For the fiscal year ended December 31, 2001
Commission file number 0-15786
COMMUNITY BANKS, INC.
(Exact names of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2251762
(I.R.S. Employer Identification No.)
150 Market Street, Millersburg, PA
(Address of principal executive offices)
17061
(Zip Code)
(717) 692-4781
Registrant's telephone number, including area code
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class | Name of each exchange 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 markwhether 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, 2002, the aggregated market value (based on recent selling prices) of the voting stock of the registrant held by its nonaffiliates ( 7,362,461 shares) was $185,165,894.
Indicate the number of shares outstanding of each registrant’s classes of common stock, as of the latest practical date.
8,804,526 shares of common stock outstanding on March 1, 2002
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 28. This document contains 31 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. [ ]
Item 1. Business:
Community Banks, Inc. (Corporation) is a financial holding company whose banking subsidiary is Community Banks and whose non-banking subsidiaries are Community Banks Investments, Inc. (CBII), Community Banks Life Insurance Company, Inc. (CBLIC), and The Sentinel Agency, Inc.
On October 18, 2001, the Corporation announced that its banking subsidiaries would be combined into a single Pennsylvania chartered banking institution under the name Community Banks. On January 3, 2002 the Corporation completed the consolidation of charters pursuant to regulatory approvals. Prior to that time, the Corporation's separate banking organizations operated as Peoples State Bank (PSB), a state chartered bank with offices throughout York and Adams Counties; and Community Banks, N.A. (CBNA), a federally chartered bank headquartered in Dauphin County with offices in central and northeastern Pennsylvania. The consolidation was designed to facilitate a regional operational focus that would ease regulatory burdens while, at the same time, continuing a philosophy of local decision-making. For the purposes of this presentation, all references to Community Banks relates to the combined activities of PSB and CBNA.
The Corporation conducts a full service commercial banking business and provides trust services in Adams County, Cumberland County, Dauphin County, southern Luzerne County, Northumberland County, western Schuylkill County, Snyder County, and York County. The Corporation currently has 42 offices. There are offices of commercial banks and savings and loan associations within its market area with which the Corporation competes. Deposits of the Corporation represent approximately 18% of the total deposits in the market area. The Corporation has 3 offices in Adams County, 2 offices in Cumberland County, 9 offices in Dauphin County, 3 offices in Luzerne County, 2 offices in Northumberland County, 10 offices in Schuylkill County, 1 office in Snyder County, and 12 offices in York County.
Like other depository institutions, the Corporation has been subjected to competition from brokerage firms, money market funds, consumer finance and credit card companies and other companies providing financial services and credit to consumers.
During 1986 the Corporation formed CBLIC to provide credit life insurance to its consumer credit borrowers. Total premiums earned were $993,000 for the year ended December 31, 2001. During 1985 the Corporation formed CBII to make investments primarily in equity securities of other banks. Total assets of CBII at December 31, 2001 were $3,462,000.
The Corporation has approximately 504 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 Corporation. The minimum required capital ratio at December 31, 2001, was 8 percent. The Corporation’s December 31, 2001 ratio approximated 11.8%. 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 minimum standard. The Corporation’s leverage ratio at December 31, 2001, approximated 7.5%. Risk-based capital requirements replace previous capital guidelines which established minimum primary and total capital requirements.
Community Banks is also subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements by the regulators about components risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy requires Community Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that Community Banks has met all capital adequacy requirements to which they are subject.
The following table summarizes the Corporation's capital adequacy position:
At December 31, 2001
- ----------------------------------------------------------------------------------------------------------------
Tier 1 Capital Total Risk-Based Capital Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- ----------------------------------------------------------------------------------------------------------------
Required Minimum 4.0% 8.0% 4.0%
Well Capitalized 6.0 10.0 5.0
Community Banks, Inc. 10.5 11.8 7.5
(A) Tier 1 capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier 1 capital divided by average total assets less disallowed intangible
assets.
Statistical Data:
The following is hereby incorporated by reference:
Pages 23, 34, and 35 of the Community Banks, Inc. Annual report to stockholders dated December 31, 2001 contain the following information concerning:
Financial Highlights, Average Balances, Effective Interest Differential, and Interest Yields for the three years ended December 31, 2001.
Rate/Volume Analysis for the two years ended December 31, 2001.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 2001.
Amortized cost and Estimated Market Values of Investment Securities as of December 31, 2001, 2000, and 1999.
Maturity Distribution of Securities as of December 31, 2001 (Market Value).
Loan Account Composition as of December 31, 2001, 2000, 1999, 1998, and 1997.
Maturities and Sensitivity to Changes in Interest Rates for Commercial, Financial, and Agricultural Loans as of December 31, 2001.
Non-performing Loans as of December 31, 2001, 2000, 1999, 1998, and 1997.
Loan Loss Experience for the five years ended December 31, 2001.
Loans Charged Off and Recovered for the five years ended December 31, 2001.
Allowance for Loan Losses as of December 31, 2001, 2000, 1999, 1998, and 1997.
Maturity Distribution of Time Deposits over $100,000 as of December 31, 2001.
Maturity Distribution of all Time Deposits as of December 31, 2001.
Interest Rate Sensitivity as of December 31, 2001.
Item 2. Properties:
The Corporation owns no real property except through its subsidiary bank. Community Banks owns the following buildings: 150 Market Street, Millersburg, Dauphin County, Pennsylvania (the corporate headquarters); 13-23 South Market Street, Elizabethville, Dauphin County, Pennsylvania; 3679 Peters Mountain Road, Halifax, Dauphin County, Pennsylvania; 906 North River Road, Halifax, Dauphin County, Pennsylvania; 800 Peters Mountain Road, Dauphin, Dauphin County, Pennsylvania; Main and Market Streets, Lykens, Dauphin County, Pennsylvania; Route 209, Tower City, Porter Township, Schuylkill County, Pennsylvania; 29 East Main Street, Tremont, Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair, Schuylkill County, Pennsylvania; Port Carbon Highway, St. Clair, Schuylkill County, Pennsylvania; 300 East Independence Street, Shamokin, Northumberland County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill County, Pennsylvania; One South Arch Street, Milton, Northumberland County, Pennsylvania; 30 S. Church Street, Hazleton, Luzerne County, Pennsylvania; 702 West Main Street, Valley View, Schuylkill County, Pennsylvania; Route 25, East Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center Street, Ashland, Schuylkill County, Pennsylvania; 300 Hobart Street, Gordon, Schuylkill County, Pennsylvania; 9-11 N. Centre Street, Pottsville, Schuylkill County, Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania; 2796 Old Post Road, Linglestown, Dauphin County, Pennsylvania; 5060 Jonestown Road, Lower Paxton, Dauphin County, Pennsylvania; 201 St. John's Church Road, Camp Hill, Hampden Township, Cumberland County, Pennsylvania; 100 E. King Street, East Berlin, Adams County, Pennsylvania; 3421 Carlisle Road, Dover, York County, Pennsylvania; 29 N. Washington Street, Gettysburg, Adams County, Pennsylvania; 57-59 Main Street, Glen Rock, York County, Pennsylvania; 234 N. Main Street, Loganville, York County, Pennsylvania; 16576 Susquehanna Trail South, New Freedom, York County, Pennsylvania; Corner of Noss Road & Route 616, York New Salem, York County, Pennsylvania; and 3093 Cape Horn Road, Red Lion, York County, Pennsylvania.
In addition to the offices above, Community Banks leases offices at Main Street, Pillow, Dauphin County, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2008; 600 Carlisle Street, Hanover, York County, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2006; 509 Greenbriar Road, York, York County, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2029; and 460 High Street, Hanover, York County, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2002. Also, the Bank leases offices at 390 E. Penn Drive, Enola, Cumberland County, Pennsylvania; Route 93, Conyngham, Luzerne County, Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania; 6700 Derry Street, Rutherford, Dauphin County, Pennsylvania; 339 Main Street, LaVelle, Schuylkill County, Pennsylvania; 750 East Park Drive, Harrisburg, Dauphin County, Pennsylvania.
Community Banks also owns real property through its subsidiary, PSB Realty, at the following locations: 1191 Eichelberger Street, Hanover, York County, Pennsylvania; 155 Glen Drive, Manchester, York County, Pennsylvania; 1345 Baltimore Street, Hanover, York County, Pennsylvania; 5625 York Road, New Oxford, Adams County, Pennsylvania; and 2508 Eastern Boulevard, York, York County, Pennsylvania.
From time to time, the subsidiary banks also acquire real estate by virtue of foreclosure proceedings, such real estate is disposed of in the usual and ordinary course of business as expeditiously as is prudently possible.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than litigation incidental to the business of the Corporation, to which the Corporation is a party.
Item 4. Submission of Matters to a Vote of Security Holders:
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
APPENDIX A
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998, AND 1997
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Return on average equity 12.21% 15.08% 14.40% 12.22% 11.36%
Return on average assets .97% 1.12% 1.22% 1.21% 1.12%
Average equity to average assets 7.96% 7.45% 8.44% 9.88% 9.85%
Dividend payout ratio 43.25% 37.48% 36.70% 40.09% 37.69%
APPENDIX A
Continued
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT SECURITIES
(dollars in thousands)
At December 31, 2001, 2000, and 1999
2001 2000 1999
----------------------- ----------------------- -----------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------------------- ----------------------- -----------------------
Mortgage-backed U.S. government agencies $ 74,403 $ 74,370 $ 74,685 $ 74,689 $ 80,887 $ 77,626
U.S. Government corporations and agencies 144,640 142,544 147,422 144,410 149,103 139,873
Obligations of states and political sub-
divisions 172,223 169,993 102,741 104,173 92,851 86,658
Corporate securities 99,561 98,405 42,350 42,498 35,638 35,658
Equity securities 57,846 58,589 23,689 24,049 20,056 20,725
---------- ---------- ---------- ---------- ---------- ----------
Total $548,673 $543,901 $390,887 $389,819 $378,535 $360,540
========== ========== ========== ========== ========== ==========
COMMUNITY BANKS, INC. AND SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
(dollars in thousands)
as of December 31, 2001
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield (a)
---------------------------------------------------------------------------------------
U.S. Government agencies $ 7,576 $38,285 $115,056 $ 55,997 $216,914 8yr. 8 mos. 6.03%
Obligations of states and political
subdivisions 2,730 24,474 50,453 92,336 169,993 11yr. 0 mos. 7.74%
Other 2,449 8,157 43,496 102,892 156,994 12yr. 3 mos. 5.75%
-------- ------- -------- --------- --------
Total $12,755 $70,916 $209,005 $251,225 $543,901 10yr. 5 mos. 6.48%
======== ======= ======== ======== ========
Percentage of total 2.4% 13.0% 38.4% 46.2% 100.0%
===== ===== ===== ===== =====
Weighted average yield (a) 5.13% 6.63% 6.25% 6.70% 6.48%
===== ===== ===== ===== =====
(a) Weighted average yields were computed on a tax equivalent basis using a
federal tax rate of 35%.
The Corporation monitors investment performance and valuation on an ongoing basis to evaluate investment quality. An investment which has experienced a decline in market value considered to be other than temporary is written down to its net realizable value and the amount of the write down is accounted for as a realized loss.
APPENDIX A
Continued
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and agricultural $158,223 18.4% $135,612 16.6% $107,419 15.0% $105,416 16.7% $ 86,832 15.4%
Real estate-construction 21,225 2.5 22,403 2.7 17,003 2.4 17,643 2.8 5,815 1.0
Real estate-mortgage 554,354 64.5 540,639 66.0 464,680 65.0 390,152 62.0 369,521 65.5
Personal-installment 107,893 12.6 109,976 13.4 117,317 16.4 104,388 16.6 92,485 16.4
Other 17,209 2.0 10,228 1.3 8,583 1.2 12,169 1.9 9,347 1.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
858,904 100.0% 818,858 100.0% 715,002 100.0% 629,768 100.0% 564,000 100.0%
-------- -------- -------- -------- --------
===== ===== ===== ===== =====
Less:
Unearned discount (1,626) (3,984) (6,986) (10,018) (11,799)
Reserve for loan losses (12,132) (10,328) (8,976) (8,608) (8,535)
-------- -------- -------- -------- --------
$845,146 $804,546 $699,040 $611,142 $543,666
======== ======== ======== ======== ========
The Corporation’s loan activity is principally with customers located within its local market area. The Corporation continues to maintain a diversified loan portfolio and has no significant loan concentration in any economic sector. Commercial, financial, and agricultural loans consist principally of commercial lending secured by financial assets of businesses including accounts receivable, inventories and equipment, and, in most cases, include liens on real estate. Real estate construction and mortgage loans are primarily 1 to 4 family residential loans secured by residential properties within the bank’s market area. Personal-installment loans 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 manage interest rate risk. Historically, relative credit risk of commercial, financial and agricultural loans has generally been greater than that of other types of loans.
APPENDIX A
Continued
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
AND REAL-ESTATE CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 2001
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
-------- ---------- --------- --------
Commercial, financial and
agricultural $60,739 $41,202 $56,282 $158,223
Real estate-construction 21,225 --- --- 21,225
------- ------- ------- --------
$81,964 $41,202 $56,282 $179,448
======= ======= ======= ========
Interest Sensitivity
Variable Fixed Total
-------- ---------- ---------
Due in one year or less $ 79,632 $ 2,332 $ 81,964
Due after one year 80,393 17,091 97,484
------- ------- -------
$160,025 $19,423 $179,448
======= ======= =======
APPENDIX A
Continued
NON-PERFORMING LOANS (a)
(dollars in thousands)
as of December 31
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans past due 90 days or more:
Commercial, financial and agricultural $ 1,002 $ 8 $ 146 $ 47 $ 53
Mortgages 405 495 147 353 467
Personal installment 239 98 73 36 77
Other 13 11 12 7 21
-------- -------- -------- ------- --------
1,659 612 378 443 618
-------- -------- -------- ------- --------
Loans renegotiated with borrowers --- 205 254 248 626
Loans on which accrual of interest has been discontinued:
Commercial, financial and agricultural 3,783 2,042 2,231 3,037 2,951
Mortgages 6,952 3,445 3,203 2,419 3,700
Other 355 356 222 282 346
-------- -------- -------- ------- --------
11,090 5,843 5,656 5,738 6,997
-------- -------- -------- ------- --------
Other real estate owned 631 416 615 853 1,423
-------- -------- -------- ------- --------
Total $13,380 $7,076 $6,903 $7,282 $9,664
======== ======== ======== ======= ========
(a) The determination to discontinue the accrual of interest on non-performing loans is made on the individual case basis. Such factors as the character and size of the loan, quality of the collateral and the historical creditworthiness of the borrower and/or guarantors are considered by management in assessing the collectibility of such amounts.
The approximate amount that would have been accrued on those loans for which interest was discontinued in 2001 was $605,000. Interest income from these loans would have approximated $649,000 in 2000.
The change in non-performing loans is primarily a result of the impact of economic conditions upon the loan portfolio. The economic outlook remains uncertain. If the economy in the Corporation's trading area improves this could have a positive impact on delinquency trends and collectibility of loans. However, the commercial real estate market in the Corporation's trading area remains stagnant. The ability of borrowers to liquidate collateral is dependent upon the demand for commercial real estate projects and a buyer's ability to finance commercial real estate projects.
APPENDIX A
Continued
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 2001, 2000, 1999, 1998, and 1997
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans at year-end, net of unearned income $857,278 $814,874 $708,016 $619,750 $552,201
======== ======== ======== ======== ========
Average loans balance (a) $838,178 $768,204 $665,422 $579,926 $526,564
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 10,328 $ 8,976 $ 8,608 $ 8,535 $ 7,538
Net charge-offs (b) (3,276) (1,511) (1,220) (1,981) (820)
Provision for loan losses, 5,080 2,863 1,588 2,054 1,817
-------- -------- -------- -------- --------
Balance, allowance for loan losses,
December 31 $ 12,132 $ 10,328 $ 8,976 $ 8,608 $ 8,535
======== ======== ======== ======== ========
Net charge-offs to loans at year end .38% .19% .17% .32% .15%
Net charge-offs to average loans (a) .39% .20% .18% .34% .16%
Balance of allowance for loan losses
to loans at year end 1.42% 1.27% 1.27% 1.39% 1.55%
(a) Averages are a combination of monthly and daily averages.
(b) For detail, see Schedule of Loans Charged Off and Recovered.
The allowance for loan losses is based upon management's continuing evaluation of the loan portfolio. A review as to loan quality, current macro-economic conditions and delinquency status is performed at least on a quarterly basis. The provision for loan losses is adjusted quarterly based upon current review. The table on page 13 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.
APPENDIX A
Continued
The amount of the allowance assigned to each component of the loan portfolio is derived from a combination of factors. Estimation methods and assumptions used in the process are reviewed periodically by both management and a committee of the board of directors. The methodology used by the Corporation in estimating the allowance has not changed during 2001.
The Corporation's allowance for loan losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets its affiliates serve.
Commercial and real estate loans are internally risk rated by the Corporation's loan officers and periodically reviewed by loan quality personnel. Consumer and residential real estate loans are generally analyzed in the aggregate as they are of relative small dollar size and homogeneous in nature.
In addition to economic conditions, consideration of loan portfolio diversification, delinquency and historic loss experience, consideration is also given to examinations performed by the regulatory authorities.
To determine the allowance and corresponding loan loss provision, the amount required for specific loans is first determined. For certain commercial and construction loans, this amount is based upon specific borrower data determined by reviewing individual non-performing, delinquent, or potentially troubled credits. The remaining commercial as well as consumer, and residential real estate loans are evaluated as part of various pools. These pool reserves, generally are based upon historic charge-offs and delinquency history, other known trends and expected losses over the remaining lives of these loans, as well as the condition of local, regional and national economies and other qualitative factors.
To ensure adequacy to a higher degree of confidence, a portion of the allowance for loan losses is considered unallocated. The unallocated portion of the allowance is the amount which, when added to these allocated amounts, brings the total to the amount deemed adequate by management at that time. This unallocated portion is available to absorb losses sustained anywhere within the loan porfolios.
During 2001 management deemed it appropriate to reduce the relative portion of the total allowance allocated to real estate-mortgage loans to 8% from 15% at year-end 2000. The corporation has accompanied the downward trends in the relationships of net charge-offs to average loans and non-performing loans with a reduction in the relationship of the allowance to total loans.
The provision for loan losses totaled $5,080,000 for the year ended December 31, 2001, compared to $2,863,000, $1,588,000, $2,054,000, and $1,817,000 for the years ended December 31, 2000, 1999, 1998, and 1997, respectively. The relationship of the allowance for loan losses to loans at year end approximated 1.42% compared to ratios of 1.27% to 1.55% for the previous four years. In reviewing the adequacy of the allowance for loan losses, management considered the relationship of nonaccrual loans, renegotiated loans, and accruing loans contractually past due 90 days or more to total assets. This relationship approximated .84%, .51%, .55%, .63%, and .94% at year-end 2001, 2000, 1999, 1998, and 1997, respectively.
APPENDIX A
Continued
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
For the years ended December 31, 2001, 2000, 1999, 1998, and 1997
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans charged off:
Commercial, financial and agricultural $2,275 $ 303 $ 489 $1,304 $ 312
Real estate-mortgage 484 521 190 248 361
Personal installment 108 215 903 833 941
Other 909 886 81 77 96
------ ------- ------- ------ -------
Total 3,776 1,925 1,663 2,462 1,710
------ ------- ------- ------ -------
Loans recovered:
Commercial, financial and agricultural 120 23 140 53 442
Real estate-mortgage 108 83 43 104 79
Personal installment 18 298 243 299 345
Other 254 10 17 25 24
------ ------- ------- ------ -------
Total 500 414 443 481 890
------ ------- ------- ------ -------
Net charge-offs $3,276 $1,511 $1,220 $1,981 $ 820
====== ======= ======= ====== =======
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES*
(dollars in thousands)
as of December 31
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Loans:
Commercial, financial and agricultural $ 9,285 $ 5,268 $3,030 $3,008 $2,771
Real estate-construction 10 14 9 7 10
Real estate-mortgage 965 1,593 1,509 1,726 2,274
Installment 1,030 1,748 1,575 1,566 2,013
Unallocated 842 1,705 2,853 2,301 1,467
------ ------- ------- ------ -------
Balance $12,132 $10,328 $8,976 $8,608 $8,535
====== ======= ======= ====== =======
*See Schedule "Loan Account Composition" for the percent of loan classification
to total loans.
APPENDIX A
Continued
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 2001
Remaining to Maturity:
Less than three months $20,893
Three months to six months 17,895
Six months to twelve months 17,512
More than twelve months 23,092
---------
$79,392
=========
MATURITY DISTRIBUTION OF ALL
TIME DEPOSITS
(dollars in thousands)
as of December 31, 2001
Remaining Maturity:
One year or less $347,250
After one year through two years 95,077
After two years through three years 48,458
After three years through four years 25,957
After four years through five years 13,661
After five years 2,522
---------
$532,925
=========
APPENDIX A
Continued
The excess of interest-earning assets over interest-bearing liabilities which are expected to mature or reprice within a given period is commonly referred to as the "GAP" for that period. For an institution with a positive GAP, the amount of income earned on its assets fluctuates more than the cost of its liabilities in response to changes in the prevailing rates of interest during the period. Accordingly, in a period of decreasing interest rates, institutions with a positive GAP will experience a greater decrease in the yield on their assets than in the cost of their liabilities. Conversely, in a period of rising interest rates, institutions with a positive GAP face a greater increase in the yield on their assets than in the cost of their liabilities. An increasing interest rate environment is favorable to institutions with a positive GAP because more of their assets than their liabilities adjust during the period and, accordingly, the increase in the yield of their assets is greater than the increase in the cost of their liabilities.
The positive GAP between the Corporation's interest-earning assets and interest-bearing liabilities maturing or repricing within one year approximated 2% of total assets at December 31, 2001.
Significant maturity/repricing assumptions (based on internal analysis) include the presentation of all savings, Money Market, and NOW accounts as being 34% interest rate sensitive . Equity securities are reflected in the longest time interval. Assumed pay downs on mortgage-backed securities and loans have also been included in all time intervals.
The following table sets for the scheduled repricing or maturity of the Corporation's interest-earning assets and interest-bearing liabilities at December 31, 2001.
APPENDIX A
Continued
Interest Rate Sensitivity - ------------------------------------------------------------------------------------------------------------------------------------ At December 31, 2001 1-90 90-180 180-365 1 year Dollars in thousands days days days or more Total - ---------------------------------------------------------------------------------------------------------------------------------- Assets Interest-bearing deposits in other banks $ 1,372 --- --- --- $1,372 Investment securities 68,219 $ 17,765 $ 50,893 $407,024 543,901 Loans, net of unearned income* 234,412 86,765 99,620 436,481 857,278 Loans held for sale 10,479 --- --- --- 10,479 - ------------------------------------------------------------------------------------------------------------------------------------ Total $314,482 $104,530 $150,513 $843,505 $1,413,030 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities Savings $103,899 --- --- $206,014 $ 309,913 Time 87,065 $ 80,664 $123,221 162,583 453,533 Time in denominations of $100,000 or more 20,893 17,895 17,512 23,092 79,392 Short-term borrowings 60,002 --- --- --- 60,002 Long-term debt 21,367 --- --- 300,788 322,155 - ------------------------------------------------------------------------------------------------------------------------------------ Total $293,226 $ 98,559 $140,733 $692,477 $1,224,995 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Sensitivity Gap Periodic $ 21,256 $ 5,971 $ 9,780 $151,028 Cumulative 27,227 37,007 188,035 Cumulative gap as a percentage of earning assets 2% 2% 3% 13% *Does not include nonaccrual loans.
APPENDIX A
Continued
Forward-Looking Statements:
Incorporated by reference is the information appearing under the heading "Forward-Looking Statements" on page 32 of the Annual Report to Stockholders for the year ended December 31, 2001 (hereafter referred to as the "Annual Report").
Quantitative and Qualitative Disclosures About Market Risk
Community Banks, Inc. has only a limited involvement with derivative financial instruments and does not use them for trading purposes. These derivatives are embedded in their host contract and are not required to be bifricated. The business of the Corporation and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities and investment securities) which are primarily funded by interest-bearing liabilities (deposits and borrowings). Such financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Other than loans which are originated and held for sale, all of the financial instruments of the Corporation are for other than trading purposes.
Interest rate sensitivity results when the maturity or repricing intervals of interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are different, creating a risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Corporation's interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments. The Corporation's exposure to interest rate sensitivity is managed primarily through the Corporation's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. Since the Corporation's primary source of interest-bearing liabilities is customer deposits, it's ability to manage the types and terms of such deposits may be somewhat limited by customer preferences in the market areas in which it operates. Borrowings, which include Federal Home Loan Bank (FHLB) advances and short-term loans, subordinated notes, and other short-term and long-term borrowings are generally structured with specific terms which in management's judgement, when aggregated with the terms for outstanding deposits and matched with interest-earning assets, mitigate the Corporation's exposure to interest rate sensitivity.
The rates, terms and interest rate indices of the Corporation's interest-earning assets result primarily from its strategy of investing in loans and securities (a substantial portion of which have adjustable-rate terms) which permit the Corporation to limit its exposure to interest rate sensitivity, together with credit risk, while at the same time achieving a positive interest rate spread compared to the cost of interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate Sensitivity
Managing the Corporation's exposure to interest rate sensitivity involves significant assumptions about the exercise of embedded options and the relationship of various interest rate indices of certain financial instruments.
APPENDIX A
Continued
Embedded Options
A substantial portion of the Corporation's loans and mortgage-backed securities and residential mortgage loans contain significant embedded options which permit the borrower to prepay the principal balance of the loan prior to maturity ("prepayments") without penalty. A loan's propensity for prepayment is dependent upon a number of factors, including the current interest rate and interest rate index (if any) of the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic and other factors in specific geographic areas which affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable-rate loans pursuant to the current relative levels and expectations of future short and long-term interest rates. Since a significant portion of the Corporation's loans are variable rate loans, prepayments on such loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates making fixed-rate loans more desirable.
Investment securities, other than mortgage-backed securities and those with early call provisions, generally do not have significant embedded 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 such customers 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 by the Corporation of FHLB borrowings and subordinated notes prior to maturity.
Interest Rate Indices
The Corporation's loans and mortgage-backed securities are primarily indexed to the national interest indices. When such loans and mortgage-backed securities are funded by interest-bearing liabilities which are determined by other indices, usually deposits and FHLB borrowings, a changing interest rate environment may result in different levels of changes in the indices leading to disproportionate changes in the value of, and net earnings generated from, the Corporation's financial instruments. Each index is unique and is influenced by different external factors, therefore, the historical relationships in various indices may not be indicative of the actual change which may result in a changing interest rate environment.
APPENDIX A
Continued
Interest Rate Sensitivity Measurement
In addition to periodic gap reports comparing the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates, management also utilizes a report which measures the exposure of the Corporation's economic value of equity to interest rate risk. The model calculates the present value of assets, liabilities and equity at current interest rates, and at hypothetically higher and lower interest rates at one percent intervals. The present value of each major category of financial instruments is calculated by the model using estimated cash flows based on prepayments, early withdrawals, weighted average contractual rates and terms, and discount rates for similar financial instruments. The resulting present value of longer term fixed-rate financial instruments are more sensitive to change in a higher or lower interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing date. The information provided by these analyses provides some indication of the potential for interest rate adjustment, but does not necessarily mean that the rate adjustment will occur or that it will occur in accordance with the assumptions. Despite these inherent limitations, Community believes that the tools used to manage its level of interest rate risk provide an appropriate measure of market risk exposure.
The following table reflects the estimated present value of assets, liabilities and equity using the model for Community Banks, Inc. as of December 31, 2001 at current interest rates and hypothetically, higher and lower interest rates of one and two percent.
Base
-2% -1% Present Value +1% +2%
-------------------------------------------------------------------------------
(dollars in thousands)
Assets
Cash, interest-bearing time deposits,
and federal funds sold $ 46,136 $ 46,136 $ 46,136 $ 46,136 $ 46,136
Investment securities 568,553 553,066 543,901 522,093 506,606
Loans, net of unearned income 903,412 886,053 871,674 854,103 839,387
Loans held for sale 10,856 10,649 10,479 10,689 10,867
Other assets 64,072 64,072 64,072 64,072 64,072
---------- ----------- ----------- ---------- ---------
Total assets $1,593,029 $ 1,559,976 $ 1,536,262 $1,497,093 $1,467,068
========== =========== =========== ========== ==========
Liabilities
Deposits $1,022,022 $1,015,948 $1,009,947 $1,004,019 $ 998,161
Short-term borrowings 60,002 60,002 60,002 60,002 60,002
Long-term debt 333,645 329,032 324,492 320,025 315,629
Other liabilities 13,103 13,103 13,103 13,103 13,103
---------- ----------- ----------- ---------- ---------
Total liabilities 1,428,772 1,418,085 1,407,544 1,397,149 1,386,895
---------- ----------- ----------- ---------- ---------
Total stockholders' equity 164,257 141,891 128,718 99,944 80,173
---------- ----------- ----------- ---------- ---------
Total liab. and stockholders'
equity $1,593,029 $1,559,976 $1,536,262 $1,497,093 $1,467,068
========== =========== =========== ========== ==========
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters:
Incorporated by reference is the information appearing under the heading "Market for the Corporation's Common Stock and Related Securities Holders Matters" on page 33 of the Annual Report.
Item 6. Selected Financial Data:
Incorporated by reference is the information appearing under the heading "Financial Highlights" on page 23 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Incorporated by reference is the information appearing under the headings "Rate/Volume Analysis"; "Average Balances, Effective Interest Differential and Interest Yields"; and "Management's's Discussion of Financial Condition and Results of Operations" on pages 24 through 35 of the Annual Report.
Item 8. Financial Statements and Supplementary Data:
Critical Accounting PoliciesThe Corporation has established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of its financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Corporation. The Corporation believes that the allowance for loan losses, which is discussed in the section titled "Allocation of Allowance" requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. See "Footnote 2 Summary of Significant Accounting Policies" for a detailed description of the Corporation's estimation process and methodology related to the allowance for loan losses.
The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated January 24, 2002, are incorporated by reference to pages 6 through 22 of the Annual Report.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
Item 10. Directors and Executive Officers of the Registrant:
The following table sets forth the name and age of each director of Community Banks, Inc. as well as the director's business experience, including occupation for the past 5 years, the period during which he has served as a director of Community Banks, N.A. (Formerly Upper Dauphin National Bank), and the number and percentage of outstanding shares of Common Stock of the Bank beneficially owned by said directors as of December 31, 2001.
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- -------------------
Eddie L. Dunklebarger Chairman/Pres/CEO 1999 174,513 1.95%
Age 48 CTY/CBNA/PSB (3)
Prior to 3/31/98
Pres/CEO PSB
Thomas L. Miller Retired Chairman/ 1966 70,111 .79%
Age 69 CEO of CTY & (4)
CBNA
Kenneth L. Deibler Self-Employed 1966 39,087 .44%
Age 79 Insurance Broker (5)
Elizabethville, PA
Robert W. Rissinger Sec./Treasurer 1968 290,157 3.28%
Age 75 Alvord Polk Tool Co. (6)
(Cutting Tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 148,344 1.68%
Age 76 Millersburg and (7)
Harrisburg, PA
James A. Ulsh Attorney-at-Law 1977 20,472 .23%
Age 55 Mette, Evans& (5)
Woodside
Harrisburg, PA
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- -------------------
Samuel E. Cooper Retired Superintendent 1992 4,188 .05%
Age 68 Warrior Run School (5)
District
Turbotville, PA
Ronald E. Boyer President, 1981 29,500 .33%
Age 64 Alvord-Polk Tool Co. (8)
(Manufacturing of Cutting tools)
Millersburg, PA.
Peter DeSoto CEO, J.T. Walker 1981 52,705 .60%
Age 62 Industries, Inc. (5)
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long Partner 1981 13,041 .15%
Age 72 Millersburg Hardware (12)
Millersburg PA
Donald L. Miller President, Miller Bros. 1981 103,449 1.17%
Age 72 Dairy (5)
Millersburg, PA
John W. Taylor, Jr. President-Air Brake 1998 25,858 .29%
Age 71 &Power Equip. Co. (9)
Earl L. Mummert Consulting Actuary 1998 32,935 .37%
Age 57 Conrad M. Siegel, Inc (10)
Wayne H. Mummert Retired U.S. Postal 1998 74,364 .84%
Age 68 Service/Farmer (11)
Section 16(a) Beneficial Ownership Reporting Compliance
In 2001, to the knowledge of the Corporation, one director, Allen Shaffer, filed a Form 4 11 days late with the Securities and Exchange Commission. All executive officers timely filed all reports with the Securities and Exchange Commission.
None of the directors or nominee directors are directors of other companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
Executive Officers:
The following table sets forth the executive officers of Community Banks, Inc., their ages, their positions with Community Banks, Inc. and the beneficial ownership (as determined in accordance with the rules and regulations of the Securities and Exchange Commission) of Common Stock of the Corporation owned by each of such persons as of December 31, 2001.
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- -------------------
Eddie L. Dunklebarger Chairman/President/CEO 1999 174,513 1.95%
Age 48 CTY/CBNA/PSB (3)
Prior to 3/31/98
Pres/CEO of PSB
Terry L. Burrows Senior Vice President 1977 36,382 .41%
Age 53 Director of Risk Management (4)
Prior to 12/31/01
Executive Vice President/
Finance
Donald F. Holt Executive Vice President/ 2001 0 0%
Age 45 Finance (8)
Robert W. Lawley Executive Vice President/ 1980 17,251 .19%
Age 47 Operations (5)
Anthony N. Leo Executive Vice President/ 1999 20,028 .23%
Age 41 Fin. Services&Adm. (6)
Jeffrey M. Seibert Executive Vice President/ 1999 58,758 .66%
Age 42 Banking Services (7)
(1) Initial year employed in this capacity.
(2) See footnote 2 on page 23.
(3) See footnote 3 on page 23.
(4) Includes 244 shares held in an ESPP and stock options to acquire 10,453
shares.
(5) Includes 15 shares held by Mr. Lawley's children and stock options to
acquire 17,165 shares.
(6) Includes 98 shares held in an ESPP, 6,064 shares held by a 401(k) and stock
options to acquire 13,767 shares.
(7) Includes 856 shares held in an ESPP, 8,666 shares held in Mr. Seibert's
IRA, 6,181 shares held by a 401(k) and stock options to acquire 34,045
shares
(8) Mr. Holt became the chief financial of CTY and Community Banks on December
31, 2001 and was previously employed by Keystone Financial, Inc. as its
senior vice president and controller from 1987-1998 and as executive vice
president and chief financial officer from 1999-2000. During 2001, Mr. Holt
served as vice president of finance and administration of the Pennsylvania
Chamber of Business and Industry.
The following is all shares beneficially owned by all directors and executive officers of the Corporation as a group:
Amount and Nature
of Beneficial
Ownership (1)(2)
Percent
Title of Class Direct Indirect(3) of Class
-------------- ------ ---------- --------
Common 1,174,002 294,201 16.08%
(1) See footnote 2 on page 23.
(2) Included in these totals are shares held by director emeriti of the
Corporation as follows:
Leon E. Kocher - 32,540 shares which includes 14,241 shares held by Mr. Kocher’s
wife, and stock options to acquire 1,050 shares.
Raymond N. Leidich - 79,683 shares which includes 39,054 shares held by Mr.
Leidich’s wife, and stock options to acquire 1,575 shares.
Ernest L. Lowe - 68,947 shares which inlcudes 219 shares held by Mr. Lowe’s wife,
463 shares held in a 401(k), 1,742 shares held by Mr. Lowe’s IRA, and stock
options to acquire 28,919 shares.
Joseph J. Monahan - 22,733 shares.
Harry B. Nell - 39,105 shares which includes 992 shares held by Mr. Nell’s wife,
and stock options to acquire 3,369 shares.
(3) The 7,968 shares owned by Alvord-Polk, Inc. are counted only once in this
total. Alvord-Polk, Inc. is 50% owned by Robert W. Rissinger and 50% owned
by Ronald E. Boyer. Thus, these shares are indicated above as being
beneficially owned by both Mr. Rissinger and Mr. Boyer.
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 7, 2002; and the information included therein with respect to this item is incorporated herein by reference.
Pension Plan:
Community Banks maintains a pension plan for some of its employees. Employees hired prior to December 31, 1998 became participants in the pension plan on January 1 or July 1 after completing one year of service (12 continuous months and 1,000 hours worked) and reaching age 21. The cost of the pension is actuarially determined and paid by Community Banks. The amount of monthly pension is equal to 1.15% of average monthly pay, plus .60% of average monthly pay in excess of $650, multiplied by the number of years of service completed by an employee. The years of service for the additional portion are limited to a maximum of 37. Average monthly pay is based upon the 5 consecutive plan years of highest pay in the last 10 years. The maximum amount of annual compensation used in determining retirement benefits is $170,000. A participant is eligible for early retirement after reaching age 60 and completing five years of service. The early retirement benefit is the actuarial equivalent of the pension accrued to the date of early retirement. As of December 31, 2001, the following officers have been credited with the following years of service: Ernest L. Lowe - 17 years of service, Robert W. Lawley-26 years of service, and Terry L. Burrows-28 years of service.
In 1999, the Board of Directors amended the plan so that pension benefits will be offset by employer contributions to the CTY 401(k) Plan. Employees hired after December 31, 1998 are not eligible to participate in the pension plan. The amounts shown on the following table assumes an annual retirement benefit for an employee who chose a straight life annuity and who will retire at age 65. These amounts are not yet offset for the employer contribution in the 401(k) Plan.
PENSION PLAN TABLE
Years of Service
- ------------------------------------------------------------------------------------------------------------------------------------
15 20 25 30 35 40
- ------------------------------------------------------------------------------------------------------------------------------------
Remuneration
$35,000...................... $ 8,486 $11,314 $14,143 $16,971 $ 19,800 $ 22,138
$55,000...................... $13,736 $18,314 $22,893 $27,471 $ 32,050 $ 35,778
$75,000...................... $18,986 $25,314 $31,643 $37,971 $ 44,300 $ 49,418
$95,000...................... $24,236 $32,314 $40,393 $48,471 $ 56,550 $ 63,058
$115,000.................... $29,486 $39,314 $49,143 $58,971 $ 68,800 $ 76,698
$135,000.................... $34,736 $46,314 $57,893 $69,471 $ 81,050 $ 90,338
$150,000.................... $38,673 $51,564 $64,455 $77,346 $ 90,237 $100,568
$175,000.................... $43,923 $58,564 $73,205 $87,846 $102,487 $114,208
$200,000.................... $43,923 $58,564 $73,205 $87,846 $102,487 $114,208
$225,000.................... $43,923 $58,564 $73,205 $87,846 $102,487 $114,208
$250,000.................... $43,923 $58,564 $73,205 $87,846 $102,487 $114,208
$275,000.................... $43,923 $58,564 $73,205 $87,846 $102,487 $114,208
Directors' Compensation:
In 2001, each CTY director received a quarterly fee of $750. Each outside director received a fee of $250 for each Board meeting attended. Each director who was not an executive officer also received $250 for each committee meeting attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
Refer to Item 10 on pages 21 through 25.
Item 13. Certain Relationships and Related Transactions:
(a) Transaction with Management and Others
Incorporated by reference is the information appearing in Note 12 (Related Parties) of Notes to Consolidated Financial Statements on page 18 of the Annual Report.
(b) Certain Business Relationships
Allen Shaffer, a director of the Corporation, is an attorney practicing in Harrisburg and Millersburg, Pennsylvania, who has been retained in the last fiscal year by the Corporation and who the Corporation proposes to retain in the current fiscal year. James A. Ulsh, a director of the Corporation, is a shareholder/employee of the law firm of Mette, Evans,&Woodside, Harrisburg, Pennsylvania, which the Corporation has retained in the last fiscal year and proposes to retain in the current fiscal year. Thomas J. Carlyon, director emeritus of Community Banks, is a partner in the law firm of Carlyon&McNelis, Hazleton, Pennsylvania, which the Corporation has retained in the last fiscal year and proposes to retain in the current fiscal year. Earl L. Mummert, a director of the Corporation, is an actuarial consultant with Conrad M. Siegel, Inc., Harrisburg, Pennsylvania, which provides actuarial services to the Corporation.
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.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K:
Reference (page)
------------------
(a) (1) Consolidated Financial Statements Form Annual Report to
Report of Independent Public 10-K Shareholders
----- ----------------
Accountants --- 22
Balance Sheets as of December 31, 2001
and 2000 --- 6
Statements of Income for each of the three years
ended December 31, 2001 --- 7
Statements of Changes in Stockholders' Equity for each of the
three years ended December 31, 2000. --- 8
Statements of Cash Flows for each of the three years ended December
31, 2001. --- 9
Notes to Financial Statements --- 10-22
All other schedules are omitted since the required information is not applicable or
is not present in amounts sufficient to require submission on the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated by reference to the Proxy Statements dated April 14, 1987 and April 12, 1988 and Amendment 2 to Form S-2 dated May 13, 1987.
(13) Portions of the Annual Report to Security Holders incorporated by reference within this document is filed as part of this report.
(21) Subsidiaries of the Registrant (See Item 1, pages 2 and 3.)
(b) The registrant did not file on Form 8-K during the fourth calendar quarter of the year ending December 31, 2001
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8(File No. 0-15786 and File No. 33-24908) of Community
Banks, Inc. of our report dated January 24, 2002 relating to the consolidated
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
March 27, 2002
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.
Date: March 6, 2001
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.
/S/ (Donald F. Holt) Ex. Vice President and 2/13/02
- ----------------------------------
(Donald F. Holt) Chief Financial Officer
/S/ (Ronald E. Boyer) Director 2/13/02
- ----------------------------------
(Ronald E. Boyer)
/S/ (Samuel E. Cooper) Director 2/13/02
- ----------------------------------
(Samuel E. Cooper)
/S/ (Kenneth L. Deibler) Director 2/13/02
- ----------------------------------
(Kenneth L. Deibler)
/S/ (Peter DeSoto) Director 2/13/02
- ----------------------------------
(Peter DeSoto)
/S/ (Thomas W. Long) Director 2/13/02
- ----------------------------------
(Thomas W. Long)
/S/ (Donald L. Miller) Director 2/13/02
- ----------------------------------
(Donald L. Miller)
/S/ (Thomas L. Miller) Director 2/13/02
- ----------------------------------
(Thomas L. Miller)
/S/ (Earl L. Mummert) Director 2/13/02
- ----------------------------------
(Earl L. Mummert)
/S/ (Wayne H. Mummert) Director 2/13/02
- ----------------------------------
(Wayne H. Mummert)
/S/ (Robert W. Rissinger) Director 2/13/02
- ----------------------------------
(Robert W. Rissinger)
/S/ (Allen Shaffer) Director 2/13/02
- ----------------------------------
(Allen Shaffer)
/S/ (John W. Taylor, Jr.) Director 2/13/02
- ----------------------------------
(John W. Taylor, Jr.)
/S/ (James A. Ulsh) Director 2/13/02
- ----------------------------------
(James A. Ulsh)
Financial Trends
Community Banks, Inc.
And
Subsidiaries
Percent Change
2001 2000 1999 2001/2000 2000/1999
Per-Share Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (basic) $ 1.55 $ 1.60 $ 1.51 (3.1)% 6.0%
Net income (diluted) 1.52 1.58 1.49 (3.8) 6.0
Cash dividends .67 .60 .55 11.7 9.1
Balance Sheet Data -At Year End (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,509,734 $1,308,713 $1,151,344 15.4% 13.7%
Total loans 857,278 814,874 708,016 5.2 15.1
Deposits 1,003,225 919,241 826,167 9.1 11.3
Core (Tier 1) capital 113,383 103,613 96,633 9.4 7.2
Profitability Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets .97% 1.12% 1.22%
Return on average stockholders' equity 12.21% 15.08% 14.40%
Efficiency ratio (1) 55.33% 55.42% 55.54%
Asset Quality
Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
total loans 1.42% 1.27% 1.27%
Allowance for loan losses to
non-performing loans 95% 155% 143%
Non-performing assets to
total assets .89% .54% .60%
Graphs
Diluted Earnings Per Share ($) Return on Average Assets (%) Return on Average Equity (%)
1.04 1.25 1.49 1.58 1.52 1.12 1.21 1.22 1.12 .97 11.36 12.22 14.40 15.08 12.21
97 98 99 00 01 97 98 99 00 01 97 98 99 00 01
Cash Dividends Per Share ($) Total Deposits ($000,000's) Total Loans ($000,000's)
.40 .51 .55 .60 .67 675 728 826 919 1,003 552 620 708 815 857
97 98 99 00 01 97 98 99 00 01 97 98 99 00 01
(1) Excluding merger and restructuring related expenses in 2001.
2001 2000
---------------------------------
ASSETS
Cash and due from banks $ 44,764 $ 42,166
Interest-bearing time deposits in other banks 1,372 2,568
Investment securities, available for sale (market value) 543,901 389,819
Federal funds sold --- 6,280
Total loans 857,278 814,874
Less: Allowance for loan losses (12,132) (10,328)
------------- -------------
Net loans 845,146 804,546
Premises and equipment, net 22,640 21,587
Intangible assets 968 1,059
Other real estate owned 631 416
Loans held for sale 10,479 2,719
Accrued interest receivable and other assets 39,833 37,553
------------- -------------
Total assets $1,509,734 $1,308,713
============= =============
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 160,387 $ 155,796
Savings 309,913 257,178
Time 453,533 426,573
Time in denominations of $100,000 or more 79,392 79,694
------------- -------------
Total deposits 1,003,225 919,241
Short-term borrowings 60,002 36,093
Long-term debt 322,155 239,613
Accrued interest payable and other liabilities 13,103 9,788
------------- -------------
Total liabilities 1,398,485 1,204,735
------------- -------------
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; 8,968,000 and 8,545,000 shares
issued in 2001 and 2000, respectively 44,839 42,726
Surplus 35,906 29,155
Retained earnings 36,923 38,723
Accumulated other comprehensive income (loss),
net of tax (benefit) of $(2,167) and $(374),
respectively (4,024) (694)
Less: Treasury stock of 119,000 and 300,000
shares, at cost, respectively (2,395) (5,932)
------------- -------------
Total stockholders' equity 111,249 103,978
------------- -------------
Total liabilities and stockholders' equity $1,509,734 $1,308,713
============= =============
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock State Bank. The accompanying notes are an integral part of the consolidated financial statements.
-------------------------------------------
2001 2000 1999
-------------------------------------------
Interest income:
Interest and fees on loans $69,925 $66,791 $55,844
Interest and dividends on investment securities:
Taxable 20,075 20,570 17,064
Exempt from federal income tax 7,172 4,812 5,103
Federal funds interest 800 750 579
Other interest income 103 71 92
-------- -------- --------
Total interest income 98,075 92,994 78,682
-------- -------- --------
Interest expense:
Interest on deposits:
Savings 6,820 6,954 6,823
Time 24,461 23,712 18,721
Time in denominations of $100,000 or more 4,270 4,013 2,340
Interest on short-term borrowings and
long-term debt 15,683 13,228 8,997
Federal funds purchased and repo interest 906 1,292 1,553
-------- -------- --------
Total interest expense 52,140 49,199 38,434
-------- -------- --------
Net interest income 45,935 43,795 40,248
Provision for loan losses 5,080 2,863 1,588
-------- -------- --------
Net interest income after provision for
loan losses 40,855 40,932 38,660
-------- -------- --------
Other income:
Investment management and trust services 632 527 458
Service charges on deposit accounts 3,406 2,731 2,282
Other service charges, commissions and fees 1,955 1,638 1,116
Investment security gains 1,704 469 251
Insurance premium income and commissions 1,483 1,266 765
Gains on loan sales 1,367 404 607
Other income 1,594 1,113 909
-------- -------- --------
Total other income 12,141 8,148 6,388
-------- -------- --------
Other expenses:
Salaries and employee benefits 18,528 16,466 14,936
Net occupancy expense 5,267 4,504 4,070
Insurance subsidiary activities 740 586 497
Merger and restructuring related expenses 1,968 -- --
Other operating expense 10,018 8,907 7,998
-------- -------- --------
Total other expenses 36,521 30,463 27,501
-------- -------- --------
Income before income taxes 16,475 18,617 17,547
Provision for income taxes 2,879 4,702 4,257
-------- -------- --------
Net income $13,596 $13,915 $13,290
======== ======== ========
Basic earnings per share 1] $ 1.55 $ 1.60 $ 1.51
======== ======== ========
Diluted earnings per share 1] $ 1.52 $ 1.58 $ 1.49
======== ======== ========
1] Per share data for all periods has been restated to reflect stock dividends and splits.
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial statements.
------------------------------------------------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
------------------------------------------------------------------------------------
Balance, December 31, 1998 $39,182 $17,989 $36,074 $ 3,130 $(2,082) $ 94,293
Comprehensive income:
Net income 13,290 13,290
Change in unrealized gain (loss) on
securities, net of tax of $(7,984) and
reclassification adjustment of $251 (14,827) (14,827)
Total comprehensive income (1,537)
Cash dividends ($.55 per share) (4,877) (4,877)
5% stock dividend (323,000 shares) 1,616 6,080 (7,696)
Net increase in treasury stock (82,000 shares) (1,885) (1,885)
Issuance of additional shares (21,000 shares) 105 190 (359) 379 315
-------- -------- -------- --------- -------- ---------
Balance, December 31, 1999 40,903 24,259 36,432 (11,697) (3,588) 86,309
Comprehensive income:
Net income 13,915 13,915
Change in unrealized gain (loss) on
securities, net of tax of $5,925 and
reclassification adjustment of $469 11,003 11,003
Total comprehensive income 24,918
Cash dividends ($.60 per share) (5,216) (5,216)
5% stock dividend (348,000 shares) 1,740 4,612 (6,352)
Net increase in treasury stock (125,000 shares) (2,344) (2,344)
Issuance of additional shares (16,000 shares) 83 284 (56) 311
-------- -------- -------- --------- -------- ---------
Balance, December 31, 2000 42,726 29,155 38,723 (694) (5,932) 103,978
Comprehensive income:
Net income 13,596 13,596
Change in unrealized gain (loss) on
securities, net of tax of $(1,297) and
reclassification adjustment of $1,704 (2,408) (2,408)
Change in unfunded pension liability,
net of tax of $(497) (922) (922)
---------
Total comprehensive income 10,266
Cash dividends ($.67 per share) (5,880) (5,880)
5% stock dividend (426,000 shares) 2,130 6,773 (8,903)
Purchases of treasury stock (28,000 shares) (689) (689)
Issuance of additional shares ( 209,000 net
shares of treasury stock reissued and
3,000 shares of common stock canceled) (17) (22) (613) 4,226 3,574
-------- -------- -------- --------- -------- ---------
Balance, December 31, 2001 $44,839 $35,906 $36,923 $(4,024) $(2,395) $111,249
======== ======== ======== ========= ======== =========
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 The Glen Rock State Bank. The accompanying notes are an integral part of the consolidated financial statements.
2001 2000 1999
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Operating Activities:
Net income $ 13,596 $ 13,915 $ 13,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 5,080 2,863 1,588
Depreciation and amortization 3,081 3,615 2,091
Investment security gains (1,704) (469) (251)
Loans originated for sale (94,933) (23,440) (33,285)
Proceeds from sales of loans 88,540 25,125 33,207
Gains on loan sales (1,367) (404) (607)
Change in other assets, net (92) (13,653) 1,038
Increase in accrued interest payable and other
liabilities, net 4,237 1,533 561
--------- --------- ---------
Net cash provided by operating activities 16,438 9,085 17,632
--------- --------- ---------
Investing Activities:
Net (increase)decrease in interest-bearing time
deposits in other banks 1,196 (447) (737)
Proceeds from sales of investment securities 124,490 28,343 38,136
Proceeds from maturities of investment securities 134,308 15,708 36,775
Purchases of investment securities (417,679) (57,486) (124,803)
Net increase in total loans (46,343) (108,924) (90,604)
Net increase in premises and equipment (3,532) (5,868) (2,949)
--------- --------- ---------
Net cash used by investing activities (207,560) (128,674) (144,182)
--------- --------- ---------
Financing Activities:
Net increase in total deposits 83,984 93,074 98,214
Net increase in short-term borrowings 23,909 19,345 3,838
Proceeds from issuance of long-term debt 83,236 160,757 46,000
Repayment of long-term debt (694) (135,009) (11,007)
Cash dividends (5,880) (5,216) (4,877)
Purchases of treasury stock (689) (2,344) (1,885)
Proceeds from issuance of common stock 3,574 311 315
--------- --------- ---------
Net cash provided by financing activities 187,440 130,918 130,598
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (3,682) 11,329 4,048
Cash and cash equivalents at beginning of year 48,446 37,117 33,069
--------- --------- ---------
Cash and cash equivalents at end of year $ 44,764 $ 48,446 $ 37,117
========= ========= =========
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock State Bank. The accompanying notes are an integral part of the consolidated financial statements.
1. ORGANIZATION AND BASIS OF PRESENTATION:
Community Banks, Inc. (Corporation) is a financial holding company whose wholly-owned subsidiaries include Community Banks, Community Banks Investments, Inc. (CBII) and Community Banks Life Insurance Company (CBLIC). All significant intercompany transactions have been eliminated in consolidation. The Corporation operates through its main office in Millersburg, Pennsylvania, and through 41 branch banking offices located in Adams, Cumberland, Dauphin, Luzerne, Northumberland, Schuylkill, Snyder, and York Counties in Pennsylvania. Community Banks provides a wide range of services through its network of offices. Lending services include secured and unsecured commercial loans, residential and commercial mortgages and various forms of consumer lending. Deposit services include a variety of checking, savings, time and money market deposits. The Corporation also provides specialized services through its wholly-owned subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The more significant accounting policies of the Corporation are:
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, 2001 and 2000, there were no securities identified as "held-to-maturity" or "trading." All other securities are classified as "available-for-sale" securities 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 stockholders' equity. Quoted market values, when available, are used to determine the fair value of "available-for-sale". If quoted market prices are not available, then fair values are estimated using quoted prices of instruments with similiar characteristics.
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.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available.
A loan is considered impaired when, based on current information and events, 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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans over $250,000 by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.
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 an 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.
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the related assets as follows: banking premises, 20 to 40 years, furniture, fixtures, and equipment, 3 to 5 years. Leasehold improvements are amortized over the shorter of the lease term or 20 years. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recovered. 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, which represents the excess of purchase price in