected in
shareholders equity.
Net loans increased 13.1% from December 31, 1997 to December 31,
1998. Real estate loans increased 12.1%, while commercial and
personal loans increased 22.8% and 10.8%, respectively, during
the period. New banking offices and increased demand for loans
affected these changes.
The following table sets forth information regarding nonaccrual
loans, other real estate owned, restructured loans, and loans
which are 90 days or more delinquent but accruing interest at the
dates indicated.
December 31
1998 1997 1996 1995 1994
(dollars in thousands)
Nonaccrual loans.......... $3,430 $4,614 $4,754 $3,177 $2,902
Other real estate owned... 625 866 883 901 1,846
Restructured loans........ 248 626 277 494 366
Accruing loans contractually
past due 90 days or more.. 441 551 808 917 819
Total.................. $4,744 $6,657 $6,722 $5,489 $5,933
====== ====== ====== ====== ======
Ratio of nonaccrual loans,
other real estate owned,
restructured loans,
and accruing loans contractu-
ally past due 90 days or
more to total assets...... .56% .93% 1.03% .99% 1.13%
As discussed in Note 5 to the financial statements, management
performs periodic reviews of its loans to identify risks in the
loan portfolio. As a result of these periodic reviews, problem
loans and potential problem loans are identified and the
likelihood of collectibility is assessed. Based upon the results
of these reviews, which also consider other pertinent data,
management determines an appropriate allowance for loan losses.
Other relevant factors include past loss experience, current
economic conditions, and the growth and composition of the loan
portfolio. The allowance for loan losses is maintained at a
level believed by management to be adequate to absorb potential
losses in the respective portfolios. The allowance for loan
losses to loans net of unearned income approximated 1.38%, 1.41%,
1.36%, 1.40%, and 1.46% at year-end, 1998, 1997, 1996, 1995, and
1994, respectively.
At December 31, 1998, management is not aware of any loans or
lending relationships that are expected to deteriorate in the
next year. In addition, the Corporation is not aware of any
significant environmental liability related to real estate owned
or in-foreclosure procedures.
The increase of $240,000 or 1.7% in premises and equipment was
affected by new banking locations. Goodwill is being amortized
over fifteen years. The balance of loans held for sale at
December 31, 1998 included student loans totalling $2,257,000.
The increase of $4,990,000 or 43.3% in accrued interest
receivable and other assets was impacted by increases in accrued
interest receivable, prepaid expenses, and deferred taxes.
Total deposits increased $46,150,000 or 8.4% in 1998 with most of
the increase occurring in savings and time deposits. As
previously noted, management chose to reduce short-term
borrowings and increase long-term debt by borrowing at the
Federal Home Loan Bank of Pittsburgh.
Liquidity:
The primary functions of asset/liability management are the
assurance of adequate liquidity and maintenance of an appropriate
balance between interest-sensitive earning assets and
interest-bearing liabilities. Liquidity management refers to the
ability to meet the cash flow requirements of depositors and
borrowers.
A continuous review of net liquid assets is conducted to assure
appropriate cash flow to meet needs and obligations in a timely
manner.
The Corporation's primary funding requirement is loan demand.
The loan demand is primarily funded through deposit growth.
Generally, any deposit growth not used in funding loan demand is
invested in short-term, interest-bearing deposits or longer term
investments. These short-term investments and shorter term
investment portfolio securities are a source of liquidity to fund
loan demand.
For the years ended December 31, 1998, 1997 and 1996, financing
activities provided cash of $122,501,000, $54,530,000, and
$91,724,000, respectively. Deposit growth and long-term debt
accounted for the largest portion of this funding source in 1998
and 1997. Deposits and short-term and long-term borrowings
represented the largest funding source in 1996.
Net cash used in investing activities totalled $134,101,000,
$60,583,000, and $97,807,000 for the years ended December 31,
1998, 1997 and 1996, respectively. The primary uses of funds in
1998 were purchases of investment securities of $179,097,000 and
net increases in total loans of $59,991,000. The primary uses of
funds in 1997 were purchases of investment securities of
$94,995,000 and increases in net loans of $36,380,000. In 1996,
investment securities purchased and net increases in loans also
represented most of the investing activities.
Forward Outlook:
Management is unaware of any regulatory recommendations which, if
implemented, would have a material effect on the liquidity,
capital resources, or operations of the Corporation. Adequate
loan demand is anticipated for the remainder of 1999 and
management will continue to carefully evaluate this demand based
on the creditworthiness of borrowers and the relative strength of
the economy in the Corporation's market.
Effects on Inflation:
All business enterprises are affected by the constantly changing
economic environment. Changes in the economy, however, affect
the banking industry differently than other industries. A bank's
assets and liabilities are primarily monetary in nature and
values are established without regard to future price changes.
Also, banks, unlike industrial corporations are not required to
provide for large capital expenditures in the form of premises,
equipment and inventory. Interest rate changes and the actions
of the Federal Reserve Board have a greater impact on a bank's
operations than do the effects of inflation. Although occasional
deviations may occur, it is management's policy to generally
attempt to maintain rate-sensitive assets at a level
approximating rate-sensitive liabilities. Based on a one-year
parameter, this relationship approximated 105% at December 31,
1998.
Accordingly, management anticipates that any decline in interest
rates will negatively impact earnings of the Corporation.
Conversely, management may be able to increase rates on certain
earning assets more rapidly than those of interest-bearing
liabilities if a significant increse in interest rates would
occur. This may result in an increase in the net interest margin
of the Corporation.
Capital Strength:
The current economic and regulatory environment has placed an
increased emphasis on capital strength. Risk-based capital
guidelines recognize the relative degree of credit risk
associated with various assets by setting lower capital
requirements for some assets which clearly have less credit risk
than others. Capital guidelines require banks to hold 4% Tier 1
and 8% Total Risk-based capital. Following is a summary of
significant capital ratios at the dates indicated.
Regulatory December 31,
Minimum 1998 1997
(dollars in thousands)
Core (Tier 1) Capital --- $74,813 $69,214
Leverage ratio (A) 4.0% 8.8% 9.6%
Risk-based Capital Ratios:
Tier 1 capital ratio (B) 4.0% 12.8% 15.0%
Total risk-based capital
ratio (C) 8.0% 14.0% 15.8%
(A) Core capital divided by total assets less
intangible assets.
(B) Core capital divided by year-end risk-adjusted
assets, as defined by risk-based capital
guidelines.
(C) Total capital divided by risk-adjusted assets,
as defined by risk-based guidelines.
As shown by the table, the Bank's capital ratios exceeded
regulatory minimums in 1998 and 1997. The core capital ratio
decreased from 15.0% to 12.8%, and the total capital ratio
decreased from 15.8% to 14.0%, still well above the regulatory
minimums of 4.0% for core and 8.0% for total capital. These
changes were impacted by the Corporation's asset growth and
retention of earnings during the year.
Impact of the Year 2000 Issue:
The "Year 2000 Issue" is the result of the possibility that
computer programs may be unable to properly recognize the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or
engage in similar business activities.
Based on an ongoing assessment, the Corporation has determined
that it will need to modify or replace portions of its software
and hardware so that its computer systems will properly utilize
dates beyond December 31, 1999. If such modifications and
conversions are not made, or are not completed on a timely basis,
the Year 2000 Issue could have an adverse impact on operations of
the Corporation. However, management presently believes that as a
result of modifications to existing software and hardware and
conversions to new software and hardware, the Year 2000 Issue
will be mitigated.
The Corporation's Year 2000 Action Plan has been categorized into
five phases: Awareness, Assessment, Testing, Validation, and
Implementation. The initial focus within those phases has been on
vendors and systems that are related to mission critical business
processes. Mission critical processes are defined as those areas
of the business whose continued operations are required in order
to provide basic banking services. Management is currently
testing these mission critical processes and plans to complete
implementation by May 31, 1999. In addition, all other business
processes subject to Y2K remediation are expected to be completed
prior to December 31, 1999.
Community Banks, Inc. has initiated formal communications with
all of its significant vendors and large commercial customers to
determine the extent to which it is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. To date,
no material impact is anticipated based upon responses to these
communications. The Corporation's estimated Year 2000 project
costs include the costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently
available information. For significant vendors, management will
validate that they are Year 2000 compliant by December 31, 1999,
or make plans to switch to a new vendor or system that is
compliant. For large commercial loan customers, management will
take appropriate action based upon the customer's response.
The Corporation will utilize both internal and external resources
to reprogram or replace, and test software for Year 2000
modifications. Costs incurred to date as well as for the 1998
fiscal year for the Year 2000 project total less than $100,000
and are generally considered normal operating costs by the
Corporation. All Year 2000 conversion software and modifications
are being delivered and executed by the Corporation's various
software vendors with which the Corporation deals for its many
different computer processing and transaction functions. The
Corporation does not anticipate significant expense incurred or
charged to the Year 2000 Issue due to its many software,
maintenance, and licensing agreements with its software vendors.
The cost to complete the internal process is currently estimated
to be less than $100,000.
Management believes that the Corporation's existing alternative
processing procedures will be available as a contingency
alternative in the unanticipated event that the Year 2000 Issue
results in significant disruption of normal business
activities.
Recent Accounting Pronouncements:
During 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" (SFAS No.
130), which established standards for the reporting and
disclosure of comprehensive income and its components (revenues,
expenses, gains, and losses). SFAS 130 requires all items
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes a
reclassification adjustment for net realized investment gains
included in net income of $575,000, $770,000, and $302,000 for
the years ended December 31, 1998, 1997, and 1996 respectively.
The new standard requires only additional disclosures in the
consolidated financial statements: it does not affect the
Corporation's financial position or results of operations.
During 1998, the Corporation also adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132), which
revises employers' disclosures about pensions and other
postretirement benefit plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were under
previous pronouncements.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June of 1998.
SFAS 133 establishes standards for recording derivative financial
instruments on the balance sheet at their fair value. The
statement requires changes in the fair value of derivatives to be
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part
of a hedge transaction, and, if it is, the type of hedge
transaction. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management
anticipates that the adoption of SFAS 133 will not have a
material effect on the Corporation's financial condition or
results of operations.
The Financial Accounting Standards Board issued Statement of
Financial Standards No., "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131) in 1997. SFAS 131
establishes standards for disclosure about products, services,
geographic areas, and major customers. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. Management has
reviewed SFAS 131 and determined that the Corporation only has
one qualifying segment and no additional disclosure is required.
SFAS 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise" requires that after a securitization
of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed
securities or other retained interest based on its ability and
intent to sell or hold those investments. The statement is
effective for the first fiscal quarter beginning after December
15, 1998. Management anticipates that this Statement will not
have a material effect on the Corporation's financial condition
or results of operations.